5.4.4 Energy Supply
There are two primary types of options available for reducing emissions. One
is to increase the efficiency of energy supply, and the second is to switch
from carbon intensive fuels to low or no carbon content sources of energy. The
two options face different categories of barriers and the most relevant are
described in this section.
Low prices are, in part, a consequence of direct and indirect subsidies to producers,
and the non-inclusion of external costs in their production and use (Watson
et al., 1996; Harou et al., 1998). It is common in the energy supply sector
to find price policies (public or private) which do not reflect the full
costs. These full costs include environmental externalities, which, for
example, are not included in any coal transaction or gasoline prices in the
United States. Producers and users of new energy technologies are not usually
rewarded for the associated environmental benefits (World Bank, 1999).
Lack of Consistency in the Evaluation of Energy Costs
Closely related to the price barrier faced by clean fuels is the selective evaluation
of energy costs from different energy sources. There is a need to make a comprehensive
evaluation of all costs and benefits.
Lack of Adequate Financial Support
Multilateral development banks, public banks, and private banks generally do
not offer soft credit, or programmes aimed specifically at energy technologies.
This acts as a further barrier to capital-intensive energy projects. The absence,
up until now, of specific programmes and an administrative process adapted to
this type of project has resulted in high transaction costs and a lack of discussion
of this key issue as a solution in the climate change problem. The role of a
multilateral system could be especially important for the development of a hydropower
programme, financing of regional interconnections, and developing small, sound
environmental technologies for energy supply like mini hydro, solar, and wind.
Institutional Transformation and Reforms
Privately-owned generation, transmission, and distribution entities are playing
increasingly large roles in electric utility systems worldwide. Many national
power utility systems have been totally or partially privatized.
The liberalization of the power industry, which introduces competition within
the generation segment, could have a significant impact on the viability of
renewable sources. Some observers may argue that subsidies of any sort are antithetical
to the concept of a deregulated market, and that the purpose of liberalization
is precisely to eliminate such subsidies and market distortion. In competitive
markets where the process is replaced by the market-driven decisions of generation
companies subsidies to renewable sources may become less acceptable (Bouille,
Segmentation of the electricity chain may reduce the incentives for electricity
companies, especially electricity distribution companies, to act on end-use
efficiency (Poole et al., 1995).
There are institutional and administrative difficulties associated with the
development of technology transfer contracts. These are necessary to qualify
regional construction companies as partners in any undertaking. There is a need
for greater regional co-operation among developing countries in both research
and development, and the development of an international commercial contracting
network, to improve technology transfer.
Along with the institutional difficulties of technology transfer projects,
high transaction and implementation costs act as barriers as well. Often, cost
estimations of new technologies do not include items related to transaction
costs or items associated with technology penetration (policy implementation
costs). Both transaction costs and policy implementation costs are additional
expenses to technology transfer, limiting competitiveness and market potential.
Legal and Regulatory Framework
Many energy supply sources are subject to a lack of regulation other than for
safety, inadequate tariffs for transport and distribution, and no incentives
to increase efficiency. For example, there is often no penalty for natural gas
flaring. This reduces the motivation for improving the efficiency of the supply
chain of such sources.
If electric utility companies sell electricity within a regulatory system that
allows them to recover all operating expenses, including taxes and a fair return
for their investments, they will show no interest in increasing their efficiency.
Within this system, utilities will be reimbursed the operational costs independent
of the quality of the service offered (US DOE, 1996).
Distributed electricity generators often face a complex bureaucratic process
for authorizing the construction and operation of co-generation facilities.
Complicated terms of grid connection, as well as technical, economic, and institutional
rules limit access to the grid for distributed generators (Verbruggen, 1990,1992,
Lack of Information
While lack of information on energy technology performance, technical, and economic
characteristics is not a very significant barrier in the energy supply sector,
this market failure is related to market transparency. The inability of the
private market to provide generic information (no transparency), and the possibility
that in the field operation of a technology may differ from controlled
environment operation by a technology producer, both increase uncertainty and
risk in an investment. These problems are extensions of the information barrier4.
Developed countries generally have more capital and technological resources
than do developing countries (World Bank, 1999). This can greatly affect the
decision-making process in developing countries, as they may not have the newest
knowledge to adequately assess new technology opportunities.
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