LEVERAGING PRIVATE FINANCE               AND INDUCING INNOVATION FOR               CLIMATE MITIGATION THROUGH             ...
Background (1)• Technological innovation and allocation of private finance towards on „clean‟energy (and other environment...
Background (2)1.    Innovation     • role of different policy instruments on high-value renewable energy     patents and a...
1. TECHNOLOGICAL INNOVATION
CC Mitigation and Adaptation Technologies         (Number of patent applications - claimed priorities, worldwide)Source: H...
Prices matter – and spur innovation          The Effect of an Energy Tax on Patent Counts in Combustion          Efficienc...
Pricing as a Necessary but not Sufficient     Condition•   Difficulty of targeting environmental „bad‟ directly and    exc...
Principles of environmental policy design in order to        encourage green innovation   • Stringency – how ambitious is ...
The Role of Policy Flexibility: The Estimated          Effect on Patented Environmental Inventions         1.8         1.6...
The Role of Policy Predictability: The Estimated        Effect of Volatility in Public R&D on Inventive        Activity   ...
The Need for a Mix of Policies:      Sequencing and Complementarity in AFV Technologies10                                 ...
Policy Impacts and Distance from “Market”•   To induce a 1% increase in electric vehicle innovations, the    alternatives ...
2. INVESTMENT AND FINANCE
Directing Change Without “Picking Winners”• Since “neutral” pricing of externality is not „sufficient‟ = >necessity to be ...
An Example: Intermittency of (some)Renwables and Targeting of Incentives
Challenge of Increased Penetration of    Renewables• The most important renewable energy sources  (wind, solar, ocean/tide...
Means of Overcoming Intermittency• Reduce correlation of variation in intermittent sources  and/or allow for ex ante/ex po...
Public R&D on Advanced Energy Storageand Advanced Grid Management     1400     1200     1000      800                     ...
Summary Results of Empirical Model       (Estimated Effects of „Strategy‟)                                                ...
Benefits of Investing in Transmission Capacity:                 Simulation of Capacity Requirements                       ...
Benefits of Investing in Transmission Capacity:                Value of Capital Stock                   40                ...
Asset Finance for Renewable Energy Projects*             ($US Million)* Wind, solar, geothermal, biomass, waste, small hyd...
% of Renewable Energy Projects* Financed             from Balance Sheet          100%           90%           80%         ...
Targeting of Grants for Renewable Energy Projects inSelected Countries (1990-2011)  United States                         ...
Grants to “New Energy” Projects in Canada             (2000-2011)Source: OECD Project on “Leveraging Private Finance for C...
Main Equity Providers in Canada for Renewable             Energy Projects (2000-2011 - $US million)                   1000...
Largest Grant-Giving Agencies               (all “new energy” – 2000-2012)                                      $US       ...
Main North-South Asset Finance Flows inRenewable Energy* (2000-2012)         * Wind, solar, geothermal, biomass, waste, sm...
Main North-South VC Flows in Renewable               Energy* (2000-2012)* Wind, solar, geothermal, biomass, waste, small h...
Exposure to “New Energy” of Asset Finance             ProvidersNote: Based on Weighted Mid-Point of BNEF Classes. Source: ...
Estimated Effects of Different Renewable Energy               Project Characteristics on Gearing Ratio               (Prel...
Estimated Effects of FITs/RECs on the Value of         Assets (Preliminary)Note: Figure shows the estimated elasticity in ...
Tax Preferences: Stream vs. One-off (1990-2011)          1 - Wind    5 - Geothermal 3 - Biomass&Waste                     ...
Estimated Effects of Policy Leveraging on                     Private Finance (Preliminary)              1200             ...
MORE INFORMATION AT:WWW.OECD.ORG/ENVIRONMENT/INNOVATION                  & WWW.OECD.ORG/ENVIRONMENT/FINANCE               ...
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Leveraging Private Finance and Inducing Innovation for Climate mitigation Through Policy Design

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  • Leveraging Private Finance and Inducing Innovation for Climate mitigation Through Policy Design

    1. 1. LEVERAGING PRIVATE FINANCE AND INDUCING INNOVATION FOR CLIMATE MITIGATION THROUGH POLICY DESIGN Presentation byNick Johnstone, Ivan Hascic and Miguel Cardenas Rodriguez at Sustainable Prosperity Ottawa, Nov. 8th, 2012
    2. 2. Background (1)• Technological innovation and allocation of private finance towards on „clean‟energy (and other environmental fields) share two key attributes • Public policy context plays a key role in determining the returns on investment • Many of the expenditures are irreversible (i.e. non-recuperable R&D expenditures; long-lived and specific capital) Small differences in policy conditions can have long-lived implications fortrajectory of the economy Small changes in policy conditions can have significant implications for therate of change of transition of the economy
    3. 3. Background (2)1. Innovation • role of different policy instruments on high-value renewable energy patents and alternative fuel vehicle patents • role of policy stringency, flexibility and predictability on „environmental‟ patents more generally • the role of technology agreements and the CDM on technology and knowledge transfers2. Investment and Finance (preliminary) • role of different policy measures on allocation of private finance for projects of different technological maturity • the extent of crowding out/crowding in which exists between different public (i.e. grants) and private (i.e. equity) sources of finance; •the benefits of complementary projects in terms of ease of access to finance (e.g. investments in transmission infrastructure and grid quality)
    4. 4. 1. TECHNOLOGICAL INNOVATION
    5. 5. CC Mitigation and Adaptation Technologies (Number of patent applications - claimed priorities, worldwide)Source: Haščič, I. et al. (2010), “Climate Policy and Technological Innovation andTransfer: An Overview of Trends and Recent Empirical Results”, OECD EnvironmentWorking Papers, No. 30 http://dx.doi.org/10.1787/5km33bnggcd0-en
    6. 6. Prices matter – and spur innovation The Effect of an Energy Tax on Patent Counts in Combustion Efficiency and Renewable EnergySource: OECD Energy and Climate Policy and Innovation (2012). Based on estimation ofsample of OECD economies over period 1978-2008. Results indication that if oil price isapproximately equal to prices reached in 2008 oil shock => switch from fossil fuel combustionefficiency innovation to renewable energy innovation. See also ENV WKP 45
    7. 7. Pricing as a Necessary but not Sufficient Condition• Difficulty of targeting environmental „bad‟ directly and excessive administrative costs – i.e. environmental policy and transaction costs• Secondary „non-environmental‟ market failures – i.e. information failures, split incentives, network externalities• „Credibility‟ of policy-induced price signals over the longer term may not be sufficient for risky investments• Inertia in the market which can favour incumbent firms and technologies – “deadweight of past” may correlate with environment-intensity” 7
    8. 8. Principles of environmental policy design in order to encourage green innovation • Stringency – how ambitious is the policy objective relative to “BAU” • Predictability – how certain and credible is the signal given by the policy • Flexibility – how much space is provided to identify new technologies and methods • Incidence – how closely does it target the underlying policy objective • Depth – does it generate incentives across the full range of possible outcomesSource: Johnstone et al. “Environmental Policy Design Characteristics and TechnologicalInnovation” ENV WKP No. 16. 8
    9. 9. The Role of Policy Flexibility: The Estimated Effect on Patented Environmental Inventions 1.8 1.6 1.4 1.2 1 Stringency Alone 0.8 Stringency & Flexibility 0.6 0.4 0.2 0 Model 1 (No Year FE) Model 2 (Year FE)Note: Figure shows the estimated importance of different characteristics of environmental policyframework (policy stringency, policy flexibility) in encouraging inventive activity in environmentaltechnologies. Measured as the number of patent applications (claimed priorities) deposited during1975-2006.Source: OECD (2011) Invention and Transfer of Environmental Technologies 9www.oecd.org/environment/innovation. See also ENV WKP No. 16.
    10. 10. The Role of Policy Predictability: The Estimated Effect of Volatility in Public R&D on Inventive Activity 0.50 0.40 0.30 0.20 0.10 Model 1 (No FE) Model 2 (FE) 0.00 R&D Volatility R&D Level -0.10 -0.20 -0.30 -0.40Note: Figure shows the estimated response to a 1% increase in the level and volatility of publicR&D in encouraging inventive activity in environmental technologies, measured as the numberof patent applications (claimed priorities) deposited during 1975-2007 in a cross-section ofOECD countries.Source: Kalamova, Johnstone and Hascic (2012) in V. Constantini and M. Mazzanti (eds.) The 10Dynamics of Environmental and Economic Systems (Springer, forthcoming).
    11. 11. The Need for a Mix of Policies: Sequencing and Complementarity in AFV Technologies10 Fuel prices 9 Standards 8 7 6 5 Fuel prices 4 Public R&D Public R&D Standards 3 2 1 0 Electric HybridNote: For ease of interpretation elasticities have been normalised such that effect ofR&D=1. Unfilled bars indicate no statistical significance at 5% level.Source: OECD (2011) Invention and Transfer of Environmental Technologies.
    12. 12. Policy Impacts and Distance from “Market”• To induce a 1% increase in electric vehicle innovations, the alternatives are: – Increase R&D by 14% (i.e. $26 mln instead of $23 mln per year per country, on average) – Increase fuel price by 63% (i.e. $1.30 instead of $0.80, on avg)• To induce a 1% increase in hybrid vehicle innovations, the alternatives are: – Increase R&D by 53% (i.e. $35 mln instead of $23 mln per year per country, on average) – Increase fuel price by 5% (i.e. $0.84 instead of $0.80, on avg)
    13. 13. 2. INVESTMENT AND FINANCE
    14. 14. Directing Change Without “Picking Winners”• Since “neutral” pricing of externality is not „sufficient‟ = >necessity to be „prescriptive‟ (at least to some extent) => mainchallenge for policy makers• Some general principles: • Support a „portfolio‟ of projects and technologies to diversify risk of getting it “wrong” • Benefits of chosen portfolio should be robust with respect to information uncertainty (i.e. ancillary benefits) • Identify “local general purpose” technologies and investments which complement a variety of emission-reducing strategies
    15. 15. An Example: Intermittency of (some)Renwables and Targeting of Incentives
    16. 16. Challenge of Increased Penetration of Renewables• The most important renewable energy sources (wind, solar, ocean/tide) are ‘intermittent’• Generation potential is subject to significant temporal variation (minutes, hours, days, seasons), which is uncertain and often correlated, and negatively correlated with peak demand (in some cases)• This means that increased capacity of renewable energy generation is not a perfect substitute for ‘dispatchable’ generation capacity (e.g. fossil fuels)• Challenge of LOLP becomes greater as share rises – note that some countries have targets > 40%, where capacity credit starts to converge to zero
    17. 17. Means of Overcoming Intermittency• Reduce correlation of variation in intermittent sources and/or allow for ex ante/ex post adjustment. How? o “Back up” dispatchable sources (include some hydro) o Spatial dispersion of sources (within type) and diverse portfolio of sources (across types) o Improvements in load management and distribution o Trade in electricity services (states, countries) o Investment in advanced energy storage o Malleability of demand (e.g. smart grids)• Benefits hypothesised to vary at different levels of „penetration‟ of intermittent renewable power 17
    18. 18. Public R&D on Advanced Energy Storageand Advanced Grid Management 1400 1200 1000 800 Wind Solar 600 Tide/Ocean Storage 400 Grid Management 200 0 Note - IEA Totals $2010 Million
    19. 19. Summary Results of Empirical Model (Estimated Effects of „Strategy‟) Although ECF mostly depends on ecological factors (wind speed), it is also significantly affected by other explanatory variablesNote. Summary results (elasticities) for the European sample (21 countries – 322obs). Source: D. Benatia et al. „Increasing the Productivity and Penetration ofIntermittent Renewable Energy Power Plants‟ (ENV/WPCID(2012)2).
    20. 20. Benefits of Investing in Transmission Capacity: Simulation of Capacity Requirements .12 250 .12 .11 200 .1 .1Capacity in GW WPEN_EUR .09 .08 150 .08 .07 .07 .06 100 .06 .06 .05 .05 .04 50 2010 2012 2014 2016 2018 2020 Product WCAP_ABS WCAP_denspath WCAP_congpath WPEN_EUR 20
    21. 21. Benefits of Investing in Transmission Capacity: Value of Capital Stock 40 20$2009 billion 0 -20 -40 2012 2015 2018 2020 mean of cost_denspath mean of cost_densify mean of cost_congpath mean of cost_congestion 21
    22. 22. Asset Finance for Renewable Energy Projects* ($US Million)* Wind, solar, geothermal, biomass, waste, small hydro. Source: OECD Project on “LeveragingPrivate Finance for Clean Energy Through Public Policy Design: Finding Evidence from Micro-Data”
    23. 23. % of Renewable Energy Projects* Financed from Balance Sheet 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%* Wind, solar, geothermal, biomass, waste, small hydro. Source: OECD Project on“Leveraging Private Finance for Clean Energy Through Public Policy Design: Finding
    24. 24. Targeting of Grants for Renewable Energy Projects inSelected Countries (1990-2011) United States Canada GP_CapitalSubsidy GP_CapitalSubsidy GP_Demonstration GP_Demonstration GP_ProductDevelopment GP_ProductDevelopment GP_PureResearch GP_PureResearch Australia China GP_CapitalSubsidy GP_CapitalSubsidy GP_Demonstration GP_Demonstration GP_ProductDevelopment GP_ProductDevelopment GP_PureResearch GP_PureResearch
    25. 25. Grants to “New Energy” Projects in Canada (2000-2011)Source: OECD Project on “Leveraging Private Finance for Clean Energy Through PublicPolicy Design: Finding Evidence from Micro-Data” (OECD, forthcoming)
    26. 26. Main Equity Providers in Canada for Renewable Energy Projects (2000-2011 - $US million) 1000 900 800 700 600 500 400 300 200 100 0Source: OECD Project on “Leveraging Private Finance for Clean Energy Through PublicPolicy Design: Finding Evidence from Micro-Data” (OECD, forthcoming)
    27. 27. Largest Grant-Giving Agencies (all “new energy” – 2000-2012) $US Recipients > $50M MillionAsian Development Bank 1257.25 China, Indonesia, Nepal, Sri Lanka, Philippines, Thailand, VietnamInter-American Development Bank 1102.97 Argentina, Barbados, Bolivia, Dominican Republic, Nicaragua, PeruNorway Ministry of Foreign Affairs 1000 BrazilJapan Int’l Cooperation Agency 988.4 Egypt, Indonesia, Kenya, VietnamWorld Bank 785.2 India, Uganda, Philippines, Thailand, VietnamAgence Francaise de Developpement 421.9 Kenya, Morocco, VietnamEuropean Investment Bank 338.6 China, Nicaragua, South AfricaFederal Republic of Germany 257.25 Kenya, South Africa, ChinaEuropean Commission 196.6 BulgariaNordic Investment Bank 146.6 LithuaniaInternational Finance Corp 71.7 South AfricaInternational Bank for R&D 62.2 Argentina Source: OECD Project on “Leveraging Private Finance for Clean Energy Through Public Policy Design: Finding Evidence from Micro-Data” (OECD, forthcoming)
    28. 28. Main North-South Asset Finance Flows inRenewable Energy* (2000-2012) * Wind, solar, geothermal, biomass, waste, small hydro. Source: OECD Project on “Leveraging Private Finance for Clean Energy Through Public Policy Design: Finding Evidence from Micro-Data” (OECD,
    29. 29. Main North-South VC Flows in Renewable Energy* (2000-2012)* Wind, solar, geothermal, biomass, waste, small hydro. Source: OECD “Leveraging Private Finance for Clean EnergyThrough Public Policy Design: Finding Evidence from Micro-Data” (OECD, forthcoming)
    30. 30. Exposure to “New Energy” of Asset Finance ProvidersNote: Based on Weighted Mid-Point of BNEF Classes. Source: OECD Project on“Leveraging Private Finance for Clean Energy Through Public Policy Design: FindingEvidence from Micro-Data” (OECD, forthcoming)
    31. 31. Estimated Effects of Different Renewable Energy Project Characteristics on Gearing Ratio (Preliminary) 0.05 0 -0.05 -0.1 -0.15 -0.2Note: Elasticities for continuous variables and marginal effects for discrete variables. Source: OECDProject on “Leveraging Private Finance for Clean Energy Through Public Policy Design: Finding Evidencefrom Micro-Data” (OECD, forthcoming)
    32. 32. Estimated Effects of FITs/RECs on the Value of Assets (Preliminary)Note: Figure shows the estimated elasticity in terms of disclosed transaction values of assets perMW to a 1% increase in the level of the respective policy measures. Unbalanced panel of 31countries (OECD & BRICs) over 12 years (2000-2012). Unfilled bars indicate not statisticallysignificant at 5% level. Source: OECD Project on “Leveraging Private Finance for Clean EnergyThrough Public Policy Design: Finding Evidence from Micro-Data” (OECD, forthcoming) 32
    33. 33. Tax Preferences: Stream vs. One-off (1990-2011) 1 - Wind 5 - Geothermal 3 - Biomass&Waste FP_stream FP_single 2 - Solar 4 - SmallHydro 0% 20% 40% 60% 80% 100%
    34. 34. Estimated Effects of Policy Leveraging on Private Finance (Preliminary) 1200 1000 800$US Million 600 400 200 0 No No No No No No No No Yes Yes Yes Yes Yes Yes Yes Yes -200 Capital Demo Project** Prod Dvlpmt Research FP_single*** FP_stream*** FIT_d* REC_d Subsidy**Note: Figure shows predicted effect of the presence of different policies on allocation of privatefinance towards different clean energy projects. Dotted line represents mean value. *‟s representdegree of significance. Source: OECD Project on “Leveraging Private Finance for Clean EnergyThrough Public Policy Design: Finding Evidence from Micro-Data” (OECD, forthcoming) 34
    35. 35. MORE INFORMATION AT:WWW.OECD.ORG/ENVIRONMENT/INNOVATION & WWW.OECD.ORG/ENVIRONMENT/FINANCE 35

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