climate and energy policy

If the Energy [R]evolution is to happen, then governments around the world need to play a major role. Their contribution will include regulating the energy market, both on the supply and demand side, educating everyone from consumers to industrialists, and stimulating the market for renewable energy and energy efficiency through a range of economic mechanisms. Governments in countries like South Africa, where renewable energy forms a miniscule portion of the electricity supply, should be looking to learn from and build on the successful policies already adopted by other countries.

To start with, developed countries need to agree on further binding emission reduction commitments in the second phase of the Kyoto Protocol. Only by setting stringent greenhouse gas emission reduction targets will the cost of carbon become sufficiently high to properly reflect its impact on society. This will in turn stimulate investments in renewable energy. Through massive funding for mitigation and technology cooperation, industrialised countries will also stimulate the development of renewable energy and energy efficiency in developing countries. South Africa has a responsibility to take a progressive role in the international negotiations, and it is crucial that emerging economies such as South Africa begin to take responsibility for their domestic emissions. The only solution to climate change is comprehensive, global and coordinated action, which means that countries with high emission levels must take concrete and immediate steps towards a green development pathway.

Alongside these measures specific support for the introduction of feed-in tariffs in the developing world - the extra costs of which could be funded by industrialised countries - could create similar incentives to those seen in countries like Germany and Spain, where the growth of renewable energy has boomed. The actual implementation of REFIT in South Africa has become urgent. Energy efficiency measures should also be more strongly supported through the Kyoto process and its financial mechanisms. Carbon markets can also play a distinctive role in making the Energy [R]evolution happen, although the functioning of the carbon market needs a thorough revision in order to ensure that the price of carbon is sufficiently high to reflect its real cost. Only then can we create a level playing field for renewable energy and be able to calculate the economic benefits of energy efficiency. South Africa is one of the world’s least energy efficient nations, and greater demand-side management combined with large-scale energy efficiency measures are crucial to reduce the country’s energy intensity.

Industrialised countries should ensure that all financial flows to energy projects in developing countries are targeted towards renewable energy and energy efficiency. All financial assistance, whether through grants, loans or trade guarantees, directed towards supporting fossil fuel and nuclear power production, should be phased out in the next two to five years. International financial institutions, export credit agencies and development agencies should provide the required finance and infrastructure to create systems and networks to deliver the seed capital, institutional support and capacity to facilitate the implementation of the Energy [R]evolution in developing countries.

While all energy policies need to be adapted to the local situation, we are proposing the following policies to encourage the Energy [R]evolution that all countries should adopt:

10.1 climate policy

Policies to limit the effects of climate change and move towards a renewable energy future must be based on penalising energy sources that contribute to global pollution.

> Action: Phase out subsidies for fossil fuel and nuclear power production and inefficient energy use

The United Nations Environment Programme (UNEP) estimates (August 2008) the annual bill for worldwide energy subsidies at about $300 billion, or 0.7% of global GDP57. Approximately 80% of this is spent on funding fossil fuels and more than 10% to support nuclear energy. The lion’s share is used to artificially lower the real price of fossil fuels. Subsidies (including loan guarantees) make energy efficiency less attractive, keep renewable energy out of the market place and prop up non-competitive and inefficient technologies.

Eliminating direct and indirect subsidies to fossil fuels and nuclear power would help move us towards a level playing field across the energy sector. Scrapping these payments would, according to UNEP, reduce greenhouse gas emissions by as much as 6% a year, while contributing 0.1% to global GDP. Many of these seemingly well intentioned subsidies rarely make economic sense anyway, and hardly ever address poverty, thereby challenging the widely held view that such subsidies assist the poor.

Instead, governments should use subsidies to stimulate investment in energy-saving measures and the deployment of renewable energy by reducing their investment costs. Such support could include grants, favourable loans and fiscal incentives such as reduced taxes on energy efficient equipment, accelerated depreciation, tax credits and tax deductions.

The G-20 countries, meeting in Philadelphia in September 2009, called for world leaders to eliminate fossil fuel subsidies, but hardly any progress has been made since then towards implementing the resolution.

Action: Introduce the “polluter pays” principle

A substantial indirect form of subsidy comes from the fact that the energy market does not incorporate the external, societal costs of the use of fossil fuels and nuclear power. Pricing structures in the energy markets should reflect the full costs to society of producing energy.

This requires that governments apply a ‘polluter pays’ system that charges the emitters accordingly, or applies suitable compensation to non-emitters. Adoption of ‘polluter pays’ taxation to electricity sources, or equivalent compensation to renewable energy sources, and exclusion of renewables from environment-related energy taxation, is essential to achieve fairer competition in the world’s electricity markets.

The real cost of conventional energy production includes expenses absorbed by society, such as health impacts and local and regional environmental degradation - from mercury pollution to acid rain – as well as the global negative impacts of climate change. Hidden costs include the waiving of nuclear accident insurance that is too expensive to be covered by the nuclear power plant operators. The Price Anderson Act, for instance, limits the liability of US nuclear power plants in the case of an accident to an amount of up to $98 million per plant, and only $15 million per year per plant, with the rest being drawn from an industry fund of up to $10 billion. After that the taxpayer becomes responsible58. This kind of system would clearly be potentially crippling for a country like South Africa.

Although environmental damage should, in theory, be rectified by forcing polluters to pay, the environmental impacts of electricity generation can be difficult to quantify. How do you put a price on lost homes on Pacific Islands as a result of melting icecaps or on deteriorating health and human lives?

An ambitious project, funded by the European Commission - ExternE – has tried to quantify the full environmental costs of electricity generation. It estimates that the cost of producing electricity from coal or oil would double and that from gas would increase by 30% if external costs, in the form of damage to the environment and health, were taken into account. If those environmental costs were levied on electricity generation according to its impact, many renewable energy sources would not need any support. If, at the same time, direct and indirect subsidies to fossil fuels and nuclear power were removed, the need to support renewable electricity generation would seriously diminish or cease to exist.

One way to achieve this is by a carbon tax that ensures a fixed price is paid for each unit of carbon that is released into the atmosphere. Such taxes have, or are being, implemented in countries such as Sweden and the state of British Columbia, and South Africa is currently considering such an approach. Another approach is through cap and trade, as operating in the European Union and planned in New Zealand and several US states. This concept gives pollution reduction a value in the marketplace.

In theory, cap and trade prompts technological and process innovations that reduce pollution down to the required levels. A stringent cap and trade system can harness market forces to achieve cost-effective greenhouse gas emission reductions. But this will only happen if governments implement true ‘polluter pays’ schemes that charge emitters accordingly.

Government programmes that allocate a maximum amount of emissions to industrial plants have proved to be effective in promoting energy efficiency in certain industrial sectors. To be successful, however, these allowances need to be strictly limited and their allocation auctioned.

10.2 energy policy and market regulation

Essential reforms are necessary in the electricity sector if new renewable energy technologies are to be implemented more widely.

Action: Reform the electricity market to allow better integration of renewable energy technologies

Complex licensing procedures and bureaucratic hurdles constitute one of the most difficult obstacles faced by renewable energy in many countries. A clear timetable for approving renewable energy projects should be set for all administrations at all levels, and they should receive priority treatment. Governments should propose more detailed procedural guidelines to strengthen the existing legislation and at the same time streamline the licensing procedures. In South Africa, the establishment of an Independent Market and Systems Operator is crucial to begin the process of integrating Independent Power Producers into the market and creating access to the grid. The actual uptake of the REFIT is also a crucial step forward that needs to be made within the South African context, as a support mechanism for the establishment of a robust renewable energy industry.

Other general barriers include the lack of long term and integrated resource planning at national, regional and local level; the lack of predictability and stability in the markets; the complete grid ownership by Eskom and the absence of (access to) grids for large scale renewable energy sources, such as offshore wind power or concentrating solar power plants. The International Energy Agency has identified Denmark, Spain and Germany as examples of best practice in a reformed electricity market that supports the integration of renewable energy.

In order to remove these market barriers, the South African government should consider how to:

• streamline planning procedures and permit systems and integrate least cost network planning;
• ensure access to the grid at fair and transparent prices;
• ensure priority access and transmission security for electricity generated from renewable energy resources, including fina;
• unbundle all utilities into separate generation, distribution and selling companies;
• ensure that the costs of grid infrastructure development and reinforcement are borne by the grid management authority rather than individual renewable energy projects;
• ensure the disclosure of fuel mix and environmental impact to end users;
• establish progressive electricity and final energy tariffs so that the price of a kWh costs more for those who consume more;
• set up demand-side management programmes designed to limit energy demand, reduce peak loads and maximise the capacity factor of the generation system. Demand-side management should also be adapted to facilitate the maximum possible share of renewable energies in the power mix;
• introduce pricing structures in the energy markets to reflect the full costs to society of producing energy.