Different approaches for different technologies

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One important dimension of the risk profiles of different technologies is the extent to which they are commercially proven. Technologies such as the CCGT power plant, or the highly efficient domestic refrigerators, are well established and understood. By contrast, CCS and the fuel cell hybrid car are not. Therefore, policies to support low carbon technologies need to take their stage of development into account.

For some, this would be entirely wrong (Helm, 2006). Their view is that as long as carbon emissions are appropriately priced, there is no need for government to intervene further in technology deployment decisions. The appropriate pricing of carbon emissions may be enough to encourage the uptake of technologies that are near to market. However, such a generic incentive is unlikely to be sufficient to encourage developers of medium and long-term options to develop them further so that they are available as and when required. Evidence from the Renewables Obligation in the UK has already been cited in this chapter. While this policy instrument can, in theory, support a range of technologies including wind power, wave and tidal power and domestic scale PV, it has largely supported the cheapest near-market technologies. Winners under this policy framework include onshore wind, co-firing of biomass in conventional power plants and landfill gas (Ofgem, 2007).

Stage 1 (R&D) Stage 2 (early Stage 3 (refinement Stage 4 (early demonstration) & cost reduction) commercialisation)

Stage 1 (R&D) Stage 2 (early Stage 3 (refinement Stage 4 (early demonstration) & cost reduction) commercialisation)

-Current Policy Framework-Ideal Profile

Figure 8.3 Illustrative profiles of renewable energy funding by stage of technology development

Source: Adapted from Carbon Trust (2006b)

There is important evidence that many technologies require support through many stages of the innovation process - not just initial R&D and market diffusion. According to work by the Carbon Trust, the part of the innovation process often neglected by public policy is the stage between demonstration and commercial deployment known as the 'valley of death' (Carbon Trust, 2006b). As shown in Figure 8.3, the Carbon Trust has argued that there is a need to rebalance the profile of support for renewable energy in the UK. This would reward near-term technologies less. It would also offer greater incentives to technologies that have settled on a 'dominant design' through R&D and demonstration, but have not yet entered the early diffusion stage where costs reductions are likely to occur.

This argument mirrors other studies that identify a gap in government support at this crucial stage in development (Grubb, 2005; Stern, 2006b, Chapter 16). William Bonvillan at Massachusetts Institute of Technology has noted that future energy innovation policy might learn from institutions such as the Defence Advanced Research Projects Agency (DARPA) which has been successful at supporting technologies across the 'valley of death' (Bonvillan, 2007). One example that supports this argument is US government support for advanced cleaner coal technologies such as the integrated gasification combined cycle (IGCC) during the 1980s and 1990s. While this yielded a number of utility-scale demonstration plants that were supported by generous capital grants, further incentives to bring down costs and improve reliability through replication have not been implemented. No further IGCC plants have yet been built since these demonstrations despite some new support measures in the 2005 Energy Policy Act (Watson, 2006).

This leads on to a further general point. While grants or tax breaks are usually used by governments to fund R&D, the appropriate type of support for technologies at other stages of development is less clear. A number of examples can be used to illustrate this. The US cleaner coal programme offered capital grants to selected demonstration projects, leading to lots of novel technology but poor performance and high costs. This is not necessarily evidence of 'failure', but shows that further support might be required as a bridge to full commercial availability. Capital grants have also been used in the UK to support some renewable energy technologies (for example, offshore wind and solar PV). This augments the incentive they receive from the Renewables Obligation. Micro-generation in British consumers' homes has also been eligible for grants through the Low Carbon Buildings Programme. By contrast, Germany has implemented a successful output-based incentive (the 'feed-in tariff) to aid the deployment of renewable energy technologies at household and commercial scales. A number of studies have pointed out that the German system has been more successful than that in the UK because it offers more certainty (and lower risk) to investors (Mitchell et al., 2006).

These examples, particularly the German feed-in tariff and the US cleaner coal programme, suggest that predictable performance-based incentives could be preferable if the technologies concerned are beyond their initial development and/or demonstration stages. This makes particular sense if the objective is to move towards commercial deployment so that emissions are reduced, rather than to demonstrate lots of novel features. CCS plants are clear candidates for such an approach. As the author has argued elsewhere (Watson, 2006), a performance incentive based on a payment per tonne of carbon abated would maximise the chances of reliability, whereas a capital grant programme would risk poor performance and technological 'gold plating'.

A further complication to this picture emerges if the focus of the discussion is broadened from the electricity generation sector to include low carbon technologies for transport, households, buildings and industry. Successful innovation policies will need to take these different settings and contexts into account, given findings in the innovation literature about the co-evolution of technologies, markets and institutions (Foxon et al., 2008). This lends further weight to the view that a carbon price alone will be insufficient (see Chapter 11), even if it were equally visible to investors such as power companies, public sector organisations and individual citizens.

Decision-making processes by these investors vary widely and are constrained by different limitations and barriers. Power companies carry out detailed financial appraisals with the help of consultants. Citizens consider cost alongside many other factors, and do not make investments in energy efficiency or micro-generation for entirely 'rational' reasons (Watson et al., 2006). Furthermore, their choices are often restricted by existing 'locked-in' infrastructures. For example, switching to an electric car would not just depend on whether the car itself is affordable, but also whether the infrastructure exists to charge it up. Upfront cost is a particularly important barrier to investment by householders (Oxera, 2006) - something that a carbon price will do little to alleviate. Energy efficiency in industry has its own specific set of barriers (Sorrell, 2004). Therefore, these different investment contexts - the home, the community, the large-scale power market or the transport industry - require technology development and deployment policies that are sensitive to their particularities.

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