Underestimating change
Risks of the transition
Experience from past successful technology transitions shows the fatal tendency to underestimate change. Transformations lead to disruption, as Nokia, RIM (BlackBerry), Kodak and many others have experienced. At present the energy transition and the mobility transformation are running in parallel; they reinforce one another. This transformation will reach an unprecedented scale in a very short time. The risks that come with it will not only affect the energy and automotive sectors, they will permeate the entire economy.
Past transitions related to technologies with limited reach. The disruption was confined to a few companies. The energy transition, by contrast, affects all sectors; the scale of a transition within just 20 – 25 years can hardly be estimated. Its effects can already be felt clearly in the automotive sector.
The risks of the energy transition
Stranding risk and its consequences
Even though the transition to e-mobility is a decisive factor for the energy transition and an important driver of energy efficiency, the automotive sector is nevertheless small compared with the energy sector as a whole. The change will affect the entire economy; no sector is independent of energy supply, of energy prices. The risks associated with the transition cannot be linked directly to empirical values. Historical data on comparable developments are not available.
The catchword for the risks associated with disruption is stranding risk1, which sounds abstract. It is often dismissed lightly with the following argument: what is supposed to happen if oil, coal and natural gas stay in the ground?
It is precisely this line of argument that is fatal; the risk lies in this view. It ignores the collapse of the fossil energy sector and of the economies that depend on energy exports. The financial resources in the energy sector are by no means inexhaustible; they are used up as quickly as they are taken in through the sale of raw materials. Beyond that, the argument leaves the financial risks entirely out of account. From the financial crisis we know the significance of spill-over effects. It is unlikely that they will not occur in the energy transition. The BIS notes that they could exceed the effects of the financial crisis.
Empirical evidence and the modelling based on it indicate that the oil and gas reserves needed up to the end of the energy transition have probably long since been developed. Nevertheless, further enormous investments flow every day into the development of new oil and gas fields. These investments will probably end up as write-downs. And these amounts already clearly exceed the losses from the financial crisis.
Of course there are other models besides the empirically based ones. There are many models, but almost as many have failed; their forecasts were overtaken by reality almost always and within a short time. The spectacular failure of the IEA models is almost legendary2. This identifies one of the greatest risks of the transition: model risk
1 Stranding risk: the risk that assets lose value and, in parallel, liquidity; the emerging selling pressure leads to further losses and ultimately to a fire sale with a collapse of liquidity. The lack of tradability, the stranding, is the consequence.
The model risk
The use of a model with little robustness virtually induces wrong economic decisions. Wrong decisions on a scale that endangers the continued existence of companies, sectors and economies. These models lead to blatant misjudgements; they obscure the dangers that come with the transition, such as the possible collapse of entire economies and economic associations such as OPEC.
The automotive sector in Germany is currently experiencing what it means to have used no forecasts, or weak ones resulting from unsuitable models. With empirically based modelling, the shift to e-mobility was recognisable by 2017 at the latest.
Instead of adjusting to the global trend, the sector has tried to oppose the change. But the change cannot be stopped; even the support provided by EU import duties on Chinese electric vehicles will not be able to protect the sector, according to the empirical evidence3 of successful technology transitions. The tightening of energy consumption regulations in China, the world's largest car market, underlines the change. The attempt by some parties to revive the combustion engine will prove to be a fatal wrong decision. As a consequence, the change will hit the companies concerned all the more sharply. Automotive technology is technology on a global market; the delays in Germany will not stop the trend.
The alternative to modelling would be to do without modelling. That would be a deliberate commitment to closing one's eyes to the future. Even expert estimates, poor as they have demonstrably proved to be, are still better than that.
Modelling also reveals the heterogeneity of the change. Energy costs will not develop uniformly. Access to battery-backed 24/7 solar power is already possible in some sunny countries for less than 3 ct./ kWh, and 1 ct./ kWh is probable by 20304. This creates completely new challenges for competitiveness. The possible relocation of production sites or the move to sun-blessed economies is a decision that has to be taken. It is not to be taken on the basis of energy prices alone, but these play an important role.
3 The empirical evidence of successful technology changes is a reliable estimator for technology transitions currently under way.
4 Provided that self-generation and self-consumption of the energy is possible without using the grid (grid fee) (e.g. in Spain).
One's own conviction
Perhaps the greatest risk
The energy transition has been discussed for almost 50 years. The accelerating development has been noticed and followed by many. The arguments about the energy transition have been exchanged so often that they are no longer questioned; by now they have hardened into certainty. One example is the frequently cited, exorbitantly high costs of expanding the electricity infrastructure. These may well be based on studies by well-known consulting firms. They do, however, leave the drastic development of electricity storage out of account. Battery costs are falling very fast. The volume produced is growing exponentially, and so is storage density with every new generation of batteries. Decentralised electricity storage is the key to a fundamental reduction in (distribution) grid expansion. This electricity storage can not only absorb the surplus production of PV electricity; wind power can also be buffered well in distributed electricity storage during low-load periods. At peak times it can be released again. In part, this decentralised storage can be provided by BEVs (battery electric vehicles) through bidirectional charging. The costs are borne by the BEVs and are not attributable to grid expansion. With this approach the expansion of the distribution grids is reduced drastically, and the costs quoted in the consulting firms' studies mentioned above are so much waste paper.
In principle, all the familiar arguments that deny a rapid transition collapse when looked at today. Development is now so rapid that the press can hardly keep up with publishing it. This development is overlaid by the dramatic events of recent years, wars and severe natural disasters. In this way, doubts about a rapid transition harden into the certainty that it is not possible. Precisely therein lies one of the greatest risks. The speed is underestimated.
That is exactly the cause of the underestimation of the disruption. Except that this time it will not remain confined to individual companies like Nokia or Kodak.
Regulation as a risk
A further source of risk is regulation itself. On the one hand, regulation has in many areas developed into a considerable burden. On the other, there is an overconfidence in regulation. In the financial sector, for example, the developing regulation is partly seen as protection against the risks; the argument runs as follows: the regulators have already had stress tests carried out, and by passing these stress tests the most important risks are surely covered. So nobody needs to worry.
The empirical evidence of past technology transitions, however, is diametrically opposed to this. The disruption will probably exceed the regulatory stress tests by orders of magnitude. Whether the regulators are aware of this we cannot judge, but the regulators have already absolved themselves with corresponding disclaimers. Nobody will be able to reproach them.
Large fund investors such as insurers frequently invoke the ESG rules for funds, arguing that the rules protect against risks because they are designed in line with the transition path. However, those who drew up the ESG rules used a far less reliable estimator than empirical evidence. In fact, the apparent safety increases the danger. Should the risks materialise, this will hardly be confined to the energy market; it will shake the financial markets, as experience from the financial crisis shows.
But as already mentioned, comparable experience is lacking. Nor can this be solved with the benchmarking that is so popular among strategy consultants. The risks will in all probability develop with a new dynamic and an unknown scale. For the management of transition risks we refer you to Risk Management.
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