An Institutional Analysis of the Transition

to

Renewable Energy

Jim Goetz Nora Lovell Grant B. MacIntyre Paswel Phiri Jong O Sun Biyayo Bamidaaye Sinon Isaiah L Sutton NTRES 431 Environmental Strategies 14 December 2004

Table of Contents Section Page Introduction 3 Brief History of Energy 4 Real Cost of Energy 7 Alternatives to the Energy Status Quo 9 The Role of Non-Governmental Organizations 10 Togo Case Study: The Perspective of Biyayo Bamidaaye Sinon 10 Light Up the World Case Study 13 Philips Lighting Case Study 15 The Market: Market Shifts for Renewable Energy 16 Catalysts for Market Change 17 The Future of the Market and the Shift Towards Renewables 18 Shell Case Study 19 The Role of Government 21 Government Policy for Renewable Energy 21 Tax Shifting Case Study 23 Obligation and Trading Case Study 24 The Bush Administration Energy Plan 25 Conclusion 26 References Cited 28 List of Figures Figure 1. Historic Oil Prices 5 Figure 2. Oil and Gas Worldwide Production 6 Figure 3. Primary Energy Consumption Per Capita (BP 2004) 7 Figure 4. The Sustainability Lens 19 List of Tables Table 1. Policy Instruments for Renewable Energy 22

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Introduction

Energy is an essential resource for people in developing and developed nations alike.

Throughout history, the energy needs of people have evolved and intensified over time. With the

potentially severe consequences of global warming on the not-so-distant horizon and the human

population rapidly expanding as conventional energy reserves dwindle, a worldwide shift

towards more sustainable forms of energy will occur whether people plan for it or not. The

question is whether the efforts of society's chief coordinating institutions - government, market

and civil society organizations - will be sufficient to provide a soft landing when conventional

energy sources eventually are depleted. In the context of global energy, the shift from carbon-

based fossil fuels to more sustainable systems must happen via institutional reform. Change can

come from three sources: government policy, market initiatives or community-based projects. In

order for the global energy sector to shift towards more sustainable, renewable energy sources,

institutions will have to combine efforts and goals for a more stable, equitable energy supply,

and a healthier environment.

Around the globe the state of energy is changing. Energy demand is growing at the same time

global scarcity of these resources looms. The nature of energy demand is also changing. No

longer do people require just the service that energy provides, but growing numbers of

consumers also demand that the service be provided in an ecologically friendly way. This

consumer preference is causing energy companies to reevaluate their operational standards. The

standards for energy companies are also being questioned and criticized by governments and

NGO’s as these groups attempt to strengthen environmental standards. Finally energy

companies are reinventing the ways in which they operate in order to remain efficient in

competitive markets. In response to these factors, governments, communities, NGOs, and

markets are catalyzing the shifts today and from the status quo to alternate means of energy

production.

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A Brief History of Energy

Much of the history of human civilization is a chronicle of the cultural and technological

advances that have allowed people to use energy from sources other than the sweat of one’s own

brow. The earliest sources were wood for heat, as early as 250,000 BP (James 1989) and slavery

for labor. Other early advances around 3000BP or earlier included using draft animals for

transport and agriculture, wind and water for milling grain, and sail power for transport.

Ushering in the industrial age in Britain in the 1700s, was the large-scale use of coal for steam

engines. At the turn of the 20 century use of petroleum expanded, and more recently, there has

been expanded exploitation of natural gas for transport and generating electricity (Smil 1994).

This trend towards ever more centralized energy generation has culminated in the ostensible

technological pinnacle of energy generation, splitting the atom in nuclear fission reactors;

meanwhile nuclear fission remains an unattainable dream.

th

Today in industrial nations, energy use in daily life is so pervasive that it is barely noticed,

except perhaps when winter heating bills arrive, or by its conspicuous absence, such as during

the large-scale blackout that crippled much of the northeastern US in 2004. Indeed, every

commercial good we consume, (live in, drive, eat, wear, sit on, etc.) requires energy to produce,

package, transport, sell, use, and ultimately to dispose of. Heavy reliance of industrial society on

energy has been enabled by the high energy content and relatively low market cost of fossil fuels

from which most of this energy is derived. Figure 1 below shows historic oil prices , with

conspicuous spikes in 1973 as a result of the OPEC’s oil embargo as a reaction to US support of

Israel in the Yom Kippur war and in the 1980’s due to interruption in oil supply from Iran and

Iraq due to political turmoil and war between those two countries.

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Figure 1. Historic Oil Prices (BP 2004)

Oil production peaked in the US in 1970, and based on the peak oil model, it is expected to peak

globally as early as 2010. Passing peak oil production means that we will have consumed as

much as half of the total oil reserve (Aleklett 2004). Having already extracted the cheapest half

of reserves, the most expensive half of reserves will remain, and prices will climb. Annual

consumption has exceeded discoveries of new reserves since the early 1980s. At current rates of

exploitation we have approximately 34 years of oil left. However, as consumption continues to

rise globally, the end of the oil era may arrive in 25 years or less (Shaker al-Molsi 2004). Figure

2 shows production peaks in several important global oil-producing areas (APSO 2004). The

peak oil model is strongly contended by some (e.g. Lynch 2004) who dismiss the Hebbert model

on which the peak oil model is based. This notwithstanding, the main difference in opinion is

when, not if oil resources will be depleted.

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Figure 2. Oil and Gas Worldwide Production (USDSG 2004)

Globally, there are sizeable inequalities regarding access to and use of energy. For example,

about a third of the world’s population has only wood or other biomass for energy, while another

third has only limited access to modern energy. Industrialized countries use a disproportionate

amount of energy, with the US being the most extreme example. Despite having only 4.5%

global population and only 2% of global oil reserves the US consumes about 25% of world oil

production (WWI 2004), amounting to 20 million barrels per day. The world’s richest people

consume about 25 times more energy than the poorest, with US citizens consuming about

fivefold more than the average global citizen (WWI 2004). After enjoying a refreshing hot

morning shower, a consumer has already used more energy than a third of the world’s population

will use that entire day (Wightman, pers. com). The map in Figure 3 shows patterns of global

primary energy consumption per capita (BP 2004).

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Figure 3. Primary Energy Consumption Per Capita (BP 2004)

Despite these current differences, the global energy use landscape is changing dramatically.

Consumption is rising fastest in the developing world, for example, where petroleum use has

quadrupled since 1970, and China now leads the world in coal consumption (WWI 2004). This

global increase in energy use will have far-reaching effects on supply and demand. Although

energy intensity (energy input per dollar of output) of the global economy is declining, these

improvements in energy efficiency are more than cancelled out by increased consumption due to

population growth and greater affluence in developing countries (WWI 2004).

Real Cost Of Energy

Profligate consumption of convenient, abundant, cheap fossil fuel and nuclear energy, is

however, not without consequences that pervade every facet of society. Energy from fossil and

nuclear fuel may be cheap on the market, but the external costs are high. Human and

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environmental health alike suffer greatly due to pollutants from burning fossil fuels to produce

energy. Emissions of sulfur and nitrogen compounds degrade air and water quality by

contributing to smog and acid precipitation. CO2 emissions from combustion of fossil fuels

contribute greatly to global warming. Environmental, human and local economic health suffer

from catastrophic fuel spills such as the Exxon Valdez which ran aground in 1989 and spilled 11

million gallons of oil (EVOS 2004), and from grave nuclear reactor incidents such as at

Chernobyl in 1986.

Deeply entrenched reliance on fossil fuels is also a burden on the economy, due to costly direct

and indirect subsidies that promote the energy status quo (EIA 1992). Price spikes (see Figure 2)

due to interrupted supply and inelastic demand have cost billions, if not trillions of dollars due to

subsequent economic recession, lost economic growth, unemployment and inflation (Carlsnaes

1982). Additionally, there are risks to food and national security, whose monetary cost is

difficult to quantify. For example, the average US citizen requires the equivalent of 400 gallons

of oil per year for food production, preparation and transport (Pimentel et al. 1994). Without

fossil fuel inputs, current food production could not be maintained using current methods.

Further threats to national security are evident in the vulnerability of nuclear power stations to

terrorist attack.

Currently, 55% of the oil consumed in the US is imported, much of that from unstable and

undemocratic regimes. Due chiefly to the importance of oil reserves to the US economy, costly

covert and military engagement critical to ensuring the flow of oil, in particular the Middle East,

span decades (Carlsnaes 1988). The current conflict in Iraq alone, which is arguably a war to

secure oil reserves, costs US taxpayers in excess of 1 billion dollars day (NPP 2004). The risk to

the US economy, food and national security is clear if one considers that of the major oil

exporting nations, only Norway has a stable, representative government. Despite these critical

vulnerabilities, corporate and government policies and personal patterns of consumption in the

US are such that the Department of Energy projects that imports will rise to 70% of our supply

by 2025 (NRDC 2004).

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Alternatives To The Energy Status Quo

As an alternative to the high environmental, human and economic costs of the energy status quo

which is based on ever expanding conventional energy supply, in particular, many environmental

and social groups promote expanded efforts both to conserve energy, and a large-scale shift to

alternative means of energy generation known collectively as "renewables."Renewables do not

rely on limited fossil fuels, and produce little or no pollution, and are decentralized, making them

attractive for remote, underserved locations. Passive solar construction, solar photovoltaic, wind,

and renewable biomass are the chief alternative energy technologies involved. The expanded use

of these technologies has been hindered on the one hand by decades of fossil fuel prices kept

artificially low by government policies (Carlsnaes 1988) and on the other hand, (until recently)

higher unit cost of alternative energy. Now that market prices of alternative, green energy

sources have decreased to levels that are more competitive with fossil and nuclear fuels, they are

becoming more attractive if the accounting considers the external costs and risks of conventional

energy dependence.

People’s choices for energy use are affected by, income, climate, resource availability, as well as

cost and knowledge of alternatives (e.g. green power). Of these, availability and cost are the two

that can be most directly influenced by the interaction between corporate, government and NGO

policies, incentives and initiatives. Through means such as taxes, subsidies and regulation,

governments lay the ground rules for corporations and NGOs to affect what choices are available

to consumers. The following sections review the roles of NGO, governmental and market

institutions in promoting a shift to alternative, renewable energy sources.

The Role of Non-Governmental Organizations

“Because of the important role of fossil fuels in the build up of greenhouse gases in the

atmosphere (the energy sector produces about half the global emissions of green-house gases)

and concomitant climate change concerns, renewables constitute an important option for

mitigating and abating the emissions of greenhouse gases (Socolow, 1992). Global warming is a

looming reality for developed and developing nations alike. In order to prevent climatic disaster,

environmental devastation, the loss of biodiversity and high human costs; a shift to renewable

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energies can reduce global consumption of fossil fuels and thus greenhouse gases. In the United

States a mere 6% of the nation’s energy is derived from renewable sources because of the

opposition of vested interests, path dependency, market saturation and the sunk cost of high

infrastructure investment (IEA 2003). More than two billion people live without electricity,

almost all of them in developing countries (Winrock 2004). Without a change in the energy

status quo, it is highly unlikely that these people will ever be connected to an electrical grid.

Non-renewable energy sources based on petroleum, nuclear or coal are highly centralized and

require intensive capital investment and damage the environment. Alternatively, renewable

energies are easily distributive and sustainable, thus making wind, hydroelectric or solar

excellent options for developing nations. Non-governmental organizations (NGOs) have been

proven to be effective, even critical, catalysts for the shift towards renewable energy sources in

nations that lack functional market and governmental institutions.

Togo Case Study: The Perspective of Biyayo Bamidaaye Sinon

Africa, especially rural areas, depend heavily on biomass for energy. The use of biomass as a

fuel is harmful to the environment and leads to deforestation and erosion which diminishes

agricultural productivity. The main biomass fuel is charcoal, made from the burning wood

covered by soil and collected it turns to ash. The people who cut down trees to make their own

charcoal do not replant the trees they fell because there is no incentive to do so. A tragedy of the

commons situation arises because of a lack of property rights related to the trees. People can

simply collect trees from elsewhere rather than maintain a forest for the future. The use of

biomass as fuel thus degrades the environment because the resultant deforestation causes erosion

and drinking water contamination, which can lead to desertification, which breaks the

equilibrium of ecosystems and decreases the frequency of rain. It also contributes to the

emission of CO2, a greenhouse gas.

African nations do not have the means to mitigate this deterioration. There is a strong argument

to promote other forms of energy, such as solar, water and wind, which are environmentally

friendly and suited for Africa. As a matter of fact, Africa has abundant sunlight all year and

consistent winds. Many regions are well watered. The opportunities that exist for renewable

energies in Togo are not realized because political leaders are more interested in filling up their

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own pockets more than investing the money into the country and its people. Revenue collected

by the government is not distributed to the people via transfer payments, national infrastructure

or public works. Instead, the money goes to buy the new minister 17 air conditioners for one of

his many houses. The President of Togo has been so for the past 37 years! Political offices

rarely change and there are an entrenched minority of incumbents who benefit from the status

quo thus blocking any and all attempts for reform. The people in power are those who benefit

financially from the dire economic state of Togo. Therefore, those people in the best position to

bring about positive change will never allow such reform to happen because they will not

benefit.

Economic conditions fail to improve because the market is perverse and the government is

corrupt. Private companies from foreign nations are thus reluctant to set up business in Togo

because of the corruption, political instability and dysfunctional market system. In Togo, the

military is the government and the President is a member of the military. The new minister

signed a decree attempting to control the making of charcoal. This new minister wanted to

create a market for charcoal thus enabling only a few suppliers to produce this necessary fuel

source thus driving up the price of charcoal and most likely the profits of a beneficiary in the

charcoal making industry. However this decree did not take effect because soldiers opposed the

restrictions on charcoal making, fearing that their wives would have trouble affording fuel.

In developed and developing nations alike, fuel is central to the daily activities of people’s lives.

Every day, hours are devoted to the time-consuming, labor-intensive task of collecting trees to

make charcoal for fuel. Economic productivity is inhibited because the labor force is small in

comparison to what could be gained from decreased domestic work. Additionally, labor

productivity is minimal because of the lack of capital that is available for investment. The use of

charcoal as a fuel source is clearly not the best option for the rural people in Togo, but is the only

option. Cook stoves are available but are far too expensive. Furthermore, the bottled gas that is

required to fuel the cook stove is extremely expensive. However, natural gas is extremely cheap

in Togo and gas cans are refillable. What makes the purchase of a cook stove unfeasible is the

initial capital investment required to purchase it and the gas can. Many people would buy a cook

stove if it were affordable but there is not even the possibility of credit or installment payments

because the do not exist in Togo. Commercial businesses do not allow people to take out loans

on the purchase of expensive consumer goods. If people wanted to buy such an item, they would

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have to get a loan from the bank. Bank loans are extremely difficult to obtain and economically

impractical because of high interest rates. If people in Togo could afford to buy cook stoves, this

would ease deforestation, erosion, and respiratory health would improve along with the quality

of life. With less time devoted to the making of fuel, an increased labor force could stimulate

economic growth as people would be able to work and thus contribute to the production of goods

and services.

This Togo case study shows that a simple, minor shift towards more efficient energy can

improve the quality of people’s lives in developing nations while preventing environmental

degradation and the emission of greenhouse gases. Renewables constitute a reliable and

ecologically sound long-term solution to the inadequate provision of energy that is common in

most of the world. Conventional energy is centralized and requires considerable infrastructure

for distribution In developing nations, most people live in isolated villages which makes the

extension of power to remote areas cost prohibitive. Renewable energies are decentralized

options and thus a more competitive method of delivering energy to the rural poor. NGOs have

the institutional capacity to disseminate such technologies using their existing infrastructure.

Nations that are most lacking in institutional structure are the developing nations in which people

are oppressed by corrupt governments, while suffering from poverty because of economic

failure. Those countries with the most need represent the greatest opportunity for reform and a

shift towards renewable energy sources with the help of NGOs.

Light Up the World Case Study

Light Up the World Foundation (LUTW) is an international humanitarian organization dedicated

to illuminating the lives of the world’s poor. White light emitting diodes (WLED) are efficient,

durable, sustainable and a cost effective way to supply power to people far from the distribution

grid. Tiny WLEDs fabricated from layers of silicon and seeded with atoms of phosphorous work

by exploiting the quirky laws of quantum physics to transform electrons directly into photons of

light. A cheap plastic reflector focuses the light into a conical beam. Solar-powered

photovoltaic cells provide the energy for free. WLEDs have an estimated life of 100,000 hours

(over 40 years) while the system itself is expected to last 10-20 years. The goal of LUTW goal is

to replace kerosene lamps with WLED lighting. Kerosene lamps are the primary source of

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energy in developing countries representing, costing approximately 50 dollars or 25% of a

typical family’s annual income. The fumes affect respiratory systems, increasing the

susceptibility of millions of people to influenza, pneumonia and other respiratory illness. The

also are the cause of over 200,000 deaths from fires every year, contribute to acid rain and green

house gases while inefficiently converting only 65% of its energy to light. Families could buy

WLED lighting with only two years' cost of kerosene, and the system would last at least 10

years. LUTW promotes the diffusion of this technology by establishing micro-credit purchasing

schemes and innovative lending groups. The success of LUTW lighting is demonstrated in each

and every of its case studies. The group hopes only to increase its sustainable distribution of

white light emitting diodes to the rural poor of developing nations.

The technology for affordable and effective renewable energy is finally available for

dissemination by NGOs. These groups are already well-positioned in countries around the world

to invest in assistance and directly equip recipient countries with tools for eventual self-

management of their human, natural and financial capital. NGOs serve as the most effective

means of bringing about renewable energy reform because their flexibility to act as an

institutional nexus, organizing the needs of local peoples, the environment, the market and the

government to maximize benefits to all. The extension work, training, capacity building and

education of local people is what ensures the long-term maintenance of NGO goals. Links

between various NGOs can foster information exchange, diffusion and infrastructure. NGOs can

potentially improve market conditions via microeconomic reform with innovative financial

mechanisms. In Togo for example, commercial institutions could be instructed on how to create

crediting policies with reasonable interest rates. The very success of LUTW is based on their

innovative microeconomic lending designs. The successful achievement of a NGOs’ goals

depends on its ability to integrate all institutional actors by providing the main coordinating and

organizational services.

Shifts towards renewable energy in developing nations will likely result in macroeconomic

improvements for individual countries and the global economy as a whole. As shown in the

Phillips case study (below) among others, at the institutional level, business and governments

alike are beginning to realize that the centralized energy model is becoming increasingly

obsolete and that renewables are becoming the norm, not the exception. A shift towards more

renewable energies in the developing world will not only improve the lives of individuals in

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developing nations and protect the environment for future generations but also bring about

significant macroeconomic reform. Oil import dependency is extremely high in developing

countries, and it drains valuable hard currency (WTLU Evan Mills, 2002). As much as 90% of

the export earnings of some developing countries are used to pay for imported oil, most of it for

power generation (SELF newsletter, 2002 WLUT). A reduction in this value by even a few

percentage points could divert funding towards beneficial national infrastructure, education or

health care (Karakezi 1999). Nations that become energy self-sufficient instead of relying on

imports from developed countries will be most able to rise above their debased economic

positions. The economies of most developing nations are fragile and indebted. This makes

government and private capital investments into large-scale energy enterprises nearly impossible.

Renewable energies that don’t require high initial investments can thus more effectively provide

for the people of developing nations. Furthermore, renewable energies are far more labor

intensive in comparison to capital intensive fossil fuel based energy sources which can thus

employ the highly available and relatively cheap labor force that exists in most developing

nations.

Philips Lighting Case Study

The nexus between NGOs and the Market could be viewed on a continuum time scale,

respectively. For example Phillips Lighting is a product subdivision within Phillips Electronics

that manufactures lamps and luminaries. “The corner stone of Phillips Lighting Environmental

Management is the maintenance of the right balance between ecological impact and economic

growth.” Phillips has recently created a solar powered highly efficient bulb that it hopes to sell

in developing nations. The philosophy behind their innovative business venture is best explained

in the work of C.K. Prahaland, professor of corporate strategy at the University of Michigan

Business School, “The Fortune at the Bottom of the Pyramid.” Phillips expects extraordinary

profits from the sales of its lighting system because of the sheer size of their target market. An

estimated 4 billion people (2/3 of the world’s population) are currently unserved. The success of

Phillips’ new product “will have to prove its worth in the marketplace.” In order to evaluate the

feasibility of their goals, Phillips could turn to NGOs that have already laid the groundwork and

infrastructure for market-based interaction. The success of NGOs in accomplishing their

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humanitarian goals could influence business ventures and capital investment into developing

nations.

The Role Of The Market

Market Shifts for Renewable Energy

There are powerful forces such as demographics, incomes, market liberalization and demand that

will shape the socio-economic context for energy. Recent UN population forecasts point to 8.5

billion people by 2050 and a maximum global population of 10 billion by 2075 (UNFPA 2004)

Populations are ageing. Even in developing countries with young populations, age profiles by

2050 should resemble the Organization for Economic Co-Operation and Development (OCED)

today. Over 80% of people are likely to live in urban environments by 2050 (UNFPA 2004).

Demographic uncertainties are unlikely to be fundamental in shaping energy developments.

Even modest annual economic growth of 3.5% over the next 50 years (less than what has

occurred in the past half century) would bring widespread affluence, hopefully raising global

average per capita incomes above $20,000 by 2050 (World Bank 2003). Although factors such

as income, demographics and population growth will determine the market for renewable

energies, the transition towards renewables will be a result of consumer demand. Fossil fuel

scarcity, increased production costs, pollution, deteriorating health, the threat of global warming

and general environmental destruction will serve as the catalyzing factors for a greening of the

energy sector. Technology, environmental concerns and resource scarcity will prove to be the

forces that drive the global energy economy away from conventional, destructive sources

towards sustainable and renewable systems.

Increasing energy costs and environmental degradation will make conventional energy sources

less attractive. Energy efficiency could more than double simply through widespread diffusion

of existing and anticipated technologies (Shell International 2001). Under these conditions

energy consumption in 2050 would be just over twice what it is now.

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Catalysts for Market Change

Three factors have the potential to bring about fundamental changes in the energy system. The

first is energy resource scarcity. This occurs rarely at a global level, when growth in demand

cannot be met because resources are limited or the costs of new production capacity are too high.

There is broad agreement that coal will not become scarce in the next 50 years (OECD 2003),

although resources are concentrated in a few countries thus making equitable and efficient

distribution nearly impossible. Oil production has long been expected to peak but research has

shown that a scarcity of oil supplies (including unconventional sources and natural gas liquids) is

very unlikely before 2025 (Shell International 2001). Although oil resources may not disappear

entirely for another century, the competitive cost of alternative energies such as biofuels could

potentially fall below the $20 price tag on barrels of oil. Gas reserve uncertainty is considerable.

Scarcity could occur as early as 2025, or well after 2050. Gas is considered by many to be

scarcer than oil, constraining expansion (Shell International 2001). In view of the high price of

oil, the difficulty of even distribution for coal and the ambiguity shrouding natural gas,

renewable energies could prove to be the best economic and environmental option.

The second driving force for discontinuity in energy patterns is new technology. Can technology

that offers superior or new qualities, even at higher costs, can dramatically change lifestyles and

related energy use? Widespread introduction of electricity in the early twentieth century

prompted fundamental changes in production processes, business organization and patterns of

life. Coal-fired steam engines powered the early stages of industrialization, replacing wood,

water and wind. The internal combustion engine provided vastly superior personal transport,

boosting oil consumption. The combined cycle gas turbine has become the technology of choice

for power generation – greatly increasing the demand for gas, already the preferred heating fuel.

Two potentially disruptive energy technologies are solar photovoltaic, which offers abundant

direct and widely distributed energy, and hydrogen fuel cells, which offer high performance and

clean final energy from a variety of fuels. Both will benefit from manufacturing economies of

scale, but both presently have fundamental weaknesses. Fuel cells require new fuelling

infrastructure, while photovoltaic need new forms of storage as well as significant cost

reductions. These new technologies could potentially provide sufficiently superior energy

systems that will induce consumers to pay a premium. The importance of technological

improvement in shaping energy needs is illustrated by the striking increases in steam engine

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efficiency beginning in the early 18th century, which reduced coal needs by a factor of 25. The

latest technology is often more than twice as efficient as the installed average and a 25%

improvement in cost-effective efficiency is typically available – the natural outcome of

continuing advances and long-lived capital stock. How quickly improvements are introduced

depends on cost relative to the energy prices. History has demonstrated that consumers will pay

a premium for superior attributes. Despite the fact that oil was twice the price of coal, a transition

occurred because oil was more efficient, more convenient, cleaner once its power was harnessed

by the internal combustion engine. The convenience of natural gas makes it the preferred

heating fuel despite higher costs. Evolving energy supplies have steadily decarbonized, but this

has been a by-product of the pursuit of convenience, quality and cleanliness, not a conscious

effort to reduce carbon dioxide emissions.

The third key influence on the future energy system is social and personal priorities. Energy

choices are ultimately social choices. Government and public attitudes towards energy security

or self-sufficiency will, for example, influence the penetration of natural gas into Asian and

European markets. It could also be the driving force in government support for renewable

energy. Personal choices – related to values, the environment and lifestyles – influence the

energy system. Affordability is not the key constraint in OECD countries. And, while carbon

abatement will influence the energy system, it need not determine the path. Many options exist

for reducing greenhouse emissions, often linked to local air quality improvement. When

concerns prompt demands for change, much depends on what technologies or resources are

readily available. Timing can make the difference between evolutionary or revolutionary

solutions to problems like climate change.

The Future of the Market and the Shift Towards Renewables

The scenarios discussed in this section reveal that there is little conviction in industry and

government circles that fundamental scarcities of non-renewable energy sources will occur

within the next fifty years. The projected scenarios often described in corporate documents are

basically speculative in nature and offer no firm directions for the future. The most powerful

catalyst will be social and political pressure on the energy industry to deliver more efficient,

cleaner energy that protects the environment and the climate. The market for renewable energy

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require a trigger mechanism within the industry that will help spur innovation and strategic

realignment towards a grater share of renewable energy in total energy supplies and technologies

that will make current energy sources environmentally benign.

Shell Case Study

The drivers that affect the entire market bear down on individual players as well. One example of

how government, community, and economic incentives are catalyzing change is at the Royal

Dutch/Shell Group (Shell). Shell is a global conglomerate of energy and petrochemical

companies. Starting out from a seashell stand in London in the mid 1800s Shell inc. has evolved

into one of the largest energy suppliers in the world. Today the Shell group employs over

119,000 people in over 145 countries (Shell 2004a).

The Shell group is committed to advancing the company’s environmental status, a drive led in

part by Shell Renewables, which is one of five core companies within the Shell group. The CEO

of Shell Renewables, Karen De Segundo, explains: “Renewables will become an important part

of the energy mix of the future. We intend to create a significant business in this sector, making

the most of the opportunities which this trend will bring.” The other element of Shell’s

commitment to environmental quality is a company-wide dedication to sustainable development.

The Shell business strategy is focused on sustainability as a means to increase market share,

improve employee recruitment and retention, improve public relations and increase overall

productivity (Shell 2004b).

Why is Shell committed to renewable energy and sustainable development? It may be safe to

assume that it is not eco-conscience alone that the ultimate driver, otherwise they likely would

have already abandoned fossil fuels. Instead they have an economic incentive to be cleaner and

more eco-friendly. One of the most direct benefits that Shell claims is the cost reduction resulting

from improving eco-efficiency. Eco-efficiency makes their entire operation more efficient,

saving raw materials costs, decreasing waste and possibly creating new revenue opportunities.

By decreasing waste they are able to avoid the fees associated with refuse and pollutants that are

imposed by government regulation. Shell strategists also feel that a more sustainable reputation

will provide social advantages over their competitors in the context of community as a strong

customer base and market as a profit motive.

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By developing sustainably they hope to corner loyal support from consumer groups and the

communities in which Shell operates. Pleasing the local communities will decrease project

delays caused by civil unrest. The other social advantage that Shell strategists hope to gain by is

a better work force. Shell believes that this is a core value for many people and will be a great

motivator in recruitment and retention of employees (Shell 2004b). It is by integrating their

economic goals with ideas of sustainability that they believe they can maximize future growth.

They call it looking through the sustainability lens shown in Figure 4, which indicates Shell’s

view of the interactions between economic growth and the improvement of social and

environmental conditions.

Figure 4. The Sustainability Lens

Shell maintains that it is shifting toward more sustainable enterprise techniques for all of the

above reasons, but is this more than empty rhetoric? The answer is strongly affirmative.

However, transforming a company that for over a hundred years has survived by the use fossil

fuel cannot be accomplished overnight. Shell still produces about 3% of the entire world’s oil

and has plans new refineries. This notwithstanding, Shell has also produced about 20% of all the

solar panels that are installed around the world (Shell 2004c). These advancements are slow but

they are in the right direction.

To further advance environmental quality Shell has begun meeting voluntary environmental

certification requirements, currently urge all of their subsidiaries to become ISO 14001 or

European Union’s Eco-Management certified. Shell even owns 159,000 ha of FSC certified

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forest in Central America (Shell 2001). Shell's image and practices are improving. For example,

former Green peace protester Chris Rose, who coordinated a massive campaign against Shell in

1995, now praises the company as an industrial leader for environmental reforms stating, “Shell

deserves support because it is the only oil company to have reaffirmed its commitment to the

Kyoto Protocol” ( Kirby 2001).

Shell's motivation to improve their environmental status is clear. Overall it seems that its own

economic self-interest is the primary catalyst for change. Shell has found that the economic self-

interest of the company is a means to achieve sustainable growth. By committing to increase the

efficiency and productivity of their operation as a method to increase profits they are able to

make other gains as well. A sustainable image gains Shell consumer market share and public

accolades.

The future is bright for Shell; it now has a jump on the competition and will be able to adjust

faster to evolving markets. The call for sustainability, corporate accountability, and safe energy

will continue to rise in the future. Governments will continue to raise the bar on environmental

standards, and the market will not have room for firms who aren’t able to make the necessary

changes. This will allow new firms into the market and give great benefits to existing firms who

are able to stay ahead of the status quo.

20

The Role Of Government

Government Policy for Renewable Energy

Many policy-makers see that renewable energies contribute not only to natural resource

conservation and environmental protection but also provide economic and security benefits via

energy sector diversification (McCormick 2001, IEA 2002). In recent years, renewable energy

technology has advanced considerably in terms of cost competitiveness and market penetration

(OECD/IEA 2002). However, in most cases renewable energies are still not competitive and

account for only a small portion of the energy mix (IEA 2004). IEA World Energy Outlook’s

scenarios suggest that the share for renewables significantly changes according to government

policy (IEA 2004). Under these conditions, government policies play an important role in

determining the market success of renewable energy.

Governments are pursuing a wide range of strategies through the combination of policy

instruments to facilitate the development and broader use of renewable technologies. IEA

collected information on member countries’ existing renewable energy policies and constructed

the database (IEA 2004). These policy instruments can be classified many ways. Table 1 shows

some of the main policy instruments in use. One method is based on the main objective of

policy: to reduce costs, facilitate transition, improve market rules, the policy process and

outreach (IEA 2003). And the other method is categorizing the policy types by the target position

of market - policies addressing supply and capacity, supply and generation, demand and

capacity, demand and generation, and so on (IEA 2004).

Generally, renewable market development has started out with financial assistance to R&D and

projects’ support, thereafter encouraging larger market takeoff, where future government support

is not needed, through such strategies as tax treatment, feed-in tariffs, and soft interest rates.

Recently the financial incentives have been added by legislation for mandatory purchase of

electricity from renewable power, and renewable portfolio standards have emerged (IEA 2001).

Renewable energy shows great potential for solving some of today’s energy security and

environmental challenges, but more attention must be paid to what is really happening with

renewable energy policies and markets. The type of policy that governments could set up vary

according to the kind or renewable energy targeted (IEA 2003). Generalized, common policy

21

cannot be applied to renewables because each energy technology follows will be competitive

based on its own particular merits, and its state of technical development (IEA 2003). Constant

and predictable governmental support is crucial for the successful market deployment of

renewables, but policies should be developed and applied individually.

Table 1. Policy Instruments for Renewable Energy

Method Classification Policy Instrument

Reduce Costs R & D, Market Development/ Project support,

Feed-in Tariffs

Transition Portfolio Targets, RE Certificates/ Green

Power

Market Rule

Tax Treatment, Environment Programs,

Distributed Generation, Regulatory Reform,

Empowering Customer Choice

Object of

Policy

Policy Process & Outreach Education, Information Program etc.

Supply and Capacity

Investment Tax Credit, Property Tax

Exemptions, Capital Grants, Government

Purchases, Third-party Finance

Supply and Generation

Bidding Systems, Production Tax Credits,

Guaranteed Prices, Feed-in Tariffs,

Obligations, Tradable Certificates

Demand and Capacity Customer Grants/Rebates, Tax Credits, Sales

Tax Rebates, Third-Party Finance

Demand and Generation

Net Metering, Green Pricing, Voluntary

Programs, Government Purchases, Exercise

Tax Exemption

Policy

Addressing

Etc Regulatory and Administrative Rules, Public

Awareness Programs

22

The most remarkable market growth has always been achieved through a combination of policies

rather than one single policy (IEA, 2004). However many new policies are introduced without

consideration for intra-policy interactions, resulting in ineffective and inefficient government

action. An assessment of renewable energy policies based on a full-cost accounting analysis of

each policy and policy mix within renewable energy policy and with other energy alternatives is

needed (IEA 2004). Such an analysis would provide policy-makers with additional information

for considering the role of renewable energies in the broad policy portfolio and the choice of

measures in promoting renewable energies.

Tax Shifting Case Study

In October 1999, Leeds Metropolitan University in the United Kingdom started buying at least

30% of its energy from green power sources. Six months later, Edinburgh University signed an

agreement to obtain 40% of its energy this way. Since renewable energy sources in the United

Kingdom are exempt from a climate change levy enacted in April 2001, making this switch is

virtually cost-free and can even save money.

The Netherlands has more than 775,000 green energy customers, which represents 5% of the

population. The number of customers has tripled in just one year. This rapid growth is due to an

energy tax exemption for green electricity, green energy deregulation, and successful marketing

campaigns.

Germany has approximately 280,000 green energy customers. Many large German companies

are buying green power, helping to create consumer demand to move beyond fossil fuels. In

March 1999, a comprehensive ecological tax reform law took effect in Germany that reduced

income taxes, raised taxes on energy sources tied to carbon emissions, and exempted renewables.

In February 2000, the parliament passed a renewable energies law that included payments for

excess green energy generation fed back into the power grid; at those times, the meters run

backwards, and reduce customers’ electric bills. These policies, which help make green energy

cost-effective, are essential to the ultimate success of green power programs (Fischlowitz

Roberts 2002).

Obligation and Trading Case Study

Many countries are now considering or have implemented renewable energy targets combined

with TRC systems as a way to force the growth of renewables markets while decreasing the costs

23

of supporting them. By introducing competitiveness in the renewable energy market with

obligations and trading, governments seek to encourage to reduce technology costs and to

increase efficiency in production (IEA 2002, 2003)

Portfolio targets

By guaranteeing a minimum market size and a schedule for implementation, governments reduce

regulatory uncertainty and attract private sector investment. The European Community has

agreed on a directive that sets indicative national targets for renewable energy penetration in EU

member countries– 12% share of overall energy, 21% of electricity energy and 5.75% share of

bio-fuels in motor fuels by 2010 (European Union Directive 2001/77/EC and 2003/30/EC).

Australia has implemented legislation for a mandatory portfolio target coupled with a TRC

market. The United States is debating a national portfolio target for renewables, while fourteen

states have already instituted renewable portfolio standards.

Renewable Energy Certificates

Tradable Renewable Energy Certificates (TRCs), as a means to achieve Portfolio Targets, are

being presented as the future instrument of preference to build renewable markets. The principle

of such certificates is simple: liable entities (generators, suppliers or end-users) are mandated to

generate or use a certain quantity or percentage of renewable electricity. Certificates are issued

by the generators of renewable electricity and must be surrendered by liable entities to prove

compliance. Certificates are traded separately from the electricity, and their price represents a

premium that the generators will seek to maximize by lowering their production costs and

competing for the largest market share.

Obligation and Trading

By combining a green (tradable) certificate scheme with a mandatory minimum share of energy

to be produced by sources of renewable energy, governments offer a flexible solution for energy

producers to achieve their mandatory targets. In 2001, Belgium, the Netherlands, Sweden and the

United Kingdom have been the most active in this field, while trading of certificates has started

in Australia under its Mandatory Renewable Energy Target and Italy’s system begins in 2002. A

particular case of tradable certificates program was set up in Italy in 2001, where a renewable

energy certificate system already exists. The Italian system involves certificates for energy

savings achieved by electricity and gas distributors. Each distributor has been allocated a target

24

level and can rely on trading of energy efficiency certificates to comply. As the use of this

mechanism has begun only recently, insights on its effectiveness are limited but promising.

The Bush Administration Energy Plan

The Bush administration energy plan is designed to “help bring together business, government,

local communities, and citizens to promote dependable, affordable, and environmentally sound

energy for the future” (White House Energy Plan (WHEP), 2001). This stated goal is remarkably

similar to the synthesis of our course, which hypothesizes a blend of market, state, and

community controls leading us to a sustainable environmental future. However, one can

understand a reasonable amount of skepticism as the Bush administration record does not

promote a great confidence that they are the leaders of lead us in the Green Revolution. The

following is an analysis of the proposed Bush Energy plan in the context of market and

community.

The Bush plan is heavily anchored in market-based incentives. For example, it encourages the

use of “an income tax credit for the purchase of hybrid and fuel cell vehicles” (WHEP, 2001), as

well as “increase funding for renewable energy and energy efficiency research” (WHEP, 2001).

The research included in the plan focuses on protecting the financial structure of farms and

businesses, as well as protecting the consumers’ financial situation. The report does provide lip

service to environmental goals, listing them as the third purpose of this report, but it does not

appear that environmental protection and preservation is a goal of the Bush administration.

The plan covers a lot of areas of potentially valuable energy sources, such as natural gas,

hydropower, nuclear power, biomass fuels, and wind resources. To promote these alternative

sources, the Bush plan proposed an “increase of $39.2 million in the FY 2002 budget amendment

for the Department of Energy’s Energy Supply account that would provide increased support for

research and development of renewable energy resources” (WHEP, 2001). However, the plan

does not set up an infrastructure designed to create, produce, or distribute these alternative

technologies. In fact, this amount pales in comparison to the amount spent on foreign oil each

year, which according to the Natural Resources Defense Council (NRDC) is 20 billion dollars

(NRDC, 2004). In 1999, government subsidies totaled 6.2 billion dollars, which was only one

percent of total energy expenditures (Sutherland, 2001). In that same year, renewable energy

25

research trailed coal and nuclear research (Sutherland, 2001). It appears that any serious

consideration of alternative fuels will have to come well into the future.

Aside from the flowery language used by Vice President Richard B. Cheney, there seems to be

little community involvement in this energy plan. The plan is primarily focused on market

incentives and government regulations and subsidies. This does not fit with the sustainable future

we have envisioned in this course. To that end, the Bush energy policy seems destined to fail to

provide a truly sustainable energy future.

Conclusion

Throughout history systems for extracting and using energy have continually evolved. A new

transformation is on the horizon, a shift from environmentally destructive fossil fuel energy

sources, towards sustainable, renewable energy. How and when this change occurs will depend

on the roles adopted by market, governmental and NGO institutions. NGOs currently provide an

excellent means of diffusing renewable energy sources in developing nations, especially on local

scales. NGO's play a particularly critical role in the energy shift in countries that lack competent

market and governmental institutional structure.

Government policy is also an important force to promote the transition to renewable energy ,

especially in developed nations that are heavily dependent on fossil fuels. Among the many

effective strategies are tax shifting to favor renewable energy or for example, and legislation

allowing net metering such as at EcoVillage in Ithaca, NY. Governments can use obligation

trading which sets a cap on emissions and then allows industry to trade those rights. Renewable

energy certificates require power generating industries to provide certain percentage of their

energy using renewable sources.

Government policy can influence the market by controlling the incentives for the supply and

demand of renewable energies. With appropriate policy, governments can sway producers and

consumers away from fossil fuels towards renewable energy. The market will shift towards

renewable energy systems given requisite technological advancements, and in response to

informed consumer demand and suitable, effective government policy.

26

Perpetual uncertainty as to the extent of conventional energy reserves, and even our future need

for them as a result of yet unimagined technologies, make predicting the future a risky prospect

at best. However, it appears that the indisputably finite nature the earth's of fossil fuel reserves

makes inevitable a global energy shift. The shift will certainly occur before the close of the

current century, but likely much sooner, and will almost certainly involve more distributed

energy generation relying heavily on renewables. How soon and how smoothly the transition

occurs will depend on actions and interactions of government market and civil society

institutions, as well as on choices of individual consumers. Will the shift be an orderly,

sweeping transition or a protracted series of minor incremental changes? What new technologies

will lead the market? Will incumbent industries lead the transformation or will new market

entrants gain consumer favor? How quickly will the market transform as an institution? Will

pressure for change ultimately be based on conflict, scarcity, environmental exigency, or

something yet unanticipated? Will industries shift to renewable energy systems to avoid

government regulation? Will consumer demand lead the transition to safer, greener, cleaner,

more efficient energy? Only time will tell. In order to replace environmentally-damaging fossil

fuels, renewable energy systems will need to succeed in the marketplace. Through the profit

motive, the market may prove to be the most promising force for change of the energy status

quo, if complimented appropriately by the efforts of NGOs and directed by government policy.

27

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