Katrin Ostertag

Local Utilities Under the EU Emission Trading Scheme: Innovation Impacts on Electricity Generation Portfolios

In January 2005, the EU wide emission trading scheme (EU ETS) for large stationary emitters of CO2 started in its then 25 Member States. The general objective of this novel economic instrument is to help the EU cost-efficiently achieve its Kyoto commitment of reducing its greenhouse gas emissions (GHG) by −8% by 2008–2012 (compared to 1990) and future – possibly more stringent – GHG reduction goals. With a view to the scale of long-term emission reduction requirements, climate protection innovations will have to play a major role. It is therefore of utmost importance to understand how the EU ETS influences activities in these technologies.

Governance Variety in the Energy Service Contracting Market

Earlier versions of this paper were presented at the DIME Workshop “The Changing Governance of Network Industries”, Naples, 29–30 April 2010, at the 1st DIME Scientific Conference “Knowledge in space and time: economic and policy implications of the knowledge-based economy” in Strasbourg, 7–9 April 2008 and at the 9th IAEE European Energy Conference “Energy Markets and Sustainability in a Larger Europe” in Florence, 10–13 June 2007.

The standard theory of market failure

The theory of market failure represents a normative framework to identify instances where the level of societal welfare produced by market processes alone can be further improved. It also indicates by which type of public intervention this may be achieved. With the approach of Paretian welfare economics and the model of perfect competition, it can be shown that perfect competition will produce optimal results with regard to the static functions of the market and maximal welfare in a static perspective36. Perfect competition is, therefore, one possible reference framework to assess the performance of market processes.

The debate on no-regret potentials —origin, context, issues

The term “no-regret potentials” was coined during the debate on climate change. It designates opportunities for the reduction of greenhouse gas (GHG) emissions “… that are worth undertaking whether or not there are climate-related reasons for doing so.” (IPCC 1996, p. 271). In the IPCC’s Third Assessment Report (TAR), no-regret potentials are increasingly equated with GHG emission reduction potentials at negative (net) costs (IPCC 2001, p. 21). In the light of considerable uncertainties surrounding climate change causes and effects, no-regret potentials play a special role in determining the dimension of precautionary policy efforts. Some argue that “…until we have a better understanding of the impacts of global warming, any response should be limited to no-regrets policies.” (Manne, Richels 1995, p. 1). In this context, the implementation of no-regret potentials is considered as a hedging strategy, balancing the risks of waiting against those of premature action.

Theoretical conclusions — A typology of no-regret Potentials

The essence of the theoretical part of this thesis consists in a summary of the different phenomena by which no-regret potentials may manifest themselves and of the underlying causes. This summary is based on the isoquant diagram from Chapter 2 (see Figure 2-5 reproduced below), and the Tables presented in the concluding chapters on the individual theories. We re-organise the findings around the different points in the isoquant-diagram to derive a classification of “true” and “false” no-regret potentials. In total we have six possible states of the economy. Types I, III, and V represent true no-regret potentials. Types II, IV, and VI, as their logical counterparts, are false no-regret potentials according to our re-evaluation scheme. The falsity of the no-regret potentials that may appear in some studies is rooted in inappropriate criteria or incomplete data for the profitability assessment of the energy saving investment considered (Types II and VI), or it may go back to the implicit assumption that the presence of any market failure works to the detriment of energy efficiency and hence provokes a no-regret potential (Type IV). Table 7-1 gives an overview of the typology. The six individual types are described in more detail in the next section.

Complementary perspectives on the no-regret potential

Standard market failures, transaction cost economics and investment theory form the principal theoretical elements in our framework. This focus was chosen because it regroups many of the aspects to be analysed in the re-assessment of the no-regret potential. However, in order to complete the chain of arguments for re-assessing the size and determinants of the no-regret potential, two further perspectives need to be introduced. They concern the aspects of dynamic market failures, i. e. dynamic inefficiencies (Chapter 6.1), and policy evaluation (Chapter 6.2). The perspective of dynamic efficiency aims to assess whether unexploited profitable energy saving opportunities are, indeed, a sign of sub-optimally long lags in adoption, or whether they are a “normal” temporary phenomenon. Our discussion of policy implications lays the foundation for determining the possibility of effective and cost-efficient policy intervention. Only if this is the case, can the no-regret potential be profitably exploited.

Generalisation of case study results

In this chapter, we first summarise the main results from our previous theoretical and empirical analysis. This will answer two of our initially formulated research questions: Do existing estimates of the no-regret potential stand up to a re-evaluation within our theoretical framework? How large is the no-regret potential and what determines its size?

Transaction cost economics

In the debate on no-regret potentials, transaction costs are a rather controversial issue. On the one hand, the controversy concerns the level of transaction costs related to energy saving measures. Existing cost-benefit analyses for energy saving measures are often criticised for being incomplete because, allegedly, they would not fully account for transaction costs. Depending on the level of transaction costs, this negligence is more or less severe. Some studies, e. g. Sutherland (1991), hold that transaction costs are so high that they challenge favourable results of quantitative cost-benefit analyses and explain why energy-efficient technologies are not adopted. Other studies implicitly assume transactions costs to be zero (e. g. Lovins, Lovins 1991; Landwehr et al. 1996). As pointed out, e. g. by Golove and Eto (1996, p. 24) this aspect of the debate suggests a need to empirically quantify transaction costs and integrate them in the cost-benefit assessment of the measures considered.

Case study of electric motors

Electric motors were selected for a case study for two reasons. First, we consider HEMs to be a typical example for a no-regret technology because it is widely claimed that the technical energy savings potential associated to high efficiency electric motors (HEMs) is large and that a large part of it is profitable 185. This is related to the fact that electric motors are a generic technology, which is applied in all sectors of the economy. As a consequence, a large part of Germany’s total electricity consumption can be attributed to this technology — roughly 60% or 250 TWh; in the industrial sector this share is even higher, i. e. 68% (Landwehr et al. 1996, p. 7). The second reason for choosing HEMs is a methodological one. The engineering study, cited above for the assessment of the technical and economic potential of HEMs in Germany, provides data in great detail. Therefore, the material in this study lends itself to a re-evaluation. In addition, we had privileged access to the (unpublished) data bases underlying this study.

Case study of “Contracting”

Contracting can be briefly defined as the outsourcing of the energy management function to a specialist firm. We have chosen contracting as an example for our second case study for two major reasons. First, in the era of energy market liberalisation, the contracting market is generally expected to prosper and develop rapidly. Supposedly, this promotes energy efficiency by autonomous market forces in an economic way. Secondly, the example of contracting complements our case study of HEMs in several respects. It is widely regarded as an organisational measure for achieving energy efficiency improvements, while we discussed HEMs as a technical measure. Moreover, as a brief analysis of the contracting market in Germany shows below, a large share of the market is related to heating services in residential buildings. This complements the electricity oriented perspective and the industry focus in the first case study. Finally, while the example of HEMs provided rich evidence at the level of phenomena of no-regret measures, the interest of the contracting study lies more in the re-evaluation of causes of market failures and the possibilities of their resolution.