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How do policies mobilize private finance for renewable energy?—A systematic review with an investor perspective

With the urgency of climate change, and billions spent globally on renewable energy (RE) support policies, it is crucial to understand which policies are effective. Substantial scholarly research on RE deployment policies has been carried out over the last two decades, resulting in inconclusive findings regarding the effectiveness of mobilizing private finance. Here, we take a novel perspective and review 96 empirical studies concerning the impact of policies on two key investor decision metrics: investment risk and investment return. Only if both metrics correspond to the investors’ expectations are they willing to engage in RE projects. First, our rigorous literature review shows that effective policies address risk and return simultaneously. Second, we find that generic instrument design features, such as credibility and predictability (continuous evaluation and monitoring), considerably impact investment risk. A more focused analysis of the specific design elements of feed-in tariffs, auctions and renewable portfolio standards reveals that these instruments are most effective when they are designed in such a way that they reduce RE project risk while increasing return. We distil important implications for policymakers who aim to foster renewable energy and clean technologies more broadly.

Written by Friedemann Polzin, Florian Egli, Bjarne Steffen and Tobias S. Schmidt

Read the full publication online

Revolutions at sea – reflecting on the cost of offshore wind

The costs of offshore wind are falling dramatically. Several European countries have now agreed to buy power from offshore wind farms at costs which challenge the notion that renewable energy must be heavily subsidised to survive.

The UK government has recently awarded contracts to offshore wind projects scheduled for the early 2020s, at prices 50-60% lower than those it handed to offshore wind projects in 2014.  Germany and the Netherlands have recently announced contracts, also for expected delivery in the early 2020s, in which offshore wind developers have agreed to receive the market price only – zero subsidy contracts.

What has caused these rapid cost reductions? Can we expect the costs of offshore wind contracts to remain at these relatively low levels, or even to reduce further?

The cost reductions are likely to have had a few contributing factors, several of which can be seen optimistically as factors that will continue to keep costs low in the future.

One such factor is an innovation relating to policy design. The payment level received by offshore wind projects is now increasingly decided not by governments, but by requesting companies to bid in for the contract, declaring the price at which they would be prepared to deliver it. Such auction-based systems allow governments to choose the lowest cost of the now revealed bids. It seems plausible that the move towards auction-based allocation systems may have helped to drive down prices by introducing price competition into the bidding process.

Technological improvement is an important factor for enabling such cost reductions. There has been a clear trend towards larger and more efficient turbines which can deliver greater amounts of energy, increasing return on investment, thereby lowering costs. The trend is set to continue, with one major company expecting the turbines they will use in 2024 to be double the current size.

However, other factors that could explain the recent low bids may give a less clear grounds for optimism that the low prices are here to stay.

It is possible that companies may currently be bidding low for strategic reasons. For some companies, a lower return may be considered worthwhile, at the present time, for the benefit of maintaining their project supply chains. If subsidies in some previous rounds were overly generous, as some have suggested, it might be that this is currently enabling some flexibility on the balance sheet for low bids. If this is part of the explanation, such strategic bidding could not be maintained in the long run.

Auction design can also incentivise companies to put in bids lower than they would ideally accept, if they believe that another project will bid in higher and set the price received by all selected bids. However, if such a strategy backfires then a company could win a contract but at a price at which it is impossible to deliver the project – sometimes called “the winner’s curse”.

Another important factor likely to be lowering costs at the present time is the relatively low cost of financing. Investors have increased familiarity with offshore wind, and the long term contracts being issued by governments help to manage uncertainty, enabling lenders to lend at lower rates of interest. However, there are also important external conditions – interest rates in general are exceptionally low at the moment. As interest rates are likely to rise again in the future, it is possible that this could add to the cost of future projects.

Costs of projects are also strongly affected by site conditions, such as distance from shore and depth of water. There is a limited number of sites close to shore and in shallow water, and if future sites are in deeper water and further from shore this could drive up costs.

It is also important to recall that not all costs associated with offshore wind farms are necessarily accounted for in the costs paid for by project developers, and thus covered by the subsidies. Important additional costs are the costs of connections to power grids, and of balancing the system, for example in the event of too much power being injected on to the grid at the wrong time and wrong place. Because wind turbines have variable output dependent on wind conditions, they can exert significant costs on the system in this way. In some countries generators must pay for, or at least make a contribution towards these kinds of costs. In other countries, generators are not required to cover their own balancing and transmission costs, as these are met by the network operator. This is an important contributing factor towards the difference in costs between offshore wind projects in different European countries. Clearly, systems that do not target transmission and balancing costs at generators to some extent create favourable conditions for offshore wind, and they certainly make achieving zero-subsidy auctions more likely. However, if not paid by generators, transmission and balancing costs still have to be covered by system operators and are ultimately paid for by consumers. Thus, there is a strong argument that to herald a ‘zero-subsidy’ auction within a system that does not direct transmission and balancing costs at generators is misleading – especially if offshore wind exerts greater than average transmission and balancing costs – as the socialisation of transmission and balancing costs is a clear subsidy. Giving generators some kind of signal as to the costs their output imposes on the network is an important part of developing a well-balanced and efficient system. While shielding offshore wind generators from these costs may have attractions in the short term, it could lead to greater costs in the longer term, if it means the system develops in a way that is harder and more expensive to balance.

Of course, the news of extremely low prices for offshore wind contracts is to be welcomed. However, rather than becoming too focussed on zero-subsidy auctions as ends in themselves, we should continue to pay attention to making policies that look robust across all market conditions: long-term policy stability; careful attention to auction design; allocating transmission and balancing costs to support rational network development and incentivise innovations in storage and flexibility; and supporting and coordinating innovation chains.

INNOPATHS in the European Sustainable Energy Week #EUSEW18

This year, the EU Sustainable Energy Week celebrated its 13th anniversary and INNOPATHS was invited to present some of its early results in this important event. The EU Sustainable Energy Week, which took place in Brussels last week (June 4-8), is the annual flagship event in the EU in which sustainable energy policy is at the centre of the debates and discussions among stakeholders from the governmental, industrial, academic, and non-for-profit communities. The European Commission´s Directorate General for Energy (DG Energy) and the Executive Agency for Small and Medium-sized Enterprises (EASME) join forces by focusing the 2018  conference on the theme – “Lead the clean energy transition”.

The theme clearly resonated. The conference included 60 sessions and more than 2,500 participants. We found that discussions involving energy efficiency policies attracted special interest during last week. With the revised Energy Performance of Buildings Directive (EPBD) on the table, Ms. Mechthild Wörsdörfer, Director in charge of renewables, research and innovation, energy efficiency of the DG Energy of the European Commission, highlighted that energy efficiency will bring “multiple benefits, such as lower cost of the energy transition, reduced energy bills for the most vulnerable, a more lenient and competitive EU economy, higher quality of life and cleaner air and environment”.

Since INNOPATHS is an innovative project in substance and form aiming to generate new state-of-the-art low-carbon pathways for the European Union, we did not want to miss out on the opportunity to contribute to the discussion of policies to facilitate deep energy renovation in buildings.

I presented the work of the University of Cambridge (with Prof. Laura Diaz-Anadon), the Euro-Mediterranean Centre on Climate Change (CMCC) (Dr. Elena Verdolini) and the European University Institute (Dr. Stefano Verde) developing one of the four innovative online tools coming out of the project.  In particular, I provided some early results from the prototype of the online Policy Evaluation Tool, which we designed with Nice&Serious (N&S) (Peter Larkin and his team), to inform policy makers and other stakeholders on the impacts of different policies on a wide range of outcomes (including economic, environmental, and social) in a panel with Commission and other European project representatives.

I presented INNOPATHS insights on the main innovations of the project, the barriers encountered for deep renovation of the residential building stock in the EU, as well as policy recommendations to overcome those obstacles. Using a systematic review of research on Building Codes and White Certificates collected for the Policy Evaluation Tool prototype, we presented some of the barriers envisioned for deep renovation in buildings to improve energy efficiency, among others:

  1. A poor understanding of the causes of policy failures in the buildings sector
  2. Aged building stock in some EU jurisdictions
  3. Lack of evidence in or applicable to Southern European contexts
  4. Aversion towards more stringent regulatory policies
  5. Lack of trust in the realization of expected savings
  6. Non-negligible welfare impacts in low income households

I found that the introduction of the Policy Evaluation Tool received a warm welcome and interest from the many attendees to the session on Deep Energy Renovation.

In addition to the panel, the audience were able to contribute to the debate by answering the following question: “According to you, which are the most important barriers hampering wide-scale energy renovation in Europe”. With 43 answers, 44% of the respondents said that the lack of knowledge and interest of the building owners was the main barrier, followed by a 30% who highlighted the lack of convincing financing solutions and a 28% reporting that the main obstacle was an unfavourable regulatory environment, incoherent policies and support schemes. These barriers for deep renovation highlighted by the stakeholders are surprisingly aligned with the early findings from the Policy Evaluation Tool on how to overcome key barriers.

Of special interest was the agreement among participants regarding the need to guide EU and national level policies in the building sector towards: the remodelling and renovation of the existing stock of buildings, the important role of finance schemes to undertake such works and the digitalization of the sector. The latter resonates with the recent creation in the UK of the Centre for Digital Built Britain (CDBB). The importance of increasing the ambition of long-term targets for countries in terms of energy efficiency or energy savings, the provision of innovative financial schemes to support digitalisation in buildings, and the need to improve information in an accessible way for households’ owners and tenants to create a demand for green buildings were recurring themes.

All in all, it seems clear that projects such as INNOPATHs are crucial for informing policies in the building sector to continue working towards a sustainable, clean and fair future for everyone.

Christina Penasco @chrispenasco

A paradigm shift towards renewable energy finance for Sub-Saharan Africa?

Sub-Saharan Africa is one of the most promising future markets for renewable energy projects in the coming decades. There is a significant effort from project developers and investors to enter the market but huge obstacles hinder the realisation of such projects. For this reason, Allianz Climate Solutions and the Project Development Programme (implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit under the German Energy Solutions Initiative of the German Federal Ministry for Economic Affairs and Energy), hosted a workshop in Berlin to discuss possible financing models for CAPEX-free operator models for photovoltaic projects in Ghana and Kenya.

The need for discussion and exchange between investors, project developers and financial institutions as well as policy makers was identified as crucial in order to successfully develop and implement responsive solutions to the upcoming challenges in emerging markets like the Sub-Saharan region.

This blog addresses possible ways of rethinking the transaction process and developing tools for renewable energy projects which could be a step forward to respond to the challenges of emerging markets.

Read full publication here

 

Professor Benjamin Sovacool and Jessica Jewell write piece for The Conversation

On Thursday 8 March 2018, Professor Benjamin Sovacool and Jessical Jewell’s study ‘Fossil fuel subsidies need to go – but what about the poorer people who rely on cheap energy?’ was published in The Conversation.

Professor Benjamin Sovacool is Professor of Energy Policy at the Science Policy Research Unit (SPRU) at the School of Business, Management, and Economics, part of the University of Sussex.  There he serves as Director of the Sussex Energy Group and Director of the Centre on Innovation and Energy Demand.

Drawing from a review he did for Ecological Economics, Benjamin has teamed up with Jessica Jewell from the International Institute for Applied Systems Analysis to write a piece about energy subsidies for The Conversation.

Read full publication here

 

Is climate policy a constraint or an opportunity for job creation?

  1. Context

Do climate policies represent a constraint or an opportunity for job creation and employment growth? Two theses are recurrently put forward in the political debate. The first emphasizes the cost increase, especially the pass-through on energy prices for polluting industries, which would threaten international competitiveness and thus employment. The other stresses positive long-term effects that, besides reducing emissions, will boost innovation and thus long-term competitiveness.

A rigorous evaluation of climate policies, such as carbon taxes, must of course account for the expected decrease in pollutant emissions and energy consumption. However, to be complete, this evaluation must study broader indirect effects on industrial competitiveness and employment – the very ones that are likely to have a primary impact on the well-being of people involved in carbon intensive productions (Smith, 2015).

The concern of an immediate loss of competitiveness is felt particularly in France. This concern comes first and foremost from the fact that the recent Energy Transition Law caused a strong increase in the carbon tax (€ 22 in 2016, € 56 in 2020, € 100 in 2030). This is the argument that industrial lobbies claim to curb overly ambitious environmental policies, especially in a context of non-binding international agreements, such as those initiated by COP21. Also, unions are worried that unilateral policy may lead to the relocation of more polluting activities and thus jobs to countries that implement a less ambitious carbon pricing schedule, or an opportunistic strategy of non-intervention. The main argument of the US administration against international agreements on climate change has always been that, in absence of a well-designed enforcement mechanism, ‘carbon leakage’ —a lose-lose outcome in terms of job losses and higher emissions—becomes a real possibility. For instance, a border carbon tax adjustment has been proposed as an amendment to the World Trade Organization rules to make the enforcement of international agreements on climate change credible.

An alternative view on the effect of climate policies emphasizes the positive consequences for innovation and the creation of a comparative advantage in new sectors where demand is expected to increase rapidly. These green innovative activities would use relatively more skilled labor than polluting activities, and this could have a large multiplier effect on employment for local communities. To turn climate policies into an opportunity, governments could also consider using the revenues from the carbon tax to reduce the tax burden on labor. A drop in taxation on labor could lead to a substitution effect leading to net job creation.

The purpose of this policy brief is to provide a preliminary empirical answer to the question of whether climate policies are an impediment or, on the contrary, an opportunity for employment growth. In doing so, we compare the performance of France, a country for which we have detailed micro-data to test the effects of climate policies, with those of its main economic partners, Spain, Italy and especially Germany.

 

  1. Employment dynamics and energy prices in energy-intensive industries

With regards to the situation of France compared with that of the three major European countries, Germany, Spain and Italy, it is first necessary to look at the extent to which climate policies have changed in these four countries.

Admittedly, climate policies are multidimensional and therefore their effective stringency is difficult to compare. However, it is possible to use differences in energy prices for gas and electricity (the two main energy sources for these four countries) to proxy the effect of carbon pricing. Indeed, while the European Emission Trading System (EU ETS) sets, in principle, a single carbon price, national-level instruments have been introduced to subsidize renewable energies in all four countries. This has thus created a certain heterogeneity in policy stringency across these countries. In France, for example, the Social Contribution of Electricity Generation (CSPE) was introduced to finance EDF’s purchases of electricity produced with renewable energies. The impact of the CSPE has increased over time in a very clear way: 0.003 euro per kw/h in 2003, or 5% of the price of electricity for a medium-sized industrial consumer in 2003, compared with 0.019 euro per kw/h in 2015, or 31.6% of the price of electricity for a medium-sized industrial consumer in 2015.

Let’s first look at the evolution of electricity prices (Figure 1) and gas prices (Figure 2) for an average industrial consumer, in the four countries, between 2000 and 2015.[1] In all countries both prices are rising sharply. In France, the price of electricity increases slightly less than in other countries and the price level remains below the average price in other countries. Since the gas market is global, the price variation across countries is much lower than in the case of electricity. There is therefore a stronger tendency for price convergence for gas than for electricity. It should also be noted that the impact of the price of natural gas (and the highly correlated oil price) is much higher in Italy, Germany and Spain than in France, where electricity is produced mainly by means of nuclear power. Thus, France’s effective exposure to energy price shocks, either because of climate policies or because of rising gas and oil prices, is lower than in the other three countries.

Now let’s look at how employment has evolved in the industries most exposed to rising energy prices. Using the average energy intensity across countries, we define two groups of industries: one with high exposure and the other with medium exposure to price changes.[2] Since in France the price of energy has increased relatively less than in other countries, a smaller impact on employment should be expected. Figure 3 and 4 show exactly the opposite for the period 2000-2011. In fact, while employment in polluting sectors declined in all four countries, the decline is more pronounced in France than in Italy and Germany. Moreover, the level of activity in highly polluting sectors (Figure 3) and moderately polluting (Figure 4) is significantly lower in France (7% of total employment in 2011) than in Italy (13.1 % of total employment in 2011) or in Germany (10% of total employment in 2011). Obviously, these are only correlations and such a result may be ascribed to other structural factors, such as the degree of specialization in these industries or the innovativeness in clean technologies.

 

3. Electricity prices and employment in French firms

Because employment in polluting industries reacts more to energy prices in France than in other countries, we examine in greater details what happened to French companies using firm-level data. This allows us to formally test whether these job losses can be ascribed to the increase in energy prices rather than to other structural factors. A recent INNOPATHS study (Marin and Vona, 2017) estimates the elasticity of employment of French manufacturing firms following a change in the price of energy.[3]

Table 1 shows the main results of this analysis, which uses the historical experience of price increases in the 2000s to extrapolate the effects of the carbon tax provided for in the energy transition law. They are, in a way, not surprising. Rising energy prices (measured as a weighted average of the prices of different energy sources) effectively reduce employment in French manufacturing. The effects are significant: a 10% increase in prices reduces employment by 2.6%. Unsurprisingly, these effects are stronger in the more energy-intensive industries (3.4% job loss) and more exposed to international competition (3.1% job loss). To put these results in context, it should be noted that, according to this calculation, a carbon tax of € 56 per tonne of CO2 will lead to an average increase in energy prices of 20% and, therefore, these elasticities should be doubled. However, unreported results also show that these employment effects are upper bounds, at least for multi-plant firms that can use their internal labour market to mitigate the negative effect of the shock.

This negative employment effect should also be weighed against positive effects in terms of a decrease in the energy demand and reduction of emissions. Table 2 shows that these effects go in the right direction. A 10% increase in energy prices reduces demand by more than 6%, and reduces greenhouse gas emissions by more than 11%. These quite considerable effects offset the social cost generated by the decrease in jobs. However, further research is required to understand the extent to which this decrease in emissions is just a reflection of an increase in emissions embedded in the country’s import. Such analysis as well as an analysis distinguishing between short-term and long-term effects would clearly allow us to shed more light on the net benefits of a carbon tax.

Overall, these large job losses raise the more general question of the change in comparative advantage induced by climate policies in international markets. At a first glance, it seems clear that, unlike Germany, France has not been able to turn the challenge of the energy transition into an opportunity to develop a new comparative advantage. To corroborate this conclusion, the next section will turn back to aggregate data on green exports and the size of the green economy in these two countries.

 

4. The energy transition: an opportunity for creating green jobs

Previous results only consider effects on energy-intensive industries. Keeping constant the industry structure, they do not consider the positive effects of job creation in the new green sectors. The destruction of jobs in energy-intensive industries can be more than offset by job creation in green industries. From this perspective, the energy transition may contribute to reignite sluggish economic growth. The scale of this counterbalancing effects remains difficult to establish: green industries follow different growth patterns from energy-intensive industries as they are usually more exposed to trade and are upstream in the value chain.

With particular reference to the situation in Europe, the available data allows for a comparison only between Germany and France and for a time span limited to the financial crisis period (2008-2014). We compare these two countries on four dimensions: employment in the green sector (Figure 5), green sector exports (Figure 6), value-added in the green industry (Figure 7), and investment in green technologies (Figure 8). It appears that the number of green jobs is roughly the same in both countries, albeit with faster growth in Germany, but also that exports of green products are 3.8 times higher in Germany than in France. Green value added is almost twice as high in Germany, and investments in green technologies almost 3 times higher. Germany is therefore more competitive than France in green industries, probably because its capacity for industrial development and therefore growth of activity and employment, in this sector as in the others, is higher. A possible answer to this divergence between France and Germany comes from a recent study on the drivers of green employment in US regions (Vona et al., 2017). According to this study, green jobs require more qualifications than jobs removed from polluting industries, mainly in terms of technical skills and engineering. Local technological expertise, as measured by the number of patent applicants in the region and by the presence of a national research lab, is also positively associated with the creation of green employment. Given the well-established comparative advantage of Germany in engineering services and machinery industries, the evidence on US regions can contribute to explain the difference between Germany and France in the capacity to turn climate policies into an opportunity. In Germany, the capital goods industry plays a key role in the design of green production processes. Recent work, based on patents, shows that Germany has a comparative advantage today and future much stronger than France in three of the four key green technologies: wind turbines, batteries and photovoltaic panels (Zachmann, 2016). 5. Concluding remarks It is very likely that the energy transition will negatively affect industrial competitiveness in the short term and therefore employment in a proportion that is greater if the companies concerned already suffer from a competitiveness deficit, like in France. This evidence argues for a phased and gradual transition, which must take into account both the time required to build a comparative advantage in the green sector, and the immediate negative effects on the polluting sectors in an already negative economic situation. The use of border carbon tax adjustment, as suggested by, among the others, Helm et al. (2012), represents a way to slow down the carbon and job leakage, giving more time to the affected industries in developed countries to adjust. On the other hand, it is no less obvious that such a transition may bring with it the creation of skilled jobs and growth. As the evidence of US regions tell us, these offsetting effects on job creation are more likely to occur if climate policies are combined with industrial policies and R&D investments on low carbon technologies. 

 

References

Greenstone, M. (2002), ‘The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act Amendments and the Census of Manufactures.’ Journal of Political Economy 110(6), 1175-1219.

Helm, D., Hepburn, C., Ruta, G., (2012), ‘Trade, climate change, and the political game theory of border carbon adjustments.’ Oxford Review of Economic Policy 28(2), 368-394.

Kahn, M., and Mansur, E. (2013) ‘Do local energy prices and regulation affect the geographic concentration of employment?.’ Journal of Public Economics 101, 105–114.

Marin, G., Vona, F., (2017), ‘The Impact of Energy Prices on Environmental and Socio-Economic Performance: Evidence for France Manufacturing Establishments.’ OFCE working paper.

Martin, R., Muûls, M., de Preux, L., Wagner, U., (2014), ‘Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme.’ American Economic Review 104(8), 2482-2508.

Smith, V. K. (2015). ‘Should benefit–cost methods take account of high unemployment? Symposium introduction.’ Review of Environmental Economics and Policy 9(2), 165-178.

Vona, F., Marin, G., Consoli, D., (2017), ‘Measures, Drivers and Effects of Green Employment: evidence from US metropolitan and non-metropolitan areas, 2006-2014.’ SPRU working paper.

Walker, W. (2013), ‘The Transitional Costs of Sectoral Reallocation: Evidence From the Clean Air Act and the Workforce.’ Quarterly Journal of Economics 128(4), 1787-1835.

Zachmann, G. (2016), ‘An approach to identify the sources of low-carbon growth for Europe,’ Bruegel policy contribution n.16.

 

Tables and Figures

Table 1. Effects on employment of 10% increase of energy prices

Sector D% Employment
All Manufacturing Sectors -2.6%
Energy Intensive Sectors -3.4%
Non-energy Intensive Sectors -0.9%
Sectors exposed also to international competition -3.1%
Sectors not exposed to international competition -1.6%

Sources. Marin and Vona (2017).

 

Table 2. Effects on Energy Demand and CO2 Emissions

Sector D% of Energy Demand D% CO2 Emissions
All Manufacturing Sectors -6.4% -11.2%
Energy Intensive Sectors -6.6% -11.5%
Non-energy Intensive Sectors -5.3% -10.9%
Sectors exposed also to international competition -7.9% -11.4%
Sectors not exposed to international competition -5.4% -11%

Sources. Marin and Vona (2017).

 

Figure 1: Electricity Prices, industrial consumers

Figure 2: Gas Prices, industrial consumers

Figure 3: Share Employment High Energy Intensive

Figure 4: Share Employment Mid Energy Intensive

Figure 5: Green Employment

Figure 6: Green Value Added

Figure 7: Green Exports

 

Figure 8: Investments In Cleaner Tech

[1] Source Eurostat, http://ec.europa.eu/eurostat/data/database.

[2] Source EU-KLEMS, http://euklems.net/. The groups are rather standard in the literature and coincide with the more energy intensive industries. Highly polluting industries are: Chemistry, Metals, Manufacturing of other non-metallic mineral products, Coke and Oil Refining, Mining. Moderately polluting industries are: Food and Beverages, Leather and Footwear, Rubber and Plastics, Textile, Wood and Wood Products, Other Manufacturing Sectors including Recycling.

[3] This study is based on data from establishments in the manufacturing sectors in France during the period 1997-2011. Three databases are merged: the DADS database (to have a measure of employment, by type of qualification, in each establishment), the FICUS database (to build a measure of enterprise productivity, unreported in this note but available in the paper) and the ECAI database (to obtain measurements of the energy mix used and energy prices paid by a sample of French establishments in the manufacturing industry). The national price of different energy sources is used, weighted by the initial energy mix of the establishments, as an instrumental variable to isolate exogenous changes in energy prices unrelated to quantity-discounts. Our estimates are conditioned to a rich set of control including sector- and region-specific trends and establishment fixed effects. We also take into account the effects of European policy to set a carbon price, the ETS (Emission Trading Scheme). The employment effects of ETS are low, consistent with the low effective severity of this policy which has provided generous exemptions for more energy-intensive industries exposed to international competition (see: Martin et al. 2014).

 

Surprises and change

The first serious efforts to develop new and renewable energy into viable energy options started in the aftermath of the oil crises in the late 1970’s. The then Carter administration launched multi-billion R&D programmes in the USA to start an alternative energy revolution. Likewise, the first deployment programmes of wind energy were initiated in the USA, which brought some 1 GW of Danish wind power to the Californian market with a hope of producing cheap electricity. At the same time, the first global energy scenarios1 were designed at IIASA near Vienna predicting a turn to an oil-free, mainly nuclear-based energy economy, flavored with solar energy.

In retrospect, many of these early efforts in clean energy were disappointments and didn’t meet the quick promise of turning the world energy economy around. Neither have we been able to foresee the many ‘surprises’ and disruptions that followed during the next 40 years, which together have pushed the new and renewable energy technologies to a market breakthrough.

There is not a single mastermind or grand policy plan behind the success of clean energies, but rather a sequence of interlinked incidences with amplifying effects and making use of enabling drivers such as advances in science and the U.N. climate accords. Not to mention the pioneering markets in Germany with strong policy links which provided generous subsidies to new energy technologies, which in turn induced huge learning effects and cost reductions.

One of the biggest surprises during the last decades was the transformation of China towards an innovation-driven economy. China played a crucial role in bringing down the cost of photovoltaics and wind power. During the last ten years, the price of PV has dropped by more than 90% thanks to the efficient, low-cost, and large-scale Chinese innovation system integrated into manufacturing. In addition, the scale of economies played a role. The Chinese scaled up production facilities tenfold from those typical in the USA and Europe. Remarkably, no major breakthrough in the core PV technology preceded this dramatic cost plunge. This ‘surprise’ came from outside the traditional research and technology development realm, which is often thought to deliver the disruptions.

A similar ‘surprise’ was the victory of the Danish wind power industry, which beat the billion-dollar U.S. wind programme in delivering competitive windmills to the market 40 years ago. The Danish success has been attributed to the effective networking amongst market actors, developers, and researchers, and their openness to share experiences whilst competing.

Some ‘surprises’ may have unpredictable consequences. For example, the U.S. shale gas boom took off in a quite short time period 10 years ago and brought very cheap gas into the U.S. market, displacing coal in power production. These changes were so large that they had a global impact; e.g. cheap coal started to filter into Europe. Unfortunately, the Emission Trading System (EU ETS) was incapable of preventing this and coal use has increased in many EU countries, contradicting the EU climate policy. Ironically, the strong price-driven fuel shift from coal to gas in the USA lead to relative CO2 emission reductions of about the same size as those in the European Union with strong climate and support-driven policies.

Above examples should not be misunderstood as a laissez-faire attitude, but as a cautious remark that future development is not linear. Neither is ‘surprise’ the only factor that created a change, but there are other important factors, many with a socio-economic and political dimension.

Actually the success of PV, wind, and shale gas described above is not just about a mere ‘surprise’, but a result of successful commercialization strategies, in which technology development and deployment measures were optimally applied. Policies played a role in the big picture as well, particularly in accelerating development and providing a framework for penetration. The dialogue between science and policy is also of importance. Scientists have valuable knowledge and insight, and could advise policy makers about future opportunities and threats, and urge actions, when necessary. The recent communication2 on the sustainability of forest bioenergy (policies) by leading European scientists serves as an example of such advice.

In a world of ‘surprises’, it is no wonder that the predictions on the future of new energy technologies include major uncertainties. Once a new technology starts to become cost-competitive and takes off, the future predictions tend to be too pessimistic, while when still being far from the breakthrough point, they are often too optimistic.  A prevailing positive development may also be stopped by a sudden unexpected ‘surprise’. This was the case with nuclear power caused by the Three Mile Island, Chernobyl, and Fukushima accidents, and the consequent rise of public opposition to nuclear and deterioration of its economics, which turned the hailed nuclear renaissance into a disaster, also reflected by recent scenarios3.

Technology disruptions and ‘surprises’ are vital for technology evolution. Therefore, understanding the nature of disruptions deserves attention. The present clean energy transition will trig a range of new innovations, e.g. in transport, in integration of renewable energy, and through digital economy. Consumers are much stronger involved in the change than previously, which emphasizes social innovations linked to digitalization, circular, and sharing economy, among others.

Perhaps the next ‘surprise’ originates from bottom-up movements and not from a specific technology per se, but from using a range of technologies and expertise together to make a systemic change. What kind of a surprise could Artificial Intelligence generate, not to speak about the distant possibility that one day AI >Human I?

Enabling ‘surprises’, not preventing them, may be important for a CO2-free future, meaning that nourishing a multitude of agents and ideas, which may lead to disruption, would be welcome. The inertia of energy economy is known to be large; it involves huge investments and conservative players. Here, governments may help by unlocking the lock-in to the past energy and avoiding path dependencies. Giving due attention to enablers, drivers, and pushers, which accelerate a change, is worthwhile. Understanding technology limitations is also useful, but we shouldn’t undermine the human ingenuity to overcome such obstacles.

 

  1. Jeanne Anderer, Alan McDonald, Nebojsa Nakicenovic, Wolf Hafele (Ed.). Energy in a Finite World, Paths to Sustainable Future, Ballinger Publishing, 1981.
  2. EASAC – the European Academies’ Science Advisory Council Multi-functionality and sustainability in the European Union’s forests. EASAC policy report 32, April 2017.
  3. International Energy Agency (IEA). World Energy Outlook 2017, November 2017.

Peter D. Lund is professor at Aalto University in Finland. He chaired the Advisory Group on Energy of the EU in 2002-2006. He is past chair of the EASAC Energy Panel. He also holds several visiting positions in China.

We must accelerate transitions for sustainability and climate change, experts say

We must move faster towards a low-carbon world if we are to limit global warming to 2oC this century, experts have warned.

Changes in electricity, heat, buildings, industry and transport are needed rapidly and must happen all together, according to research from our partners at the Universities of Sussex. The new study, published in the journal Science, was co-authored by INNOPATHS’ Benjamin K. Sovacool.

To provide a reasonable (66%) chance of limiting global temperature increases to below 2oC, the International Energy Agency and International Renewable Energy Agency suggest that global energy-related carbon emissions must peak by 2020 and fall by more than 70% in the next 35 years. This implies a tripling of the annual rate of energy efficiency improvement, retrofitting the entire building stock, generating 95% of electricity from low-carbon sources by 2050 and shifting almost entirely towards electric cars.

This elemental challenge necessitates “deep decarbonisation” of electricity, transport, heat, industrial, forestry and agricultural systems across the world.  But despite the recent rapid growth in renewable electricity generation, the rate of progress towards this wider goal remains slow.

Moreover, many energy and climate researchers remain wedded to disciplinary approaches that focus on a single piece of the low-carbon transition puzzle. A case in point is a recent Science Policy Forum proposing a ‘carbon law’ that will guarantee that zero-emissions are reached. This model-based prescription emphasizes a single policy instrument, but neglects the wider political, cultural, business, and social drivers of low carbon transitions.

A new, interdisciplinary study published in Science presents a ‘sociotechnical’ framework that explains how these different drivers can interlink and mutually reinforce one another and how the pace of the low carbon transition can be accelerated.

Professor Benjamin K. Sovacool from the University of Sussex, a co-author on the study, says:

“Current rates of change are simply not enough. We need to accelerate transitions, deepen their speed and broaden their reach. Otherwise there can be no hope of reaching a 2 degree target, let alone 1.5 degrees. This piece reveals that the acceleration of transitions across the sociotechnical systems of electricity, heat, buildings, manufacturing, and transport requires new conceptual approaches, analytical foci, and research methods.”

The Policy Forum provides four key lessons for how to accelerate sustainability transitions.

Lesson 1: Focus on socio-technical systems rather than individual elements

Rapid and deep decarbonization requires a transformation of ‘sociotechnical systems’ – the interlinked mix of technologies, infrastructures, organizations, markets, regulations and user practices that together deliver societal functions such as personal mobility.  Previous systems have developed over many decades, and the alignment and co-evolution of their elements makes them resistant to change.

Accelerated low-carbon transitions therefore depend on both techno-economic improvements, and social, political and cultural processes, including the development of positive or negative discourses. Professor Steve Sorrell from the University of Sussex, a coauthor of the study, states: “In this policy forum we describe how transformational changes in energy and transport systems occur, and how they may be accelerated. Traditional policy approaches emphasizing a single technology will not be enough.”

Lesson 2: Align multiple innovations and systems

Socio-technical transitions gain momentum when multiple innovations are linked together, improving the functionality of each and acting in combination to reconfigure systems.  The shale gas revolution, for instance, accelerated when seismic imaging, horizontal drilling, and hydraulic fracturing were combined.   Likewise, accelerated low-carbon transitions in electricity depend not only on the momentum of renewable energy innovations like wind, solar-PV and bio-energy, but also on complementary innovations including energy storage and demand response.  These need aligned and then linked so that innovations are harmonized.

Prof. EU INNOPATHS consortium researching low-carbon transitions for Europe, comments: “One of the great strengths of this study is the equal emphasis it accords to technological, social, business and policy innovation, in all of which governments as well as the private sector have a key role to play.

“European countries will become low-carbon societies not only when the required low-carbon technologies have been developed but when new business models and more sustainable consumer aspirations are driving their deployment at scale. Public policy has an enormous role to play at every step in the creation of these changed conditions.”

Lesson 3: Offer societal and business support

Public support is crucial for effective transition policies. Low-carbon transitions in mobility, agro-food, heat and buildings will also involve millions of citizens who need to modify their purchase decisions, user practices, beliefs, cultural conventions and skills. To motivate citizens, financial incentives and information about climate change threats need to be complemented by positive discourses about the economic, social and cultural benefits of low-carbon innovations.

Furthermore, business support is essential because the development and deployment of low-carbon innovations depends upon the technical skills, organizational capabilities and financial resources of the private sector. Green industries and supply chains can solidify political coalitions supporting ambitious climate policies and provide a counterweight to incumbents.  Technological progress can drive climate policy by providing solutions or altering economic interests. Shale gas and solar-PV developments, for instance, altered the US and Chinese positions in the international climate negotiations.

Lesson 4: Phase out existing systems

Socio-technical transitions can be accelerated by actively phasing out existing technologies, supply chains, and systems that lock-in emissions for decades. Professor Sovacool comments that: “All too often, analysists and even policymakers focus on new incentives, on the phasing in of low-carbon technologies. This study reminds us that phasing out existing systems can be just as important as stimulating novel innovations.”

For instance, the UK transition to smokeless solid fuels and gas was accelerated by the 1956 Clean Air Act, which allowed cities to create smokeless zones where coal use was banned. Another example is the 2009 European Commission decision to phase-out incandescent light bulbs, which accelerated the shift to compact fluorescents and LEDs. French and UK governments have announced plans to phase-out petrol and diesel cars by 2040. Moreover, the UK intends to phase out unabated coal-fired power generation by 2025 (if feasible alternatives are available).

Phasing out existing systems accelerates transitions by creating space for niche-innovations and removing barriers to their diffusion. The phase-out of carbon-intensive systems is also essential to prevent the bulk of fossil fuel reserves from being burned, which would obliterate the 2oC target. This phase-out will be challenging since it threatens the largest and most powerful global industries (e.g. oil, automobiles, electric utilities, agro-food, steel), which will fight to protect their vested economic and political interests.

Conclusion 

Deep decarbonization requires complementing model-based analysis with socio-technical research. While the former analyzes technically feasible least-cost pathways, the latter addresses innovation processes, business strategies, social acceptance, cultural discourses and political struggles, which are difficult to model but crucial in real-world transitions. As Professor Geels notes, an enduring lesson is that “to accelerate low-carbon transitions, policymakers should not only stimulate techno-economic developments, but also build political coalitions, enhance business involvement, and engage civil society.”

Additionally, the research underscores the non-technical, or social, elements of transitions.  Dr. Tim Schwanen from the University of Oxford, a coauthor, states that “the approach described in this Policy Forum demonstrates the importance of heeding insights from across the social sciences in thinking about low-carbon transitions.”

While full integration of both approaches is not possible, productive bridging strategies may enable policy strategies that are both cost-effective and socio-politically feasible.

Further links

This article was originally posted on the University of Sussex website.

Click here to read the full paper in Science

How economic and social actors can champion CO2 phase-out

Projects funded under the Horizon2020 funding programme contributed to the DG Research and Innovation & EASME coordinated policy session on ‘How economic and social actors can champion CO2 phase-out’ which took place on 22 June in Brussels.

The session was part of the EU Sustainable Energy Week and featured contributions from three EU-funded research projects, which was followed by a panel discussion:

  • INNOPATHS: Innovation pathways, strategies and policies for the Low-Carbon Transition in Europe
  • REINVENT: Realising Innovation in Transitions for Decarbonisation
  • EU-CALC: EU Calculator: trade-offs and pathways towards sustainable and low-carbon European Societies

Prof Paul Ekins, INNOPATHS project coordinator, addressed the following questions during his presentation:

  • Can deep decarbonisation pathways be reconciled with the political objectives of reinvigorating European industries and strengthening economic competitiveness?
  • What does science have to say about the risks and opportunities related to innovation, deployment, financing or public acceptance?

Watch the full presentation below.

INNOPATHS will also contribute to the work of a high-level expert panel, established by the European Commission (DG Research and Innovation), which prepares a report on the research and innovation challenges that will have to be tackled on the way towards the full decarbonisation of the European economy. This report will be published mid-2018.

A copy of the presentation slides are available on the EUSEW2017 website.