The Energy Transition Principles
Summary - The fundamental incentives to create a sustainable world by self-organizing behavior are electrification of final energy, energy mortgage and the Turntoo Model.
A few weeks ago, I had an epiphany. It was during a “CO2 Conference” in Rotterdam and I was listening to a presentation about “the Energy Transition”. The persons who were presenting and debating were pretty important: all board level company managers and CEOs (including oil and gas majors). These captains of industry have experienced quite some challenging situations in their career. They were unanimous in one regard however. Every single one of them stated that the energy transition is difficult. Extremely difficult. They were all eager to state in different ways on how difficult it is:
“It is one of the biggest challenges we face as a company.”
“The complexity of the energy transition is enormous.”
“There is no silver bullet.”
All these important C-level people got me thinking. Is it really that hard? Are we not simply pretending that the energy transition is difficult, because we simply do not want to transition as it hurts our current business models? What if there are silver bullets but we have simply not yet agreed upon them? Are we experiencing a group version of the Streetlight Effect? During my epiphany, I considered the option that maybe things are less complex than we want them to be.
Just because something is difficult, is no excuse for finding solutions. This is often referred to as the Streetlight Effect.
With a background in engineering and sustainability, I have been thinking about these topics for quite some time. Technical minds strive for elegant, simple solutions that are based on easy-to-comprehend principles. This is very much in line with Ockham’s Razor: “simpler solutions are more likely to be correct than complex ones”.
While I was digesting the presentation, I came to the sudden understanding that only three basic principles are required to realize the energy transition: Electrification, Energy Mortgage and the Turntoo Model.
This article is a short elaboration on these principles, and how they form a simple framework that provide the proper incentives and guidelines for people to facilitate the energy transition. Why do I think these principles will do just that? Because I believe in the right incentives. It is an important lesson I learned from Freakonomics: create the proper incentives and people will self-organize in the most efficient way to achieve the a common goal. It is my hope that the below stated principles provide a basis for a new ideology to form a sustainable (socio-)economic framework.
Sometimes doing the right thing simply means creating the right environment and incentives for people to organizes themselves to achieve that righteous thing.
Principle 1 - Electrification (of Final Energy)
This one sounds perhaps the most self-evident of all. Electrification is quite the hype nowadays, especially when I speak to fellow believers in the energy transition. But why? And what does “Final Energy” mean? Let us pause for a moment and think about why we use energy, and for which purposes.
Have you ever wondered why we use energy? Have you ever wondered why we use gasoline for our cars and not for our lamps (anymore)? Most of us have not. As with many things, we take energy for granted. We take it for granted that we have lighting on demand, which was basically magic a hundred years ago. I believe we take it for granted because we are not interested in energy. We are only interested in what we can do with it. In the end, we only really want three things: lighting, transport, and heating. That is all we use energy for. For clarity sake, I include (industrial) motion within transport and heat includes both industrial heat for chemical processes and warming yourself after a cold winter walk inside the confines of your home.
Each application of energy - lighting, transport and heating - can be done most efficiently by means of electricity. As an engineer, I know this is an (extremely) bold statement to make, as it is subject to many assumptions. Nevertheless, from a thermodynamic standpoint, energy losses are very low when converting electricity when compared to chemical conversions. It is simply easily converted into other forms of energy. Here you might argue that chemical fuels are way more efficient to generate heat than anything else, simply because of the fact that if we burn something, everything is converted into useful energy. Which is, of course, entirely true. Chemical energy, and especially heat, can however not readily be converted into other forms of energy. It is very hard, and conversion losses are high. Electricity is a highly versatile, easily converted energy that can be used for anything. That is why we should strive for electrification. If we agree on the fact that all applications in the end-usage are electrical (“Final Energy”), how this electricity is generated will not matter (although I am positively certain this will become solar in the long-term). Once all applications are electrical, you can use any form of energy production or storage (synthetic fuel, ammonia, methanol, batteries, hydrogen) as long as these sources are sustainable.
Electrification - The end-state of any application should be electrical (Final Energy). Energy production and storage can be done in a myriad of ways, as long as the end-state is electric.
Humans want lighting, transport and heating. All these applications/forms of energy are most efficiently done with electricity.
The only thing stopping electricity from becoming the most dominant form of energy, is economical and environmental energy storage.
Principle 2 - Energy Mortgage
What happens when there is so much energy generated by renewables, demand for electricity cannot meet the supply? In that case, energy producers are forced to sell electricity on the market for negative prices. That's right, producers will actually pay consumers to take their energy. Unfortunately it is only for wholesale consumers, not your regular household. You can read more about negative prices here.
What happens when the price per kWh drops below zero due to renewable oversupply? Investors get anxious. Imagine you are an investor. You will never get your money back investing in renewable energy with a negative electricity price. And you can forget about interest on your investment. It is expected negative kWh prices on the wholesale energy market will occur more often in the future (example). What does this all mean? Investors will not invest in renewables when profits are expected to decrease. We have to face the fact that the current business model of selling kWh is rigged. It is built to accommodate fossil fuels, where the producers has a focus to sell as many kWh as possible to the consumers.
What I propose is simple. We pay for our energy in the same way as we pay for our mortgages: a fixed fee per month for a long period of time, say 10 years. The fee is dependent on the size of your house and/or family. You can consume as many kWh as you want, just like with your internet connection where you can consume as many megabytes as you like. I call this product an "energy mortgage". Why would this be a good thing? Because of two simple reasons:
The energy producer has the incentive to sell you the least amount of energy to make as much profit as possible, creating a focus on energy efficiency, storage and renewables.
With an energy mortgage, the energy producer is certain of cash flow for a longer period of time and not dependent on kWh prices, making it a low-risk investment.
An energy mortgage favors the usage of renewables and increased energy storage. Producers have the incentive to use renewables and storage, who have (way lower) OPEX costs and are therefore beneficial to this system.
I have been told such a system already exists in some places, such as Australia, but I have not found any information on it. Perhaps you can tell me more about this if you have any information.
“Free” Energy - Energy should be leased for a fixed fee only, not paid for per kWh. The latter creates the incentive for producer to sell only more, while a fixed fee for energy provides incentives for the produces to sell the least amount of kWh as possible.
When energy is leased for a fixed fee, renewable energy and energy storage automatically become more attractive.
The system already exists in certain industries. It is similar to an internet subscription, where one generally pays a fixed fee for unlimited megabytes.
A leasing model for a longer period of time provides the advantage for energy producers of having a steady and predictable revenue.
Principle 3 -Turntoo Model
This principle might be the most difficult to explain. It takes quite some time to understand as it is diametrically opposed to the linear economy. This principle is based on a completely paradigm shifting way of how we think about material transactions, or resources for that matter. Basically, it comes down to the following.
If someone sells you a material resource, the seller is responsible for proper ‘waste’ disposal and getting it back from you. The consumer (you) is not in any way responsible for handling any waste. This is the world turned upside down, for a reason. When we consider “Earth” to be a ‘pawn shop’ containing all our resources, we will need to give it back to Earth at some day, for some price. Which is exactly the way of thinking we need to ensure a sustainable use of Earth resources. Simply put: when we take something out of the Earth, at some point in time we will give it back. With the exception being those resources we eat, and get replenished by the Earth itself in a natural way (provided it is replenished by the time we have used it, such as most of the food we eat). In this way, we do not have Earth Overshoot Day in August, but each January. Of the next year.
It is not a new idea and it is not mine. The idea is from Thomas Rau (great guy). In his book Material Matters, it is stated that both the power of production and the responsibility of consumption need to be in the hands of the producer of a product. This creates the proper incentives for the producer to reduce and re-use the amount of material in its product. It is a framework to automatically transition from a linear economy towards a circular economy. One example that Thomas Rau provides in the book is with regards to office lighting. Instead of buying a light bulb, and needing it replaced after a while, he simply leases light from the producer directly. The consumer (Thomas) only pays a fee for having access to lighting. All other responsibilities fall into the hands of the producer, Philips. They are responsible for the design, construction, transport, material usage, installation, energy usage and recycling of the material. With these incentives, Philips was able to reduce energy consumption in Thomas Rau’s office by 44% and costs for the consumer went down.
Turntoo Model - If someone sells you (transaction) a material resource, the seller is responsible for getting the material back.
This principle is coming from Thomas Rau (great guy). It states that both the power of production and the responsibility of consumption need to be in the hands of the producer of a product containing a resource.
The Turntoo Model create incentives for the producer of a product, not the consumer, to limit or fully recycle the use of resources.
Personal Note
Electrification, Energy Mortgage and Pawn Shop Earth, these are the three principles you need for a successful energy transition. I have to admit: these ideas are not new. I stand on the shoulders of giants and listen to ideas from people who are a lot smarter than me. However, I do feel that the combination of the principles are a fresh, clear view towards the energy transition which will help you as well. Besides, we need to start making making the energy transition cool, with proper economic incentives. Not just a moral issue. I believe these principles can be the stepping stones towards a better future.