SSGA: The feedback loops of the energy transition

SSGA: The feedback loops of the energy transition

Energy Transition
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Positive feedback loops underpinned by innovation will likely lead to a mass displacement of fossil fuels by renewables. “If the history of technological revolutions teaches us anything, it is the rapid speed at which change can occur once an interconnected set of positive feedback loops dominate the behaviour of a system,” Carlo Funk, EMEA Head of ESG Investment Strategy at State Street Global Advisors, said.

In a joint article with the Carbon Tracker Initiative, Carlo summarizes seven feedback loops of the energy transition observed across costs, technology, expectations, finance, society, politics and geopolitics. These feedback loops are driving a rapid transformation of the global energy system:

  1. The volume-cost feedback loop: As renewable volumes rise, so costs fall, which then spurs more volumes. Falling fossil volumes mean lower utilization 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.