How utilities could cut demand for electricity

The oil industry is being forced to stop being what it is. In any other industry this would have been absurd.

Imagine an activist group calling on Amazon to stop selling goods online. Imagine that group arguing that Amazon’s business harms the planet (which it does) and it should either stop existing or at the very least teach people to not want all the goods it offers. Imagine someone telling Amazon it must reduce demand for its products, that is, shoot itself in the leg.

This is exactly what many are telling Big Oil companies although a lot more bluntly. The recent Shell court ruling that obliged the company to reduce its oil and gas output is certainly a case in point as this Bloomberg article notes but look at the headline. It is not ironic. It wonders how the oil industry could shoot itself in the leg by reducing demand for its products. Like the court ruling against Shell, such a call is not seen as preposterous only because it targets the oil industry.

“Imagine Shell decided to stop selling petrol and diesel today. This would certainly cut Shell’s carbon emissions,” Shells’ Ben van Beurden wrote following the court ruling that ordered the company to slash emissions by 45 percent from 2019 levels by 2030. “But it would not help the world one bit,” Van Beurden went on. “Demand for fuel would not change. People will fill up their cars and delivery trucks at other service stations.”

Indeed, what we call fundamentals, namely supply and demand, are not called fundamentals for kicks. They are called this because they are the basic driving forces of any market. A lot of the time demand rises and falls as a result of natural, organic, changes in the behaviour of those that consume a certain commodity or product. But as we well know, demand can be created artificially — this is what the modern advertising industry is all about, after all. If we extend this thinking to the opposite of demand creation, it would make sense that just as it can be created, demand can be artificially destroyed.

Indeed, there are already suggestions how to do that with energy. One report from a UK research organization called FIRES has proposed a number of ways to reduce humankind’s use of energy in order to reduce its dependence on fossil fuels. While a lot of the ideas expressed in the report are kind of eccentric, such as the phase-out of air travel and maritime transport, it is nevertheless an important piece of writing. The reason: the authors address the elephant in the energy transition room that is demand for energy.

Most of the writing on energy-related topic nowadays focuses on generation capacity additions, energy efficiency, and the electrification of everything. The fact that all this is being done amid rising energy demand on a global scale is mentioned but not dwelled on, for the most part. The reason for this is simple: solar and wind power, and electric vehicles are (potentially) lucrative businesses. Nobody running a business would want their prospective consumers to not need their product or service, just like Big Oil.

But for anyone following the energy transition narrative and the effects of the pandemic on energy use one thing has become blaringly obvious. Humankind generates greenhouse gas emissions because we consume energy. It’s as simple as that: energy demand means emissions generation. The less energy demand there is, the lower the emission levels. However, neither the EU nor the Biden administration, to mention the biggest proponents of the energy transition, have yet called on their respective populations to conserve energy and use less of it.

What they are doing is a completely different thing. The governments spearheading the energy transition are effectively calling for more energy consumption by focusing on the fact that we only need to switch from oil and gas to wind and solar, from fossil fuels to electricity, and all our energy problems would be solved. Throw in hydrogen as well for good measure, with billions either already earmarked or at least tentatively planned for production capacity.

Governments make money from taxes and a lot of taxes come from energy consumption. It would be ridiculous to suggest that a government would encourage its taxpaying citizens to use less of the energy that makes up a solid part of budget revenues. Take Germany, for example.

Germans pay the most expensive electricity in the EU. Broken down, the price per kWh includes a renewable energy surcharge (21% of the total price) and an ecological tax, equal to 7% of the total. It also includes other taxes such as VAT and a so-called offshore liability tax. This is an interesting one: it penalizes grid operators for not connecting to offshore wind farms soon enough to sell their output. Operators, for their part, are free to pass this penalty on to the end-consumers.

This example should be enough to dispel the myth of the cheap renewable power but it probably won’t be. In any case, this article is not about the myth of cheap renewable power. It is about the realities of energy demand and supply. Imagine, now, that the German government, which is spending billions in renewable power subsidies, and the energy companies building and operating wind and solar installations are told by an activist group to find a way to reduce their consumers’ demand for electricity. Imagine a court orders RWE to reduce its carbon emissions by 45% from 2019 levels by 2030, whatever it takes.

No government in their right mind would risk social unrest because of blackouts, which are the only way to reduce energy consumption quickly. No company in its right mind would intentionally undermine consumers’ demand for its product or service. And it would be a safe bet to make that any organization calling for less energy use would be met with either pointed disregard or an embarrassed admission that yes, maybe we could do with a little less energy but it’s implausible to even consider such a scenario because people should not be told what to do. Except when it comes to what form of energy to use and what kind of car to drive, that is.

Amazon emitted 51.17 million tonnes of carbon dioxide in 2019, per the company’s own report. That was despite a pledge to become a cleaner business. The number was 15% higher than emissions for the previous year. The reason Amazon gave for the surge? It was in “high growth mode.” There is hardly a better example of the inter-relation between growth of any kind and pollution, also of any kind.

Just like Amazon — and any other business — growing economies are growing emitters. It is not a coincidence that the idea economic growth is not necessarily a good thing has begun sneaking into the energy transition narrative. After all, if growth equals emissions, then it only makes sense that a slowdown would mean lower emissions. We all witnessed it first-hand last year amid the lockdowns.

This year, Big Oil supermajors are being targeted by activist investors and courts along with environmentalists to stop being oil companies. These are double standards at their best yet the latest trends in oil and gas demand have made one thing clear: it would take a lot more than a few years to destroy oil and gas demand artificially after decades of growth.