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A Transition Perspective On Regulation and Renewable Energy

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By Jan Coen van Elburg and Derk Loorbach

The sustainable energy transition is a central topic in debates across Europe and within countries. From the field of transition studies, it becomes clear that energy transition is not only a buzzword but a fundamental process of structural change. As we are entering this transition, fundamentally new demands are being placed upon existing decision making structures and regulatory frameworks. In this article we argue that consistent regulatory strategies for transition are needed: both to enable and guide emerging sustainable alternatives as well as to break down unsustainable systems that slow down the transition or make it extremely costly.

The large scale introduction of renewable energy technologies is a key transition challenge in the 21st century. For several reasons (climate change, peak oil/prices, dependence on unstable regions, deforestation and biodiversity, armed conflicts, environmental and safety risks) a transition of the energy systems is required to ensure sustainable energy provision. This is pointed out by scientists1 as well as by authorities2 and opinion leader3 . In this article, we reflect upon both the perceived barriers as well as the possibilities for consistent regulatory strategies to guide and accelerate sustainable energy transitions. We also highlight that accelerating energy transitions, as the German example shows, require a speed of change hard to follow by processes of regulatory change.

The energy transition
The energy system as we have it today is not sustainable and not suitable for extrapolation. A multibillion challenge to address. Despite energy saving (crucial though), there are no renown prognosis about absolute decrease of energy consumption worldwide4. The simple explanation for this is the growth in population, as well as the industrialization of countries like China and India that used to have an energy extensive economy of limited seize. Shell’s energy scenario (2008) assumes at least a doubling of global energy consumption between now and 2050. In practical terms, this means that if we would succeed to establish a complete transition for current energy use (100% renewables) today, we would still only be half way. Considering this, a long-term and fundamental process of change seems inevitable as well as necessary: a transition towards a sustainable energy system5.

The concept of transition has been studied in several disciplines such as sociology, biology and technology studies6. Little insights have so far been generated concerning the relationship between transition principles and the legal and regulatory framework, although not because it is considered to be unimportant. Transition and innovation literature tends to refer to the role of legislation as a fundamental barrier (protecting status quo, conservative standards, administrative hurdles, being responsible for lock in) for transition and innovation. These general observations sometimes manifest in the political arena in a plea for a ‘transition law’, ‘ experimental standards’, ‘faster licensing processes’, ‘regulatory free zones’ or a ‘climate law’. ‘Something’ to generate a breakthrough for all kind of legal bottlenecks. So far, however, there is little fundamental insight in the relation between transitions and the regulatory framework.

Over the past years, a few countries have been accelerating ahead of the pack in terms of energy transition. Germany and Denmark are especially profiting from their consistent policies and investments over the last two decades, and are now making rapid progress when it comes to renewable energy production. Though only through making use of substantial subsidy schemes however. The Spanish practice shows how fragile systems that lean on subsidy mechanisms can be. One should question whether this is the sustainable way to address the multibillion investment game called energy.

The point is that it is not the renewables that are financed, but the failure of the regulatory system. Much of the policy-debate as well as relevant research in the area of energy transition has focused on technologies, (consumer) behavior and the role of policy. While often regulation has been indicated as a barrier, so far only little attention has been paid to the possible enabling role of regulatory frameworks. If one looks closer, it becomes apparent that the current regulatory system forces the energy transition society to subsidize renewables endlessly. Simply because we do not dare to abolish support for fossil fuels along the way. For a successful energy transition path against limited costs, it is necessary to address the regulatory regime we have created.

The regulatory framework for energy
The regulatory regime in energy evolved throughout the 20th century and now encompasses a complex web of highly differentiated regulations at local/regional, national and the European level. This complex regulatory system in itself has emerged to facilitate, streamline and control the production of sufficient, safe and affordable energy to power Europe’s growth, starting even before WWII, but expanding rapidly in the second half of the century. Coal and Steel were the pillars of European integration in the fifties, shortly afterwards followed by nuclear energy. The regime constructed governed on the one hand a gradual opening of the market to enable operations on a larger scale and allow for international competition. These market rules were accompanied by safety and security standards and later (particularly in the eighties/nineties) environmental norms.

In March 2011, European Commission DG Energy published a summary of EU legislation that falls under the legislative competence of “DG ENER”. The following policy areas are distinguished: General, Oil, Gas, Electricity, Renewables, Eco-design of Energy-Using Products, End use Efficiency & Energy Services, Energy Efficiency in Buildings, Cogeneration – Combined Heat and power, Trans-European Networks, and Nuclear energy7. 156 pieces of legislation varying from extensive directives to executive (COM) and decisions with a limited scope. As an illustration of the EURATOM heritage of the EU, a majority of 88 pieces of legislation concern nuclear energy. Contrary to that, the relatively new subject of Renewable Energy is governed only by three directives: Directive 2009/28/EC (promotion use renewables), Directive 2003/30/EC (biofuels) and Directive 2001/77/EC (electricity from renewables). Other rules however also influence renewables directly. Renewables therefore do not fit in very well. Not in the least as a result of legislation that was not constructed with the energy transition in mind. Some examples of this are:

1. Under the Paris Convention (1960) the Liability of the nuclear energy operator is limited in amount and time. State guarantees cover the damage beyond a certain level (€300 million). If a serious accident takes place the guarantee will never give sufficient coverage. A study of German insurance experts (BEE 2011) estimates that a nuclear disaster would cost €6.09 trillion in the worst-case scenario. The study also estimates the costs of proper insurance for nuclear disasters at up to €2.36 per KWH. Ten times more than the average retail rate of electricity. Even if these are high estimates, it places subsidies for renewables in a totally different light compared to the support for nuclear.

2. European waste legislation creates systems where wood produced for the purpose of generating electricity is not considered to be waste, whereas byproducts of the municipality Parks Department should be considered as waste, generating a considerable amount of additional administrative requirements. Because rest material may also undergo certain industrial processes before being processed into energy, there will always be a legal ‘grey’ zone that can only be fixed by a judge.

3. Fiscal legislation within Member States throughout Europe stipulates that those who use high volumes pay less tax (in NL 200* less). A devastating disincentive for industry really trying to invest in energy saving. Meanwhile, small-scale (often local) initiatives face the full fiscal burden for the relatively small business case.

4. Wind parks at sear literally require space (Dogger bank: 770 sq. miles). Wind at sea as a new comer has to position itself in between the vested and protected interests of oil/gas, fishery and shipping. Vested interests are willing to use all means possible to frustrate project development and protect their interests. Ten-year procedures are no exemption, of course leading to relatively high costs for realization as well as annulment of the project.

Neither the ETS system nor the volatile subsidy regimes can repair these shortcomings. A transition perspective should be placed upon the regulatory system. One that would make room for investments in renewables and energy saving without the unfair competition that comes along with the current regulatory system.

A regulatory or regulated energy transition?

Drawing from transition studies, there are at least 4 dimensions where the tensions between accelerating energy transitions and existing regulatory frameworks emerge:
A. Long-term system innovation: Transitions span decades and develop in a non-linear, unmanageable manner. They imply structural systemic change, and put stress on existing regulatory systems as well. The biggest challenge is to keep up the pace in regulatory change. A recent example is the debate in Germany to force coal-based energy production to continue while not being profitable so as to provide back-up for renewables. But one could also think about the debate upon removing regulations that support fossil fuels.

B. Integrality: Legislation, as a product of the administrative organization, is typically one-dimensional. Addressing policy themes like spatial planning, the environment, renewable energy, oil, nuclear industry, transport, housing, agriculture, and waste. Apart from the thematic dimension, there are the policy areas that govern all themes from a specific angle: state aid, competition, finance, internal market, and penal law. Bylaws and standards are going more in depth on sub themes leading to specific rules for specific actions under specific circumstances. An immense complication for projects that follow an integrated approach.

C. Flexibility: The regulatory framework is not constructed to create flexibility but to create legal certainty. The legislative standards formulate the rules of the game. Some regulations may include flexibility in the form of exemptions, hard ship clauses, temporary waiver or specific permits. Even legislation exists that sets aside other rules for special purposes such as economic crises (“Crisis and restoration Act Netherlands” puts aside certain procedures in order to speed up the economic recovery) or natural disasters (EU procurement laws allow for direct contracting in case of, for example, unexpected flooding, earthquakes etc.).

D. Selectivity: It is the task of the legislator to act in a non-discriminatory way. Same (legal) subjects, same circumstances, same rules, same enforcement. There is reason, however, to address the non-discriminatory principle for economic activities with some scrutiny. In the first place one should point out that in billions of Euros investment games, legislative standards are not necessarily the outcome of an objective process where arguments are weighed leading to norms and standards that can be based on a solid, objective assessment. Although the law making process, including the lobbying, can in principle be considered to be part of a normal democratic process, the way different interests are represented should be taken into consideration.

These four dimensions systematically underline the problematic nature of the relation between transition and the regulatory framework. Transitions span decades and develop in a non-linear, unmanageable manner. They imply structural change, and put stress on existing regulatory systems. They need an integrated approach rather than a sector driven detailed set of rules to comply with.

In our view the regulatory framework will always stay behind in the fast moving track of energy transition. European legislation may seek to define what renewables are, but who can tell what kind of issues, technologies or solutions are available even as close as 2020? Transitions are by definition chaotic and non-linear, which necessitates rapid responses from legal frameworks to rapidly shifting (market) conditions. Legal definitions – like those of “waste”, “renewables” or “fermentation (of which interpretation can be critical for renewable business cases) are constructed in yesterday’s world. One should simply not try to frame transition into fixed rules, except where critical safety and society issues are at stake. Selectivity would need to be applied. A non-discriminatory approach keeps renewables in a marginal role. However, this is an inefficient way for transition to go ahead. If energy transition is taken seriously, it should receive consistent support in public procurement criteria, state aid cases and R&D investments. At the costs of fossil fuels.

“One should simply not try to frame transition into fixed rules, except where critical safety and society issues are at stake.”

Outlook
In the four dimensions introduced in this article the tensions become clear and the need for more attention to regulatory barriers as well as regulatory strategies becomes evident. Obviously, as transitions cannot be planned or enforced by regulation, we question the added value of long-term policy goals and incremental regulatory strategies. Rather, we need to develop a better understanding and insight into specific instruments that might help accelerate and guide sustainability transitions in general by creating space for innovations (e.g. feed in tariffs, equal access to the grid) or limiting access for unsustainable options (removing fossil subsidies, carbon taxes).

This would concretely imply measures like:

  • A systematic breakdown of all financial incentives that are directly or indirectly devastating for the business cases of renewables and energy saving technology: nuclear liability guarantees, fiscal advantages for energy intensive industry, public R&D for nuclear and oil.
  • A systematic financial facilitation of renewable energy projects: no application of state aid rules below 10 million Euro support value; systematic application of green procurement and space for entrepreneur imitative in the procurement process.
  • Abolishment of obligatory Member States targets for renewables; instead a multi-annual financial deployment program that is only open for Member States that have set themselves national targets above the reference scenario of the EU.
  • Risk and Climate impact based licensing procedures rather than procedure driven processes. Smaller risk = shorter and less complex licensing procedure.
  • A European top runner program that creates business advantages for continuously improving the environmental effects of products, preferences, and selectivity, rather than minimum standards.

The most important interpretation of rules should take place in the light of climate/energy ambitions. Legal standards in the area of energy have not proven themselves as objective standards that construct a fair level playing field. Therefore, legal obstacles should be set aside through application of one of the transition characteristics. Energy transition effects should have a weight in the legal process in a climate-energy era8. If not energy transition will be too little, too late and too expensive.

About the Authors
Derk Loorbach
is associate professor and director of the Dutch Research Institute For Transitions (www.drift.eur.nl), at the Erasmus University Rotterdam. He is one of the original developers of transition management for sustainability transitions and has published extensively on this topic. He has also initiated and been involved in numerous transition initiatives and experiments, both in the energy sector as well as in other domains.

Jan-Coen van Elburg is director at Rebel (www.rebelgroup.com). He holds an MA in European Law and in Environmental Studies. Jan-Coen has over 15 years experience as a legal expert and project leader in a various projects related to structuring and financing of renewable energy. Both for national and international clients. Jan-Coen is part time researcher at Erasmus University/Drift focusing at the troublesome relationship between energy transition and the regulatory framework

References
1. IPPC 2011, Special Report on Renewable Energy Sources and Climate Mitigation, Published for the intergovernmental Panel on Climate Change
2. International Energy Agency, Deploying Renewables 2011: Best and Future Policy Practice, ISBN 978-92-64-12490-5
3. Friedman, Thomas L, 2008, Hot, Flat and Crowded, Farrar, Straus and Giroux, New York.
4. Söderholm P., Hildingsson R., Johansson B., Khan J., Wilhelmssom F.; “Governing the transition to low-carbon futures: A critical survey of energy scenarios for 2050”, Futures 43 (2011) 11-0-1116
5. Verbong, G. & Loorbach, D. (eds) 2012, Governing the Energy Transition; Reality, Illusion or Necessity?, Routlegde, New York.
6. Grin, J., Rotmans, J., Schot, J., with, i.c., Loorbach, D. & Geels, F.W. 2010, Transitions to Sustainable Development; New Directions in the Study of Long Term Transformative Change, Routledge, New York.
7. ENERGY DIRECTIVES overview published at: http://ec.europa.eu/energy/infringements/index_en.htm. Particularly relevant to renewables:
• Council Directive 2009/28/EC of the European Parliament and the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC; OJ of the EU L 140/16-62, 5.6.2009.
• Council Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings; OJ of the EU L153/13-36 , 18.6.2010.
8. Friedman, Thomas L, 2008, Hot, Flat and Crowded, Farrar, Straus and Giroux, New York.

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