Low carbon energy futures: Making the markets work?

Transcription

1 Low carbon energy futures: Making the markets work? Ronan Bolton Science, Technology and Innovation Studies University of Edinburgh TIK Group, University of Oslo, 22/4/15

2 Topics covered 1. Background to the British Model of energy liberalisation 2. Reconfiguring the market to deliver investment in LC generation 3. Infrastructure investment as a new policy priority and relationship with investors 4. Reflections: Investment, uncertainty and socio-technical system change

3 The British Model of energy liberalisation Source: Künneke, R. and T. Fens (2007).

4 Stephen Littlechild s textbook model 1. Privatization to reduce political influence 2. Vertical separation of competitive and regulated components 3. Horizontal restructuring split up incumbents for competing generators and suppliers 4. Independent system operator real-time system balancing, network stability 5. Independent regulation economic regulation of monopolies, access to networks 6. Introduce market and trading arrangements generation and retail, ancillary services markets, leading to competition ** Investment decisions based on market signals rather than state direction Littlechild, S. (2006). Foreword: the market versus regulation. Electricity Market Reform: An International Perspective F. Sioshansi and W. Pfaffenberger, Elsevier

5 Privatisation and liberalisation global diffusion Source: Voß, J.-P. (2007). Designs on governance: development of policy instruments and dynamics in governance. PhD Thesis, University of Twente.

6 Since the mid 2000s there has been a re-emergence of long term energy planning: New priorities and the energy trilemma Energy policy Trilemma Climate Change Act (2008): UK government committed to 80% reduction in GHG by 2050 from 1990 levels Energy security: Becoming a net importer of gas, falling spare capacity on the system (4% capacity margin in 2015/16) Rising energy prices: 5.7% rise in domestic electricity bill since 2011, 11.3% for gas

7 Questioning the market and the emergence of a low carbon investment logic The time for market innocence is over. We must still rely on companies for exploration, delivery and supply, but the state must become more active, interventionist where necessary. This is critical in Europe, when, despite progress, full liberalisation of energy has not been achieved, and when key states are strong players in energy decision-making. - Malcolm Wicks 2009 If the UK does not invest in low-carbon technologies, then it will become increasingly dependent on energy imports, reflecting declining North Sea output of natural gas...it would result in exposure to the risks of high import prices, and possible fuel supply interruptions. Investment in low-carbon technologies reduces reliance on energy imports and therefore provides a hedge against possible high prices and fuel supply interruptions - Committee on Climate Change, 2012

8 CCGT Gas plants low risk investments Figures from Digest of UK Energy Statistics

9 Electricity Market Reform contracts for difference Reducing risk for low carbon

10 Who will invest? Insufficient utility company balance sheets to finance the transition/the changing role of utilities A reduction in long term project debt available from banks Scale of investment: Capital needed for UK energy transition varies between 7.0bn annually by 2020 to 17.2bn annually to 2030 Source: BNEF

11 Market dominated by European multinationals E.ON RWE Source: Bloomberg New Energy Finance (2012)

12 Engaging with the investment community - Green Investment Bank

13 Engaging with the investment community - Infrastructure UK

14 Understanding the investment community We don t need to invest in infrastructure at all or we can invest in hospitals and schools rather than wind turbines. We have pretty wide global choices about where we make our investments and we ll chase the investments that ll make the best returns for our customers and so it really is a competitive market out there for capital and if the UK is a very confusing uncertain place where the governing coalition seems to have rather divergent views about the future of energy policy and there s questions about commitment to the direction of travel - Advisor for a large UK investment fund Packaging operational assets: you get a project or a bunch of projects that are already built, there are predictable flows of revenues and the electricity markets and then issue a bond to finance their ongoing growth Creating an investment pipeline: if the government comes along, and this is what we have been saying to the government, the government comes along and provides some kind of guarantee around the construction risk there are other ways potentially to provide the guarantees, then you have an investment grade BBB type bond which we could invest potentially, a billion, two billion, in - Advisor for a large UK investment fund

15 A new scenario: Government is setting long term targets and increasingly directing system change Government is reformatting markets and moving towards technology specific support New relationship between public and private is centered around managing uncertainty and allocating investment risk A recalibrated energy regime where de-risked operational assets are refinanced by institutional investors Characterising the messy middle : An adaptation of the incumbent regime: A recalibrated energy regime where de-risked operational assets are refinanced by institutional investors This type of managed, coordinated system change is quite different to the picture painted in the transitions studies literature

16 Socio-technical transitions the multi-level perspective (Geels, Kemp) because it is predominantly regime-led and continuitybased, accelerated energy innovation presents a challenge to niche-led, more disruptive theories of sustainable innovation (Transitions Studies and Technological Innovation Systems theory) (Winskel and Radcliffe, 2014)

17 Challenge for regime actors managing uncertainty

18 Socio-technical regimes and uncertainty insights from other literatures Frank Knight Distinction between uncertainty and risk - Regime adaptation can be viewed as an effort to move from a situation of uncertainty to one of risk Jens Beckert Social devices for reducing uncertainty - networks and organisational routines breed familiarity and provide structure to economic exchange Neil Fligstein During periods of market turbulence and uncertainty incumbents look to government to certainty and stability by defining property rights, rules of exchange, and governance structures Institutional economists (Williamson) Importance of hybrid forms of economic organisation which facilitate information exchange and reduce uncertainty in economic processes

19 Reflections and conclusions No longer in an age of certainty characterised by energy policy paradigms (market v state) a new hybrid phase of inter-paradigm borrowing (Kuzemko 2013) In a new age of uncertainty and hybridity there is a need to investigate in more depth the dynamics of ST regimes and their capacity to adapt through coordinated and managed innovation processes Many of the uncertainties originate at the global scale transitions studies needs to pay more attention to the globalisation of energy and financial flows An unresolved tension in transition studies between disruption (implying markets) and the need for certainty and stability (implying regulation) Is the British Model dead? What future for energy markets? What can we learn from different countries?

20 Papers & contact Bolton & Foxon (2015). A socio-technical perspective on low carbon investment challenges Insights for UK energy policy. Environmental Innovation and Societal Transitions. Bolton, Foxon & Hall. Managing uncertainty: An analysis of UK energy regime realignments to deliver investment in electricity Infrastructure. Environment and Planning C (undergoing revisions) Hall, Foxon, & Bolton. Investing in low carbon transitions: Energy finance as an Adaptive Market. Submitted to Climate Policy Bolton & Foxon (2015). Infrastructure transformation as a socio-technical process Implications for the governance of energy distribution networks in the UK. Technological Forecasting and Social Change. Hannon & Bolton (2015). UK Local Authority engagement with the Energy Service Company (ESCo) model: key characteristics, benefits, limitations and considerations. Energy Policy. Contact: Ronan.Bolton@ed.ac.uk Energy and Society Research Group: gy_and_society_research_group