What is the energy system?

Energy analysts often use the term "energy system" when they are actually referring to the "energy sector." The energy sector is only the upstream part of the energy system. Figure 5.1 puts this difference into perspective by representing the architecture of the energy system as a series of vertically linked source-to-service pathways. The examples next to each system component are randomly chosen and do not represent any special correlation across the various columns.

Fig. 5.1 The architecture of the energy system

The energy sector in figure 5.1 primarily focuses on the production and sale of energy currencies. Electric utilities generate and sell kWhs, while the oil sector explores for and produces oil, refines the oil into marketable products, and sells these in the market-place. The success of any particular agent within the energy sector is usually measured in terms of kWh or litres of gasoline sold. However, the reason people purchase kWhs of electricity or litres of gasoline is only indirectly related to these products. What people really want are energy services, i.e. information via electronic mail, the exchange of information through a telephone conversation, or the service of getting back safely from work to a comfortably temperature-conditioned home. It is important to note that the demand for energy services changes (in quantity and quality) as a function of demographics, income, technology, and location. But their fundamental nature does not change.

The supply of energy services depends on two or more interdependent inputs: one or more energy service technologies plus one or more energy currencies. It is the combination of the technology "automobile" and the currency "gasoline" that provides the energy service "transportation" - not the energy product gasoline alone.¹ The downstream market conditions - in essence oil products' ability to provide the energy services demanded by residential, commercial, and industrial consumers - drive the upstream activities of the oil industry. Oil product demand, end-use competition, and interfuel substitution depend, in all but the shortest term, as much on the techno-economic performance of the energy service technologies providing the services as they do on the actual oil product market prices. As technologies change, so do the competitive edges of the associated fuels.

More precisely, energy services are the product of energy service technologies plus infrastructures (capital), labour (know-how), materials, and energy currencies. Clearly, all these input factors carry a price tag and are substitutes for each other. From the perspective of an energy service consumer, the important issue is the quality and cost of energy services. It matters very little what the energy currency is, and, even less, what the source of that currency was. It is fair to say that most energy services are blind to the upstream activities of the energy system.

But, for the development of civilization, it is the end-service technologies, such as automobiles, aircraft, furnaces, electric motors, and computers, that are most important - or at least the most visible. It is these technologies (including associated infrastructures) and their mix that determine the quality and quantities of energy services people can buy.

The energy system is service driven, i.e. from the bottom up. Energy, however, flows top-down. It appears that the energy industry's priorities resemble the flow of energy - top-down - and approach zero once energy leaves the domain of the energy sector indicated in figure 5.1. Only recently have some energy sector industries begun to adopt a full source-to-service perspective, prompted in most cases by regulatory intervention. "Integrated resource planning" (IRP) and "demand-side management" (DSM) have been promoted to assist the industry in getting out of the energy sector "ghetto." In essence, IRP and DSM explicitly call for the inclusion of the end-use devices into the utilities' investment planning activity. Extending this to an example outside the utility domain, oil company subsidiaries might sell transportation services by leasing out highly efficient vehicles and charging for their use on a mileage basis only (the gasoline, car maintenance, etc., would be on the company).

With regard to the evolution of the architecture of the energy system depicted in figure 5.1, the following observations are in order:

1. the bottom-up, service-to-source architecture is time invariant;
2. the basic services of shelter (keeping warm), security, nutrition, communication, and health care are time invariant; and
3. the components of all chains from service technologies to sources are time "variant."

In the context of time variance or energy system evolution, there are several questions that must be addressed:

- Which components of which chains are most subject to change?
- What causes the change, i.e. is the change policy driven or innovation driven (market pull or technology push)?
- What is the rate of change (the dynamics of technology diffusion or evolution)?