INNOPATHS in the European Sustainable Energy Week #EUSEW18

This year, the EU Sustainable Energy Week celebrated its 13th anniversary and INNOPATHS was invited to present some of its early results in this important event. The EU Sustainable Energy Week, which took place in Brussels last week (June 4-8), is the annual flagship event in the EU in which sustainable energy policy is at the centre of the debates and discussions among stakeholders from the governmental, industrial, academic, and non-for-profit communities. The European Commission´s Directorate General for Energy (DG Energy) and the Executive Agency for Small and Medium-sized Enterprises (EASME) join forces by focusing the 2018  conference on the theme – “Lead the clean energy transition”.

The theme clearly resonated. The conference included 60 sessions and more than 2,500 participants. We found that discussions involving energy efficiency policies attracted special interest during last week. With the revised Energy Performance of Buildings Directive (EPBD) on the table, Ms. Mechthild Wörsdörfer, Director in charge of renewables, research and innovation, energy efficiency of the DG Energy of the European Commission, highlighted that energy efficiency will bring “multiple benefits, such as lower cost of the energy transition, reduced energy bills for the most vulnerable, a more lenient and competitive EU economy, higher quality of life and cleaner air and environment”.

Since INNOPATHS is an innovative project in substance and form aiming to generate new state-of-the-art low-carbon pathways for the European Union, we did not want to miss out on the opportunity to contribute to the discussion of policies to facilitate deep energy renovation in buildings.

I presented the work of the University of Cambridge (with Prof. Laura Diaz-Anadon), the Euro-Mediterranean Centre on Climate Change (CMCC) (Dr. Elena Verdolini) and the European University Institute (Dr. Stefano Verde) developing one of the four innovative online tools coming out of the project.  In particular, I provided some early results from the prototype of the online Policy Evaluation Tool, which we designed with Nice&Serious (N&S) (Peter Larkin and his team), to inform policy makers and other stakeholders on the impacts of different policies on a wide range of outcomes (including economic, environmental, and social) in a panel with Commission and other European project representatives.

I presented INNOPATHS insights on the main innovations of the project, the barriers encountered for deep renovation of the residential building stock in the EU, as well as policy recommendations to overcome those obstacles. Using a systematic review of research on Building Codes and White Certificates collected for the Policy Evaluation Tool prototype, we presented some of the barriers envisioned for deep renovation in buildings to improve energy efficiency, among others:

  1. A poor understanding of the causes of policy failures in the buildings sector
  2. Aged building stock in some EU jurisdictions
  3. Lack of evidence in or applicable to Southern European contexts
  4. Aversion towards more stringent regulatory policies
  5. Lack of trust in the realization of expected savings
  6. Non-negligible welfare impacts in low income households

I found that the introduction of the Policy Evaluation Tool received a warm welcome and interest from the many attendees to the session on Deep Energy Renovation.

In addition to the panel, the audience were able to contribute to the debate by answering the following question: “According to you, which are the most important barriers hampering wide-scale energy renovation in Europe”. With 43 answers, 44% of the respondents said that the lack of knowledge and interest of the building owners was the main barrier, followed by a 30% who highlighted the lack of convincing financing solutions and a 28% reporting that the main obstacle was an unfavourable regulatory environment, incoherent policies and support schemes. These barriers for deep renovation highlighted by the stakeholders are surprisingly aligned with the early findings from the Policy Evaluation Tool on how to overcome key barriers.

Of special interest was the agreement among participants regarding the need to guide EU and national level policies in the building sector towards: the remodelling and renovation of the existing stock of buildings, the important role of finance schemes to undertake such works and the digitalization of the sector. The latter resonates with the recent creation in the UK of the Centre for Digital Built Britain (CDBB). The importance of increasing the ambition of long-term targets for countries in terms of energy efficiency or energy savings, the provision of innovative financial schemes to support digitalisation in buildings, and the need to improve information in an accessible way for households’ owners and tenants to create a demand for green buildings were recurring themes.

All in all, it seems clear that projects such as INNOPATHs are crucial for informing policies in the building sector to continue working towards a sustainable, clean and fair future for everyone.

Christina Penasco @chrispenasco

Energy Performance of Buildings Directive Revisions: What to Know.

The following is a guest blog by Anthony Gilbert, specialist in real estate and real estate marketing, and owner of The RealFX Group. Improving the energy efficiency of Europe’s buildings is a key element of a successful low-carbon transition. An important focus of the work of INNOPATHS is an examination of the barriers to achieving this objective, and how to overcome them. The blog focusses on the recent revisions to the EU’s Energy Performance of Buildings Directive (EPBD), which currently sits at the heart of European policy to encourage energy efficiency in buildings.


The EU has recently changed its Energy Performance of Buildings code to encourage the efficiency of older buildings in the union. This move is just one of eight different proposals that seek to reduce the amount of energy used in EU structures. Right now, the building sector accounts for 40% of all energy use in the EU. With 75% of all buildings in Europe described as energy inefficient, these new proposals seek to renovate buildings in an effort to lower energy consumption by up to 6% and COemissions by up to 5%.

Primary Objectives 

These revisions state that smart technology is to be implemented whenever possible to inefficient buildings. Ultimately, this translates to more automation and better control systems. The larger goal for the EU is to hit 0% emissions by the year 2050. Professionals are instructed to use readiness indicators to determine how easy it will be to integrate the new technology into the building.

Ideally, they’ll be able to piece the resulting data together to determine the best renovation strategies for future structures. The EU is trying to capitalize on just how adaptable technology can be. They see these methods as a chance to stabilize the electricity and to drive the union away from the use of fossil fuels and carbon emissions.

The Role of Member States 

The directives of these revisions are deliberately vague to account for the many anomalies and incongruities of renovation and retrofitting. Member States are given the freedom to accomplish these objectives as they see fit. Each neighborhood is allowed to decide the best way to implement the changes based on not only the physical infrastructure but also the environmental obstacles that may stand in the way of ideal working conditions. The larger EU bureaucracy will only interfere if they feel that Member States are not honoring the revisions or otherwise failing to promote sustainability. As they begin promoting more renovations, homeowners and tenants should start to see their energy bills fall.

A Rise in Jobs

The rate of renovation in the EU is currently between .4 – 1.2%, so there’s a lot of room for growth when it comes to installing smarter energy systems. The construction industry in Europe puts 18 million people to work and is responsible for 9% of Europe’s GDP. These new directives give experts in renovations and retrofits more opportunities to put their knowledge to good work, and it gives novices a chance to learn on the job and transform themselves into the energy protectors of tomorrow. These types of radical turnarounds tend to boost jobs in related sectors. The rise in competition usually results in better products and services, which is truly a win-win for both people and the planet.

Improved Lifestyles

Building inefficiency doesn’t just hurt the environment, it can also hurt the people who reside in the buildings. Humidity, dust, and pollutants can hang in the air of a building that lacks the necessary components to circulate it. Vulnerable groups like children and the elderly are particularly susceptible to illness after repeated exposure. The smarter a building is, the more breathable the air will be and the more comfortable the residents will feel. Ultimately, the EU wants everyone to start taking their energy consumption seriously. By starting with the buildings people live and work in, they hope to spur a larger movement that makes it easy to hit their greenhouse gas goals.

Future Goals 

The EU fully understands that is has a long way to go if they’re hoping to stamp out energy inefficiency in a sector as large as the building industry. However, these revisions are truly a step in the right direction. By encouraging Member States to put their energy into smarter building, they inadvertently create demand for green building. As homeowners, building owners, and tenants start to see their health improve and their energy bills become much more affordable, it will create a new standard of living. Leaders believe that this strategy will help them achieve global leadership in promoting renewable energy.

Every country is responsible for promoting their own version of energy efficiency, but the EU seems to have the right idea by dreaming big. Benefits like job creation, better health, and lower utility bills are developments that everyone can support, regardless of their personal views about our responsibility to preserve the planet for future generations.

Anthony Gilbert is the owner of The RealFX Group. Anthony specializes in real estate and real estate marketing, and likes to follow and promote advancements in accessible and efficient technology for homeowners.

Local and regional governments as pathfinders for the transition to a low-carbon economy

The energy transition required to mitigate against global warming is rightly regarded as a global, international challenge requiring macro-level shifts in environmental and economic policy, and the role of local and regional governments, be it in developing viable and replicable business models, acting as a lead customer in driving eco-innovative solutions, or using their economic leverage through procurement, can be easy to overlook.

As a global network of cities and regions working on both political advocacy and concrete projects relating to energy transition, ICLEI has established city networks aimed at uptake of renewable energy and setting of low-emissions targets, carrying out eco-innovative energy tenders, as well as community-owned energy projects and road-mapping projects for low-carbon heating and transport in cities.

Regional networks and eco-innovative tenders
The SPP Regions project, which concluded in March 2018, generated over 1000 GWh of renewable energy and achieved its carbon and energy savings targets through eco-innovative tenders carried out in the project’s 7 regional sustainable procurement networks.

Starting in 2015 and coordinated by ICLEI, the project has promoted the creation and expansion of European regional networks of municipalities working together on sustainable public procurement (SPP) and public procurement of innovation (PPI). As it approaches its conclusion, it has saved 395,000 tCO2/year and primary energy totaling 1,425 GWh/year, as well as procuring 1,015 GWh of renewable energy across 39 tenders in 7 countries, involving 31 contracting authorities. Additionally, the project recruited new partner networks in 8 other European regions and worked closely with the Procura+ European Sustainable Procurement Network.

The full list of tender models is available to download on the project website, where a savings calculation methodology used in the GPP2020 project demonstrates how the targets and achievements are quantified. The project has also produced a package of in-depth guidance and a series of ‘how-to’ videos on the implementation of various sustainable procurement practices such as market engagement and circular procurement, as well as the 3rd edition of the Procura+ Manual.

BuyZET – Mapping city’s transportation emissions footprints
Launched in November 2016, the BuyZET project is a partnership of cities aiming to achieve zero emission urban delivery of goods and services through procurement of innovation solutions and the development of city procurement plans.

The project has released a series of reports on the methods and results of the transportation footprint mapping exercise that identifies high priority procurement areas. These procurement areas have the potential, through improved processes and supplier solutions, to impact upon the transportation footprint of a public authority.

The first step in mapping the transportation footprint is to identify and include all activities performed by cities that involve transportation. Each city within the BuyZET project – Copenhagen, Oslo and Rotterdam – has studied the transportation impacts of different types of procurement activities following different methodologies developed within the project. The three reports from Copenhagen, Oslo and Rotterdam are available here, as well as a consolidated summary of the results of the three reports.

Heat Roadmap Europe
Heat Roadmap Europe, which studies heat demand accounting for approximately 85-90% of total heating and cooling in Europe, has issued a brochure which presents an overview of the current state of the energy demand for heating and cooling in the EU.

In March 2018, a workshop hosted by the EU Joint Research Centre and co-organised by Aalborg University and ICLEI, introduced participants to the project’s main mapping and modelling tools to develop national Heat Roadmaps: Forecast, Cost Curves, JRC-EU-TIMES and EnergyPLAN. Together the tools will allow for building technically possible and, socio-economically feasible, decarbonisation scenarios.

Campaigns and initiatives for a low-carbon economy
ICLEI convenes several collaborative initiatives involving energy and emissions targets at the European and global levels:

Cities for Climate Protection Campaign
Local Government Climate Roadmap
Procura+ European Sustainable Procurement Network
Global Lead City Network on Sustainable Procurement

Two main ingredients for a successful energy transition? A diverse financial system and the right policies

The discussion and action points for moving to an almost carbon-free energy supply have shifted from developing technologies towards a question of how to most effectively and efficiently implement the energy transition without compromising economic development and well-being [1,2]. Transforming our energy systems into more decentralized and renewable energy sources will require a vast deployment of innovations and, accordingly, huge investment. Estimates for the total investment begin at about USD 700 billion, which amounts to a mere 1% of global GDP [3]. There are two key levers to accomplish this task that are cited in almost every publication and report since the early 2000s. These are the use of private financial resources, and an appropriate policy framework. There has been a lively debate about what enabling elements are required for these elements to drive the transition and “shift the trillions” [4].

Financing energy technology innovation – the need for diversity

There is no doubt that the financial sector could, in principle, finance the transition. The financial system gives direction to the development of the real economy. Its traditional role is to mobilize and transform savings into productive investments. However over the last 20 years, driven by consolidation, the race for efficiency and deregulation and financial markets lost a lot of the diversity that is needed to finance innovation (see Figure 1). Many markets are dominated by just a few banks and institutional investors, which have been severely affected by the 2010 financial and subsequent regulation, driving a lot of risk carrying capacity out of banking and insurance markets, which turn provide financing risk-capital such as venture capitalists. The focus of the ecosystem for financing towards debt and later stages of the innovation cycle creates a bias towards calculable risks and, importantly, the maintenance and expansion of the existing capital stock in existing firms rather than new ventures. New forms of alternative finance innovations (such as crowdfunding or community-based credit unions) that could provide the necessary investments might be able to fill this gap, but their volumes are still (too) small. A very important ‘side-effect’ of increasing the diversity of players in financial markets is that the system as a whole becomes more resilient against shocks. Many different players with many different decision heuristics are less prone to making the same errors (Polzin et al. 2017).

Figure 1: Financial instruments to finance clean energy innovation (Source: Polzin et al. 2017)

Policy framework – clear directions and a choice of instruments

Given the current financial landscape we see two main strands of policy interventions to increase both attractiveness of low-carbon energy technologies and the diversity of sources of finance that can be mobilised.

First, innovation policy such as grants for R&D, demonstration support, risk-sharing facilities, tax-credits or Feed-in Tariffs will attract the necessary early-stage investments for future generations of technologies needed for an energy transition (for example organic batteries or power to gas). To overcome the so-called ‘valley of death’ in the innovation chain, public loans or loan guarantees might be suitable, but the risk of over-funding rapidly growing firms should be taken into account. Governments could also invest directly to create a technology ‘track-record’, important for investors [5]. In the later stages of innovation, especially for renewable energy, depending on the design features, portfolio standards or recently popular capacity auctions, prove effective tools. All these efforts should be embedded in a clear and long-term policy strategy consistent with the commitments of the Paris Agreement to be credible to investors. Consistency, stringency and predictability to reduce deep uncertainty and policy risk are deemed especially crucial.

Second, equally important for achieving a mostly privately-financed energy transition are appropriate financial market conditions and regulations [3]. Unprecedented monetary policies in the Eurozone (Quantitative Easing) have driven the cost of debt finance to zero or below and flooded financial markets with cheap debt finance. Still, only very little of that monetary expansion finds its way into the real economy, let alone into clean energy. Framework conditions for either debt or equity-based instruments influence their contribution to a clean energy transition, as a developed capital market is needed to channel resources. In this regard, a fiscal preferential treatment of debt finance, which is widespread today, should be avoided. Typically, interest is deductable as costs, while dividend payments only occur after tax. Policy makers should try to level the playing field across sources of finance. Furthermore capital market regulation shapes investment mandates and risk models and thus ultimately determines the feasibility and viability of investments into clean energy. Regulation (for example Basel III, Solvency II), especially since the financial crisis, is almost exclusively geared towards stability and security. Hence institutional investors and their intermediaries are forced to stay away from risky asset classes such as venture capital. A no-regret solution would be to require financial intermediaries to lower their overall leverage ratio (debt to equity) and operate with more equity. With more ‘skin in the game’, banks and institutional investors can responsibly handle more risk and uncertainty on their balance sheets. New alternative finance such as equity and debt-based crowdfunding are also becoming more regulated in many countries. Regulators should abstain from clamping down on them, for example through a regulatory sandbox.

In sum, to effectively and efficiently mobilise private finance for innovation and diffusion of low-carbon energy technologies, it is paramount to increase diversity of financial sources available in the market and also, next to an adequate innovation policy, adjust financial market regulations and conditions. The INNOPATHS finance workstream, consisting of ETH Zurich, PIK, Allianz Climate Solutions and Utrecht University will further explore the dynamics finance-energy (innovation)-policy dynamics [see for example 5,6].

Resources:

[1] Mazzucato, M., Semieniuk, G., 2018. Financing renewable energy: Who is financing what and why it matters. Technol. Forecast. Soc. Change. 127, 8-22. https://doi.org/10.1016/j.techfore.2017.05.021

[2] Polzin, F., 2017. Mobilizing private finance for low-carbon innovation – A systematic review of barriers and solutions. Renew. Sustain. Energy Rev. https://doi.org/10.1016/j.rser.2017.04.007

[3] Polzin, F., Sanders, M., Täube, F., 2017. A diverse and resilient financial system for investments in the energy transition. Curr. Opin. Environ. Sustain. 28, 24–32. https://doi.org/10.1016/j.cosust.2017.07.004

[4] Germanwatch, 2017. Shifting the Trillions – The Role of the G20 in Making Financial Flows Consistent with Global Long-Term Climate Goals. https://germanwatch.org/en/13482

[5] Geddes, A., Schmidt, T.S., Steffen, B., 2018. The multiple roles of state investment banks in low-carbon energy finance: an analysis of Australia, the UK and Germany. Energy Policy 115, 158–170. https://doi.org/10.1016/j.enpol.2018.01.009

[6] Steffen, B., 2018. The importance of project finance for renewable energy projects. Energy Econ. 69, 280–294. https://doi.org/10.1016/j.eneco.2017.11.006

A paradigm shift towards renewable energy finance for Sub-Saharan Africa?

Sub-Saharan Africa is one of the most promising future markets for renewable energy projects in the coming decades. There is a significant effort from project developers and investors to enter the market but huge obstacles hinder the realisation of such projects. For this reason, Allianz Climate Solutions and the Project Development Programme (implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit under the German Energy Solutions Initiative of the German Federal Ministry for Economic Affairs and Energy), hosted a workshop in Berlin to discuss possible financing models for CAPEX-free operator models for photovoltaic projects in Ghana and Kenya.

The need for discussion and exchange between investors, project developers and financial institutions as well as policy makers was identified as crucial in order to successfully develop and implement responsive solutions to the upcoming challenges in emerging markets like the Sub-Saharan region.

This blog addresses possible ways of rethinking the transaction process and developing tools for renewable energy projects which could be a step forward to respond to the challenges of emerging markets.

Read full publication here

 

Electric mobility and vehicle-to-grid integration: unexplored questions and benefits

Reducing energy demand in the transportation sector is one of the most difficult challenges we face to meet our CO2 emission reduction targets. Due to the sector’s dependence on fossil fuel energy sources and the monumental negative consequences for climate change, air pollution and other social impacts, countless researchers, policymakers and other stakeholders view a widespread transition to electric mobility as both feasible and socially desirable.

How do we go about making it happen? As researchers working on low carbon mobility we need to start looking beyond technical challenges and look at the role of consumer acceptance and driver behavior, as well as the role for policy coordination, to move forward. My colleagues and I have been looking at research on vehicle-to-grid (V2G) and vehicle-grid-integration (VGI) and found that the focus has been too narrow so far. To help make the transition to electric mobility happen, we need to understand the benefits of the technology and propose areas where research should expand.

How does V2G work?

V2G and VGI refers to efforts to link the electric power system and the transportation system in ways that can improve the sustainability and security of both. As our figure below illustrates, a V2G configuration means that personal automobiles have the opportunity to become not only vehicles, but mobile, self-contained resources that can manage power flow and displace the need for electric utility infrastructure. They could even begin to sell services back to the grid and/or store large amounts of energy from renewable and distributed sources of supply such as wind and solar.

Visual depiction of a Vehicle-to-Grid (V2G) or Vehicle-Grid-Integration (VGI) network

Source: Willett Kempton

What are the benefits of V2G integration?

A transition to V2G could enable vehicles to simultaneously improve the efficiency (and profitability) of electricity grids, reduce greenhouse gas emissions from transport, accommodate low-carbon sources of energy, and reap cost savings for vehicle owners, drivers, and other users.

The four main benefits of V2G integration are:

  • Turning unused equipment into useful services to the grid

A typical vehicle is on the road only 4–5% of the day, so 95% of the time, personal vehicles sit unused in parking lots or garages, typically near a building with electrical power.[1]

  • Using underutilised utility resources

Many utility resources go underused, which is an implication of the requirement that electricity generation and transmission capacity must be sufficient to meet the highest expected demand for power at any time. One study estimates that as of 2007, 84% of all light duty vehicles, if they were suddenly converted into plug-in electric vehicles (PEVs) in the United States, could be supported by the existing electric infrastructure if they drew power from the grid at off-peak times[2].

  • Financial and economic benefits

Automobiles in a VGI configuration could provide additional revenue to owners that wish to sell power or grid services back to electric utilities.  Some studies suggest that some types of vehicle fleets could earn even more revenue than passenger vehicles, especially fleets with predictable driving patterns.[3]

  • Reduced air pollution and climate change, and increased integration and penetration of renewable sources of energy. PNNL projected that pollution from total volatile organic compounds and carbon monoxide emissions would decrease by 93% and 98%, respectively, under a scenario of VGI penetration and total NOx emissions would also be reduced by 31%. [4]  A VGI system can further accrue environmental benefits by providing storage support for intermittent renewable-energy generators.[5]

The unexplored questions

The vast majority of studies looking at VGI simply assume that consumers will go along and behave as the system tells them to. We need to better understand people, what cars they want to buy, and what it would take for them to be comfortable in letting someone else control the charging of their electric vehicle.

Furthermore, we need to understand how the societal benefits of the technology are distributed, especially among vulnerable groups. A transition to low carbon mobility needs to be just and equitable too.

V2G clearly has the potential to provide a wide variety of benefits to society.  However, research needs to broaden its focus and consider the following aspects:

  • Environmental performance of V2G in particular, rather than electric vehicles more generally;
  • Financing and business models, especially for new actors such as aggregators who may sit between vehicle owners and electric utilities;
  • User behavior, especially differing classes of those who may want to adopt electric vehicles and offer V2G services, and those who may not;
  • Natural resource use, including rare earth minerals and toxics needed for batteries and lifecycle components;
  • Visions and narratives, in particular cycles of hype and disappointment;
  • Social justice concerns, notably those cutting across vulnerable groups;
  • Gender norms and practices; and
  • Urban resilience in the face of intensifying climate change and consequent natural disasters.

Although the optimal mix is hard to discern, the share of V2G and VGI studies that focus on technical matters and rely on technical methods seems too large and imbalanced—as demonstrated by the many socially relevant research questions that remain unexplored.

Ultimately, these gaps in research need to be addressed to achieve the societal transition V2G advocates hope for.

 

Further reading:

This blog is based on two studies – “The Future Promise of Vehicle-to-Grid (V2G) Integration: A Sociotechnical Review and Research Agenda” and “The neglected social dimensions to a vehicle-to-grid (V2G) transition: A critical and systematic review”—are available in the October Volume of Annual Review of Environment and Resources and Environmental Research Letters.

Read more about CIED’s research on urban transport and smart freight mobility.

Citations:

Sovacool, BK, L Noel, J Axsen, and W Kempton. “The neglected social dimensions to a vehicle-to-grid (V2G) transition: A critical and systematic review,” Environmental Research Letters 13(1) (January, 2018), 013001, pp. 1-18.

Sovacool, BK, J Axsen, and W Kempton. “The Future Promise of Vehicle-to-Grid (V2G) Integration: A Sociotechnical Review and Research Agenda,” Annual Review of Environment and Resources 42 (October, 2017), pp. 377-406.

References:

[1] G. Pasaoglu et al., Travel patterns and the potential use of electric cars – Results from a direct survey in six European countries, Technological Forecasting & Social Change Volume 87, September 2014, Pages 51–59

[2] Michael K. Hidrue, George R. Parsons, Is there a near-term market for vehicle-to-grid electric vehicles?, Applied Energy 151 (2015) 67–76

[3] Michael K. Hidrue, George R. Parsons, Is there a near-term market for vehicle-to-grid electric vehicles?, Applied Energy 151 (2015) 67–76

[4] Kintner-Meyer, Michael, Kevin Schneider, and Robert Pratt. 2007. “Impacts Assessment of Plug-In Hybrid Vehicles on Electric Utilities and Regional U.S. Power Grids Part 1: Technical Analysis,” Pacific Northwest National Laboratory Report, available at http://www.pnl.gov/energy/eed/etd/pdfs/phev_feasibility_analysis_combined.pdf.

[5] Okan Arslan, Oya Ekin Karasan, Cost and emission impacts of virtual power plant formation in plug-in hybrid electric vehicle penetrated networks, Energy 60 (2013) 116-124

Is climate policy a constraint or an opportunity for job creation?

  1. Context

Do climate policies represent a constraint or an opportunity for job creation and employment growth? Two theses are recurrently put forward in the political debate. The first emphasizes the cost increase, especially the pass-through on energy prices for polluting industries, which would threaten international competitiveness and thus employment. The other stresses positive long-term effects that, besides reducing emissions, will boost innovation and thus long-term competitiveness.

A rigorous evaluation of climate policies, such as carbon taxes, must of course account for the expected decrease in pollutant emissions and energy consumption. However, to be complete, this evaluation must study broader indirect effects on industrial competitiveness and employment – the very ones that are likely to have a primary impact on the well-being of people involved in carbon intensive productions (Smith, 2015).

The concern of an immediate loss of competitiveness is felt particularly in France. This concern comes first and foremost from the fact that the recent Energy Transition Law caused a strong increase in the carbon tax (€ 22 in 2016, € 56 in 2020, € 100 in 2030). This is the argument that industrial lobbies claim to curb overly ambitious environmental policies, especially in a context of non-binding international agreements, such as those initiated by COP21. Also, unions are worried that unilateral policy may lead to the relocation of more polluting activities and thus jobs to countries that implement a less ambitious carbon pricing schedule, or an opportunistic strategy of non-intervention. The main argument of the US administration against international agreements on climate change has always been that, in absence of a well-designed enforcement mechanism, ‘carbon leakage’ —a lose-lose outcome in terms of job losses and higher emissions—becomes a real possibility. For instance, a border carbon tax adjustment has been proposed as an amendment to the World Trade Organization rules to make the enforcement of international agreements on climate change credible.

An alternative view on the effect of climate policies emphasizes the positive consequences for innovation and the creation of a comparative advantage in new sectors where demand is expected to increase rapidly. These green innovative activities would use relatively more skilled labor than polluting activities, and this could have a large multiplier effect on employment for local communities. To turn climate policies into an opportunity, governments could also consider using the revenues from the carbon tax to reduce the tax burden on labor. A drop in taxation on labor could lead to a substitution effect leading to net job creation.

The purpose of this policy brief is to provide a preliminary empirical answer to the question of whether climate policies are an impediment or, on the contrary, an opportunity for employment growth. In doing so, we compare the performance of France, a country for which we have detailed micro-data to test the effects of climate policies, with those of its main economic partners, Spain, Italy and especially Germany.

 

  1. Employment dynamics and energy prices in energy-intensive industries

With regards to the situation of France compared with that of the three major European countries, Germany, Spain and Italy, it is first necessary to look at the extent to which climate policies have changed in these four countries.

Admittedly, climate policies are multidimensional and therefore their effective stringency is difficult to compare. However, it is possible to use differences in energy prices for gas and electricity (the two main energy sources for these four countries) to proxy the effect of carbon pricing. Indeed, while the European Emission Trading System (EU ETS) sets, in principle, a single carbon price, national-level instruments have been introduced to subsidize renewable energies in all four countries. This has thus created a certain heterogeneity in policy stringency across these countries. In France, for example, the Social Contribution of Electricity Generation (CSPE) was introduced to finance EDF’s purchases of electricity produced with renewable energies. The impact of the CSPE has increased over time in a very clear way: 0.003 euro per kw/h in 2003, or 5% of the price of electricity for a medium-sized industrial consumer in 2003, compared with 0.019 euro per kw/h in 2015, or 31.6% of the price of electricity for a medium-sized industrial consumer in 2015.

Let’s first look at the evolution of electricity prices (Figure 1) and gas prices (Figure 2) for an average industrial consumer, in the four countries, between 2000 and 2015.[1] In all countries both prices are rising sharply. In France, the price of electricity increases slightly less than in other countries and the price level remains below the average price in other countries. Since the gas market is global, the price variation across countries is much lower than in the case of electricity. There is therefore a stronger tendency for price convergence for gas than for electricity. It should also be noted that the impact of the price of natural gas (and the highly correlated oil price) is much higher in Italy, Germany and Spain than in France, where electricity is produced mainly by means of nuclear power. Thus, France’s effective exposure to energy price shocks, either because of climate policies or because of rising gas and oil prices, is lower than in the other three countries.

Now let’s look at how employment has evolved in the industries most exposed to rising energy prices. Using the average energy intensity across countries, we define two groups of industries: one with high exposure and the other with medium exposure to price changes.[2] Since in France the price of energy has increased relatively less than in other countries, a smaller impact on employment should be expected. Figure 3 and 4 show exactly the opposite for the period 2000-2011. In fact, while employment in polluting sectors declined in all four countries, the decline is more pronounced in France than in Italy and Germany. Moreover, the level of activity in highly polluting sectors (Figure 3) and moderately polluting (Figure 4) is significantly lower in France (7% of total employment in 2011) than in Italy (13.1 % of total employment in 2011) or in Germany (10% of total employment in 2011). Obviously, these are only correlations and such a result may be ascribed to other structural factors, such as the degree of specialization in these industries or the innovativeness in clean technologies.

 

3. Electricity prices and employment in French firms

Because employment in polluting industries reacts more to energy prices in France than in other countries, we examine in greater details what happened to French companies using firm-level data. This allows us to formally test whether these job losses can be ascribed to the increase in energy prices rather than to other structural factors. A recent INNOPATHS study (Marin and Vona, 2017) estimates the elasticity of employment of French manufacturing firms following a change in the price of energy.[3]

Table 1 shows the main results of this analysis, which uses the historical experience of price increases in the 2000s to extrapolate the effects of the carbon tax provided for in the energy transition law. They are, in a way, not surprising. Rising energy prices (measured as a weighted average of the prices of different energy sources) effectively reduce employment in French manufacturing. The effects are significant: a 10% increase in prices reduces employment by 2.6%. Unsurprisingly, these effects are stronger in the more energy-intensive industries (3.4% job loss) and more exposed to international competition (3.1% job loss). To put these results in context, it should be noted that, according to this calculation, a carbon tax of € 56 per tonne of CO2 will lead to an average increase in energy prices of 20% and, therefore, these elasticities should be doubled. However, unreported results also show that these employment effects are upper bounds, at least for multi-plant firms that can use their internal labour market to mitigate the negative effect of the shock.

This negative employment effect should also be weighed against positive effects in terms of a decrease in the energy demand and reduction of emissions. Table 2 shows that these effects go in the right direction. A 10% increase in energy prices reduces demand by more than 6%, and reduces greenhouse gas emissions by more than 11%. These quite considerable effects offset the social cost generated by the decrease in jobs. However, further research is required to understand the extent to which this decrease in emissions is just a reflection of an increase in emissions embedded in the country’s import. Such analysis as well as an analysis distinguishing between short-term and long-term effects would clearly allow us to shed more light on the net benefits of a carbon tax.

Overall, these large job losses raise the more general question of the change in comparative advantage induced by climate policies in international markets. At a first glance, it seems clear that, unlike Germany, France has not been able to turn the challenge of the energy transition into an opportunity to develop a new comparative advantage. To corroborate this conclusion, the next section will turn back to aggregate data on green exports and the size of the green economy in these two countries.

 

4. The energy transition: an opportunity for creating green jobs

Previous results only consider effects on energy-intensive industries. Keeping constant the industry structure, they do not consider the positive effects of job creation in the new green sectors. The destruction of jobs in energy-intensive industries can be more than offset by job creation in green industries. From this perspective, the energy transition may contribute to reignite sluggish economic growth. The scale of this counterbalancing effects remains difficult to establish: green industries follow different growth patterns from energy-intensive industries as they are usually more exposed to trade and are upstream in the value chain.

With particular reference to the situation in Europe, the available data allows for a comparison only between Germany and France and for a time span limited to the financial crisis period (2008-2014). We compare these two countries on four dimensions: employment in the green sector (Figure 5), green sector exports (Figure 6), value-added in the green industry (Figure 7), and investment in green technologies (Figure 8). It appears that the number of green jobs is roughly the same in both countries, albeit with faster growth in Germany, but also that exports of green products are 3.8 times higher in Germany than in France. Green value added is almost twice as high in Germany, and investments in green technologies almost 3 times higher. Germany is therefore more competitive than France in green industries, probably because its capacity for industrial development and therefore growth of activity and employment, in this sector as in the others, is higher. A possible answer to this divergence between France and Germany comes from a recent study on the drivers of green employment in US regions (Vona et al., 2017). According to this study, green jobs require more qualifications than jobs removed from polluting industries, mainly in terms of technical skills and engineering. Local technological expertise, as measured by the number of patent applicants in the region and by the presence of a national research lab, is also positively associated with the creation of green employment. Given the well-established comparative advantage of Germany in engineering services and machinery industries, the evidence on US regions can contribute to explain the difference between Germany and France in the capacity to turn climate policies into an opportunity. In Germany, the capital goods industry plays a key role in the design of green production processes. Recent work, based on patents, shows that Germany has a comparative advantage today and future much stronger than France in three of the four key green technologies: wind turbines, batteries and photovoltaic panels (Zachmann, 2016). 5. Concluding remarks It is very likely that the energy transition will negatively affect industrial competitiveness in the short term and therefore employment in a proportion that is greater if the companies concerned already suffer from a competitiveness deficit, like in France. This evidence argues for a phased and gradual transition, which must take into account both the time required to build a comparative advantage in the green sector, and the immediate negative effects on the polluting sectors in an already negative economic situation. The use of border carbon tax adjustment, as suggested by, among the others, Helm et al. (2012), represents a way to slow down the carbon and job leakage, giving more time to the affected industries in developed countries to adjust. On the other hand, it is no less obvious that such a transition may bring with it the creation of skilled jobs and growth. As the evidence of US regions tell us, these offsetting effects on job creation are more likely to occur if climate policies are combined with industrial policies and R&D investments on low carbon technologies. 

 

References

Greenstone, M. (2002), ‘The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act Amendments and the Census of Manufactures.’ Journal of Political Economy 110(6), 1175-1219.

Helm, D., Hepburn, C., Ruta, G., (2012), ‘Trade, climate change, and the political game theory of border carbon adjustments.’ Oxford Review of Economic Policy 28(2), 368-394.

Kahn, M., and Mansur, E. (2013) ‘Do local energy prices and regulation affect the geographic concentration of employment?.’ Journal of Public Economics 101, 105–114.

Marin, G., Vona, F., (2017), ‘The Impact of Energy Prices on Environmental and Socio-Economic Performance: Evidence for France Manufacturing Establishments.’ OFCE working paper.

Martin, R., Muûls, M., de Preux, L., Wagner, U., (2014), ‘Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme.’ American Economic Review 104(8), 2482-2508.

Smith, V. K. (2015). ‘Should benefit–cost methods take account of high unemployment? Symposium introduction.’ Review of Environmental Economics and Policy 9(2), 165-178.

Vona, F., Marin, G., Consoli, D., (2017), ‘Measures, Drivers and Effects of Green Employment: evidence from US metropolitan and non-metropolitan areas, 2006-2014.’ SPRU working paper.

Walker, W. (2013), ‘The Transitional Costs of Sectoral Reallocation: Evidence From the Clean Air Act and the Workforce.’ Quarterly Journal of Economics 128(4), 1787-1835.

Zachmann, G. (2016), ‘An approach to identify the sources of low-carbon growth for Europe,’ Bruegel policy contribution n.16.

 

Tables and Figures

Table 1. Effects on employment of 10% increase of energy prices

Sector D% Employment
All Manufacturing Sectors -2.6%
Energy Intensive Sectors -3.4%
Non-energy Intensive Sectors -0.9%
Sectors exposed also to international competition -3.1%
Sectors not exposed to international competition -1.6%

Sources. Marin and Vona (2017).

 

Table 2. Effects on Energy Demand and CO2 Emissions

Sector D% of Energy Demand D% CO2 Emissions
All Manufacturing Sectors -6.4% -11.2%
Energy Intensive Sectors -6.6% -11.5%
Non-energy Intensive Sectors -5.3% -10.9%
Sectors exposed also to international competition -7.9% -11.4%
Sectors not exposed to international competition -5.4% -11%

Sources. Marin and Vona (2017).

 

Figure 1: Electricity Prices, industrial consumers

Figure 2: Gas Prices, industrial consumers

Figure 3: Share Employment High Energy Intensive

Figure 4: Share Employment Mid Energy Intensive

Figure 5: Green Employment

Figure 6: Green Value Added

Figure 7: Green Exports

 

Figure 8: Investments In Cleaner Tech

[1] Source Eurostat, http://ec.europa.eu/eurostat/data/database.

[2] Source EU-KLEMS, http://euklems.net/. The groups are rather standard in the literature and coincide with the more energy intensive industries. Highly polluting industries are: Chemistry, Metals, Manufacturing of other non-metallic mineral products, Coke and Oil Refining, Mining. Moderately polluting industries are: Food and Beverages, Leather and Footwear, Rubber and Plastics, Textile, Wood and Wood Products, Other Manufacturing Sectors including Recycling.

[3] This study is based on data from establishments in the manufacturing sectors in France during the period 1997-2011. Three databases are merged: the DADS database (to have a measure of employment, by type of qualification, in each establishment), the FICUS database (to build a measure of enterprise productivity, unreported in this note but available in the paper) and the ECAI database (to obtain measurements of the energy mix used and energy prices paid by a sample of French establishments in the manufacturing industry). The national price of different energy sources is used, weighted by the initial energy mix of the establishments, as an instrumental variable to isolate exogenous changes in energy prices unrelated to quantity-discounts. Our estimates are conditioned to a rich set of control including sector- and region-specific trends and establishment fixed effects. We also take into account the effects of European policy to set a carbon price, the ETS (Emission Trading Scheme). The employment effects of ETS are low, consistent with the low effective severity of this policy which has provided generous exemptions for more energy-intensive industries exposed to international competition (see: Martin et al. 2014).

 

Surprises and change

The first serious efforts to develop new and renewable energy into viable energy options started in the aftermath of the oil crises in the late 1970’s. The then Carter administration launched multi-billion R&D programmes in the USA to start an alternative energy revolution. Likewise, the first deployment programmes of wind energy were initiated in the USA, which brought some 1 GW of Danish wind power to the Californian market with a hope of producing cheap electricity. At the same time, the first global energy scenarios1 were designed at IIASA near Vienna predicting a turn to an oil-free, mainly nuclear-based energy economy, flavored with solar energy.

In retrospect, many of these early efforts in clean energy were disappointments and didn’t meet the quick promise of turning the world energy economy around. Neither have we been able to foresee the many ‘surprises’ and disruptions that followed during the next 40 years, which together have pushed the new and renewable energy technologies to a market breakthrough.

There is not a single mastermind or grand policy plan behind the success of clean energies, but rather a sequence of interlinked incidences with amplifying effects and making use of enabling drivers such as advances in science and the U.N. climate accords. Not to mention the pioneering markets in Germany with strong policy links which provided generous subsidies to new energy technologies, which in turn induced huge learning effects and cost reductions.

One of the biggest surprises during the last decades was the transformation of China towards an innovation-driven economy. China played a crucial role in bringing down the cost of photovoltaics and wind power. During the last ten years, the price of PV has dropped by more than 90% thanks to the efficient, low-cost, and large-scale Chinese innovation system integrated into manufacturing. In addition, the scale of economies played a role. The Chinese scaled up production facilities tenfold from those typical in the USA and Europe. Remarkably, no major breakthrough in the core PV technology preceded this dramatic cost plunge. This ‘surprise’ came from outside the traditional research and technology development realm, which is often thought to deliver the disruptions.

A similar ‘surprise’ was the victory of the Danish wind power industry, which beat the billion-dollar U.S. wind programme in delivering competitive windmills to the market 40 years ago. The Danish success has been attributed to the effective networking amongst market actors, developers, and researchers, and their openness to share experiences whilst competing.

Some ‘surprises’ may have unpredictable consequences. For example, the U.S. shale gas boom took off in a quite short time period 10 years ago and brought very cheap gas into the U.S. market, displacing coal in power production. These changes were so large that they had a global impact; e.g. cheap coal started to filter into Europe. Unfortunately, the Emission Trading System (EU ETS) was incapable of preventing this and coal use has increased in many EU countries, contradicting the EU climate policy. Ironically, the strong price-driven fuel shift from coal to gas in the USA lead to relative CO2 emission reductions of about the same size as those in the European Union with strong climate and support-driven policies.

Above examples should not be misunderstood as a laissez-faire attitude, but as a cautious remark that future development is not linear. Neither is ‘surprise’ the only factor that created a change, but there are other important factors, many with a socio-economic and political dimension.

Actually the success of PV, wind, and shale gas described above is not just about a mere ‘surprise’, but a result of successful commercialization strategies, in which technology development and deployment measures were optimally applied. Policies played a role in the big picture as well, particularly in accelerating development and providing a framework for penetration. The dialogue between science and policy is also of importance. Scientists have valuable knowledge and insight, and could advise policy makers about future opportunities and threats, and urge actions, when necessary. The recent communication2 on the sustainability of forest bioenergy (policies) by leading European scientists serves as an example of such advice.

In a world of ‘surprises’, it is no wonder that the predictions on the future of new energy technologies include major uncertainties. Once a new technology starts to become cost-competitive and takes off, the future predictions tend to be too pessimistic, while when still being far from the breakthrough point, they are often too optimistic.  A prevailing positive development may also be stopped by a sudden unexpected ‘surprise’. This was the case with nuclear power caused by the Three Mile Island, Chernobyl, and Fukushima accidents, and the consequent rise of public opposition to nuclear and deterioration of its economics, which turned the hailed nuclear renaissance into a disaster, also reflected by recent scenarios3.

Technology disruptions and ‘surprises’ are vital for technology evolution. Therefore, understanding the nature of disruptions deserves attention. The present clean energy transition will trig a range of new innovations, e.g. in transport, in integration of renewable energy, and through digital economy. Consumers are much stronger involved in the change than previously, which emphasizes social innovations linked to digitalization, circular, and sharing economy, among others.

Perhaps the next ‘surprise’ originates from bottom-up movements and not from a specific technology per se, but from using a range of technologies and expertise together to make a systemic change. What kind of a surprise could Artificial Intelligence generate, not to speak about the distant possibility that one day AI >Human I?

Enabling ‘surprises’, not preventing them, may be important for a CO2-free future, meaning that nourishing a multitude of agents and ideas, which may lead to disruption, would be welcome. The inertia of energy economy is known to be large; it involves huge investments and conservative players. Here, governments may help by unlocking the lock-in to the past energy and avoiding path dependencies. Giving due attention to enablers, drivers, and pushers, which accelerate a change, is worthwhile. Understanding technology limitations is also useful, but we shouldn’t undermine the human ingenuity to overcome such obstacles.

 

  1. Jeanne Anderer, Alan McDonald, Nebojsa Nakicenovic, Wolf Hafele (Ed.). Energy in a Finite World, Paths to Sustainable Future, Ballinger Publishing, 1981.
  2. EASAC – the European Academies’ Science Advisory Council Multi-functionality and sustainability in the European Union’s forests. EASAC policy report 32, April 2017.
  3. International Energy Agency (IEA). World Energy Outlook 2017, November 2017.

Peter D. Lund is professor at Aalto University in Finland. He chaired the Advisory Group on Energy of the EU in 2002-2006. He is past chair of the EASAC Energy Panel. He also holds several visiting positions in China.

Can energy efficiency be market-based?

Energy efficiency is widely recognised as the “first fuel” of decarbonised energy systems of the future, and is an unquestionable pillar of the EU’s ‘Energy Union’. It is one of the most cost-effective options to accelerate the transition to a low carbon economy and may enable achievement of other socioeconomic goals, such as boosting economic growth and employment, and reducing energy poverty. However, nowadays the current paradigm of European approach is aimed at removing market barriers and to make energy efficiency progress based on market instruments creating win-win opportunities for both supply and demand sides. Will this happen in the near future? Can we make energy efficiency a real energy resource in a competitive energy market?

The Role of Market-Based Instruments (MBI)

Historically, the adoption of energy efficiency technologies and practices has often required public subsidies. Out of the public eye, the number of energy efficiency obligation schemes around the world (including white certificate programmes) is growing. A similar trend can be observed for the second type of MBIs – auctions (including tendering programmes), where bids are collected for funds to deliver specific energy savings. According to a recent IEA report, the number of MBIs has quadrupled over the last decade, while the value of investments triggered by MBIs has increased six-fold over the same time. As a result, global energy consumption was approximately 0.4% lower than it would have been otherwise. The IEA further expects that by 2025, energy savings induced by auctions will double to more than the current energy consumption of Poland.

Speaking about Poland

The Energy Efficiency Obligation imposed by Article 7 of the Energy Efficiency Directive requires that Member States ensure that energy suppliers and distributors achieve energy savings of 1.5% per year. In Poland, the obligation has been implemented in the form of a white certificate scheme. Polish experiences with white certificates can serve as an example showing that learning a lesson and a proper (re)design of the obligation schemes by the government may bring promising results. The first version of the scheme was introduced in 2011 and turned out to be complicated, unclear and costly. After major changes introduced in 2016, the application as well as measurement and verification procedures were significantly simplified. As a result, it is expected that the market value of white certificates in Poland in the years 2016-2020 will be approximately 1 billion euro, leading to an electricity price increase of 1.3% in 2020.

But is it more cost-efficient than grants?

At first glance, the answer to this question is positive. However, according to IEA, there is not enough evidence which would prove that efficiency outcomes delivered by MBIs are always more cost-effective than energy savings reached through other means, such as grants. Still, existing data show that savings can be made at a low cost. These observations suggest that not only further research, but also longer timeframes of obligation schemes’ operation are needed to profoundly address this question and design future energy efficiency policies in an effective and efficient manner.

Future outlook: pink glasses of MBIs’ designers

Policy-makers are acknowledging the potential of MBIs. In November 2016, the European Commission announced its “Clean Energy for All Europeans” proposals, which set a 30% energy efficiency target for 2030, to be achieved largely through strengthening and extending existing policy mechanisms, including Energy Efficiency Obligation Schemes (EEOS). Hailed as a great success by the EC, Article 7 is being amended to extend the obligation period beyond 2020 to 2030. The EC expects EEOS to generate the highest amount of savings by 2020 of a single measure notified under Article 7 (86.1 Mtoe), with much smaller savings reached thanks to fiscal incentives (49.0 Mtoe), energy and CO2 tax measures (34.4 Mtoe) and regulations and voluntary agreements (27.1 Mtoe). Recently, the targets proposed by the Commission have been pushed even further by the European Parliament’s energy and industry committee (ITRE). On 28 November 2017, ITRE supported a 40% binding overall target for 2030, with binding national targets, as well as strong rules on annual energy savings. In sharing experiences and expertise with a smart MBI design across countries, interaction between policy makers and researchers will be essential in ensuring these targets are successfully achieved.

Written by Ewa Stefaniak, Maksymilian Kochański, and Katarzyna Korczak
Warsaw University of Technology

Is the IEA still underestimating the potential of photovoltaics?

Photovoltaics (PV) has become the cheapest source of electricity in many countries. Is it likely that the impressive growth observed over the last decade – every two years, capacity roughly doubled – will be sustained, and is there a limit to the growth of PV? In a recently published article (Creutzig et al 2017), we tackle this question by first scrutinizing why past scenarios have consistently underestimated real-world PV deployment, analyzing future challenges to PV growth, and developing improved scenarios. We find that if stringent global climate policy is enacted and potential barriers to deployment are addressed, PV could cost-competitively supply 30-50% of global electricity by 2050.

A history of underestimation

Any energy researcher knows that projecting energy use and technology deployment is notoriously challenging, and the results are never right. Still, the consistent underestimation of PV deployment across the different publications by various research groups and NGOs is striking. As an example, real-world PV capacity in 2015 was a factor 10 higher than projected by the IEA just 9 years before (IEA, 2006).

A main reason for this underestimation is strong technological learning in combination with support policies. PV showed a remarkable learning curve over the last twenty years: On average, each

doubling of cumulative PV capacity lead to a system price decrease of roughly 20%. With substantial support policies such as feed-in-tariffs in many countries including Germany, Spain and China, or tax credits in the USA, the learning curve was realized much faster than expected, which in turn triggered larger deployments. These factors together have led to an average annual global PV growth rate of 48% between 2006 and 2016.

Can continued fast growth of PV be taken as a given? We think not. Two potential barriers could hinder continued growth along the lines seen over the last decade, if they are not addressed properly: integration challenges, and the cost of financing.

Integration challenge: Many options exist

Output from PV plants is variable, and thus different from the dispatchable output from gas or coal power plants. However, power systems have always had to deal with variability, as electricity demand is highly variable. Thus, a certain amount of additional variability can be added to a power system without requiring huge changes, as examples like Denmark, Ireland, Spain, Lithuania or New Zealand show: In these countries wind and solar power generates more than 20% of total electricity, while maintaining a high quality of power supply (IEA, 2017).

Under certain conditions wind and solar can even increase system stability. In fact, the size of the integration challenge largely depends on how well the generation pattern from renewable plants matches the load curve. Accordingly, in regions with high use of air conditioning such as Spain or the Middle East, adding PV can benefit the grid: On sunny summer afternoons when electricity demand from air conditioning is high, electricity generation from PV is also high.

As the share of solar and wind increases beyond 20-30%, the challenges increase. Still, there are many options for addressing these challenges, including institutional options like grid code reforms or changes to power market designs in order to remove barriers that limit the provision of flexibility, as well as technical options like transmission grid expansion or deployment of short-term  storage (IEA, 2014a). None of these options is a silver bullet, and each has a different relevance in different countries, but together they can enable high generation shares from photovoltaics and wind of 50% and beyond.

Financing costs: international cooperation needed

Many developing countries have a very good solar resource and would benefit strongly from using PV to produce the electricity needed for development. However, because of (perceived) political and exchange rate risks as well as uncertain financial and regulatory conditions, financing costs in most developing countries are above 10% p.a., sometimes even substantially higher.

Why does this high financing cost matter for PV deployment? One of the main differences between a PV plant and a gas power plant is the ratio of up-front investment costs to costs incurred during the lifetime, such as fuel costs or operation and maintenance costs. For a gas power plant, the up-front investment makes up less than 15% of the total (undiscounted) cost, while for a PV plant, it represents more than 70%. Thus, high financing costs are a much stronger barrier for PV – the IEA calculated that even at only 9% interest rate, half of the money for PV electricity is going into interest payments (IEA, 2014b)!

Clearly, reducing the financing costs is a major lever to enable PV growth in developing countries. Financial guarantees from international organizations such as the Green Climate Fund, the World Bank or the Asian Infrastructure Investment bank could unlock huge amounts of private capital at substantially lower interest rates.

Such action could help to leapfrog the coal-intensive development path seen, e.g., in the EU, US, China or India. Replacing coal with PV would alleviate air pollution, which is a major concern in many countries today – in India alone, outdoor air pollution causes more than 600,000 premature deaths per year (IEA, 2016a).

Substantial future PV growth possible if policies are set right

How will future PV deployment unfold if measures to overcome the potential barriers integration and financing are implemented? To answer this question, we use the energy-economy-climate model REMIND and feed it with up-to-date information on technology costs, integration challenges and technology policies. The scenarios show that under a stringent climate policy in line with the 2°C target, PV will become the main pillar of electricity generation in many countries.

energy-economy-climate model REMIND

We find a complete transformation of the power system: Depending on how long the technological learning curve observed over the past decades will continue in the future, the cost-competitive share of PV in 2050 global electricity production would be 30-50%! Our scenarios show that the IEA is still underestimating PV. The capacity we calculate for 2040 is a factor of 3-6 higher than the most optimistic scenario in the 2016 World Energy Outlook (IEA, 2016b).

We conclude that realizing such growth would require policy makers and business to overcome organizational and financial challenges, but would offer the most-affordable clean energy solution for many. As long as important actors underestimate the potential contribution of photovoltaics to climate change mitigation, investments will be misdirected and business opportunities missed. To achieve a stable power system with 20-30% solar electricity in 15 years, the right actions need to be initiated now.

References:

Creutzig, F., Agoston, P., Goldschmidt, J.C., Luderer, G., Nemet, G., Pietzcker, R.C., 2017. The underestimated potential of solar energy to mitigate climate change. Nature Energy 2, nenergy2017140. doi:10.1038/nenergy.2017.140. https://www.nature.com/articles/nenergy2017140

IEA, 2017. Getting  Wind  and  Sun  onto the Grid. OECD, Paris, France.

IEA, 2016a. World Energy Outlook Special Report 2016: Energy and Air Pollution. OECD, Paris, France.

IEA, 2016b. WEO – World Energy Outlook 2016. OECD/IEA, Paris, France.

IEA, 2014a. The Power of Transformation: Wind, Sun and the Economics of Flexible Power Systems. OECD, Paris, France.

IEA, 2014b. Technology Roadmap: Solar photovoltaic energy. OECD/IEA.

IEA, 2006. World Energy Outlook 2006. IEA/OECD, Paris, France.

Author

By Dr. Robert Pietzcker,  Post-doctoral researcher, Potsdam Institute for Climate Impact Research (PIK)