Discussion:
Using two well-known renewable energy transition
case studies, potential transformations in the
competitive landscape that are typically overlooked
in policy design have been identified.
Germany’s energy transition journey exemplifies the
complexities arising from trying to achieve local
industry development targets and high penetration
targets, simultaneously, within a tight timeframe.
With hindsight, we can say that policy has
overlooked the potential competitive pressures that
could have arisen from global suppliers, inhibiting
the achievement of local goals. Additionally, the
German experience demonstrates how
underestimating future cost reductions in the
supported renewable technology can result in
transmuting a reasonable financial incentive to a profligate one, and consequently causing political
controversy while trying to agree on policy
amendments. Scenario planning and asking ‘what-if’
questions are routes to mitigating the associated
uncertainty. Equivalently, policies can be designed
with flexibility attached to them to adapt for
potential changing market conditions
In the US, regardless of the numerous federal and
state policy instruments that were devised to support
wind energy penetration, the natural gas value chain
continued to improve its competitiveness in both the
production of fuel and conversion to electric power –
the supply cost curve moved downwards, even in the
face of flat or growing demand levels. These
improvements, which were not competitive reactions
to wind industry growth, changed the landscape for
all power generating technologies. We can imagine
that this progress will continue, even assuming
policy driven support for a new technology does not
eat into the market share of the incumbent. It will
therefore take longer than originally imagined by
policy makers for the new entrant to become cost
competitive in its own right. The high reliance of
wind energy development on incentives for more
than 20 years since the introduction of the wind PTC
is an example. However, if the new entrant secures
so great a penetration that demand for the incumbent
begins to decline in absolute terms, the incumbent
will move further down the supply curve to a lower
marginal cost. This additional consequence of
competition will further prolong the need for policy
support for the new entrant.
The scale and duration of financial commitments by
governments are undoubtedly an important aspect of
any policy, and the case studies tell us that policy
suppleness with respect to the finances can prevent
creating political controversy at later stages of policy
implementation. Two characteristics of a supple
policy are of particular importance; the first is
concerned with the ability to reduce or cease financial support dedicated to a specific technology
if the technology costs fall for whatever reason. The
German case-study (i.e. second blind-spot) reflects
the value of this option in the face of technology
costs falling faster than anticipated.
In the alternative case of renewable technology costs
not falling as fast as those of incumbent fossil fuel
supply chains, the danger is different. If the aim of
policies supporting renewable energy is achieved –
absolute reductions in consumption of fossil fuels –
an economy may suffer higher energy prices than its
competitors relying on fossil fuels. Renewables are
only competitive with conventional fuels when their
full cycle costs are comparable to the costs rather
than the current market prices of fossil fuels. The
continuing excess costs of renewables can only be
borne by one of three stakeholders: investors (and
their lenders), consumers, and taxpayers. There is no
magical fourth source of funding. These higher
energy costs are locked in once the capacity is
installed, because of the high capital, low operating
costs of wind and solar electricity. Furthermore,
unless investors are coerced, there is a maximum
contribution they will make based on their rate of
return requirements. This leaves the balance to be
shared between taxpayers and consumers, either
directly or indirectly.
It is not hard to imagine that governments seeking to
bolster their economies will succumb to the
temptation to reduce the costs of support to their
transition strategies. This may cause investors
relying upon incentives to fill the cost gap in their
economic comparisons of conventional and
renewable energy to hold back or require levels of
commitment that are politically difficult to provide.
At least in the current economic climate, energy
prices and taxes appear to exert more influence on an
electorate, and thus their political leaders, than an
appetite for a clean energy transition.