An Institutional Analysis of the Transition to Renewable Energy

Transcription

1 An Institutional Analysis of the Transition to Renewable Energy Jim Goetz Nora Lovell Grant B. MacIntyre Paswel Phiri Jong O Sun Biyayo Bamidaaye Sinon Isaiah L Sutton NTRES 431 Environmental Strategies 14 December 2004

2 Table of Contents Section Page Introduction 3 Brief History of Energy 4 Real Cost of Energy 7 Alternatives to the Energy Status Quo 9 The Role of Non-Governmental Organizations 10 Togo Case Study: The Perspective of Biyayo Bamidaaye Sinon 10 Light Up the World Case Study 13 Philips Lighting Case Study 15 The Market: Market Shifts for Renewable Energy 16 Catalysts for Market Change 17 The Future of the Market and the Shift Towards Renewables 18 Shell Case Study 19 The Role of Government 21 Government Policy for Renewable Energy 21 Tax Shifting Case Study 23 Obligation and Trading Case Study 24 The Bush Administration Energy Plan 25 Conclusion 26 References Cited 28 List of Figures Figure 1. Historic Oil Prices 5 Figure 2. Oil and Gas Worldwide Production 6 Figure 3. Primary Energy Consumption Per Capita (BP 2004) 7 Figure 4. The Sustainability Lens 19 List of Tables Table 1. Policy Instruments for Renewable Energy 22 2

3 Introduction Energy is an essential resource for people in developing and developed nations alike. Throughout history, the energy needs of people have evolved and intensified over time. With the potentially severe consequences of global warming on the not-so-distant horizon and the human population rapidly expanding as conventional energy reserves dwindle, a worldwide shift towards more sustainable forms of energy will occur whether people plan for it or not. The question is whether the efforts of society's chief coordinating institutions - government, market and civil society organizations - will be sufficient to provide a soft landing when conventional energy sources eventually are depleted. In the context of global energy, the shift from carbonbased fossil fuels to more sustainable systems must happen via institutional reform. Change can come from three sources: government policy, market initiatives or community-based projects. In order for the global energy sector to shift towards more sustainable, renewable energy sources, institutions will have to combine efforts and goals for a more stable, equitable energy supply, and a healthier environment. Around the globe the state of energy is changing. Energy demand is growing at the same time global scarcity of these resources looms. The nature of energy demand is also changing. No longer do people require just the service that energy provides, but growing numbers of consumers also demand that the service be provided in an ecologically friendly way. This consumer preference is causing energy companies to reevaluate their operational standards. The standards for energy companies are also being questioned and criticized by governments and NGO s as these groups attempt to strengthen environmental standards. Finally energy companies are reinventing the ways in which they operate in order to remain efficient in competitive markets. In response to these factors, governments, communities, NGOs, and markets are catalyzing the shifts today and from the status quo to alternate means of energy production. 3

4 A Brief History of Energy Much of the history of human civilization is a chronicle of the cultural and technological advances that have allowed people to use energy from sources other than the sweat of one s own brow. The earliest sources were wood for heat, as early as 250,000 BP (James 1989) and slavery for labor. Other early advances around 3000BP or earlier included using draft animals for transport and agriculture, wind and water for milling grain, and sail power for transport. Ushering in the industrial age in Britain in the 1700s, was the large-scale use of coal for steam th engines. At the turn of the 20 century use of petroleum expanded, and more recently, there has been expanded exploitation of natural gas for transport and generating electricity (Smil 1994). This trend towards ever more centralized energy generation has culminated in the ostensible technological pinnacle of energy generation, splitting the atom in nuclear fission reactors; meanwhile nuclear fission remains an unattainable dream. Today in industrial nations, energy use in daily life is so pervasive that it is barely noticed, except perhaps when winter heating bills arrive, or by its conspicuous absence, such as during the large-scale blackout that crippled much of the northeastern US in Indeed, every commercial good we consume, (live in, drive, eat, wear, sit on, etc.) requires energy to produce, package, transport, sell, use, and ultimately to dispose of. Heavy reliance of industrial society on energy has been enabled by the high energy content and relatively low market cost of fossil fuels from which most of this energy is derived. Figure 1 below shows historic oil prices, with conspicuous spikes in 1973 as a result of the OPEC s oil embargo as a reaction to US support of Israel in the Yom Kippur war and in the 1980 s due to interruption in oil supply from Iran and Iraq due to political turmoil and war between those two countries. 4

5 Figure 1. Historic Oil Prices (BP 2004) Oil production peaked in the US in 1970, and based on the peak oil model, it is expected to peak globally as early as Passing peak oil production means that we will have consumed as much as half of the total oil reserve (Aleklett 2004). Having already extracted the cheapest half of reserves, the most expensive half of reserves will remain, and prices will climb. Annual consumption has exceeded discoveries of new reserves since the early 1980s. At current rates of exploitation we have approximately 34 years of oil left. However, as consumption continues to rise globally, the end of the oil era may arrive in 25 years or less (Shaker al-molsi 2004). Figure 2 shows production peaks in several important global oil-producing areas (APSO 2004). The peak oil model is strongly contended by some (e.g. Lynch 2004) who dismiss the Hebbert model on which the peak oil model is based. This notwithstanding, the main difference in opinion is when, not if oil resources will be depleted. 5

6 Figure 2. Oil and Gas Worldwide Production (USDSG 2004) Globally, there are sizeable inequalities regarding access to and use of energy. For example, about a third of the world s population has only wood or other biomass for energy, while another third has only limited access to modern energy. Industrialized countries use a disproportionate amount of energy, with the US being the most extreme example. Despite having only 4.5% global population and only 2% of global oil reserves the US consumes about 25% of world oil production (WWI 2004), amounting to 20 million barrels per day. The world s richest people consume about 25 times more energy than the poorest, with US citizens consuming about fivefold more than the average global citizen (WWI 2004). After enjoying a refreshing hot morning shower, a consumer has already used more energy than a third of the world s population will use that entire day (Wightman, pers. com). The map in Figure 3 shows patterns of global primary energy consumption per capita (BP 2004). 6

7 Figure 3. Primary Energy Consumption Per Capita (BP 2004) Despite these current differences, the global energy use landscape is changing dramatically. Consumption is rising fastest in the developing world, for example, where petroleum use has quadrupled since 1970, and China now leads the world in coal consumption (WWI 2004). This global increase in energy use will have far-reaching effects on supply and demand. Although energy intensity (energy input per dollar of output) of the global economy is declining, these improvements in energy efficiency are more than cancelled out by increased consumption due to population growth and greater affluence in developing countries (WWI 2004). Real Cost Of Energy Profligate consumption of convenient, abundant, cheap fossil fuel and nuclear energy, is however, not without consequences that pervade every facet of society. Energy from fossil and nuclear fuel may be cheap on the market, but the external costs are high. Human and 7

8 environmental health alike suffer greatly due to pollutants from burning fossil fuels to produce energy. Emissions of sulfur and nitrogen compounds degrade air and water quality by contributing to smog and acid precipitation. CO 2 emissions from combustion of fossil fuels contribute greatly to global warming. Environmental, human and local economic health suffer from catastrophic fuel spills such as the Exxon Valdez which ran aground in 1989 and spilled 11 million gallons of oil (EVOS 2004), and from grave nuclear reactor incidents such as at Chernobyl in Deeply entrenched reliance on fossil fuels is also a burden on the economy, due to costly direct and indirect subsidies that promote the energy status quo (EIA 1992). Price spikes (see Figure 2) due to interrupted supply and inelastic demand have cost billions, if not trillions of dollars due to subsequent economic recession, lost economic growth, unemployment and inflation (Carlsnaes 1982). Additionally, there are risks to food and national security, whose monetary cost is difficult to quantify. For example, the average US citizen requires the equivalent of 400 gallons of oil per year for food production, preparation and transport (Pimentel et al. 1994). Without fossil fuel inputs, current food production could not be maintained using current methods. Further threats to national security are evident in the vulnerability of nuclear power stations to terrorist attack. Currently, 55% of the oil consumed in the US is imported, much of that from unstable and undemocratic regimes. Due chiefly to the importance of oil reserves to the US economy, costly covert and military engagement critical to ensuring the flow of oil, in particular the Middle East, span decades (Carlsnaes 1988). The current conflict in Iraq alone, which is arguably a war to secure oil reserves, costs US taxpayers in excess of 1 billion dollars day (NPP 2004). The risk to the US economy, food and national security is clear if one considers that of the major oil exporting nations, only Norway has a stable, representative government. Despite these critical vulnerabilities, corporate and government policies and personal patterns of consumption in the US are such that the Department of Energy projects that imports will rise to 70% of our supply by 2025 (NRDC 2004). 8

9 Alternatives To The Energy Status Quo As an alternative to the high environmental, human and economic costs of the energy status quo which is based on ever expanding conventional energy supply, in particular, many environmental and social groups promote expanded efforts both to conserve energy, and a large-scale shift to alternative means of energy generation known collectively as "renewables."renewables do not rely on limited fossil fuels, and produce little or no pollution, and are decentralized, making them attractive for remote, underserved locations. Passive solar construction, solar photovoltaic, wind, and renewable biomass are the chief alternative energy technologies involved. The expanded use of these technologies has been hindered on the one hand by decades of fossil fuel prices kept artificially low by government policies (Carlsnaes 1988) and on the other hand, (until recently) higher unit cost of alternative energy. Now that market prices of alternative, green energy sources have decreased to levels that are more competitive with fossil and nuclear fuels, they are becoming more attractive if the accounting considers the external costs and risks of conventional energy dependence. People s choices for energy use are affected by, income, climate, resource availability, as well as cost and knowledge of alternatives (e.g. green power). Of these, availability and cost are the two that can be most directly influenced by the interaction between corporate, government and NGO policies, incentives and initiatives. Through means such as taxes, subsidies and regulation, governments lay the ground rules for corporations and NGOs to affect what choices are available to consumers. The following sections review the roles of NGO, governmental and market institutions in promoting a shift to alternative, renewable energy sources. The Role of Non-Governmental Organizations Because of the important role of fossil fuels in the build up of greenhouse gases in the atmosphere (the energy sector produces about half the global emissions of green-house gases) and concomitant climate change concerns, renewables constitute an important option for mitigating and abating the emissions of greenhouse gases (Socolow, 1992). Global warming is a looming reality for developed and developing nations alike. In order to prevent climatic disaster, environmental devastation, the loss of biodiversity and high human costs; a shift to renewable 9

10 energies can reduce global consumption of fossil fuels and thus greenhouse gases. In the United States a mere 6% of the nation s energy is derived from renewable sources because of the opposition of vested interests, path dependency, market saturation and the sunk cost of high infrastructure investment (IEA 2003). More than two billion people live without electricity, almost all of them in developing countries (Winrock 2004). Without a change in the energy status quo, it is highly unlikely that these people will ever be connected to an electrical grid. Non-renewable energy sources based on petroleum, nuclear or coal are highly centralized and require intensive capital investment and damage the environment. Alternatively, renewable energies are easily distributive and sustainable, thus making wind, hydroelectric or solar excellent options for developing nations. Non-governmental organizations (NGOs) have been proven to be effective, even critical, catalysts for the shift towards renewable energy sources in nations that lack functional market and governmental institutions. Togo Case Study: The Perspective of Biyayo Bamidaaye Sinon Africa, especially rural areas, depend heavily on biomass for energy. The use of biomass as a fuel is harmful to the environment and leads to deforestation and erosion which diminishes agricultural productivity. The main biomass fuel is charcoal, made from the burning wood covered by soil and collected it turns to ash. The people who cut down trees to make their own charcoal do not replant the trees they fell because there is no incentive to do so. A tragedy of the commons situation arises because of a lack of property rights related to the trees. People can simply collect trees from elsewhere rather than maintain a forest for the future. The use of biomass as fuel thus degrades the environment because the resultant deforestation causes erosion and drinking water contamination, which can lead to desertification, which breaks the equilibrium of ecosystems and decreases the frequency of rain. It also contributes to the emission of CO2, a greenhouse gas. African nations do not have the means to mitigate this deterioration. There is a strong argument to promote other forms of energy, such as solar, water and wind, which are environmentally friendly and suited for Africa. As a matter of fact, Africa has abundant sunlight all year and consistent winds. Many regions are well watered. The opportunities that exist for renewable energies in Togo are not realized because political leaders are more interested in filling up their 10

11 own pockets more than investing the money into the country and its people. Revenue collected by the government is not distributed to the people via transfer payments, national infrastructure or public works. Instead, the money goes to buy the new minister 17 air conditioners for one of his many houses. The President of Togo has been so for the past 37 years! Political offices rarely change and there are an entrenched minority of incumbents who benefit from the status quo thus blocking any and all attempts for reform. The people in power are those who benefit financially from the dire economic state of Togo. Therefore, those people in the best position to bring about positive change will never allow such reform to happen because they will not benefit. Economic conditions fail to improve because the market is perverse and the government is corrupt. Private companies from foreign nations are thus reluctant to set up business in Togo because of the corruption, political instability and dysfunctional market system. In Togo, the military is the government and the President is a member of the military. The new minister signed a decree attempting to control the making of charcoal. This new minister wanted to create a market for charcoal thus enabling only a few suppliers to produce this necessary fuel source thus driving up the price of charcoal and most likely the profits of a beneficiary in the charcoal making industry. However this decree did not take effect because soldiers opposed the restrictions on charcoal making, fearing that their wives would have trouble affording fuel. In developed and developing nations alike, fuel is central to the daily activities of people s lives. Every day, hours are devoted to the time-consuming, labor-intensive task of collecting trees to make charcoal for fuel. Economic productivity is inhibited because the labor force is small in comparison to what could be gained from decreased domestic work. Additionally, labor productivity is minimal because of the lack of capital that is available for investment. The use of charcoal as a fuel source is clearly not the best option for the rural people in Togo, but is the only option. Cook stoves are available but are far too expensive. Furthermore, the bottled gas that is required to fuel the cook stove is extremely expensive. However, natural gas is extremely cheap in Togo and gas cans are refillable. What makes the purchase of a cook stove unfeasible is the initial capital investment required to purchase it and the gas can. Many people would buy a cook stove if it were affordable but there is not even the possibility of credit or installment payments because the do not exist in Togo. Commercial businesses do not allow people to take out loans on the purchase of expensive consumer goods. If people wanted to buy such an item, they would 11

12 have to get a loan from the bank. Bank loans are extremely difficult to obtain and economically impractical because of high interest rates. If people in Togo could afford to buy cook stoves, this would ease deforestation, erosion, and respiratory health would improve along with the quality of life. With less time devoted to the making of fuel, an increased labor force could stimulate economic growth as people would be able to work and thus contribute to the production of goods and services. This Togo case study shows that a simple, minor shift towards more efficient energy can improve the quality of people s lives in developing nations while preventing environmental degradation and the emission of greenhouse gases. Renewables constitute a reliable and ecologically sound long-term solution to the inadequate provision of energy that is common in most of the world. Conventional energy is centralized and requires considerable infrastructure for distribution In developing nations, most people live in isolated villages which makes the extension of power to remote areas cost prohibitive. Renewable energies are decentralized options and thus a more competitive method of delivering energy to the rural poor. NGOs have the institutional capacity to disseminate such technologies using their existing infrastructure. Nations that are most lacking in institutional structure are the developing nations in which people are oppressed by corrupt governments, while suffering from poverty because of economic failure. Those countries with the most need represent the greatest opportunity for reform and a shift towards renewable energy sources with the help of NGOs. Light Up the World Case Study Light Up the World Foundation (LUTW) is an international humanitarian organization dedicated to illuminating the lives of the world s poor. White light emitting diodes (WLED) are efficient, durable, sustainable and a cost effective way to supply power to people far from the distribution grid. Tiny WLEDs fabricated from layers of silicon and seeded with atoms of phosphorous work by exploiting the quirky laws of quantum physics to transform electrons directly into photons of light. A cheap plastic reflector focuses the light into a conical beam. Solar-powered photovoltaic cells provide the energy for free. WLEDs have an estimated life of 100,000 hours (over 40 years) while the system itself is expected to last years. The goal of LUTW goal is to replace kerosene lamps with WLED lighting. Kerosene lamps are the primary source of 12

13 energy in developing countries representing, costing approximately 50 dollars or 25% of a typical family s annual income. The fumes affect respiratory systems, increasing the susceptibility of millions of people to influenza, pneumonia and other respiratory illness. The also are the cause of over 200,000 deaths from fires every year, contribute to acid rain and green house gases while inefficiently converting only 65% of its energy to light. Families could buy WLED lighting with only two years' cost of kerosene, and the system would last at least 10 years. LUTW promotes the diffusion of this technology by establishing micro-credit purchasing schemes and innovative lending groups. The success of LUTW lighting is demonstrated in each and every of its case studies. The group hopes only to increase its sustainable distribution of white light emitting diodes to the rural poor of developing nations. The technology for affordable and effective renewable energy is finally available for dissemination by NGOs. These groups are already well-positioned in countries around the world to invest in assistance and directly equip recipient countries with tools for eventual selfmanagement of their human, natural and financial capital. NGOs serve as the most effective means of bringing about renewable energy reform because their flexibility to act as an institutional nexus, organizing the needs of local peoples, the environment, the market and the government to maximize benefits to all. The extension work, training, capacity building and education of local people is what ensures the long-term maintenance of NGO goals. Links between various NGOs can foster information exchange, diffusion and infrastructure. NGOs can potentially improve market conditions via microeconomic reform with innovative financial mechanisms. In Togo for example, commercial institutions could be instructed on how to create crediting policies with reasonable interest rates. The very success of LUTW is based on their innovative microeconomic lending designs. The successful achievement of a NGOs goals depends on its ability to integrate all institutional actors by providing the main coordinating and organizational services. Shifts towards renewable energy in developing nations will likely result in macroeconomic improvements for individual countries and the global economy as a whole. As shown in the Phillips case study (below) among others, at the institutional level, business and governments alike are beginning to realize that the centralized energy model is becoming increasingly obsolete and that renewables are becoming the norm, not the exception. A shift towards more renewable energies in the developing world will not only improve the lives of individuals in 13

14 developing nations and protect the environment for future generations but also bring about significant macroeconomic reform. Oil import dependency is extremely high in developing countries, and it drains valuable hard currency (WTLU Evan Mills, 2002). As much as 90% of the export earnings of some developing countries are used to pay for imported oil, most of it for power generation (SELF newsletter, 2002 WLUT). A reduction in this value by even a few percentage points could divert funding towards beneficial national infrastructure, education or health care (Karakezi 1999). Nations that become energy self-sufficient instead of relying on imports from developed countries will be most able to rise above their debased economic positions. The economies of most developing nations are fragile and indebted. This makes government and private capital investments into large-scale energy enterprises nearly impossible. Renewable energies that don t require high initial investments can thus more effectively provide for the people of developing nations. Furthermore, renewable energies are far more labor intensive in comparison to capital intensive fossil fuel based energy sources which can thus employ the highly available and relatively cheap labor force that exists in most developing nations. Philips Lighting Case Study The nexus between NGOs and the Market could be viewed on a continuum time scale, respectively. For example Phillips Lighting is a product subdivision within Phillips Electronics that manufactures lamps and luminaries. The corner stone of Phillips Lighting Environmental Management is the maintenance of the right balance between ecological impact and economic growth. Phillips has recently created a solar powered highly efficient bulb that it hopes to sell in developing nations. The philosophy behind their innovative business venture is best explained in the work of C.K. Prahaland, professor of corporate strategy at the University of Michigan Business School, The Fortune at the Bottom of the Pyramid. Phillips expects extraordinary profits from the sales of its lighting system because of the sheer size of their target market. An estimated 4 billion people (2/3 of the world s population) are currently unserved. The success of Phillips new product will have to prove its worth in the marketplace. In order to evaluate the feasibility of their goals, Phillips could turn to NGOs that have already laid the groundwork and infrastructure for market-based interaction. The success of NGOs in accomplishing their 14

15 humanitarian goals could influence business ventures and capital investment into developing nations. The Role Of The Market Market Shifts for Renewable Energy There are powerful forces such as demographics, incomes, market liberalization and demand that will shape the socio-economic context for energy. Recent UN population forecasts point to 8.5 billion people by 2050 and a maximum global population of 10 billion by 2075 (UNFPA 2004) Populations are ageing. Even in developing countries with young populations, age profiles by 2050 should resemble the Organization for Economic Co-Operation and Development (OCED) today. Over 80% of people are likely to live in urban environments by 2050 (UNFPA 2004). Demographic uncertainties are unlikely to be fundamental in shaping energy developments. Even modest annual economic growth of 3.5% over the next 50 years (less than what has occurred in the past half century) would bring widespread affluence, hopefully raising global average per capita incomes above $20,000 by 2050 (World Bank 2003). Although factors such as income, demographics and population growth will determine the market for renewable energies, the transition towards renewables will be a result of consumer demand. Fossil fuel scarcity, increased production costs, pollution, deteriorating health, the threat of global warming and general environmental destruction will serve as the catalyzing factors for a greening of the energy sector. Technology, environmental concerns and resource scarcity will prove to be the forces that drive the global energy economy away from conventional, destructive sources towards sustainable and renewable systems. Increasing energy costs and environmental degradation will make conventional energy sources less attractive. Energy efficiency could more than double simply through widespread diffusion of existing and anticipated technologies (Shell International 2001). Under these conditions energy consumption in 2050 would be just over twice what it is now. 15

16 Catalysts for Market Change Three factors have the potential to bring about fundamental changes in the energy system. The first is energy resource scarcity. This occurs rarely at a global level, when growth in demand cannot be met because resources are limited or the costs of new production capacity are too high. There is broad agreement that coal will not become scarce in the next 50 years (OECD 2003), although resources are concentrated in a few countries thus making equitable and efficient distribution nearly impossible. Oil production has long been expected to peak but research has shown that a scarcity of oil supplies (including unconventional sources and natural gas liquids) is very unlikely before 2025 (Shell International 2001). Although oil resources may not disappear entirely for another century, the competitive cost of alternative energies such as biofuels could potentially fall below the $20 price tag on barrels of oil. Gas reserve uncertainty is considerable. Scarcity could occur as early as 2025, or well after Gas is considered by many to be scarcer than oil, constraining expansion (Shell International 2001). In view of the high price of oil, the difficulty of even distribution for coal and the ambiguity shrouding natural gas, renewable energies could prove to be the best economic and environmental option. The second driving force for discontinuity in energy patterns is new technology. Can technology that offers superior or new qualities, even at higher costs, can dramatically change lifestyles and related energy use? Widespread introduction of electricity in the early twentieth century prompted fundamental changes in production processes, business organization and patterns of life. Coal-fired steam engines powered the early stages of industrialization, replacing wood, water and wind. The internal combustion engine provided vastly superior personal transport, boosting oil consumption. The combined cycle gas turbine has become the technology of choice for power generation greatly increasing the demand for gas, already the preferred heating fuel. Two potentially disruptive energy technologies are solar photovoltaic, which offers abundant direct and widely distributed energy, and hydrogen fuel cells, which offer high performance and clean final energy from a variety of fuels. Both will benefit from manufacturing economies of scale, but both presently have fundamental weaknesses. Fuel cells require new fuelling infrastructure, while photovoltaic need new forms of storage as well as significant cost reductions. These new technologies could potentially provide sufficiently superior energy systems that will induce consumers to pay a premium. The importance of technological improvement in shaping energy needs is illustrated by the striking increases in steam engine 16

17 efficiency beginning in the early 18 th century, which reduced coal needs by a factor of 25. The latest technology is often more than twice as efficient as the installed average and a 25% improvement in cost-effective efficiency is typically available the natural outcome of continuing advances and long-lived capital stock. How quickly improvements are introduced depends on cost relative to the energy prices. History has demonstrated that consumers will pay a premium for superior attributes. Despite the fact that oil was twice the price of coal, a transition occurred because oil was more efficient, more convenient, cleaner once its power was harnessed by the internal combustion engine. The convenience of natural gas makes it the preferred heating fuel despite higher costs. Evolving energy supplies have steadily decarbonized, but this has been a by-product of the pursuit of convenience, quality and cleanliness, not a conscious effort to reduce carbon dioxide emissions. The third key influence on the future energy system is social and personal priorities. Energy choices are ultimately social choices. Government and public attitudes towards energy security or self-sufficiency will, for example, influence the penetration of natural gas into Asian and European markets. It could also be the driving force in government support for renewable energy. Personal choices related to values, the environment and lifestyles influence the energy system. Affordability is not the key constraint in OECD countries. And, while carbon abatement will influence the energy system, it need not determine the path. Many options exist for reducing greenhouse emissions, often linked to local air quality improvement. When concerns prompt demands for change, much depends on what technologies or resources are readily available. Timing can make the difference between evolutionary or revolutionary solutions to problems like climate change. The Future of the Market and the Shift Towards Renewables The scenarios discussed in this section reveal that there is little conviction in industry and government circles that fundamental scarcities of non-renewable energy sources will occur within the next fifty years. The projected scenarios often described in corporate documents are basically speculative in nature and offer no firm directions for the future. The most powerful catalyst will be social and political pressure on the energy industry to deliver more efficient, cleaner energy that protects the environment and the climate. The market for renewable energy 17

18 require a trigger mechanism within the industry that will help spur innovation and strategic realignment towards a grater share of renewable energy in total energy supplies and technologies that will make current energy sources environmentally benign. Shell Case Study The drivers that affect the entire market bear down on individual players as well. One example of how government, community, and economic incentives are catalyzing change is at the Royal Dutch/Shell Group (Shell). Shell is a global conglomerate of energy and petrochemical companies. Starting out from a seashell stand in London in the mid 1800s Shell inc. has evolved into one of the largest energy suppliers in the world. Today the Shell group employs over 119,000 people in over 145 countries (Shell 2004a). The Shell group is committed to advancing the company s environmental status, a drive led in part by Shell Renewables, which is one of five core companies within the Shell group. The CEO of Shell Renewables, Karen De Segundo, explains: Renewables will become an important part of the energy mix of the future. We intend to create a significant business in this sector, making the most of the opportunities which this trend will bring. The other element of Shell s commitment to environmental quality is a company-wide dedication to sustainable development. The Shell business strategy is focused on sustainability as a means to increase market share, improve employee recruitment and retention, improve public relations and increase overall productivity (Shell 2004b). Why is Shell committed to renewable energy and sustainable development? It may be safe to assume that it is not eco-conscience alone that the ultimate driver, otherwise they likely would have already abandoned fossil fuels. Instead they have an economic incentive to be cleaner and more eco-friendly. One of the most direct benefits that Shell claims is the cost reduction resulting from improving eco-efficiency. Eco-efficiency makes their entire operation more efficient, saving raw materials costs, decreasing waste and possibly creating new revenue opportunities. By decreasing waste they are able to avoid the fees associated with refuse and pollutants that are imposed by government regulation. Shell strategists also feel that a more sustainable reputation will provide social advantages over their competitors in the context of community as a strong customer base and market as a profit motive. 18

19 By developing sustainably they hope to corner loyal support from consumer groups and the communities in which Shell operates. Pleasing the local communities will decrease project delays caused by civil unrest. The other social advantage that Shell strategists hope to gain by is a better work force. Shell believes that this is a core value for many people and will be a great motivator in recruitment and retention of employees (Shell 2004b). It is by integrating their economic goals with ideas of sustainability that they believe they can maximize future growth. They call it looking through the sustainability lens shown in Figure 4, which indicates Shell s view of the interactions between economic growth and the improvement of social and environmental conditions. Figure 4. The Sustainability Lens Shell maintains that it is shifting toward more sustainable enterprise techniques for all of the above reasons, but is this more than empty rhetoric? The answer is strongly affirmative. However, transforming a company that for over a hundred years has survived by the use fossil fuel cannot be accomplished overnight. Shell still produces about 3% of the entire world s oil and has plans new refineries. This notwithstanding, Shell has also produced about 20% of all the solar panels that are installed around the world (Shell 2004c). These advancements are slow but they are in the right direction. To further advance environmental quality Shell has begun meeting voluntary environmental certification requirements, currently urge all of their subsidiaries to become ISO or European Union s Eco-Management certified. Shell even owns 159,000 ha of FSC certified 19

20 forest in Central America (Shell 2001). Shell's image and practices are improving. For example, former Green peace protester Chris Rose, who coordinated a massive campaign against Shell in 1995, now praises the company as an industrial leader for environmental reforms stating, Shell deserves support because it is the only oil company to have reaffirmed its commitment to the Kyoto Protocol ( Kirby 2001). Shell's motivation to improve their environmental status is clear. Overall it seems that its own economic self-interest is the primary catalyst for change. Shell has found that the economic selfinterest of the company is a means to achieve sustainable growth. By committing to increase the efficiency and productivity of their operation as a method to increase profits they are able to make other gains as well. A sustainable image gains Shell consumer market share and public accolades. The future is bright for Shell; it now has a jump on the competition and will be able to adjust faster to evolving markets. The call for sustainability, corporate accountability, and safe energy will continue to rise in the future. Governments will continue to raise the bar on environmental standards, and the market will not have room for firms who aren t able to make the necessary changes. This will allow new firms into the market and give great benefits to existing firms who are able to stay ahead of the status quo. 20

21 The Role Of Government Government Policy for Renewable Energy Many policy-makers see that renewable energies contribute not only to natural resource conservation and environmental protection but also provide economic and security benefits via energy sector diversification (McCormick 2001, IEA 2002). In recent years, renewable energy technology has advanced considerably in terms of cost competitiveness and market penetration (OECD/IEA 2002). However, in most cases renewable energies are still not competitive and account for only a small portion of the energy mix (IEA 2004). IEA World Energy Outlook s scenarios suggest that the share for renewables significantly changes according to government policy (IEA 2004). Under these conditions, government policies play an important role in determining the market success of renewable energy. Governments are pursuing a wide range of strategies through the combination of policy instruments to facilitate the development and broader use of renewable technologies. IEA collected information on member countries existing renewable energy policies and constructed the database (IEA 2004). These policy instruments can be classified many ways. Table 1 shows some of the main policy instruments in use. One method is based on the main objective of policy: to reduce costs, facilitate transition, improve market rules, the policy process and outreach (IEA 2003). And the other method is categorizing the policy types by the target position of market - policies addressing supply and capacity, supply and generation, demand and capacity, demand and generation, and so on (IEA 2004). Generally, renewable market development has started out with financial assistance to R&D and projects support, thereafter encouraging larger market takeoff, where future government support is not needed, through such strategies as tax treatment, feed-in tariffs, and soft interest rates. Recently the financial incentives have been added by legislation for mandatory purchase of electricity from renewable power, and renewable portfolio standards have emerged (IEA 2001). Renewable energy shows great potential for solving some of today s energy security and environmental challenges, but more attention must be paid to what is really happening with renewable energy policies and markets. The type of policy that governments could set up vary according to the kind or renewable energy targeted (IEA 2003). Generalized, common policy 21

22 cannot be applied to renewables because each energy technology follows will be competitive based on its own particular merits, and its state of technical development (IEA 2003). Constant and predictable governmental support is crucial for the successful market deployment of renewables, but policies should be developed and applied individually. Table 1. Policy Instruments for Renewable Energy Method Classification Policy Instrument Reduce Costs R & D, Market Development/ Project support, Feed-in Tariffs Portfolio Targets, RE Certificates/ Green Transition Object of Power Policy Tax Treatment, Environment Programs, Market Rule Distributed Generation, Regulatory Reform, Empowering Customer Choice Policy Addressing Policy Process & Outreach Supply and Capacity Supply and Generation Demand and Capacity Demand and Generation Etc Education, Information Program etc. Investment Tax Credit, Property Tax Exemptions, Capital Grants, Government Purchases, Third-party Finance Bidding Systems, Production Tax Credits, Guaranteed Prices, Feed-in Tariffs, Obligations, Tradable Certificates Customer Grants/Rebates, Tax Credits, Sales Tax Rebates, Third-Party Finance Net Metering, Green Pricing, Voluntary Programs, Government Purchases, Exercise Tax Exemption Regulatory and Administrative Rules, Public Awareness Programs 22

23 The most remarkable market growth has always been achieved through a combination of policies rather than one single policy (IEA, 2004). However many new policies are introduced without consideration for intra-policy interactions, resulting in ineffective and inefficient government action. An assessment of renewable energy policies based on a full-cost accounting analysis of each policy and policy mix within renewable energy policy and with other energy alternatives is needed (IEA 2004). Such an analysis would provide policy-makers with additional information for considering the role of renewable energies in the broad policy portfolio and the choice of measures in promoting renewable energies. Tax Shifting Case Study In October 1999, Leeds Metropolitan University in the United Kingdom started buying at least 30% of its energy from green power sources. Six months later, Edinburgh University signed an agreement to obtain 40% of its energy this way. Since renewable energy sources in the United Kingdom are exempt from a climate change levy enacted in April 2001, making this switch is virtually cost-free and can even save money. The Netherlands has more than 775,000 green energy customers, which represents 5% of the population. The number of customers has tripled in just one year. This rapid growth is due to an energy tax exemption for green electricity, green energy deregulation, and successful marketing campaigns. Germany has approximately 280,000 green energy customers. Many large German companies are buying green power, helping to create consumer demand to move beyond fossil fuels. In March 1999, a comprehensive ecological tax reform law took effect in Germany that reduced income taxes, raised taxes on energy sources tied to carbon emissions, and exempted renewables. In February 2000, the parliament passed a renewable energies law that included payments for excess green energy generation fed back into the power grid; at those times, the meters run backwards, and reduce customers electric bills. These policies, which help make green energy cost-effective, are essential to the ultimate success of green power programs (Fischlowitz Roberts 2002). Obligation and Trading Case Study Many countries are now considering or have implemented renewable energy targets combined with TRC systems as a way to force the growth of renewables markets while decreasing the costs 23

24 of supporting them. By introducing competitiveness in the renewable energy market with obligations and trading, governments seek to encourage to reduce technology costs and to increase efficiency in production (IEA 2002, 2003) Portfolio targets By guaranteeing a minimum market size and a schedule for implementation, governments reduce regulatory uncertainty and attract private sector investment. The European Community has agreed on a directive that sets indicative national targets for renewable energy penetration in EU member countries 12% share of overall energy, 21% of electricity energy and 5.75% share of bio-fuels in motor fuels by 2010 (European Union Directive 2001/77/EC and 2003/30/EC). Australia has implemented legislation for a mandatory portfolio target coupled with a TRC market. The United States is debating a national portfolio target for renewables, while fourteen states have already instituted renewable portfolio standards. Renewable Energy Certificates Tradable Renewable Energy Certificates (TRCs), as a means to achieve Portfolio Targets, are being presented as the future instrument of preference to build renewable markets. The principle of such certificates is simple: liable entities (generators, suppliers or end-users) are mandated to generate or use a certain quantity or percentage of renewable electricity. Certificates are issued by the generators of renewable electricity and must be surrendered by liable entities to prove compliance. Certificates are traded separately from the electricity, and their price represents a premium that the generators will seek to maximize by lowering their production costs and competing for the largest market share. Obligation and Trading By combining a green (tradable) certificate scheme with a mandatory minimum share of energy to be produced by sources of renewable energy, governments offer a flexible solution for energy producers to achieve their mandatory targets. In 2001, Belgium, the Netherlands, Sweden and the United Kingdom have been the most active in this field, while trading of certificates has started in Australia under its Mandatory Renewable Energy Target and Italy s system begins in A particular case of tradable certificates program was set up in Italy in 2001, where a renewable energy certificate system already exists. The Italian system involves certificates for energy savings achieved by electricity and gas distributors. Each distributor has been allocated a target 24

25 level and can rely on trading of energy efficiency certificates to comply. As the use of this mechanism has begun only recently, insights on its effectiveness are limited but promising. The Bush Administration Energy Plan The Bush administration energy plan is designed to help bring together business, government, local communities, and citizens to promote dependable, affordable, and environmentally sound energy for the future (White House Energy Plan (WHEP), 2001). This stated goal is remarkably similar to the synthesis of our course, which hypothesizes a blend of market, state, and community controls leading us to a sustainable environmental future. However, one can understand a reasonable amount of skepticism as the Bush administration record does not promote a great confidence that they are the leaders of lead us in the Green Revolution. The following is an analysis of the proposed Bush Energy plan in the context of market and community. The Bush plan is heavily anchored in market-based incentives. For example, it encourages the use of an income tax credit for the purchase of hybrid and fuel cell vehicles (WHEP, 2001), as well as increase funding for renewable energy and energy efficiency research (WHEP, 2001). The research included in the plan focuses on protecting the financial structure of farms and businesses, as well as protecting the consumers financial situation. The report does provide lip service to environmental goals, listing them as the third purpose of this report, but it does not appear that environmental protection and preservation is a goal of the Bush administration. The plan covers a lot of areas of potentially valuable energy sources, such as natural gas, hydropower, nuclear power, biomass fuels, and wind resources. To promote these alternative sources, the Bush plan proposed an increase of $39.2 million in the FY 2002 budget amendment for the Department of Energy s Energy Supply account that would provide increased support for research and development of renewable energy resources (WHEP, 2001). However, the plan does not set up an infrastructure designed to create, produce, or distribute these alternative technologies. In fact, this amount pales in comparison to the amount spent on foreign oil each year, which according to the Natural Resources Defense Council (NRDC) is 20 billion dollars (NRDC, 2004). In 1999, government subsidies totaled 6.2 billion dollars, which was only one percent of total energy expenditures (Sutherland, 2001). In that same year, renewable energy 25