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ritteUTitle Sider/Pages ~ew renewable energy developments and the climate change 28 .ssue: A case study of Norwegian politics

E%blikasjonstype/Publication Type Nummer/Number FNI report 08/2000 Forfatter(e)/Author(s) ISBN 4tle Christer Christianson 82-7613 -395-9 h-ogram/Programme ISSN 0801-2431 E%osjekt/Project Strategist instituttprogram (SIP) ‘Internasjonale regimer pa milja- og ressursomr~det: [mplementering, konflikt og synergi’

3ammendrag/Abstract [t is widely agreed that the search for cleaner energy technologies is central to any long-term :esponse to the threat of global climate change. Many countries are thus promoting the adoption of new renewable energy (NRE) sources and technologies within the context of energy and ;Iimate change policies. This report unfolds linkages between public policies and NRE develop- ments using as a case in point. The aims are firstly to assess the impacts of policy design md public priorities in terms of technology and industrial development dynamics, and secondly :0 discuss the role attributed to the climate change issue. The primary conclusion is that in spite of long-lasting public efforts, NRE sources represent mly a pitiable fraction of the energy produced, delivered and consumed in Norway, and only modest industrial development dynamics have taken place. Among the most important reasons for his poor outcome are (i) weak demand-side policies; (ii) fluctuating patterns in public priorities; and (iii) low electricity prices. The Norwegian experience substantiates claims that effective public strategies should be firmly based upon long-term commitments, employ a combination of policies and measures conducive to technical change and innovation, and be capable of guarding against path dependence.

StikkordlKey Words Norway, new renewable energy, climate change, public policy, technological change, issue linkages

Bestilling til/Orders to: Fridtjof Nansen Institute, Postboks 326, N-1326 , Norway. Tel: (47) 67111900 Fax: (47) 67111910 Email: sentralbord(ij)f ni.no Preface

This report has been written within the Strategic Institute Prograrnme (SIP) ‘Conflict and

Synergy Between International Regimes in Environmental Management’ at the Fridtjof Nansen Institute. The project, financed by The Research Council of Norway, started in 1999 and is poised to end in 2001.

The report has benefited considerably fi-om interviews and conversations with a number of people, most notably Per Finden, Institute for Energy Technology, and Peter Bernhard, Kristian Grorud, and Fridtjof Salvesen at KanEnergi AS. I have also received valuable comments on earlier draft versions from colleagues at the Fridtjof Nansen Institute, notably

Olav S. Stokke, Steinar Andresen, Jon B. Skj=rseth, Kristian Tangen and Per Ove Eikeland.

Lysaker, September 2000

Atle Christer Christianson 1 INTRODUCTION 1

2 HISTORICAL BACKGROUND AND POLICY CONTEXT 3

3 PERCEPTIONS AND RHETORIC: THE EVOLUTION AND IMPACTS OF NEW RENEWABLE ENERGY POLICIES IN NORWAY 5

3.1 The rise of new renewable energy (1978-1982) 6

3.2 Transitory period (1982-89): from optimism toward ‘wait and see’ 8

3.3 Sustainable development and public environmental enthusiasm (1989-92) 9

3.4 From targets and timetables towards joint implementation and cost-effectiveness (1992-2000) 11

3.5 Post Kyoto developments 13

4 ASSESSING THE IMPACT OF PUBLIC POLICIES: DRIVERS, BARRIERS AND CONTEXT 17

4.1 Push without pull? 18

4.2 Systemic interdependencies and lock-ins 19

4.3 Technological opportunities and cumulativeness of technical knowledge 21

5 CONCLUSIONS AND LESSONS 23

REFERENCES 25 List of Tables

TABLE 1: THEORETICAL AND TECHNICAL/lWACTICALA POTENTIALS FOR UTILISATION OF NEW RENEWABLE ENERGY SOURCES IN NORWAY (TWH) (SOURCE: ST.MELD.NR65(1981-82) 7

List of Figures

FIGURE 1: GOVERNMENT FUNDS FOR NEW RENEWABLE ENERGY SOURCES FROM 1978-98, INCLUDING SUPPORT FOR RESEARCH AND DEVELOPMENT (R&D) AND MARKET INTRODUCTION. PRICES ARE lN 1998 NOK CORRECTED FOR INFLATION THROUGH THE NORWEGL4N CONSUMER PRICE INDEX. (SOURCE: KANENERGI AS). 5 1 Introduction

The threat of global warming and resultant climate change currently poses one of the biggest dilemmas for policymakers, within governments and industries alike. Among the contentious issues is the question of how much effort should be invested in near-term emissions control, and how much should be deferred. Not surprisingly, the debate has largely revolved around the issue of economic costs, for which it is often argued that rapid abatement now should be avoided due to the costs it would impose on society at large. Hence, since the costs of abatement technologies are likely to decrease with time, and learning about climate change risks will improve, there are economic reasons for favouring some delay of emissions abatement, and emphasise ‘no regret’ savings in near-term mitigation strategies’.

However, it is also becoming increasingly recognised that the emphasis on cost- effective, short-term policies may not allow for minimizing the overall costs of climate policies over the long term (e.g. Hourcade and Robinson, 1996; Grubb, 1997; Ha-Duong et al, 1999). A key to Mure response capability may thus be to induce development, deployment and widespread dissemination of low-carbon supply and conservation technologies, capable of competing head-to-head with, and eventually substituting, carbon-intensive technologies. In order to devise robust and effective policy strategies with such goals, it is pivotal that policymakers comprehend the fi.mdamental processes through which technology evolves, and the role of public policy in such developments. With this in mind, it may prove usefid to analyse and assess experiences from the implementation of domestic policies and strategies. As many of the options, challenges and conflicts that face policymakers are likely to recur across regions and countries, important lessons can be learned from identifying key determinants behind successes and failures.

This report examines the promotion of new renewable energy (NRE) sources and technologies in Norway over the last two decadesz. More specifically, the objective is firstly to trace and describe changes in public priorities and the portfolio of policy instruments and

1See Weyant (1999) and Toman et al (1999) for comprehensive discussions on the economics of climate change. 2The concept of NRE is used in this report to denote all renewable sources and technologies except large-scale hydro and conventional biomass combustio~ such as wind, passive and active solar heri~small-scale hydro, wave and tidal, geothermal, and photovoltaic. 2 Atle Christer Christianson measures. Secondly, the report assesses the impact of such policies with respect to technical change and innovation. By impact on technology and innovation we mean respectively the effects of public policy on the rate and direction of technical change, and firms’ attempts to introduce new technologies. Finally, the report discusses issue-linkages in terms of the extent to which the emergence of a ‘new’, topical issue – climate change – has been able to affect the strength and outcome of policies within an adjacent area – NRE. Hence, due to the strong couplings between greenhouse gas (GHG) emissions and current patterns of energy use, one could expect growing concern over global warming to increase levels of governmental support for NRE.

The report is organised as follows. Section 2 offers a brief introduction to the study of the Norwegian energy system in terms of resource endowments and public priorities. The evolution of policy developments concerning NRE is then unfolded in section 3, along with a discussion of the most important policy measures and public support programmed. Section 4 identifies and discusses key factors and mechanisms that may have impeded NRE developments in Norway, while section 5 wraps up the report in terms of concluding remarks and recommendations. 2 Historical background and policy context

Compared to most other countries, Norway is uniquely endowed with primary energy sources. Besides being a major exporter of oil and gas, renewable hydroelectric power represents about

99% of Norway’s electricity production (OED, 2000). Total installed hydroelectric capacity makes up some 27,470 MW with annual mean production of about 113 TWh (ibid.). The bulk of this capacity was constructed over the years 1960-90, with the major construction boom from 1970-85. Owing to the harnessing of vast hydroelectric resources there has traditionally been excess generation capacity” in the Norwegian electricity sector. However, due to low rates of investments in new generation capacity over the last decade, steadily increasing consumption, and capacity constraints on imports fi-om the Nordic market, decision-makers may indeed face a situation of increasing deficit on the national power balance unless no new measures are introduced. A sign of what may come was the extremely low rainfall and high electricity demand that combined to turn Norway from a net electricity exporter to a net importer of some 9 TWh in 1996. Norway was also a net importer in 1997 and 1998.

In order to comprehend the favorable politico-institutional and economic context within which the hydropower construction boom was embedded, it has been claimed that during the post-war reconstruction era the “hydropower complex was given a political mandate for implementing extremely expansive programmed for hydropower construction and raising of energy-intensive industries” (Midttun, 1988). This extensive public engagement involved close administrative ties between energy and industry policies, which allowed the programmed to continue throughout the 1970s and early 80s despite public critique. The continuation of these expansive programmed, for which securing access to ample and cheap electricity was a key priority, were made possible by “price subsidies, high demand forecasts and suboptimal economic behaviour from major electricity companies” (ibid.). However, following the establishment of the Ministry of Petroleum and Energy (MPE) in 1978, a shift in political priorities was witnessed. Petroleum policy was given a more prominent role, and electricity policy was obliged to find its place within a broader policy framework. 4 Atle Christer Christiansen

Considering choices pertaining to the supply-side of energy policy there are still hydroelectric resources to be harnessed, although it is widely recognised that one cannot rely solely on hydropower developments in order to ensure satisfactory energy supplies (NOU 1998: 11; St.meld. m. 29, 1998-99). Taking into account Norway’s vast resources of natural gas, construction of gas-fired power plants would seem an obvious alternative. In fact, the Norwegian Water Resources and Energy Directorate (NVE) granted a concession to a consortium, Naturkraft, to construct and operate two gas-fired plants already in 1996. The ‘gas power issue’ triggered heated and contentious debates among policymakers and interest- groups, involving the resignation of the former centrist Prime Minister in the spring 2000, but is currently put on hold for commercial reasons due to low electricity prices in the Nordic and European markets. 3 Perceptions and rhetoric: The evolution and impacts of new renewable energy policies in Norway

For analytical purposes we divide the period to be covered into four different phases, which strongly correlates with periods of fluctuating public priorities concerning the development and adoption of NRE. Figure 1 demonstrates how the level of public tiding has oscillated over the period 1978-98, in terms of levels as well as the distribution between the various NRE sources and technologies.

100

80 Y O 60 z

0

[❑ VVave■ Bio ❑ Solar ❑ wind ■ other I

Figure 1: Government funds for new renewable energy sources fi-om 1978-98, including support for research and development (R&D) and market introduction. Prices are in 1998 NOK corrected for inflation through the Norwegian consumer price index. (Source: KanEnergi AS).

The first phase begins with the establishment of public support programmed in 1978, and ends in 1982 with the submission of the first White Paper on NRE. Figure 1 shows that wave power comprised the focal point during this period, echoing the high technological expectations at the time. The second, ‘transitory’ period (1982-9) entails a shifl in public expectations concerning near term developments, precipitating a gradual decrease in levels of 6 Atle Christer Christiansen public tiding and more of a ‘wait and see’ approach. The submission of the 1989 White

Paper on Norway’s follow up to the Report of the World Commission on Environment and Development marks the onset of the third phase (1989-92). This is a period characterised by public environmental enthusiasm, encompassing a shift towards higher public expectations regarding the future role of NRE and rising public expenditures. Levels of support again decrease after the Rio summit and up until the year of the 1997 Kyoto conference, resonating with a more cautious approach to the climate change issue and increased emphasis on cost- effectiveness. During the post-Kyoto years public funding has increased considerably, although the lion’s share of increased public support has been spent on bioenergy, reverberating public perceptions and expectations of bioenergy as the source most likely to contribute cost-effectively to near-term energy supplies.

3.1 The rise of new renewable energy (1978-1982)

Against the backdrop of increasing energy prices, concern for environmental problems associated with the use of fossil fuels, and constrained access to oil resources, the first move towards public support for NRE developments in Norway was taken by the parliament in 19783. Support w’as in this initial phase restricted to a few projects on wave power. Following the budgetary negotiations later that year, however, it was decided to establish a publicly supported R&D programme that was to include also other energy sources and technologies. A White Paper on “New renewable energy sources in Norway” (St.meld. m. 65, 1981-82) was then submitted in 1982, which comprises tlzefirst and to date only policy document devoted solely to the role of public policy in this area. Based upon a preliminary assessment of Norway’s resource endowments it was argued that domestic efforts should concentrate on technologies based upon the NREs solar energy, wind power, wave power, and biomass. For the purpose of illustrating public expectations at the time, Table 1 shows the potentials given in the White Paper for future utilisation of these NREs:

At the outset these potentials maybe deemed rather optimistic, at least concerning the potentials for the years 2000 and 2020. However, the projections were admittedly based on a

3Two projects on wave power had, however, been supported by funds from the Royal Norwegian Council for Scientific and Industrial Research (NT’NF) since 1976. New Renewable Energy Develo~ments and the Climate Change Issue 7 set of highly restrictive assumptions. It was for instance presumed that the first commercial prototype of a wave power plant with an installed capacity of 200 MW had been put in operation by 1990, and that 10 plants comprising an overall capacity of 2000 MW were in operation by the year 2000. The projections were fi.uthermore conditional, dependent upon the outcome of R&D efforts, technological developments, fidure rates of adoption, and exploitation of area resources. The need for continued public support of NRE was justified on account of five fimdamental objectives. First, to provide technical options Jor the future capable of supplementing generation capacities based on hydroelectric power or replacing oil as primary energy. Second, to improve resource-economics in terms of economizing with domestic energy stocks. Third, to replace polluting fossil fiels and thus mitigate environmental impacts at the national and international level. Fourth, to increase j7exibility and emergency preparedness within the domestic energy supply system. And finally, to acknowledge international solidarity in terms of avoiding resource depletion on a global scale.

Table 1: Theoretical and teclmical/practicala potentials for utilisation of new renewable energy sources in Norway (TWh) (Source: St.meld. m 65 (1981-82)

Energy source Theoretical Technical/practical potentials in year potential 1990 2000 2020

Biomass 142 11,1 16,7 23,6

Wave power 583 0,3 3,3 23,6

Solar energy 258333b 0,3 0,6 1,7

Wind power 3194 0,3 4,1 23,6

a Predictions for technical/practical potentials were based upon a set of criteria consisting of access to energy at location, location opportunities, and expectations concerning technological change and capacity limits (St.meld. nr 65, 1981.82: 18). b The theoretical potential for utilisation of solar energy is reduced to some 89 TWh when based solely on inhabited areas. 8 Atle Christer Christiansen

A goal for future work should thus be to establish a sujlicient pool of knowledge and

experience in order to compare potentials for NRE sources with conventional energy sources. Taking into account Norway’s limited resources (human and financial capital) it was suggested that core activities should be mapping of resources, adaptation of technologies developed in the international market, and assessment of potentials for profitable industry developments.

3.2 Transitory period (1982-89): from optimism toward ‘wait and see’

Even though the 1982 White Paper offered rather optimistic predictions regarding the long- term opportunities for NRE developments, public finding was nevertheless cut considerably during the 1980s (see Figure 1). Thus, whereas policymakers may have anticipated accelerating rates of technological change, the period 1982-89 entails more of a ‘wait and see’ approach in terms of public expectations and priorities. In a 1985 White Paper on ‘TJorway’s fiture energy consumption and -production” (St.meld. 71, 1984-85) it was concluded that NRE sources were unlikely to become competitive in the short term. Excessive costs and cheap energy horn conventional sources were raised as the main obstacles towards near-term deployment of NRE technologies. However, it was also recognised that most NRE technologies were still in an early stage of development. Their capability to compete head-to- head with conventional technologies would thus depend strongly on supply-push (R&D)

policies. Still, due to tight budgetary constraints, it was proposed to maintain public support at the present level, whereas the scant resources should be allocated to areas in which Norway enj eyed competitive advantages in terms of resource endowments and technological competence. Within other areas the objective should be to maintain a certain level of scient@c preparedness (ibid.: 133).

Considering the practical implementation of supply-push policies we note that even though support programmed for NRE were established in 1978, research activities were not co-ordinated or integrated in terms of dedicated or well-defined programmed until 1989. Little emphasis was thus put on creating an appropriate institutional flamework and a collective identity among agents involved in NRE activities. Neither did there exist clear and precise criteria to distibute funds between R&D, information, demonstration proj ects, and market introduction during this period. Priorities were mainly established in response to guidelines New Renewable Energy Developments and the Climate Change Issue 9 from the Ministry of Petroleum and Energy and ‘needs’ articulated by R&D institutions and universities. R&D efforts were largely confined to a few technologies and projects, such as development of wood stoves and fireplaces, mapping of wind resources and sighting, utilising solar heating in buildings and the development and testing of prototypes to harness power fi-om the waves.

3.3 Sustainable development and public environmental enthusiasm (1989- 92)

Fundamental concern over future energy supplies was clearly a key determinant for setting up the first public support programmed for NRE. However, as the politics of environmentalism shifted horn an emphasis on local to regional and eventually global environmental issues towards the late 1980s, the global climate change issue gradually ascends the political agenda. The period from 1989-92 may thus be inferred as one ofpublic environmental enthusiasm, in which Mrs. Gro Harlem Brundtland played a key role, both as chairman of the World Commission on Environment and Development (WCED) and as Prime Minister (Andresen and Butensclwm, 1999).

One of the milestones in this period is the 1989 White Paper on “Environment and Development” (St.meld. m. 46, 1988-89), which outlined the Programme for Norway’s follow-up of the Report of the WCED. Herein the government stated that the ambition was for Norway to be a ‘pusher’ in the process towards establishing an international climate agreement. In order to act upon this ambition the Government proposed that a target for Norway should be to “reduce the growth of C02 emissions so that they can be stabilised during the 1990s and at the latest by the year 2000” (ibid.: 10~. Core policy instruments and measures conducive to the attainment of this target were public support programmed for NRE developments, energy efficiency measures, and active use of price-mechanisms and taxation policies in order to internalise environmental costs in energy prices’.

4During the followingdebates in the Parliament the target was in fact made even stricte~ stabilisation of emissions at the 1989 level by the year 2000 (Reitaq 1998). 5Norway was among the forerunners as regards the use of carbon taxes, introducing a tax on energy-related C02-emissions already in 1991. The tax currently covers some 64% of all COz-emissions (St.meld. nr. 8, 1999-2000). To date this levy comprises the most important but also the most contentious measure in Norway’s climate policy (Reitan, 1998; Kasa, 1999). 10 Atle Christer Christiansen

The issue linkages between NRE and climate change is also recognised in the 1989 White Paper on “Energy-economizing and energy research” (St.meld. m. 61, 1988-89). Environmental benefits and the need to develop and adopt measures conducive to mitigating climate change were thus singled out as the single most important reasons for increasing public support for NRE. Due to the ‘urgency’ of such environmental problems, it was even stated that ‘radical measures’ were needed (ibid.: 98). Positing the climate change issue as the perhaps most important rationale for public policies to support NRE developments marks in itself a shifi in the government’s perception. Public fimding was also increased from some 20 million NOK in 1989 to more than 50 million in 1992. However, the targets for NRE developments were altogether rather vague. Whereas the quantitative target of stabilizing domestic C02 emissions was clearly articulated and ambitious, political support for NRE developments was largely confined to the achievement of three qualitative objectives. Firstly, to develop new, competitive energy technologies with minimal environmental damage. Secondly, to provide adequate framework conditions for the introduction of such technologies. And thirdly, to encourage the establishment and raising of new and competitive Norwegian industry. No specific targets concerning the fhture market shares of NRE were given.

Reorganizing the structure ofpublic support programmed

In the 1989 White Paper (St.meld. m. 61, 1988-89) concerns were raised over the lack of a proper institutional framework for the co-ordination of public support progmumnes for NRE. It was suggested to establish ‘goal-oriented’ and ‘time-limited’ support programmed with specific responsibilities for each NRE branch, and to give NVE a larger share of administrative tasks for demonstration and market introduction programmed. The focal point within the new solar energy prograrnme was prototype developments, whereas developing technical solutions with potential for niche market applications in the international markets was targeted for wave power. The scope of activities related to wind power was expanded in 1989 by the establishment of a demonstration and market introduction prograrnme offering coverage of up to 50°/0 of total project costs. The aims were mainly to test modem wind power technology and examine aspects related to co-ordinating operation of wind and hydropower plants. Over the years 1989-93 a total of eight wind power turbines were constructed, including the first ‘wind farm’ of five medium sized turbines at Vikna. Funding New Renewable Energy Developments and the Climate Change Issue 11

for bioenergy was scaled up during the early 1990s, as perceptions were that opportunities for industrial developments seemed considerable, and that bioenergy had the largest potential for contributing cost-effectively to domestic energy supplies.

3.4 From targets and timetables towards joint implementation and cost- effectiveness (1992-2000)

Against the backdrop of Norway’s initial activism on the international arena and the public environmental enthusiasm at the national level, the 1993 White Paper “On energy economizing and new renewable energy sources” (St.meld. nr. 41, 1992-93) marks a shift toward a more cautious approach. The government thus emphasised the need to co-ordinate Norwegian efforts with activities in the international domain in order not to double up R&D efforts. This was clearly precipitated by a growing awareness that costs of reducing domestic emissions would be very high. Goal orientation and co.st-eflectiverzes.s should thus be employed as guiding principles when selecting among and implementing policy instruments and measures.

In order to comply with these principles the government proposed to direct R&D support towards areas with the largest potential for economic growth and industrial development dynamics. Efforts should also be made to identi~ and remove bottlenecks that could prevent the ‘cheapest’ NRE sources from entering the market place. In terms of public priorities the government pinpointed technologies based upon bioenergy sources and wastes as cost-effective contributions to near-term energy supplies, whereas solar energy technologies could represent opportunities for industrial development dynamics. Despite such attempts at guiding NRE developments in particular directions, the government did not propose any new policy measures or instruments in order to stimulate NRE developments, besides expanding the scope of support programmed aimed at energy economizing to also include plants utilising biomass, wastes and solar energy. The objective was thus to ensure implementation of market-near technologies and to invigorate exchange of information on alternative energy sources between suppliers and consumers.

The long awaited White Paper on climate change strategies was then submitted in 1995 (St.meld. nr. 41, 1994-95), in which Norway officially abandoned the domestic 12 Atie Christer Christiansen stabilisation target in favour of a cost-effective strategy aiming to mitigate global GHG emissions. Since curbing GHG emissions was considered to be less costly in other OECD countries the government proclaimed that Norway should work actively towards an international agreement to ensure a reasonable burden sharing between countries and cost- effective strategies at the international level. A sensible strategy at the national level would be to focus on ‘no-regret’ measures during the initial stages. However, in order not to compromise the achievement of the long-term objectives endorsed by the Framework Convention on Climate Change, the government also aclmowledged a responsibility to continue and strengthen support schemes for development and adoption of cost-effective NRE technologies.

Sey-suf$ciency as a target for domestic energy supplies

In the following 1997 White Paper on “Environmental policy for sustainable development” (St.meld. nr 58, 1996-97), which was issued only a few months in advance of the Kyoto summit, the government again stressed the need to work towards legally binding international agreements, flexible mechanisms, and cost-effective strategies. Moreover, the government proposed as a target for Norway that electricity consumption in a so-called ‘normal year’ should be based entirely on renewable energy sources. Key goals were thus to decrease the use of electric heating in cases where NRE sources and technologies could be deployed instead, and to increase utilisation of bioenergy and water-carried central heating by some 5 TWh over a period of 5-10 years. The latter objective constitutes a landmark in terms of providing speczjic targets for future market shares of NRE in Norway. However, targets were not established for other NRE sources, as the future role of such energy sources would be conditional, dependent upon future energy prices, technological developments, environmental regulations and other framework conditions pertaining to the structure of energy markets.

Setting up the NYTEK and BSI support programmed

Owing to reduced public funding for energy research in general, and an aspiration to reduce the number of ‘user-driven’ R&D programmed, the newly established Research Council of Norway decided to co-ordinate research activities connected to NRE and other efficient

bSee e.g. Nilsen (1998) and Andresen and Butenschan (1999) for detailed accounts on developments in Norway’s climate policy. New Renewable Energy Developments and the Climate Change Issue 13 energy technologies. These efforts led to the establishment of the programme ‘Efficient and Renewable Energy Technologies’ (NYTEK) in 1995, with the objective to support user- driven R&D activities through the phases from invention towards testing of prototypes. Co- operation with industry was placed at the centre of the programmers activities in order to appease long-term strategies for economic growth, ensure beneficial utilisation of resources, and achieve environmental objectives. Even though decisions concerning allocation of tiding should in general take into account only the incoming applications, bioenergy was given priority on the grounds that it represented the NRE source with the largest potential for near-term, domestic energy production. Another program denoted ‘Company Specific Introduction’ (BSI) was introduced by NVE in 1994, with the objective to support introduction of energy efficient and renewable energy technology produced by Norwegian companies for the Norwegian market, preferentially the stationary energy market. Examining the portfolio of BSI-projects and the distribution of fimds reveals a clear prevalence of bioenergy and, although to a lesser extent, solar energy projects, whereas wind, wave and small-scale hydro represent only a small fraction. The ‘bias’ towards bioenergy thus correlates with the increased emphasis on cost-effectiveness and concern over short-term energ supplies.

3.5 Post Kyoto developments

In response to the challenges posed by the Kyoto Protocol, a White Paper on “Norwegian implementation of the Kyoto Protocol” was submitted in the spring of 1998 (St. meld. m. 29, 1997-98). Herein the Government proposed four principles for the selection of abatement measures. First, policies should be based upon the polluter pays principle. Second, measures should aim for a high degree of government or steering contro~ i.e. measures should be designed in terms that targets are achieved within a certain time flame. Third, measures should be cost-efiective; emission reductions should be achieved in ways that minimise overall societal costs. And fourth, measures should be designed and implemented in order to ensure cost-eftlciency over time; i.e. dynamic eficiency. Specific objectives for the energy sector were to consume energy more efficiently, to develop and deploy renewable energy sources, and to stimulate a transition from electrical heating towards other energy carriers for heating purposes. In order to pursue these objectives, it was suggested to introduce a policy 14 Atle Christer Christiansen package of supply-push and demand-pull strategies, for which the details were to be worked out in a forthcoming White Paper on energy policies.

In the 1999 follow-up White Paper “On Energy Policy” (St.meld. nr. 19, 1998-99) the

Government called for an energy policy based upon an “ambitious environmental policy”, in terms that environmental objectives should determine the technologies to be used in the provision of energy services. Among the core objectives in such a strategy was firstly to constrain energy consumption beyond a situation in which the development was left unattended. Secondly, to increase the consumption of heat based on new renewable energy sources, heat pumps and waste heat by 4 TWh annually within the year 2010. And finally, to construct wind power plants with annual production of 3 TWh by the year 2010. In order to act upon these targets the government proposed a policy package comprising of investment subsidies in the order of 5 billion NOK over a period of 10 years combined with a gradually increasing tax on electricity consumption, In terms of economic incentives it was also suggested that the electricity tax should be reimbursed for plants using recycled fiels, whereas a credit equal to half the current tax rate was proposed in order to quick-start wind power developments. Exemptions fi-om investment taxes were also proposed for energy technologies based on bioenergy, wind power plants, mini and micro hydropower plants, as well as for heat pumps and district heating systems.

Considering the policy package in an innovation-oriented context, there has been a change towards a more flexible approach and a portfolio of measures that does justice to the various stages of technological change; i.e. the phases of invention, innovation and diffision. However, the policy instruments and measures accrue largely to the task of creating a market- pull conducive to the adoption of nzatw-e technologies. This is also the case for a project- based support scheme established in 1997 with the objective to stimulate bioenergy developments within specific geographical regions. The quali@ing criteria laid down by NVE clearly states that support should be restricted to market near ador mature technologies, for which projects giving the highest energy output per unit of support were prioritised. Acknowledging the need to stimulate also developments of less mature technologies, and thus avoid ‘picking winners’ ex-ante, the Government advocated a gradual increase in publicly funded R&D and long-term stability for investment subsidies. New Renewable Energy Developments and the Climate Change Issue 15

To conclude, the historical outline clearly illustrates that priorities and objectives in Norwegian politics concerning NRE developments have changed over time. Thus, whereas fimdamental concerns over the quality of energy supply services, environmental concern, and international solidarity precipitated public efforts, emphasis has gradually turned toward cost- effectiveness and contributions to near-term energy supplies. However, the ‘strength’ of public policy has also increased somewhat as the climate change issue has matured.

4 Assessing the impact of public policies: drivers, barriers and context

One way of assessing the impact of public policies is to measure the performance of renewable energy technologies against predictions and technological expectations that helped shape public policies over the past two decades’. Comparing current market penetration of wave, wind, solar and bioenergy with early projections, it is only fair to say that new renewable energy sources and technologies have failed to live up to public expectations.

Norway’s operating wind capacity is at present about 13 MW with annual production of about 38 GWh (OED, 2000), or some 0.03 ‘Yoof total power production. There is currently no grid- connected wave power plant in Norway, and opportunities for commercial applications seem limited to specific purposes. Utilisation of bioenergy does, however, provide some 13 TWh annually or about 5% of primary energy consumption. Still, about half of this is due to conventional burning of firewood, whereas the rest is consumed mostly within the pulp and paper and manufacturing forest industries to produce process heat and power. Somewhat unexpectedly, considering the rather unfavorable natural conditions in Norway with limited hours of daylight, small photovoltaic systems have become highly popular in certain niche markets, e.g. among owners of cottages and recreational homes. A total of approximately 80 000 units have so far been installed amounting to some 4 MW.

Besides recognizing the pitiable market shares of NRE, only limited industrial developments have taken place. There are at present only a few firms of small size within the various NFE-branches, and the rate of new enties into the population of innovators is low. At the international level, however, technical improvements and cost reductions have over the past two decades made wind turbines and solar cells the fastest growing energy sources in the 1990s (Dunn and Flavin, 2000). How then, may one explain the rather meagre outcome of Norwegian efforts? Should the ‘ftilure’ to live up to public expectations be equated simply with poor technical and economic performance, or are other factors to be ‘blamed’ for

7See McVeigh et al (1999) for a similar assessment of policies and developments in the U.S. 18 Atle Christer Christiansen constraining technical change and innovation? This section attempts to identifj and assess some of these factors.

4.1 Push without pull?

It is generally agreed that the impact of policies on technological change and innovation depends on simultaneously investing resources in R&D activities and creating a stable market for adoption and diffusion of NRE technologies. A combination of supply-push and demand- pull strategies is thus considered a key to successful technology and industrial developments’. The importance of demand-pull factors in particular is strongly coupled with the phase of dzjiusion, which represents the stage of technological change in which widespread applications and interactions between a technology and its environment lead to new levels of technical standards, economic performance, and productivity (e.g., Griibler, 1998). Cost reductions following the diffision phase are well documented in the literature, and are commonly portrayed in terms of ‘learning’ or ‘experience curves’. For NRE technologies, such as wind power and solar photovoltaic cells, learning rates typically reveal about 10-20°A reductions in specific investment costs for each doubling of cumulative output (Neij, 1997; Griibler, 1998).

In other European countries and the US one finds a mix of administrative and incentive based instruments, including production support, guaranteed feed in tariffs, accelerated depreciation rules, tax rebates, taxes/charges on conventional fiels, public tenders, and purchase requirements (Mitchell, 1995; Wiser et al, 1998; Loiter and Norberg- Bohm, 1999). However, such measures have only been used to a limited degree in Norway, where emphasis clearly has been put on supply-push strategies. One may thus argue that the pitiable market penetration and marginal industry developments in Norway should not necessarily be equated with a failure of existing policies and measures as such. Rather, one may subscribe poor development dynamics to the absence of measures that are conducive to creating viable commercial conditions for NRE technologies. Thus, whereas the stimulus of public policy may have succeeded in bringing certain technologies through the stages of

8In the much-cited work by Mowery and Rosenberg (1979) the authors thus argue that supply-push and demand- pull should be considered as “necessary, but not sufficient, for innovation to result both must exist simultaneously” (ibid.: 231). New Renewable Energy Developments and the Climate Change Issue 19 research, development, and demonstration, other measures and incentives are often required in order to develop technologies into commercial maturity. In terms of policy options and design it has been argued that publicly funded R&D programmed should be co-ordinated with market enablement programmed (Mitchell, 1995). Comparing the portfolio of companies and technologies that have been funded by the NYTEK and BSI programmed, however, reveals only limited overlap. The assembly of ‘co-fimded’ projects is mainly related to bio- and solar energy, in which some few companies prevail.

4.2 Systemic interdependencies and lock-ins

Scholars studying the concept of technological change frequently observe the formation and evolution of so called ‘technological systems’, comprising of a set of components or building blocks in which every component is dependent on ‘all others’ (e.g. Hughes, 1987, 1994; Gri.ibler et al, 1999). Among the components making up an energy system are both physical artefacts, such as hydroelectric turbines, transmission and distribution lines, as well as organisations or institutions. Owing to the interdependency and interaction among these elements, choices pertaining to systems management are often made in order to support the operating principles of the system as such. The existence of such systemic interdependencies are oilen designated ‘network externalities’, in terms that they impose constraints on the fundamental process of variation and selection among candidate technologies, locking in patterns of energy production and use to particular configurations.

Investigating into the technological and institutional base of the Norwegian energy sector one observes several ways in which systemic interdependencies impede the adoption and diffision of NRE sources and technologies. Firstly, infrastructures for heating are predominantly based on electricity rather than hot water’. The lack of an infrastructure to support water-carried heating systems thus effectively locks out many NRE sources that are inclined to produce heat rather than electricity i.e. solar and bioenergy heating applications. Secondly, infrastructures for transmission and distribution of electricity are mainly

9Whereas some 22% of heating systems installed in residential buildings in 1958 were based on hot water, this

share had dropped to 10/0in 1995 (NOU: 1998). Compared to other Scandinavian countries, the share of district heating used for heating purposes is also very low. Districtheating in fact covers some 50% of total space heating demand in and Denmark (Christiansen and Tangen, 1999; Koefod, 1999). 20 Atle Christer Christiansen

constructed on the basis of centralised base load power, reflecting the dominant position of

hydroelectric power plants. A core feature of NRE sources is, however, that they are commonly available locally or on site, and many NRE technologies comprise small and modular units that are well suited to provide distributed generation (DG) capacity. Resistance from utilities and long-standing regulatory incentives designed to support large-scale hydropower are, however, major hurdles for investments in small-scale DG. Designing and implementing appropriate policy measures conducive to promoting DG based upon NRE sources may thus prove beneficial to the environment as well as society at large]o.

Whereas interrelations between technologies for power production and distribution have created what may be inferred as technological lock-in, we also find evidence of institutional lock-in within the Norwegian energy systemll. Midttun (1988) has provided a comprehensive account of ways in which the close ties between the hydropower and energy- intensive industries allowed expansive programme for hydropower construction to continue beyond sectoral-extemal economic demands. The author points to the importance of an efficient institutional basis in creating an ‘institutional lag’ or inertia, so that external demand for change is “delayed because of norms, decision-patterns and interest linked to a traditional sector development” (ibid.: 122). As a corollary one may argue that the perceived ‘need’ to provide ample and cheap electricity supplies to uphold activities within the energy-intensive industries has acted as an impediment that constrains the adaptation and deployment of NRE technologies. Another way of posing this argument is to say that NRE developments have been constrained by the structure ofdenzand (Dosi, 1988).

When analysing the impacts of institutional inertia and network externalities one should also include the central role of the petroleum sector. It seems in this respect evident that the emergence of new sectoral interests, such as NRE, is affected through the selective institutional support that has been built up around petroleum activities. The struggle over public interest and resources should thus be viewed in light of the fact that oil and gas issues clearly prevail in terms of the number of sections as well as employees within the Ministry of

10Potential benefits from DG are not only enhanced utilisation of local resources and local employment, but also reduced energy losses and avoided costs associated with upgrading or expanding intiastructures for transmission and dktribution. ]1See Unruh (2000) for a discussion of teclmologkal and institutional lock-in mechanisms that apply to fossil- fbel based energy systems, leading to what the author terms carbon lock-in. New Renewable Enerav 13eve10DrnetItsand the Climate Chanae Issue 21

Petroleum and Energy and other government agencies. Financial constraints also come into play, in terms that petroleum operations account for a substantial proportion of overall investments in Norway, both public and private. Accrued investments for 1998 amounted to some 80 billion NOK (OED, 1999), whereas governmental fimds for NRE totalled some 100 million. The ability to overcome vested interests and institutional inertia will most likely be decisive for the fhture role of NRE.

4.3 Technological opportunities and cumulativeness of technical knowledge

Whereas the importance of ‘demand-pull’ and ‘supply-push’ clearly have relevance for policy discussions, the literature on technical change and innovation argues persuasively that the environment in which such activities take place is strongly affected by factors such as technological opportunities and cumulativeness of technological knowledge. One should thus recognise that innovative activities are first and foremost selective, incremental and cumulative, in terms that the accumulation of knowledge and accretion of individually small improvements play crucial roles in improving the performance of a technology and its cost characteristics (e.g. Rosenberg, 1982; Dosi et al, 1988). At the technological level, referring to specific ‘technical’ features and learning processes, the impact of cumulativeness is conveniently displayed in terms of experience or learning curves. Such curves normally portray technologies moving along a trajectory of gradual improvements, but in some cases there may also be a ‘discontinuous’ shifi from one curve to another. Owing to the largely uncertain nature of innovative activities, however, it is often difficult to predict if and when incremental changes may shift into bursts of technological progress. It is thus crucial to maintain a stable and nurturing environment for trying out and testing new technologies, in which users and suppliers interact in improving technological design and performance. Such interactions are not only important, but are also time-consuming, and should as such not be short-stopped by top-down decisions. Oscillating patterns in public priorities may thus impair conditions for accumulation of experience and maintenance of human know-how, both of which are crucial for emerging technologies.

The importance of creating an interactive environment for learning is also crucial at thejhn and sectoral level. The ‘staying power’ of public policies is an important component 22 Atle Christer Christiansen in the perception of commercial risks, in terms that an unstable policy climate is likely to cause concern within companies over long-term technological opportunities. Examining the way in which publicly funded R&D programs have been organised and operated in Norway reveals that programs have been set up mostly for periods of up to four years, within which institutional restructuring and shifts in public priorities have been frequent. Preferences have also varied over time, in terms that the lion’s share of R&D budgets were spent on wave power during the late 1970s and early 1980s, whereas bioenergy has taken over in recent years. Lack of long-term stability with respect to both program structure and funding combines to create a rather unfavorable climate for co-operation and interaction among potential investors, technology suppliers, industrial partners and other institutions. Considering in particular the relatively small number of research institutions and laboratories within the Norwe@n energy system, it is in principle difficult to attract interest for participation in research areas that continuously face the risk of losing their tiding at the next crossroad. Just as weak demand side policies were identified as a market barrier to the emergence and diffision of NRE technologies, the underdeveloped organisational and political power of the NRE industries points to institutional barriers.

Shifts in public priorities and preferences may also create uncertainty among potential investors in terms of introducing a risk that the technology developed will ultimately not be demanded or too costly. Such shifts affect on one hand technological expectations, which is recognised as an important determinant for innovators’ and entrepreneurs’ decisions regarding the adoption of innovations and the timing of fiture improvements (Rosenberg, 1982). Commercial expectations are also affected, in the sense that innovators must have confidence that they are going to enjoy the rewards accruing to successful innovations. A case in point that illustrates lack of confidence in the commercial opportunities at industry level is Statoil’s recent decision to pull out of a wind power project in mid-Norway, citing unsatisfactory prospects for profitability as the main reason. In spite of increased subsidies introduced as part of a government plan to encourage investments in wind power, Statoil said it would instead turn its focus toward other options such as biomass for heating purposes and heat pumps. Another case highlighting low expectations is Kv~mer’s decision to shelve its wave energy activity following the damages to one of its prototypes caused by a storm in the late 1980s and an internal reorganisation in 1990. 5 Conclusions and lessons

In spite of more than twenty years of governmental support NRE sources represent only a pitiable fraction of the energy produced, delivered and consumed in Norway, and only modest industrial development dynamics have taken place. In order to account for this poor outcome we firstly argued that weak demand side policies are likely to have slowed down the rate of technology and industrial development dynamics. Secondly, we identified three salient features pertaining to the technological and institutional base of the Norwegian energy system that appear to have locked the energy system at large into a particular configuration: (i) reliance on low energy prices to uphold activities within the energy-intensive industries; (ii) the dominant role attributed to the hydropower and petroleum sectors in the Norwegian energy economy; and (iii) an infrastructure for production, transmission and distribution of energy based predominantly on centralised base load generation and electrical heating. Finally we argued that oscillating patterns of public priorities have impaired the opportunity of innovative activities and short-stopped the cumulative processes of knowledge generation, learning and dissemination.

Unfolding the co-evolution of energy and environmental policies suggests that NRE policies have strengthened somewhat as the climate change issue has ‘matured’. The evolving climate regime and the Kyoto Protocol have thus created a more favorable climate for NRE developments in terms that additional demand-side policies and economic incentives have been proposed and/or implemented. Specific policy commitments and targets concerning the future role of certain NRE sources have also been proposed. However, we also recognise a reorientation among policymakers in terms that preferences and priorities have changed fi-om an emphasis on unilateral targets and actions towards joint implementation and cost- effectiveness at the international level.

Even though the outcome of public policies aimed at promoting NRE developments in Norway is pitiable, we still argue that there are important lessons to be learned from the study of Norwegian politics. First, the Norwegian experience substantiates claims that a combination of ‘demand-pull’ and ‘supply-push’ measures will be required in order to create 24 Atle Christer Christiansen

a stable and fimctioning market for NRE technologies. Second, owing to the long lead-times

required for new technologies to traverse from the stage of invention to marketable innovation and diffision, it is also critical that policymakers maintain a long-term perspective with respect to public policies. Third, it may be usefi.d for the government to use its buying power to improve market opportunities for technology suppliers. And finally, the Norwegian case suggests that it is impontant to formulate and implement policies and measures capable of removing or overcoming the barriers currently constraining the development and deployment of NRE technologies. Carefi.dly designed public policies and enlightened government intervention may thus avoid unwanted path dependence by guiding technological developments in a direction beneficial to society and the environment.

Whereas this report has dealt largely with the impact of domestic policies and actions on NRE developments, other forces and mechanisms will clearly affect the fiture market for

NRE. The evolution of the climate change regime may thus be a key determinant to success or failure in fiture NRE developments, in terms that it is likely to affect social demands for NRE as well as the policy context. The processes of deregulation and restructuring within the energy sectors in other Nordic and European countries along with emerging niche markets for environmentally benign products are other factors likely to play important roles. Even though the potential impacts from these and other driving forces are highly uncertain, long-term policy commitments and innovation-oriented policy designs can surely improve conditions for the development of NRE technologies and industries. References

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