9th February 2012

Choosing the right one

by Georg Zachmann on 9th February 2012

Public support for new energy technologies has involved some pretty expensive decisions. Billions of public Euros have been spent on nuclear energy in countries that are currently phasing-out this technology. Research and development funding for CCS, hydrogen fuel cells, nuclear fusion, and second generation biofuels have not, as yet, led to a major commercial breakthrough. Visibly, today, thousands of cross-subsidized solar panels lie under a layer of snow in Germany.

It is clear, however, that incumbent technologies such as coal fired power plants and gasoline cars lack the capability of achieving emissions reductions targets set out by the EU. Consequently, new low-carbon technologies have to enter the market. For this purpose, the EU has established horizontal policies, including carbon prices as technology-neutral support instruments for an energy transition.

However, some market failures are locking in the incumbent energy system, making horizontal measures, like carbon prices, insufficient for delivering the energy system transition at the required speed. Additionally, horizontal policies cannot be used for supporting technology at certain stages of development (e.g. industrial stage R&D, demonstration, and deployment all call for technology-specific support). Although technology-specific policy may be necessary for a speedy energy system transition, public support should be directed to a portfolio of technologies. This is because the energy and transport transition will be riddled with uncertainty over the eventual success of promising new technologies. A portfolio approach would make the vital transition resilient to unexpected shocks. Such an approach is necessary also because funding all technologies would be unfeasible in terms of expense. Additionally, indiscriminate technology-specific support would also ignore the fact that different technologies are contemporaneously in different stages of development.

In selecting a portfolio of technologies, choices will be critical. In the presence of multiple new technologies which compete not only for a market but also for production factors, excessive support to one technology might even slow development of the optimal technology. Government action may provide a focal point for a ‘less efficient’ technology, not only directing public financial resources but also other production factors (skilled labour, capital, etc) away from the more efficient technologies. Thus, the public needs to carefully select which technology to support, when and how. This decision is extremely difficult as it involves evaluating technologies of unknown future merits. Furthermore, coordination among member states is crucial for avoiding costly incompatibilities between national energy and transport systems.

The EU should adopt a choice mechanism that is dynamic, adaptive and able to digest new information. This mechanism should optimise support in a quick, reliable and effective manner. In order to enable both industry and consumers to form the right expectations over the direction of technology, mechanism transparency is critical. The only way to control the potential impacts of public policy on industry investment choices, and promote fair competition, is through a transparent policy clearly communicating government priorities and decision parameters. Predictability and technology-neutrality can only be ensured when technology choice is based on transparent and defined metrics and priorities. Stakeholders need to have incentives for providing unbiased forecasts of the capabilities of their technology. These forecasts should be processed in an open multi-technology model to provide guidance for the targeting of support. Such a model should be built, maintained, extended and published by an independent public institution. This transparent mechanism would ensure that stakeholders can predict public technology decisions. Stakeholders would thus find it easier to commit to the long-term and risky investments needed to make the low-carbon energy and transport system transition a reality. Along these lines, the European Commission has put some effort into devising a support methodology. The Strategic Energy Technology Plan (SET Plan) and independent technology reviews by the EU Joint Research Centre are two key instruments developed by the Commission. However, the SET Plan does not answer the essential questions: which technology should be supported? When and how? A comprehensive multi-technology view is currently lacking in policy decisions. In the same vein, the EU’s new innovation funding programme, Horizon 2020, slated to distribute some €80 billion between 2014 and 2020 (35% “climate-related”), will not rely on an open multi-technology model to guide the targeting of support. If the EU continues along this path, major technology choices will be at best backed-up by the non-transparent and proprietary energy models currently used by the Commission, and at worst largely at the mercy of shifting politics. In contrast to a ‘shot-in-the-dark’ definition of thresholds or numbers (such as 50-50 co-financing or one-million cars in 2020), a transparent choice mechanism may promote more coordination between regions, nations, and firms. Such a technology-neutral choice mechanism should be developed to assist the selection of a portfolio of promising low-carbon technologies which require technology-specific support.

The cost of the transition is put at several percentage points of GDP. Therefore, potential government intervention would have to be large-scale. To avoid extensive inefficiencies, a structured approach, adapted to the complexity of the challenge, is warranted.