North America’s three large energy distribution systems—the electrical grid, natural gas delivery, and petroleum products supply—have evolved over more than a century to be efficient and effective, offering abundant low-cost energy to a growing population. Now each system is showing warning signs of capacity constraints (signaled by spot reliability issues and price spikes) while simultaneously undertaking the separate challenge of decarbonization.
Any large complex system is humbling to long-term forecasting, risk management, compliance, or capital allocation, to name a few. Getting any of these wrong has tangible repercussions. Consider the Darwinian nature of clean transportation fuels: over 300 North American oil refineries were operating in 1980 but only about 125 are left standing today. The rate of refinery closures accelerated during Covid, with another nine gone. These were not casualties of climate change, but of economics and forecasting. Marginal economics exposed by the Covid demand drop, combined with conventional-wisdom forecasts of declining fossil fuel consumption, triggered capacity rationalization decisions. Those decisions proved ill-timed, since demand rebounded post-Covid and the surviving refining capacity proved over-stretched, which in turn caused retail gasoline and diesel prices to skyrocket. The survivors’ benefit, however brief.
What happens to closed refineries? Many of these sites are suitable for a new life processing renewable feedstocks instead of fossil. Capital costs for re-purposing are significant, but less than greenfield construction of renewable refineries, so about a dozen such conversions are in varying stages of commissioning. The catch-22 is that each conversion represents a net loss of around 70% of that refinery’s previous gasoline and diesel production, meaning that the fossil fuel supply shrinks faster than the renewable supply is added. This further strains total supply capacity.
When the airline industry reaches capacity, say at holiday time, travelers know that one thunderstorm near a hub or one computer glitch at a regional control center can snarl the entire nationwide system. The evening news will be showing passengers sleeping on the floor. Our customers—energy consumers—don’t want the same thing happening which they reach for the light switch, the gas heat, or the vehicle fuel pump. The way to avoid the equivalent of sleeping on the floor as we modify our energy distribution systems is to appreciate two imperatives:(1) decarbonization will take longer than advertised, simply because of the time it takes to build the modifications that can make a meaningful dent in the existing fossil infrastructure; and (2) the Law of Unintended Consequences warns us there will be setbacks when invasive surgery is performed on large complex systems. The mantra “first do no harm” comes to mind.