The Real Deal
How decentralisation gets us closer to the truth - and hopes for a clean energy revolution ...
… ’Twas in truth an hour of universal ferment … the soil of common life was at that time too hot to tread upon’. For a 21st century global citizen living in the age of climate change, this might seem like a foreboding prophecy of the future. Instead, it is an echo from the past, written by William Wordsworth in his autobiographical poem, ‘The Prelude’, in 1805, and reflecting on his experience of the smouldering atmosphere on the metropolitan streets of revolutionary France in the 1790s. Some 200 years later, when asked by Henry Kissinger about the impact of the French Revolution, Chinese Premier Zhou Enlai was reported to have quipped: ‘It’s too soon to tell’. So too, there remains much to prove today as to how the ‘Clean Energy Revolution’ is getting on in cooling the soil, as we look to the future and the prospects of entering the hottest year in recorded human history.
The deal on the table in 1789, in many ways defining the French Revolution, was the ‘Declaration of the Rights of Man and of the Citizen’. It had a lot going for it. Inspired by Enlightenment ideals such as liberty, equality, and fraternity, it aimed to guarantee basic rights and freedoms regardless of social status and to replace the strive for centralised control under the absolute monarchy of the ‘Ancien Régime’ with representative government. And it paved the way for the abolition of feudalism. However well-meaning and inspirational for human rights and democratic movements, it also had its share of shortcomings and unintended consequences. The Declaration itself didn’t apply to women or slaves. The revolution developed into the ‘Reign of Terror’ between 1793 and 1794 (or ‘Year II’ of the revolutionary calendar), and unresolved tensions culminated in the Napoleonic Wars.
French revolutionary heritage returned to punctuate the history of the Clean Energy Revolution in 2015 with the legally binding international treaty on climate change known as the ‘Paris Agreement’, adopted by 196 countries at the 21st Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change (UNFCCC). The Paris Agreement aimed to limit global warming to well below 2C, preferably to 1.5C, compared to pre-industrial levels. It aimed to increase countries' ability to deal with the impacts of climate change. It aimed to make finance flows consistent with a pathway towards lower greenhouse gas emissions and climate-resilient development. And it included a mechanism to review progress on its implementation, and to increase ambition over time.
The latest deal on the table in 2024, the ‘Dubai Agreement’, was struck at COP28. The headline ‘Global Stocktake Agreement’, following up on the mechanism introduced by Article 14 of the Paris Agreement, was not an actual treaty with signatures but a consensus document that outlined steps to accelerate climate action before the end of the decade. I discussed this document in my prior Substacks, including ‘What’s the plan?’ and ‘The Hangover’. But the Dubai COP also produced other deals: the ‘Declaration on Climate and Health’, which was signed by 124 countries, recognising the health risks of climate change and committing to action, and the ‘Declaration on Sustainable Agriculture, Resilient Food Systems, and Climate Action’, which was signed by 159 nations, representing nearly 80% of the world's land area, and that aimed to integrate food and food systems into national climate plans.
So, is this latest French-inspired climate revolution working? On the one hand, the Dubai Agreement built upon the foundations of the Paris Agreement. But on the other hand, it was a fundamental acknowledgement of a lack of progress towards reaching its goals. Despite 20 years and $9 trillion of investment in renewable energy and the grid, greenhouse gas emissions and global average surface temperatures are still going up and fossil fuels (still 80% of energy and the largest human caused contribution to climate change) are not yet substantially being displaced. There were however some remarkable features and reflections of the interfaces between ideals and reality. For instance, the Dubai Agreement marked the first time that a COP outcome acknowledged the need for a transition away from fossil fuels. The Agreement explicitly called for a phasing down of (albeit ‘unabated’) coal, but also called for pragmatism in that, as it stated, ‘transitional fuels can play a role in facilitating the energy transition while ensuring energy security’. The corollary of 80% of the world’s energy being fossil fuels is that we can’t yet do without it.
There is something in this relationship between realism and idealism that merits more attention. Indeed, the headline objective in the Dubai Agreement’s ‘calls on Parties … to contribute to global efforts’ speaks volumes: ‘Tripling renewable energy capacity globally and doubling the global average annual rate of energy efficiency improvements by 2030’. It is because of time (decades), cost (trillions), resource intensity (e.g. metals, minerals, and the associated environmental and social impacts and unintended consequences) and limitations (e.g. large-scale industrial heat and transport fuels) that renewable energy capacity cannot go it alone. At the same time as the clean energy revolution takes shape and builds speed and scale, fuelled by the sun or wind or heat or whatever we can source sustainably, we must stop wasting three quarters of the energy that we are generating. That’s why the Dubai Agreement contains one of the most truly revolutionary proposals to date, which is to place energy efficiency alongside renewable energy on the front line of the battle.
Given that most energy gets lost in the processes of extraction and conversion (around 10%), generation (around 50%), transmission and distribution (around 10%) and end use (around 10%), this is one of the largest, most urgent, and most impactful problems to solve in the clean energy revolution – not just making more energy, but wasting less. See my Substack, ‘The War on Waste’. The clue as to how to address it is in the breakdown that I have just given and that the waste results largely from the centralised generation of energy. I go deeper into this topic, and why in the world the global energy system has been built like this, in my Substack, ‘The Perfect Problem’.
So, if this is a real problem - which it is - then what does a real solution look like? And in the real world? We might then get towards a discussion about the real deal.
As a first step, efficiency suggests doing the same or more with less. On the demand side of energy, this can involve replacing mechanical and electrical infrastructure assets associated with how energy is used, for instance by changing lighting, heating, ventilation, air conditioning, building management systems, motors, and controls. Given that most energy is used in buildings, industry and transport, the total addressable market is measured in the trillions. A white paper released this month by the World Economic Forum pointed to the potential for a reduction of energy intensity (that is energy used for each unit of economic output or GDP) by over 30%, worth up to $2 trillion in annual cost savings. Governments should mandate it because waste is not ok, and companies should do it because it’s better business.
At the same time, massive generation, transmission, and distribution losses associated with the centralised energy system, which builds energy in one place to supply a demand load in another, can be addressed by decentralising energy generation, bringing it closer to the point of use. This can help to deliver energy closer to its ‘true’ cost, rather than bearing the burden of most it being lost in the journey to get where it’s needed. As I cover in my Substack, ‘Blowing Hot Air’, this can avoid the loss of heat in the generation process by putting it to good use or work, and unleashes the deployment of a wide range of renewable energy technologies and solutions, such as waste heat recycling from industrial processes, ground, and air source heat supply, distributed solar and electrical and thermal storage.
Efficient and decentralised generation of energy, taken together as a phrase, forms the acronym ‘EDGE’, which inspires the name of my book, ‘The Edge: How competition for resources is pushing the world, and its climate, to the brink – and what we can do about it’ (published by Nicholas Brealey Publishing, part of the Hachette Book Group). The book aims to locate where we are in the Clean Energy Revolution in the context of history and to help chart where we go next, and how fast. It aims to consider the wider context of energy, climate and conflict, and also to be practical, described from my perspective as an institutional investor, managing public and private investment vehicles at Sustainable Development Capital LLP (SDCL), involving a portfolio of $2.5 billion of capital commitments, and specialising in the ‘EDGE’ markets.
The book, The Edge, looks to the future and seeks to recognise patterns from the past, but it also helps to frame how we understand the present, the importance, urgency, cost effectiveness, security benefits and huge carbon abatement power of being more efficient, and how the process of decentralisation can expose the truth about the source of the problems that we are trying to solve.
Today’s news headlines contain a litany of examples of the travails of the Ancien Régime of centralised energy systems. Only this week, we have seen further huge delays and cost increased the long planned nuclear power plant in the UK, Hinkley Point C, now scheduled for operations in the third decade after it was planned. As Europe diversifies its sources of natural gas after Russia’s invasion of Ukraine (Ukraine translated into English from Russian means, literally, ‘On the Edge’) and tries to reduce its use, so the United States government has halted permits for new LNG export infrastructure until the Department of Energy comes up with a plan consistent with climate goals. The United States was positioned to step into Russia’s shoes after it cut off 40% of Europe’s supplies, but it relies on being shipped rather than piped. Meanwhile, Russia’s plans to replace the European market with China have come under pressure as its western ‘Power of Siberia 2’ pipeline is delayed, reportedly amidst savvy negotiations by Chinese buyers over the real deal that it is willing to do while Russia lacks alternatives. Those at the grittier end of the Clean Energy Revolution will be watching this closely as China’s transition from coal (55% of energy) to natural gas, just as it expands renewables, will be defining.
Meanwhile financial markets at the beginning of 2024 are having their own go at trying to reconcile their hopes for the future to the reality of the deals of the past and present. Massive government spending in the aftermath of the Covid-19 pandemic has ballooned government debts since the beginning of this decade, contributing to ending the zero-interest rate policy (ZIRP) period of the last one. The ‘real deal’ for interest rates may in fact turn out to be closer to the 4% levels before ZIRP, as implied by the prevailing yields on the 10-year US and UK government bonds, than the low-cost borrowing rates encouraged by central banks to stimulate economies during it. Money, like energy, is valuable and the real deal will involve being efficient with the use of it. Wasting it on energy is not. Likewise in the energy market, decades of relatively cheap Russian gas in Europe and subsidised fossil fuels kept energy prices low, but the lid came off for many nations and industries with Russia’s invasion of Ukraine - and there are plenty more geopolitical flashpoints to stoke concern as I discuss in my Substack, ‘Pens and Swords’- with inflationary effects, forcing a confrontation with reality and a fresh approach to achieving hopes for the future.
Identifying the noise in the system – whether it be stimulus for the economy or masking and burdening the inefficiencies of the centralised energy system and its cost, and climate and security risks on society – we can start to reveal the real problems and develop the real deal: what we might do about them.
The real deal – and we have seen glimmers of what it looks like in the US Inflation Reduction Act, in the European Energy Efficiency Directive, and even in parts of China’s 14th Five Year Plan - will involve doing more with less, improving productivity and competitiveness and, in so doing, achieving better, more sustainable economic growth and investment returns.
Now that really would be revolutionary …
Picture credit: ChatGPT 4.
Video credit: Hodder & Stoughton Limited, an Hachette UK company.
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Epilogue
An outstanding highlight of my year last year was having my name printed on the same page as Sir Simon Schama in the programme for the Cliveden Literary Festival, where I spoke about my book, ‘The Edge’. He was my inspiration to study history at Oxford and author of possibly the best book ever written on the subject: ‘Citizens’, on the French Revolution.