Comparison in Pricing Policies- Product Pricing vs. Service Pricing
Innovation and the Evolution of Energy Systems Policy and ...bcc.ncc-cma.net/upload/userfiles/3)...
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Innovation and the Evolution of Energy SystemsPolicy and Modelling
Michael GrubbProfessor of Energy and Climate Change
University College London
International Seminar on Climate System and Climate Change (ISCS) Nanjing University,
July 2018
• The nature of Innovation in energy and industrial technologies• Innovation at system level – a 3 pillar process• Examples from Europe – Germany and the UK• A novel approach to ‘integrated assessment’ modelling – pliability and inertia
• Invention – the creation of something new (ideas, technologies, products, business models, etc.)
• Innovation – development and improvement associated with introduction of novelty into economic realm
• Diffusion – widespread dissemination / adoption
Basic concepts
Technology usually means a product + knowledge, with the product itself embodying technical knowledge
The economics of these processes – especially the innovation stage – still a subject of much theoretical dispute and uncertainty
Economics has traditionally distinguished three stages
Learning by doing• Both codified knowledge
and intangible ‘know-how’; often tacit
• In technologies, implies “experience curves” as a function of deployment
Learning by searching• Codified, explicit knowledge• Depends on investments in
education, R&D etc.
There is also ‘learning by interacting’; ‘learning by using’, etc.
Knowledge can be • codified (explicit, e.g. from writing and formal education) • or tacit (assumed, acquired through experience, implicit)
On Knowledge and Learning
Knowledge is acquired from Learning, through
Technology push view• The theoretical basis
– Technologies are ideas-led– Multiple uncertainties and market failures
impede any economic incentives– Governments identify public needs, fund
exploration & develop potentials• Some classic energy examples:
– Nuclear fission– Coal-based synthetic fuels– Nuclear fusion
• Basic problems of:– Governments ‘picking winners’– Cooperation vs competition
• Theoretical paradox– giant leap from innovation to diffusion,
absence of innovation ‘learning by doing’– Seamless transition from public (innovation) to
private (diffusion) money
Views on Innovation: Polar Opposites?Market pull view
• Theoretical basis– Innovation is driven by economic incentive– Role of government restricted to basic R&D &
correcting specific ‘market failures’• Some classic energy examples (assumed):
– Oil industry development – Combined cycle gas turbines
• Basic problems of:– Classic R&D failures / spillovers – Inadequate Policy direction / internalisation– Real world is ‘second (or third or fourth..)- best’
• Theoretical paradox– Absence of curiosity or public-good learning-by-
searching / or – seamless transition from public (R&D) to private
(innovation), perfect research-industry communication– Idealised Intellectual Property (i.e monopoly) markets– Long term certainty including government-market– Unlimited ‘deep pockets’ and risk neutrality
Different conceptions of innovation ..
Issue Technology-push: Govt R&D-led technical change
Market pull: Demand-led technical change
Implications for long-run economics of big problems (e.g. climate change)
Atmospheric stabilisation likely to be very costly unless big R&D breakthroughs
Atmospheric stabilisation may be quite cheap as incremental innovations accumulate
Policy instruments and cost distribution
Efficient instrument is government R&D, complemented if necessary by ‘externality price’ (eg. Pigouvian tax) phased in.
Efficient response may involve wide mix of instruments targeted to reoriented industrial R&D and spur market-based innovation in relevant sectors. Potentially with diverse marginal costs
Timing implications Defer abatement to await technology cost reductions
Accelerate abatement to induce technology cost reductions
Carbon cost profile over time Carbon cost starts small and rises slowly
Big investment in early decades, cost declines as learning-by-doing accumulates
‘First mover’ economics of emissions control
Costs with little benefits Up-front investment with potentially large benefits
Nature of international spillover / leakage effects arising from emission constraints in leading countries
Spillovers generally negative (positive leakage) due to economic substitution effects in non-participants
Positive spillovers may dominate (leakage negative over time) due to international diffusion of cleaner technologies
… can radically affect the policy conclusions
…. Of the many stages and interactions & feedbacks between them
Real innovation is complex because ….
Diffusion
…. also because it spans the transition between technology push and market pull, and associated public vs private incentives/funding
Novel technology
Mature technology
Market accumul
ation
Commercial-isation
Demon-stration
Applied R&D
Basic Research
Formation and Product/ Technology Push
Market Pull and Growth
Fig.9.5 The Innovation Chain
Note: there is no single “right” structure for the innovation chain … merely different degrees of disaggregation of the various stages
“Invention”“Innovation”
“Diffusion”
Feedback
Real innovation is complex ….
So the ‘polar opposites’ are unhelpful
Overall, innovation involves complex multi-domain journeys
Basic R&D
Technology RD&D Demonstration Commerciali-
zation Market
accumulation Wide
diffusionTechnology
journey
Organisation & supply chain
1 or 2 individuals
Venture or new unit
First outsiders
Recruit specialists,
Develop supply chain
Grow operational
staff
Maturecompany or independent
division
FinancingPublic orInternal funding
Internal fundsor projectgrants
Internal funds, Project grants,
angel or VCinvestors
First sales, internal or
external fundsstill needed
First profits
Financing through private equity,
banks, etc.
Market Regulation
Neutral or negative regulation
Neutral or negative
regulation
Neutral regulation
Specific positive
regulation
Positivegeneral
regulation
Fully adapted regulatory
environment
Institutional Research institutions
Bespoke
tech institutions
First sector associations
Eg. first IPO, licence
acquisitions
Lobbying, corporate expansion
Stable role of associationsin negotiatingsector policy
Customers and standards
No marketdefined
first targeting of
possible markets
ChoosingMarket of
commercial-ization
Early adopters and niches, basic standards
Expanding range of
customers
Well defined Customer profile,
trusted brand
1st
2nd
3rd
Infrastructure Research infrastructure
Test centres Negative
or neutral
‘Piggybacking’/First enablinginfrastructure
Barriers from existing
infrastructure
Adapted or Dedicated
infrastructure
Grow
ing social scale and role of higher domains
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Innovation and the Evolution of Energy SystemsPolicy and Modelling
Michael GrubbProfessor of Energy and Climate Change
University College London
International Seminar on Climate System and Climate Change (ISCS) Nanjing University,
July 2018
• The nature of Innovation in energy and industrial technologies• Innovation at system level – a 3 pillar process• Examples from Europe – Germany and the UK• A novel approach to ‘integrated assessment’ modelling – pliability and inertia
Countries with higher energy prices did not end up spending more on energy- In fact they spend less
Eastern Europe had prices lower than any OECD- And ended up spending more on energy
Not consistent with classical measures of in-country
consumer price elasticities), evidence for:
Energy efficiency regulation and related
policy responsesInnovation throughout
energy supply and product chains
Challenge is to accelerate such trends for decades without politically untenable policy-
driven price shocks
Energy systems adjusted in the decades after oil price shocks - to keep energy expenditure to an economically manageable level
Innovation far wider than just supply technologies ..
But no pillar on its own can credibly transform global energy systems– nor offers a politically stable basis for policy
• Energy efficiency policy on its own limited by: – Scale of intervention required– Growing scale satisficing behaviour – …. Leading to large Rebound effects
• Pricing on its own limited by:– Blunt nature of impacts First and Third Domain impacts– Rising political resistance to rising fuel bills – .. and competiveness concerns
• Innovation on its own limited by:– Lack of demand pull incentives– Scale & risks of investment costs– Political failures in absence of rising market feedbacks
Figure 12‑ 4 Potential joint benefits in energy and climate policy
Pillar
Standards & engagement for Smarter Choices
Enhance efficiency,Indoor and Local health
subsidy removal ..
Prices and markets for Cleaner products and
processes
Stabilise investor confidence, revenues,
air pollution & energy security
Strategic investment for Innovation & Infrastructure
Accelerate Innovation in weak sectors, coordinate supply
chain & infrastructure
Co-Benefits Integration
Climate Policy potential to
MotivateStabiliseCoordinateFinance
forlong-run security
efficiency growth
innovation
Whilst the underpinning evidence and theory of Planetary Economics suggests several routes to ‘co-benefits’
Fig. 12.3 Public and private returns in the 3 domains
Res
ourc
e U
se /
Ener
gy &
Em
issi
ons
Economic Output / Consumption
Pillar III
1. Private returns >> public returns but not realised
=> Standards and engagement
Innovation and infrastructure
Cleaner products and processes
Pillar ISmarter choices
Pillar II
3. Public returns (including innovation, security &
environment) >> private returns
=> Strategic investment
Essential to understand the complementary economic roles of the different pillars in Asia?
Experience and theoretical reasoning on each pillar shows..• There are multiple lines of evidence that in context of transforming the
global energy system over a few decades, all three domains are of comparable importance
• Only approaches that integrate across all three domains have potential to generate ‘Green Growth’
• The dominant neoclassical ‘Second Domain’ theories emphasise instrument (pricing) that maximises political opposition unless it is nested in the complementary triad
• First and Third pillar policies can (and have) delivered multiple benefits, but ….
Innovation and the Evolution of Energy SystemsPolicy and Modelling
Michael GrubbProfessor of Energy and Climate Change
University College London
International Seminar on Climate System and Climate Change (ISCS) Nanjing University,
July 2018
• The nature of Innovation in energy and industrial technologies• Innovation at system level – a 3 pillar process• Examples from Europe – Germany and the UK• A novel approach to ‘integrated assessment’ modelling – pliability and inertia
2020-20%
Greenhouse Gas Emissions
20%Renewable
Energy (national targets)
20%Energy Efficiency
10%Interconnection
2030≤ -40%
Greenhouse Gas Emissions
≥ 32%Renewable
Energy
≥ 32.5%*Energy Efficiency
15%Interconnection
*to be reviewed by 2020, having in mind an EU level of 30%
New Governance System and Indicators
UK Germany
Energy Efficiency
EU Product Standards (high economic & environmental value)
Emphasis on cost-effectiveness, quasi-market approaches
Emphasis on strategic imperative (eg. deep retrofits)
Carbon Pricing
Carbon pricing - EU ETSKey instrument: shored up by carbon floor price since 2014
Peripheral instrument
Low-carbon power
(since 2010, EU renewables directive)Diverse options, Second-mover renewables
Renewables central, Prime mover
Both UK and Germany have in practice pursued 3-pillar policies, but with different emphasis
0
50000
100000
150000
200000
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Cumulative PV installedcapacity, MW
Germany Japan China others
From 1996 to 2006, German plus Japanese PV deployment > 70% of total global deployment. By 2006, their cumulative share accounted for 82% of global PV capacity.
Japan dominated until 2003, Germany 2004 to 2012.
…. And cost
The decline and collapse of UK coal power generation – 20 year view
Falling electricity demand, with Coal displaced by gas & Renewables
UK electricity – an ‘island of coal’ no more
UK power sector emissions halved since 1990, coal now below 10% of generation.
C price drives operation and closure not new investment or efficiency. Impact since 2014 much bigger than before due to price+ and :• Lower gas – coal price
differential • energy efficiency policies,
demand declining since c. 2010
• Rapidly rising share of renewables
UK electricity – an ‘island of coal’ no more
UK Germany
Energy Efficiency
EU Product Standards (high economic & environmental value)
Emphasis on cost-effectiveness, quasi-market approaches
Emphasis on strategic imperative (eg. deep retrofits)
Carbon Pricing
EU ETSKey instrument: shored up by floor price since 2014
Peripheral instrument
Low-carbon power
(since 2010, EU directive)Diverse options, Second-mover renewables
Renewables central, Prime mover
Result
Far more cost-effective over-delivery of 2020 GHG target
More costly and under-delivery of 2020 GHG target, but huge innovation
Progress to 2030 and beyond may be more costly (esp heating)
Deeper future reductions now clear, cost-effective, & embedded
UK and Germany: both models have value
Innovation and the Evolution of Energy SystemsPolicy and Modelling
Michael GrubbProfessor of Energy and Climate Change
University College London
International Seminar on Climate System and Climate Change (ISCS) Nanjing University,
July 2018
• The nature of Innovation in energy and industrial technologies• Innovation at system level – a 3 pillar process• Examples from Europe – Germany and the UK• A novel approach to ‘integrated assessment’ modelling – pliability and inertia
Illustrative model
Adaptive energy system
The ‘global optimal trajectory’ is radically different for an adaptive / pliable energy system, given ‘typical’* damage & discounting assumptions
Default (reference) trajectory
Standard (non-adaptive)
Emissions: if emissions system adaptive/pliable, steady decline: sustained almost linear if fully adaptive
‘Ambition’: with these parameters, cumulative emissions c. +350GtC, if high damages, or if system highly pliable (in which case, stabilises atmosphere)
Blue range: with semi-pliable (‘A&B cost’: � = 0.5) emission system, shows emissions range for damage sensitivities x 2 & 0.5 respectively
Default (reference) trajectory
Standard (non-adaptive)
Adaptive / fully pliable system
Adaptive / fully pliable system
Default (reference) trajectory Standard (non-
adaptive)
* See Annex for assumptions: many parameters reflect typical DICE parameters
Semi-pliable (50:50) system(shown with range of climate damages)
Semi-pliable (50:50) system
Source: https://www.eprg.group.cam.ac.uk/eprg-working-paper-1808/
‘Optimal’ effort
Effort: If adaptive / pliable system, much bigger early efforts because they have much higher benefit
Measures which steadily adjust the pathway are optimal at much higher effort / ‘cost of carbon’
Standard (non-adaptive)
Adaptive / fully pliable system
Semi-pliable (50:50) system
Timely investment: Optimal global investment < $1trn/yr can cut annual costs (abatement + damage) towards end of century by at least 5 times as much
Standard (non-adaptive)
Adaptive / fully pliable system
Semi-pliable (50:50) system
Default (reference) trajectory
Source: https://www.eprg.group.cam.ac.uk/eprg-working-paper-1808/
Key policy implication of some numerical analysis
• The value of measures which adjust the pathway is several times that of measures which just save CO2
• Useful to think of a ’base’ carbon price as that which can be implemented today to reflect the assumed damage of CO2 emissions
• Measures in the First and Third Domains may well justify a “cost of carbon” well above this base carbon price, because these measure endure
• A rising base carbon price can also enhance in particular strategic investments & leverage long term institutional finance
• .. When the Three Domains & associated Pillars of Policy designed as a mutually reinforcing package
• 21st Century energy systems will be radically different from 20th Century
• Transition is already under way, so far driven far more by the non-pure-market policies
• We need the full and balanced package – including fresh consideration of carbon pricing:– Stability and direction?– Use of revenues for energy innovation and infrastructure? – Direct consumer access to zero-carbon energy
• Clear policy direction with all three pillars can shift risk, lower finance costs, and increase the gains to innovation and infrastructure
Standards & Engagement
Markets & Prices
Strategic Investment
POLICY PILLARS
Technology options &
competitiveness
Manage bills, increase
responsiveness
Revenues, revealed costs, strategic value
Values, pull & preferences
Attention, products &
finance
Education, access & control
“Only Connect”
Conclusions• Overwhelming evidence of induced learning and capacity of energy technologies and systems to adapt in
response to policies and external forces (“pliability”)• But coupled with high inertia – several decades for major transitions• Consider Dynamics
– ‘Optimal’ response does not just depend on assumed scale and non-linearity of impacts and discount rate! Also depends on responsiveness and inertia and adaptive capacity (pliability) of emitting systems
– Standard frameworks imply sharply rising costs – both damages and mitigation costs - over the century– Adaptability / pliability is a major driver of the net benefits of early action – will vary by specific options and would justify
diversity in apparent mitigation costs
• The combination can lead to ‘cost benefit’ effort levels similar to a risk-averse strategy dominated by non-linearly / threshold assumptions, may almost stabilise gross costs
• Annex: Some background to model & parameter assumptions