The energy transition will be in stages 

Joseph Lacson

Part 2 of 3

I opine that the transition to a cleaner energy future will not happen overnight.  But it will happen. It will just happen in stages.

Think of change adoption as happening over a Bell curve with the level of adoption as the Y-axis and time as the X-axis. The first phase of adoption is by Innovators who make up 2.5% of the entire population. Then comes the Early Adopters (13.5%), followed by the Early Majority (34%), the Late Majority (34%), and then the Laggards (16%).

The Innovators are the first to try out new products and features, and embrace change. Innovators are key because they serve as the initial testing pool for new technologies. Given the highly risky nature of taking on innovative new technologies, many innovators tend to be government-owned entities or private enterprises who seek out public-private cost share programs. Some work on small modular reactors, as an example, are being undertaken by private companies that are supported by their government. 

Early Adopters have a bit more leeway to take on change as they have greater financial and non-financial capacity. Internet companies armed with thousands of well-paid employees, for instance, can afford to take on the relatively higher cost of clean energy sources because in an industry with 80% gross profit margins, there is ample economic space. A small mom-and-pop business facing 10% margins has much less room and sophistication to take on a shift to renewable energy.

The diffusion of innovation theory, visualized in the Bell graph above, explains that the passage of a new solution will come through stages of adoption. Image courtesy of the Corporate Finance Institute.

The new technology then has to be greater than what it was at the Innovation stage in order for it to start gaining acceptance, reaching competitive price points that are enough to challenge or even displace the incumbent solution. As the cost of adopting the new technology drops — as more customers take hold of the solution and as mindsets change — the level of adoption moves to encompass the rest. 

Don’t forget that it’s not just the technologies that have to change. Equally important is how society thinks about these changes. This transition from each phase will take years and the overall change will likely take decades.  

The transition to renewable energy is, in my estimation, at the mid Early Adopter phase. The good news is that we’re probably past the Innovation stage as we have promising solutions in many renewable energy solution areas (wind, hydro, solar, etc.), with customer adoption going beyond just governments or laboratories. 

In the Philippines, about 26.3 gigawatt hours, or equivalent to 22% of gross power generation, came from renewable energy. But that figure is deceiving because a lot of the renewable energy comes from sources that are long established such as hydro (8.7%) and geothermal power (9%). Newer renewable energy sources like solar (2.1%) and wind (1%) make up a minority. 

In terms of customers, a number of companies are actively seeking renewable energy sources as their industry dynamics allow for it. But rarely are there companies who solely rely on 100% renewable energy without back-up from the grid. They still need stable electricity. More policies are being crafted and implemented to shepherd the transition but these are made in concert with other pressing societal needs.

The cost to produce electricity from renewable sources can now, in a sense, be seen as cheaper than thermal sources and would, in a vacuum, allow for a move towards more Early Majority adoption. But that isn’t the case. There are numerous obstacles that prevent much wider adoption. 

The cost of intermittency from variable renewable sources is still quite high and will remain so until scalable, longer lasting energy storage solutions are found. Currently, the cost of electricity from variable renewable energy sources coupled with energy storage is still well above the cost of traditional sources.

There just aren’t enough solutions yet to sufficiently generate renewable energy and then transmit it from source to meet the demand patterns of end-users. While developments in certain high energy use sectors like industry and transport make the adoption of renewable energy more widespread, it still lacks the maturity and scale to displace todays’ current solutions. 

Moreover, overcoming today’s systems that are so intertwined with jobs, community well-being, norms and habits are proving to be harder to hurdle.

READ: AboitizPower closes deal for fresh stake in coal plant operator

But the wheels of change are rolling. Innovation drives down costs which then convinces more users to embrace cleaner solutions. A virtuous cycle is then created which fosters more innovation, lowers costs, and reaches even more users. But while the wheels roll slower than the early adopters hope, it is much faster than what the laggards foresee.

Joseph Lacson is an accomplished business leader with extensive global expertise in investments, strategy, and business development. A Baker Scholar graduate of Harvard Business School, he has worked for companies like Procter and Gamble, Inc., Chope, and Microsoft, where he directly reported to business magnate and tech titan, Steve Ballmer. Joseph recently joined AboitizPower as its Chief Investment Officer, leading the investment efforts of the company across all facets — thermal and LNG, renewable energy, distribution, and emerging technologies.