Europe has wasted $100 billion by failing to create a renewable energy policy framework that could have better utilised the region’s natural resources to generate low-carbon power.
The figure was revealed in report published on the eve of the World Economic Forum in Davos, which urges policy-makers to incentivise investments that help minimise or avoid unnecessary costs.
It explained how three valuable lessons on policy design, market design and business models can be learnt from the European Union’s experience as a “first mover” in switching to sources of renewable energy.
On policy design, it described how society recognizes the need for an electricity system that produces less carbon, but has not yet fully bought into the full value of decarbonization.
It claims policy instability drives up the cost of renewable energy by increasing investor uncertainty and the cost of capital.
It described how it is obvious to most European citizens that southern Europe has the majority of the solar irradiation while northern Europe has the wind.
“But the EU’s investment in renewables does not reflect this: where Spain has about 65% more solar irradiation than Germany (1750 vs 1050 kWh/m2), Germany installed about 600% more solar PV capacity (33 GW vs 5 GW),” the report explained.
“In contrast, whereas Spain has less wind than countries in the north, it has still installed 23 GW of wind capacity.”
It added: “Such suboptimal deployment of resources is estimated to have cost the EU approximately $100 billion more than if each country in the EU had invested in the most efficient capacity given its renewable resources.
“And by looking across borders for the optimum deployment of renewable resources (with associated physical interconnections), the EU could have saved a further $40 billion.”
The report described how the significant penetration of renewable sources, combined with technological innovation on the grid and demand side, has provided the opportunity to decarbonize the electricity sector while reducing dependence on imported fuels.
But the experiences of the EU – an early mover in the transition – and elsewhere raise concerns over the ability to attract future investment. Returns on capital on both renewables and traditional utilities have fallen, and risks for investors have risen due to policy instability.
This crisis of “investability” has highlighted lessons for policy-makers, regulators, business and investors in both developed and developing markets.
At the same time, new business and investment opportunities are emerging in services that are much closer to the electricity customer, including products that help customers reduce their electricity consumption and generate their own power.
“The Future of Electricity – Attracting Investment to Build Tomorrow’s Electricity Sector”, written in collaboration with Bain & Company, outlines recommendations to attract the needed investment and grasp these new opportunities.
The 32-page report explains: “The electricity sector is undergoing an unprecedented transition. In the past, the sector provided affordable, secure and reliable electricity by attracting investors with low risk, stable returns. In the last decade, significant declines in the cost of renewable technologies, combined with new sources of natural gas, have offered the opportunity to simultaneously decarbonize the sector while also increasing energy security and reducing dependence on imported fuels.
“OECD countries have invested heavily to achieve this, spending $3 trillion on new renewable and conventional power plants, transmission and distribution (T&D) infrastructure, and energy efficiency measures. This investment has helped reduce carbon intensity per unit generated by about 1% per annum and increase energy security by reducing imports of fuels by about 4%.
“Yet more has to be done, especially as the industry is less than 30% through the process, with a further $8 trillion needed from now until 2040 to meet policy objectives.”
The report says policy-makers need to create policy frameworks that are efficient, stable and flexible, recognizing the inherently uncertain technological and economic environment we live in.
* Plot the most efficient pathways to policy objectives. Incentivize “no regrets” investments such as energy efficiency technologies, demand response services, and the upgrading of network and generation plant efficiencies. Exploit the most efficient renewable resources within and across borders
* Stabilize policy by building in flexibility and working to increase societal support. Recognize inherent uncertainties by investing incrementally. Communicate the value to society of the investments. Reduce investor risk by prohibiting retroactive policy changes.
Regulators need to provide clear direction to markets, while minimizing interventions:
* Ensure clear, effective signals: Provide a clear, stable market signal on carbon pricing to incentivize decarbonization. Reward efficiency, reliability and flexibility, encouraging predictable, dispatchable, fast responding supply to complement growth in demand response solutions in balancing increasingly volatile supply and demand. Recognize in network tariffs and regulatory frameworks the value of reliable grid capacity
* Create “level playing fields” across geographies, businesses and technologies: Harmonize incentives, encourage appropriate physical interconnection and remove unnecessary regulatory barriers to competition between incumbent utilities and new entrants.
Business and investors need to drive innovation in business and investor models to secure the necessary investment:
* For businesses, continue to engage with policy-makers and regulators to identify the most efficient pathways. Evolve strategies and business models that exploit the opportunities in the evolution of centralized generation while also supporting the rise of customer-centric offerings and propositions
* For investors, engage with policy-makers and regulators on how best to balance risk and return to attract the required investment. Continue to innovate in investment structures to finance the evolving risk profile in different parts of the electricity value chain.
The report added: “While there are many ongoing debates in global energy policy and regulation, these areas of general consensus offer a clear path forward for the transition in OECD markets, a journey that will be watched carefully by developing nations.
“Finally, as no single cross-stakeholder body exists, developing a joint, cross-geography, multi-stakeholder task force is recommended to increase communication and share lessons and best practices across borders and throughout the industry.
“This would help address the currently “atomized” nature of supervisory and regulatory decision-making bodies. Only by ensuring the viability of investment can policy-makers successfully transition to a more sustainable and efficient energy future.”