Breaking path dependence in the energy sector – the need for technology-specific policies

1. Breaking path dependence in the energy sector – the need for technology-specific policies Staffan Jacobsson Environmental Systems Analysis, Chalmers and RIDE

2. Outline • The scale of the climate and transformation challenge • Why technology-specific policies? • A useful framework for identifying the key policy issues • Examples from Sweden (wind and biopower)

3. The scale of the climate and transformation challenge • The scale of the environmental problem • CO2 reduction by 80% • Time frame of meeting the climate challenge • E.g. stabilise at 500 ppm implies reduction of 50% by 2050 • Power sector needs to be virtually decarbonised 2050 • 40 years is a short time period • Build up of a supply capacity and developing new technology takes decades, additional decades for replacing the incumbent technology • Steam ships • Mobile telephony

4. The scale of the climate and transformation challenge, cont • The scale of the power sector • 6,117 TWh (1973) - 17,450 (2004) – 35,000? (2050) • Implies a need to add capacity to supply about 29,000 carbon neutral TWh by 2050 • Wind and solar power • Capacity increases by 46 and 430 times give • 7,149 and 2,835 TWh by 2050 (one third of demand for carbon neutral power) • Each of these involve investment levels on par with the telecommunication sector in the OECD (mobile communication, internet etc) • 2025: investment in solar power: 137 billion USD • 2030: investment in wind power: 114 billion USD • 2003: investment in telecommunication (OECD): 130 billion USD

5. Why technology-specific policies? • The size of the sector implies that policy must foster a range of carbon neutral technologies • The time scale of the climate challenge and of the learning processes, including uncertainties, implies that these need to be fostered in parallel and not sequence • Cluster of technologies will vary in cost and in nature of learning processes and bottlenecks • The policy challenge is to identify and act upon a varied set of technology- and time specific challenges

6. A useful framework identifying the key policy issues • Intervention is legitimate but how can policy makers find a guide to the key policy issues? • Broader rationale for policy intervention: “Failures” in markets, networks, institutions or (innovation) system weaknesses in structural terms • But how identify system weaknesses? • Little guidance in ‘IS and Policy literature’ • Generic vs. TIS-specific? • Propose functional analysis of TIS as a way to identify system weaknesses

7. Some clarifications • A TIS is primarily an analytical construct. It does not imply that • all actors in a particular system are consciously working together towards the same goal, although some may be, or • that they necessarily share the same goals, or • that conflicts and tensions are not part and parcel of the dynamics of innovation systems, or • that the system in focus has to exist in reality as a full-fledged one, or that it cannot be emerging, with very weak interaction between components, or • that we see the system’s components as directed or orchestrated by any specific actors but we see ‘system builders’ as central actors, or • that there is no or little room for agency

8. Firms in the whole supply chain Operate on markets (product/input) Other organisations Government bodies, industry and bridging organisations, interest organisations, universities etc. Political networks Advocacy coalitions, lobbying Learning networks User-supplier, related firms, competitors (direct or via common suppliers etc.), university-industry Institutions Policy and regulatory framework, culture (norms), beliefs (cognitition) about problem agendas, ways to do business etc. The Structural Components of a TIS

9. Structural dynamics: Three key processes • Entry of firms and other organisations • Bring resources, fill gaps in the value chain, open new applications, forms a ’mass’ and DoL • Formation of networks • Impact on resource flows, opportunities, beliefs and advocacy • Institutional alignment • Heart of the process • Advocates compete to gain influence over institutions

10. High uncertainty facing investors Technologies, markets, regulation The process lasts for decades Wind turbines in Germany Organic milk in Sweden Cumulative process of small changes forming a new entity Invisible and frustrating With the elements in place, the TIS can shift to a growth phase Any change in components may trigger a ”change in gear” Positive feedbacks drive the system in a self-reinforcing way The goal of policy is to enable this to occur on a broad scale Structural dynamics: Features of a ”formative” phase

11. From structure to functions • Can trace evolution of structure but can’t assess the ”goodness” of a structure • Entry of firms • Formation of networks • Institutional alignment • Guiding policy makers requires finding weaknesses in a TIS • Need intermediate variables to explain causations • ’IS and Policy’ literature unsystematic and ad hoc • Introduce a second level of key processes: • Analyse and assess ”functions” that link structure to performance • Key processes extracted from a multidisciplinary literature base and from experimental empirical work

12. Proposed set of functions (key processes at the functional level) • Knowledge development and diffusion • Influence on the direction of search • Entrepreneurial experimentation • Materialisation • Market formation • Resource mobilisation • Legitimation • Development of positive externalities (”free utilities”)

13. Driving forces and blocking mechanisms • Endogenous vs. exogenous forces of change: • Endogenous: cumulative causation (Myrdal) • Exogenous: regime (destabilisation, Raven 2005), landscape, SIS, NIS • Examples of mechanisms blocking functions: • Exogenous, e.g. highly organised incumbents hinder legitimation and institutional alignment; ‘sailing ship’ effects (i.e. development of competing technologies) blocks ‘influence the direction of search”. • Endogenous, e.g. poorly developed learning or political networks blocks ‘knowledge diffusion’ and ‘legitimation’. • Policy issues for each TIS can be specified in terms of these mechanisms • Examples from wind and biopower in Sweden

14. Conflicting interests • Access to raw materials • Decentralised vs. centralised • Nuclear power trauma Inducement mechanisms Blockingmechanisms 1990s R&D funds F1: Knowledge development & diffusion Relative cost Investment subsidies etc. F2: Entrepreneurial experimentation Regulatory uncertainty F3: Materialisation F4: Influence on the direction of search Green demand from some municipal utilities F5: Market formation F6: Resource mobilisation CO2 tax F7: Legitimation F8: Development of positive externalities

15. Electricity price increase • European integration • Tradable emission schemes • Deregulation Inducement mechanisms Blockingmechanisms 2000s R&D funds F1: Knowledge development & diffusion Institutional misalignment F2: Entrepreneurial experimentation Climate change debate • Permit procedures (wind) • Inherent features of green certificates(mainly wind) F3: Materialisation Green certificates F4: Influence on the direction of search Conflicting interests F5: Market formation • Access to raw materials (bio power) • Fossil gas competition (bio power) • Nuclear power trauma (wind) • Local conflicts of interest (wind) F6: Resource mobilisation F7: Legitimation F8: Development of positive externalities

16. Conclusions • The scale of the transformation challenge is formidable • We need to foster the development and diffusion of a range of carbon neutral technologies simultaneously • Technology-specific policies are required • Have presented one framework that appears to work to identify the technology specific policy challenges