Energy in Transition…

While the frenzy and hype over the “end of the Hydrocarbon Era” may have abated somewhat, only a fool would conclude that the issue has gone away.

There seems little doubt that we are moving through another period of transition from one primary energy base (hydrocarbons) to a more multi-faceted one- that of renewable energy sources.

Forecasting exactly when and how this transition will occur (and even the extent to which it must) is a mug’s game. Humans have a seemingly innate tendency to extrapolate from what happened in the past far into the future, while at the same time becoming over-enthused about a new technology. This is also coupled, particularly in the case of hydrocarbons (fossil fuels), with the “doom view”- either “oil is going to run out” as propagated by the once-popular Peak Oil scenario, “it’s soon going to be stranded in the ground” in the Peak Demand scenario.

In reality, there are so many factors involved in the current transition that the real skill will be in determining which will exert the most leverage, and the extent to which those will influence the speed and scale of change.

While past may not be prologue, energy transitions tend to take decades, not years. Research by Vaclav Smil shows that it took coal 55 years to go from 5% to 40% of global energy supply; while oil took 60 years for the same shift; and it has taken natural gas 55 years to go from 5% to 25%. If one contemplates the fact that renewables currently provide little more than 3% of overall global energy supplies, one can imagine that their transition to importance, let alone dominance, is unlikely to be measured in years.

Secondly, as the population of the world continues to expand, potentially reaching 10BN (from c. 7.5BN today) at its currently expected peak in 2050 (a forecast that will, no doubt, also be wrong!) absolute energy consumption is only likely to increase, even if some parts of the world (e.g., the EU) strive to reduce it. Existing technologies, based on hydrocarbons, seem more likely to supply that larger population with its energy needs in that timeframe, in the absence of some yet unforeseen technological breakthrough, or a draconian implementation of measures aimed at curbing the risk of irreversible climate change through curtailment of hydrocarbon use. While not impossible, both seem unlikely in the near to medium term.

Thirdly, sources such as hydrological and nuclear power simply do not have the capabilities to meet growing demand, even at the margin- the former because it is limited and localized; the latter because of lingering distrust and extremely long project lead times. Solar and wind are more scalable (as has already been seen), but require use of significant space, raising the issue of alternative land uses unless somehow located offshore.

Fourthly, people sometimes mistake the technology for the solution, rather than an incremental shift in application of an idea. The rise of electric vehicles as replacements for those powered by internal combustion may be inexorable, but some technology has to produce the energy that they will store in their batteries. Renewable sources are no more likely to be the source for that power than any other for now.

None of this is to argue that there will be no transition. Rather, it is to point out that fixating on any one path, technology or timeframe is inherently misguided. If ever a situation called for scenario planning and weighting of both probability and impact, this transition does.

At Awbury, our approach is always to make an analysis of all relevant factors affecting a risk, and then aim to ensure that our portfolio can survive any realistic scenario, however seemingly remote or extreme.

The Awbury Team

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