Major Barriers to the Introduction of Renewable Energies

In most countries –developing and developed countries alike– the market penetration of renewable energy technologies is severely hampered by a wide range of institutional, regulatory and financial barriers that directly or indirectly discriminate against the use of renewable energy. These barriers can broadly be classified as problems of costs and pricing (e.g. subsidies for conventional fuels, high up-front costs, high transaction costs), problems of legal and regulatory rules (e.g. transmission access, market access for independent power producers) and poor market performance (e.g. lack of access to credit, lack of information, technological uncertainties and investment risks) (see Beck/Martinot 2004: 3-6, G8 Renewable Energy Task Force: 40). Some of the key barriers shall be outlined in the following. Emphasis is thereby primarily placed on barriers resulting from political and economic interest constellations, whereas questions of technological and technical obstacles are only touched upon. This can be justified on the ground that most of the barriers are not only of pure technical nature but are often a direct consequence of the powerful vested interests of the fossil fuel industry and other affiliated social and institutional actors, which have a direct stake in the economic performance of the fossil energy sector (shareholders, research institutions, governmental agencies and ministries, labour unions etc.).

A glance at international energy subsidies⁶⁰ and spending policies is helpful to get a grasp of the magnitude of vested interests in fossil fuel energy systems. In the past, the development and the use of fossil fuels and nuclear power have strongly benefited from huge government subsidies and one-sided investment decisions of international donor organisations. Although global awareness of the environmental risks and social costs associated with excessive fossil fuel consumption has increased, energy spending patterns have only slightly changed over the last years and are still considerably skewed in favour of fossil fuel technologies. Due to the enormous methodological problems of quantifying international energy subsidies, there exist only a few global studies on this subject. In the early 1990s, two different studies conducted

60Energy subsidies are defined by the International Energy Agency as “any government action that concerns primarily the energy sector and that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by energy consumers” (IEA 1999: 43).

Chapter 4: Mitigating Energy Import Dependency: Prospects of Renewables by the OECD and the World Bank estimated world fossil fuel consumption subsidies from under-pricing at around $230 billion per year. With two-thirds of total consumption subsidies, the former Soviet Union countries were responsible for the bulk of subsidies. Developing countries accounted for most of the remaining share. In OECD countries, consumption subsidies were offset by energy taxes, which exceeded subsidies by around $19 billion dollars.

In the following years, economic reforms in most of the former communist countries caused an abrupt decline in energy subsidies. In 1997, annual fossil fuel subsidies were estimated by the World Bank at $10 billion in OECD countries and at $48 billion in the twenty largest countries outside the OECD (UNEP/IEA 2002: 11-12). Another study conducted by the IEA in 1999 examined subsidies in eight of the largest non-OECD countries (China, India, Indonesia, Iran, Kazakhstan, Russia, South Africa and Venezuela). The study found out that energy end-use prices in these countries were about 20 percent below market prices being tantamount to subsidies in the order of $95 billion in 1998 (IEA 1999: 9).

A recent study by André de Moor from the “Netherlands Institute of Public Health and the Environment” seems to confirm that the overall level of global energy subsidies has little changed since the beginning of the 1990s. Quite in line with earlier OECD and World Bank estimates, he puts annual global energy subsidies at around $240 billion, whereby developing countries account for $162 and OECD countries for $82 billion. Two-thirds of global subsidies directly support the use of fossil fuels. When subsidies for power generation from fossil fuels are added, the share raises to over 80 per cent. Public subsidies to renewable energy use are almost exclusively confined to OECD countries and are estimated at around $9 billion. De Moor points out that the rationale for energy sector subsidies differs between OECD and non-OECD countries. Industrialized countries primarily subsidise energy production to safeguard energy security and protect sector employment. Examples for heavily subsidised energy sectors are the coal industries in Germany, Spain and the United Kingdom as well as the nuclear power industries in France and Japan. In contrast, developing and transitional countries often subsidise energy consumption by setting end user prices below world market prices – mainly to provide cheap energy for the poorest parts of the population.

Such policies are not only common in oil exporting countries like Indonesia, Iran and Venezuela, but are also often to be found in net fuel importing developing countries. China and India, for example, are said to be the biggest subsidizers in absolute terms, accounting for around $44 billion of energy subsidies. Other forms of subsidies can include non-payments and public bailout operations. These kinds of subsidies are particularly characteristic for the

Chapter 4: Mitigating Energy Import Dependency: Prospects of Renewables transitional economies in Eastern Europe and the former Soviet Union. According to estimates from the late 1990s, annual subsidies for non-payments of energy bills and bailouts were somewhere between $10 and $30 billion in the Ukraine. In Russia the volume of non-payments amounted to some $85 billion in 1997 (Moor 2001: 5-11).

Energy subsidies are not per se problematic and there may often be good reasons for governments to intervene in national energy markets. Reasons to justify subsidies may include the protection of domestic industries and employment, the reduction of energy import dependency, the affordability of energy services for poor income groups, the protection of the environment and the reduction of barriers to market entry for cleaner energy technologies like wind and solar energy (UNEP/IEA 2002: 20, Pershing/Mackenzie 2004: 6). However, in many instances, subsidies do not bring about socially desirable gains in terms of social welfare or environmental improvement. Quite the contrary, subsidies often undermine incentives for suppliers and consumers to provide and use energy services efficiently. In energy import dependent developing countries, consumption subsidies may act as a drain on foreign exchange earnings by creating a higher demand for imported fossil fuels. Likewise, consumption subsidies in energy exporting countries may inflate domestic energy consumption to the cost of the amount of energy available for export (NEF 2004: 15).

Subsidies lacking “sunset provisions” (meaning that a subsidy is automatically phased out after a certain period of time) tend to make consumers and producers overly dependent on the benefits provided by a certain subsidy and may undermine incentives to invest in new energy technologies and infrastructures. As a result, the reliance on out-of-date and environmentally dirtier energy technologies is often encouraged. This is well demonstrated by the results of the previously cited IEA study. A complete removal of energy price subsidies in the above specified eight non-OECD countries would reduce primary energy consumption by 13 percent, increase GDP through higher economic efficiency by almost 1 percent, lower CO2emissions by 16 percent; and would produce considerable domestic environmental benefits, e.g. through reduced local air pollution (IEA 1999: 10).

Large-scale fossil fuel and nuclear energy subsidies not only reduce incentives for production and consumption efficiency, they also considerably undermine the development and commercialisation of renewable energy sources, which could be far more economically and environmentally attractive, if conventional energy subsidies were abolished or significantly reduced. In this context, the metaphor of an “unlevel playing field” is often used to describe

Chapter 4: Mitigating Energy Import Dependency: Prospects of Renewables the bias against renewable energy use. Distortions include favouritism for large-scale and centralized energy systems and the failure to incorporate negative externalities (e.g.

environmental and health damages) into energy market prices (Pershing/Mackenzie 2004: 3).

The global tilt in favour of conventional energy sources is also reflected in capital investments.

According to a report of the G8 Renewable Energy Task Force, only 1 to 3 percent of power sector investments in developing countries have been directed towards renewable energies in recent years (Moody Stewart/Clini 2001: 29). A forthcoming study by the World Resources Institute has critically examined investments in new power plants for a selected group of developing countries in the period from 1994 to 2001. The study found out that out of $90 billion in private and public capital flows, more than 90 percent of the investments were allocated to large-scale natural gas and coal projects. Smaller diesel-run power stations accounted for another 8.5 percent. In line with the G8 report, only 1.5 percent of capital investments were directed towards renewable energy supplies (Philpott 2004).

The bias towards fossil fuel technologies is further mirrored in the energy loan portfolio of the World Bank Group. Between 1992 and 2003, the World Bank provided more than $10 billion to fossil fuel projects mainly through grants, credits and loans (NEF 2004: 14). At the same time, the Bank largely failed to encourage greater use of renewable energy in developing countries. Renewable energy and energy efficiency commitments accounted for just 4 percent of the World Bank’s power sector spending in 1990. Although the World Bank has steadily increased its financial commitments to renewable energy projects over the last decade, the share of fossil fuel projects in total energy portfolio spending still accounted for 86 percent in 2003 (World Bank 2004: 10). Current examples of the World Bank’s unaltered support for capital intensive fossil energy projects in developing and transitional economies include the partial financing of the Chad-Cameroon and the Baku-Tblisi-Ceyhan oil pipelines. Total project costs are estimated at approximately $2.2 billion for the pipeline from Chad to Cameroon (plus an additional $1.5 billion for oil field development in Chad) and $3.6 billion for the pipeline stretching from the Caspian Sea to Turkey’s Mediterranean coast⁶¹. To put these figures in relation, the World Bank’s portfolio for renewable energy and energy efficiency projects comprised around $1.7 billion in early 2004 (World Bank 2004: 10).

The World Bank is also frequently criticized for supporting fossil fuel projects in developing

61 The cost figures and further project information can be found on the corresponding project websites of the World Bank Group. See www.worldbank.org/afr/ccproj/ for the Chad-Cameroon Pipeline and www.ifcln1.ifc.org/ifcext/btc.nsf for the Baku-Tblisi-Ceyhan Pipeline.

Chapter 4: Mitigating Energy Import Dependency: Prospects of Renewables countries that primarily serve the interests of multinational corporations and that help to stabilize energy markets in industrialized countries instead of improving the domestic energy situation in the project countries. According to calculations by the “Institute for Policy Studies” (IPS), around 80 percent of all fossil fuel extraction and transportation projects financed by the World Bank between 1992 and 2003 were export-oriented and ultimately secured energy consumption in OECD countries (Vallete/Kretzmann 2004: 2) ⁶². This also holds true for the two above mentioned pipeline projects. In response to mounting criticism from nongovernmental organizations about the World Bank’s involvement in extractive industries (including fossil fuel industries), the World Bank commissioned an external review of its activities. The “Extractive Industries Review” (EIR) was led by the former Minister of the Environment for Indonesia, Dr. Emil Salim, and addressed the central question whether projects in the oil, gas and mining sector are compatible with the World Bank Group’s overall goals of poverty reduction and sustainable development. The final report was published in early 2004 and concluded that the World Bank should rebalance its priorities in the energy sector and concentrate on promoting the transition to renewable energy. In particular, the EIR called upon the World Bank to “phase out investments in oil production by 2008 and devote its scarce resources to investments in renewable energy resource development, emissions-reducing projects, clean energy technology, energy efficiency and conservation, and other efforts that delink energy use from greenhouse gas emissions. During this phasing out period, World Bank Group investments in oil should be exceptional, limited only to poor countries with few alternatives” (EIR 2004: 65, Vol. I).

Biased subsidy policies and energy investment decisions are not the only obstacles to the propagation of renewable energy technologies in developing countries. Fossil fuel products – especially oil – are an attractive commodity to tax in low-income countries because of the limited fiscal options available to them and the usual inelasticity of demand for petroleum products (Seymour/Mabro 1994: 41). In contrast to industrialized countries, the collection of income and sales taxes often proves difficult and tax payments are frequently in arrears. It is therefore not surprising that in many developing countries excise taxes (e.g. gasoline taxes) represent a substantial share of government revenues. This is particularly the case in

62 The same research report lists the main corporative beneficiaries of previous World Bank fossil fuel projects.

The American company Halliburton ranks top. Since 1992, Halliburton alone was involved as an investor, contractor or developer in thirteen World Bank projects worth $2.5 billion. Among the other top beneficiaries with an involvement in projects supported by more than $1 billion of World Bank finance are Shell (Netherlands/UK), Chevron Texaco (USA), Total (France), ExxonMobil (USA), Bechtel (USA) and BP (UK) (Vallete/Kretzmann 2004: 4).

Chapter 4: Mitigating Energy Import Dependency: Prospects of Renewables countries where fiscal institutions are too weak to enforce the collection of income and sales taxes or central governmental structures have completely broken down due to political unrest and civil war. In sub-Saharan countries the taxation of petroleum products, for instance, accounts for around one-third of government’s total tax revenues. In some cases, domestic fuel taxation and tax transfers from the customs authorities may even form the very basis of the government’s finances. Extreme examples include small land-locked countries like Lesotho, Swaziland and the emerging Palestinian state of The West Bank and Gaza (Metschies 2001: 65) ⁶³.

A strong reliance on the taxation of petroleum products may hinder the prospects of introducing renewable energies because their increased use could further erode an already fragile tax base. From a fiscal point of view the introduction of renewable energies in developing countries can be problematic on two grounds. First, renewable energy like biogas and solar or wind power is mainly produced in a large number of small and decentralized facilities. Locally produced energy can be consumed on the spot and does not have to be transported across the country. Renewable energy use, thus, replaces the long energy chains typical for fossil fuel energy systems through shorter energy chains based on the utilization of indigenous energy resources (Scheer 2002: 70-78). This is especially the case in rural areas where no utility lines are available and renewable energy is primarily used off-grid. The decentralized nature of renewable energy systems makes taxation more difficult in comparison to energy systems where energy generation is highly centralized and energy distribution networks can more easily be controlled (e.g. gasoline distribution through petrol station networks). The second and more important fiscal problem arises from the fact that growth in renewable energy use has so far been mainly fostered by extensive financial support mechanisms. Although renewable energy support schemes across OECD countries differ widely in approach and scale, they are almost exclusively based on programs of grant and subsidies (e.g. feed-in tariffs, reduced capital costs and low-interest loans). In contrast, only few governments in developing countries possess the financial means to launch renewable energy promotion policies comparable to those currently implemented in industrialized

63 In most OECD countries, fuel taxation is also a major source of public revenue. According to data from the OPEC, over the period from 1996 to 2000, the G7 nations (USA, Japan, United Kingdom, France, Germany, Italy and Spain) earned on average $270 billion per year from oil taxation. In comparison, annual sales revenues for OPEC nations accounted for $170 billion (OPEC 2001). However, in contrast to developing countries, fiscal systems in industrialized countries are based on a greater diversity of tax sources and direct taxes like taxes on income and sales play a more significant role in total revenue streams. In Germany, for example, fuel taxes constitute the third-most important revenue source (€43 billion in 2003) behind wage taxes (€173 billion) and sales taxes (€137billion) (BMF 2004: 37).

Chapter 4: Mitigating Energy Import Dependency: Prospects of Renewables countries. Hence, the transition to increased renewable energy use entails two simultaneous challenges. Developing countries have to mobilize enough finance to stimulate the introduction of renewable energy technologies and at the same time have to cope with declining revenues from taxes on conventional energy sources. This dilemma can only be solved by devoting a larger share of development aid to renewable energy projects in developing countries and by ensuring that fiscal regimes in these countries become more balanced and increasingly allow for local and decentralized tax collection in the future.

In addition to the outlined financial challenges, renewable energy has to compete with powerful vested interests in the status quo of national energy systems. The power sector in developing countries is still largely dominated by state-owned monopolies, which offer considerable opportunities for rent-seeking activities and corruption (Brook/Besant-Jones 2000: 3-4). The enormous amount of cash generated and redistributed through the energy sector provides another important incentive for semi-legal and illegal business practices.

According to the findings of the anti-corruption body Transparency International, the energy sector is one of the world’s most corrupt business sectors. The 2002 Bribe Payers Index revealed that the oil and gas sector ranks third and the power sector and transmission sector ranks fifth out of 17 business sectors that are most susceptible to official corruption (Transparency International 2003: 22). Corruption in the energy sector can take many forms and can involve public officials and political decision-makers at all levels. Common practices range from petty corruption (e.g. bribes demanded by safety inspectors and meter readers) and corrupt management practices (e.g. side payments for sale or purchase contracts) up to grand corruption, such as personal enrichment of political leaders and the granting of profitable monopolies in exchange for political favours. In most cases, corruption increases supply costs for energy services and leads to an inadequate collection of revenues. The financial losses can only be compensated by reducing service quality or by increasing end-user prices. Both practices predominantly hurt low-income households. More affluent households have greater financial means to cope with inadequate public energy services and are less vulnerable to poor social services, which indirectly result from a diversion of public funds to the inefficient energy sector (Lovei/McKechnie 2000: 2-4).Organized crime in the energy sector may also take place outside official energy structures. In many developing countries fuel smuggling constitutes a severe problem. For example, it has been estimated that between 20 and 50 percent of all fuel consumed in the African countries Benin, Burkina Faso, Cameroon, Chad, Ghana, Mali, Niger and Togo is of non-taxed origin (Metschies 2001: 72).

Chapter 4: Mitigating Energy Import Dependency: Prospects of Renewables

A large-scale market entry of renewable energy technologies is likely to upset the nature of competition in national energy markets because the new technologies facilitate independent and decentralized power production. Such a development would not only undermine opportunities to capture monopoly rents but would also interfere with vested economic interests linked to corruption, fuel contraband and other illegal activities within developing countries´ energy sectors. It can therefore be assumed that the beneficiaries of inefficient and unsustainable energy sectors in developing countries will mostly be interested in keeping the

A large-scale market entry of renewable energy technologies is likely to upset the nature of competition in national energy markets because the new technologies facilitate independent and decentralized power production. Such a development would not only undermine opportunities to capture monopoly rents but would also interfere with vested economic interests linked to corruption, fuel contraband and other illegal activities within developing countries´ energy sectors. It can therefore be assumed that the beneficiaries of inefficient and unsustainable energy sectors in developing countries will mostly be interested in keeping the