Energy Transition: 101

Every generation has its share of buzz words. Somewhat obscure in the current list starring artificial intelligence, data science and cryptocurrency, is energy transition, a term often used in conjunction with moving towards clean, renewable energy.

Before diving deep, let’s step back and think about the role of energy in our lives. Most of us who are priveleged to enjoy the comforts of modern life, have energy to thank for it. Almost every moment, we use energy without even thinking about it. From morning to night, think of every activity — cooking, driving, cleaning, using phones, laptops, electronics, plastics and even most furniture today comes from an energy source. At its core, we can think of energy being used for four primary purposes — heat, electricity, transportation and plastics/petrochemicals.

Listen intently and you will notice the dialogue around energy undergoing a vast change. The manner in which energy is being marketed, discussed and envisioned is changing. Power companies have started selling 100% green energy plans (electricity from renewable sources) to customers or are seen talking of being 100% renewable energy-driven. Big petroleum companies like Shell and BP have re-branded themselves as “energy” companies and are making renewables a big part of their long-term strategy. Electric cars and Tesla, have become a common buzz word and are looking to fundamentally change the automobile sector. There’s a lot happening in “Energy Transition” and all that I have discussed is just the tip of the iceberg.

In this article, I lay the framework of the what, why and how of energy transition.

What is energy transition?

Energy transition, as the name implies, is simply moving away from one energy source to another. For instance, a large population has transitioned from using wood to propane to natural gas for heating. Often, the transition signifies moving to a better alternative, either in terms of being cost effective or more convenient or less polluting or all of the above.

Post world war, we saw a transition from coal and wood to petroleum products, for its high carbon intensity. More recently, thanks to the US shale revolution, we are seeing a transition from coal to cheaper natural gas for power. The bonus is it’s less polluting. Transition has happened often in energy since the beginning of the industrial revolution along with new technology and new needs. So, why is there so much hype around energy transition this time around?

Why transition again?

As such, there are three distinct factors that drive energy transition -

Economics, Reliability & Environment

Economics is the biggest driver for the obvious reason that the market optimizes to reduce costs and maxmize benefits. For the same functionality, quality and convenience, we tend to choose the cheapest option. If given a choice between a cheaper air-conditioner and a more expensive option with higher efficiency, the market will pick the cheaper option. While an individual may be energy-efficient, the overall market will always choose solely based on economics, with all other factors remaining constant. This concept is critical because it shows the importance of government “policy intervention” to help adoption of less economic but environmentally beneficial technologies.

Reliability is the ease of access and availability of energy. It is inevitably linked to economics as an unreliable energy supply leads to volatile pricing which is undesirable to the market. The need to have reliable energy and be self-sustainable is an impetus for innovation. A great example is the oil embargo placed by OPEC (organization of largest oil producers) on the US and several other countries in 1973. At that point, US was a net importer and the embargo resulted in US oil prices rising nearly four-fold. This prompted the several foreign governments to invest in development of renewable energy and domestic fossil fuels, which subsequently resulted in technological breakthroughs such as solar water heaters, usign ethanol from sugarcane as motor fuel etc.

Environment: A greater, collective environmental consciousness is engendering the transition this time around. The impacts of global warming/ increase in CO2 emissions due to industrialization is being felt in multiple ways. Global temperature increase in contributing to more erratic weather patterns, ice is melting at a faster rate and resulting in an increase in sea level. This, in turn is impacting the ecology — animal and plant species, probably in more ways than we completely understand. While this has been happening for a while, in the last decade or so, actions to slow this environmental decay are gaining ground.

Most recently, the United Nations’ International Panel for Climate Change met in Paris in 2016, famously called the “Paris Agreement”, and set an ambitious goal to limit increase in global average temperature to well below 2 °C above pre-industrial levels; and to pursue efforts to limit the increase to 1.5 °C. About 190 countries have agreed to pursue these goals, with each country setting their own strategy to achieve it.

How can we achieve these goals?

• Reduce emissions at the source (transitioning from more-polluting to less polutting sources like renewables)
• Reduce emission by consuming less (shared transport), by conserving energy (smart lights) and improve efficiency (fuel economy)
• Removing emissions from the environment (carbon sequestration)

I will be discussing this ideas in more detail in my next article but for now, the thought I want to leave you with is — we need to change the way we consume energy. While energy conscious behavior of every individual counts, the largest change needs to be driven at the macroscopic level.

How do we transition?

Government programs such as tax incentives and rebates help in early adoption of new technologies and greener energy solution in some countries. Various federal and state governments have offered incentives for solar and wind farms, residential and commerical solar panels and have helped offset some of the costs associated with electric vehicles. But, ultimately, anything has to make economic sense to achieve scale. Incentives help create a sizeable market, drive demand and untilmately helps buy time to develop technology and drive down costs.

Since its conception, innovations in battery technology and solar panels have resulted in substantial cost reduction. Auto manufacturers are a couple of years from that point when electric vehicles (EVs) will be competitive to gas vehicles, without any incentives. About 5 million EVs were on the road globally in 2019 compared to 200 million petroleum powered cars , according to to the IEA. In absolute numbers, the market size is small for EVs but has grown strongly in the past decade. China and the European Union are leading the charge for EV adoption in the future.

Energy transition to clean energy is picking momentum but its adoption rate will be contingent on policies as much as research and development. Energy Transition has been brought mainstream mainly by “green” electricity. While this has been great, there needs to be a greater push to develop new technologies and alternative fuels such as hydrogen to satisfy other areas of energy demand.

In the next article, we will dive deeper into the specifics of energy transition technologies and breakthroughs in different demand sectors.