by Garvin Jabusch
We now live in a global economy with two
fundamentally different types of energy: commodity-based in
the form of fossil fuels and uranium, and technology-based,
represented primarily by solar and wind. That observation is
interesting as far as it goes, but what does it mean? The term renewable
(as it pertains to energy) gets used so often that it is easy to
forget what it really entails. For starters, tech-based renewables
become less expensive over time, as demand for them drives scale,
innovation, and improves cost structures in implementation (think
about the last couple of computers you’ve purchased).
This is
precisely the opposite of how we have traditionally thought about
energy and, how it’s priced. With commodity-based energy like coal
and oil, energy costs go up over time as demand increases
(population and economic growth necessitates this) and the
cheaper-to-acquire sources are used up. The contrast between the
old and new means of acquiring energy is nothing less than
revolutionary, as it means that economic growth need no longer
choke itself off as a consequence of its own success. Since the
fuels for technology-based energy (sunshine and wind) are free, it
means we're entering into a fundamentally new economic era wherein
traditional measurement of energy costs will no longer apply.
We currently measure energy in units of power from the supply
side: gallons, barrels, BTUs, kilowatt hours, and so on. However,
if power generation is no longer slave to a commodity resource
with its accompanying supply and pricing dynamics, perhaps it’s
time to change how we measure it.
Given the amount of power the world economy uses in a day,
compared to the available wind and solar power naturally provided
in a day, the potential power that can be harnessed is basically
infinite for human purposes. To illustrate this, imagine the time
in history when everyone thought there was infinite coal and oil
in the ground, but we just didn’t have very many wells or mines to
get it out. This was, as far as anyone then could see, the
situation at the dawn of the 20th century, when oil
rushes and coal booms around the globe redrew borders, sparked
decades-long wars, and reshaped human existence on the planet. The
future of human productivity was at stake, and people rushed to
capitalize on that, similar to how investments are beginning to
flow today towards the great transition of our own time - the
switch to electrification through renewables.
Of course, there are some crucial differences between the
renewable energy future we see today and the beginning of the
fossil fuel era that shaped the last century. For one thing, oil
and coal turned out to be nowhere near infinite: in fact, the more
we use, the more we need, and the harder (read: more expensive) it
becomes to get. A similar argument is sometimes made (poorly)
about sun and wind: the best spots for wind and solar will be
utilized first to maximize investment, and over time more marginal
areas will have to be utilized. For instance, Hawaii and
California, both very sunny places, are moving quickly on
utility-scale solar. Similarly, flat and windy Texas is a world
leader in installed generating capacity for wind turbines.
However, unlike oil, the amount of sun that falls on less sunny
places, like Vermont, is still consistent and never diminishes.
The same is true for more and less windy places. To cap all of
that off, the amount of wind and sun that occur even in the
darkest and least windy places is still in excess, given
sufficient deployment of renewables, of current power needs.
So, what happens now as the equivalent of unlimited barrels and
gallons, falling from the sky for free, are increasingly captured
and put to productive economic use? Will we remain fixated on
measurement only from the supply side? Could we even if we wanted
to? Can one put a meter on sunlight? Perhaps a more relevant
measure now would be to assess the ability of that energy to do
productive work, or in economic terms, to turn material into
products and to provide services. Much as supply measurements are
used today, this more descriptive production measure would be
applied the same to, say, the energy needed by a company like
Patagonia to turn plastic bottles into high quality fleece
clothing, and the power to operate your television.
Essentially the question becomes: how much of the energy we pour
into the economy is productive and how much is wasted? According
to economists, notably John A. “Skip” Laitner, about 15% of it
becomes economically useful while the remaining 85% dissipates
unrequited (here
is Laitner’s 2013 paper; free registration required).
Green Alpha’s Next EconomyTM thesis is that our
collective and per capita economic activities must ultimately have
only a de minimus impact on the economy’s underlying
ecosystems, all while we maintain and improve standards of living.
In that light, any accounting of global economic activity that
suggests we are only getting 15% of the productive energy we
generate is, to put it mildly, kind of a big deal. It means that
the ability of our economy to grow and to run in a way that won’t
overtop earth’s carrying capacity is badly hampered relative to
what could be. “You can imagine what a huge array of costs that
imposes on the economy and that set of costs just clamps down and
makes it harder to provide economic activity and to provide jobs
that we need,” as Laitner put it on a recent
podcast.
If energy is increasingly coming from a cost-negligible source,
and the lifetime of the technology we use to capture it is long
enough to easily amortize its capital expenditure, it is time to
start focusing on what we do with it, and how. There will, before
long, be such an abundance of renewable energy available that we
need to start asking how it can best be deployed to maximize
economic gains. Measuring where energy goes, and what is done with
it when it gets there, will become more important than where it
comes from. Laitner has reached a similar conclusion: he believes
that our abysmally low rate of converting energy to productive
work is a systemic weakness. As he has blogged,
“if we miss the big gains in energy and exergy efficiency,
focusing instead on investments in costlier and more hazardous new
energy resources, we run the risk of a continued weakening of
the economy.” (Italics added.)
Energy efficiency and resource productivity are opposite sides of
a coin. We need efficiency to do more with less: less material
inputs, less person-hours, less water, etc. Doing more with less
is key to providing jobs and transitioning to an indefinitely
sustainable economy. As the world electrifies, economies will
increasingly revolve around renewables to power the factories,
shipping, computers and consumers who require those goods and
services. What matters now is measuring energy’s ability to
functionally provide for society, as opposed to the price per of
input on the supply side. Put another way, the 85% of energy we
generate and pay for that is wasted is an enormous basket of costs
that slows the potential growth of the global economy in all of
its manifestations (e.g. job growth).
Growth in global economic productivity is well understood to be
slowing. The Organization for Economic Cooperation and Development
(OECD) has
recently given the global economy a "barely passing grade of
B-." The World Bank and others have agreed that global
productivity growth this year may decline to 1-1.2%. McKinsey
& Company agrees, and reports
that the problem is more long-term and systemic: “unless we
can dramatically improve productivity, the next half century will
look very different. The rapid expansion of the past five decades
will be seen as an aberration of history, and the world economy
will slide back toward its relatively sluggish long-term growth
rate.”
The primary reason for slow productivity gains is the inefficient
use of resources, largely energy, but also water, phosphorus, land
and human labor, among many others. Structurally, in terms of our
institutional understanding of how to address this, the problem is
that we don’t track the right kind of data to measure the
effective use of energy in the economy. The conversion of energy
to productivity is the numerator in the ratio of human endeavor to
global economic growth. We collect energy’s supply side information,
but we don’t track how much of that ends up being productive. This
is odd, because that’s really the core of understanding economic
activity. Moreover, the data we do have doesn’t inform us how
individual inputs can help optimize the economic activity that
would, in turn, drive sustainability as well as productivity.
Knowing how many BTUs we’ve sold doesn’t get us very far; again,
it’s not the supply so much as the effective use of energy that
runs the world.
What’s required to make best use of the emerging abundance of
renewable energy is a transparent flow of rich information to
measure, evaluate and direct energy in a way that optimizes use
and increases productivity. To get the world thinking outside of a
supply-side orientation is a big change, and will require lots of
new tools and education. Perhaps the emphasis on the supply-side
aspect of energy has been a consequence of the historical
commodity nature of the fuels themselves. Since they have been
dangerous, dirty, difficult to extract and move around the globe,
those responsible have expected commensurate (perhaps outsized)
recompense. Increasingly however, energy harvested from renewable
sources is freeing the world from those economic handcuffs; you no
longer need a multi-billion dollar coal plant to power your house
or drive your car. More systematic observation, automation and
intelligence in our entire array of systems and devices, with real
time measurement driven by machine-to-machine and
Internet-of-things technologies, all optimized by algorithms, can
now accelerate this revolution.
But present supply side thinking can’t inform any of this because
measuring inputs isn’t the same as measuring outcomes.
Fundamentally, increasing growth, jobs and standards of living are
all about reducing costs of energy, material, services and
capital. As with most aspects of holistic Next Economics we have
to solve for multiple objectives. So, the transition away from
supply-side measurement to outcomes optimization will require a
paradigm shift. Understanding what we need as a society and how to
line up resources in a way to achieve those outcomes is the
critical issue. And incremental improvements to legacy metrics
will not cut it.
At Green Alpha Advisors
we strive to rethink what we’re doing in our own business of
portfolio and asset management in a way that reflects the
requirement of the global economic system to evolve to align our
energy, material resources and capital with our economic best
interests and desires for prosperity. The old, inherited paradigms
that only allow us to think in terms of incremental improvements
do not help us understand the functional and structural problems
associated with unutilized energy, material and capital. As
Greentech Media journalist Katherine Tweed recapped
from a paper from Laitner, “If we want to understand how to wring
more efficiency out of our energy usage, we need to redefine
energy use in the first place.”
An economy-wide 15% productive energy use rate is only good news
if you’re on the supply side selling all those barrels; the wasted
85% is easy money in that case. But what happens as renewables
become the globe’s dominant source of energy and there are far
fewer barrels to sell? Laitner’s work seems to
be agnostic regarding where energy comes from, emphasizing instead
the need to redefine our old ideas about how to measure its
impacts and outcomes. For Green Alpha, the fact that the world is
increasingly making energy from cheap tech instead of from
expensive commodities means it is finally in a position to begin
recapturing the lost 85% and realizing a far more sustainable,
regenerative and prosperous global economy.
We can now design an economy where a far greater fraction of our
energy is put to productive use improving standards of living,
accelerating progress and reducing impact on climate and
resources. But before we can do that we have to reimagine how we
think about energy in the first place. No one can sell a photon,
so perhaps it’s time to stop running the world of energy from the
supply side, using supply side metrics and talking to each other
with outdated language.
http://www.altenergystocks.com/archives/2015/06/commodity_energy_vs_technology_energy_this_ changes_everything.html