We need cheap, abundant energy

Here’s how we get it: more R&D, and fewer red herrings. Co authored with Joe Kaplinsky.

Mary Shelley’s novel Frankenstein, or the modern Prometheus (1818) suggested that human power over nature could lead to tragedy. Then, a century after Shelley’s lone doctor foolishly experimented with human body parts and electricity, Karel Capek’s play Rossum’s Universal Robots – performed in London in 1923 – mixed biology with large-scale industrial processes, and had the resulting worker androids turn against their manufacturer.

Movies soon developed the same theme. Man became subordinate to machine in Fritz Lang’s Metropolis (1927), Stanley Kubrick’s 2001 (1968), and James Cameron’s The Terminator (1984). Still later, even software engineers had become nervous. As the 21st century began, Sun Microsystems co-founder Bill Joy argued that genetics, nanotechnology and robotics could conspire together to rid the planet of mankind.

Today, environmentalism fears that continued industrialisation could warm the planet enough to annihilate it. Yet the world should resist such dystopias.

Cheap energy is good for us all

Unwittingly, a growing but chaotic civilisation on Earth has changed the planet’s climate. Now, with a more conscious approach, people can gain still more civilisation by adopting a less chaotic energy regime.

We believe that if the world could be more thoughtful about energy supply, individuals could be thoughtless about their energy use. This isn’t irresponsible. What has proved irresponsible is the West’s 30-year neglect of investment and innovation in energy supply.

Thoughtful ingenuity, not changes in consumer awareness or behaviour, is the way to exit today’s energy crisis – and the way to deal with a warming planet.

The problem is that both energy firms and the state have abdicated responsibility for technological advance, preferring displacement activities in finance and elsewhere. Indeed, this abdication isn’t peculiar to the energy sector, but general to capitalism today.

An economic and technological programme for universal energy supply would have a broad political effect, too. It would energise humanity, by organising enough cheap energy for people to lead richer and freer lives. We must put energy in perspective, however. Just as questions of energy cannot be reduced to climate change, neither can the fate of the world be reduced to energy. Innovations in energy supply need to accompany innovations in other sectors, if the root causes of backwardness around the world – and of genuine environmental degradation – are to be tackled.

Alongside other investments, though, energy can help humanise the planet and make it a delight to live on. Human beings are multi-talented. By integrating energy innovations with other innovations, human beings can do more than just survive. They can make the environment a place where they can better realise their potential.

Mitigating or adapting to climate change isn’t as desirable as developing a 30-50 year gale of new-generation technologies, in energy and elsewhere, aimed at transforming the planet in a human direction. But to meet the world’s needs to recover a sense of human capabilities in innovation, both in and beyond the energy sector.

Some of our science is missing

It’s vital that people get serious about basic scientific research conducted entirely for its own sake. In March 2008, Britain’s Science and Technology Facilities Council announced that it could no longer finance Cheshire-based Jodrell Bank, one of the world’s leading centres of radio astronomy. As the Times noted, the proposed saving of £2.5m a year was equivalent to the grants and subsidies paid out to the Prince of Wales in 2007.

In 2008, the heir to the British throne gets more funding than research into fundamental aspects of the universe. There’s no predictable or measurable ‘pay-off’ for basic physics, so it’s left to languish. In 2004, the Engineering and Physical Sciences Research Council (EPSRC) showed just how much nuclear fusion is valued in Britain. In its largest ever grant allocation, the EPSRC lavished £48m on the UK Atomic Energy Authority (UKAEA) at its Culham site in Oxfordshire. Over four years, this amounted to just £12m a year. How unambitious!

People need to know how contemptuous Western elites can be toward scientific research. Sir David King, previously the government’s chief scientist, used the opening of the CERN Large Hadron Collider experiment in Geneva in 2008 to suggest that it was ‘all very well’ to search for fundamental particles, but that ‘we need to pull people towards perhaps the bigger challenges where the outcome for our civilisation is really crucial’ – in other words, toward climate change. Again, this reveals distinctly low horizons.

Research, investment and the Enron paradigm

In 1969, Robert Rathbun Wilson, the US physicist who built Fermilab, the world’s highest-energy particle accelerator laboratory, addressed the Congressional Joint Committee on Atomic Energy. Rhode Island Senator John Pastore asked Wilson to spell out what research into high-energy particle physics would do to improve the defence of the United States.

Wilson gave a reply that went down in scientific history. Fermilab, he said, had “nothing to do directly with defending our country, except to make it worth defending”.

Civilisation needs to recreate the pride in human curiosity that Wilson evoked. Research into the secrets of the nucleus, like earthbound or space-bound technology that improves mankind’s grasp of the cosmos, is worth defending in its own right – even if it brings no benefits to energy supply.

That said, we’ve no doubt that such research will, over the course of the 21st century, help the world put together some impressive advances in the generation and transmission of energy.

“Financial engineering takes precedence over physical engineering”

The financialisation of the firm substitutes for genuine innovation

The West has a slothful record on innovation, especially in energy. As the IPCC’s Working Group III puts it, a technology and R&D response to the challenge of climate ‘has not occurred’.

In the US, weak investment by general business is the context for dismal investments in energy R&D, whether public or private. Between 1959 and 2007, the ratio of gross private investment to America’s GNP hovered around 15 per cent. By way of comparison, in continental Europe in the 1950s, the ratio of gross fixed investment to GDP mostly exceeded 25 per cent. In China in 2004, the ratio of total fixed capital formation to GDP was an astonishing 41 per cent. Worse, from 1999 to 2005, US outlays on non-residential equipment and software dropped from 55 to 45 per cent of gross private fixed investment, while those on housing rose from little more than 25 per cent to nearly 40 per cent.

US investment has tilted toward housing and, since 2005, toward commercial property. The main innovations have been in finance, not engineering or energy. In the US but also beyond, ‘new product development’ often has had little to do with technological innovation, and everything to do with new forms of finance. And nowhere has the broad financialisation of the firm and of industry been clearer than in energy.

The practices of Enron – once the world’s largest firm trading energy and America’s seventh biggest corporation – have proved more exemplary than exceptional. Just as Enron started out mainly in gas pipelines and ended up mainly in financial instruments known as derivatives, so the ‘business models’ favoured by energy firms today tend to focus on streams of revenue, not streams of fuel.

Derivatives are ways of betting on the price movements of a thing rather than buying the thing itself. During the post-war boom, one could bet on the future price only of basic commodities such as wheat. But in 1972, the collapse of fixed rates of exchange for currencies led the Chicago Mercantile Exchange to offer international businesses the chance to speculate and especially insure themselves through bets on currency futures. Then, in 1974 and 1978 respectively, gold and energy futures began to be traded.

Today’s market for derivatives, however, only emerged in the 1980s, when the discipline of risk management expanded out from corporate finance departments into every aspect of business practice. It was in the 1980s that the desire to hedge against the future price of everything – currencies, interest rates, raw materials, the stock market – established burgeoning derivatives markets not just on exchanges, but also among private parties.

In the late 1990s, Enron began to offer derivatives related to energy prices and future weather conditions over the Web. In this way it was able to capitalise on investors’ fears. Meanwhile, the relative weakness of US business investment, again born of risk aversion, meant that there was plenty of cash around for Enron to borrow – at low rates of interest.

Since the 1980s, the energy sector has helped deepen capitalism’s general preference for corporate acquisitions over innovation.

Whingeing and preaching

In his book The Culture of Complaint (1993), the Australian critic Robert Hughes brilliantly attacked a divisive trend: approaching politics as a plaintiff or a supplicant victim. Consumer complaints about energy utilities were not among Hughes’ chosen targets. Nevertheless, he implicitly anticipated how in 1998 complaining about utilities became institutionalised. In New South Wales, Australia, six electricity suppliers and one transmission company set up an Ombudsman to handle complaints. The following year, Britain’s Office of Gas and Electricity Markets (OFGEM) was formed. Today, it declares the protection of consumers its ‘first priority’. In 2000, too, the British government also established Energywatch, a watchdog whose mission was ‘to get the best deal we can for energy consumers’.

Posturing politicians like to present the consumer as vulnerable to rapacious energy utilities, always out to rip people off on prices and skimp on customer service. The truth about energy today, however, is a little more complicated.

Take the fashionable concept of ‘energy services’. Here, the supply of power and heat to a home or organisation is nothing compared to the multi-faceted service relationships that electricity and gas utilities now want with their customers. Forget kilowatts and kilojoules; think billing, call centres, web sites and IT systems for customer relationship management. Utilities now believe that their task is to increase customer loyalty, stop customers defecting to other suppliers (‘churn’), flaunt Green credentials, and build trust – not just with consumers, but also with state regulators.

Energy innovation has now been largely reduced to… discounts for use at weekends. In energy services, the ghost of Enron lives on. It’s possible to be in the virtual, financial energy business more than in real energy supply.

Meanwhile, governments preach the red herring of conservation.

“Only in today’s dumbed-down society can metaphors successfully pass as theories”

In the summer of 2008, the UK householder’s bill for energy topped around £1300 – high not just for the poor, but for middle-class homeowners too. In the autumn of the same year, Gordon Brown announced a £1bn initiative for conservation measures, including insulation. But the problem is that going Green in home energy means more than just adding insulation. To maximise energy efficiency means redesigning complete building envelopes to incorporate heat recovery through mechanical ventilation systems. In practice, that would require making houses with integral air-conditioning, or ‘active houses’.

People are right to suspect that insulation – like the microgeneration of electricity from people’s homes – may turn out to be a fool’s errand. No wonder the government finds them ‘reluctant’ to change their behaviour, even when it insists that efficiency measures are ‘demonstrably cost effective’.

Schumpeter’s ‘gale of creative destruction’ vs business models

When in 1942 the economist Joseph Schumpeter famously described capitalism as being in a ‘perennial gale of creative destruction’, he wasn’t just reflecting on technological advance during the war. Competition with and the destruction of commercial rivals was also his focus. These things now occurred, Schumpeter argued, not just by changes in price, product quality or sales volume, but also by a new, ‘powerful lever’ behind long-term improvements in output and cheapness: new consumer goods, technologies and methods of production or transport, as well as new markets, sources of supply and forms of organisation. Thus technology formed only a part of Schumpeter’s approach to economic development.

While Schumpeter’s comprehensive approach had merits, today’s experts in innovation go too far. They give a nod to R&D; but they add and implicitly prefer just about any other stratagem to it. Business models have the last word, and innovation can mean whatever you want.

What these models have in common is a limited amount of genuine technological innovation; a stress on expensive, high-margin consumables and software; an attempt to drive up switching costs on the part of users (‘lock-in’ to proprietary systems); a reliance on advertising, branding, retailing, franchising, and more or less regular ‘hits’ on users’ finances.

Mobile phone companies, digital TV broadcasters and Internet Service Providers have scores of formulae for their subscriptions and call rates. In energy, utilities do something similar. The net result, however, has been consumer annoyance that, for all the babble about payment regimes, basic service can often go wildly wrong.

Dumbing us down with User-centeredness and Open Innovation

Today we see an emphasis on user-centeredness and open innovation, while R&D is stagnant in the West. Management consultants Booz Allen propose that ‘just throwing money’ at R&D ‘isn’t the answer’. In fact, throwing money at energy R&D would make a change.

What the world confronts today is not a knowledge economy, but rather a relative scarcity of knowledge. People no more live in a knowledge or network economy than they live in a consumer society. Knowledge is the basis for innovation, but the fact is that the world doesn’t have enough of that either. People never lived in the atomic age or the space age. They are not engaged in life after the oil crash; nor are they about to move into a hydrogen economy.

In the same superficial vein, open, networked ecosystems of innovation represent a disingenuous reading of the field through the spectacles of IT and of biology. There’s no reason why technological and other kinds of innovation should resemble the flow of electrons around a physical grid, and no reason why the conscious, human activity of innovation should emulate the unconscious, Darwinian world of random mutation and natural selection. Analogies and metaphors are all very well. But only in today’s dumbed-down society can they successfully pass as theories.

To present innovation in ecological terms is to make a new twist on an old myth. Indeed, the illusion that the Earth’s ecosystem, rather than human activity, is the key source of wealth is now deeply embedded in mainstream economics. Yet genuinely innovative physical grids – in electricity, broadband, hydrocarbons and water – are more important to a humanised planet than rhetoric about networked innovation.

We have no doubts about the potential, in new technologies, for innovation on a grand scale. But as we have shown there are significant barriers to that kind of innovation. So long as precaution and environmentalism dominate the thinking of society, today’s boom in wind turbines is unlikely to assume the dimensions of Schumpeter’s gale.