What you need to know about Energy Economics - Part 1

In our practice, executive classrooms and group interventions, and when talking Energy and Energy transition- I focus a lot on three important elements for the realization of successful energy (transition) programs :

1) Global Change, Scenario's, Vision and strategy: identifying the reasons and issues for change and choice, and a durable (pro- or reactive) vision, position and strategy in this change.
2) Execution: Organising and Delivering Performances
3) Leadership and Change: Value and Values.

The simple truth is:

You can't perform, if you don't have a compelling and inspiring vision, position and strategy in the change (on Energy and Energy Transition).
Any vision, strategy or position is just a thought, opinion or idea - if you ain't be able to execute or to deliver it. No matter how great.
And finally, and surely not in the least, any strategy being executed without the ethics and morality of leadership value and values that matter- is and rings hollow.

Leadership and Leadership of change is the most essential soft skill which makes the journey an actual achievement of lasting value.
Now- in the field of strategy, economic modelling and scenario’s , there is lot of rumble out there, but seldom do I see, hear or find the combination of wisdom, insights, and ability which can stand the test of times.

Which can oversee the whole playground in the Energy sector, on an international, regional and local basis- and who can bring value to the table blending and balancing the interests of the economy, with that of society and of nature.
Our attempt is to do find the forms and formats to do so.

To bring simplicity in complexity, and to make the tools and techniques available for industry decision makers and professionals to do so.
One of these new tools may be our research and study into the workings of the world energy system.

This research was inspired by a range of questions.

Not in order of priority, I would like to share a couple of those typical and hopeful relevant questions:

How will our world energy system evolve over the next 30 years?

What will be the effect and rise of energy demand in the emerging nations of Asia and beyond be on the rest of the world economy?

Where and when may we see tensions? And what policy measures make sense? Can we make everybody win ?

What strategies and roadmaps are best to bring energy to all?

Can we align the interests between the free-market economies and the more state-governed energy approach to this energy challenge?

How and when do we have to make room for the new? Can we identify the “trends and triggers” to watch over the next decades, so we can maintain prosperity and peace ?

What is the effect of the rise in capital intensity of the energy sector on the financial markets and the economies?

What if the quality or availability of the fossil energy resources disappoints, and energy needs to be truly shared among the energy craving nations?

How can we better understand and predict the impact and behaviours of the renewable and non-renewable energy industry into our growth economics?

How can we better balance and understand the rise of economies – with that of sustainability issues ?

And so on.

Now- without much ado- I would like to introduce our research to you, and make you aware of the exciting modelling work on-go-ing.

The research

In the Netherlands, and in co-operation with the Faculty of Technology, Policy and Management of Delft University of Technology, we have embarked on an exciting and new frontier research project.

A project on design of an agent-based model for global energy system: a novel approach for exploring its future under different real and plausible energy scenarios

This research project aims to provide additional facts and insights on the developments within the global energy system- and allow hopefully for a more balanced and inclusive decision making.

Energy is one of the essential factors of human modern life. The population of the world is increasing and lifestyle of people is improving. At the same time, and according to some energy experts, we may see conventional oil, coal and gas production reaching their peak and that the age of easy oil is over. It can be a signal for future energy shortage. Everyone has the right to have access to sufficient energy at affordable price. Energy shortage can cause high energy prices and high degree of inequality among nations and people. Contributing to solve this problem is the motivation of the research. Besides, the global energy system is a complex adaptive system composed of many physical and technological entities as well as many relevant actors and institutions. The states and behaviors of the global energy system emerge from states and interactions of all the actors and components.

We can consider the global energy system as a complex socio-technical system. It is composed of two important systems: Technical-physical system and a Network of Actors. This Socio-technical system perspective invites us to analyse the system from both of these perspectives. The main difference between these two perspectives is that the system perspective treats its subjects as mechanical beings, while the actor perspective treats it subjects as reflective actors. Here, reflectivity means that the actors have the ability to learn and that we can apply economic and policy rules towards their behaviours [1].

In this research, technical analysis involve identification of main energy resources and their potentials, technological development, changes in quality of resources, geography of resources, etc. Actors analysis involves identification of actors and players. In this research, actors are clusters of neighbouring countries with almost the same interests and the same energy state. These clusters use different sets of rules for decision making and interacting with each other. These rules can be influenced by technical properties of actors, geography, economic systems, international institutions, etc.

Biophysical economics perspective is selected for modelling the technical layer of the system. In biophysical economics, the laws of the physical sciences limit and constrain the available choices of economic actors. This type of economics uses basic ecological and thermodynamic principles to analyze the economic processes [2]. So, with biophysical economics perspective, flows of energy are being modeled in the system. In biophysical economics, energy return on investment (EROI) plays an important role. EROI can be considered as a measure for accessibility of resources. It can influence the production and availability of energy as well. If we can improve accessibility and availability of resources through biophysical economics, the problems of affordability and inequality will be mitigated. Biophysical economics perspective can also give us opportunity to assess the some environmental impacts in future works.

EROI can generate signals for Actors to invest in different resources. It can be sensed by actors and be taken into account in their trade decisions. For incorporating the roll of actors in the system, agent-based modelling is being used. Agent-based model can help us to see what kind of pattern can emerge in the global energy system if different clusters of countries behave differently without any central control. Agent-based models have three main layers. At the first level, there are agents who act autonomously. At the second level, there is network of agent through which they can interact. Flows of information, material, energy, money, etc. are typical flows in agent-based models. At the third level, we have the system as a whole. The states and behaviours of the system emerge from states of agents and their interactions.

As part of this research project, we would like to write some comment on the existing energy economics models and thinking. In this first article on our energy model research, we like to share with you some information on biophysical economics.