Cost and Risk in the New Economy

We've been working on a new client project over here at The Groundwire Group and it has gotten me thinking about the challenges of the energy transition in a new way. How much of the world can we understand through the lenses of cost and risk?

Our global economic future is at an inflection point, much like the global climate- unsurprisingly so, given how closely these systems are linked. Data and computing power will act as the cornerstones of the 21st-century economy, energy-hungry beasts that must be fed more electrons from a system struggling to shift its baseline while meeting these growth demands.

A recent episode of the Planet Money podcast examined a revolution in U.S. steel production that toppled big American incumbents: the advent of the mini-mill, and its breakthrough innovations that moved its scope from small-scale components to flat-rolled sheet steel. It's a fascinating story where I saw so many parallels to our energy transition challenge: ossified legacy conglomerates, assets no longer fit for purpose, and a belief within these incumbents that the source of their problems was externalized, unfair foreign competition rather than their own failure to innovate.

The story demonstrates a trend that continues to be true today: efficiency and modularity win. We need to find a way to apply those lessons in equal measure to new sources of energy demand and to building the new grid needed to supply them. A new grid for a new kind of economy requires a new way to thinking about the costs and risks associated with how we proceed.

Which costs, whose costs, and why?

I get kind of fired up about this topic. There are fundamental issues of fairness in play that are not easily resolved. Within most clean energy industry spheres I find myself frequently reminding folks that placing the entire cost burden of decarbonization onto ratepayers and consumers is a recipe for disaster and profoundly unfair. It's too easy to paint people with a brush of "climate denier" if they don't think it's fair for their energy bills to go up to support a specific offshore wind project which, on its own, won't meaningfully shift the climate equation. Of course, there are arguments to be made about supporting a larger industry and working toward subregional commitments and aggregate effects, but for the majority of people, that's just too abstract to matter.

The Columbia Energy Exchange podcast recently recorded an episode from CERAWeek, which is basically energy conference Mecca for the uninitiated. The last time I personally attended was days after Russia's invasion of Ukraine. I imagine the discourse at this year's conference was equally alarming as we confront the raw truth of our energy system - it's embedded within a capitalist system that prioritizes profits, and there are still big profits to be made from fossil fuels.

Their guest, Bloomberg opinion columnist Javier Blas, cited a recent poll that showed only 38% of Americans are willing to pay $1 per month to address climate change, a decline of 14 percentage points since 2019. This poll was news to me, and the results are alarming - the same poll also found that belief in human-driven climate change declined 11% from 2019 to 2023, with most of the change driven by a drop in opinion among Democrats. That's alarming, baffling, and an absolute canary in the coal mine of public discourse about climate policy. Unfortunately, the link to the poll's data was broken, but given the state of extreme weather, it's hard to understand how this opinion could be trending downward unless you bring in some of the cognitive biases we covered in last week's edition. When the problem just seems to get more dire, does that increase our resistance to acknowledging our own role in it?

Distribution of costs isn't just a question of individual burdens, it's also highly relevant to our macroeconomic outlook as a nation. Countries in Europe have been grappling with deindustrialization due to higher energy costs, with the new Carbon Border Adjustment Mechanism intended to level the playing field and its efficacy as yet unknown. These economic shifts carry serious political consequences while shifting emissions, along with jobs, to developing economies. Loss of economic activity is also a cost. Loss of political support carries a cost.

Another recent podcast featured the author of offshore wind's favorite new study, the anti-offshore wind network map from Brown University, and brought a different take on how to think about anti-renewable energy sentiment and its relationship to shared burdens. I've heard industry advocates point to this study as proof that offshore wind opponents are just a front, a conspiracy of fossil fuel interests to hamstring their competitors, but the study's lead researcher has a more nuanced view. While yes, messaging and tactics have been amplified by fossil fuel interests and, in some cases, direct evidence of funding to support these efforts, there are also actual people in actual communities who feel they will be unfairly impacted by the development of these projects. In some cases, those concerns are legitimate, and in some cases, we need to recognize that folks have those concerns, while there may be concerns and needs of other groups who have historically been harmed that should outweigh the concerns of the privileged.

The discussion lands in a place I think we really need to take to heart: "We're all looking out for our self-interest in different ways, and we just make different decisions to decide what that self-interest is […] and steamrolling them is not good for our democracy or our discourse. I mean, a great way to unleash a national or international lion of anti-offshore wind opposition would be to call them climate deniers over and over again or say that they don't have free will or say that this is all some astroturf project of Charles Koch and friends." It's a hard discussion to have, but one we need to engage with head-on and acknowledge that there are trade-offs in every choice we make.

Which is greater: the cost of inaction, or the cost of further undermining our democracy? That's not a trick question, it's a deadly serious one.

Understanding risk is all about data

Evaluating these costs and trade-offs generally involves evaluating risk, which brings us full circle back to the issue of data.

The risks facing our energy system are often being managed by legacy utility companies, notorious for their opaque data and obscure modeling methodologies. Another major steward of data associated with energy system risks are insurers. Odd Lots recently did a fantastic episode on the troubled home insurance markets in Florida and California. The similarities between the insurance and utility industries are striking: regulated differently in every state, rate changes are approved by these regulators based on different criteria, and in some cases, they are statutorily restricted from changing rates based on projections of the future. Their guest points out that for about the last forty years, the insurance industry would deal with around eight billion-dollar disasters every year. Over the past five years, insurers were liable for an average of sixteen billion-dollar disasters per year. That's in part because of inflation - the "cost" of a disaster is calculated based on the cost to replace damaged property, and those costs have gone up substantially, but clearly there are other factors in play.

The actuarial models used to calculate insurance premiums are typically backed up by data owned by re-insurers, insurance for insurance companies. How do we know we can trust those models? How do we leverage models that estimate climate risk in states that have prohibited any discussion of climate (ahem, Florida) or in states that statutorily prohibit the use of forward-looking models (ahem, California)? The questions around who has the right to own climate data and how those data are used for commercial purposes versus public benefit are the focus of this episode of America Adapts, the Climate Change Podcast. The horrifying anecdote about how AccuWeather notified a subscription-paying train company of an approaching tornado but not the nearby town, resulting in several dozen people being killed, felt too dystopian to be true, but you can hear it straight from the horse's mouth in this CNBC interview with their CEO (seriously, jump to 10:30 mark).

The conversation on America Adapts covers a lot of ground, and the key insight is that we have a trust gap that's nearly as large as the information gap. Distance of information is a major barrier to effective climate communications, which we've covered in previous newsletter editions. How do we ensure that this information about risk is not only available, but accessible from an intellectual standpoint? It's impossible to generate real dialogue about the trade-offs we need to make when evaluating cost and risk without equality of information.

Choices about data and the transparency of those choices can shape reality

Data transparency discourse has moved beyond the question of what big companies do with our personal data and squarely into the realm of AI and large language models. An episode of EconTalk, Conversations for the Curious dives deep into the weeds of how AI tools are proliferating with little transparency about their programming and training data. These models purport to reflect an aggregated reality when it is becoming increasingly clear that these realities are highly curated. What I loved about this episode is the examination of how the choices made in training these models reflect specific social and corporate values, before wandering down a thought-provoking rabbit hole about free speech, censorship, and groupthink.

Groupthink flattens conversations in the same way algorithms are flattening our culture. The language and absurd prescriptivism of groupthink is deeply off-putting to those who don't feel embraced or included by that group, which radicalizes an opposition while simultaneously weakening the strength and quality of the in-group's arguments. I see a lot of groupthink in climate circles and it's holding us back from thinking more expansively, honestly, and creatively about how we address these very serious trade-offs between cost and risk, profit and loss, the protected and the sacrificial.