Energy systems and their transition V Filip Cernoch FSS MU CENTER FOR ENERGY STUDIES Energy transition to low-carbon system • Climate change results from the production and consumption patterns — satisfying consumer's demands for goods and services through the carbon-based energy technologies and systems • Climate change mitigation is based on a switch to more efficient (low or zero-carbon) technologies and sources (RES) • Why don't carbon-saving technologies diffuse faster? CENTER FOR ENERGY STUDIES Theory of technology (energy) transition Economic argumentation suggests that the optimal technology is selected based on market forces and fully informed, optimizing agents. But this argumentation is incomplete 1) There are some other factors affecting the people and company's choices (setting the system) 2) Once some choices are made they determine the future path (changing the system) CENTER FOR ENERGY STUDIES Different transport choices of similar countries Different transport choices of similar countries CENTER FOR ENERGY STUDIES Different transport choices of similar countries CENTER FOR ENERGY STUDIES Different power production choices of similar countries CENTER FOR ENERGY STUDIES Different power production choices of similar countries CENTER FOR ENERGY STUDIES Different power production choices of similar countries CENTER FOR j ENERGY STUDIES I What determines which technology is in use? • Technically best choices from technologies available? • But different countries make different choices = It is not market decision only, people (individuals, collectives) make choices. Market just coordinate CENTER FOR ENERGY STUDIES 1) Technological systems - case of automobile industry • Beginning of 20.century, competition among steam-, electrict-, gas-powered vehicles to substitute horse and carriage, (noxious, noisy, complicated and dangerous vs cheap gasoline as a byproduct from the production of kerosene) •Than period of increasing returns to scale...locking internal combustion engine (ICE) as the dominant design •Producers of other design are reduced — in 1890s, 1900 different firms producing over 3200 different variants of ICE vehicles in USA. In 1920s, a few dozens. By 1955 the Big Three (General Motors, Ford, Chrysler) held 90 % of domestic and 80 % of the global market CENTER FOR ENERGY STUDIES Technological systems • Surviving oligopolistic firms shifted their focus from product to processes innovation, development of specialized knowledge = forming the basis of a company's competitive advantage • General Motors divided engine development into 22 subsystems (ignition, fuels systems, lubrication etc.). That had lasting impacts on specialised labor and knowledge development • = firms tend to focus on existing competencies and away from alternatives that could make their present products obsolete • = capital investment goes preferentially towards projects that reduce production costs and perfect existing product CENTER FOR j ENERGY STUDIES! Performance versus Cost -* Installed base ot Market .sture Technological systems explanation • Technological system (TS) — inter-related components connected in a network or infrastructure that includes physical, social and informational elements (for example, automobile transportation system) • Changes in TSs are based on evolutionary framework with the dominant design models • Invention and inovation create several technologial variants • Period of uncertainty — variants compete for performance improvements and market share • One of the variants captures a critical mass of the market and become de facto standard • Technologies than can exhibit increasing returns to scale (positive feedback) that accelerate improvements relative to competing variants CENTER FOR ■ ENERGY STUDIES! Lock-in of interdependent TSs • Network externalities arising from systemic relations among technologies, infrastructures, independent industries and users • Positive externalities — physical and informational networks can become more valuable to users as the grow in size (road network, telephone network) = the viability of the automobile depends on the development of multiple supporting technologies and industries to create a functional system CENTER FOR ENERGY STUDIES The techno-institutional complex • TSs and institutions are inter-linked. • Techno-inistutional complexes (TICs) emerge through synergistic co-evolution initiated by technological inreasing returns and perpetuated by the emergence of dominant technological, organizational and institutional design CENTER FOR j ENERGY STUDIES! The techno-institutional complex The techno-institutional complex - energy Capture Learning Lock-in of public institutions • The involvement of govt is important for two principal reasons 1) ability of institutional policy to override market forces. In the evolution of a technological system, govt intervention can remove market uncertainty about the direction of technological development through policy (RES) 2) once the governmental institutions (formal, such as legal structures, or informal, such as culture, norms and values) are established they tend to persit in their initial form for extended period (agriculture subsidies, redundant offices) CENTER FOR ENERGY STUDIES 2)Path dependency • History (culture) shapes choices — path dependence (where we are now is the result of our decisions in the past) • Superior technological variant doesn't allways win out in dominant design frameworks. Inferior designs can become locked-in through a path-dependence process + Some form of systematic barriers to the adoption of new energy systems (technologies) = history matters CENTER FOR ENERGY STUDIES Cost of durable capital Cost of durable capital gigawatts 60 Current (2010) U.S. capacity 1930 1940 1950 1960 1970 1980 1990 2000 3) Cultural and normative reasons: China's navy • From 1405 until 1433, Zheng He's seven ocean expeditions (from China to Southeast Asia, India, Persian Gulf, Africa...) • Hudreds of ships ( some of them 400 feet long, 160 feet wide), navy not comparable to anything in the world until WWI. Tens of thousands of sailors • Then the oceangoing ships was intentionally destroyed • Financial but also ideological and cultural (Confucianism — isolationism) reasons CENTER FOR ENERGY STUDIES 4) Political inertia • Changes could be very disruptive - risk of unexpected results. • Big changes in policy regimes rare (CAP of EU) • Ideology matters CENTER FOR ENERGY STUDIES Changes in energy systems 1) Could be (and has been) done 2) Sometimes it takes research and development (sail to steam, coal to diesel locomotives) 3) Sometimes it takes changes in policy — nuclear energy 4) New systems face chicken-egg problem CENTER FOR ENERGY STUDIES Sources • Gawande, A.: Getting there from here, 2009. • Unruh, G.C.: Understanding Carbon Lock-in, 2000. • Schmalensee, R.: Energy Decisions, Markets, and Policies, 2012. CENTER FOR ENERGY STUDIES