Saturday, May 19, 2007

Is sustainable energy policy sustainable?

Or a bubble about to burst?

Sustainable policy requires a.o. sound economics, political commitment, consideration on technical development, while taking into account possible reactions of market actors affected.

Ifenergy comments about the explosion in venture capital finance for energy technology startups, speculating on money flowing into shaky startups which may lead to an alternative energy bubble.

Another case is wind energy. Ambitious policies have created an industry employing 40,000 in Germany. But now that onshore opportunities have been largely exhausted, this industry is pressured to go rapidly offshore, with relatively unproven technology. The quick ramp in turbine size is almost beyond precedent compared to other engineering technologies. Hopefully, there will be no future price to pay.

Investment into renewable energy has developed into a large global market - we can find many posts citing 11-12 digit figures for annual turnover of this industry. But equally, large subsidy flows accompany market development. These subsidies are usually presented as 'a few percent of the household electricity bill', and much smaller than the support for conventional energy (carbon fuels and nuclear), and hence declared reasonable. However, compared to its contribution, renewable energy receives much larger support than conventional energy. How will citizens react if the expected learning investments would not materialise, and renewable energy pushes up the electricial energy bill?

Learning effects may come to the rescue. Historically, renewable energy technologies have demonstrated a 15-20% cost reduction for each doubling of cumulative output.  But costs still need to go down a factor 2-3 to be competitive with conventional generation. At the current market size of more than 50 B$ annually, the learning investment to double cumulative output a couple of times to achieve a factor 2 cost reduction represents a daunting figure.

Energy prices and externalities may come to the rescue. If energy prices continue to rise, and the cost of carbon is fully taken into account in energy prices, renewable energy may not need much cost reduction to become competitive. This seems an assumption embedded in many roadmap scenarios.

Time will tell, but it appears that sustainable energy policies could benefit from basic engineering considerations in the scaling up of systems, as well as economic consideration on learning effects towards mass deployment. Sequencing the right policies at the right time, while timely phasing out policies that have run their course deserves more attention.

All the discussion about an energy revolution is a bit reminiscent of the 'new economy' before the dot-com bubble burst in 2002.

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