Energy Transitions? Not So Fast.

Stock SectorApril 18, 20187min7
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Daniel Kahneman, a Nobel laureate in Economics, wrote a bestseller called “Thinking, Fast & Slow.” The book describes System 1 thinking, which is fast and automatic, and System 2 thinking, which is slow and deliberate. This framework can be used to understand two of today’s most prominent energy experts: David G. Victor and Vaclav Smil.

Vaclav Smil is perhaps the world’s premier thinker on all things energy, and when it comes to the pace of upcoming energy transitions his thinking is “slow.” By contrast, David G. Victor is in the “fast” camp. Victor recently published a policy paper on energy transitions, which argues against the inevitable inertia of fossil fuels. Indeed, his paper points to “tsunamis of innovation” that are washing over the energy industry.

But first, let’s take it slow. Vaclav Smil is famous for his ability to synthesize across disciplines and illuminate energy’s impact on every aspect of the economy. Perhaps more importantly, Smil is also a “slayer of bullshit,” according to David Keith, an energy and climate scientist at Harvard.

In a must-read article, Paul Voosen examines how Smil has profoundly influenced the world’s conception of energy transitions. Smil summarizes humanity’s major energy transitions in three stages: fire, farming, and industrialization. The most recent stage — industrialization — is particularly significant because it ushered in the era of energy dense fossil fuels.

As Voosen puts it, Smil’s central claim is that the world now “faces its fourth energy transition: a move to energy sources that do not emit carbon dioxide, and a return to relying on the sun’s current energy flows.” This fourth energy transition poses a unique challenge, however, because it is utterly unlike those of the past.

Humans have historically abandoned fuels with lower “power density” for fuels with greater power density. For instance, people moved away from burning wood and toward denser fuels such as coal and oil because they produced more energy. In other words, per Voosen’s profile of Smil, “humans have typically traded relatively weak, unwieldy energy sources for those that pack a more concentrated punch.” But today, the world is going in reverse. Investors and activists alike are seeking to “climb back down the power density ladder, from highly concentrated fossil fuels to more dispersed renewable sources, such as biofuel crops, solar parks, and wind farms.” Humanity has always exploited evermore energy dense resources — until now.

True to his “Thinking Slow” approach, Smil notes that the fourth transition could last a long time. Looking back at history, Smil observed to Voosen that such transitions are slow and hard to predict and that “existing technologies have a lot of inertia.” Overall, Smil forces us to recognize the strong staying power of fossil fuels, and, Voosen says, to “question many of the rosy assumptions underlying scenarios for a rapid shift to alternatives.”

David G. Victor, by contrast, is “thinking fast” by envisioning a more rapid energy transition. His core message is unpredictability — which can quickly upend our energy paradigm.

At first, Victor seems to agree with Smil. He acknowledges in his paper that for decades it was fairly easy to predict what would happen because energy systems had significant inertia. The received wisdom was that our energy future would therefore reflect the past, with some small changes on the margin. Crucially, though, that is not the case today. According to Victor, predicting our next transition will be much more difficult because “almost every aspect of the energy system is changing simultaneously, and, when complex systems change in complex ways, predictability goes down.” Victor notes the new technologies and innovations that have transformed our oil and gas markets, and challenged the traditional electric utility business model.

Are these all these changes mere coincidence? Hardly. As Victor argues, “these massive changes aren’t just unfolding in parallel. They have common roots in the application of digital and control technologies and advanced materials.” With characteristic optimism, Victor interprets these changes as “just the beginning” of even greater disruptive transformations.

Victor concludes with a call to action. He claims the most important new priority for energy is “the need to find new businesses and policies that will unleash massive capital behind new technologies.” Not surprisingly, Smil differs in this respect, and is “not comfortable offering solutions … sweeping government policies or investment strategies.”

It seems, then, that we are left with two equally plausible explanations. Who is right? Victor, the technological optimist? Or Smil, the historical pessimist?

Smil says his pessimism is rooted in history, but even some of his supporters, such as David Keith, think he puts too much stock in the energy patterns of the past. Nevertheless, Smil says he’d delight in being proven wrong. My own “fast thinking” is that it will be a slow transition indeed.

Quinn Connelly is a 2018 MBA candidate at Vanderbilt University’s Owen Graduate School of Management.

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