Working Group III: Mitigation

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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.

Energy Prices
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, 1998).

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, 1996).

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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