THE LONG-RUN PERSPECTIVE: HOW TO INTEGRATE RENEWABLES IN ENERGY MARKETS?

The Problem of Instrument Change

The widespread deployment of RES means that they have grown out of their niche existence. This success yields new challenges. These, in turn, open up the problem of how to adequately adapt RES support over time—what North (1990) refers to as ‘adaptive efficiency’. There are two main reasons, why the energy transition requires adaptations of the policy framework (see Table 5.2). First, multiple technological changes, and possibly surprises, have characterized

Table 5.2. Schematic overview of major transition challenges beyond RES deployment

Source: Authors, based on a review of energy transition literature (e.g., Miller et al. 2013).

the energy sector and will continue to do so. This concerns not only the most imminent aspect of RES production costs but also prospective developments of storage options and demand-side management, as well as developments in the fossil energy sector (see the shale gas boom). So, beyond the question of how to adequately account for RES cost decreases in RES remunerations, the issue of how RES can be aligned with complementary technologies needs to be addressed. This leads to the second point, namely that RES support policies cannot stop at the single aim of increased deployment of RES (see Miller et al. 2013). Immature niche technologies might necessitate a narrow policy focus on capacity increases, but as RES mature, new priorities emerge: market and system integration. With increasing shares of RES, volatile feed- in from wind and photovoltaic power, as well as cumulating expenses for RES support are to be dealt with. In the long run, volatile RES must guarantee security of supply, which is not merely a technological issue but also one of incentives—at some point in time, RES producers will have to face price and quantity risks. Consequently, RES support needs to evolve beyond simple deployment of RES by fixed feed-in tariffs, considering all relevant systemic repercussions (both from a technological and a socioeconomic point of view).

In other words, the danger arises that energy transition policies replace the ‘carbon lock-in’ (Kalkuhl, Edenhofer, and Lessmann 2012; Unruh 2000) with a RES lock-in. At the same time, however, political stability constitutes an important factor for ensuring successful economic policy in general (Weingast 1993) and technology policy in particular (Grubler etal. 2012). While avoiding lock-ins, political flexibility gives rise to political uncertainty and may lead to inefficiently low private investment (Dixit 1992; Hepburn 2006). Thus, a trade-off holds, similar to the discussion about discretionary vs. rule-based approaches in monetary policy (see Lohmann 1992). Optimally, the RES support scheme would be flexible enough to account for unexpected developments concerning technologies and market structures, but also stable enough so as not to undermine private investors’ contributions to the transition process via including RES in their portfolios.

This ‘adaptive efficiency’ perspective needs to be linked with the Public Choice framework. Politicians are primarily motivated to win elections, so their incentive to conceive of a coherent mix of systemic and anticipatory policies (see Sovacool 2009) is low compared to the overwhelming incentive to secure instantaneous stakeholder support. Given that the status quo of RES support represents a balanced compromise resulting from careful political brokering of different interests, path dependency looms. Furthermore, politics generally responds to challenges in an ad hoc way because it is intently fixed on the media attention cycle. Consequently, challenges are not met according to the objective risk they carry but according to the actors’ capacities to respond to the media-induced level of stress (see Prittwitz 1990). As regards the transition challenges, the advisable ‘integrated power system policy’ (Miller etal. 2013) remains elusive. In sum, one important prediction of the Public Choice framework is that some degree of path dependency of the main RES policy characteristics can be expected.

Yet, interestingly, it is, even in principle, unclear what the optimal policy solutions to the aforementioned challenges of market and system integration would be. For instance, can spatial issues such as system-friendly allocation of new wind parks be adequately addressed within the framework initially set up for launching RES or does this require a wholly new support scheme? In the following, we analyse the German RES scheme with respect to its history of adaptation. On this basis, we set out future regulatory options that take restrictions of political feasibility into account.