Earlier this year, storms Malik, Corrie, Dudley and Eunice, and the crisis in Ukraine demonstrated the weakness of the UK’s centralised energy supply. The UK’s infrastructure needs to be more environmentally sustainable to increase operational resilience to inevitable future physical, geopolitical, and market-driven events.
In fact, there is an urgent need to change the way we think of procuring energy and using transportation. The age of centralised, command and control, extraction resource-based energy sources (oil, gas, coal and nuclear) will not end because we run out of supply but because these businesses will be disrupted by superior technologies, product architectures and business models. New, compelling technologies such as solar, wind, hydro, biomass, electric autonomous driving vehicles will change the incumbent energy industry.
The picture is more extensive than just Environmental, Social and Governance-driven (ESG) initiatives. The adoption of these new technologies is more proactive as they ensure that the root cause of problems is mitigated at source. ESG is more reactive. The sight of higher bills in the coming months, and maybe years, should be quite enough motivation to encourage investment into personal and national energy independence.
For years now, Silicon Valley has been hard at work, creating clean disruptive technologies that have several characteristics.
First, technology-based disruption: digital electron-based technology will replace resource atom-based industries with solar and wind. Polluting internal combustion engine cars will be replaced with electric vehicles fuelled by solar and wind energy.
Wright’s Law says the cost of each unit produced decreases as a function of the cumulative number of units produced – meaning that the cost of production falls as more electric cars are built. For example, the cost of producing lithium-ion batteries for electric vehicles has fallen from $3250 in 1995 to under $100 today. The annual 10 per cent declines in costs has also pushed the unit cost of lithium-ion batteries across a critical threshold, enabling the production of electric vehicles at scale.
The hard and soft technologies that exponentially improve performance reducing costs, are key to the products and business models that covert, manage, store, and share clean energy.
Second, changing the existing energy architecture: In the 1990s, technology disrupted the communications and publishing industries with the arrival of mobile phones and the internet. Similarly, today’s energy disruption will create a new architecture that will be decentralised, distributed, mobile, intelligent, and participatory. This architecture will enable ordinary people to build smaller, more operationally resilient, distributed power plants across the country.
Third, cheap, abundant and participatory energy: The new energy model will disrupt the business models based on scarcity, depletion, command-and-control monopolies. Th effect will be similar to the disruption of the communications and publishing industries, which made information more accessible, abundant, participatory and cheap.
The joining of two decentralised technologies: lithium-Ion batteries for power storage and green energy will solve the problem of renewables being dependent on the weather.
Finally, the green disruption cannot be avoided. With the increasing costs of extraction and monopolies controlling prices, this energy disruption seems much more plausible today. Consider the exponential cost improvements of disrupting technologies, the emergence of new business models, the accessibility of generation, finance and the exponential market growth as people switch to the cheaper, more resilient energy source.
The first wave of energy disruption has already happened with distributed wind, hydro, wave and solar energy generation. The place of renewables in UK’s energy mix has grown and, while it needs to grow a lot faster, new technologies will help to reach that goal.
The largest technology companies have one common denominator: they are governed by information economics. These innovative companies have grown quickly and grew cash rapidly because the cost of serving customers reduced once the infrastructure was in place. Natural resource-based companies have their business models based on the economics of decreasing returns, scarcity, extractive thinking, hierarchical culture and centralised power.
We don’t have to look very far in history for an example where one industry was disrupted by technology. The photographic film industry was destroyed by rapid improvements in digital imaging, information technology, disruptive business models and a participatory culture that made the new technology economically accessible to all.
Old industries leaders could not change their business models fast enough to mitigate the loss of their markets. Existing energy and transportation industries have a similar business model to the film industry. Each a light switch turned on generates a cash-flow to that utility.
New solar and wind technologies will disrupt the existing power utilities in the same way. After the initial cost of building a solar rooftop, the marginal cost of each additional unit of energy drops exponentially to close to zero as the sun and wind have no cost. This also applies to competitive wholesale markets as solar and wind have a marginal cost of zero. Existing utility companies will not be able to compete.
Technology and investment in technological projects could play a transformative role in helping tackle climate change risks and in building resilience.
Businesses such as investment managers and insurers who use financial markets for long-term investments have the capacity (through a climate change strategy) to influence investments into companies trying to solve climate change risks, finance sustainable projects, help reduce costs of energy and transportation, and build a more resilient future. These businesses will benefit, in the long term, from more predictable cash-flows that will make their businesses more attractive to investors.
An age of energy transformation is here and is likely to become a reality globally by 2030.
Robert Chanon, CFIRM, is interim ERM director and climate change lead at Aviva. The views expressed in this article are his own and do not represent those of either Aviva or IRM.
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