Large-Scale Innovation System: Leadership and Political Case Study of Germany’s Energy Transition

Groom and Grow a Large-Scale Innovation
System: a Leadership and Political
Case Study of Germany’s Energy Transition
By
Siripong Treetasanatavorn
Submitted to the MIT Sloan School of Management
on January 27, 2014 in Partial Fulfillment of the Requirements of the
Sloan Fellows Program in Innovation and Global Leadership
for the Degree of Master of Business Administration
ABSTRACT
The past decades have witnessed Germany’s Energiewende as a spearhead of the
large-scale energy and power system transformation that sets out an unprecedented
leadership and political movement on the basis of collective efforts across public,
private and nonprofit sectors—an exemplary success characterized by an innovation
transformative force of socio-political engagement.
Despite a wide range of desirable changes brought forward by a large-scale energy
innovation system, the grand-scale transformation constantly encounters challenges
to meet a large variety of diverging requirements from multiple stakeholders,
considering its grand promises addressing the dilemma of energy security versus
economic growth, environmental commitment versus industrial competitiveness, as
well as political leadership to transform the society versus the practicality of limited
legitimacy to internalize the long-term fiscal requirements.
From the perspective of a leader with political authorities, this study brings forward
an analytical and interpretation framework that elaborates, discusses and
characterizes the logic of a large-scale innovation in political terms, with an
analogous dynamics of renewable energy versus innovation development,
embracing both long-term benefits and short-term challenges.
Independent Study Supervisor: John Van Maanen
Title: Erwin H. Schell Professor of Management Professor of Organization Studies
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Contents
1. Introduction 3
1.1 Motivation: Interpretation of Energy Transition 4
1.2 Background and Method 5
1.3 Organization of the Essay and Caveat 6
2. Logic of Energy Transition Policy Framework 7
Logic of a Large-Scale Innovation Policy Framework
2.1 Policy Overview: Renewable Energy Acts 8
2.2 Logic of Renewable Feed-in Tariffs 10
2.3 Implications of Market-Aligned Policy Logic 13
3. Challenges of Germany’s Energy Transition 19
Challenges of Large-Scale Innovation Systems
3.1 What is at Stake? A Critical Look at Energy Transition 20
3.2 Mapping out Fundamental Challenges 21
3.3 Multi-dimensional Challenges: Sources of Dilemma 26
4. Tying It All Together: Interpreting Energy Transition as a 31
Large-Scale Innovation System
4.1 Framing Large-Scale Innovation Dynamics 32
4.2 Understanding Logic of Large-Scale Innovation 33
4.3 Interpreting Challenges of Energy Transition Dynamics 36
Appendix I: Abstract Innovation Dynamics 40
Appendix II: Selected Energy Statistics of Germany 42
Bibliography 43
Biography 47

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1 Introduction
The past decades have witnessed Germany’s Energiewende1
as a significant
political and policy transformation embracing a large-scale participation of the public,
private and nonprofit sectors that set out a series of reforms of the national and state
energy and power systems towards the long-term overarching goals improving
economic sustainability, energy dependence and environmental protection without
deteriorating industrial competitiveness. The policy intends to meet these goals by
increasing uses of renewable energy and improving energy efficiency in the system,
while reducing the use of coal as energy resources in the long run. This engagement
has been set out an unprecedented leadership and political movement on the basis
of collective efforts of the Federal Republic of Germany—an exemplary success
characterized by the innovation transformative power of socio-political engagement.
Addressing a variety of short and long-term policy objectives, this large-scale
national policy encounters substantial challenges from multiple stakeholders,
considering its grand promises addressing the dilemma of energy security versus
economic growth, environmental commitment versus industrial competitiveness, as
well as political leadership to transform the society versus the practicality of limited
legitimacy to internalize the long-term fiscal requirements. Yet an integral driving
force behind the Energy Transition lies inarguably in the power of innovation from
technologies and systems, change processes and social engagements, as well as
stakeholder management and leadership, all of which mutually reinforce the
collective transformative force required to bring about changes toward a large-scale,
long-term and sustainable paradigm-shift in economic, social and political terms.
This chapter first introduces the Energy Transition as an exemplary leadership and
political case discussing a broad set of distinctive, underlying challenges at the heart
of every large-scale innovation-driven change process. The chapter concludes with
an overview of the essay structure comprising brief description of the theme
discussed in each chapter.

1
Energy Transition in English, and this English term will be used throughout the study. For further
information, see references Cabinet of Germany (2010a, 2013a or 2013b).

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1.1 Motivation: Interpretation of Energy Transition
In Energy Transition context, the author formulates this essay with a motivation and
intent to study the roles, logics and implications of leadership and related political
and policy agenda in the construction of a large-scale innovation system, particularly
as a broad mechanism to harness and foster changes by applying policy instruments
and engaging multiple political stakeholders to unleash and maintain the intended
transition dynamics toward growth of the sustainable energy provision model. The
study will focus on the specifics such as key technical and policy components, as
well as the big-picture perspectives on how the Germany’s Energy Transition, a case
study, functions as instrumental political and policy driver to innovative, systemic
changes at the national level. Particular attention shall be paid to the tensions and,
more importantly, resolutions that a leader is required to comprehend:
• Risks and opportunities of the innovative resolution-finding mechanism;
• Dilemma and underlying legitimizing logic drawing the sense of urgency of
changes that call upon a broad-based participation from stakeholders; and
• Technical and adaptive changes2
consisting of technical, behavioral and
mental models required to address short and long-term challenges.
Thanks to the substantial roles of innovation in this case, the study shall extend the
understanding of the specific Energy Transition case to a generic context, and
examine how one may take lessons learned as a leader with political and moral
authority to embrace the power of innovation as a mechanism toward changes.
Specifically, innovation shall be discussed as an analogy of the specific challenges
that bring forward structural organization required to address the Energy Transition
dilemma arisen from the requirement, resource and process gaps between the short
and long-term objectives. This logic shall further be interpreted as an instance of an
innovation framework to implement necessary changes brought forward to realize
long-term vision as well as embrace short-term practical constraints.
One critical component that exhibits a distinctive parallel between the specific and
the generic is the vital role of a leader to acquire and maintain political legitimacy to
bring about any change processes in the first place. Naturally, this requirement infers
a broad-based participation of the society to build a right sense of collective purposes
toward constructive changes, and thereupon to identify and solidify a necessary
common ground among stakeholders as a basis to determine “change” objectives,
required mechanism and corresponding roadmap that mandates and stipulates roles
and responsibilities for each stakeholder in the ecosystem. Essentially, the change
process should focus not only on the transparency, accountability and integrity, but
also the basic principle of co-leadership, co-ownership and as a result co-beneficiary
of the cumulative, collective engagement. Figure 1 summarizes the study approach.

2
Adaptive versus technical changes particularly in the sense that Heifetz and Linsky (2002) mentioned
in the leadership practice context.

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1.2 Background and Method
Energy Transition embodies a rich, interdisciplinary body of political and policy
essence, related directly to the roles of leadership with political authorities to manage
and engage the complex, multifaceted subject matter with technological, economic
and societal relevance to the German society. This is an ideal research area with
practical resonance to the current world yearning for ideas and innovation in the
energy area. Such has immensely and exquisitely inspired the author to investigate,
study and contribute in the academic frame of the MIT Sloan Fellows program.
Indeed, the subject has been chosen in connection primarily with the author’s
background and experience3
in the renewable energy and particularly in the wind
industry in Germany, Denmark and China, where he spent his academic and
professional career in 2001-13 with Siemens Corporate Technology (Global
Research Headquarters), Siemens Wind Power and Siemens Limited China. The
acquired and developed knowledge and experience at the triad intersection of
academia, business and government across a large number of innovation areas laid
an intellectual curiosity basis that extends the author’s interest across bourgeoning
topics, in particular Energy Transition, closely associating with the three
aforementioned sectors, where leadership renders a profound impact to the society.
The author wishes that the research could at least bring forward ideas and insights
that contribute to an understanding of how and why leaders matter in innovation.
As mentioned earlier in this Chapter, the author believes that the most effective way
to structure the research of this interdisciplinary nature is both to adhere to the
specifics of the case and to draw an analogous perspective that (a) compares to the
generic frameworks, (b) infers by using known facts and underlying logics and (c)
formulate and test (as far as possible) hypotheses that potentially explain or
characterize the causes or consequences. For example, the generic frameworks as
mentioned refer to innovation frameworks such as economies of scale and scope
and disruptive innovation—certainly applicable and relevant to the Energy Transition.
Regarding use of references, the author focuses mainly on the available official
publications as primary sources, such as from the Federal Chancellor, Federal
Cabinet of Germany, Federal Ministers and/or Federal Parliament, since the
information as such could be treated as facts suitable for framing the analysis prior to
further logical inference or interpretation. Still, some referred documents in this
research contain also opinions and theses such as technical white papers and
newspaper columns. The sources in this category are generally referred to as
secondary yet necessary to enrich the discussion, for example, to emphasize certain
observations that are in logical alignment or complement with the primary sources or
other secondary sources. To ensure the specificity of this matter, all external
references are always cited and listed alphabetically at the end of the study. By so
doing, the author hopes that this research work shall remain applicable and relevant
to future evolutions of this subject matter and of a broader theme in innovation
leadership at the triad intersection of academia, business and government.

3
See also the author’s biography on the last page of this essay.

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1.3 Organization of the Essay and Caveat
Applying the approach as discussed in this chapter, the author structures the essay
into seven chapters (including this chapter), each of which is dedicated to the specific
discussions addressing each part of the study:
• Chapter 2 analyzes logic of the Energy Transition program and the roles
innovation in policy, economic and technical terms. The discussion shall be
extended to implications, challenges and logic of innovation toward changes;
• Chapter 3 outlines and elaborates fundamental challenges of the Energy
Transition and discusses each aspect of this national policy ranging from
energy security and economic to environmental and technical terms;
• Chapter 4 renders an interpretation of the large-scale energy-innovation from
an abstract innovation dynamics as a conclusion of this study.
Last but not least, the author reiterates the purpose of this essay to study the roles of
leadership and politics of a large-scale innovation system at large by analyzing the
Energy Transition case upon potentially relevant criteria. The interpretation of the
specific case and the generic intellectual construction of an innovation system may or
may not be relevant, depending on contexts. With this caveat in mind, the author
shall remain objective and neutral, particularly in political terms, particularly as the
discussed subject matter is an ongoing case. To this end, the author intends to bring
forward potential contributions in this study to the leadership, politics and innovation
research areas as much as appropriate given this circumstance.
Figure 1: Approach: This study will approach the leadership and political challenges
of an innovation system by interpreting the specifics of Germany’s Energy Transition
and inferring lessons learned in a broader leadership context
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2 Logic of Energy Transition Policy Framework
Logic of a Large-Scale Innovation Policy Framework
Design and implementation of the robust, transparent and result-enabling logic is not
only a critical success factor of any political and policy engagements, but also
leaders’ natural source of power that helps them systematically engage and
implement the intended changes. In Energy Transition context, leaders apply logic
primarily to (a) construct an attractive, fair and forward-looking policy and investment
environment as a foundation of a broad-based participation; (b) foster a necessary
setup required to create an innovation ecosystem that initiates, multiplies and
sustains transformative forces; and (c) build up scale, scope and momentum that
altogether self-reinforce and sustain engagement legitimacy and authority.
With this motivation, the author explores in this chapter fundamental logic of the
transition framework and relevant policy agenda that creates regulatory environment,
supporting schemes and underlying mechanisms, in order to enable a successful
implementation of renewable energy technologies and related innovation. Focuses of
the discussion remain at a high level with an intention to depict a big-picture
perspective, and reveal important logic, implications and interpretations. This
approach is chosen to relate the intended logic to the major theme of this study,
focusing on the interaction of public leadership and innovation buttressing the
transition and transformation as intended by the German authority4
.

This chapter first lays out an overview of the integrated policy framework and briefly
introduces fundamental policy mechanisms and instruments, as well as challenges
particularly arisen from the ongoing unbalanced renewable portfolio5
with implications
in technological and economic terms. Further discussions elaborate analytical
essence of the policy agenda and outline important implications of the renewable
energy development, instrumental to the sustainable growth pathway.

4
The discussion will focus on a series of German Renewable Energy Acts, mainly the latest publication
since January 1, 2012. See reference German Federal Ministry of Environment (2000, 2004, 2008,
2011b and 2012).
5
The discussion in this topic relies on the publicly available data by Informationsplattform der deutschen
Übertragungsnetzbetreiber (2014), to be discussed in the next section.

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2.1 Policy Overview: Renewable Energy Acts6
Energy Transition is a conceptual terminology encompassing a range of related
regulations and policies aiming at constructing a transformation of the Germany’s
energy system in political, technological and socioeconomic terms. The ultimate,
long-term scenario is characterizable by a significantly less share of fossil energy
resources and substituted by renewable resources that accompanied by a more
distributive, adaptable and intelligent provision system bridging a large variety of
resource types and delivery-consumption dynamics and patterns. To this end, the
previous decade has seen a continuous evolution of this engagement as reflected in
a series of federal authority publications—Renewable Energy Acts—constituting
primary logics of this policy-driven, market-oriented transition7
. Figure 2 provides an
overview of this framework comprising key objectives, mechanisms and instruments.
Policy Objectives
Fundamental objective8
of the policy is to increase shares of relevant and promising
renewable resources in the supply and consumption mix to at least 35% by 2020 and
80% by 2050. This endeavor is geared toward the following goals:
• Continuously growing mix of the renewable resources as an integral measure
to increase, strengthen and maintain sustainability of the current system;
• Limit of or increasing substitution to fossil resources with renewables; and
• Sustainable economic competitiveness as a result of incrementally more
efficient renewable technologies, also considering economic tools that
internalize environmental impacts as externality costs from fossil energy use.
Implied in this context, the policy focuses on five broad renewable energy technology
classes9
: hydro, wind onshore (on land) and offshore (mainly constructed into the sea
beds), solar (mainly photovoltaics), biomass and geothermal. In addition, the policy
objectives could be achieved only with gradual yet substantial and sustainable
technological development pathway as a prerequisite of the long-term transition.
Policy Mechanisms and Instruments
Central mechanism of the policy employs feed-in tariffs to foster the uptake of
promising renewable technologies with the guaranteed “feed-in prices” of the energy
generated from the specific renewable types, of which the utilities or grid operators
are obliged to provide access and buy such generated, feed-in energy at the policy-
defined levels. Three primary aspects of this mechanism can be summarized:

6
Major references to be discussed are the series of German Renewable Energy Acts versions 2000,
2004, 2009, 2012 and the addendum for Photovoltaics in 2012, see references appeared in the same
order from references German Federal Ministry of Environment (2000, 2004, 2008, 2011b and 2012).
7
As mentioned in Section 1.3 Background and Method, the author will orient the discussion to official
publications from the Cabinet of Germany, relevant Ministries and state authorities, as well as the
Federal Parliament, upon which implications and hypotheses will be formulated to address research
questions in this study.
8
Refer to paragraph 2 from reference German Federal Ministry of Environment (2011b).
9
Refer to paragraph 3 from reference German Federal Ministry of Environment (2011b).

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• Feed-in tariffs10
or policy-defined energy price guarantee of individual
renewable technologies, with policy objectives to encourage long-term
investment of selected technologies, despite unattractive economics in the
short run yet of promising economic potential and strategic implications to the
transition in the mid-to-long run, as economies of scale increase over time;
• Degression rates11
or policy-defined innovation rates successively adjusting
the stipulated feed-in tariffs for each technology, in anticipation of a higher
level of technological advances, an increasingly greater scale and scope, and
therefore a stronger learning effect and economic competitiveness; as well as
• Economic alignment and adjustment12
to market values, so as to balance
and offset the policy-defined prices in accord with actual supply-demand
dynamics—a potentially useful method to increase transparency of the price
scheme and thereby enhance long-term market-based investment prospect.
Combining these three aspects together, one could interpret the framework as a
policy-driven, market-aligned approach that focuses on the long-term investment
opportunities made possible by the nature of price-based feed-in tariff principle. This
approach also addresses the necessity to construct an innovation-driven
environment as a vital ingredient of the transition that is achievable only on a
gradual, continuous and broad-based participative basis. The framework also pays
close attention to the logic of the capital market that favors investment decisions
oriented to a long-term, predictable growth accompanied by reliable and trustworthy
regulatory environment that imbues investor’s trust and confidence in the investment
prospect that, in turn, relies substantially on the long-term political commitment.
Policy Challenges
However, it is worth noting that this policy approach faces a critical challenge that
leads to an unbalanced portfolio (see also Figure 3). The fact that the policy has only
limited flexibility to adjust the feed-in remuneration rates to reflect traded values in
the market, competitive gaps (eg, benefits) among each promoted renewable
technology could in principle vary—leading to unintended gaps of competitions
between different types of renewable technologies, plausibly without technological
criteria as primary investment determinants. In other words, this situation may not
necessarily lead to an investment decision that recognizes and rewards technological
merits, whereupon further accumulations of decisions in the same manner could
undesirably lead to an inefficient, unbalanced renewable portfolio at the system level.
Considering the current statistics as shown in the same figure, one could recognize
considerable gaps between cumulative benefits (relative amount of the generated
renewable energy) and cumulative costs (relative amount of the policy-defined costs
of generated energy). For example, the relatively lower average cost-efficient solar
technologies13
represent an unproportionally high cumulative cost, inferably caused
by solar technology’s relatively attractive investment prospect when compared to
other alternatives. This challenge will be discussed further in the following section.

10
Feed-in Tariffs for each technology are according to paragraphs 16 to 33 from reference German
Federal Ministry of Environment (2011b).
11
See also paragraphs 16 to 33 from reference German Federal Ministry of Environment (2011b).
12
Mechanisms as stipulated are according to paragraphs 33 to 44 from reference German Federal
Ministry of Environment (2011b).
13
See also Subsection Economic Competitiveness in Section 3.2 for a rationale for this cost efficiency
of solar technology particularly in Germany.

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2.2 Logic of Renewable Feed-in Tariffs
Transformation at the intended scale and scope requires continuous political will and
commitment to engage the “change” agenda in the long run14
. With this basic
principle, the author explores in the following an analysis of the renewable feed-in
tariffs, the central policy scheme of Energy Transition, with focuses on the
fundamental logic and also in the context innovation-related dilemma with short and
long-term challenges as discussed in the first two chapters.
Arguably, regardless of the promises and prospects in the long run, innovation at an
early phase confronts complex challenges not only due to short-run technological
and economic risks, but also challenges to successively scale up functionality and
efficiency toward high-order impacts such as economies of scales or learning15
,
disruptive innovation16
or even structural competitiveness at the national level17
. In
this section, the author first elaborates necessary logic and basic challenges of feed-
in tariffs to enable energy innovation growth in both short and long runs.
Basic Logic of Feed-in Tariffs
This concept is built on the premise that the renewable technologies at today’s
development stage and implementation scale (therefore impact from the economies
of scale) do neither possess (a) competitive economics therefore attractive
investment prospect in the “as-is” condition, nor (b) attractive investment in the
“projective” conditions in the foreseeable future18
, so as to compete with incumbent
energy technologies. On this basis, governmental intervention policy is designed to
ensure a levelized (even protected particularly at an early phase of the technology
development) economically competitive ground in the mid-to-long term19
. With this
effort, it is anticipated that some of these technologies would have a better chance to
reach a maturity level to compete in the market with their own economics, thereby
increasing the probability to increase shares to the long-term energy mix.
With this rationale, the policy estimates and regulates the level of intervention—
renewable energy prices stipulated by the feed-in tariffs—in order to constitute an
“artificial” economic competitiveness of the promoted renewable technologies at least
in the short run. This competitiveness gains from a higher price level than the market
average. It is intended that by so doing, renewable plant operators or investors would
be able to operate the business with reasonable profits, and invest in research and
development to advance technology functions, efficiencies and related economics.

14
Also refer to the context of long-term dynamics in Section 4.3 Reading Energy-Innovation Challenges.
15
For example, according to Henderson (1974) in terms of economic improvement with growing,
cumulative experience.
16
In particular according to Christensen (1997) and Christensen and Raynor (2003) who observe and
hypothesize mechanisms, frameworks and practices of disruptive innovation.
17
Notably as proposed in the diamond model by Porter (1990, 2000), where he put forward a framework
and particularly roles of government to create structures, conditions and environment to create and
sustain innovative competitive advantages of the nation.
18
Even though the investment as such renders both public and business values, the rendered
perspective is focused on the business administration terms, that is, the investment as such does not
give a prospect to yield an attractive return in comparison to other alternatives, eg, return on equity.
19
In the magnitude of 20 years, see paragraph 21 from reference German Federal Ministry of
Environment (2011b).

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Competitiveness Logic: Degression Rates
Taking a big-picture perspective, the renewable industry would therefore have a
better chance to tackle short-term challenges, gradually establish an economic
competitiveness and eventually construct a competitive and sustainable value chain,
ranging from acquisition and processing of raw materials, manufacturing of system
components and supply-chain management to integration, construction and project
turnkey of the renewable plants. The logical consequence at the macro level as such,
however, depends on how to define competitiveness in a relative sense.
Relating this aspect to the concept of innovation growth dynamics20
, one could infer
further logics of the renewable feed-in tariffs from short-term impacts as well as
enhanced competitiveness from scale from the following arguments:
• Short-term attractive investment prospect could be inferred from attractive
feed-in tariff rates, ie, short-term profit at least equal to the level of
incumbents. Given the required upfront investment in capital expenditure (eg,
plant construction, research and development), the profit on a per-unit energy
generated and sold should also commensurately compensate indirect costs
adjusted by investment risks (eg, via discount rate), also in consideration of
indirect costs of incumbents21
(eg, of coal or gas power plants); and
• Degression rate and enhanced competitiveness from scale are inherently
encapsulated in the design of the feed-in tariffs that give incentives and
recognize merits from the increasing scale and efficiency and as a result
increasing economic competitiveness. In practice, this means that feed-in
tariffs should frame investment prospect not only in as-is but also projective
terms. Technically speaking, the projection could be formulated in terms of
gradients or change rates of the policy tariff rates over time that adequately
rewards, encourages and even anticipates scale and innovation impact.
Putting in context, the definition of such tariff gradients22
and in broader terms
degression rate23
should also relate to the scale and proportionality of the
actual implementation magnitude (eg, national construction target24
).
Considering these two aspects together, feed-in tariffs further infer the logic of long-
term competitiveness, as a result of accumulated impact from short-term
attractiveness and an increasing scale. The author believes that this is an eventual
objective of the policy, where at least some renewable technologies could potentially
be developed to compete successfully in the market without policy intervention. In
addition, such long-term competitiveness should be defined in a larger context, such
as incorporating externality costs of other energy resources (eg, carbon emission).
This long-term benefit would then have a coherent strategic perspective addressing
technology and innovation, economic competitiveness and climate change aspects.

20
See Sections 4.1 and 4.3 for further discussions about the energy dynamics.
21
The author argues in this context also as an extension from the Merit Order Concept (see reference
European Wind Energy Association, 2010), which considers only the marginal cost, rendering a
significant advantage to renewable energy resources given zero fuel cost despite intermittency.
22
See for example paragraph 6 from reference German Federal Ministry of Environment (2012) with the
specification of the cost efficiency policy or degression rates, subject to the actual implementation scale
in excess of or below the targeted accumulated capacity of solar photovoltaics.
23
According to paragraph 20 from reference German Federal Ministry of Environment (2011b), feed-in
tariff for each technologies are adjusted individually on a yearly basis, eg, 1-2% for hydro and biomass,
5% or geothermal, 7% for wind offshore and up to 15% for solar photovoltaics.
24
See for example paragraph 5 from reference German Federal Ministry of Environment (2012) with the
specification of 52 GW target for the solar photovoltaic accumulated capacity.

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Growth Dilemma: Potential Supply-Demand Distortion
Undesirable complications arise as shares of the renewable energy, as the
proportion of renewable energy with the policy-defined artificial prices grows in the
energy supply-demand mix. In fact, the higher proportion of the renewable energy,
the more distorted the energy supply-demand dynamics would become. This depicts
the growth dilemma that occurs arguably as a consequence of the policy.
The distortion created by the policy could actually be in an acceptable and tolerable
extent unless it fundamentally deteriorates primary function of the market dynamics
to balance supplies with demands at which prices and quantities (traded energy
amount) are balanced at the equilibrium. However, as the relative share of the
artificially expensive renewable energy at the supply side of the market continues to
increase, the proportion of the unmet demands would tend to grow, since there
would be less and less supplies available at the requested price level. This situation
leads to two potential undesirable consequences:
• Increasing customer unwillingness25
to pay more without additional utilities,
assuming that renewable energy does not give any differentiated values; or
• Increasing potential fragmentation of the energy market that breaks away
from or limit the exposure to the renewable sources, insofar the policy-defined
renewable prices are artificially higher than those at the balanced dynamics.
The latter action may not be practical in real terms, because energy consumers could
generally not choose from which energy sources to buy. Prices and quantity
perceived by the consumers are those of the predefined mix from a variety of
sources. At present, no consumers may arbitrarily choose the supply mix at will.
These consequences are certainly not desirable, particularly in operational terms.
Yet this concern is relevant and must be addressed not only to maintain the supply-
chain dynamics but also to allow sustainable growth of the renewable energy.
Generally, there are potentially three logical approaches to resolve this conflict:
• Coupling an increasing share of renewable energy with quantity caps26
that
limit potential impact of the distortion to the supply-demand dynamics;
• Stronger, more flexibly links of potential economic improvement27
(from scale
and scope) to the adjustment of tariff rates over the long run; and also
• Dynamic market alignment of renewable energy prices and tariffs.
An initial form of the latter approach has been incorporated in the Renewable Energy
Act28
, yet mainly in the form of reallocation charges accumulated only twelve times a
year and in fact without dynamic adjustments of the tariff rates. However, this implies
an important first step toward market alignment via public participation, which could
gain public acceptance, while ensuring attractiveness of the renewable prospect.

25
As reported by the growing discontent of the public to carry an increasing energy price, see a recent
publication in the newspaper Frankfurter Allgemeine Zeitung by Lohse E. (2013) discussing the practical
problems of the transition in technical (grid network expansion) and economic (retail prices of energy as
a consequence of policy-supported renewable energy increase) terms.
26
Technically speaking, this argument relates to the tariff-based concept (price driven) to the quota-
based concept (volume as percentage of the overall energy mix). See for example in the California state
as proposed by California Public Utilities Commission (2013).
27
See discussion in the next section, Subsection Implications of Mechanisms and Instrument Logic.
28
Refer to Market Premiums (“Prämien für die Direktvermarktung”) and Cost Reallocation (“EEG
Umlage”). See paragraphs 33 to 44 from reference German Federal Ministry of Environment (2011b).

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2.3 Implications of Market-Aligned Policy Logic
Renewable Energy Acts are formulated, stipulated and implemented essentially to
grow renewable energy resources in the energy mix by means of market
mechanisms. This approach requires policy engagement to improve and maintain
renewable energy attractiveness particularly in return on investment terms and
leverage the power of innovation not only from technological advances but also from
the potential to improve the economics. According to the previous section, the feed-in
tariff scheme is designed and deployed to achieve these ends, yet faces undesirable
complications, which could be resolved by aligning renewable energy costs with the
market. This reveals policy imperfection especially as it is intended to satisfy multiple
seemingly conflicting goals, for example, to:
• Overcome short-term friction versus grow, accelerate momentum once the
scale and competitiveness reach a certain magnitude;
• Deliver market values versus ensure affordability as public good; as well as
• Stipulate policy flexibility to adjust to the dynamics of market environments
versus maintain a reliable, predictable platform for innovators to groom, grow
their contributions and capture premiums without unintended growth artifacts.
This section extends the discussed logic of the feed-in tariff concept to the
implications of its existence due to such tension, dilemma and conflict. Main focuses
are dedicated to the necessity to keep the balance under various circumstances. An
important assumption in this discussion: even though renewable energy is an
innovative, high-cost (in the short run) “product”, it is merely a commodity (no
differentiation) from its inception. This presents an extraordinary challenge subject to
design and optimization across economic, technological and political dimensions.
Implications of Policy Rationale
The policy that aims to substitute over 80%29
of the energy generation mix with
renewable resources sends a strong signal substantiating political intent and sense
of urgency to overhaul the current energy provision system. Inferring from the policy
framework as presented in the previous chapter, one could derive30
the following
implications from the policy objectives (see also Figure 3):
• Recognition of the lack of long-term capabilities to sustain the current energy
mix predominantly comprising fossil and nuclear resources, if disregarding an
incremental progress of renewable resource use, as a long-term substitution;
• Awareness of dependency risks from overreliance on non-renewable
resources, due to fossil energy import and climate change threats; and
• Necessity to temporarily increase economic competitiveness of renewable
energy technologies while limiting the cost-transfer impact to the public.
Of particular significance, the policy implicitly entrusts the power of innovation from
technologically and economically promising advances gained from protected, long-
term research investment that would, in turn, successively improve functionalities,
capabilities and efficiencies in harnessing renewable energy resources and
potentials to transfer such values and benefits to the public in the long run.

29
Targeted for 2050 according to paragraph 2 of German Federal Ministry of Environment (2011b).
30
Infer from paragraph 2 from reference German Federal Ministry of Environment (2011b).

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Implications of Mechanism and Instrument Logic
Central to this principle is an acknowledgment by the authority to acquire trust and
legitimacy from the constituencies and markets (as advocates, subsidizers and
beneficiaries of the transformation) in the policy agenda. Such could be gained only
by a long-term commitment and engagement. This concern is particularly relevant
due to the nature of transition that may succeed only by a large-scale, continuous
support from the public. Zooming in to the practicality aspect, one could recognize
that this grand-scale vision requires implementable substeps that fit and cumulatively
contribute to the long-term targets. This inferable narrative fits excellently to the
policy choice based on the long-term, broad-based and ambitious feed-in tariffs.
Fundamental to the renewable feed-in tariff scheme is a market-aligned incentive
mechanism that increases dependability and attractiveness to invest, participate and
even subsidize at least temporarily with an anticipation that the deficits (and
associated risks) in the short run are worth absorbing when projecting to the potential
benefits achievable from collective, continuous long-term-oriented engagement. In
economic terms, renewable feed-in tariff mechanism implies the following caveats:
1. Optimal renewable energy development relies on a long-term, reliable policy
that makes possible predictability of the revenue stream and profitability, as
an instrument to minimize market risk and thereby encourage long-term
investment in advanced technologies and related commercialization;
2. Eventual objectives of the policy aim not only at the creation of innovative
values (renewable energy) and successive improvement (efficiency), but also
long-term economic competitiveness (convergence of tariffs to zero); and
3. Alignment with the mechanisms of the market is key to define a reasonable
development convergence path, as a critical process to make sure that the
created values correspond to the resonance of the public support by gauging
the perceived values traded in the market as a proxy instrument.
Roles of the authority on this basis are extended to the definition, formulation and
implementation of the feed-in tariffs that reflect these rationale and caveats.
According the current policy as discussed in the previous chapter, one could
recognize the application of (a) long-term tariff guarantee31
as a response to the first
implication; (b) successive tariff reduction principle in the long run or degression32
as
a response to the second, and (c) market alignment mechanism as a response to the
third, despite currently only in a limited form, extent and functionality33
.
In technical terms, the development of renewable energy to a large-scale system
requires more than policy constituents that target at the buildup of generative
technologies, but also the adaptive consequence in the grid networks. Main
challenges inherent to the renewables lie in the technical, economic and political
implications of the inevitable intermittency34
. To this end, the current policy program
responds to this implication by stipulating a necessity to extend grid networks and
delegate control rights to the utilities and network operators, so as to manage the
generative level that may cause fluctuation and bottlenecks in the grid networks35
.

31
Refer to the discussion in the previous section, Subsection Basic Logic of Feed-in Tariffs.
32
Refer to the discussion in the previous section, Subsection Competitiveness Logic: Degression Rates.
33
Refer to the discussion in the last paragraph of the previous section, Subsection Growth Dilemma:
Potential Supply-Demand Distortion.
34
See also Section 3.2 Subsection Technology and Innovation.
35
See paragraphs 9 and 11 from reference German Federal Ministry of Environment (2011b).

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Implications of Policy-Led Growth Dilemma
Growth by nature requires a flexible structure to respond to inherent evolution in
scale and complexity, as well as to adapt to potential dynamic environments. This
fact poses a significant challenge particularly to the design of the policy environment
that involves dynamic structures such as of innovation systems and energy markets.
Particularly to the design of feed-in tariff regime, flexibility and adaptability are
required to address (a) the specifics of each renewable technology, (b) requirements
and limits of the market and consumers, (b) energy supply-demand dynamics, and
(d) balance of risk premiums and cost reallocation charge as discussed previously.
In practice, feed-in tariffs at least in the current version are, generally speaking,
inflexible and rigid, and lack the specificity and dynamics to gain and adapt efficiency
in the marketplace. The designed tariffs determine for each individual promoted
technology a generic range of guaranteed prices (revenue streams for plant owners,
investors or operators), logically distinguishably in power plant size36
. Yet this
universally regulated rule, establishing a levelized competitive ground, may lead to
unintended consequences, such that the inflexibility and rigidity could deductively
become aggravated over time. Two classes of inflexibilities are observable:
• Any two companies of different scale and economics competing in the same
technology of the same project size and at the same time; gain benefits from
the same tariff at different levels. This infers that a company that probably
gains only marginally in the beginning would be in a position to accumulate
slight benefits and translate such advantages to a significant level over time.
• Any two companies of the same economics competing in two technologies of
the same project size, but with different benefit levels implied by the tariffs;
gain benefits from the potentially advantages at different levels. This infers
disparities in attractiveness terms that could potentially over time lead to a
cumulative unbalanced growth, disproportionally tilting to the technology with
superior benefit level. Over time this effect would also lead to unintended
undergrowth of one or more technologies with inferior tariff attractiveness.
This generally infers that the decision to invest in a certain renewable technology or
project may rely mainly or even solely on the economic metric regardless of possible
merits in other aspects. In principle, giving priority to the economic attractiveness is a
prudent and even necessary practice. However, from the perspective of the political
authorities to grow a large-scale renewable energy system, investors should not
make their decisions based solely on this aspect. Rather, a forward-looking decision
should be made on the basis of holistic merits, for example, whether an alternative
technology may achieve superior long-term efficiencies and better fit the evolving
infrastructure and market needs, despite short-term inferior economics.
Presumably due to this inflexibility, the current renewable energy system consists of
a disproportionally large share of solar photovoltaic resources, inferably due to
relatively attractive solar feed-in tariffs in the previous decade, especially when
comparing the associated economic cost in percentage share (28%) with the amount
of power generated (8%), both in cumulative terms37
up to 2011. See also Figure 2 a
brief note focusing on year 2011, whose disproportion was even more pronounced.

36
As discussed in the previous section in Subsection Competitiveness Logic: Degression Rates.
37
According to reference Informationsplattform der deutschen Übertragungsnetzbetreiber (2014), the
percentage numbers are based on the relative sum up to 2011 of the economic cost in billion Euro

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Implications of Renewable Cost Assessment
As discussed thus far, the logic of feed-in tariffs may not necessarily lead to a
desirable growth pathway, since one policy metric designed to achieve an objective
(eg, tariff definition of individual technologies) may create unintended impacts to
another (eg, unbalanced technology portfolio). This problem characterizes the
dilemmas as discussed, for example, in the context of growth at different phases.
With this challenge in mind, it is generally of considerable benefit to reduce the
competitiveness complexity to a range of generative costs of each renewable
technology and resource type, thereby enabling a direct comparison of technology
attractiveness (profit level) given the knowledge of associated feed-in tariffs
(revenue). The comparison as such normally extends across different dimensions:
• Renewables and non-renewables: inferring approximate competitiveness
comparability of, for example, wind onshore versus solar voltaic technologies,
as well as wind onshore versus natural gas, coal and nuclear resources;
• Cross-regional perspective: inferring approximate competitiveness
comparability of, for example, wind offshore in Denmark versus the UK; and
• Timeframe perspective: inferring current and projective competitiveness
comparability of, for example, natural gas versus wind in five years.
The assessment as such is called levelized cost of energy (LCOE). For example, an
international organization such as the International Energy Agency regularly
publishes this analysis information that reflects a big-picture evolution of comparative
economic view in the global energy sector (See IEA and OECD 2010). This analysis
knowledge is of significant use as it provides a standard comparison baseline38
.
In principle, even though this basis could enhance the capability to define the
competitiveness level and as result a robust, transparent feed-in tariff scheme, it is
inferable that the policy needs to adapt to the specificity of the focused renewable
areas particularly in alignment with the local political and policy agenda. With LCOE
(cost) knowledge, the specified feed-in tariffs (revenue) generally deduce the profit
level and profitability of certain renewable technologies. The latter is a critical
decision criterion which specific renewable energy projects of a chosen technology,
location, and risk and opportunity profiles should be invested. The investment
decision as such also assumes dependability of the underlying policy to merit
investor’s efforts over the long haul, specifically because renewable economics of
any types depend on relatively small, incremental generated values (profit), whose
investment premiums are determinable by efficiency gains from innovation and scale.

terms (without inflation rate adjustment) from solar voltaic versus the total renewable cost (28% = 22.2
billion Euro / 78.8 billion Euro), and the power generated in TWh terms (8% = 49.7 TWh / 614.3 TWh).
38
LCOE analysis usually gives a range that most represent the generative costs under certain
circumstances and assumptions; for example, in the given reference the projective assessments are
conducted with different level of risk levels reflected in the discount rate (the higher the riskier).
Therefore, the use of such analysis is generally suitable only to form a baseline as part of the decision
making process.

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Figure 2: Energy Transition Framework Overview39
: captures essential components
of Energy Transition in terms of overarching goals, policy mechanisms and
instruments, as well as underlying challenges and particularly in an example of the
unbalanced renewable energy portfolio40
.

39
Interpreted from the renewable energy law 2012 (Erneuerbare-Energien-Gesetz 2012). See reference
German Federal Ministry of Environment (2011b).
40
According to reference Informationsplattform der deutschen Übertragungsnetzbetreiber (2014), the
percentage numbers are based on 2011’s relative sum of the economic cost in billion Euro terms
(without inflation rate adjustment) from solar voltaic versus the total renewable cost (46% = 7.8 billion
Euro / 16.7 billion Euro), and the power generated in TWh terms (19% = 19.3 TWh / 102.9 TWh).

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Figure 3: Implications of the Energy Transition Framework41
: infers policy rationale
from the presented logic of the mechanisms and instruments that reinforce growth of
the renewable energy technologies. The analysis also unveils challenges from
market mechanisms that are not necessarily in alignment with all policy objectives
but yet implies the necessity of future development pathways beyond short-term
economic constraints.

41
Also interpreted from Renewable Energy Act 2012 (Erneuerbare-Energien-Gesetz, EEG 2012). See
reference German Federal Ministry of Environment (2011b).

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3 Challenges of Germany’s Energy Transition
Challenges of a Large-Scale Innovation System
Risks of the Energy Transition are high, and so are opportunities from a large range
of long-term benefits of the sustainable energy provision system. As an analogy from
the perspective of innovation dynamics, this political and policy endeavor faces an
immense challenge particularly in the short run, not only in terms of stakeholder
engagement to gain legitimacy and support from a broad-based participation, but
also breadth and depth of “policy package” as stated by the Cabinet of Germany
(2013b) coupled with political commitment required to imbue trust, such that the
targeted scale, scope and momentum of the transition could be implemented on the
basis of necessary, even attractive political, policy and technical environment.
This fact underlines the significance of getting the right understanding of the
challenges in the first place. First and foremost, the author believes that this step
shall be of utmost priority to be able to lead a successful engagement, particularly of
such a grand-scale effort incorporating a large number of stakeholders, parties and,
most importantly, interests. To this end, this chapter first elaborates key fundamental
challenges of the Energy Transition case study across five main criteria: energy
security, economic, environmental, technical-engineering and political terms; then
extend this analysis to the cross-disciplinary complexity over the short and long-term
views. In conclusion, the discussion extends to the analogous theme: challenges in
the construction of a large-scale innovation system from the leadership perspective.
This chapter continues the discussion with a critical look at the Energy Transition
across the five aforementioned aspects, elaborates the fundamental challenges of
each aspect separately and explores the underlying complexities when considering
cross-dimensional interrelationships as a basis of policy prerequisites, caveats as
much as necessary objectives themselves.

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3.1 What is at Stake? A Critical Look at Energy Transition
Arguably, the inception of this political and policy initiative was formed on a basis of
necessity to ensure the security of primary energy resources. In 1973, the world
experienced for the first time a major crisis of oil supply, underlying an imperative at
the global level to address the threat of oil import security and potential supply
disruption that may cause a serious damage in political, economic, social and even
ethical terms. The need to address this matter exacerbated further in 1986 from the
Chernobyl’s disaster and in 2011 from the Fukushima Daiichi’s nuclear incident, both
of which exposed a serious safety concern of nuclear energy at an unforeseeable
scale. Particularly after the latter incident in 2011, the Cabinet of Germany under
chancellorship of Dr. Angela Merkel swiftly decided42
to make a substantial policy
correction to accelerate the phase-out of nuclear generative technology from the
entire use of Germany (see German Federal Ministry of Environment 2011).
Taking a critical look at the entire Germany’s energy landscape, one would perceive
that energy security is apparently only one aspect out of several others that underlie
the necessity, even the sense of urgency of this transition. However, in every
challenge, the author believes that there exist considerable opportunities. In fact, the
impact of this political and policy agenda is multi-dimensional with consequences
over both the short and long runs, thereby reflecting the complexity of such
challenges at stake. In order to facilitate the discussion, the author summarizes in
Table 1 opportunities and risks of the Energy Transitions across the following five
criteria, with an emphasis on the potential impacts of this political and policy agenda:
• Energy security is a major trigger of the Energy Transition even though the
sustainable impact is subject to the implementation scale and scope over the
long haul, thereby necessitate bridging practices in the short run;
• Economic competitiveness is a critical short-run concern due to the required
substantial investment upfront, of which cost of return depends on a long-
term political engagement and implementation scale. Yet the benefit could be
(a) substantial from the potential economies of scale and competitiveness;
and (b) sustainable if coupled with policies and efforts to create value chain;
• Climate change and environment could be addressed sufficiently by a long-
term, integrated engagement. Yet, without an implementation at the global
scale, the impact that depends on collective efforts, shall be limited;
• Technology and innovation require scales and a long-term, large-scale
engagement to grow the ecosystem from research and development to a
broad-based implementation scale. Risks from renewable intermittency can
be mitigated with the power grid distribution expansion, and downstream
applications related to electrification of the entire energy value chain; and
• Political aspect unveils a substantial transformation challenge required to
achieve a sustainable change across levels of engagements as it encounters
immeasurable risks from potentially limited gradual short-term constraints.
Not only should political and policy engagements be concerned about opportunities
and risks in any political agenda and policy mechanisms, this broad view implies a
spectrum of interrelated and interdependent duties and responsibilities that leaders
and political authorities are obliged to address simultaneously and comprehensively.

42
This decision in 2011 was reached even though Germany itself has never had any significant safety
and security concern at any of its nuclear reactor operations.

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3.2 Mapping out Fundamental Challenges
The following discussion will focus on each of the five introduced critical aspects with
implications of the power of innovation. This section will portray basic constituents
upon which the author builds a line of argumentation of how the tensions across
these dimensions play a substantial role to define policy challenges, such as, energy
security versus economic growth, environmental commitment versus industrial
competitiveness, as well as political leadership versus all other aspects.
Energy Security43
From the first oil crisis in 1973 to the beginning of Dr. Angela Merkel’s first
chancellorship in 2005, Germany’s dependence on oil and natural gas import as
primary energy resources grew in both relative and absolute terms: from 38% (142
Mtoe) to 49% (194 Mtoe), yet ameliorated to 46% (168 Mtoe)44
in 2011. From a
closer look, Germany in fact depended less on oil import during this period (35% to
25%), yet with a significantly stronger share of the imported natural gas (3% to 21%).
At the same time, it reduced the level of domestic energy production from coal
almost to one third (38% to 13%) while increasing45
the share of production from
nuclear energy (1% to 8%) that balanced the energy supply portfolio. This trend
implies that as the overall energy mix shifted to limit causes of greenhouse gas and
CO2 emissions by a smaller share from the coal-based energy resources, the
dependence on energy import increased, so did the corresponding risks of the
energy security supply.
From the consumption viewpoint, a similar trend towards a stronger use of natural
gas can be observed (8% to 23% of the total energy consumption level from 1973 to
2011), with a smaller share of oil in relative terms (55% to 42%), which, however,
remains an absolute necessity (remaining >90%) to meet increasing demands in the
transportation sector, particularly in absolute terms (34 to 49 Mtoe). The reason is
boiled down to the lack of efficient, affordable technological substitutes, particularly
due to a limited adoption of electric vehicles so far. At the same time, growth of the
natural gas use is strengthened by creation of downstream markets in the residential
sector (none to 36%) and a considerable growth in the industry sector (13% to 35%).
This development underscores the needs to manage dependence and risks at both
demand and supply sides. Along with Germany’s attempts to improve its carbon
footprints by limiting the use of coal as generative resources, its energy mix more
than ever depends on the imported fossil energy as well as nuclear resources, which
expose geopolitical and safety concerns. This situation would likely continue to
challenge its policy objectives, whose achievement depends on the secured,
sustainable supply of imported energy resources at an attractive price level.

43
See publication from IEA (2014a) for full reference of the data cited in this Subsection Energy
Security. Appendix II provides a summary of the relevant information from this reference.
44
Mtoe stands for million tons of oil equivalent.
45
However, as mentioned earlier, Germany decided in 2011 to reverse this trend by accelerating the
termination of nuclear energy use. See also reference German Federal Ministry of Environment (2011a).

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Economic Competitiveness
From the supply side, a significant part of the transition shall rely on a successful
ramp-up of both relatively expensive renewable energy technologies in the short run
and a larger-scale adoption, installation and integration-optimization of the renewable
generation technology and grid system in the long run. From the demand side, it
requires significant improvement in energy efficiency and smart consumption terms
that rely not only on technological advance but the implementation scale and scope,
which could potentially shape the entire economic value chain, thereby redefining the
energy consumption behaviors and practices in the first place.
The economic competitiveness of energy technologies is primarily measured by
comparative generative cost, a metric determining the substituting power exerted by
energy consumers at various points in the value chain. This argument shall,
however, remain valid only as long as electricity is considered a commodity
regardless of generative resource types (see also a complementary view in
Subsection Technology and Innovation on pp 24). This topic has become a subject of
intense debates questioning the realistic potential of renewable energy in economic
competitiveness terms, particularly, how soon the generative cost of each renewable
technology shall become “levelized” with the average consumption mix, and
particularly how should its learning curve or the economies of scale be. For example,
the Fraunhofer Institute by Kost et al (2012) published a projection46
of generative
costs of relevant renewable technologies in Germany with the following findings:
• Average cost of energy production of the entire electricity mix mainly of fossil
resources will increase from 0.060 to 0.080 €/kWh from 2012 to 2020;
• Average cost of wind onshore technology will improve from 0.075 to 0.070
€/kWh during the same time and becomes competitive from 2017; and
• Average cost of solar photovoltaic (PV) will improve from 0.130 to 0.090
€/kWh, and is projected to become economically competitive by 202247
.
This implies that only with an increase of domestic implementation scale alone, there
exists a realistic chance that at least German wind onshore and solar photovoltaic
technologies will become economically competitive in near future48
.
An actual economic consideration, however, needs to be seen in a larger context. In
principle, there could potentially be available technologies invented, developed and
become technologically and economically competitive from other countries. The
questions in economic competitiveness sense should then be reinterpreted as (a)
how the Energy Transition should define such competitiveness, eg, in production
versus consumption, in upfront investment versus lifecycle terms, or in regional and
global trade versus local employment and technology value chain creation terms;
and more importantly (b) how it could effectively manage potential conflicts between
the short-run investment costs and the long-run competitive benefits.

46
Wind onshore plants of size 2-3 MW with the operation with 1300 to 2700 full-load hours per year.
Photovoltaic ground-mounted installations assumed larger than 1000 kWp – with an assumption in
Germany with 1100 to 1300 kWh/m
2
per year of horizontal solar irradiance in relation to a PV module in
optimum orientation. In comparison, this number will increase for locations in France with 1700 kWh/m²,
in Spain with 2000 kWh/m² and in North Africa with 2500 kWh/m² per year.
47
Cost projection beyond 2022 is based on the current learning rate of PV systems and PV modules, ie,
15-20% cost reduction if the installed system capacity doubles, and that the capacity growth continues
at the current level.
48
Competitiveness of renewable resources also relies strongly also on the choice of renewable
technologies and plant location, which determines the characteristics and level of power generative
efficiency and therefore the potential economic value of the invested capital.

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Climate Change and Environment
Germany’s dependence on fossil resources as discussed earlier has an implication
over its overarching policy objectives to reduce carbon footprints in the entire energy
value chain, while continuing to manage the safety and security risks as well as
serving the energy demands required by the economy. The policy mechanism that
laid out by the Cabinet of Germany (2013b) therefore focuses on a comprehensive
policy package addressing the following three components: (a) energy supply by
increasing renewable and decreasing nuclear share in the mix; (b) energy distribution
by expanding power grid scale and coverage to support the growth of renewable
generative plants, and (c) energy demands by improving overall energy efficiency—
all of which contribute to the climate change and environmental policy objectives.
This approach reflects the administration’s recognition of the complexities that this
challenge could not be addressed separately without considering the big-picture
perspective of the entire value chain. For example, a simplistic view that an
investment in the renewable energy is a panacea to solving the climate change
problem may seem logical given its carbon-neutral characteristic, is, however,
confronted with subtle challenges in political, economic and even technological
terms. To this end, the author emphasizes the significance of a system approach,
meaning, a change that would potentially sustain the impact, needs be addressed
not inclusively at primary “polluter” components (eg, carbon-intensive generative
sources), but rather at the entire system across physical and policy dimensions.
First, the engagement should address the entire physical system: by disrupting the
current dynamics from (a) diversifying and shifting the supply mix with renewables,
(b) provisioning enabling infrastructure such as distributive grid systems and
complementary grid components, to (c) streamlining and strengthening the
consumption methods that reinforce both the directional shift and scale of changes.
For the latter, Germany could significantly accelerate the transition by increasing the
scale of electric vehicle adoption as well as leveraging the use of biofuel, hydrogen
and substitute natural gas (SNG), as proposed by DLR, IWES & IFNE (2012).
Second, the engagement should embrace an integrated, interdisciplinary approach,
by redefining and rescoping the policy objectives and mechanisms that reposition
roles and impacts of the transition beyond changes of the energy value chain. Not
only does energy play a role in economic policy terms, it gives broad policy
implications such as industrial, commercial and trade, as well as labor, employment
and social dimensions that play their parts in the overall dynamics impacting climate
change and environment causes. In other words, the policy objectives addressing the
climate change alone shall never be sufficient. They should attempt to disrupt the
ways the energy is generated, distributed and delivered, as well as consumed,
conserved and reused—that all collectively determine the change direction and
momentum of the entire ecosystem, ie, in adaptive rather than technical terms49
.
Third, the engagement requires collective efforts at the global level, in order that the
transition impact would give a necessary and sufficient change magnitude that
creates a long-term, sustainable impact. To this end, Germany sets a clear long-term
objective to reduce (a) the greenhouse gas emission by 80-95% and (b) the CO2
emission at least by 85%, both of which by 2050 as compared to the 1990’s level50
.

49
According to an earlier discussion of technical and adaptive changes in the context of leadership
challenges. See reference Heifetz and Linsky (2002).
50
Three scenarios of how Germany can achieve this goal are discussed in DLR, IWES & IFNE (2012).

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Technology and Innovation
Through the lens of innovation, future advances could potentially transform the ways
we perceive energy value chain in a fundamental way. A profound change could take
place by the coupling and optimization of related renewable technologies beyond its
classical use cases and functions, particularly as the definitions of energy generation,
storage, transformation, distribution and consumption evolves, and the entire energy
value chain becomes more sophisticated, distributed and potentially decommoditized
(see also a complementary view in Subsection Economic Competitiveness on pp 22).
This implies challenges to create prudent policy and economic incentives in the short
run that foster the creation of innovative potentials, which do not yet exist or exist but
only in a limited form. In economic terms, the potentials as such are, in fact, the
sources of long-term values and competitiveness, however, only once the scale and
scope of the transition reach a certain level that could self-reinforce and self-
sustainable the innovation development without exogenous forces.
In fact, the initial phase of the transition with a limit in implementation scale and
scope of the renewable technology causes an even more profound technical
challenge. The fluctuating and unpredictable nature of the renewable resources
causes intermittency in the generated power throughout the day (eg, the sun shines
only during the day) and over the year (eg, wind blows stronger in winter). This
variation is undesirable especially from the perspective from consumers, whose
demand of energy is generally uncorrelated to the generative characteristics.
From a macro view at a system level, the deficit as such at one location at an
instantaneous time could be cancelled out or alleviated if renewable plants are
interconnected over a large geographical area. Intuitively, one could imagine the
larger the better. In fact, this is a subject that requires specific engineering designs
that take into account the aggregate statistics over an array of spatiotemporal
domain with power grid (and potentially with storage and transformers in future) as a
major instrument to facilitate and match the variation at both demand and supply
sides. For example, IEA and OECD (2010) mentioned the following three
observations for wind technologies in general and specific to Germany:
• “The output correlation of separate wind plants tends to decrease with
distance, particularly on land. This phenomenon, if the output of all wind
plants in a certain area is considered simultaneously, results in a smoothing
effect, to some extent reducing the peaks and troughs in output.”
• “While the output of a single turbine fluctuates very rapidly between maximum
and zero output, aggregated German production shows a much steadier
output profile, ramping up and down more slowly.”
• “The scale of balancing areas, and the way in which wind power plants are
dispersed over them is thus of great importance.”
In generic terms, the author51
emphasizes the significance of (a) technical feasibility
study of the potential natural resources at the location that the selected renewable
technology may harness to generate energy; (b) technological advancement and
related economics attributed to the selected technology; and (c) infrastructure
particularly power distribution network and complementary technologies such as
energy storage compensating potential intermittency in the power grid.

51
Adapted from an earlier unpublished policy analysis by the author. See reference Treetasanatavorn
S. (2013).

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Political Challenges
• “Solid finance is the first priority: the Grand Coalition52
should address and
resolve grand challenges. For this reason, solid finance is our first priority. We
anticipate no deficit budget from 2015 going forward. Second, we shall reform
the Energy Transition such that the energy price is affordable and yet with a
growing share of renewable energy resources.” – Dr. Angela Merkel53
The political transformation force behind Energy Transition gains its legitimacy on the
basis of necessity since the first oil crisis in 1973, the Chernobyl disaster in 1986, the
Russian-Ukrainian gas dispute in 2009, and most significantly the Fukushima Daiichi
incident in 2011. The program per se has evolved over the past forty years in priority,
direction and substance terms, arguably due to the shift of political focuses that tend
to vary from an administration to another, or even within any given legislative period.
This signifies the (relatively) short-term nature of the politics that come to exist not
only to pursue a long-term vision but also respond to the needs of the constituencies,
whose interest may not necessarily concern or give priority to a long-term prospect.
In the author’s opinion, this is a genuine source of political dilemma that leaders with
political authorities are required to embrace, address and comprehend the underlying
structure related to a political and policy decision-making process. The complexity as
such is arguably reflected not only reflected in the innovation-driven energy
discipline, but the root-cause common denominator may rather lies in a complex
dynamic nature that involves delay, uncertainty over time and human’s limit to
comprehend a shift of roles between causes and consequences54
. In other words, it
often involves a political complication when the policy possesses a complexity that
could sufficiently be addressed only with a long-term systematic engagement.
Translated to the Energy Transition context, the latter argument is a combination of
overarching technical and political vision, determining an optimal “change” blueprint
as the long-term objectives of the engagement. Leaders are then required to frame,
define, steer and implement a series of practices over the course of the program. In
reality, however, the technical requirement on the basis of a long-term engagement
has been by itself a subject of intense and controversial debate instead of how to
define the best ways forward within that frame (ie, how to implement Energy
Transition), but rather oftentimes whether the long-term objectives per se are worth
pursuing at all in the first place (ie, whether Energy Transition is a necessary
objective). In other words, such a requirement has become a major obstacle, instead
of a source of long-term inspiration toward an optimal, sustainable pathway forward.
In a modern political society, the statement above is, however, not necessarily be
valid, since the term optimal need be justified not only in technical terms but also in a
corresponding political context. More importantly, a political vision is optimal only
insofar it reflects the legitimacy from the society it represents, not only in what to
achieve but also how to reach that end. In this specific transition context, the
necessity to correspond the latter issue at this moment in time (early 2014) is the
strictly limited fiscal resources as result of the prolonged European debt crisis since
2009, giving rise to short-term fiscal constraints of the administration.

52
Refer to a coalition of her party—the Christian Democratic Union of Germany (CDU)—the Christian
Social Union of Bavaria (CSU) and the Social Democratic Party of Germany (SPD).
53
As known as “Merkel III” for the 18th legislative period. See also a full translation of the interview from
Bundeskanzerlin (2013).
54
Applied in the sense, for example, of circular causality (Minsky, 1985) or feedbacks (Sterman, 2000).

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3.3 Multi-dimensional Challenges: Sources of Dilemma
Built on top of fundamental challenges, this section further explores relationship and
discrepancy among each particular aspect, particular in the sense of potential cross-
disciplinary impacts, considering the transition in practical terms where leaders are
often in the position to implement the program in a comprehensive, holistic manner
taking into account all relevant aspects. The objective of this discussion is not only
limited to extending an intellectual understanding of the challenges, but also intended
to unveiling selected underlying priority issues characterizing the sources of
dilemma, attributable in multi-dimensional forms of short and long-term perspectives.
Cross-disciplinary Challenges
From the previous section, the discussion sets forth in the following as extends the
breadth and depth of the Energy Transition challenges by exploring correlations and
cross-impacts of the political and policy engagement in each aspect, which could
arguably be reinforcing, conflicting or potentially a combination of both effects over
the course of the program implementation timeline. The impact of multiple types,
orders and scales of this large-scale transition reflects and self-characterizes the
very nature of a large-scale leadership engagement, coupled with further disruptive,
risk and uncertainty factors55
ingrained in the innovation-orientated practices.
Correlating each aspect of the challenges in terms of energy security, economic
competitiveness, climate change and technology and innovation (see Section 3.2
Mapping out Fundamental Challenges), the author characterizes the result of this
cross-disciplinary analysis in three major types as a basis of the multi-dimensional
political and policy engagement. See a complementary presentation in Table 2:
Self-reinforcement at the right scale is a characterization of the technology and
innovation in conjunction with the climate change engagement. Both aspects not only
share a similar nature requiring an extensive, continuous and long-term effort to grow
the scale and scope in order to sustain the impact and advance the sophistication of
the transition, but also mutually reinforce the constructive growth dynamics of each
other. That is, the higher the innovation growth momentum reaches, the larger scale
and impact the technology may contribute to the climate change issue. In the
opposite sense, the greater impact the transition renders in climate change terms,
the stronger motivation of the transition policy agenda will permeate to the society at
large, and the better chance that the transition will be able attract a broader-based
participation, a prerequisite to successfully address the two challenges that give this
political engagement a win-win proposition. This item is marked by green in Table 2.
Dual self-reinforcing, long-term vision is attributed to (a) the energy security
versus technology and innovation, and (b) the economic competitiveness versus the
climate change, as marked by yellow in Table 2. This category underscores the
necessity of the leadership practice to embrace a dual long-term agenda as an
inherent way to address multiple seemingly conflicting policies in the short run. This
thought can be elaborated by two following instances:

55
The impact as such depends largely on the gain or to loss prospect, or in other words, the
perspective-dependent prospect applicable to the objective of innovation practices. See further
discussions of the prospect theory by Kahneman and Tversky (1979).

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• Technology and innovation of the transition could never achieve the scale
and scope required to sufficiently address the need of the energy security
without a long-term vision to grow the self-reinforcing dynamics that bring
together the dual needs of both aspects. The latter condition is non-trivial.
Without a long-term perspective, the more attractive short-term benefit from
the as-is energy security practice (ie, possible temptation to discard the
transition and focus on the fossil path) may lead to a long-term dilemma (after
a certain inflection point, it would be too late to build the required technology).
• Economic competitiveness as a desirable factor to grow the required broad-
based participation to reinforce the momentum and scale buildup necessary
to reverse the climate change trend. Both aspects, however, are not
attainable without a dual long-term vision to break away from the as-is
practices, which may be unsustainable in the long run, but also the divested
resource and attention undermine continuous, strenuous engagement
needed in the short run to scale up the “change” initiative.
It is inferable that leaders should weigh in the possibilities to impose a long-term
vision early on toward a necessary way forward, regardless of short-term challenges,
since by doing so, a number of small decisions will cumulatively and collectively
contribute to resolving the long-term complexity in structural and systematic manner.
Dual contrasting goals, the most challenging aspect of the transition as marked by
violet in Table 2, describe the endeavor to address the challenges in technology and
innovation as well as economic competitiveness terms. This complication can be
explained by reflecting the role of innovation in economic value terms (return on
investment) versus the opposite view that requires innovation to develop the scale,
scope and quality as public good that should be by definition universally available,
affordable and without discrimination to the entire society. The seemingly plausible
approach of “only getting the scale right” to resolve the short-term conflicts could be
necessary but mostly likely insufficient to address this fundamental discrepancy.
• Arguably, the progress in technology and innovation relies predominantly on
the basis not only to create but also to capture economic values. With market
power and asymmetric information advantages (see Akerlof, 1970), efforts to
advance technology and innovation in the past decades have been invested
and successfully translated to breakthroughs supporting the transition. This
certainly represents benefits to the inventors or business organizations in
return on investment terms, therefore rending the economic competitiveness
and incentivizing the entire ecosystem to repeat or emulate this success.
• However, whether or not this development simultaneously leads to the
economic competitiveness of the nation at large is subject to further
investigation. This matter involves further roles of the public policies and
institutions to ensure a fair share of the technological and economic profit in
the society, while maintaining the economic incentives to further selectively
invest in potential innovations that create the most values and contributions.
Emphasizing too much at either part of the equation may set out an
unintended signal that undermines the desirable achievement of both goals.
In addition, the short-run tactical and operational mechanisms, as marked by orange
in Table 2, are also required to bridge short-term risks in energy security terms, since
the short-run impact of economic competitiveness and climate change is minimal to
sufficiently relate to the justification of potential risks of short-term security gap, which
could exacerbate the policy dilemma on the basis of limited visible short-term results.

Large-Scale Innovation System: Leadership and Political Case Study of Germany’s Energy Transition

Large-Scale Innovation System: Leadership and Political Case Study of Germany’s Energy Transition

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