The cheap energy era is ending

The forces of creative destruction so aptly described by 20th-century economist Joseph Schumpeter in 1942 are in full force in the 21st century. Social media first destroyed the centuries-old model of advertising subsidising news coverage, then undermined the idea that evidence underpins truth and seeded a modern era’s version of the biblical Tower of Babel, where there are many talkers and little comprehension. 

It is a key responsibility of company directors to protect and promote the interests of the company they direct. We now understand that the single pursuit of short-term accounting profit is not in the company’s best interests. Myopic, reckless and selfish corporate conduct erodes value and is unsustainable. Employees disengage, the social licence to operate erodes, customers leave, revenue and profits decline, and wealth is destroyed. 

Good governance requires horizon scanning, risk management, resilience building, social acceptance. It also requires creating value through goods and services that are worth more than they cost to produce. 

For more than 200 years, at an accelerating pace, our version of civilisation has drawn down natural capital to produce goods and services, lifestyles and length of life unimaginable 250 years ago when Adam Smith wrote the Wealth of Nations. 

Fundamentally, humans figured out how to use the energy stored over millions of years to power machines. In our civilisation, prosperity depends on energy. A barrel of oil is estimated to perform the equivalent work of 10,000 hours of manual labour. For example, at US$100 for 166 litres of oil, at the current exchange rate, that’s about one New Zealand cent per hour of work. 

More than 20 countries have now decoupled GDP growth from emissions of greenhouse gases, but none have yet uncoupled economic growth from energy consumption. Every company, and therefore every director, is exposed to energy as a driver of input costs and demand for its output. 

Dependence on long and vulnerable supply chains for fossil fuels and exposure to volatile fossil fuel prices was an unavoidable risk for New Zealand until the 1970s. Yes, we had some coal, little oil and no fossil gas. The major finds of fossil gas off Taranaki gave New Zealanders a local supply, but our demand for oil grew with the economy. 

The fossil gas fields are depleted and even after 50 years of exploration and some additional discoveries, no new major finds have been made in recent decades. Our bet on ‘just in time’ discovery has not paid off. Businesses dependent on cheap, abundant fossil gas are, in Schumpeterian terms, about to feel the destructive force of creative destruction.  

New Zealand, like most countries, needs to transition away from fossil fuels as the primary source of energy to increase resilience, protect sovereignty, remain competitive and enhance prosperity. This will also reduce greenhouse gas emissions. The energy transition is under way.  

For New Zealand, geothermal, solar and wind electricity generation technologies have advanced significantly in the past decade, as have batteries for devices and ground transport. Coal and hydro lakes remain the least-cost potential electricity storage options to enhance resilience by reducing exposure to supply disruption and price volatility. All this is commonly available knowledge.  

Directors should not be caught off guard when fossil fuel supply lines are revealed to be vulnerable and price spikes occur. A failure to prepare is an abdication of responsibility and a failure of governance. Firms that spent the past five years electrifying may pay more for electricity but have much lower costs for oil and fossil gas. They have not only reduced their energy costs but also mitigated business risks.  

Directors who have led on energy efficiency initiatives – swapping into EVs, installing heat pumps, investing in solar generation for own use, getting off fossil gas for water and space heating, and electrifying low- and medium-temperature process heat – have exercised good governance. 

Directors who were poorly informed, believed savings were not worth the effort, assumed things would stay the same or change slowly, or saw electrification as a political rather than business choice, or outsourced strategic choices to market forces, now find themselves on the wrong side of history. 

It is not too late and the game is not over. However, recent events must be a prompt to directors to accept responsibility for having an energy strategy for the businesses they guide, even if we still do not have an energy strategy for our nation. 

This country’s energy choices should not be left to those with vested interests in old technologies and established business models. Elected leaders should act in the national interest. Business leaders should expect nothing less.