Innovation in low carbon technologies: theory and policy

1
Innovation in low carbon technologies theory and
policy

• Dr Tim Foxon
• Cambridge Centre for Climate Change Mitigation
  (4CMR),
• University of Cambridge
• Presentation at ICE, University of Bath, 17 April
  2007

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Outline

• Drivers of UK energy policy
• Climate change and energy security
• Technological and institutional change in energy
  systems
• Systems failures in low carbon innovation
• Carbon lock-in
• Towards improved policy processes for low carbon
  innovation
• Transition to a low carbon economy

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UK energy policy

• 1980s and 1990s
• Privatisation, liberalisation of energy markets
• Dash for gas in electricity generation
• 1997-2003
• Reform of electricity trading, NETA
• Introduction of Renewables Obligation
• Energy White Paper Low Carbon Economy
• 2005-present
• Energy security issues come to the fore
• New Energy White Paper, May 2007

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2003 Energy White Paper

• Four goals for UK energy policy
• Reducing CO2 emissions by 60 by 2050
• Maintain reliability of energy supplies
• Promote competitive markets, to improve economic
  growth and UK productivity
• Adequate and affordable home heating
• Aim to achieve goals together
• Market framework and policy instruments should
  reinforce each other to achieve goals

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2006 Energy Review

• Increasing concerns about energy security
• Energy gap, as most current nuclear and many
  coal-fired power stations close by 2020
• Dependence on imported gas supplies
• Increasing oil price
• Review progress towards four policy goals
• Examine what further measures are needed
• Focus on framework relating to nuclear new build

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Stern Review Economics of Climate Change

• Risk management framework
• Risks of extremely damaging phenomena if mean
  global temperature rise exceeds 2C
• Estimated economic and social costs of impacts
  are 5-20 of Gross World Product
• This implies the need to stabilise atmospheric
  concentrations at between 450 and 550 ppm
  CO2equivalent (400-500 ppm CO2)
• Economic and social costs of stabilisation are
  around 1 of Gross World Product

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Costs of climate change mitigation

• Two methods for estimating the costs of
  mitigation both give around 1 of GWP
• Bottom-up technology modelling
• Wide range of technology options
• Annual abatement cost by 2050 1 2.5
• Top-down macroeconomic modelling
• Meta-analysis of models, comparing BAU to
  stabilisation scenarios
• Reduction in GWP 1 3
• Higher costs at lower end of stabilisation range

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Stern Review Policy conclusions

• Putting a price on carbon through taxes or
  trading schemes - necessary not sufficient
• credibility of future carbon price
• uncertainties, risks of options and timescales
• under-investment due to spillover effects
• Acclerating technological innovation (Ch16)
• support for energy RD (needs to double)
• creating markets and driving deployment (should
  increase two to five times globally)
• Overcoming institutional and non-market barriers
  to adoption

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Other energy policy drivers

• Maintaining energy security
• Concerns over rising dependence on imported gas
• Levels of investment needed
• 900 bn in European electricity generation over
  next 25 years
• European energy policy
• Sustainability, security, competitiveness
• Unilateral reduction in GHG emissions by 20 by
  2020 (up to 30 with international agreement)

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Range of technology options

• Improvements in efficiency of provision of energy
  services
• Buildings, industry, vehicles
• Low carbon primary energy
• Renewables, biomass, nuclear
• Coal or gas with carbon capture and storage
• Transport
• Biofuels, hydrogen from sustainable sources
• Fuel cells, lightweight materials

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Understanding innovation

• Innovation is a dynamic, systemic, non-linear
  process
• Technology push or market pull can be reinforced
  or inhibited by
• feedbacks between stages of technology
  development
• influence of framework conditions, e.g.
  government policy, availability of risk capital

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Think about stages, but also about actors
And about flows and feedbacks
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Innovation Systems

• Innovation systems
• Range of actors and interactions (both market and
  non-market) leading to production, diffusion and
  use of new, and economically useful, knowledge
• Actors exhibit bounded rationality, uncertainty
  about future
• Processes of learning and expectations about
  future markets and technological improvements
• Institutional factors (social rule systems)
  create drivers or barriers to innovation

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UK innovation systems for renewables

• ICEPT/E4Tech Report for DTI Renewables Innovation
  Review 2003/04
• Key technologies and actors
• wind, marine, solar PV, biomass, hydrogen from
  renewables, district and micro-CHP
• Flows of knowledge, influence and funding -
  stakeholder interviews
• Framework conditions

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Identifying systems failures in UK renewables
innovation systems

• From demonstration ? pre-commercial
• little support for scaling up
• market pull from RO still too weak
• need for niche market support?
• From pre-commercial ? (supported) commercial
• multiple risks technology, market, regulatory,
  systems
• need to improve risk/reward ratio?

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Technological lock-in

• Path dependence of development
• specific sequences of events
• specific timing of outcome-shaping events
• similar starting conditions leading to a wide
  range of possible outcomes
• small events that can have large consequences
• Lock-in
• increasing returns to adoption (positive
  feedback) can lead to lock-in of incumbent
  technologies

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Increasing returns to adoption of technologies
(Arthur)

• Scale economies
• spread fixed costs over increasing volume
• Learning effects
• experience gained reduces unit costs
• Adaptive expectations
• adoption reduces uncertainty, as users gain
  confidence in quality, performance, longevity
• Network or co-ordination effects
• network benefits increase with more users

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Institutions

• Institutions are social rule systems
• Formal social rules
• legislation
• economic rules
• contracts
• Informal constraints
• social conventions
• rules of behaviour

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Increasing returns for institutions (North)

• High set-up or fixed costs
• Learning effects for organisations
• Co-ordination effects
• formal constraints, such as contracts
• informal constraints, e.g shared knowledge
• Adaptive expectations
• institutional framework reduces uncertainties

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Lock-in of political institutions (Pierson)

• Collective action
• highly dependent on actions of others
• High density of institutions
• learning, co-ordination and expectations
• Asymmetries of power
• reinforcing current power structures
• Complexity and opacity of politics
• mistakes difficult to rectify

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Co-evolution of technological and institutional
systems

• Lock-in of technological and institutional
  systems
• Interacting increasing returns to adoption of
  technologies and institutions
• Techno-institutional system or complex becomes
  locked-in
• Example of current carbon-based energy system
  (Unruh)

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Electricity generation techno-institutional system
Source Unruh (2000)
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Electricity generation techno-institutional system

• Institutional factors
• satisfy increasing demand
• reduce unit price
• liberalise markets in 1990s
• Feed back into technological system
• dash for gas, rapid expansion of gas-fired
  generation
• Reinforces institutional drivers
• Lobbying to reduce interference in markets

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Policy drivers and barriers for sustainable
innovation

• Project in ESRC Sustainable Technologies
  Programme, Oct 2002 - March 2005
• Foxon, Pearson, Makuch and Mata, Imperial College
• www.sustainabletechnologies.ac.uk/Projects/policy.
  htm
• 4 Stakeholder workshops
• policy-makers, business, NGOs academics
• Case studies of UK low carbon innovation systems
  and EU environmental regulation

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Towards improved policy processes for sustainable
innovation policy

• (1) Sustainable Innovation policy regime,
  bringing together innovation, energy and
  environmental policy regimes
• (2) Apply systems thinking and practice
• (3) Advance procedural and institutional basis
  for policy delivery
• (4) Develop a more coherent and integrated mix of
  policy instruments to promote SI
• (5) Incorporate policy learning and review

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(1) Long-term strategic framework

• Create stable and consistent policy framework
• encourage investment in low carbon innovation for
  the long term
• Strategic Energy Agency
• Lessons from Dutch Transition approach
• Framework of long-term vision, strategic goals,
  transition paths and key steps
• Now being applied to innovation in energy policy
  by Ministry of Economic Affairs

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Dutch Transition Approach
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(2) Apply systems thinking

• Address systems failures
• Create niche markets to support early stage
  technologies at pre-commercial stage, e.g. Marine
  Renewables Deployment Fund
• Use techno-economic and policy windows of
  opportunity
• Instruments relevant to stages of innovation
  process
• Promote diversity of options to overcome
  lock-in of current systems
• Positive economic value of diverse options

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Incorporating systems thinking into UK low carbon
innovation policy

• System failures in bringing through early-stage
  renewable technologies
• Favours technologies that are not disruptive of
  current system
• Needs to be complemented by knowledge networks
  and skills base development
• Long-term thinking in principle, but political
  aspirations not regarded as sufficiently
  bankable by investment community

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(3) Advance procedural/institutional basis for SI
policy delivery

• Improve public-private institutional basis
• Stimulate and engage low carbon innovation
  incubators
• Clusters of innovators
• e.g. UK Carbon Trust
• Engage broader stakeholder participation
• Particularly from innovation constituency, rather
  than just big business

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(4) Develop more coherent and integrated mix of
policy instruments

• Market-based instruments are important
• getting the prices right through taxes or
  tradable permits
• But they are not sufficient
• fail to address other influences on innovation
• often watered down in design/implementation
• Other innovation-supporting instruments
• market development policies, support for RD and
  demonstration, information measures

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(5) Undertake policy learning

• Not possible to achieve an optimal mix of
  policies
• Because of uncertainties, path dependence,
  bounded rationality etc.
• Improve policy learning processes
• Monitor and evaluate policy implementation
• Review policy impacts on SI processes
• Improve learning and policy processes, e.g. SEPN

33
Improving UK low carbon innovation policy
processes

• Emphasis on market led approach
• Rejection of calls for banding of technologies
  (now being reconsidered)
• Little integration with other policy development,
  particularly NETA
• Leading to problems, particularly for smaller
  renewable and CHP generators
• Lack of formal inclusion of policy learning
• Ad hoc responses to practical difficulties

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Innovation for a Low Carbon Economy (Edward
Elgar, 2007)

• 2 Workshops at UKERC in Oxford
• Economic approaches
• Endogenous technological change
• Learning curves
• Institutional approaches
• Functions of innovation systems
• Evolutionary dynamics
• Management approaches
• Firms strategies

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Transition to a low carbon economy two
frameworks

• Understanding transitions in socio-technical
  systems
• Three-level framework landscape, socio-technical
  regime, niches (Rip and Kemp)
• Analyse past transitions interactions between
  technological and institutional factors (Geels)
• Analyse transition paths how niches develop and
  coalesce to challenge existing socio-technical
  regimes

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Dynamic multi-level perspective on technological
transitions
Source Geels (2002)
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Co-evolution of Firms, Technologies and
Institutions

• Co-evolutionary framework
• History of industrial development (Murmann)
• Institutions, e.g. university research, patents,
  influence technology development
• Firms seek to influence institutional structures
• Links to evolutionary economics
• Contributions of technological and institutional
  changes in energy systems to economic growth and
  productivity (Nelson, Schurr)

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European electricity systems

• Study of European electricity systems
• Co-evolution of technologies, institutions and
  firms strategies (Stenzel, Pearson, Foxon)
• Case studies of UK, Germany and Spain
• Incumbent firms follow a dual-track strategy of
  undertaking low carbon innovation, and lobbying
  to weaken implementation of policies

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Proposed new research

• Transitions in UK energy systems
• Proposed EPSRC/E.ON research with Imperial, Bath,
  Strathclyde, UEA, Loughborough, PSI
• Link historical analysis of transitions and
  whole systems thinking with detailed
  engineering modelling to assess feasibility of
  different transition paths

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References

• Stenzel, T, Pearson, P and Foxon T J (2007),
  Corporate Strategy in the Electricity Sector An
  Approach to integrating Individual Agency into
  the Systemic Analysis of Innovation, submitted
  to Industrial and Corporate Change
• Foxon, T J, and Pearson, P (2007), ' Towards
  Improved Policy Processes for Promoting
  Innovation in Renewable Electricity Technologies
  in the UK Energy Policy Vol 35, No.3, pp
  1539-1550
• Foxon, T J (2007), Technological lock-in and the
  role of innovation, in Handbook of Sustainable
  Development, G. Atkinson, S. Dietz and E.
  Neumayer (eds.), Edward Elgar
• Foxon, T J, Gross, R, Chase, A, Howes, J, Arnall,
  A and Anderson, D (2005), The UK innovation
  systems for new and renewable energy
  technologies, Energy Policy Vol 33, No.16, pp
  2123-2137
• Foxon, T J, Gross, R and Anderson, D (2003),
  Innovation in long-term renewables options in the
  UK Overcoming barriers and system failures,
  Report for the Department of Trade and Industry
  (DTI), London, November 2003,
• http//www.dti.gov.uk/files/file22072.pdf