What chess tells us about energy reform

When the Norwegian Chess Master Magnus Carlsen defeated his rival Viswanathan Anand to retain his world champion title in Sochi, Russia, on 25 November, he was congratulated by the President Vladimir Putin and invited for tea. Carlsen, a 24-year-old chess prodigy, displayed exceptional talent as a young boy and became the second youngest grandmaster in 2004 at the age of 13. At 19, he became the youngest chess player to be ranked world number one. His peak FIDE rating – the benchmark in the world of chess – is the highest in history.

Carlsen has displayed astonishing perseverance and dedication to reach this level and outsmart a number of seasoned chess players over the years. Norway, his home country, is known for its vast energy resources, the world’s largest sovereign wealth fund propped up by petroleum revenues, and pristine nature, among other things. No surprise that Norway scores well on the Global Energy Architecture Performance Index 2015, released today: ranking second, beaten narrowly by Switzerland. India, the home country of Anand, Carlsen’s opponent, is faring less well, ranking 95th on the same index. Russia, also a giant in chess and energy terms, comes 39th.

So what do chess and energy have in common if anything? More than most would think. Firstly, chess is a game of patience. Watching a game of chess can, for some, be like “watching paint dry”. The action moments are few and far between but, when they occur, they can be a tipping point, significantly altering the likely outcomes. A strategic error can have fatal consequences further down the line. Energy systems are similar but slower. It took coal more than a century to overtake biomass as the world’s major energy source. It took oil more than half a decade to overtake coal, and although cycles are getting faster and the energy mix more diverse, it has taken decades for nuclear, gas and renewable energy to build their market share. Looking back, these fuels have all been game-changers. But the biggest game-changer hitherto was the use of electricity, which revolutionized the way we consume energy even today. Energy transitions are faster than in the past due to advances in technology and policy change, but they require well-defined strategies and reforms that transcend shorter political cycles.

Secondly, “talent” is important but won’t create success in itself. Carlsen certainly had a unique talent for chess, but he would never have become world champion without dedication and hard work. To be a good chess player, one needs to play to one’s strength and improve weaknesses. So for energy: Norway and Switzerland both have energy resources (mostly hydropower in the case of Switzerland), but without “hard work” in terms of good policies enabling investment over time, they would not have ranked top on our energy index.

Indeed, Russia (39th) and several resource-rich countries in the Middle East which rank in the last quartile of the 125 countries covered by the energy index show that there is more to high-energy system performance than a significant resource endowment. A high-performing energy system must deliver on several dimensions: ensure affordable energy to power the economy at minimal environmental footprint, and provide secure access to energy for all. Not an easy task.

As countries seek to improve their energy system on these dimensions they do well to develop the energy resources and their strongest energy sector capabilities, while seeking to improve areas they are less good at, perhaps learning from experience in other countries. There is no perfect energy system – even Switzerland can improve its performance, just like Carlsen.

Thirdly, mastering complexity requires a clear but adaptable strategy with difficult trade-offs to be made, and a good rank is not a guarantee for future success. When the first chess game of last month’s world championship opened, both Carlsen and Anand had a clear vision for success and a strategy to achieve it. Carlsen once said that in a game of chess he can think up to 17 moves ahead. While this capability is crucial to envision scenarios, adapting the strategy to the course of the game to maximize chances of winning can be equally important. Difficult trade-offs must be made: “what happens if?”, or “should I give up this knight to have a chance at taking the opponent’s queen?”

Energy policy and investment choices are similar: What happens to the cost of energy if we create this policy incentive to invest in renewable energy? Will the cost of renewable energy come down fast and the positive impact in terms of reduced emissions and increased energy diversity outweigh the costs? Or will the cost of subsidies lead to significantly rising electricity prices and possibly public opposition? What would our next policy response be in each of these cases? Or if you are a chief executive officer (CEO) of a utility company, how should I adapt my business model to succeed in a market where end-customers are producing ever larger shares of their own energy needs and new market entrants possess significantly different capabilities?

Just as Carlsen, when confronting a difficult choice in a game, might think of a famous example from the history of chess, an energy policy-maker or an energy company CEO might think of a best or worst practice from another country or company that faced a similar situation. Each strategic choice is about mastering complexity and will have future knock-on effects.

Fourthly: it’s geopolitics. Since the time of the Cold War, chess has had connotations of geopolitics. After all, it is a brain game; which country can foster the brightest mind of this world? When the decision was taken to hold the last Anand-Carlsen game in Russia, the signal effect of the venue given ongoing tensions between Russia and Ukraine was debated in Norwegian media. From the time of the oil embargo in the 1970s until today, energy, and notably oil and gas, has been closely intertwined with geopolitics. With the US heading for energy independence and the oil price dropping dramatically from highs a few years ago, the fortunes are turning from energy producers to consumers and the geo-economic balance of power is shifting. Energy policy-makers must factor in this changing energy reality in their planning.

Fifthly: man or machine? When will a machine outsmart Carlsen and all other human chess players? The race between man and machine and the fascination for human and artificial intelligence is known from the world of chess. Less known, but equally important, is the increasing use of algorithms, data and industrial internet in the world of electricity. Google’s acquisition of Nest Labs, the thermostat producer, for $3.2 billion at the beginning of 2014 made waves in the energy world and served as an eye-opener for the possibilities of using data and industrial internet solutions to reduce costs and provide more efficient and tailored solutions.

Energy policy-makers will, sooner rather than later, confront questions of data ownership and how to enable rather than stifle innovation, while industry incumbents will need to adapt to stay on top of the innovation curve.

Lastly, it is about mastering public engagement. Carlsen’s success has created a wave of interest for chess in Norway and a much more “chess literate” population. Carlsen and his team have been riding the wave of public engagement like some stars from sports and entertainment. In a hyperconnected world where social media has given more instant power to the people, mastering public engagement over time is a “must” and not a “nice to have” also for energy. While energy reforms in the past were done largely by bureaucrats and informed by engineers and others, it has now become a highly public issue, perhaps also increasingly so due to the link to the sustainability agenda.

Mastering public engagement has never been more important for successful energy reforms.

China’s fight against local air pollution rose to the top of the country’s political agenda sparked by a public outcry which, in turn, was helped by social media. Several energy-related measures to reduce air pollution have since been enacted and their effect will no doubt be subject to the scrutiny of the Chinese people. In Japan, the public debate on the role of nuclear post-Fukushima is tense and the restarting nuclear reactors will depend on public acceptance. In Germany, a country going through significant energy transition – and ranking 19th on our energy index – the cost of subsidies for renewable energies is subject to intense public debate. Still, close to 70% of Germans still back the “Energiewende”.

In Indonesia, newly elected president, Joko “Jokowi” Widodo, announced the politically sensitive fuel subsidies reduction on 17 November – barely a month after he took office – and was promptly faced with street protests and a drop in approval ratings. Reforming fuel subsidies remains a notoriously difficult political issue in many countries often subject of public opposition – despite overall positive effects. After long years of debating energy reforms and strong public opposition, Mexico is finally on its way to implement ambitious reforms of its oil and gas and electricity sectors. The benefits of these reforms will unfold over decades and will depend on continued public support. Promoting transparency, fact-based energy debates and increasing the general energy literacy of the population will no doubt be part of the agenda of energy policy reformers in decades to come. Some of them may enjoy a chat with Magnus Carlsen.

The Global Energy Architecture Performance Index 2015 is released today.

Author: Espen Mehlum, Director, Head of Knowledge Management and Integration, Energy Industries, World Economic Forum

Image: The coal power plant of German utility RWE Power is reflected in water near the western town of Neurath February 28, 2014. REUTERS/Ina Fassbender