Innovation policy for future energy systems

– a compilation and analysis of international policy experiments

Sweden’s energy policy aims to create the conditions for a stable energy supply – one that is also sustainable and contributes to trade and industry’s competitiveness. The current energy policy framework and instruments generally work well and will, according to most assessments, be sufficient to achieve the goals set for 2020.

In the future, however, particularly between 2020 and 2050, a number of important energy challenges look set to emerge. The overarching vision for Sweden’s climate and energy policy is a fossil fuel independent energy system by 2050, which poses various challenges and encompasses significant and complex questions concerning the transformation of the transport system, the future of nuclear power, and the development of renewable energy and its input into the power grid. Currently there are only partial answers to how these issues should be handled, and energy policy will in coming years need to be clarified, not only in terms of its general direction, but also the steps that need to be taken to reach that point, and the players with responsibility for each of the steps involved. The Swedish government has also set up an energy commission tasked with investigating some of these issues. This is in addition to Roadmap 2050, which is currently being considered by the environmental drafting committee.

The starting point for this report is that innovation, both technical and political and institutional, will play a central role and that this will not happen automatically:

  • The low price of carbon dioxide emissions means that the incentives for reduced use of fossil energy are weaker than is socio-economically profitable.
  • Non-priced and positive spill-over effects from research and development are leading to underinvestment in new knowledge about future technologies.
  • Knowledge barriers and risk barriers mean that investors are missing out on business opportunities that are both financially and socio-economically profitable.

Taken together, this warrants a combination of measures along the entire innovation chain. The question is how innovation policy can be formulated in order to address these challen­ges, and what opportunities and challenges this creates for political decision-makers.

The report illustrates and reflects the issue in light of the experiences of innovation-promo­ting energy policy in other countries. The focus is on the design and implementation of policy instruments aimed at developing and disseminating new technology to tackle future energy challenges.

Below is a summary of the report’s core observations.

Lessons from policy experiments in other countries

What we are seeing in practice is that the majority of countries combine general measures, such as taxes, emission rights trading and public R&D programmes, with a variety of selective innovation policy instruments.

The countries differ in several dimensions, and the design and implementation of policies varies. Developed industrial and knowledge nations such as Denmark, Germany and the USA have entirely different conditions to emerging economies, such as India and China. Directly transferring policy experiments between countries is therefore difficult, but the differences also mean that there is a sizeable and varied experience bank to study and learn from.

On the basis of the international experiences and experiments, three general observations emerge as central themes, irrespective of the countries’ different conditions:

  • Stable rules and institutions play a decisive role in the effects of any energy policy and its costs. Considerable variations in tax levels and in the design of support systems create uncertainty in the market, which raises the risk premium and makes investors less inclined to finance projects having to do with renewable energy and energy effi­ciency. New technology thus becomes more expensive to develop than would other­wise have been the case, and any commercialisation is delayed. The USA’s support for producers of renewable electricity (Production Tax Credit) is one of a number of examples given in the report of the negative effect created by this policy risk.
  • A further dimension discussed is the balance between short-term cost-effectiveness and long-term goal attainment. Political decisions are often characterised by a desire to implement measures that achieve a specific goal at the lowest possible cost, which is a reasonable starting point. However, innovation and technological development will be a condition for achieving the long-term goals, meaning instruments and approaches are needed that promote innovation and transform the entire energy system. In such cases, demands for short-term cost-effectiveness can be counter-productive. Instead, a more long-term time perspective is required. The experiences, both positive and negative, associated with the German feed-in tariff have proven to be a driver for innovation within both renewable energy technology and related service industries, business models and funding solutions. This also provides experiences of the risks of rising costs and the importance of a well-thought-out design for selective policy instruments.
  • One final important parameter is the balance between established interests and challenging solutions. The energy policies in many countries are often governed by the interests of established players. However, the structural transformation of the energy system that will be needed also requires new players and their ideas. One way of supporting this has been to include small, new companies and other challenging play­ers in formal prioritisation and decision processes. Innovations for future energy systems require institutional innovations, including within the policy field, and new ways of reaching decisions. Canada’s broad support processes for research and innovation in the energy field may provide a source of inspiration in this context.

The Swedish context – some reflections on potential policy implications

Energy policy in Sweden finds itself at the start of 2015 undergoing a process of transformation. Despite facing numerous challenges, Sweden is in many ways well equipped to respond to such challenges. However, a number of significant challenges lie on the horizon beyond 2020. According to assessments, it is not possible to achieve the goals set for 2050 using currently agreed or planned policy instruments.

Innovation policy can, if correctly designed and incorporating international experiences, play a supplementary role to other and more general policy instruments. There are some particularly relevant questions linked to the Swedish context that need to be asked in light of these experiences:

  • How can the Swedish electricity certificate system be developed and supplemented with other instruments that more clearly promote innovation and radical technological development? More stable prices and stronger demand for new technology which enable a greater degree of private investment are key pieces of the puzzle in this context. Feed-in tariffs (FiT) have proven to be a better alternative for this particular purpose than electricity certificates, and therefore there are good reasons to look more closely at the opportunities for introducing similar instruments in Sweden also. How­ever, here it is also crucial to carefully analyse the risks that accompany this type of instrument, not least those associated with the costs to electricity consumers. Reverse auctions, which are used for example in India and California, may be another option to consider.
  • How can energy policy be developed to be more cohesive and transparent, yet also more consistent?Sweden’s energy policy is based on a series of individual efforts which are at present fully harmonised only to a certain extent. It is clear that the Swedish Energy Agency’s (Energimyndigheten) mandate to promote the development of renewable energy through electricity certificates and research efforts clashes with the tax relief granted to some elements of trade and industry. One example is the rela­tively low taxation levied on diesel compared to petrol. Prioritisation processes for energy research could be opened up, as in Canada, or be closed, as in South Korea, with the choice between these two options having probable consequences for the overall direction of energy policy. Closed processes generate more focus, but risk cementing already established structures – which brings us to the final question.
  • How can Sweden’s areas of strength be utilised without new influences being exclu­ded? The report discusses how many other countries allow their energy policies to be governed to a high degree by the priorities of economic and growth policy, as well as by the needs and agendas of established players. This is also the case in Sweden. Sweden is a small country with limited resources and so does not have the option to invest in everything. Some element of focus should be a reasonable strategy for achie­ving stated energy and climate policy objectives. A principle may be to invest in some­thing we are already good at and build on it further. There is great potential within the bio-based economy, with bioenergy and new bio-based materials. Within the auto­motive industry too there are strong traditions and knowledge environments that can be utilised to satisfy a growing demand for electric cars and their various subcomponents, for example. A different perspective may be to invest more in certain elements of the innovation chain, such as the development of knowledge, design and intellectual property rights. There is considerable economic value to be gained here, which may also contribute to Sweden’s development as a green growth engine.

Naturally any decision on the various courses discussed above is ultimately political, and priorities and perspectives must be weighed against one another. The experiences of other countries show in no uncertain terms that it is easy to make mistakes – but also that clarity can be rewarded and is appreciated by investors who want to see clear, stable rules with strong public support.

Innovation policy for future energy systems – a compilation and analysis of international policy experiments

Serial number: Report 2015:05

Reference number: 2014/182

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