The power outages and bottlenecks in Texas, paradoxically an energy center, above all arouse empathy for those affected, as this situation clearly highlights something that is already well understood: the central role that energy plays. Photo credit: Bigstock.MONTEVIDEO, Feb.25 (IPS) – Marta Jara is a Non-Resident Fellow at the Institute of the AmericasCrises. This is particularly evident from a distant point of view and when we benefit from the fact that we are not directly affected, there is a lack of strong emotions and responses that often influence our judgments.
While prejudice makes us efficient decision-makers in our daily lives, when dealing with complex problems with dire consequences, it is the effectiveness of decision-making that counts. Raising awareness of relevant decision distortions and the means to neutralize them is increasingly a key competence in the energy industry and in the modern business world.
The power outages and bottlenecks in Texas, paradoxically an energy center where many of our readers live, could have friends or colleagues, above all arouse empathy for those affected, as this situation vividly highlights something that has already been well understood: the central role that plays energy. Our modern life simply cannot tolerate power outages, let alone go for days without electricity and heat.
But perhaps most importantly, we are reminded of the basic characteristics of a solid energy system: abundance, security, and affordability. Abundance means having a pool of energy that is available in such a way that our activities and our development are not restricted. Safety means that the river is not prone to interruptions of any kind: technical, political, meteorological, etc.
In order for the system to be secure, both the availability of the supply and the infrastructure must be stable, be it through self-robustness, diversification, redundancies or immaterial elements such as trust between the participating partners.
Affordability means that economic access to energy is largely granted. It is, of course, a relative term that has different meanings regardless of whether it is applied to a context of people’s basic needs or to the competitiveness of companies.
There is one other aspect that has not yet received the same attention as the other three, and it is environmental performance. If externalities such as CO2 emissions are properly included in the energy price, this attribute needs to be taken into account when discussing affordability.
Last week’s crisis brings us back to the core issue of compromises that must be seen as part of any energy solution. Every society has to find the right ones to balance the often contradicting system attributes (e.g. more redundancy can mean more costs).
This is the job of the elected officials. But their work pretty much ends there. Once the preferences are established, it becomes a technical task to monitor how the system is designed and to what standards it is designed and operated.
This is what technical operators and regulatory authorities do. The present case shows (not exceptional) the guilt placed on each moving target and reveals the (possibly deliberate) confusion about roles and responsibilities in energy governance.
The clear separation of duties makes it necessary to explicitly state risk tolerance and political goals. If you don’t, political decisions will inevitably be pushed into an opaque space where industry and other lobbies will find it easier to get their way.
Establishing these constraints for a system design in advance is not a natural exercise for politicians because it is not an easy task to talk about compromises. The public expects compromises to be minimized. In Spanish there is an expression for the ideal product: “bueno, bonito y barato” (good, beautiful and cheap) and it is almost synonymous with utopia.
However, ignoring the limits of reality when adopting a strategy can be more painful later than rolling up your sleeves and even starting a conscientious discussion.
While behavioral science is used to support complex human interactions ranging from market dynamics to policy making to politics, energy professionals also need to think more about how cognitive biases affect our industry.
The conflict avoidance described above can be characterized by what is known as “ostrich bias” (discarding unpleasant information, similar to when an ostrich digs its head in the sand as if it would disappear when it saw no threat).
There are many common decision-making and behavioral biases that can be observed in connection with the Texas crisis that appear to tarnish stakeholders and public judgment. Not only the posts on social media, as expected, but also institutional statements from high-ranking officials provide many examples.
Discarding information (the still low share of wind energy in the Texan energy mix and the factually higher impact of disruptions in the supply of natural gas) to confirm one’s convictions (in this case in favor of fossil fuels) is a textbook case.
Affirmation biases then go beyond the choice of energy to affirm the perception of who villains and heroes are based on affiliation. Polarized societies encourage affirmation bias.
Another typical bias is outcome bias: judging a decision by its outcome rather than its quality. If the decision not to winterize certain devices was correct in terms of risk tolerance and cost, it is still correct if an undesirable or even extreme event occurs, as it means the likelihood has been assessed but not viewed as a design condition .
Or the opposite decision to spend more on resilience was the right one and had to be defended at investment time with the same passion that guilt is expressed today. Of course, there is always political recognition when things go bad and therefore failures are usually opportunistically emphasized rather than judged by the original decision criteria. Therefore, the distortion of results is also promoted in the public debate.
A more comprehensive consideration of decision bias, which are particularly relevant in times of technology disruptions and the energy transition, is an entire category that is described in the context of prospectus theory. This theory suggests that it is natural to be bound by the status quo, to justify the established system, and to be reluctant to dispose of assets that are declining in value.
Without a doubt, financial depreciation is not without its embarrassment. Environmental, Social and Governance (ESG) standards set by regulators and institutional investors are increasingly challenging this tendency to make irrational decisions, forcing decision-makers to rigorously re-evaluate portfolios and overcome inertia in order to fulfill their fiduciary duties. Larry Fink’s 2021 letter to Black Rock CEOs essentially focuses on getting the ostrich to get its head out of the sand.
It seems like a lost battle pointing to the irrationality of human behavior, given that this (comparatively) brief energy crisis in Texas is not the first of its kind and similar conclusions have been drawn in the past, but arguably better scientific resources exist to tackle it old challenges can be tapped.
To balance populism and tribal behavior, energy professionals in the public and private sectors should raise awareness and increasingly use neuroscientific approaches. These approaches will enable deeper engagement with a complex group of stakeholders and more effective communication on realistic options for solving critical problems – climate change high on the list – and understanding their implicit tradeoffs.
Elections in many countries in the hemisphere, the pressures of post-COVID economies, and the highly uncertain energy markets represent a challenging scene that can be taken over by tribal crossfires or open a space for much-needed informed and consensus-building strategic dialogues.
Is there any hope of honest public debates that will lead to quality policy decisions? If not, we should not only expect power outages, but also much greater disruptions.
(1) (Gino, Francesca; Moore, Don A .; Bazerman, Max H. (2009). “No Harm, No Foul: The Biasing of Outcomes in Ethical Judgments” (PDF). SSRN1099464. Harvard Business School Working Paper, No. 08 -080.)
(2) Prospectus theory, developed by Nobel Prize winners Daniel Kahneman and Amos Tversky, 1979
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