Posted by: joachim in Policy on February 18th, 2013

While it was easy for the German government to abandon nuclear power in 2011, it proves much more difficult to replace the old energy mix with a new strategy. That’s because energy policy is never limited to the one resort of the energy minister. In fact, energy policy touches so many sectors. That’s not surprising, since the provision of energy is intrinsically linked with economic wealth of nations..

Here is why it’s so difficult.

Objectives

There are quite a few objectives for energy policy, which differ from country to country, as do the constraints. The support of renewable energy is only an indirect objective. However, as some governments have set themselves renewable energy targets, it becomes a quasi-objective all of its own.

Objective Context Policies Side Effects
Mitigate Climate Change Many governments or states are committed to combatting climate change. In a first instance, they have set themselves carbon emission reduction targets. Over the years, more and more countries have declared targets, some more ambitious than others. The crux of the matter is how to reach those targets.

The instrument of choice is a carbon emission reduction certificate trading scheme like the EUETS. This has the effect that more cost effective schemes would get done first. More expensive solutions ranging from renewable energy generation to carbon storage would have to wait.

It is believed, however, that all solutions will be required to combat climate change, and, hence, policy makers have introduced further policies such as airport taxes, incentives for renewable energy, or other tax incentives.

In addition, in order to stay competitive, countries are worried that too much of this would be detrimental. Hence, the polilcy comes with exceptions and high allocations.

 

The various policies are competing with each other rather than complementing.

For instance, setting targets for renewable energy undermines the technology-neutral carbon trading scheme in favour of more expensive technologies.

Airport taxes on the other hand do not discriminate against inefficeint airplanes, and therefore will only divert traffic to low tax countries but not help higher fuel efficiency.

In the end, all of those competing policies render the carbon price too low to be an efficient instrument.

Supply Stability

One of the objectives of utilities is to supply households and industry with electricity at all times without power cuts. To achieve that, the overall generating capacity has to be sufficient, and the mix of technologies involved has to be right so that capacity can be switched on and off at short notice.

Where overall capacity is not sufficient, "load shedding" will occur either according to a schedule or unscheduled ("power cuts").

In most instances, there is no policy to start with, as it is the responsibility of utilities to provide uninterrupted supply of electricity.

Few governments finance the capital to build capacity themselves. China is probably one of the few exceptions. Mostly, governments set targets for certain technologies. For instance: We want 4GW of solar by X.

Subsidizing specific technologies in order to hit technology-specific capacity targets may have a negative impact on the overall energy mix for power generation. Too much solar may mean no investment in pump storage stations, which are needed for storage (and can be switched on and off when necessary).
Energy Security Energy security is about a country’s ability to access the fuels it needs for its energy mix. How much do we want to depend on other countries on our energy? This is neither a mere philosophical nor a purely economic question. Many wars have been fought over access to energy, since energy powers economies. Policy in this area comes in the form of state-sponsored or state-sanctioned projects such as the gaspipeline from Russia to Europe. Subsidies given to nuclear power station operators may fall into this category too.

Politically motivated projects (such as the gas pipeline from Russia to Europe) may cause new dependencies that are assessed in a very different light a few years later.

State sponsorhip of particular technologes bears the risk of high costs.

Access to Energy In countries with low rates of electrification, getting households to access electricity is vital for economic growth and wealth. The policy of choice is to make investments in infrastructure attractive to foreign investors. For instance, by allowing re-patriation of foreign currency and waiving of import duties on equipment. This may cause a substantial outflow in currency. Import of foreign goods and foreign ownership mean that there is less economic participation by locals than hoped. This can be countered by insisting on "local content" of project. However, those local content policies may make projects more expensive or delay them.
Industry Competitiveness If a country’s industry heavily relies on energy and that energy is too high in comparison to other countries, it will lose its competitive edge. To maintain competitiveness whilst increasing the share of renewable energy, feed-in tariff laws needs to betweaked to the extent that certain industries are exempt. Consumers will have to pay a higher share of the renewable energy policy. See Consumer Protection.
Consumer Protection Governments don’t want electricity to become unaffordable for consumers.

This is a difficult one, because politicians can not fight global trends that easily. Measures include

  • Order an investigation into high oil prices
  • Get wind fall taxes from energy companies
  • Subsidise consumer energy prices
  • Regulate pricing or market

Most measures have very little effect. Side effects from wind fall tax could be lower investment levels.

Subsidies tend to fizzle out after some time, because states just can’t afford them long-term.

Jobs and economic growth

Without access to energy, economic growth is severely hindered. A recent study by the government of South Africa has quoted the cost of unserved energy to be 5-10 times the cost of generating that electricity. Hence, building more capacity enables economic growth, and therefore jobs.

Even in developed countries, the energy sector including manufacturing of equipment for power plants provides jobs for many.

Policies that target jobs and growth tend to combine incentives for investing in power plants (through tariffs) with so-called "local content" requirements. Those local content requirements come in the guise of incentive bonuses for use of locally produced equipment / local workforce, simple minimum local content ratios or selective import duties (e.g. Chinese manufactured modules in the USA).

A side effect of local content is higher cost of power in those countries with local content requirements.

However, there is an argument that fledgling industries may need temporary protection.

Support for Renewable Energy

Many solutions to above objectives seem to point to increased use of renewable energy sources, accelerating climate change mitigation, improving energy security, providing access to energy (especially in remote areas).

Where renewable energy technologies are competitive on cost, there is no need for any policy. Hydro is already the technology of choice in many countries, on-shore wind can compete with gas, and solar pv does not depend on any subsidies in Chile.

Having identified renewable energy technologies as a good option, policy needs to be clear as to what it wants to achieve:

Where policies have predominantly supported renewable energies such as wind and solar (e.g. Germany) without making changes to the grid structure or capacity storage, the grid can become instable.

Constraints

Constraint Context
Macroeconomic Trends Energy policy is a long-term game. Investment decisions taken today will affect the energy landscape for decades. Therefore, taking macroeconomic trends into account is pivotal: Deomgraphics, economic growth, competition for resources, commodity price trends, CO2 emission forecasts.
Budget Constraints When energy policy is driven by the treasury, long term view is out of the window, but governments have to work with a budget.
Public Opinion

Public opinion can have a massive impact on energy policy. In Germany, the phasing out of nuclear power was decreed by parliament in a head-over-hells action after the nuclear accident in Fukushima, mostly because the government feared electoral defeat. However, public opinion can be fickle and will also depend on the questions asked. It can be particularly strong on very narrow topics, such as "Do you wnat nuclear energy?", "Do you think electricity is too expensive?" or "Do you want a high-voltage transmission line nearby?"

Public Behaviour Public behaviour can differ from public opinion. In a nut shell: People generally like to be "green", but their personal investment decisions or behaviour does not necessarily follow that.
Climate change trends or events Some trends in natural resources as well as natural disasters can trigger a re-think of policy, or even force one. In Sri Lanka, for instance, a long-term trend of hydro power resources drying up slowly has prompted the government into re-focusing energy policy on solar power.