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Energy policy

Varying currents

What influences the adoption of certain power generation technologies? A look at how regulatory systems shape the energy mix in different countries by setting rules, incentives, and subsidies reveals the impact of policy and politics on the viability of new technologies.

Why do certain power generation technologies take off in some places but not in others? Geography plays a role: Wind conditions, coastlines, and population density determine a preference for on- or offshore wind. HVDC is helpful where generation and load centers are far apart. But ultimately, the adoption of a technology depends largely on the regulators and whether their aim is to foster innovation, bring a proven technology to market, or meet specific economic or climate goals.

Can renewables sustain themselves?

Government intervention impacts the spread of technologies. In Germany, regulatory support has stimulated solar R&D and domestic sales and exports of PV panels. In 2011 and 2012, the German PV business accounted for roughly 50 percent of the global market. But subsidies have a downside: Changes to Germany’s renewables legislation and tighter regulation have hit the market hard, and despite the popularity of the technology, the German PV industry might not survive stiff competition from Asia.

Direct versus indirect subsidies

Even though regulation is viewed with suspicion in the USA, with producers under pressure to reduce the costs of renewables, there is indirect regulatory support in the form of an income tax credit called the PTC. This has consistently boosted investment in renewables, particularly onshore wind, across the US.

Some European countries stimulate investment by guaranteeing long-term financial support in the form of feed-in tariffs. Even if direct subsidies were discontinued, mechanisms such as preferred feed-in and compensation for curtailment would remain. But experts agree that renewables must become even more competitive and hold their own against conventional technologies.

Fostering innovation

The adoption of new technologies depends on the interplay of regulation and market forces. An example is the way European companies that have invested heavily in offshore wind while receiving substantial government support are now having to compete with cheaper onshore wind – putting pressure on prices.

Innovation can also make technology more competitive. Siemens, for example, aims to lead the cost-down of electricity produced from offshore wind farms to around 9.5 €ct per kilowatt-hour by 2020 by means of better parts, materials, software, and design (e.g., of the foundation,) and lower maintenance. California has new rules requiring investor-owned utilities to add massive energy storage, but limiting their ownership of new storage assets. This creates potential for growth while leaving scope for utilities and third parties to manage the interplay of ownership and operation. 

Nuclear energy: a political choice

Although it is expensive, a government may still support nuclear energy in the interests of ensuring diversity of supply and CO2-free power generation. Japan, for example, is restarting nuclear plants to compensate for a lack of fuel resources.

The UK’s subsidies for nuclear are part of an effort to reduce CO2 emissions by an ambitious 20 to 40 megatonnes per year by 2030 by maximizing low-emission generation. The price is high, though: In the UK, it costs around €0.09 to €0.10 to generate one kWh of nuclear power, combined with a feed-in tariff of €0.13 per kWh − significantly higher than the cost of renewables.

Regulating conventional power

Rules and regulations also often make the difference in the viability of conventional generation technologies. Good examples are the debate on energy-only markets versus capacity markets or subsidies for strategic reserves.

The EU’s carbon pricing policy is another important regulatory factor. The EU emissions trading system (ETS) is based on tradable allowances and credits. By complementing this scheme with a carbon price floor to stimulate investment, the UK has managed to boost interest in gas-powered plants. In Germany, by contrast, market distortions from renewable subsidies have made conventional plants uneconomical.

Different motivations for CCPP

Elsewhere, combined cycle power plants (CCPPs) are taking off, but for varying reasons. Coal-dependent China, for example, is exploring gas-fired power generation to address environmental concerns and diversify its energy system. By contrast the main reason for the growing popularity of highly efficient CCPPs in the Middle East is to save oil for exports. Japan is adopting CCPPs to reduce its dependence on nuclear energy; Singapore to become more self-reliant in energy; and the US to make better use of large deposits of natural gas in shale formations. 

Blunt weapon or sharp tool?

Regulatory frameworks are highly influential and in some cases indispensable for fostering innovation and bringing ideas to market – often as important as topography and other external conditions. But much depends on whether governments wield regulation as a blunt weapon or a sharp tool tailored to a changing globalized market. While legislative frameworks can be crucial for the emergence of whole new business sectors or the achievement of specific economic goals, for innovators like Siemens the ultimate goal is clear: every power generation technology must sooner or later stand on its own feet and be viable without subsidy support.

Swati Prasad and Christopher Findlay, business journalists based in India and Switzerland
Picture credits: Illustration: Anton Hallman