Denmark has already come a long way in decarbonizing the energy system due to high penetration of wind power in the electricity system, increasing energy efficiency, use of (imported) biomass, but actors operating within the different energy system sectors as consumers, producers or investors increasingly find themselves caught up in messy transition processes with conflicting and inconsistent ‘signals’ from existing markets and regulations if they want to pursue a low carbon future.
Being in the middle of the transition process there exist multiple and often inconsistent ‘signals and incentives’ that support economic action for both the old and the new world, i.e. 1) electricity market prices can only allocate production, but cannot ‘signal’ and incentivize investments in new capacity and new wind power, 2) even if there is wind power installed existing taxes and regulations prevent electricification of heating services by heat-pumps, 3) the continued dependency of biomass in the heating sector is problematic, 4) fossil fuels are heavily underpriced due to subsidies and the failure of CO2 markets to provide a system changing CO2 price. And there is no clear energy system scenario pointing to energy system integration with milestones for sector integration.
Transition towards low carbon energy systems, means that the old worlds are not clearly actionable anymore. The political responses to climate change impose radical change and disruptions not only in the technical composition of the energy system, but also in the regime of economic valuation arrangements (markets and regulations) that used to stabilize the existing carbon-based world. Radical changes foster uncertainty for all actors involved, including regulators. Climate change policies face the difficult challenge that needed transformations imply that actor’s existing worlds gradually break apart while ‘rules of the game’ for the new worlds are to be constructed.
Therefore, transition processes necessarily generate messiness and uncertainty because they break up the existing stable worlds (rules of the game) that used guide actors in the carbon-based energy system. Decisions of production, consumption and investment in energy technologies and fuels depends upon ‘stable worlds’, that use economic ‘signals’ and rules to ‘incentivize action’, and stable worlds with, known rules of the game, are based upon the economic arrangement of rules, market prices, taxes, subsidies and tariffs that make up the ‘calculative space’ of actors – in their specific sectoral domains of the energy system.
Shifting rules of the game shifts the legitimate basis for revenues and the technologies and fuels they are based upon. This affects the interests and balance of power of involved actors, both the so-called incumbent actors, and the newcomers who all are involved in debating and negotiating changes in the ‘rules of the game’.
The key tenet of the IREMB project is that energy system transitions away from the ‘carbon based energy system’ towards the ‘low-carbon energy system’ require shifting market/valuation arrangements and regulations in order to re-set/reorient actors, technologies, market arrangements and use of fuels. The challenges of shifting are aggravated by the obvious, but neglected fact, that even if fossil fuels prices become extremely low, or even free, climate science say we should drastically reduce burning them.
IREMB’s focus on shifting the economic valuation arrangements goes against three tendencies: The first is ‘technology optimism’, i.e. the expectation that ‘new technologies and innovation’ can do the job of the transition to low carbon energy system without institutional changes in markets and valuation arrangements. The second, is ‘market optimism’, i.e. the expectation that ‘the market’ as an abstracted, ahistorical, and neutral institution ‘by being left to itself’ can lead the way to the transition without state regulation of markets. The third point is that concrete state planning efforts and specific goals are important to make some guidelines for the new energy system mandatory and visible for actors and shape their expectations to the future. (Husk fodnote: While IREMB provides own design solutions, the general perspective on markets in the energy sectors follow also recommendations from the 2016 IEA RE-powering report).
Transition is not a matter of regulation versus free markets, but of a delicate process of shifting the political economy from being legitimately dependent upon carbon to be legitimately dependent on low-carbon technologies and fuels. It is a clearly a political economy and the stakes and conflicts becomes higher in this phase of the transition as the climate time clock, according to IPCC, is ticking even faster with the urgent need to intensify emission reducing actions from now to 2030.
Climate science have clearly stated, that policy should phase fossil fuels out, because they are ‘toxic’ to the planet’s climate. However, compared to the well-known Food and Drug Administration that is excluding toxic and dangerous food and pharmaceutical products from the markets, there is not an institution similar to the ‘Food and Drug Administration’ that can regulate the use of fossil fuels. The struggles to enforce the Paris Agreement shows how difficult it is to establish a new regulatory institution for phasing out the climate-toxic emission from fossil fuels, because there are only few restrictions on the use of fossil fuels in the carbon-dependent market economy.
October 23-25 2019, Aalborg University, Copenhagen
Innovative Re-making of Markets and Business Models
for a renewable energy system based upon wind power