System dynamics of the energy transition
Societal transitions are defined as non-linear, fundamental changes in a societal (sub-)system. Transitions take decades and can only be truly recognised after the fact. There have been numerous transitions in the past: in mobility, energy, health care, food, culture and public administration. Characteristic for all those processes was the chaotic nature: established views, ways of working and organising come under such pressure that they can no longer be maintained. This leads to a period of instability, often accompanied by crises and chaos, before a new equilibrium is found (Grin et al., 2010).
The study of those historical transitions and the underlying patterns and mechanisms is combined with insights from complex systems theory. This leads to the fascinating insight that a system change marked by fits and starts is an evolutionary fact, and occurs in complex systems in a similar manner, from atomic level to galactic; the evolutionary patterns of variation and selection, build-up and break-down, self-organisation and emergence form the only constant (Rotmans & Loorbach, 2010). For example, think of the phase transition from water to steam if we add heat, or the erratic path of development from child to adolescent to adult. Or transitions in ecosystems that take place when tipping points are passed.
Contrary to natural processes, societal transitions are greatly influenced by human factors like power, behaviour, expectations, strategy, innovation, emotion and interests. Together people develop collective routines, solutions and structures (a ‘regime’). By investing money, time and energy we develop infrastructures, markets and institutions which together lead to ‘path dependency’: the most appealing thing is to continue on the path already embarked upon, which is also in the interest of most parties. This lock-in results in our often being particularly focused on improving the status quo with controlled innovation, which in practice leads to a declining ability to structurally adapt to changing circumstances. A transition (a regime losing its equilibrium) arises when this optimising of the status quo hits a limit, the societal environment changes significantly and alternatives arise (Loorbach et al., 2017).
The energy transition is one of the most complex and comprehensive societal transitions: the untenability of a system based on fossil fuels is scientifically undisputed and the transition has commenced a long time ago. In essence, a pattern of change started in the 1970s, which occurrs whether we like it or not. The combination of pressure from the environment, limits to the optimisation of the status quo, and increasing feasibility of alternatives, is slowly but surely upsetting the equilibrium of the centralised fossil energy regime (Markard, 2017). The historical principle is that in this context all kinds of processes occur that are self-accelerating: exponential growth of alternatives, a shifting societal consensus, the strategy overhaul on the part of companies (Loorbach, 2014).
In practice we see that actors within the regime think and work on the basis of the gradual pace of change and historical stability offered by the regime. From a scientific perspective, however, this starting point is the least likely: the only future that is not possible or desirable, is business as usual. The effects of climate change are now palpable, making this a problem also for the short term. The political and societal unrest are signals of instability which, combined with the willingness and need to intervene, can lead to rapid transitions. When the awareness necessary for transitions, the sense of urgency and perspective for action combine, transition space opens: things that were deemed selfevident disappear, predictability dissolves, resulting in great unrest. Knowledge and predictions based on the past are of little value, in particular when these predictions are based on reasoning rooted in the stability and linearity from the past.
The political, societal and financial context shifts rapidly in this chaos phase of transition. For example, the rise of global protest movements calling for the phasing out and divestment of fossil fuels. In the meantime, large investors, like pension fund ABP, are heeding this call1. In addition, we see global policy initiatives like the Beyond Oil and Gas Alliance, in which countries agree to phase out production and use of oil and gas.2 We also see that climate policy is being tightened, recently even in the US3, the second largest emitter in the world.
The judgment in the Shell climate case can also be viewed in this light of turbulent system dynamics.4 It underlines the prediction which was made in the transition perspective in the Shell climate case at first instance,5 i.e. that the judgment in the Shell climate case would have a wider impact, but particularly that the indirect (system) effects thereof would be at least as big as the direct (market) effects. For example, the judgment has contributed to an increased (financial) risk profile for the fossil industry, a risk that the oil and gas companies themselves also acknowledge.6 In addition, it was a wake-up call for numerous other companies domestically and abroad and in a wide range of industries.7 The judgment is also an inspiration for a growing number of lawsuits in which governments and companies are being summoned to take more action to combat dangerous climate change, thereby protecting human rights (Heffron, 2021; Setzer & Higham, 2022).
The fossil industry will be confronted with break-down and phase out no matter what, possibly enforced by societal pressure and external shocks like the war in Ukraine. The pattern is one of unpredictability, uncontrollability and self-reinforcing processes: the shifts in markets force companies to reposition, so that historical sector structures become unstable and companies are forced to reposition again; in the event the desired changes do not occur, governments must ultimately take fundamental actions, so that institutional structures become more unstable and large-scale policy modification is necessary; citizens orient themselves on other values, so that new behaviour patterns arise that others will follow, causing a change in societal norms.
On top of that, these changes within the market, government and society also reinforce each other. Examples are the shift in eating patterns to more plant-based proteins, which has created a new market for meat alternatives, which in turn leads to new regulations and other discussions about agricultural policy, which together create more attention and persuade consumers to move toward plant-based foods (Tziva et al. 2020).8 Or the transition in mobility, in which more and more city dwellers without their own car make use of all kinds of available forms of mobility, which is played into by shared mobility providers, and municipal governments alter the layout of the public space to give more space to green, health and sharing (Griffiths et al., 2021).9
Shell is what is known as a ‘keystone actor’ or system player in the energy sector. This metaphor is used in science to refer to actors around which an entire ecosystem of parties has developed (Österblom et al., 2015; Hilleman et al., 2020). System players are the pillars of societal systems and they often offer predictability and stability. In transition dynamics, system players are important transition points: if they make a fundamental change in course or position, the whole system will shift.
We define a system as a value chain and an actor as a company, and a system player as a company that plays a critical role in the entire value chain. A critical role means that it can influence or disrupt the entire value chain or make it change course. This can be from the inside, by a regime system player, or from the outside, in which case we speak of a niche system player or disruptor. The critical role can be based on the power position, with regard to position, size, investment level, innovation potential and earnings model. Tesla, for example, started as a niche system player, with a totally new concept for an electric car, more like a computer on wheels then a car as such. Tesla did not want to electrify the car industry as such, but offer a solution for making energy sustainable and solving the underlying climate problem. Through this new philosophy and this new business model, Tesla became a disruptor because it influenced the entire car industry and pushed it in a new direction, i.e. that of electrification. In the meantime Tesla has grown into the most valuable car manufacturer in the world and virtually all big car manufacturers are shifting to electric cars. Disruptors or niche system players often come from outside the sector, in part because they see possibilities and solutions which are overlooked within the sector. They are, as it were, trespassers in the status quo.
Shell is a regime system player, that has its tentacles in the whole energy value chain, from production, distribution, processing to sales. Shell has such a big investment budget, has so much expertise and such a network, that it can change the direction of the entire energy system. A first step can be seen in the area of green hydrogen, which Shell is focusing on in the Netherlands and for which it has managed to mobilise a wide coalition.10
Shell will build an electrolyser of 200 MW in Rotterdam in 2025, which will be the biggest green hydrogen factory in Europe. When it is finished, the electrolyser will provide 10% of the hydrogen requirements of the Shell refinery in Pernis.11 The
other 90% will continue to come from fossil natural gas. Shell’s ambitions in this area will entail that other companies and the Dutch government will follow and start investing in green hydrogen more quickly.12
A lot of wind energy is necessary for green hydrogen production, which means that in the coming decades 10-15 large wind farms will have to be built in the North Sea. The green hydrogen can then be transported to the country in gas pipes. Shell’s investment decisions therefore also have significant consequences for the wind industry. This example shows that Shell has influence in the whole value chain and can influence the wider system, which are by definition the characteristics of a system player.