Grupo de Economia da Energia

From fossil fuels to renewables: the hard energy transition

In energy on 18/07/2011 at 00:30

By Ronaldo Bicalho

To prepare an energy policy that manages the hard transition from a fossil fuel economy to a low carbon economy is not an easy task.

The massive replacement of fossil fuels by renewable energy sources involves significant technological, economic and institutional changes. These changes go beyond the energy sector and cover subjects related to a set of values associated with the crucial role of energy in economic development and social welfare and relationship with natural resources and environment derived precisely from this centrality.

The compatibility between the imperatives of energy security and climate change, by penalizing fossil fuels and incentives to renewables, has been demonstrated much more complex than previously conceived.

The idea of bringing together the best of both worlds – the self-sufficiency and low emission, increased energy security and combat the factors causing climate change – concerning the expansion of renewable sources in the energy matrix has been facing relevant technological, economic and political-institutional obstacles.

The first obstacle is technological and concerns the requirement of significant advances in renewable technologies so they can actually compete with traditional technologies. These advances are related to overcome the problems associated with low capacity of storage, density and scale characteristics of the current stage of development of renewables.

The main problem is the low probability on the threshold of radical technological breakthroughs in this field, involving a massive-scale development of cheap and clean energy sources.

In fact, the development of new clean energy technologies has proven very hard and expensive, which means that many experts consider that no continuous support by government subsidies and incentives, these technologies have very little impact in the energy mix.

Likewise, the idea that technological progress is about to make renewables competitive in electricity generation, or to produce a battery to become electric vehicle capable of competing equally with gasoline car concerning both price and autonomy, should be viewed with some caution.

We have to mention that the great advantage of fossil fuels is their flexibility, i.e., the ability to provide the desired amount of energy, at the desired moment and in the desired location. This energy “liquidity” guarantees the high certainty of immediate access to an “energy power”, whether in terms of heat or work, without temporal or spatial “restriction” and comes from high capacity of storage and density, intrinsic to these sources.

The great challenge of renewable sources is to build exactly this flexibility, liquidity, so as to permit large-scale replacement of fossil fuels without changing the traditional energy consumption pattern.

As such replacement is not technologically supported, through a radical reduction of costs, the expansion of renewables depends upon mechanisms to make them competitive in relation to fossil fuels.

These mechanisms are penalized anyway because of the use of fossil fuels and incentives to use renewable sources.

Therefore, to fix a price/cost for CO2 emissions as taxation or cap-and-trade system is penalizing the use of fossil fuels.

This is a way to raise the cost of energy derived from fossil fuels, so that cleaner technology can address it on the market in better conditions.

On the other hand, it can be attempted to establish heavy incentives for expansion of renewables through tax and financial mechanisms, which in other ways end up building the competitiveness desired for these sources.

However, in both cases, this is a competitive institutionally built by State. This puts energy policy in the middle of dynamic evolution of the energy sector at the beginning of this millennium.

This evolution becomes dependent on the choices about the sources, sectors, economic agents and political actors who will be penalized and those to be encouraged by these choices.

Note that the key issue is not replacing fossil sources by renewables, but the transition between them, both as regards the duration and content.

The duration and content of transition are essential because they define the amount of resources that will be paid by the consumer and/or taxpayer during this process.

Clearly, the larger this quantity, the greater the impact on both the competitiveness and access to energy and governments’ expenditures.

In this case, the search for an energy source to act as a bridge between the current situation and desired future emerges as a mean to manage the transition costs.

The German choice for nuclear power before Fukushima and the apparent current leaning of the American for unconventional natural gas will search for the source of the transition. And it can be a zero-emission source, such as nuclear one or a source with an emission rate lower than those provided by the coal and oil byproducts, such as natural gas.

The recent German retreat, with the disposal of nuclear energy, may indicate the direct transition with the radicalization of the change process, which, on the one hand, reduces the duration of this process and, on the other hand, increases costs and uncertainty This increase has raised questions about the real intentions and political and economic sustainability of the German proposal. Especially when it involves the European crisis.

In this sense, the current economic and fiscal crisis in developed countries must become the biggest obstacle to implement an aggressive energy policy of massive expansion of renewable sources in the energy matrix, mainly due to the high costs associated with this implementation.

However, there is a single way to face it. If an observer considers the European position from Brussels, he/she could conclude that the Europeans are willing to pay all costs, whatever they are related to the exchange to a low carbon economy. If this same observer considers the position of the Republican majority in the House of Representatives he/she will conclude that Americans are unwilling to pay any costs of exchange.

It is clear that both Brussels and the Republicans can not be considered as a synthesis of European and American positions. Because it is very difficult to talk in terms of positions that represent some kind of current convergence on these issues. However, these positions summarize strong difficulties found when trying to build a convergence between energy and environmental policies worldwide. Convergence is essential to address the global nature of problems related to climate change.

Thus, considering the current context where there are no technological and economic restrictions from fossil fuels to renewables, depending upon political will to do it, it is the best way to prevent a policy intends to change consistently, economically, technologically and institutionally.

It should be clear that the technological and economic limitations make the significant expansion the renewable sources in the energy matrix a goal to be achieved through strong State intervention, by employing mechanisms of penalization and incentives to avoid costs and subsidies, which generate constraints to competitiveness and fiscal balance.

To ignore these limitations and constraints is to distort the debate and move away from a politically sustainable solution.

It is not about ignoring the effects of climate change that makes hard the transition to a low carbon economy; ignoring the real costs of this transition also makes hard to define a consistent policy to manage this very difficult and complex process in terms of technology, economics and politics.

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