Why economic growth is the new priority for energy

business and industry, economy, energy, trade

Author(s):  Reg Platt
Published date:  07 Feb 2012
Source:  Economist Intelligence Unit

2011 closed on the back of two unusually optimistic piece of news: first, the surprising, albeit limited, progress made at the international climate negotiations in Durban; second, the breaching of one trillion dollars of investment into clean energy by investors worldwide.

Somewhat surprisingly, the low carbon transition has stepped up a gear and with it the international race to develop and deploy low carbon technologies is well and truly underway. Given the perilous state of the global economy, this timely shift provides huge opportunities for jobs and growth. In December, at the United Nations climate change conference in Durban, the nations agreed to hold further negotiations on a successor to the existing emissions reduction agreement, the Kyoto Protocol, which would come into force in 2020. While an agreement to hold more negotiations is hardly exciting, an important, incremental step forward was achieved. The successor agreement, unlike Kyoto, would place obligations on both developed and developing countries. Crucially this would include China, which is the highest emitting country China’s engagement, as well as India’s, opens a path to engagement from the US who withdrew from the Kyoto Protocol in 2002 and have strongly argued against a continuation of differentiated responsibility for countries. The US welcomed the “symmetry” of the proposed new deal and has, in principle, signed up to joining.

China, as recently as the last international negotiations in December 2010, fiercely resisted the prospect of emission reduction obligations, so what has changed? One explanation is that widespread adoption of obligations will create new markets for clean energy technologies – markets that China is keen to win.

Indeed, clean energy sectors are already growing fast. In November last year Bloomberg New Energy Finance recorded the trillionth dollar of investment by governments, corporate and private investors into renewable energy, energy efficiency and smart energy technologies since its records started in 2004. Annual clean energy investment has risen nearly five-fold, from $52bn in 2004 to $243bn in 2010, a compound annual growth rate of 29%. However, as recent experiences in the solar sector shows, countries wishing to benefit from these growth sectors will need to be both strategic and bullish. This means identifying sectors where they have comparative advantage and attacking these sectors with bold ambitions.

In recent years, as Governments worldwide have piled support into their domestic solar industries, the price of panels has plummeted. The price of polysilicon, a core material, fell by 63 per cent in 2011 (ibid). While such transformational cost reductions are welcome, they mask how over-supply of panels has caused havoc in the sector. Many companies have gone bust as a result. The most high profile of these was Solyndra, whose bankruptcy involved defaulting on a $528 million loan from the US Government.

At the end of 2011, a number of US based solar firms lodged a complaint with the US International Trade Commission (ITC) alleging that China was driving down prices by subsidising their solar exports and dumping panels on the US market (i.e. selling at prices below the costs of making and marketing panels) . In December the ITC found a “reasonable indication that a U.S. industry is materially injured” by the import of solar panels from China “that are allegedly subsidized and sold in the United States at less than fair value”. The vote clears the way for additional steps by the commission and the Commerce Department that could result in heavy tariffs on Chinese imports. The Ministry of Commerce in China has launched a retaliatory investigation into whether American subsidies and other policies in the solar, wind and hydroelectric sectors have unfairly hurt the industrial development of China’s renewable energy industries.

Putting potential breaches of World Trade Organisation rules to one side, these events show the significance with which clean energy markets are increasingly viewed and how hard countries are going to fight for the spoils. However, governments that are bound by outdated views of the energy sector may fail to capitalise on the opportunities.

Energy policy is regularly viewed through the prism of the ‘trilemma’ - that is how to balance the needs for an energy system that is at once low cost, low carbon and secure. Yet we are in a new economic era with many Western economies suffering anaemic growth. A new approach is required. Governments should make investments to create a low carbon and secure energy system on the basis of the growth and jobs potential that these investments offer, not merely on account of which is the cheapest.

Forthcoming research from IPPR (Straw and Glennie 2012) will demonstrate the case for countries like Britain to develop modern sectoral industrial policies as part of their armoury in the global economy. These policies will include the public and private sectors working together to identify opportunities in sectors where Britain has a comparative advantage and overcoming barriers to development. The report argues that, in the new global economy, characterised by the rise of Asia and decline of a single paradigm to organise our economic thinking, an activist government is essential for returning the economy to a period of sustained growth.

What this means for energy policy is that governments, working with private sector partners, must first identify sectors in which their country is likely to have comparative advantage and then put in place the appropriate support. This could include investing in skills, training and R&D, providing tax-credits and low-interest loans to support start-ups and the commercialisation and market breakthrough of new technologies. Comparative advantage will arise from a mixture of factors including resource availability and the nature of the technologies. It will vary between countries - hence, while offshore wind is likely to be a key opportunity for the UK concentrated solar power may be more appropriate in Spain. China with its cheap labour force has clear advantages in manufacturing but for emerging technologies, which require high level engineering and scientific expertise, such as carbon capture and storage, the UK may be better placed. A complementary strategy for the UK would also be to play to its current strengths in carbon finance, services and project management.

Prospects for the global economy in 2012 look bleak but clean energy offers countries worldwide major opportunities. Not all countries can be winners from clean energy but governments that adopt ambitious and strategic policies with growth at their heart are likely to end up on top.

This article is an extract from a report entitled, The Global Energy Conversation Part II: Solutions to 2050, which was published following an event that brought together energy experts based in London, Washington and São Paulo for a live global conversation on the future of energy.

 
 

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Reg Platt, Senior Research Fellow