Varying
Currents
Why do certain technologies take off in
some parts of the world, but not in others?
Regulatory systems shape the energy mix
by setting rules, incentives, and subsidies.
Text: Swati Prasad and Christopher Findlay Illustration: Anton Hallman
C
rossing the border into Germany, one of the first things one
­notices is the huge number of
rooftops covered in photovoltaic (PV)
panels. Why did solar power take off
in such a big way here, compared to
neighboring countries with similarly
sunny conditions? The same question
might be asked about the popularity
of combined cycle power plants in
the Middle East, or the rapid growth
of high-voltage direct current (HVDC)
transmission in India and China.
Certainly, geography plays a role
in determining the success of a given energy technology in specific
regions. Wind conditions, coastlines,
and population density determine
a preference for on- or offshore wind
farms. HVDC is helpful in bridging
long distances between generation
and load centers with minimal transmission losses. Ultimately, though,
the adoption and market share of a
given technology depends to a large
extent on the regulators, whose job
is to translate government policy into
laws and market instruments.
What do they aim to achieve? Regulatory intervention may be designed
to foster innovation or help bring a
proven technology to market; it may
be motivated by economic considerations or the wish to achieve climate
goals. It involves a broad array of
­factors including tariff regimes and
environmental regulations both at
the global and at the national levels.
Can Renewables Sustain
Themselves?
In the case of renewable energy, government intervention has had a
­massive impact on the spread of technologies and the resulting changes
in energy markets. Take those PV panels in Germany, for example. A succession of regulatory frameworks over u
Living Energy · No. 12 | July 2015 15
Energy Efficiency
the past two decades has stimulated
research and development of solar
energy technologies and offered
­incentives for private households to
purchase the hardware. And even as
solar panels were flying off the
shelves domestically, they were also
being exported in ever-greater numbers: In 2011 and 2012, the German
PV business accounted for roughly
50 percent of the global market.
In the meantime, however, that economic success story has become a cautionary tale about the perils of overdependence on government subsidies.
­ enewable
Changes to Germany’s R
­Energy Act and tighter governmental
regulations have hit the industry hard,
and the market e
­ xperienced a sustained loss of 75 percent in value last
year. Facing tough competition from
Asian producers and a “tough-love”
approach from government r­ egulators,
it remains to be seen whether the
­German PV ­industry can pull through,
even as the technology becomes
more and more popular.
The US Approach:
Tax Credits
In the USA, where government regulation is often viewed with suspicion,
there is a great deal of pressure on
producers of green energy to bring
costs down. Regulatory support for
renewable technologies takes the
form of the Production Tax Credit
(PTC), an income tax credit that currently stands at US$0.023 per kilowatt-hour. This indirect subsidy has
set off successive waves of investment
16 Living Energy · No. 12 | July 2015
Energy Efficiency
in onshore wind across the USA. But
the PTC is not linked to any specific
technology and can also be earned
with geothermal, solar, and biomass
energy or hydropower, for example.
All renewable technologies depend
on long-term guaranteed financial
support. Whether or not investments
are made depends on direct or indirect subsidies; and in several Euro­
pean countries, investments in renewable energy technologies are
stimulated and made viable by feedin tariffs (FiTs). Even if no direct subsidies were on offer anymore, the
regulatory mechanisms of preferred
feed-in and compensation for throttling would remain in place. But
­experts agree that these renewable
energy technologies must also
­become even more competitive and
hold their own against conventional
technologies at some point.
Fostering Innovation
The development of offshore wind in
Europe is a good example of how
the interplay between regulation and
market forces determines the adoption of a new technology. Energy companies have been investing h
­ eavily
in offshore wind, but also depend heavi­
ly on support from governments.
At the same time, they must now compete with cheaper onshore wind
farms. That creates pressure to bring
down prices.
One way of achieving that is through
innovation that makes the technology
more affordable and competitive.
­Siemens has consistently sought to
bring down costs, e.g., through better
parts, materials, and software, by
­improving blade and gearbox design,
or by reducing the effort of service
and maintenance. In Europe, S
­ iemens
aims to lead the cost-down of electricity produced from offshore wind
farms to around €0.095 per kilowatthour by 2020.
Another example of regulation fostering innovation is the US state of
­California, where new rules require
the state’s big three investor-owned
utilities to add 1.3 gigawatts of energy
storage to their grids by 2020. Under
this mandate, the utilities can own
no more than half of the storage assets
they procure. This has opened the path
for a massive growth of merchant storage, customer-owned energy assets,
and other arrangements. The regulation creates three separate classes of
storage at the transmission-connected,
distribution-connected, and customerside levels. How utilities and third
parties will manage the interplay of
ownership and operation of those distinct assets remains to be seen.
Nuclear Energy: a Political
Choice
It isn’t only renewables that depend
on government support, though,
as the case of nuclear energy shows.
While some national governments
support this technology and others do
not, one thing is clear: Nuclear energy
is far from being competitive in its
own right, as it is very expensive compared to other options. Government
support for nuclear power is
therefore always linked to other ulterior motives.
In Japan, a hotly contested debate is
currently under way over the future
role of nuclear power in the wake
of the Fukushima disaster. Its fallout
has prompted many citizens to challenge the previously unquestioning
reliance on nuclear power as a way of
compensating for the country’s lack
of natural resources.
In the UK, the government’s subsidies
for this technology are part of an allout effort to achieve the extremely
ambitious goal of reducing CO2 emissions by 20 to 40 megatonnes per
year until 2030. This target requires
pulling all the stops in low-emissions
power generation, including nuclear.
The price is high, though. The cost of
generating nuclear energy in the UK
stands at about €0.09 to €0.10 per
kilowatt-hour, combined with an FiT
that currently stands at €0.13 per
kilowatt-hour – significantly higher
than the cost of renewables.
Regulating Conventional
Power
Investments in conventional generation methods, including from fossil
fuel sources, are also determined by
market instruments and governmental or supragovernmental policies;
witness, for instance, the ongoing debate over energy-only markets (where
peak prices determine the cost of energy) versus capacity markets or subsidies for strategic reserves (where
producers are compensated for maintaining a generation capability that
can be activated when needed). Here,
too, rules and regulations often make
the difference in the viability of a given technology.
The EU’s carbon pricing policy is
­another important regulatory factor:
The European Union Emissions Trading System (EU ETS), aimed at reducing carbon emissions, is based on
­allowances and credits that can be
traded. In the UK, this scheme is complemented by a carbon price floor
­intended to stimulate investment in
low-carbon generation and capacity
maintenance; it is at least partly
­responsible for the recent strong interest in gas-powered plants. In
­Germany, on the other hand, an overreliance on market forces has made
the operation of conventional plants
economically unattractive.
CCPP: Counting the Ways
Elsewhere, combined cycle power
plants (CCPPs) are taking off in a big
way, and for a variety of reasons. For
instance, China – which relies on its
huge coal reserves for 80 percent of
its power generation – is exploring
gas-fired power generation due to
­environmental concerns in its urban
areas. Moreover, by diversifying its
energy system, China wants to add
­another pillar to its power generation
capacities.
The highly efficient CCPPs are also
gaining popularity in the Middle East,
but for entirely different reasons
than in China. In the OPEC countries,
the main motivation is to save oil for
exports by using gas for domestic
electricity consumption. Japan, on
the other hand, is adopting CCPPs to
reduce its dependence on nuclear
­energy, even though it has to import
liquefied natural gas for the gas-fired
plants. S
­ ingapore is adopting the
technology to become more self-reliant in energy. US companies, for their
part, are investing in CCPPs to make
better use of the large deposits of natural gas found trapped between shale
formations.
Blunt Weapon or Sharp Tool?
Clearly, regulatory frameworks are
highly influential and in some cases
indispensable instruments for fostering innovation and bringing ideas to
market maturity. The success or failure of a given technology depends on
political priorities and economic
­considerations as much as on topography and other external conditions.
Much depends on whether governments wield the instrument of regulation as a blunt weapon, or use it as
a sharp tool that is tailored to the
constantly changing realities of a globalized market. As the examples
above show, legislative frameworks
can be crucial for the emergence of
entire new business sectors. They can
also determine the success or failure
of policies and make the difference in
achieving specific economic goals.
For companies like ­Siemens that are
in the business of technological innovation, the goal is clear – every power
generation technique must sooner
or later stand on its own feet and be
viable without regulatory support. p
Swati Prasad is a freelance business journalist
who lives and works in India as an editor and
correspondent.
Christopher Findlay is a journalist living in
­Zurich, Switzerland. He writes on science and
politics.