Heriot – Watt University

School of Social Sciences

PRINCIPLES OF ENVIRONMENTAL AND ENERGY

ECONOMICS
(C21PE)

Lecturer: Claudia Aravena Novielli

E-mail: c.aravena@hw.ac.uk
Lecture: 19/11/18
 Energy Policy - Outline
• Energy Policy. (Chapter 3. Harris, 2006)
• Policy issues and drivers.
• Themes in Energy Policy.
• Formation of the policy.
• Policy framework.
• Structural changes and policy outcomes.
 Energy Policy - Outline
• Key Policy Issues.

• The report can be

downloaded at:
http://www.gov.scot/Resource/
0051/00513466.pdf
 Formation of Energy Policy
Mixture of :

ISSUES WISHES IDEOLOGIES

STRUCTURAL POLICY
SOLUTIONS INSTRUMENTS
 Policy Formation

• Agendas resulting from:

–Experience
–Observation
–Opinion
 Agendas and Policy Formation
Personal experience and interpersonal communication

Media Agenda Public Agenda Policy Agenda

Real-world indicator of the importance of an agenda issue or an event

• Policy objectives may take 20 years to deliver.

• Public opinion can be virtually instantaneous – importance of the media
• For the practical implementation of policies we must recognize the social
and political context of the country.
Energy Policy Drivers
• Social
• Political
• International
• Commercial
• Economic/Financial
Energy Policy Drivers
• Social
• Political
• International
• Commercial
• Economic/Financial
• Environmental ?
• Security?
 Energy Policy
• Social drivers:
• Attitude to the environment and amenity
• Long term sustainability
• Universal affordability of domestic services
• High differentiation between/within countries
• Long term focus
• Influenced by : culture, history, climate, topology and
indigenous energy sources.
• Environmental policy is closely related to this.
30,000 people demonstrating in front of the Government
house and many others in the rest of the country.
Demonstration against Nuclear Power
And also wind power...
 Energy Policy
• Political drivers: • International drivers:
• Media • Influence of international
bodies and agreements
• Political parties (e.g. EU, UN, World Bank,
Kyoto protocol) and the
• Election timing commitment of the
• Manifestos country with them.
• Agreements and future
• Political ideology developments (e.g. The
interconnector IE-UK)
• Globalization.
 Political conflict Chile-Bolivia and its
consequences for the Chilean energy supply
Political cooperation between Venezuela and
Cuba and its consequences in society
100,000 barrels of oil daily for
Cuban doctors to Venezuela
 Political and International Drivers

• Examples from Europe?

 Energy Policy

• Commercial drivers:

• Ability and requirement of industry to

compete internationally.
• National market structure (e.g. Competitive,
monopolistic, oligopolistic).
• Ability to adopt new technologies.
 Energy Policy
• Economic/Financial drivers:
• Electricity costs (households, exports).
• Example of smart meters trial and tariffs.
• Electricity forms part of the monetary and fiscal
structure of nations.
• Influence of policy instruments such as taxes,
subsidies, etc.
• Privatization.
 Policy Outcomes and Instruments

emerges
• Goals / Targets
• Initiatives
Energy Policy
• Laws
action
• Regulation

• Outcomes:
• Policy (cost, productivity, environment, security, etc)
• Structural (privatization, competition, regulator)
• Instruments(Taxes, subsidies, price controls, etc)
Policy Outcomes and Instruments
• It is important the coordination of the policy with
the market structure.

• Otherwise we can face market failures and

instruments will not be effective.

• Energy policies are very different across

developed, transition and developing countries.

• Check chapter 3 of Harris, 2006 for policy trends.

 Policy Trends
• Energy policy is dynamic.
• There are visible changes in energy policy
since 1960’s.
• Energy trends between 1960 – 1985
• Energy trends between 1986 – 1995
• Energy trends between 1996 and now

• See Chapter 3 of Harris, 2006 for details

Themes in Energy Policy nowadays
• Security and sustainability of supply.
• Price.(D, S, competitiveness)

• Environment.
• Demand management. (EE)
• Foreign policy and trade.
• Open Access and competitiveness.
• Industry governance and discipline.

• Trade-offs between themes.

Priorities in European Energy Policy
 Priorities in European Energy Policy

• European single energy market

• Renewables
• Interconnection
• Environment
• Security
• Energy efficiency
• Competition / Deregulation
 But what happens in transition economies
and developing countries?
TRANSITION ECONOMIES
• Investment
• Access and leverage of energy
resources
• International alignment
• Long distance energy logistics
• Stronger regional electricity
markets
• Pragmatic approach to
international environmental
agreements and rules
DEVELOPING COUNTRIES
• Electrification
• Stability for generators
• Funding to invest in
infrastructure
• Control of corruption
• Reduction of blackouts
• Rationalisation of legacy system
of subsidy
• Solving the vicious circles
• Provide service and create
financial stability.
 Themes in Energy Policy
•Electrification
•Connect industry DEVELOPING COUNTRIES
and households

• Investment needed.
• Great participation of
Government.
• Provide service and
create financial stability.
• Price secondary.
 Themes in Energy Policy
•Electrification
•Connect industry DEVELOPING COUNTRIES
and households

• Investment needed.
• Great participation of
Government.
• Provide service and
create financial stability.
• Price secondary.
 Themes in Energy Policy
•Electrification
•Connect industry DEVELOPING COUNTRIES
and hosueholds

• Investment needed.
• Great participation of
Government.
• Provide service and
create financial stability.
• Price secondary.
 Themes in Energy Policy
•Electrification
•Connect industry DEVELOPING COUNTRIES
and hosueholds

• Investment needed.
• Great participation of
Government.
• Provide service and
create financial stability.
• Price secondary.
 Themes in Energy Policy
•Electrification
•Connect industry DEVELOPING COUNTRIES
and hosueholds

• Investment needed.
• Great participation of
Government.
• Provide service and
create financial stability.
• Price secondary.
 Formation of Policy
• Policy outcomes are uncertain; therefore small
steps and trial-and-error is part of the formation
process.

• In the adoption of a policy it is important to

consider:
• Economic viability
• Political viability
• Administrative viability

• And the social viability?

 Main Players in the Formation of
Energy Policies
• Parliament
• Government
• Legislation
• Regulators
• Environmental Organizations
• International Agreements
• Universities, Think tanks
• Industry
• Consumers

• There are requirements that are in tension between these

players – Give examples
 Policy Outcomes

• Policy outcomes are uncertain many times.

• Trial and error process.
• But with steps that are small and reversible.

• Factors of Policy Adoption:

– Economic Viability.
– Political Viability.
– Administrative Viability.
Three pillars of energy policy

Competitiveness Sustainability Security of supply

Need evidence-based policy based on strong economic

and market principles and top-class technical solutions
 Three pillars of energy policy
• Who plays an important role in these 3 pillars?

• Policy makers

• Renewables

• Legislation

• Others
 EU Energy and Climate Policy to 2020
• 2009 Climate Energy Package set EU 20-20-20 targets
for CO2 emissions, energy efficiency and renewable
energy for 2020:
– cutting greenhouse gases by at least 20% of 1990 levels (30%
if other developed countries commit to comparable cuts)
– cutting energy consumption by 20% of projected 2020 levels -
by improving energy efficiency
– increasing use of renewables (wind, solar, biomass, etc) to
20% of total energy production (currently ± 8.5%)

Long-term objective: Reduce EU GHG emissions by 80-95%

by 2050, compared to 1990 levels, in the context of similar
reductions by other developed countries.
 EU Climate and Energy Policy to 2030
• Greenhouse gas emissions: binding EU target of 40%
domestic reduction in by 2030 compared to 1990
– 43% reductions in the ETS and 30% reduction in non-ETS sectors by
2030 compared to 2005
– Strengthened EU-ETS, with the annual factor to reduce the cap on the
maximum permitted emissions changed from 1.74% to 2.2% from 2021
onwards
– Non-ETS targets set for each Member State based on GDP and
population
• Renewable energy: binding target of 27% share of
energy consumption at EU level
• Energy efficiency: indicative target at the EU level 27%
compared to projections of future energy consumption
based on the current criteria