7 Summary and Conclusion: Implications for Renewable Energy Instruments and Markets

Transcription

1 7 Summary and Conclusion: Implications for Renewable Energy Instruments and Markets This research study presents the first systematic comparison of renewable energy instruments and markets in Germany, Japan and the United States. The aim of this study was to analyze government instruments used to promote renewable energy use in terms of national renewable energy market deployment, the development of renewable power generation costs (as a proxy for innovation) and international trading in renewable energy technologies. This study further asked why different approaches to promote renewable energies emerged in Germany, the United States and Japan. This research focus answers the two central questions when considering renewable energy policies: a) which instruments are more or less effective and efficient and b) which factors explain stricter and or less strict renewable energy promotion. This study comes to the following main conclusions: Government promotion is important and is warranted to secure a sufficient diffusion of renewable energy sources. The specific design of policy instruments is of central importance for the effective and efficient development of renewable energy market deployment and generation costs. The success of countries in international trade of renewable energy technologies depends on domestic market development not export promotion measures. The enforcement of comprehensive and mandatory renewable energy policies is more likely if there is a strong pro-renewables coalition and the emphasis on economic benefits of renewable energy use is high. Theoretically, the study relates to theories of economic regulation. The intervention in energy markets through governments is justified as a way to correct market failures, most notably external costs of fossil fuel use. The first-best option for creating fair competition between all power generation technologies would be to ensure a complete internalization of external costs through a tax on fossil fuel use. However, as the discussion of Pigovian taxes exemplified the optimal level of taxation is difficult to determine and taxes are faced with the difficulty of public acceptance. Second-best measures provide some form of promotion to renewable energy sources which create no or little negative external costs to balance the cost-disadvantage compared to producers of negative externalities. Without government support renewable energy sources would diffuse at a less than optimal rate. Still, even if government support for renewable energy sources is warranted because of the persistence of negative externalities on energy markets and its environmental bene- K. Jordan-Korte, Government Promotion of Renewable Energy Technologies, DOI / _7, Gabler Verlag Springer Fachmedien Wiesbaden GmbH 2011

2 220 Summary and Conclusion fits, governments in reality also promote renewables to enhance the competitive position of its domestic industry on international markets. Here the case for government intervention in renewable energy markets is less clear. Theoretically, first-mover advantages and the lead market concept emphasize the benefits of strict government promotion of renewables in terms of export opportunities and world market shares. Even if such advantages can be gained, the risk remains that governments will not promote the most competitive domestic industries, which would result in a misallocation of scarce resources. The transformation towards a more sustainable energy system is still of prime importance. The challenges presented by global warming remain unsolved. Global energy demand will pick up again after the current slump in the global economy because of the financial and economic crisis. Dwindling fossil fuel reserves are also reinforcing the need for a greater share of renewables in the world s energy mix as Chapter 3 shows. With decreasing renewable energy generation costs, the competitive stance of renewable energy sources improves. However, government support is still needed to secure the diffusion of renewables. The theoretical discussion of quantity- and price-based models as the two primary instruments of renewable energy promotion concludes that feed-in tariffs (price-based instruments) are more effective in triggering new renewable energy capacity since producers are able to sell all quantity produced and planning security is high. Renewable portfolio standards (quantity-based instrument) are less effective since there is less planning security and no incentives to produce above the obligated quota. Further, feed-in tariffs give incentives to reduce generation costs, but do not create direct competition between generators. RPS on the other hand induce direct price competition between generators, but the surplus of reduced generation costs is limited as it has to be passed on to consumers. This reduces the incentive to lower renewable energy generation costs for the generators of renewable electricity. The empirical analysis of renewable energy promotion in Germany, the United States and Japan and the development of domestic renewable energy markets followed in Chapter 4. In all three countries, the push to promote renewables was first initiated by security of supply concerns after the oil price hikes in 1973/74 and 1979/80. During the 1990s, however, economic and environmental considerations, including climate change, have continued to drive policies, most prominently in Germany. Today, Germany has implemented the most substantial policies to increase renewable energy use of the three countries. The most important instrument is a feed-in tariff (EEG) guaranteeing the sale of any renewable power generated at the fixed price. The EEG includes different flexibility mechanisms such as an annual degression rate and different remuneration rates which re-

3 Summary and Conclusion 221 flect the different generation costs and cost improvement potentials of renewable energy sources. While the introduction of renewable portfolio standards in many US states, combined with financial incentives on the national level, resulted in increased renewable energy use since the turn of the century, the development has still been far less dynamic than in Germany or other European countries. The leadership position the US once enjoyed in renewables in the wake of the 1970s oil crises was lost in the face of a lack of political priority. Japan implemented a regulatory tool with the Renewable Portfolio Standard, but the targets are very modest. Japan s approach to renewable energy promotion thus has not been very ambitious. Japan has, however, a long history in solar energy promotion, mainly through R&D programs such as the Sunshine Project that started in Further, the use of voluntary instruments is a main element of Japan s renewable energy policy. This reflects a typical notion of the Japanese approach: first, measures are modest in scope to initiate first changes in industry behavior and to prevent strong industry opposition. Once changes have been achieved to a certain extent, then more stringent regulations are adopted. However, the close network between government and industry as exemplified by the rotating personnel of NEDO so far has prevented a more comprehensive renewable energy policy with more ambitious renewable energy targets. The deployment of renewable energy sources in Germany has been much more dynamic compared to the other two countries. Germany currently has a share of 15% of renewables in power generation, while the United States and Japan only have a share of 8.5% and 9.4% respectively. Since 2000, Germany succeeded in increasing renewable energy use by 140%, compared to 5% for both Japan and the United States. The analysis of the development of renewable energy generation costs shows that the theoretical assumption that quota system generally lead to lower prices cannot be supported by the data. Since the development of generation costs has been relatively similar in all three countries, the superiority of one policy instrument in terms of effectiveness cannot be concluded from the data. As the analysis of renewable energy markets and renewable energy generation costs highlights, the implementation of renewable energy promotion measures alone does not secure an effective or efficient promotion of renewable energy sources. The specific design of regulatory instruments is essential. The most important design requirements for any renewable energy policy instrument include (a) incentives for sufficient deployment, (b) differentiated promotion, (c) incentives to reduce generation costs and (d) an adequate balance between planning security and competition. Renewable energy instruments have to include ambitious, long-term targets and the strict enforcement of penalties for non-compliance in the case of quota models to secure

4 222 Summary and Conclusion sufficient deployment. Promotion schemes of renewable energy instruments have to differentiate between different technologies to take into account different levels of sophistication or different generation costs within the same technology due to plant size and geographical conditions. Less mature technologies either need higher renumeration rates in price-based models or technology-specific target in quota-based systems. Government promotion of renewable energy use should be declining over time to create incentives for a reduction in generation costs. Price models such as feed-in tariffs should include an annual reduction of renumeration rates for new plants by a certain percentage which reflects technological learning and accordingly declining generation costs. The direct price competition in quota system creates incentives for reduced generation costs. However, since renewable energy producers have to pass on the surplus from reduced generation costs, for public renewable energy R&D is essential in the development of new technologies. Renewable energy promotion measures need to create a balance between inducing competition among renewable energy generators and securing sufficient planning security. Feed-in tariffs offer greatest planning security, since the sale of all renewable power produced is guaranteed. In fact, the long-term planning security is the main reason for the strong growth of renewables in Germany. The dynamic development of renewable energy sources in Germany more than offset the lack of competition among renewable energy generators. Quota systems with tradable renewable energy certificates offer low planning security, which creates a main barrier to a more dynamic diffusion of renewable energy sources. Therefore, it is essential to include mandatory, long-term quota targets to increase planning security for renewable energy generators. Chapter 5 provided an analysis of government attempts to influence international trade patterns of renewable energy technologies and the empirical development on international markets for renewable energy technologies. While all three countries have export promotion measures in place, the measures are restricted to dissemination of information, assistance in the processing of exports and the provision of export-credit guarantees. Moreover, the tariffs on renewable energy technology imports in all three countries are below average industrial tariffs. Only the United States applies slightly higher than average tariffs on some renewable energy technologies (steam turbines). Therefore, the risk of protectionism or a significant distortion of trade through export promotion measures or tariffs is limited. However, more research is needed on non-tariff barriers to trade such as standards, which could have a diverting effect on international trade in renewable energy technologies. The empirical analysis shows that international trade in renewable energy technologies has already reached a high level of maturity. In absolute numbers, Germany is the

5 Summary and Conclusion 223 biggest trading (exports and imports) country of renewable energy technologies. In exports per capita, Germany and Japan are still among the top five trading countries. The United States exports considerably less than Germany and Japan on a per capita basis and is not among the top ten trading nations. In terms of growth, Germany experienced much higher growth rates in renewable energy exports (average annual growth rate of 28 percent since 2000) in the past years than Japan (average of 17% in that time period) or the United States (8%). The data confirm the assumption that a strong renewable home market is essential to develop a successful export industry with renewable energy goods. Japan s situation exemplifies this assumption especially well. Japan mainly trades solar PV technologies (76% of total renewable energy technologies exports), while solar PV is also the renewable energy source which Japan developed especially successfully on the domestic market. Germany is especially successful both in international trade with wind energy technologies as well as domestic wind energy generation. The analysis thus highlights that manufacturers from countries with early, long-term deployment policies, with the time to reduce production costs and improve product quality through technological advances, capture large shares of the global market. It is not Germany s or Japan s export promotion policies that give these countries a competitive advantage on international markets but their competitive domestic renewable energy industries. Accordingly, it is essential that renewable energy measures focus on the creation of the market conditions that support sustained penetration and expansion of renewable energy sources. Chapter 6 considered the question why Germany follows a more comprehensive approach in its renewable energy policy than the other two countries. The analysis of the development of environmental and renewable energy policy in Germany, Japan and the United States shows that a very strong pro-renewables coalition in Germany managed to successful link environmental and economic concerns in renewable energy policy. This coalition succeeded in emphasizing the possible economic benefits of renewable energy promotion and the entrance on international renewable energy markets at a relatively early stage. The early development of the German renewable energy industry reinforced its positive economic benefits and slowly led to a change in beliefs, since renewables are now being accepted as important energy sources in the mainstream of public debate. However, the judgment on effectiveness and efficiency of government renewable energy policy still has to be based on the positive economic benefits of a higher share of renewables in terms of less negative externalities due to fossil fuel use. Still, it is also essential to realize that economic development and a higher level of environmental protection are not conflicting targets but can be pursued simultaneously. The renewable energy sector is a very good example to exemplify that.

6 224 Summary and Conclusion This study focuses on renewable energy use in three industrial countries, but a higher share of renewables will also be essential to secure access to clean and sufficient energy for developing countries. The conclusion drawn in this study on design criteria for effective and efficient renewable energy instruments can also be applied to the developing world. However, there is no question that the transformation of the energy system towards a significantly higher share of renewables in electricity production creates costs as well as benefits. Therefore it is essential to further increase the cost-efficiency of all renewable energy instruments already in place and new instruments being implemented in countries worldwide. Still, the investment in a more sustainable energy future is wisely spent and allows for a gradual increase of renewables in electricity production. However, renewables alone will not be able to satisfy the electricity needs of the world. In fact, no single technological solution will be able to solve global energy, economic and climate change challenges. It is encouraging that there has never been a time when so many diverse energy technologies have been in the debate and on the research agendas of governments. Besides renewable energy, research is being conducted in the field of nuclear power, clean coal technologies (such as carbon sequestration), energy efficiency, unconventional fossil fuels and hydrogen among others. This is a very promising sign since only the diversification of energy technologies and the tapping into the potential of energy saving and efficiency technologies will secure sufficient access to energy in the future. The global economic and financial crisis also presents an opportunity to enter new paths in many areas. The crisis creates a momentum that has already led to increased cooperation of the world s largest economies on such important issues as financial market regulation, development assistance and the strengthening of international organizations such as the International Monetary Fund (IMF). At the G20 summit in London in April 2009, the member countries have agreed on a US$1.1 trillion package of measures to restore growth, jobs and confidence in the financial system. It is also a very promising sign that countries worldwide agreed to promote renewable energy jointly. So far, there has been a lack of an international organization to promote renewable energy use. The International Renewable Energy Agency (IRENA) was officially established in January 2009 and aims to provide practical advice and support for industrial and developing countries to promote a sustainable use of renewable energy on a global scale. Until today, 136 countries have signed the statute of the agency. Germany was among the first countries to join IRENA in January Japan and the United States signed IRENA s founding treaty in June IRENA could prove to be essential in securing the continuing expansion of renewable energy sources worldwide.

7 Summary and Conclusion 225 In the words of Nobuo Tanaka, Executive Director of the International Energy Agency (IEA): We cannot let the financial and economic crisis delay the policy action that is urgently needed to ensure secure energy supplies and to curtail rising emissions of greenhouse gases. We must usher in a global energy revolution by improving energy efficiency and increasing the deployment of low-carbon energy International Energy Agency (2008), New Energy Realities - WEO Calls for Global Energy Revolution Despite Economic Crisis.