Absurdities encountered in the course of the energy transition

August 13, 2018

Prof. Jonas Puck about paradox phenomena of the energy market

The European Union has set itself new energy-transition targets for 2030. Achieving them may, however, prove even more difficult than originally thought: Taking a closer look at four particularly paradoxical phenomena on the global energy market, Prof. Jonas Puck, Academic Director of the MBA Energy Management and Head of WU Vienna's Institute for International Business, explains not only how complex an issue the energy transition actually is but also what role human psychology plays in this context.

A plant is growing inside a lightbulb — On the path to the energy transition there are still some obstacles to overcome. Photo © CC0 Licence

Recently, the EU member states, the EU Parliament and the European Commission agreed on a new policy objective regarding the transition to renewable energies. By 2030, renewables are to account for 32% of the EU's total energy consumption. Energy efficiency across the Union is to increase by one third.

Taking a closer look at four paradoxical energy-market phenomena, Prof. Jonas Puck, Academic Director of the MBA Energy Management and Head of WU Vienna's Institute for International Business, explains not only how difficult the energy transition will be but also what effects the irrationality of human behavior will have in this context:

1. The rebound effect

It existed even in the days of Thomas Edison when people made excessive use of the light bulb. As a rule, an increase in efficiency leads to a decrease in consumer prices. But there is the rebound effect (or boomerang effect), which says that once we have access to a cheaper source of energy that allows us to save both energy and money, we tend to use more energy, cancelling out the potential savings. An easy-to-understand example: “You buy an economical car and henceforth also drive short distances,” says Prof. Jonas Puck.

Lightbulbs hang on cables, one is swinging — Rebound effect: if an increase in efficiency leads to cheaper energy, we tend towards using more. Photo © CC0 Licence

The effect also operates at the macroeconomic level. As some consumers save energy, prices may go down, which, in turn, can lead to other consumers using more energy. If people spend the money they save through improved energy efficiency on other things that need more energy, there will be an indirect rebound effect. The rebound effect is also significant in the context of product innovation: “Flat-screen TVs are less energy-hungry than traditional cathode-ray-tube TVs. However, people buy TV sets with larger and larger screens, resulting in an increase in annual electricity consumption,” continues the energy expert.

2. The storage dilemma

"For example, it is possible to control the output of energy in a gas power station," says Puck. This is much more difficult with wind, water and solar energy. On stormy, but sunny days, green power plants load a lot of electricity into the grids - the price of electricity falls into the negative range; the system is threatened with a collapse. Paradoxically, the supplier has to pay its customers money in order to get rid of the surplus electricity. Even pumped-storage units that pump water up into mountain reservoirs for energy storage are not an optimal solution in terms of storage efficiency. "The great challenge of the future will be to develop efficient ways of storing energy," says Puck. Then countries would also not have to resell their electricity surplus abroad. On the coast of Massachusetts, an offshore wind farm is currently under construction with the world's largest battery storage facility.

3. The oil-price paradox

“It is reasonable to assume that high oil prices in particular make consumers more inclined to embrace renewable energies,” says Prof. Puck. When prices are high, they will want to look for alternative, cheaper energy sources in an effort to save money. That said, high oil prices also have undesirable effects. “Oil and gas companies are among the leading investors in renewables because they have to innovate and develop new business models in order to be able to achieve long-term success.” However, they are more likely to delay or cut back on investments as long as their current business models are extremely successful, meaning that, despite a favorable price scenario, the transition to renewable energies will be happening much more slowly than expected.

Picture of an oil pump — As long as the oil business is profitable, investments in renewable energies will be delayed and cut back. Photo © CC0 Licence

4. The digitalization trap

In theory, innovation should lead to improved energy efficiency and thus a better energy balance. In practice, however, this is not the case in the age of digitalization. “Alas, innovation does not necessarily reduce our energy footprint.” According to a study by Morgan Stanley, the global production of cryptocurrencies such as bitcoin is likely to consume about as much electricity in 2018 as Argentina as a whole. Hence, the expansion of renewable energies is of paramount importance.

Conclusion

For the energy transition to be achieved swiftly, the countries involved need to proactively support the change through political action. Both businesses and consumers play a vital role in this context. Suitable measures include not only information campaigns but also concrete regulatory activities.

For more information about the MBA Energy Management, please click here.