The Amazon is burning, Greenland is melting, the US is rolling back environmental protections, and the energy sector consensus is that we will continue down the path of business as usual. It is easy to despair, but there is yet hope. For there are two competing narratives about the energy transition – gradual change and rapid change.
We are familiar with the first, for it is that favoured by most incumbents. It features more oil, more gas, more coal, driven by emerging market demand. As for the Paris Agreement, we won’t achieve it, and that is regrettable.
The second narrative tells a very different story. It is one where new energy technologies are rapidly supplying the growth in energy demand, leading to peak fossil fuel demand in the 2020s. This gives the world a chance of reaching the goals of the Paris Agreement, but would be highly disruptive for incumbents.
In the just published World Economic Forum’s ‘The speed of the energy transition’ report we examine the difference between the two narratives and conclude that there are four main points of difference: significance, technology, policy and emerging markets.
Firstly, at what point do renewables get big enough to impact the incumbents? Gradual advocates focus on total demand and argue that new energy technologies are relatively small and will take decades to overtake fossil fuels. Rapid advocates focus on change, and argue that new energy technologies will make up all the growth in energy supply in the course of the 2020s.
Is renewable technology growth linear or exponential? Gradual advocates argue that new energy technologies are expensive and face insoluble economic or technical impediments to growth, meaning that growth rates will be only linear. Rapid advocates, however, argue that solar and wind are already cheaper than fossil fuels for the generation of electricity, that EV are about to challenge internal combustion engine (ICE) vehicles on price, that the barriers to growth are surmountable for the foreseeable future, and that these disruptive new energy technologies will continue to enjoy exponential growth. They anticipate the rise of new technologies such as green hydrogen which can lead to further waves of change.
Will policy be static or dynamic? Gradual advocates argue that it is necessary only to model policies which we know will happen, that the forces of inertia are very powerful, and that policymakers will remain cautious and slow-moving. Rapid advocates argue the forces for change are considerably greater than those for inertia, and that technology opens up the opportunity for policymakers and regulators to design markets to better provide for all consumers’ needs. As the necessity for action becomes clear, so there will be an “Inevitable Policy Response”. Modelling only the existing policy environment has the impact of understating trends in policy making.
Finally, will emerging markets copy or leapfrog? Gradual advocates argue that the emerging markets will broadly follow the path taken by developed markets and use more fossil fuels as they get richer and energy demand rises. Rapid advocates argue that the emerging markets will enjoy an energy leapfrog to new energy technologies and significantly less energy-intensive forms of economic development while providing critical improvements in the quality of life.
The story will play out over the course of this decade, and the key issues to watch include renewable cost falls and growth rates, renewable targets in China and India, and moves to tax carbon. If the narrative of rapid change is right, the 2020s will see peak demand for ICE cars, peak demand for fossil fuels in electricity and peak demand for fossil fuels.
The gradual path is the easier of the two, well signposted and sloping downhill. So why do we hold out the prospect of hope?
A glance at the performance of the oil sector over the course of the last couple of years will tell you that financial markets are starting to bet on rapid change. And as financier George Soros reminded us with his idea of reflexivity, financial markets drive change by removing capital from incumbents and reallocating it to new technologies.
So I ask you: Who really wants to be left holding the stranded assets of the fossil era?
 The Inevitable Policy Response (IPR) is a research collaboration between PRI, Vivid Economics and Energy Transition Advisors to prepare financial markets for a wave of policy moves as governments worldwide are forced to address climate change. More at https://www.unpri.org/climate-change/preparing-investors-for-the-inevitable-policy-response-to-climate-change/4734.article