Spiralling Disruption: The Feedback Loops of the Energy Transition

EMEA Head of ESG Investment Strategy

We are at a tipping point. Positive feedback loops underpinned by innovation will likely lead to a mass displacement of fossil fuels by renewables. In this article, we identify seven feedback loops that are driving a rapid transformation of the global energy system.

Peak fossil fuel demand likely occurred in 2019. This marks the tipping point where positive feedback loops start to dominate the system. We identify seven virtuous and vicious feedback loops:

  1. The volume-cost feedback loop As renewable volumes rise, so costs fall, which then spurs more volumes. Falling fossil volumes mean lower utilisation rates, which increase costs and drive down volumes.
  2. The technology feedback loop More electric vehicles mean lower battery costs which then increases renewable penetration. In contrast, peaking fossil fuel demand means a collapse in innovation of fossil technologies.
  3. The expectations feedback loop As renewables continue to grow, so incumbent forecasts look ever less credible. As models change, so too do the perceptions of investors and policymakers.
  4. The finance feedback loop As growth draws in more capital, the cost of capital falls, enabling more expansion. Declining demand growth for fossil fuels force fossil fuel companies to change strategy.
  5. The society feedback loop As society becomes more concerned with the climate crisis and sees the attractions of renewable technology, more people embrace the new technologies. Adoption becomes more attractive due to learning and network effects.
  6. The politics feedback loop As technologies improve, voters and politicians realise that renewables can mean more gain rather than pain, thus driving political support for change. Meanwhile, declining industries lose money, power and credibility, and their political backing shrinks.
  7. The geopolitics feedback loop As China races ahead in renewable energy technology, the US is obliged to retool. This race for influence drives renewable technologies out to the rest of the world.

The 2020s will be a decade of cascading change, powered by interlinking feedback loops. Investors and policymakers need to understand the dynamics of change to take advantage of the new world that is rapidly opening up.