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Does Europe need a renewables target? – yes, but it should be defined in terms of innovation

February 8th, 2014 by Georg Zachmann, Research Fellow, Bruegel

The discussion on whether the EU needs a new renewables target beyond 2020 is gaining traction. The proponents argue that a target for 2030 would give the visibility needed for long-term investments all along the value chain (e.g. into network and storage infrastructure). That is, without a firm political timetable for the roll-out of renewables, the cost of deployment might be much higher. The opponents of firm deployment targets argue that having such targets under an emission trading system is overly costly (e.g., Robert Stavins) and that artificially high demand is creating excess rents in those parts of the value chain where supply is slow to react.

We think both sides have a point, but are missing out on one important aspect: innovation. Economic renewable energy technologies are pivotal for decarbonising our economies up to 2050. Long-term decarbonisation on a global scale will not be possible by just deploying the currently cheapest renewables technology. A system consisting of solar panels and storage in Germany is still about 10 times more expensive than an equivalent lignite-fired power plant. Bringing down the cost of the technologies to allow both industrialised and emerging countries to substitute fossil-fuel plants by renewables technologies is essential for enabling global greenhouse gas reductions.

In a recent working paper we evaluate the impact of (i) public research, development and demonstration (RD&D) subsidies and of (ii) public deployment policies on innovation and competitiveness. Our results indicate that both deployment and RD&D are increasing knowledge generation and improving competitiveness of renewable energy technologies.

We find that national deployment and RD&D help in explaining the national patenting behaviour in wind and solar. According to our estimates, if Germany had invested one standard deviation more in deployment and RD&D support for wind technology than it actually did from 2000 on, the number of German wind patents would have been 166% higher in 2009. If it only increased deployment the number of patents would have been 20% higher and if it only increased RD&D the number of patents would have been 122% higher. This indicates two things. First, both support schemes together have a higher effect than the two individually. And second, RD&D support is unsurprisingly more effective in driving patents.

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Figure 1: Predicted diffusion of a hypothetical shock to German wind RD&D spending and deployment by one standard deviation each for all years after 2000 on German wind patents

If we look into competitiveness we find a similar picture. A hypothetical increase in German deployment and RD&D support for wind technology by one standard deviation from 2000 on would coincide, according to our estimates, with a substantial increase in the revealed comparative advantage of German wind turbines on the world market. Thereby, the largest effect comes from deployment.

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Figure 2: Predicted diffusion of a hypothetical shock to German wind RD&D and deployment by one standard deviation after 2000 on German wind RCA
Note: We plot reverse ranking of Germany’s Balassa-Index for wind turbine exports, that is at one Germany would be the least competitive exporter of wind turbines in the OECD. At more than 28 it is the most competitive one.

Finally, we find significant cross-border effects, especially for deployment. Increasing deployment in one country coincides with increasing patenting in near-by countries.

Capture d’écran 2014-02-08 à 17.43.26
Figure 3: Predicted diffusion of a hypothetical shock to German wind RD&D and deployment by one standard deviation after 2000 on neighbouring countries wind patenting

European policy-makers are focused on deployment
Based on the above-presented findings we argue that both deployment and RD&D support are needed to create innovation in renewable energy technologies. However, we worry that current support is unbalanced. Public spending on deployment has been two orders of magnitude larger (in 2010 about 48bn Euro in the five largest EU countries in 2010) than spending on RD&D support (about 315mn Euro).
Yet, public RD&D support may be substantially more effective in creating innovation and also effective in improving competitiveness. Hence, we argue that focusing more on RD&D is essential to generate the new-generation technologies that are able to bring down the cost to a level where they can be globally deployed.

More coordination is needed
We have seen how deployment, unlike RD&D, seems to have substantial cross-border effects for innovation. These spill-over effects call for a better coordination of European and international policy. However, the current European debate is mainly about renationalising energy policies. Our findings are a case in point that Europe can gain from better coordination.

Need for a different type of target
Coming back to the initial question: ‘Does Europe need a renewables target?’ we believe that Europe indeed needs a target for renewables. But this should not be any more a target that encourages the uncoordinated deployment of existing technologies at all cost. The single most important benefit of renewables support is getting down the cost of future global deployment. Consequently, the European renewables target should be defined in terms of innovation. Europe needs a target that incentivises a well-balanced, timed and coordinated mix of deployment and RD&D policies for a wide portfolio of promising technologies.

Georg Zachmann and Michele Peruzzi, Bruegel

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4 Responses to “Does Europe need a renewables target? – yes, but it should be defined in terms of innovation”

  1. Steven Stoft Says:

    Excellent article. As I read it, even if we give credit to deployment for all of the interaction effect, that would come to 166% minus 122% = 44%. So to summarize, spending 100 times more on deployment produces perhaps 1/3 of the technological progress of spending on R&D. (Not too surprising since almost no deployment funds go to R&D.)

    And, of course, with a cap on emissions, reducing emissions with extra renewables only increases emissions from other sources by an equal amount. It does nothing to reduce global warming.

    The renewables lobby wastes 99% of the money it spends. But perhaps it’s not wasted. Advertising your support for renewables is a great way for environmental organizations raise money. Of course it might be cheaper to just subsidize them directly.

  2. Stephen Woodhouse Says:

    Agreed, excellent article.
    I assume that the ultimate purpose of deploying renewables is to reduce CO2 emissions. Given that renewable deployment is generally not the cheapest carbon abatement option (at least today), the economic arguments for immediate deployment are based on the delivery of future cost reductions (i.e. a correction of a market failure caused by a ‘common good’ of lower deployment costs in the future).
    Floating an idea: if future cost reductuions are really the reason for deployment, then the form of the support payment could be directly targeted to place incentives on those elements of the supply chain which have influence over future costs. Imagine a support regime that delivers additional payments based on the future value of a cost index, in a classic sliding scale incentive arrangement. (Although it might not solve the problem that by the time the better technology becomes available, the best sites will all have been taken).

  3. Odile Liu Says:

    In response to this article, I will put forward two points:
    To begin with, I will establish a picture of public subsidies to deployment and RD&D for renewables in France, in order to illustrate that RD&D has indeed been neglected at the expense of deployment.
    Secondly, I will insist on the role of private actors, who conciliate and balance best investments in deployment and RD&D.

    1) How does the French government transpose the European directive regarding the 20% renewable target? Let’s have a look at the French public subsidies.
    Subsidies dedicated to RD&D are granted through the PCRD (Programme Cadre de Recherche et Développement). 50.5 billion euros over a period of 7 years (2007-2013), dedicated to 9 themes of cooperation including energy1. Let’s divide 50 by 7, it makes 7 billion euros a year. Given that energy issues are a priority for the government, we can reasonably presume that the part allocated to energy comes to 3 billion. If we are optimistic, the part for renewables comes roughly to 1.5 billion euros.
    Subsidies dedicated to deployment are translated into bids and feed-in tariffs (i.e. the government ought to buy electricity stemming from renewable at a predetermined price). For instance, on average, the French government buys electricity from solar photovoltaic installations at 400 euros per MWh2. These subsidies cost dozens of billion euros for the French government, according to David Krembel3, who is in charge of gas infrastructures in the French Ministry of Energy.
    We notice that, in France, subsidies dedicated to deployment are approximately 10 times higher than those to RD&D.
    Due to feed in tariffs guaranteed by governments independently from efforts made on cost reduction, deployment is now undergoing a higher pace than RD&D’s, resulting in a proliferation of high-cost infrastructures based on renewables. Worse, subsidies for deployment are aggressively contested by major gas companies in Europe, such as GDF Suez, because gas power plants are compelled to close while they are necessary to overcome renewables’ intermittence. The government is currently reviewing the mechanism of subsidies.

    2) RD&D and deployment make more patents. But boosting patents without channelling creates intellectual property obstacles. Private actors may overcome these obstacles best.
    According to the article, RD&D has a greater impact on the number of patents than deployment. Also, deployment has a huge impact in patents in nearby countries. Because RD&D tends to boost the number of patents nationwide and therefore “internal” innovation, the author draws the conclusion that European policies should rather support RD&D than deployment, which is not the case today.
    More patents lead to greater innovation indeed, yet one should not forget that patents lead to competitiveness under specific conditions. In fact, intellectual property issues easily become major obstacles to competitiveness, since they are often subjected to expensive and long-lasting trials between competitors. This could particularly be threatening in the renewables sector, which consists of a myriad of small size research groups and companies.
    Consequently, regarding the RD&D, it is important to leverage public efforts with those of the private sector. In fact, it is well understood that private sector companies are better suited to conducting applied research with internal resources because, in that way, they have a free hand in proceeding to commercialisation without encountering intellectual property right issues. Technology development and market experience are strongly related and can function as a virtuous circle, which can be enhanced by a supportive policy framework.

    1 2 4: website of the French Ministry of Energy, Ecology and Sustainable Development
    3: according to my interview of David Krembel on April 23rd, 2014

  4. Meryem Bensaid Says:

    Europe has set goals in terms of carbon emission and renewable energies:
    • 20% less carbon emission
    • 20% of the energy mix produced by renewable energies
    • These goals are set by 2020

    To achieve these goals, Europe has developed 2 main types of mechanisms: feeding tariffs and tender offers.
    First, feeding tariffs ensure that renewable energies are bought at fixed tariffs depending on the type of energy chosen and sometimes on the geographical position. The tariffs are calculated by an independent organism using the cost of production, of deployment and of maintenance of the different plants. Feeding tariffs are thus decreasing, which reflects a cost reduction in renewable energies equipment. Nevertheless, the grid parity is still not reached and some argue that it won’t be reached before 2020-2025.
    Second, there are tender offers mechanisms that are used by governments on big projects such as offshore wind or big PV or wind farms. The idea is to create a competitive market to address an important demand.
    All these national measures deployed by the European governments are supposed to be applicable until 2020. Given the fact that projects are based on a 20 year-business-plan or more, the question of whether these measures have to be extended or not, and how, are key questions.

    Thus, as the article points out, European governments have mainly chosen measures that encourage the deployment of renewable energies. The economic arguments for measures in favor of deployment are based on the delivery of future cost reductions to further develop renewable energies and then reduce carbon emissions and climate change issues. The systematic reduction of feeding tariffs shows a will to indirectly encourage R&D but it is not significant I believe.
    The article aims to show the theoretical impacts of different measures that can be deployed. And it shows that the measures that encourage deployment are not sufficient to maximize the production costs reduction of the equipment and encourage competitiveness and innovation.
    The article explains that measures that encourage R&D and more precisely public research, development and demonstration create a shock in the market and can impact for more than two third of the development of the number of patents. Nevertheless, measures that encourage RD&D are more than 10 times smaller than those that encourage deployment of renewable energies plants (315m€ vs 48Mds€ in 2010).

    The article explains that the measures that encourage deployment and the ones that encourage RD&D should be balanced and that governments should encourage more the RD&D aspects to develop innovation and competitiveness and thus reduce the production costs of equipment.
    I completely agree with this idea even if it hard to be deployed. Some argue that a cost index, in a classic sliding scale incentive arrangement could be the solution. I doubt of the impact of this measure if it is calculated for the industry as a whole because I believe that in a certain way it is a vicious circle. I don’t think that it incentives enough the different players. Besides, the best sites are already taken and the returns may be mechanically lower in the sites left.
    Finally, I wanted to highlight that France has deployed a measure to encourage European equipment with a buying upside of 20% in feeding tariffs if the plant uses European materials. This measure aims to slow down the Chinese competition that created in 2011 an important crisis in the European PV market where a lot of companies went bankrupt. But I think that this measure is indirectly against the development of R&D because European equipment can thus be 20% more expensive or 20% more efficient.

    I think that plants won’t reach grid parity in 2020 and more R&D and subventions are needed to support the market. Therefore, I believe that renewables targets should be maintained. Otherwise, there will be a lot of failures: the market will slow down and an important decrease of demand would happen. Nevertheless, I think that these measures should be balanced in the whole chain and not only in the deployment part. R&D and production should be an important matter as well, to structure the industry and make it competitive in comparison with other international players but also with other types of energies or other types of mechanisms that reduce carbon emissions.
    Government should invest more in public research in this field and the investment should be European. Then, feeding tariffs should be calculated site by site with goals and penalties should be set if the efficiency is below the targets. It would takes into consideration the location of the site, the type of equipment and the cost reduction that it generates but also the maintenance and its impact.

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