The Fire Horse Energy Transition & Creative Destruction

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Joseph Schumpeter wrote that creative destruction is the essential fact about capitalism. He was not describing a gentle process. He was describing waves of innovation that dismantle capital stock, reprice assets, and reorganize entire industries. In the Chinese zodiac, the Year of the Fire Horse we have just entered symbolizes intensity, speed, and disruption. Different traditions, same observation. Some periods compress change. The global energy system now sits in one of those periods, where physics, cost curves, and geopolitics align to accelerate industrial restructuring.

The economic logic behind electrification is straightforward. Fossil systems burn fuel to create heat, convert heat to motion, and then deliver work. Each step loses energy. Internal combustion vehicles convert roughly 20% to 25% of fuel energy into motion. Gas power plants convert 35% to 60% of primary energy into electricity. Electric drivetrains convert 85% to 90% of electrical energy into motion. Heat pumps deliver 2 to 4 units of heat for every unit of electricity. When end uses electrify, primary energy demand falls even if final energy services remain constant. In many scenarios, full electrification of transport and building heat reduces primary energy demand by 40% to 60%. That reduction destroys fossil fuel throughput and the rents tied to it.

Cost curves reinforce the thermodynamics. Utility scale solar has fallen roughly 85% in cost since 2010 according to IRENA data. Onshore wind has fallen about 60% in the same period. Lithium-ion battery pack prices have fallen from over $1,000 per kWh in 2010 to under $150 per kWh in 2023, with competitive Chinese tenders for stationary storage cells near $65 per kWh. Grid batteries built for $100 to $180 per kWh, amortized over 15 years at 7% and cycled twice per day at 85% efficiency, add roughly $18 to $32 per MWh in capital cost. When paired with new wind or solar producing power at $25 to $50 per MWh, the combined cost typically lands around $43 to $82 per MWh, which sits at or below the $60 to $100 per MWh cost of new gas generation in most markets, and without the negative externalities. Natural gas generation in the west and coal in China and India needs to set the peak electricity merit order cost in order to be profitable, and increasingly it can’t. The destruction Schumpeter described is visible in balance sheets, not metaphors.

Industrial realignment follows the cost curves. China produces roughly 80% of global solar modules and over 70% of lithium-ion battery cells. It has installed more than 1,000 GW of wind and solar capacity combined, and continues adding over 200 GW per year. It has built over 40,000 km of high voltage transmission, including ultra high voltage lines moving power thousands of kilometers. The European Union has framed decarbonization through regulatory mechanisms such as the Carbon Border Adjustment Mechanism, which prices embedded carbon in imports of steel, cement, aluminum, and other materials. The United States deployed the Inflation Reduction Act with hundreds of billions in tax credits for clean manufacturing and generation, but faces political uncertainty around long term policy durability, evidenced by the last year of policy and climate action regression. Creative destruction at the state level becomes a contest over manufacturing share, supply chains, and standards setting.

Energy security now acts as an accelerant. Europe imported about 155 billion cubic meters of Russian gas in 2021. After the invasion of Ukraine, those flows collapsed. Gas prices spiked above €300 per MWh in spot markets at the peak of the crisis. Governments scrambled to build LNG terminals and secure alternative supply. At the same time, renewable deployment accelerated. Germany added over 14 GW of solar in 2023. The European Union added roughly 56 GW of solar in the same year. When a region realizes that fuel imports expose it to geopolitical coercion, domestic generation and electrification become strategic assets. Wind farms and transmission lines do not require foreign fuel contracts once built. The destruction of fossil dependency becomes national policy rather than environmental aspiration.

Capital markets respond to structural shifts. Major oil and gas companies still generate large cash flows, but long term demand projections have shrunk or at minimum flattened. The International Energy Agency’s net zero scenario projects global oil demand falling from about 100 million barrels per day to around 24 million barrels per day by 2050. Even more moderate scenarios show plateauing demand in the 2030s. If reserves booked on balance sheets assume sustained high demand, repricing risk emerges. At the same time, global investment in clean energy exceeded $1.7 trillion in 2023 according to BloombergNEF, surpassing fossil fuel supply investment. When capital shifts at that scale, it is not symbolic. It is reallocation of future growth expectations. Creative destruction in this phase is financial before it is physical.

Volatility and overreach accompany acceleration. Hydrogen has attracted over $300 billion in announced projects globally, yet only a fraction have reached final investment decision. Carbon capture projects promise tens of millions of tons of annual capture, but actual operating capture globally remains under 50 million tons per year, most of it still realistically climate negative, not even neutral. When capital chases policy signals without cost parity, projects stall. Protectionist measures can also distort markets. Tariffs on solar modules in the United States have slowed installations. Export controls on advanced chips affect grid and electric vehicle supply chains. Schumpeter’s process is not linear. It includes bubbles, policy reversals, and stranded pilots. Fire spreads quickly but can also burn capital.

Physical climate impacts add pressure. Global average temperature has risen about 1.2°C above pre industrial levels. Extreme heat events have increased in frequency and intensity. Wildfire—the fire horse made literal—damages in North America now run into tens of billions of dollars annually. Flood losses in Europe and Asia follow similar trajectories. Insurance companies have withdrawn from high risk regions in California and Florida. When actuarial tables shift, mortgage markets and municipal finance feel it. Climate risk moves from abstract projections to quarterly earnings calls. Decarbonization becomes part of risk management strategy rather than moral positioning.

The emerging geopolitical order in an electrified world differs from the fossil era. Oil chokepoints such as the Strait of Hormuz once dominated strategic thinking. In an electrified system, critical assets include battery factories, copper mines, rare earth processing plants, and transmission interconnectors. Copper demand is projected to double by 2040 in many energy transition scenarios. Lithium demand could increase five to seven times by 2035. Countries with mineral resources gain leverage, but processing and manufacturing capacity remain concentrated. Standards for electric vehicle charging, grid codes, and carbon accounting become tools of trade policy. The contest shifts from controlling fuel flows to controlling industrial ecosystems, something China understood far earlier than the west.

The Fire Horse metaphor captures the compression of change. Societies often move faster when they perceive a turning point. The Cold War space race accelerated aerospace innovation because rivalry aligned with ambition. In the current period, climate physics, cost declines, and geopolitical competition align. China seeks export dominance in electric vehicles and batteries. The European Union seeks regulatory leadership and industrial resilience. The United States oscillates politically but cannot ignore global market direction, as its automakers try and fail sell into markets with strict emissions standards. Acceleration emerges from competition as much as conviction.

Schumpeter argued that capitalism advances through waves that destroy old structures to build new ones. The energy transition now operates at that scale. Fossil infrastructure worth trillions of dollars faces declining utilization. Coal generation in the United States has fallen from over 50% of electricity in 2005 to under 20% today. Electric vehicles exceeded 14 million sales globally in 2023, about 18% of new car sales. Each percentage point increase erodes future gasoline demand. When electric vehicles reach 50% of new sales in major markets, fuel demand curves shift permanently. Creative destruction becomes arithmetic.

The process will not be uniform. Some regions, including the United States at present, will cling to fossil rents. Others will overinvest in technologies that do not scale economically. Supply chains will tighten and then expand. Trade disputes will flare. Yet the structural drivers remain. Electrification reduces energy losses. Renewable generation undercuts marginal fossil costs. Capital markets respond to expected growth. Geopolitical rivalry rewards domestic capability. When these forces synchronize, transformation accelerates.

The Year of the Fire Horse provides a cultural lens for intensity and speed, but the engine of change is industrial economics. Creative destruction is not a slogan. It is observable in gigawatts installed, billions invested, and tons of carbon avoided. The question for governments and firms is not whether this wave will pass. It is whether they position themselves on the side building the new capital stock or defending the old.