Opportunity knocks

The poet Wallace Stevens wrote of 'the lunatics of one idea... in a world of ideas'. He was referring to ideologues and fanatics, who, blinded by their single idea, couldn't see the world around them. But he might as well have been talking about the energy debate, where such lunacy has been all too common.

The fact is that there is no single idea that will solve the problem. First, we need new ways to use energy more efficiently. But there must be much bigger contributions from solar, wind, biomass, nuclear, and advanced fossil fuel technologies. In our current circumstances, we can ill afford the self-indulgence of those who, however well-intentioned, tell the world they are anti-this, or anti-that.

I have been talking about 'our energy problem', but this is incorrect. We really have three separate problems, each very difficult to solve. And because the solutions to one will sometimes make the others worse, the whole is greater than the sum of the parts.

The first problem is the projected increase in the use of energy. Unless the world goes into a deep and prolonged recession, by the middle of this century global energy use will likely have doubled, and electricity use will have tripled, placing great pressure on energy supplies and prices.

And in case there is any doubt, whatever role speculators may be playing in the current oil price spike the underlying issue is growing demand. This is an era in which hundreds of millions of people are lifting themselves out of poverty into what we might recognise as a way-station on the road to a middle-class standard of living — all within a few decades.

The second is that for at least the next several decades, because of the twist of geological fate which led much of the world's low-cost oil and gas resources to be deposited in the Gulf region, that volatile area will continue to dominate the global supply picture for the foreseeable future.

The third is, of course, climate change, the most complex when we consider the scientific, technological, economic and political aspects together.

The best — perhaps the only — chance we have of solving these problems, of breaking out of this triple straitjacket of price, climate, and security pressures, is to accelerate the introduction of new technologies for energy supply and use and deploy them on a very large scale.

Accelerate relative to what? Relative to what would happen if we left innovation entirely to the forces of the marketplace. This may be an obvious point, but it is still worth emphasising.

Energy innovation is different from other kinds of innovation because the major impetus for it comes from outside the marketplace. Two of our three big problems — energy security and climate change — are not now factored into the great majority of the millions of decisions made in the marketplace daily by suppliers and consumers of energy.

So, even if innovation can help solve those problems — and there is no doubt that it can — the economic incentives created by the play of market forces alone won't be enough to bring it about. The question is not whether to augment these forces, but how.

Here we have multiple and sometimes conflicting goals (lower prices, reduced carbon emissions, increased security). We have many different kinds of customers, from tenants and homeowners to giant industrial energy users. We have multiple time-scales, from a few years to many decades. Success will come not from a single implementation, but only if the technology is adopted by many firms, or by many more individuals. And finally, energy is a commodity, so cost is crucial.

The energy revolution coming soon isn't like the digital revolution, to which it is sometimes compared. It is actually much harder, because energy innovations, unlike many digital technologies, usually must compete against an incumbent technology in an existing market. This imposes tough, non-negotiable requirements on quality, cost competitiveness and reliability from the start.

Energy firms typically have tightly integrated supply chains and close ties to government regulators, and they rely on highly-regulated pipelines or wires to deliver services to end-users. This creates a formidable barrier between entrepreneurial newcomers and users, and tends to force innovation towards the upstream end of the value chain.

But many opportunities for innovation lie at the interface with the end-user. Most consumers are indifferent to energy itself — that is, to British thermal units or kW hours. What they care about are services that energy enables: comfort, mobility, lighting, and so on. The provision of energy is almost always just one part of a larger set-up in which a value-added service is delivered to the consumer.

Finding opportunities to combine energy services in creative new ways with other services and products is where smaller entrepreneurial firms can be expected to shine. We need to find ways to let them compete and grow in this important innovation space.