Beyond Emission Pricing – a Renewables Revolution in the True Sense of the Word

The following guest essay was written by Dr. Felix Mormann from Stanford Law School. Dr. Felix’s research focuses on the regulatory and policy challenges of climate change mitigation through sustainable energy solutions. Previously, Dr. Felix worked as a corporate and energy lawyer representing a major wind turbine manufacturer and advising clients on investment opportunities in renewable energy technologies.


Beyond Emission Pricing – a Renewables Revolution in the True Sense of the Word

Yes we can. Two years ago, scientists from Stanford University applied the mantra of President Obama’s 2008 campaign to renewable energy, when they published a plan to meet the world’s entire energy demand with wind, water, and sunlight by 2030 – using today’s technology. Similarly, the International Panel on Climate Change’s new Special Report on Renewable Energy includes scenarios, in which renewables supply 80% of the global energy consumption by 2050. The good news is: We can achieve the transition to a low-carbon renewables-based energy sector with today’s technology.

The bad news is that we are far from realizing the technological potential of renewables, not to mention their environmental and economic benefits. In its 2011 Energy Outlook, the Energy Information Administration forecasts a share of less than 15% for renewables in the U.S. electricity generation mix by 2035. Compared to 2009, the share of renewables is projected to grow by a mere four percentage points, while coal and natural gas are expected to account for more than two thirds of U.S. electricity generation. This meager growth of renewables is all the more surprising, as the EIA’s projections account for the present potpourri of policies promoting renewable energy at the U.S. federal, state, and regional level. So what is wrong with our current policy approach?

Technology is Ready, But Policy Lags

Policy measures in the U.S. and across the globe tend to focus on the cost-competitiveness of wind, solar, and other renewable energy technologies. Feed-in tariffs, production tax credits, and certificate trading schemes all aim to bridge the cost gap between renewable energy technologies and fossil fuel incumbents.

With its focus on generation cost, the present policy landscape tends to ignore regulatory, behavioral, and other obstacles to a timely transition to renewable energy. A closer analysis of the electricity market, for instance, reveals a whole plethora of barriers to the entry of renewable energy technologies. A look at Europe’s two largest economies – France and Germany – reveals just how important these barriers are. Both countries have established promotional policies that offer similar financial incentives for electricity generation from renewables. Yet, Germany has achieved several orders of magnitude greater deployment rates than neighboring France, pointing to other forces at play than generation cost-competitiveness alone.

Policy Focus on Production Cost Ignores Other Barriers

One such force is the challenge to gain access to the grid – not exactly a plug-and-play procedure. If incoming renewables entrepreneurs want to sell their power, they need to connect their generation facilities to the electricity grid. Electricity distribution, however, is a natural monopoly. Without a strong regulatory obligation to grant grid access to incoming players, producers of electricity from renewables are left at the mercy of network operators, who themselves tend to be producers of electricity eager to eliminate competition.

Before renewable energy entrepreneurs can sell (or even generate) any electricity at all, they need to obtain the permits necessary to set up and operate their power plants. The longer the lead-time and the greater the uncertainty of the permit process, the higher the cost of capital as banks and other investors will charge a premium for their financial support. A high level of fragmentation greatly complicates and lengthens the permit process. Large-scale power plant projects, e.g., for coal or nuclear, often receive preferential treatment in the form of a single, comprehensive permit process. In contrast, small-scale power plants, such as most wind and solar projects, seldom benefit from such streamlined processes but, rather, require multiple, often duplicative permit procedures. For instance, acquiring the necessary permits for a wind power plant may involve no less than eight different U.S. government agencies – at the federal level alone.

Planning, Permits, and Protests

A key factor determining the likelihood of success of any permit application is spatial planning. Traditionally, spatial planning takes the form of zoning, reserving specific zones for industrial development, including power plants. Without adjustments, many local zoning regimes would treat your residential roof-top solar PV installation and other micro-generation plants using renewables the same as a large-scale nuclear power plant. Al Gore himself fell victim to such zoning when he first tried to put solar panels on the roof of his Belle Meade home. A national survey among local planners revealed that more than 80% of the surveyed communities did not address, much less accommodate renewable energy technologies in their zoning ordinances. The necessary modifications take time and create costly uncertainty for project developers.

Many local authorities, while generally supportive of a low-carbon economy based on renewables, are reluctant to open their communities to the siting of wind turbines and other renewables plants whose aesthetic value is disputed. This “not-in-my-backyard” movement has already gained strong support in the U.S. as evidenced by the recent opposition to wind power projects in Vermont, Wisconsin, Wyoming, and the Nantucket Sound. Local population, industry, and administration require time to learn how to deal with new technology. In the meantime, renewable energy technologies struggle to overcome issues of local acceptability.

These are just a few of the many obstacles to renewables large-scale deployment. The ongoing debate about the introduction of emission pricing at the federal level and similar state initiatives suggest that a carbon tax or a cap-and-trade regime may resolve the present policy impasse. Indeed, most economists praise emission pricing as the most efficient means of promoting abatement technologies such as renewables. Just like feed-in tariffs, tax incentives and other existing policy measures, however, emission pricing would primarily address the issue of renewables’ cost-competitiveness. The aforementioned and other barriers to the large-scale deployment of renewable energy technologies would remain unresolved.

Emission Pricing – Remedy and Risk

Worse yet, emission pricing exacerbates the risk of replacing our current fossil fuel path-dependency with another. The ensuing market pull toward renewables would likely result in a run for the current least-cost renewables technologies, such as hydro and onshore wind. As the market’s invisible hand grasps for the least-cost short-term solutions, it may well ignore renewables technologies that could prove more cost-efficient in the long term. The transport sector provides an instructive example of the risks involved in prematurely narrowing climate change mitigation efforts to a single technology: The recent focus on biofuels derived from corn, sugar cane, and other food crops, praised by some as the transport sector’s energy panacea, resulted in a scarcity of crops driving food prices up to a level that threatened to bring famine to many developing countries.

Don’t get me wrong: Emission pricing has a role to play in successful climate change mitigation and promoting renewable energy. But we must not overestimate that role or concentrate our efforts solely on one, albeit a very important policy approach. Rather, our policies need to be as diverse as the obstacles they seek to overcome. It is time we embraced this policy challenge and viewed it as an opportunity. After all, it is considerably cheaper to eliminate obstacles, e.g., by regulatory intervention, instead of compensating for them, an aspect of crucial importance in these times of budget austerity.

The necessary institutional and regulatory reforms are so far-reaching that we need a renewables revolution in the true sense of the word. The current trend toward global warming can only be turned around if the economic and legal, the engineering and scientific communities, as well as educators, marketers and the infamous citizen on Main Street join forces. Following in the tradition of the Industrial Revolution, the Renewables Revolution will have to permeate and engage virtually all sectors of society.

Want to know more about what’s keeping us from realizing the technological potential of renewable energy? How the American defense and health sector and Europe’s renewables experience can guide the U.S. on the road to renewables? Then download my full paper for free here.