In this report Growth Analysis describes the overall trends in energy policy in a number of countries in Europe and beyond. The report is based on country studies that analyse broad national strategies as well as specific policies and instruments targeting different sectors and different parts of the innovation chain.
The present report is based on a number of studies that describe the development of energy policy in some of the countries that are considered to be most important as regards global development in the energy area, viz. Brazil, Denmark, India, Japan, China, Great Britain, South Korea, Germany and the USA. Each country study describes in detail both overarching long- and short-term strategies and specific interventions in different energy sectors and aimed at different parts of the innovation chain.
Our ambition is to relatively briefly summarise the main observations from the studies and present a cohesive analysis of the central driving forces, challenges and prerequisites for these countries’ energy policies. Some of these observations concerning driving forces behind and the design of energy policy are presented below.
The energy issue is becoming increasingly integrated with other policy areas, for example development and economic policy, environmental policy and foreign policy. The driving forces behind the countries’ energy policies are therefore also different, in particular as regards emphasis on environmental and climate issues, depending, among other things, on their industry structure, economic growth, income level, access to domestic energy raw materials, among other things. A general observation is that environmental issues are emphasised more in countries with a high income level and when the environmental problems are perceived to be more urgent.
A further observation is that the majority of countries apply an “all-of-the-above” strategy, i.e. implement a broad set of energy solutions, ranging from traditional coal power to more modern renewable energy technologies. Research and development for future energy solutions are also part of this strategy. China and the USA are prominent examples of this; their energy policies span the whole spectrum of energy solutions, from advanced CSP (concentrating solar power) to shale gas and hydromethane.
In Europe, the picture is somewhat different with several countries pursuing a clearly defined policy for structural changes in the energy sector – phasing out fossil fuel in favour of renewable energy. Germany is perhaps the clearest example of this but the same perspective also predominates in Denmark. The impression given by Great Britain is a little more fragmented with both major investments in renewable sources and at the same time the highest subsidies in the world on fossil energy.
It must be emphasised that China, India and several other countries have an ambition to break their fossil fuel dependency in the long term but in practice it is the conventional fossil forms of energy that will predominate for the foreseeable future.
Energy efficiency is a high priority in all the countries and is considered to be a cost-effective solution that both promotes sustainable development and strengthens competitiveness. Japan is a world leader, above all in the industry sector and continues to invest large sums in the area. Smart grids and more energy-efficient buildings are two prioritised areas, which is also true of, for example, the USA.
Common to all countries is that the fundamental driving forces behind the energy policy are a safe, secure supply of energy and economic competitiveness. This is also the case in for example Germany and Denmark, but possibly with a more long-term view of the energy issue. Higher energy costs are accepted today (within reasonable limits) because they are seen as an investment in future energy supply security and competitiveness.
The energy debate in the USA for obvious reasons mainly concerns developments in the gas market. Extraction of shale gas (and oil) has increased substantially and changed the United States’ situation from one of dependency on imports to possible independence and even net exports in the long term. Energy prices, and gas prices in particular, have also decreased significantly, which strengthens industry’s competitiveness relative to other countries. Against this background, the challenges that the USA faces have to do with how its energy system develops in the long term, i.e. beyond the present and next decades and include such issues as upgrading of the electricity grid and stability in a situation with a high degree of federal autonomy and very varying levels of ambition, aims and directions: future energy sources, beyond shale gas; greater energy efficiency in industry, homes and transportation and electrification of the vehicle fleet. Against this background, the Department of Energy has taken the initiative for a recurrent review and strategy process to be made every four years, called the Quadrennial Energy Review. The aim is to harmonise the federal energy policy and steer more in the direction of handling specific challenges in the area of energy. In line with this, it is also possible to see a shift in the general direction of the energy policy, from basic research towards applied research and innovation measures. The current polarisation in Congress, however, makes any assessment of the future extremely precarious.
Regarding the design of the policy, a general trend seen in recent years has been increasing use of selective policy instruments and technology-specific interventions. This so-called “new soft industrial policy” has been the subject of intense debate among economists and many critical voices have been raised concerning the efficiency losses that the selective policy is assumed to entail. On the other hand, both economists and politicians emphasise that the general policy instruments that have been tried hitherto have not succeeded in driving technological development and innovation at the pace required to resolve the energy challenges many countries are facing. One conclusion is that a combination of different policy instruments is needed to attain the ambitions of the energy policy and that several different parameters affect what mix of policy instruments is most appropriate.
The report also describes a number of currents in energy policy that illustrate this conclusion. These are summarised below.
Several European countries have in recent decades introduced various more or less technology-specific policy instruments, primarily to promote demand for renewable energy. Germany has its FiT system, Great Britain both FiT and green certificates, known as renewable obligations, and Denmark also has similar support systems.
Considering the results of these different systems, we can see that production of renewable electricity has risen substantially in the three countries. Development has been most dramatic in Germany, where production increased from 1.5 to 102 TWh between 1990 and 2011 and the share of renewable energy, mainly solar power, currently stands at over 12%. Detailed follow-ups that have been made also show that the subsidy systems are responsible for much of this increase. It is, however, difficult to say exactly how great this positive impact has been, because estimates of what would have taken place without the subsidies are naturally mere guesses. Irrespective of this, regarding the goal of increased production of renewable energy both the input tariffs and the electricity certificates seem to be affecting matters in the right direction.
A further dimension of these support interventions is that according to responsible decision-makers and authorities they are to be socio-economically cost-effective and entail the smallest possible cost increases for the end consumer. Here the picture is less positive. In all countries, evaluations show that the systems have become more expensive than initially thought and that the cost curve is pointing upwards at a steep angle. Current assessments show for example that the cost of expanding renewable energy in Germany over the next twenty years may be as high as a thousand billion Euro (8,840 billion SEK at current exchange rates). This bill will ultimately be paid by German households and the country already has one of the highest electricity prices in Europe.
In Great Britain, the cost of the country’s renewable energy programme is increasing rapidly and towards levels where they are meeting strong resistance. According to the Department of Energy and Climate Change, the annual cost amounted to roughly 2 billion GBP in 2013, will increase to 2.5 billion in 2014 and just over 3 billion in 2015 and will then double by 2020. The accumulated cost is then expected to be in the region of 40 billion GBP (approx. 400 billion SEK at current exchange rates) and around 100 billion GBP by 2030 (approx. 1,000 billion SEK).
Against this background, an increasingly lively debate has sprung up in both Germany and Great Britain about the future of support for renewable energy. After a prolonged period of drafting, Minister for Economics and Technology Philipp Rösler and Minister for the Environment Peter Altmaier presented a joint proposal for reducing the rising cost of the German input tariffs on 14 February 2013. This also means that a process of yearly evaluations of costs and results achieved is to be devised to reduce the risk of runaway cost increases in the future.
A debate is also going on in Denmark about the cost of expansion, primarily of wind power, and the Danish Energy Agency has been criticised for not exercising sufficient control. One example that has been mentioned is the construction of solar cell installations on agricultural land, which receive the same subsidies as domestic solar panels. This led to rapid expansion with substantial profits for investors. The cost of solar cells now risks delaying the expansion of the Kriegers Flak offshore wind farm since the total renewable energy budget may be exceeded.
The central issue here is how production of renewable energy can continue to be increased to replace coal, oil and gas in the long-term – ambitions remain largely unchanged – without the costs becoming impossible for politicians to justify. What policy measures are most effective as regards the implementation of existing technology to drive the technological development of future energy solutions and how can we strike a balance between these two necessities?
A reform of Europe’s support systems towards greater cost-effectiveness has already begun but it is still to early to say what this will result in.
In India, Japan, China and South Korea the picture is different to the one in Europe. India and China are struggling to meet the rapidly growing demand for energy and are using all means available. In Japan and South Korea, the biggest challenge is to keep energy prices down to support domestic industry while at the same driving both greater energy efficiency and diversification away from fossil fuels, which are considered to pose both a financial and a supply security risk. All four countries, however, are currently changing their institutional regulatory frameworks into more market-oriented models.
China is shifting towards freer setting of energy prices, which was confirmed at the third plenum of the Central Committee in November 2013. Energy pricing was one of the main issues and decisions taken at the plenum strengthened development towards market-pricing of electricity, oil and gas. The background is that the artificially low prices have led to undesired effects such as overcapacity in the country’s electricity-intensive industry, lack of incentives to increase energy efficiency and high energy intensity in the economy in general. Now that China both wants to climb higher in the global value chains (from cheap manufacturing to greater service content) and needs to increase energy efficiency as a matter of urgency, energy prices are seen as an important piece of the puzzle and gradually increasing energy prices can be expected for certain kinds of energy and in certain sectors.
The South Korean government also controls energy prices, which are kept artificially low to support the country’s domestic industry. Just like in China, the shortcomings of this policy are becoming increasingly evident. The country has an energy intensity that is 30% higher than the OECD average at the same time as it is totally dependent on imported energy. South Korea is therefore extremely sensitivity to external factors and for this reason the government in Seoul has initiated a number of processes to change this state of affairs. Deregulation of the electricity market and more market-oriented pricing of energy are two important components of the package.
Similar processes are also under way in Japan and India. In Japan, deregulation of the electricity market is in important issue given the country’s ambitions to increase energy supply security and at the same time complement the energy mix with renewable alternatives. In India, the state traditionally exercises very direct control of the energy sector as both regulator, producer and distributor. Some steps are being taken now, first and foremost in the renewable energy sectors, to shift towards a more indirect role for the state players and more market-based policy instruments.
Free pricing and a fully deregulated energy market are still a long way off in these countries, perhaps most of all in China. The examples above nonetheless show that they are moving in this direction. In the long term, this may have far-reaching consequences as regards energy prices and the countries’ industry structure and their role in the international energy markets.
Like the USA, Brazil finds itself in a situation where energy production has the potential to increase substantially over the coming decades – even if many obstacles remain to be faced. The overall direction of the country’s energy policy is determined by an ambition to ensure a secure and competitive energy supply, preferably from domestic resources. These resources are already extensive, not least as regards hydropower, and the discovery of very substantial oil and gas deposits off the south coast of the country (Pre-sal) has raised hopes for greatly increased energy production, lower prices and a more prominent role as a global player in the energy policy area. These, however, remain hopes and the challenges of exploiting these deep-water deposits are many. Another of Brazil’s central challenges is to build the necessary infrastructure, to be able to use not only oil and gas from Pre-sal but also the hydropower and bioenergy in the remote northern and north-western parts of the country. In connection with this, it is also worth mentioning a specific challenge for Brazil, the so-called “Custo Brasil”, the Brazil Cost, referring to the structural deficiencies in the country’s institutions as a whole and which also affect the energy area. These deficiencies include excessive layers of bureaucracy, corruption, high rates of interest, underdeveloped infrastructure and a lack of trained manpower. Alongside the direct interventions to increase energy efficiency and capacity increases in both both hydropower and fossil energy this is one of the government’s main focus areas.
Policy for energy systems of the future – beyond 2020 – An international survey