• i hate energy policy

    by  • April 22, 2013 • Everything Else • 1 Comment

    Draft of an introduction to an energy policy doc. Could use some feedback – comments welcomed!

    Nothing stands still. The continued addition of complexity to the basic systems of our society has run for hundreds of years, mainly on fossil fuels. The continued injection of energy into our societies has produced a boom in population, productivity, global interconnectedness and countless other areas. This boom has lasted for hundreds of years, and given rise to almost all that we know.

    We now face a very real imperative to change: climate. There are also looming scarcity issues which may restrict availability of some fuels below global demand, or force exploitation of more expensive and often more environmentally damaging energy sources. Energy often exists in a complex matrix of factors. Consider the complexity of a widespread migration to electric cars: battery technology, widely deployed charger station networks, changing loads on grids, a push towards “green grid” (non-fossil grids), consumer and fleet vehicle roll-over, vehicle safety regulation, automotive industry investment patterns and many other factors intersect to make such a transition either inevitable or impossible. Nobody can predict if Tesla Motors will be the Electric Ford or a footnote in transportation history. Yet the geopolitical consequences of aggregate consumer behavior are extremely serious: the amount of energy used per unit of GDP critically affects an economy’s ability to transform and conform to future restrictions in energy availability. An economy’s flexibility dictates its ability to migrate to new kinds of energy resource as they become available. The broad political outlines of the world are largely shaped by access to cheap energy: the entire Middle East, for example, is held together by liberal access to natural resources, shaping the patterns of alliances and rivalries which dominate regional politics and the world’s relationship with Islam.

    One of the complex systems built on top of this underlying energy economy is finance. As we have seen throughout history, the financial system is inherently unstable: it melts down periodically in different ways, sometimes closely repeating former patterns (bubbles, for example, repeat in exactly the same way) and sometimes displaying entirely new and unheard of modes of failure. The financial crisis has produced great waves of social upheaval, and unbelievable costs to taxpayers all over the world as governments wade in to stabilize the system by extending their own financial might to cover losses, secure debts and bolster investor confidence.

    However, this periodic storm did not affect all players in the same way. Some giants, most notably Lehman Brothers were simply caught in a fragile configuration and immediately destroyed by changing global financial conditions. Others, such as HSBC have maintained substantial profitability over a long historical period, but at a substantially lower apparent risk profile. The same logic applies to nations. Iceland, famously referred to as “a hedge fund with a flag” went under fast although it displayed surprising social resilience in recovery. Cyprus, similarly, has been hit disproportionately hard almost as if fundamental lessons from Iceland were ignored until history repeated itself: small island nation, big banks, lax regulation, and a sudden crisis which could have significant implications for sovereignty.

    The purpose of resilience is to be well positioned for future conditions which may negatively effect us and our peers. It is a competitive advantage, as the herd thins in tough times. Profitability or effectiveness in summary conditions tell us nothing about who can survive winter or effectively move south to a more welcoming environment. The long term differentials in quality of life between citizens of nations who handled the financial crisis and recovery well, and those who simply were blindsided and then botched their recoveries is enormous. Perhaps the ultimate example of this is the former USSR where the fallout from the economic crisis which provoked the final death of the Soviet Bloc still heavily impacts quality of life in the rebooted Russia and especially in the smaller states of the former Soviet Union. The same class of structural problems and lack of resilience which brought the USSR down continue to plague the region.

    Now let us turn again to energy. The global energy system is a complex system, similar to and interpenetrated by the global financial system. It shares some of the same exposures as the financial system (for example, both are vulnerable to cyber attacks). As with the financial system, different countries have different degrees of exposure, with complex and far-reaching implications for their viability when confronted with systemic shock or systemic change. Iceland, for example, is massively over-provisioned in hydroelectric energy and is heated by geothermal power. In the financial crisis, their basic access to electricity and heating fuel was not effected at all, and their recovery was unencumbered by external fuel bills. Cyprus, on the other hand, imports nearly all of its energy, and although its climate is may seem forgiving than Iceland, air conditioning is almost as energy intensive as heating in many climates. The direct exposure of an economy to financial stress is well-correlated with its energy profile: Latvia’s energy use is down 25% since the financial crisis, and its climate is far from forgiving. That is direct personal hardship for many people.

    Energy prices are not within the control of any single entity, with the exception of those with independent generation capacity who are not dependent on the market – a strong argument for renewables. Entities – from companies to countries – which have well understood and well-managed exposure to energy price fluctuations and even supply chain volatility are well positioned to weather a variety of storms. A inescapable systemic transformation of the energy sector, driven by climate and new technology is underway. There is a continuing risk of systemic shocks in the energy sector, particularly from sudden geopolitical factors.

    We hope that you will find our analysis a strong argument for understanding energy as a parallel and interrelated system to the financial system, with similar (or even greater) impacts in the event of instability. There is much to be gained from resilience in this area, on every level from the correct selection of equipment through to 30 year investment plans and continental energy grids. The need for constant adaptation and innovation to a rapidly shifting technological and political landscape is at the heart of our study.

    The only constant is change.

    Cyprus energy:

    http://greece.greekreporter.com/2013/02/18/greece-cuts-energy-use-in-crisis/ - latvian energy use stats

    http://oilprice.com/Finance/the-Economy/Iceland-Credits-Green-Energy-for-GDP-Growth.html Iceland GDP recovery & energy

    http://blogs.worldbank.org/prospects/gdp-impact-of-oil-price-shock oil / gdp correlations

    http://smallisprofitable.org - renewables as part of energy portfolios

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    Vinay Gupta is a consultant on disaster relief and risk management.


    One Response to i hate energy policy

    1. April 22, 2013 at 6:52 pm

      Hi Vinay,
      You are right to point out how much energy and finance are entangled. I can see that energy resilience is so much more important than money. It seems like borrowing money to install renewables would make sense, to improve personal or community resilience. I wonder what the fate is for indebted Cypriots?

      I do think industry plays a big part of the energy equation. During recession industry declines and hence less energy is consumed. How much of the energy decline in Ireland is down to the slowdown in construction, and associated manufacturing industries such as steel and concrete? This decline in industry and subsequent drop in demand for energy seems to have masked the real energy problem, which is price increases from tightening resources.

      I like the idea of setting up a ‘Charging’ cafe, where people can come and charge laptops and phones from a renewable source in times of energy outtages.


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