Category Archives: digital revolution

Energy revolution: exponential except for sluggish incumbents

Earlier this week I attended, and was @TheCrowd tweeter, at XEnergy, a half-day conference on the energy revolution organised by The Crowd. I was moderating the roundtable on the Energy Revolution. So, I had a ringside view of what is going on, and how big companies are responding. I can see what’s going on in five categories (see diagram) and how big companies are responding in one word: sluggishly, because they only think in terms of a financial case for marginal efforts. They risk missing out, and we risk more delay in getting to a low carbon world.

What’s going on in the energy revolution?

The first category of activity in the energy revolution is technologies for energy production and use. At the conference people were getting excited about storage (“less than five years away”). As Michael Liebreich makes clear in this brilliant 2016 Bloomberg New Energy Finance keynote, we have already seen a miracle in renewable energy. Wind costs have fallen 50% since 2009. Solar PV costs have fallen 80% since 2008. This is having consequences. US independent oil and gas producer solvency ratios have deteriorated, with 69 companies under credit ratings review. Coal is in distress. The last 3 years have seen GDP growth with carbon emissions growth. 
But more important are digital technologies, that control and match the production and use of energy. By far the most astonishing presentation of the day was from Mustafa Suleyman of Deep Mind, the Ai research company recently bought by Google. Their mantra is “solve intelligence; use it to make the world a better place”. Deep Mind is famous for being the first computer to beat a person at Go, the fiendishly difficult board game. They did this by throwing lots of data at an AI, and then letting that AI learn for itself, not from pre-determined rules about the game ‘Go’.
Now here’s the thing about ‘solving intelligence”. If you do that with Go, then you can do that with lots and lots of situations where there is more data than a human mind can cope with. One situation like that is energy management in data centres. These clusters of servers – on which your email, this blog, any internet really – sit consumer around 3% of the world’s energy. Google engineers had been pretty savvy on energy use in Google’s own sever farms. Deep Mind learnt from the data and had novel ideas that added up to an extra 40% of savings.
Let that sink in. The best specialist engineers in the world were out by 40%.
What a boon to the world to roll out that problem-solving capability across many, many domains! But. Do you feel safe in your job? If you do, then you either spend all your time doing non-routine things, or your function doesn’t depend on using data – or you’re not paying attention.
As well as control, the other critical thing digital technologies can do is match generation and use, on much quicker cycle times and with much greater accuracy. The possibility is of only producing what is needed at the moment it is needed. Which reduces the requirement for spare capacity or base-loads. The vital element here is the interfacing between all the various digital control systems and data. The other thing, of course, is avoiding the rebound effect, where the efficiency gains are wiped out by using the newly-released resources in other impactful ways.
No one technology makes up the energy revolution. Instead the potential comes from being able to the combine many, especially the ability to make many interrelated decisions quickly. 
A third category are social technologies that underpin the relationships between system actors. We’re very used to generators generating, users using and contracts between the two making sure each party knows what they’re getting. But what if someone has a solar panel on their roof? Sometimes they are a producer, sometimes a consumers. What are the right contractual relations for such a ‘prosumer’?
This is what people mean when they say ‘business models are challenged’. The existing relationships no longer fit with what the technologies can do. and the social technologies like contracts that govern those relationships are obsolete. As the value starts to go to those who can match better, then expect to see the rise of more platform business models, that create value by facilitating exchanges between two or more interdependent groups. Will the trade din ata about energy production and use be more valuable than the energy itself?
The two remaining categories are physical infrastructure and enabling context. We risk locking ourselves into a grid which is well-suited for the past – a small number of large producers – rather than the future – a large number of small producers. Whatever else one thinks of nuclear and Hinkley C, it risks crowding out the investment needed for a diffuse, dynamic grid. The roundtable participants were full of tales of their staff resisting adopting new technologies, and so the company missing out.

The sluggish response from big companies

When people talked of their experience in big companies we, inevitably, talked about the business case. People had been successful in getting capex, but often the teeth of opposition. There is lots of baggage that ‘sustainable’ must mean costly. Energy itself is rarely considered a strategic priority: either the cost to the business is too small, or it is assumed to be a given. There’s nothing we can do about it, so let’s comply, be efficient and put our scarce capital behind other ways our company can win.
All this reminded me of Clay Christensen’s classic HBR piece: “Innovation Killers: How Financial Tools Destroy Your Capacity to do New Things”. He wasn’t writing about sustainability, but just the lessons of how normal financial decision-making lets companies down. (If you are interested in the business case for sustainability then you must read the full article.) The key insight for energy and big business is this:
“The way that fixed and sunk costs are considered when evaluating future investments confers an… advantage on challengers and shackles incumbent firms.”
In any NPV calculation you look at the marginal cost and benefit – the extra cash invested to make something new happen and the extra cash back in over time. Everything else is assumed to continue on as before, with fixed costs and the same returns over time. The decision on the investment is treated as only about the new cashflows. It’s not worth including the existing cashflows in the analysis because of an unconscious assumption they will not change. 
That’s fine “as long as the capabilities required for yesterday’s success are adequate for tomorrow’s as well”. So, it’s not fine in a period of revolution. If new capabilities are required for future success, then the existing ones are going to become obsolete. The cash spent on maintaining those current capabilities is a waste but, because of the unconscious assumption that things will not change, it does not get included in the marginal investment analysis
On the other hand, challengers are looking at the total cashflows in and out. In a period of change, they had the advantage because they are considering how best to use all their resources, not just the marginal part (because most of the budget is already spent in people’s heads on the usual stuff, even before the year begins). 
In the HBR article Christensen gives an example of steel mills:
“Nucor, the attacker, had no fixed or sunk cost investments on which to do a marginal cost calculation. To Nucor, the full cost was the marginal cost. [A new mill] was the only choice on its menu—and because the IRR was attractive, the decision was simple. USX, [the incumbent] in contrast, had two choices on its menu: It could build a greenfield plant like Nucor’s with a lower average cost per ton or it could utilize more fully its existing facility. 
“So what happened? Nucor has continued to improve its process, move upmarket, and gain market share with more efficient continuous strip production capabilities, while USX has relied on the capabilities that had been built to succeed in the past. USX’s strategy to maximize marginal profit, in other words, caused the company not to minimize long-term average costs. As a result, the company is locked into an escalating cycle of commitment to a failing strategy.”
Any of that sound familiar? Is your company maximising marginal profit today and so ‘locked into an escalating cycle of commitment to a failing strategy’? Are you sure? Because that’s what I heard behind the stories from people on the roundtables again and again.

Energy: vital but invisible and interchangeable

Where I have more sympathy with incumbents is on the nature of energy. For the vast, vast majority of customers – whether business or consumers – do not buy something because of the type of energy used to make it. They care about price, quality, convenience and so on. Our modern world is built on the viability of cheap energy, starting with steam for the industrial revolution. But the quality of this blog does not depend on whether the electricity powering my computer is renewable or not (full disclosure: yes, it is renewable, through Good Energy). Energy is vital but invisible and the different sources are – from the end-user’s function point of view – interchangeable.
One roundtable member argued that the business case will only come when there is revenue growth, which means making the customer care about the carbon impact of the product they are buying. I cannot say I agree. We’ve had 20 plus years of trying to convince mainstream consumers and businesses that they should care about ‘green’. Quite apart from any ethical concerns on social engineering, it simply hasn’t worked. 
In general things get to scale when they are good-enough for the end-user and they are cheap. So, surely the way to drive the energy revolution is to about giving your end-product or service a cost advantage. The operating costs of renewables are part of taking us to a zero marginal cost society. Taking part in the energy revolution means you have cost advantage over your competitors. Use that to reduce the price point and sell more, or make more profit per unit – but use it to win.
At the end of Energy, John Elkington gave a typically rousing talk on the need for exponential, following on from the excellent Breakthrough Business Models (full disclosure: I inputted at points and commented on a draft of this report). He had four Ds for everyone’s new year’s resolutions: disrupt; decentralise; democratise; decarbonise. I agree with all four. 
What struck me was also that, for companies who use energy but are not in the energy sector, focussing on the energy revolution keeps this all off to one side. To make it strategically relevant, perhaps we need to talking about the wider digital revolution, of which massive changes in the economics of energy is one part.
Otherwise, I fear incumbents will miss out, and our progress to a low carbon world will be delayed.

Can addressing the productivity crisis address ‘limits to growth’?

Earlier this week I was at the launch of the All Party Parliamentary Group on Limits to Growth. Its mere existence is a sign that the subject is no longer taboo. I left with worries – will it get lost in defining terms? how will it get credibility beyond the usual suspects? are we trapped? – and one big hope. There’s a tantalising prospect that solving the productivity puzzle might tickle the Treasury’s fancy, and require a shift to a sustainable soci-technological basis. 
Let’s start with Prof Tim Jackson’s very useful summary of where the limits to growth debate has got to, and then move on to the wider reflections.

Tim Jackson and Robin Webster had written a short report called Limits Revisited for the launch, which considered the limits to growth debate some 44 years after the original Club of Rome report. It has three ways that limits to growth is relevant to today.

1. Resource constraints. The original argument is that, as resources are used up, there is ever-extra effort to get hold of what you need, which has a lower quality anyway. You find yourself over-allocating productive resources to getting more resources, rather than into new or different resources. Economic collapse comes when you can no longer get at the quality resources you need at a level of effort you can sustain. The report talks of oil and minerals.

I’ve always found this an under-whelming argument, and still do. Fundamentally, yes, the Earth is not an infinite source. But this is the sort of threat that our current system should be able to respond to, though doubtless with much pain for incumbent companies and dependent countries. Past oil shocks have been because producers wanted to constrain supply deliberately or we were constrained by refining capacity, not running out of oil. Rising prices pushed people to use more efficiently (e.g. shift in car sizes), invest in expanding processing capacity, invent ways of extracting previously too-hard sources (e.g. shale gas), look elsewhere (e.g. the Arctic), or find substitutes (e.g. move to solar). The Simon-Ehrlich Wager shows we cope.

Also, thinking in terms of traction, this is a non-starter. Some people have been saying “we’ll run out of X material in Y years” for decades, and have a record of being wrong. The original Limits to Growth Report wasn’t guilty of that, and said these effects start in 50-100 years time. But I think this angle, for better or worse, is discredited.

2.Planetary boundaries.  We cannot treat the Earth as an infinite sink. We’ll run out of the ability to deal with pollution and waste before we run out of stuff to turn into pollution or waste. The key example is the greenhouse gas effect. We’re releasing more greenhouse gases than the climate can handle. Result: temperature rises and, potentially, runaway climate change.

For me, this is the scary one because there are no price signals until the impacts hit the economy, by which time it is too late. My memory of the 30 year update of the original Club of Rome report, has soil erosion as the key cause of collapse. The increase in food production uses the soil faster than it can regenerate, and pollution erodes it even further. This fundamentally reduces the scale and quality of food production possible, and so reduces the scale and complexity of global civilisation that is possible.

3. Secular stagnation. This did not feature in the original report, and has come to prominence from mainstream economics in the last few years. One part of this says that growth since the 1990s relied on borrowing, which popped so spectacularly in 2007. Another part says that in the past there were General Purpose Technologies (GPTs) like steam, electricity and internal combustion engine, which increased labour productivity and therefore growth. These have run their course and there are no new ones to replace them. That’s why labour productivity has been going downing the US and UK, why wages stagnated, why people had to borrow to increase their standard of living. The emerging technologies might even decouple economic activity from jobs, which then undermines a broad mass of people having wages with which to buy stuff. We may be going ‘post-growth’.

This where I think there is juice. I was at a Cabinet Office event last year on the Future of Productivity. The all-powerful Treasury is worried about where productivity is going to come from, are most Western governments. So, addressing this challenge at least stands a chance of being heard, while the other two just bounce off people’s cognitive frames (regardless of evidence that the planet is not an infinite source or sink).

There are two explanations in play. The lesser, but still useful, is that we’re measuring the wrong thing. GDP is calculated from the financial value of transactions in the formal economy. Famously it misses the informal (like childcare) or things that aren’t in prices, like environmental externalities. That hasn’t mattered too much to policy makers in the past.

But many emerging technologies have near-zero marginal cost, which means the financial value of formal transactions is basically nil even though they are helping people live their lives. Once you put up your solar panel, you don’t pay the sun for its rays. When you have fun on-line you pay very little (especially if you are the product, meaning the company is getting value from the data about you) compared to the off-line activity you would have been doing 20 years ago (think YouTube vs cinema trip). So, GDP is under-stating the welfare from new technologies.

Also, people pay a lot of attention to labour productivity, but almost none to resource productivity. In the past that might have made sense. Going forward, we have many people but not enough planet. So attention needs to shift.

Reforming GDP has been the least successful change effort in recent times. Everyone knows its at best partial, if not downright misleading. The standard sustainability-related arguments have had no impact. Perhaps the productivity crisis – which governments do care about – gives a chance to augment GDP.

The second – and much more important – explanation for the productivity crisis: it’s exactly what you would expect if we are the trough before new technologies are properly taken up. I have to thank the European Futures Observatory for this insight. An established order has grown around the established technologies, including physical infrastructure, skills and schooling, regulation and more. So moving from one GPT to another is painful. You have to dis-assemble lots of how stuff gets done economically and socially before then be able to reassemble around the new GPT. These cycles are known as Krondatiev waves and have been much studied by Carlotta Perez.

If this is true, then the way to solve the productivity crisis is by shifting to the new technologies, especially around digital and renewables. For instance, on energy we keep building a grid for a small number of large generators. That model has had several decades of learning effects; any improvements are incremental at best. We won’t get the full benefits of solar until we we build for a large number of small generators. Because it’s new, it has decades of improvements to come. But it requires incumbents shifting their production basis, or getting out of the way. Frankly, they find it easier to lobby government for the status quo.

That’s not to say digital revolution is a straight win. There’s lots of difficult questions – how to have worthwhile jobs to what does it do to our identities – which I’ve written about elsewhere. Given that its inevitable (try putting that genie back in the lamp) we need to answer those questions, and we need to surf it to a sustainable future.

So, there’s a tantalising prospect that solving the productivity puzzle might tickle the Treasury’s fancy, and require a shift to a sustainable socio-technological basis.

But there there are worries too.

Will it get lost in defining terms? Part of the evening was spent saying how people didn’t like the presentational effect of the term ‘de-growth’ but that some sort of reducing the scale of some sectors was necessary. I liked what Kate Raworth said: we need to move going for growth, with a side-effect of whether people thrive or not, to focusing on people thriving, whether or we’re growing or not. It’s important to find a framing that will speak to where people are starting from. I worry about the need of some (not, I think the secretariat of the APPG) for purity.

How will it get credibility beyond the usual suspects? There are lots of fixed positions on growth. To caricature only slightly: environmentalist say its always bad; economists say its always good. A lot of pro-sustainability folk saying that sustainability is important may be satisfying but it will have no effect. So, the APPG will need to reach beyond the usual suspects. Can it bring in the best and interesting business voices? What about influential commentators? The FT’s Martin Wolf was been important in broadcasting the Stern Review. In his new book about the recent financial crisis he says he “lacked the imagination to anticipate a meltdown of the Western financial system” and praises heterodox economists for getting it more right than the mainstream.

Are we trapped? The final worry is not about the APPG, but about our global situation. Through the debate two things became clear:

  1. There is no path forward which has growth as we’ve known it within planetary boundaries
  2. There is no path forward for the required de-growth within the politics we have.

Basically, we’re trapped into a civilisation-degrading pattern at a global scale which will take a massive crisis before we act with the urgency and scale required. That is frightening, and depressing, prospect.

The mere existence of Group is a sign that we’re realising we’re in this trap. The Group might be able to spread understanding and acceptance amongst a crucial audience: MPs and senior policy-makers. That is a very worthwhile thing to do. And there is so much more that we must be doing too.


Big Bang Data: frightening but familiar

Today I went round the Big Bang Data exhibition at Somerset House. It raises really important questions – many with frightening implications – but I left without many new insights.


At the start of the Big Bang Data exhibition in Somerset House, you are warned that by buying a ticket you are giving permission for video and photos of your visit to be used. It’s in quite big type, in the ticket foyer. I imagine – but don’t know for sure – most other public events have similar conditions, but tucked away. Here, though there is a stinger in the tail, one you only realise right at the end.

Mostly we don’t read the terms and conditions of using the internet, whether that’s our phone we browse with, or the website we sign up to, or the app we download. Alex Hern, a technology reporter at The Guardian did, and it made him want to die.

The exhibition shows just how much data we all produce, and how many different uses it can have, how many different ways it can be represented, and how much power accrues to those who can access and make sense of it, how much threat we are under from Big Brother gathering our Big Data.

If that sounds familiar, then it is. Anyone who has been working on the consequences of the digital revolution has had to start thinking about these things. For instance, that we talk about the internet as if it is all information, but it is anchored in the real world through cables, and ugly server buildings and energy use. (For me this echoes Cartesian Dualism, that somehow mind and body are separate. This belief is deep in the Western psyche, and, for some sustainability thinkers, the key to our separation from nature and so why we treat it so badly.)

Also, that there are issues of privacy. One artist has matched hacked photos with hacked music, to give a public slideshow where no permissions were possible. Another has turned all the sexual encounters he had with his wife into a infographic that looks very tasteful until you read the key.

There are moments of beauty, like the globes in the my photo above. Each of these is a different infographic, bewitching and somehow drawing you forward to touch them. There is a staff member there just to stop you spinning the globes.

My main feeling, though, was of having the overwhelming sense that known, huge problems are going under-addressed. There was a section on ‘Data for the Common Good’, with various examples of positive attempts to use the inevitable data tsunami in ways that help humanity. But these felt small and late compared to the efforts represented in the rest of the exhibition to apply the Big Data for private profit and a creepy form of security (yes, a public good but we don’t give the police our house keys ‘just in case’ that will be useful, so why give them the data that describes our lives?). I didn’t leave the exhibition with many new insights on what to do about it.

Contrast with Jaron Lanier‘s Who Owns the Future?. Not an easy book by any stretch, and my sense is Lanier is trying to write in a a different register to shake the reader out of analytical norms – which makes it difficult to evaluate. He has fears about Siren Servers, who concentrate wealth in the hands of the few who control the data centers and processing capability but don’t have to pay to get the data in. But he also has proposals about what to do about it, a two-way linking system that would point to the source of any piece of information, creating an economy of micropayments that compensates people for original material they post to the web.

My two take aways from the exhibition were:

  • The Big Data bang is happening, and inevitably with expand and grow further.
  •  What matters now are the ways we organise ourselves in society to get the from it all.

So, that takes me back  – with due respect to confirmation bias – to  the interplay of economics, law, politics and more that set the operating context for individuals and organisations, and are expressions of dominant beliefs in society, namely the political economy that I’m considering in my sabbatical.

What are the new sorts of institutions and regulations and norms and so on that we can provide that get the bang we need? It seems unlikely these will be initiated by, or hosted by, the nation-state. So, we’ll have to create our own. And there were flashes of this in the exhibition, for instance the Open Data Institute.

And the stinger? Well, it wasn’t that your image might be used later in some promotional material about the exhibition. You were tracked as you went through the exhibition. When you got to the end there was a live display of how people were moving around. It wasn’t data in the abstract; you were the data and the data was live.

It did reinforce the frighteners – and the sense that we need new ideas, soon, on how to adapt.


Talk: How digital innovation will have a profound and disruptive effect on society and our environment

This is the text of the talk I gave at Forum for the Future regular energy drinks. My brief was to describe how digital innovation will have a profound and destructive effect on society and our environment in 10 minutes. It’s one part of my sabbatical effort to understand how we can surf the digital revolution. Here goes.

Let’s start with the bold claim. If we are on track for sustainable future in 10 years time it will be because we have figured out how to surf the digital revolution.

Behind this bold claim is the idea that digital technologies are a general-purpose technology. To quote McAffee and Brynjolfsson, they will do for mental power walk the steam engine did from muscle power. We can expect the impacts to be as profound. And the Industrial Revolution had some consequences! We moved from farms to factories, stagecoaches to locomotives, local time to timetables, villagers knowing each other to towns and cities of strangers. All this illustrates how social change and technological revolutions go hand in.

But it is still difficult to grasp what that means for us now. So, let’s imagine again my life in say 2020.

I wake early and my phone has registered disturbed sleep. It tells my yoga app and my health insurer. Over breakfast I reward my son who has had a good end of term report with Amazon’s points. He wants to spend them on the force re-re-awakens.

Citymapper tells me that my commute is disrupted so I don’t work in a local cafe. I paid in ‘Brocks’, the local currency in Brockley South East London that I earned from my solar surplus into the local electricity grid. I commute in on the Elizabeth line what used to be called crossrail.

My first meeting is assessing the work that has come back from researchers. We put a request out to our crowd, and people have sent back their findings. They get paid a little bit for effort but more if we like the insight and decide to use it. Just before lunch my phone tells me an old friend is now by and we have and impromptu get-together.

In the background lots of things happening that I don’t need to take any part in. My home concierge is turning devices on off to get the cheapest energy. Someone borrows our lawnmower and pays in ‘Brocks’. My digital assistant is dealing with my emails; I only see the ones that I’ve taught it I really need to see.

In the evening there are leaving drinks for some back-office staff. I taken either home driven by an unhappy former black cabbie.

All this illustrates a couple of points:

– My life will rely on digital
– People will be paid based on how well they work with robots (to quote Kevin Kelly)
– Individuals with more exposed and, paradoxically, have more power
– It will support an exhilarating energy revolution, Through local small groups and smart buildings
– There will be alternative models: the access economy; the sharing economy; the circular economy; the gig economy; the local economy.
– Life will be faster more automated and more bespoke

There are two great hopes of digital revolution:

– The productivity gains will mean we can meet all material needs.
– Because we can meet nonmaterial means in nonmaterial ways, we will need less stuff to have more fun and we can come back within planetary boundaries

But alongside those hopes come some big fears:

– How will people have worthwhile work?
– How will people get value from data about themselves?
– How will we address the ‘winner-takes-all’ dynamic that is driven faster by the ’network effect’ of digital technologies?
– What will be the institutions in a digitally-enabled world that are worthy of our trust?
– How will we evolve our selves to always-connected, ever-accelerating lives?

More fears can be devised and there is much we cannot know. We can know is the digital will have a profound effect on society and our environment – and so on our lives. Because networks are at it’s heart, digital technologies hold out the promise of us organising like a living system (which I think is crucial to a sustainable future – see here). If we can do that then we could have a society where people can choose how they live within planetary boundaries.

Getting this to happen will be tough. It will require us to come up with new institutions new regulations new values in fact a whole new political. But we must.

Because if we are on track for sustainable future in 10 years time it will be because we haven’t figured out how to surf the digital revolution.