Renewable energy technologies and industrial success; do economic incentives matter? Johan Albrecht Ghent University Faculty of Economics and Business Administration IEW June17-19, 2009

Structure Economic incentives always matter… However, which incentives will trigger a sustainable economic development; carbon values or quantitative targets with production subsidies? Renewables in Deploying Renewables 2008 and Energy Technology Perspectives 2008 (IEA) Barriers for intermittent sources Techno-institutional constraints for renewables

IEA Deploying Renewables 2008 (DR): what is the untapped realisable potential, given existing incentive structures (2020)? Energy Technology Perspectives 2008 (ETP): what is the optimal contribution of renewables in cost-effective climate policy schemes (2050)?

DR & the untapped potential

Despite generous production subsidies, the untapped potential remains enormous

Untapped potential up to 2020 as % of electicity generation in 2005

Do production incentives matter? Onshore wind; incentives between 60 to 120 €/MWh -> policy effectiveness between 0 and 3%

Biomass; incentives between 50 to 100 €/MWh -> policy effectiveness between 0 and 3%

Incentives to overcome cost barriers? EU electricity prices around 80 € per MWh in 2008: onshore wind, biomass & hydro are already cost-competitive -> production subsidies = private rents With prices of today (<40 €/MWh); biomass is cost-competitive

Production incentives are (too) high but clearly insufficient… Private rents up to 100 €/MWh… Diffusion of profitable (post-subsidies) renewables is blocked by non-economic barriers. Assessments of incentive schemes should include non-economic barriers.

When carbon values trigger the energy transition: IEA ETP2008 ACT – stabilize global CO 2 emissions by 2050 – additional investment cost of 17 trillion $ or 0.4% of global GDP each year BLUE – 50% reduction of global CO 2 emissions by 2050 – additional investment of 45 trillion $ or 1.1% of global GDP each year ACT & BLUE:undiscounted fuel savings > upfront investment cost

IEA ETP2008 (2) Source: IEA (2008), Energy Technology Perspectives

IEA ETP2008 (3) ACT – carbon value up to $ per ton CO 2 BLUE - carbon value up to $ per ton CO 2 [full information, perfect foresight, no financing constraints, stable incentives,..] BLUE CO 2 reductions decomposed: 54% efficiency investments, 21% renewables, 10% CCS in power generation, 9% CCS industry, 6% nuclear -> least-cost investment strategy Cost-efficiency as priority: Art 3 UNFCCC & Art 10(a) Kyoto Protocol

IEA ETP 2008 (4)

Fuels in baseline, ACT and BLUE Fossil system is resilient, becomes complemented BLUE 2005: Biomass 23%, wind 3%, solar 2.6% van primary energy

Cost-efficient CO 2 reductions CO 2 reduction cost from replacing old coal and gas plants by ultra-efficient thermal plants; between 20 tot 40 € per ton Efficiency coal plants; 37% now -> 50% Efficiency gas plants; 45% now -> 68% R&D to improve “modern renewables”

R&D Energy-related R&D as % total R&D: 11% in > 3% in 2005:

R&D (2)

IEA Deploying Renewables 2008 (DR): high incentives, very modest development, explicit recognition of non-economic barriers, no focus on cost-effectiveness of climate policy Energy Technology Perspectives 2008 (ETP): low carbon values to trigger cost-effective climate strategies, impressive development of especially older renewables (biomass & hydro), rather vague about non-economic barriers

« Modern renewables » are just part of the energy system Global energy system; 90% fossil (oil, coal & gas) – 10% nuclear, hydro & biomass (old renewables) – 0.60% modern renewables (wind, solar & geothermal; share of 0.45% in 1990) old existingHow to green the global energy system -> focus on efficiency of old existing system (fossil, nuclear, biomass, hydro: 99.40%) ; enormous potential to green the world

Barriers for intermittent sources Electricity = continuously balancing demand and supply Denmark 20% RES but only 6% consumed in Denmark (rest sold at low cost to hydro companies in Scand.) Production incentives do not trigger balancing, backup & storage investments; these problems are externalised

Techno-institutional constraints for renewables Long-run development of renewables requires clear policy schemes to upgrade and expand grids, to develop balancing and back-up capacity, etc -> very expensive necessities (complicated by liberalisation?)

Conclusions There are several puzzles about renewables… Industrial success requires tackling the complete TIC; production incentives are least efficient way to proceed (but most attractive for rent-seekers) Production incentives as well as carbon values do not overcome important institutional constraints (grids, balancing & back-up) With carbon values, institutional constraints are smaller and climate policy more affordable