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It's energy, stupid.
Why restoring energy surplus is mission #1, including for Energy Transition
The deep, deep impracticalities of exclusionary “ESG” policies have been thrown into stark relief with the current energy crisis in Europe. These policies have failed to grasp what the Chinese clearly state in their energy transition plan - we need to build before we remove. The failure of the West, but Europe in particular, to grapple with the realities of energy security leaves us this farcical position whereby new production isn’t allowed domestically (nor indeed is it supported in developing countries through development organisations) yet Europe will happily remain in hock to petrostates with grim governance, environmental and human rights records. Meanwhile, energy scarcity not only causes immediate hardship, but imperils many of the other things we want to do, not least energy transition. This basic point around energy availability is somehow lost in the weeds of discussions around least-cost pathway modelling etc, but is made brilliantly by Rob West of Thunder Said Energy in this podcast, largely discussing this recent note.
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Inflation squeeze: We’ve gone from the spending 4% of GDP on energy to spending 14% - a 10% loss straight away to just keeping the lights on, money that could be spent doing other things we care about, including energy. Rob’s work suggests that this is worse than the 70s oil crisis:
Europe Energy Crisis going to deepen over the coming years - he expects next year to be worse than this and then worse again in 2024. This requires a genuine war-time effort to ensure that things get back on track. (Luckily there is evidence of things moving with amazing alacrity in Germany.) Globally, Rob expects energy deficit to move from 2% today to 10% mid-decade, absent drastic action.
The average material that is required for the energy transition will see demand go up by a factor of five, with some things like lithium going up much more drastically. This requires huge investments in downstream production and other infrastructure.
This build out (Energy Transition being the World’s Biggest Construction Project) will require us to invest 7% of the world’s energy in building everything we need - solar panels, batteries, turbines, etc.
Food implications - 25,000 TWH per year of food is produced every year (caloric content), which requires about 10% of that in additional energy input from fertilisers. Energy shortages (and gas shortages in particular) feed directly into food inflation and harm the poorest.
In Energy Transition, too often perfect has been the enemy of good - slower to allow gas to replace coal and in particular, stymied the ability for nuclear to play as big a role as it should.
Nuclear - In the last 20 years, we’ve built 6GW per year of new nuclear and retired 5GW per year. We need to stop shutting down existing plants to put the market back into growth. Life extensions cost about $650 / KW, or 25-50% less than new renewables. This puts nuclear power plant life extension in the no-brainer category, as countries like Japan and states like California are realising.
The invasion of Ukraine is a stark reminder that, whilst we need to work to mitigate climate change, there are many other terrible circumstances that we need to work to avoid in the interim.
Impact on supply chains - energy scarcity filters down to many tiny potential bottlenecks for energy transition. Example - The front contact of solar panels contains silver, about 20g of silver per KW, used because it is the most stable metal and doesn’t mix with the silicon. Today about 20% of silver is used in PV panel production. So to increase solar panel production 5x would be equivalent to the total of current production. What is required to ramp silver production? Need to leech the silver out of pulverised ore using sodium cyanide. To make sodium cyanide you react sodium hydroxide and hydrogen cyanide. How do you make hydrogen cyanide? By reacting ammonia (currently all made from natural gas) with….natural gas! Where do you do it? In Europe, which is desperately short of natural gas. Hmmm…
Energy sector - there is a risk that the traditional energy sector ends up doing too well out of this shortage - creating in-fighting, labour issues, rent seeking. The dynamic of the oil and gas industry doing well when the rest of the world is not would create a lot of tension and make it harder to get things done.
Core focus should now be on restoring energy surplus by increasing natural gas production from friendly democracies that have high-integrity, low-leakage production.
Societal aspirations - final, but absolutely crucial point - the general thrust of the conversation around energy transition is that we want to ossify the world we currently live in and just have it with no carbon. I’d have to agree with Rob here that this is profoundly depressing. Elon Musk put it perfectly about why he built SpaceX - “Life needs to be more than just solving problems every day. You need to wake up and be excited about the future.”