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Working Papers

Title: Innovation in the energy sector
Author(s): Klaus Friesenbichler
Year: 2013
Month: July
Number: 31
Pages: 106
File URL: fileadmin/documents/pdf/Workingpapers/WWWforEurope_WPS_no031_MS50.pdf
Keywords: Cost incidence, diffusion, ecological innovation, economic strategy, electricity, European economic policy, industrial innovation, industrial policy, innovation, innovation policy, institutional reforms, multi-level governance, new technologies, ownership, policy options, renewable energy, security of supply, smart meter, social construction of technology, social innovation, sustainable growth, technology promotion
JEL-Codes: O31, O33, P48, Q48, Q58
Abstract: This study analyses the diffusion of renewable energy (RE) technologies. It analyses the transition dynamics as the sector broadens its energy mix and changes its capital stock. This shift is found to be desirable from an environmental, geopolitical and economic perspective. Yet, it greatly increases the technical and industrial complexity, and is not Pareto-efficient. We focus on wind and solar power, and discuss their promoted deployment against the energy policy principles of the EU. Put drastically, the promotion of ‘sustainability’ undermined ‘competitive’ mechanisms. This has potentially adverse effects on the ‘security of supply’ due to the market design that seeks to keep prices low. RE outperforms conventional facilities. Emergency capacities, however, are also exiting, especially in Germany. If markets are seen as one, there seems to be a threshold of wind and solar power that the current back-up system can incorporate without risking the security of supply. The policy relevant crux lies in conflicting mechanisms: the top-down promotion and planning policies undermine the bottom-up market selection. Then again, without interventions the market does not provide the socially desired outcomes. If tensions aggravate further, the implementation of the new technology base is likely to stall. In addition, the generous promotion resulted in the fast deployment of RE, which may have shortened the ‘formative phase’ of the diffusion process. A longer formative phase would have created more learning effects and fostered more incremental innovations. In addition, costs of subsidies are allocated differently across countries. Mechanisms that allocate costs to the public budget have greater acceptance rates than budget neutral ones that assign costs to consumers. The latter affect households asymmetrically across income classes. Also ownership structures changed; a large number of actors now constitute the energy sector. Citizens increasingly appeared as producers and investors, which stimulated the social acceptance of RE, and in some cases unlocked initially unfavourable vested interests.

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