Systems thinking: a personal perspective on energy markets

If you’ve ever tried to understand the energy markets, you’ll know it’s like stepping into a maze. Even people directly involved in the industry often find it dauntingly complex and those outside it tend to label it as near impenetrable. But here’s the thing – complexity doesn’t have to be scary. From my experience, adopting a systems thinking approach has helped me cut through the noise, find clarity and make sense of the seemingly chaotic web that makes up energy markets.

Systems thinking is an approach to understanding and solving problems by looking at the interconnected components of a system as a whole rather than focusing on individual parts in isolation. 

At its core, systems thinking is about defining the boundaries of the “system” you’re analysing and recognising that different parts behave and interact in distinct ways. It’s also about knowing when and where to draw the line between what’s inside the system and what’s not. Think about how your behaviour at work differs from how you act at home – it’s the same person, but two distinct systems. By applying this principle, I’ve learned to navigate some of the most pressing questions in energy, like the costs of transitioning to renewables or building new infrastructure. 

This is particularly relevant when considering the impact of renewables and infrastructure. Let’s break it down together. 

Simplifying the complex

One of the biggest challenges in any complex system is knowing where to focus your attention. It’s tempting to simplify but some may see that as naive. However, systems thinking is about smart simplification – defining clear boundaries in time and space to bring order to chaos. When you isolate a system, you can analyse its behaviour more effectively and identify trends that would otherwise be buried under the many layers of noise. 

Take energy prices, for example. If we only consider the wholesale electricity market, adding more renewable energy into the mix lowers prices as renewables have zero marginal cost. This is true within the boundaries of the wholesale market system. 

But systems thinking reminds us that the story doesn’t end there. Once you zoom out, expand your boundaries and include the transportation and distribution grids in your analysis, the picture changes drastically. The cost of expanding infrastructure to support the new energy landscape adds a significant cost burden.  

True costs of renewables

Many people assume that increasing the share of renewable energy will automatically lead to cheaper electricity. This assumption holds within the scope of the wholesale market. But when you expand the system to include the transportation of energy from generation sites to where it’s consumed, the hidden costs emerge. 

In Germany, most wind energy is generated in the north, while large-scale consumption occurs in the south. To bridge the conventional generation belt in the middle, enormous investments in transmission and distribution grids are needed. High-voltage power lines, substations and related infrastructure aren’t cheap, especially in today’s environment of high interest rates. These costs get passed on to end users, meaning that while wholesale prices may fall, total energy bills – including grid costs – are likely to rise. 

And it’s not just electricity. All energy commodities transported through grids or pipelines face similar challenges. From electricity to hydrogen, building or modifying infrastructure is capital-intensive. Transitioning to a green energy system will require not just new power grids but also an entirely new hydrogen network, further increasing overall costs. 

The hydrogen dilemma

Speaking of hydrogen, it’s a hot topic in the energy world. Green hydrogen is seen as a crucial component of decarbonisation, especially in industrial applications. But is it worth building a dedicated hydrogen grid for households or can we find a smarter solution? 

Interestingly, Germany already has experience mixing hydrogen into existing gas grids. Before 1991, West Berlin’s city gas supply included 51% hydrogen and 21% methane. This was during a time when the city, divided by the Berlin Wall since 1961 after the fallout of the Berlin Blockade in 1948, relied heavily on self-sufficient energy solutions to sustain its population amid political isolation. The Wall indirectly reinforced the need for locally produced energy, such as city gas, which enabled West Berlin to function independently until reunification. When the switch was made to natural gas, only minor adjustments were needed to accommodate the change. Today, Germany allows up to 10% hydrogen by volume in its gas grid, equating to roughly 3.3% of its heating potential. 

This is a start, but it’s far from revolutionary. The low heating value of hydrogen (3 kWh per cubic metre, compared with natural gas’s 10 kWh) means that even with higher combination levels, the impact on overall heating performance remains modest. However, increasing hydrogen levels to 20%, 30% or even 50% could make a more significant difference – without the need for entirely new infrastructure. 

So why aren’t we talking about this more? Partly because our systems thinking hasn’t yet incorporated our historical experience with hydrogen-rich city gas. And partly because sourcing enough green hydrogen to make it viable is another major challenge. 

A lesson in expansion

The hydrogen grid debate is a prime example of why systems thinking matters. When you confine your analysis to one part of the system – say, the industrial need for pure hydrogen – it seems obvious that building a new grid is necessary. But if you expand the system to include households, a mixed approach using existing infrastructure may be more practical and cost-effective. 

By revisiting historical precedents and broadening our analysis, we can find smarter solutions to today’s energy challenges. It’s not just about throwing money at new projects – it’s about optimising what we already have and understanding the trade-offs involved.  

As we transition to renewable energy and new technologies like hydrogen, the systems thinking approach will be more important than ever. Understanding the true costs of infrastructure, exploring innovative ways to integrate new resources and learning from past experiences can help us make smarter, more sustainable choices. 

In the end, energy is about more than just numbers on a bill – it’s about creating a system that works for everyone. And systems thinking is the roadmap that can get us there. 

This article originally appeared as a column on montelnews.com