The Fuse

Feedback Loops To Accelerate Energy Transition

by Nick Cunningham | August 20, 2021

The growth of renewable energy leads to falling costs, which makes renewable energy even more competitive relative to fossil fuels, which helps accelerate the energy transition.

This feedback loop is not a new concept. But a new report explains that there are multiple other feedback loops that are currently unfolding – and will accelerate – that will push fossil fuels out of the global energy system.

“Spiraling disruption”

There are many terrifying feedback loops when it comes to climate change. Hotter temperatures contribute to melting permafrost, which releases stored up methane, which in turn leads to more warming. The fear is that the process will quickly get out of control, leading to unchecked climate destabilization.

But there are also some hopeful feedback loops that are unfolding in energy markets that could lead to an accelerated process of transition, according to a new report from Carbon Tracker.

With any technology transition, the early days of an upstart appear to be slow, but the writing may already be on the wall. “With a market share of as low as 2-3%, fast-growing challengers can take all the growth in a slow-growth market and drive the incumbent’s peak,” Carbon Tracker said in its report. After the incumbent technologies – fossil fuels in this case – hit their peak, the vicious and virtuous cycles at play, “incessantly feeding off one another,” begin to pick up speed.

“As complexity scholars note, once self-accelerating loops dominate the behaviour of a system, change runs away with itself,” Carbon Tracker said.

The report identified seven separate feedback loops that are already unfolding that will accelerate the adoption of renewables and clean technologies, and accelerate the decline of fossil fuels.

For example, there is the “volume-cost” feedback loop, which, as mentioned, helps renewables scale up at a faster pace due to falling costs.

But the same process works against fossil fuels: Lower utilization rates increase costs, making them less competitive. This is already happening in coal markets and aging natural gas plants.

The “technology” feedback loop occurs when different clean technologies build on each other. More electric vehicles will help lower the costs of batteries, which makes intermittent renewable energy paired with batteries more competitive – and vice-versa. Again, as fossil fuel demand peaks, the opposite process plays out for dirtier fuels as companies stop investing in innovation.

Another one is the “expectations” feedback loop, in which conventional business-as-usual forecasts that assume steady growth in oil and gas demand begin to look less credible, and assumptions of rapid growth of cleaner technologies become ever more mainstream.

Now, a growing number of fossil fuel projects face tough questions about whether or not they are needed at all.

The landmark net-zero report from the International Energy Agency earlier this year that called for an end to new oil and gas projects in order for the world to stay on track with mid-century net-zero emissions targets is a perfect example of this. The report did much to sever the vice grip that the oil and gas industry had on growth expectations in the public imagination. Now, a growing number of fossil fuel projects face tough questions about whether or not they are needed at all.

The “finance” feedback loop is also clearly underway. Capital flows into growth sectors and out of sectors that offer no growth. Lower capital costs will aid renewables and electrification, while a shrinking pool of capital for new fossil fuel projects will raise the cost of capital.

In 2020, the electric vehicle sector attracted $28 billion in new capital raised in equity markets, according to Carbon Tracker, a ten-fold increase over prior years. On the other side, the valuations of a long list of coal and oil producers have declined sharply over the past decade. As a result, the oil majors, including ExxonMobil and Chevron, have dramatically cut capital expenditures. That trend solidified after shareholder rebellions earlier this year at both oil companies.

Tipping points

There are also three other feedback loops identified by Carbon Tracker that deal with politics and society. The greater uptake of clean technologies leads to even more people accepting the transition, they join in, and accelerate the process. The same dynamic plays out in the political arena, with voters demanding more political support for the transition and a weakened oil lobby loses its grip on policymaking.

Finally, that political concept can be applied globally, with China and the U.S. racing to capture dominant positions in the fast-growing clean tech sector.

As each of these feedback loops begin to pick up speed, certain tipping points are breached. That, in turn, increases the likelihood that the next one is breached, Carbon Tracker argues.

For instance, renewables reaching price parity with fossil fuels has already occurred in most major markets. That increases the momentum that market or public expectations are changed, which, then increases the pressure on political tipping points.

“Quite how fast this will unfold is not yet clear. Incumbents will sweat their assets; old thinking, poor risk management and institutional inertia will persist, and the deeper paradigm shift will largely occur along generational lines,” Carbon Tracker concluded.

But with many of these processes already in motion, the question is really just a matter of time.