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The New Gold Rush

No wonder extinction rebellion is in overdrive. Despite publicly backing the 2015 Paris deal to limit global temperature rises, one billion dollars has been spent on PR or lobbying by Exxon Mobil, Shell, Chevron, Total and BP. Their aim is to operate and expand fossil fuel operations.

But what if these archaic players are fighting the last war? What if their industry is about to undergo a shift that will render their current polluting business model obsolete? What if the market, not policymakers, is now picking a cleaner more efficient way to produce our energy?

Energy Strategist at Carbon Tracker, and contributing author to ‘A New World: The Geopolitics of the Energy Transformation’, Kingsmill Bond, met up with Renegade Inc. to discuss how we’ve reached peak fossil fuels and are now making the shift to renewables.

The renaissance in renewables

The notion that the growth in renewable energy sources like solar, wind and batteries is a reality is hardly controversial. The real concern, though, is whether the market will be able to sufficiently adapt to the changing conditions in order to drive a peak in demand for fossil fuels in time to safe the planet.

According to Kingsmill Bond, “if renewable technologies continue on current growth rates, we’ll see peak demand for fossil fuels in the early 2020s.”

As with all previous shifts from one paradigm to another, the resistance to the current transition is being fought hardest by the entrenched players. So, for example, the situation in recent years is one in which the incumbents within the European electricity sector failed to foresee the peaking of thermal electricity and, likewise, their counterparts within the global coal sector four years earlier were unable to foresee the peak in demand for coal.

Bond points to two other examples – the global turbine market and the global car industry. The former, Bond says, “peaked around 2011.”

Ahead of the curve

However, the latter – who have “long denied the threat of the electric vehicle” – have, in the last two years, “completely transformed their attitude.” This has happened at a time “when there’s a thousand million cars on the road and only five million EVs. The entire global sector has realized that they need to transition to the new technology. So actually the peak can happen very very quickly and the financial market consequences are felt very soon”, says Bond.

So although it might be the case that incumbents will initially be resistant to change, they also recognize that in order to successfully compete in the market place, they need to respond to changing consumer demands. It therefore, follows, that those most likely to resist the transition from fossil fuels to renewables are actually the ones who find it very hard to stop it, particularly “when – as now – these technologies are on learning curves where the costs fall by 20 percent for every doubling in capacity.”

Bond puts some numbers to this:

“The amount of investment in the renewable sector last year was over three hundred billion dollars and the oil sector maybe invested sub ten billion dollars”, he says.

Within this scenario, therefore, it’s easy to see that the giant fossil fuel companies who, traditionally, are among those least likely to transition, are the most likely to fall behind in the profit stakes, while those who invest the most in new technologies are the ones more likely to be responsible for driving the changes and hence to be the most profitable companies in the medium to long term.

Investing in renewables that command 20 percent annual growth rates, provides a “fabulous opportunity”, says Bond.

Many of the companies who are positioning themselves for this shift are Chinese:

“You see a lot of new electric vehicle companies in China. You see Chinese companies dominating the shift to solar. You see Chinese companies dominating in long distance transmission of electricity, in electric bikes”, says Bond, who adds:

“What this means is it gives these companies an opportunity to get global leadership in sectors where they have hitherto been laggards. So, for example, the automotive industry dominated by the West but actually now gives opportunities to new players to come in.”

It’s not just Chinese companies who are benefiting from the shift:

“You’ve got software companies in California, you’ve got innovators and entrepreneurs in Germany. All across the world this is the most extraordinary amount of creativity as a result of the cost falls which have made this all possible”, says Bond.

Democratizing economies 

What are the effects on local communities and economies of being able to access distributed energy?

“If in the past you were dependent upon buying fossil fuels from abroad and building very complex systems in order to get that energy to people who are widely distributed, your ability to grow was constrained. Some countries are spending up to 10 percent of GDP on importing the fossil fuels so you find it quite hard to develop”, says Bond.

However, in an environment conducive to cheaply distributed renewable sources, the opportunity for democratizing local distributed energy arguably becomes greater. Indeed, “we see many cities and regions having their own energy policy. Providing the opportunities for local communities to determine their energy future I think is quite positive for everyone”, says Bond.

Under these conditions, the global energy dividend would be potentially huge because the amount currently spent on things like defence and fossil fuels could be transitioned to domestic sources of energy. This would create more domestic employment. Eight out of ten people live in countries that import fossil fuels, so consequently this is more equitable. For most people in the world it’s a huge benefit to have your own energy source.

“Whenever a country finds a domestic source of energy they eventually figure out how to use it and they figure it out quite quickly. Now suddenly we’re in the position where every country in the world has got a huge new source of domestic energy. It’s very inspiring”, says Bond.

‘It’s difficult to get a man to understand something, when his salary depends on his not understanding it.’

However, Bond concedes that in a debate traditionally dominated by incumbents unable to conceive of a new world, Upton Sinclair’s idea remains the overarching ideology that tends to underpin prevailing political and economic establishment ideology. Central to this, is the denial industry. “We’ve seen this consistently”, posits Bond. “First of all there’s a group of people who denied there was global warming and now the same group of people are denying there’s an energy transition. The key point to make is by doing this they’re damaging their own interests.”

Bond adds:

“If you fail to realize what’s going on and you deny reality and you pay lip service. You go bust. “

The traditional business plan model adds to the complacency and mitigates against corporations making the necessary transition. There are exceptions – Danish company, Orsted which is providing visionary leadership in this area.

Bond adds some flesh to the bones:

“They recently transitioned from being Danish oil and natural gas to being one of the world’s leading wind developers. Obviously given Denmark’s location it makes sense because here’s another example of a lot of local energy offshore which they were able to exploit.”

Bond believes that we’ll see other companies doing something similar. But in order for this to happen, we need innovative political leadership and new ways of thinking within the fossil fuel industry. “Many of the leaders of the current fossil fuel industry are clearly not fit for purpose”, says Bond. Instead they pay lip service to transition:

“Privately… it’s all green wash. They didn’t see it as a real threat and they felt it was one they could ignore. But in their public statements they were positive. Of course what happened was that over the course of the succeeding decade, these companies ended up losing hundreds of billions of dollars of stranded assets, losing up to 80 percent of market capitalization and their management teams were replaced. And I think what we saw happen to the European electricity sector a decade ago is what will now happen increasingly across the fossil fuel complex”, says Bond.

Lifting the veil

The transition from one form of environment to another is a consequence of the culmination of the adaptation of knowledge. “One of the glories of capitalism”, argues Bond, “is that it tends to react relatively quickly because capital flows to the new and abandons the old. And I believe that the current degree of under-performance of the fossil fuel sector is acting as a bit of an early warning system to encourage people to make that shift.”

Bond adds:

“I can’t stress enough that what the current fossil fuel industry does is not going to change very much. It can fight like King Canute against change but change is going to happen anyway.”

However, change will be slow. Oil will remain the world’s largest source of energy for the foreseeable future and the balance of global supply and demand will remain perilously narrow. “But don’t forget”, says Bond, “horses were the largest source of global transport supply in 1910 but they spent the next 50 years declining and that’s the point. You’re going to reach the peak just before you decline.”

Ultimately, says Bond, “energy determines geopolitics, therefore a new energy environment will mean a new geopolitical environment.”

In addition:

“We live in a world very much dominated by the geopolitics of fossil fuels. If you think about the alliances, the pinch points, the links between countries and the fossil fuel sector are very very deep.

We are now shifting to a world where fossil fuels are being replaced by renewables. We’ll end up eventually in a world where the primary energy source is renewables and that’ll have significant consequences. 

For all the countries which are currently importing a lot of fossil fuels, that means a very different political environment for them. It also means that they can possibly grow faster, they can have more local jobs.”

Bond points to India as an example of one of those countries:

“Up to half of their imports have been historically spent on the import of fossil fuels. Now 140 million people are breathing air which is 10 times over the World Health Organization recommended limit. It’s quite chilling. So actually they can solve a number of birds with one stone by implementing new fossil fuels. They can both improve the health of their people and reduce their imports and that will therefore – all things being equal – tend to drive faster domestic growth but also reduce pressures upon the currency. So we should actually see the rise in some of these emerging market currencies.”

Bond highlights two other important aspects of the transition – the decline in the influence of fossil fuel exporters over time, and the rise and influence of the countries which dominate new energy technologies.

“The most interesting aspect of this shift to a new energy source is that it’s led of course by China. It’s very notable that whilst the US has been going backwards under its current president, China has been moving forward and has been implementing both leading technologies but also they have a number of very clever policies.”

Bond highlights the switch from sea power to land power and the importance the latter will play in relation to the transmission of energy between countries:

“That again is where it’s been quite impressive to see how China is utilizing a series of infrastructure, transport and energy initiatives which going into a series of countries in order to expand their infrastructure links and thus increase its land power to its neighbours”. This is what is meant by the term ‘Belt and Road’.


How does Russia fit into this story?

“On the one hand there’s an obvious threat for Russia which is the world’s largest exporter of fossil fuels. But at the same time there’s some tremendous opportunities”, argues Bond, who adds, “So, on the one hand Russia can avoid the kind of ideological error which is being made by the United States right now. Or the kind of errors being made by the UK government investing in a dying technology like Hinkley Point and nuclear.

On the contrary:

“Russia can have a much more pragmatic approach to what’s going on and tailor its policy to suit its interests. Secondly, Russia is gifted with tremendous renewable resources both in terms of wind and solar and of course industrial expertise. I think it’s very clear that Russia can seize the opportunity as it has done in the past to be a major player in this new world.

Russia’s geo-strategic location is also a factor:

“It can act as the world’s battery and both right now in order to balance the variability of renewables with its fossil fuel resources but also in the future because of its location to act as a kind of central environment for global electricity grids”, says Bond.

Bond posits that the public are ahead of the politicians in terms of their desire, globally, to shift to renewable energy sources, “You see it in poll after poll – even in the US –  but particularly in Europe, China and India”, says Bond, who points to investors as a second group to have woken up to what’s happening:

“Investors of necessity are impacted by marginal change. Growth is increasingly coming from renewable energy sources”, he claims.

Bond argues that it will be the politicians who will probably be last to wake up, because:

“One of the arguments we seek to make is that the economic tipping point – which has happened or happening – will drive a political tipping point where it becomes increasingly apparent to a new generation of politicians that you can actually have your cake and eat it. You can have less pollution, lower costs and more votes by switching to this new system.”

The long term aspiration resulting from this is less war:

“The global environment where people have their own energy and are not dependent upon chasing after limited amounts of fossil fuels will certainly be a less stressful environment”, says Bond.

Evolve or die

Under the current transition era, it would appear that the incumbent has one of two choices to make – evolve or die.

This is certainly the view of Bond:

“It’s not new technology-driven disruption. What is different in this particular instance is the very large size of the current fossil fuel sector.

I mean, we have twenty-five thousand billion dollars worth of fixed assets that will certainly need to be replaced by the end of the century and quite a lot of it will need to be written off at some stage. That causes a lot of stress.

What we’re saying is ‘Look there’s a lot of short term pain, for some very significant long term benefits’. Now the short term pain is the risks of financial disruption, the impact on the incumbents, the stranded communities which arise as a result of the upfront cost of the transition. So there’s undoubtedly short term pain.”

Bond points to global warming as an illustration of a massive stress multiplier and argues that transition is one of the tools to resolve and reduce that. In addition, he argues that migration pressures and stresses between countries will also be reduced. “That’s another very very clear benefit”, he says.

When will this pragmatic utopia come about?

According to Carbon Tracker calculations, “we will see peak fossil fuel demand in early 2023”

“The point then from a geopolitical perspective is that people look ahead. One error that’s very often made is people say, ‘Well, we’re a very long way from renewables being 100 percent of all energy therefore when it’s 100 percent wake me up.’ But the world works on marginal change. It’s very notable, for example, that when we switched from wood to coal after 1800, coal didn’t become the largest global energy source until 1905. But the whole of the 19th century was spent working out the consequences of the rise of those countries which exploited this new energy technology. So if you are looking at the percentage share and thinking that’s going to protect you from transition you are being delusional.”

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