Picture: Julian Stratenschulte via GettyImages

Ener­gy Tran­si­tions: The role of insti­tu­tions and mar­ket structures

Roula Ingle­si-Lotz, Uni­ver­si­ty of Pretoria

Many stud­ies indi­cate that the root caus­es of cli­mate change are most­ly human activ­i­ties. The 2021 Inter­gov­ern­men­tal Pan­el on Cli­mate Change (IPCC) report warns that many of these cli­mate changes are already irre­versible. But there’s still hope. The mes­sage of the IPCC report is crys­tal clear: we have to raise the ambi­tion lev­el of mitigation.

This means that dras­tic changes are need­ed to mit­i­gate envi­ron­men­tal degra­da­tion. These are rad­i­cal struc­tur­al changes that will accel­er­ate the fight against cli­mate change. It’s clear from the IPCC report that time is not on humanity’s side.

When pol­i­cy­mak­ers dis­cuss and pro­mote the just ener­gy tran­si­tion, they do so with­in each country’s insti­tu­tion­al char­ac­ter­is­tics. The just ener­gy tran­si­tion refers to the move from fos­sil fuels to clean­er alter­na­tives with the min­i­mum neg­a­tive con­se­quences for soci­ety and the economy.

Economies with bet­ter qual­i­ty insti­tu­tions do bet­ter in man­ag­ing the tran­si­tion. This is because these insti­tu­tions can, among oth­er things, encour­age inno­va­tion and effi­cient allo­ca­tion of resources.

The ques­tion that I pose here is how insti­tu­tion­al qual­i­ty and mar­ket struc­tures influ­ence the ener­gy tran­si­tions, with­in all the inter­ac­tions in the eco­nom­ic and eco­log­i­cal systems.

Path­way to a clean future

The Inter­na­tion­al Renew­able Ener­gy Agency defines ener­gy tran­si­tion as:

a path­way toward trans­for­ma­tion of the glob­al ener­gy sec­tor from fos­sil-based to zero-car­bon by the sec­ond half of this century.

Mea­sur­ing the progress of clean ener­gy tran­si­tion is not an easy task. The com­plex­i­ties of the phe­nom­e­non are considerable.

Our research paper shows that the choice of a renew­able ener­gy indi­ca­tor might alter the results when exam­in­ing the impact on car­bon emis­sions. In turn this might impact pol­i­cy suggestions.

The Fos­ter­ing Effec­tive Ener­gy Tran­si­tion 2021 report shows that 92 out of 115 coun­tries increased their ener­gy tran­si­tion index over the last decade. But only 13 showed con­sis­tent improve­ment over the peri­od. This was defined as con­sis­tent­ly above aver­age per­for­mance improve­ments on the index. These include Den­mark, Fin­land and the UK, which owe their improve­ments to:

a sta­ble reg­u­la­to­ry envi­ron­ment, diver­si­fied ener­gy mix and cost-reflec­tive ener­gy pricing.

Coun­tries with ris­ing ener­gy demand reg­is­tered the largest gains. These includ­ed Chi­na, India and Sub-Saha­ran African nations. But their ener­gy tran­si­tion index scores remain low in absolute terms.

What mat­ters

A recent lit­er­a­ture review shows there is a pletho­ra of deter­mi­nants of renew­able ener­gy adop­tion glob­al­ly. There is no con­sen­sus on the quan­ti­ta­tive fac­tors and their mag­ni­tude. But there is agree­ment on the following:

  • Sup­port poli­cies and pro­grammes as well as inter­na­tion­al com­mit­ments and agree­ments have pos­i­tive effect. An exam­ple is the Kyoto Pro­to­col.
  • Lob­by­ing pres­sure from tra­di­tion­al and pre-exist­ing ener­gy sources has a neg­a­tive effect.
  • The devel­op­ment and expan­sion of a local finan­cial sec­tor, and the qual­i­ty of insti­tu­tions, have a most­ly pos­i­tive influence.

In addi­tion, the Inter­na­tion­al Renew­able Ener­gy Agency notes that the ener­gy tran­si­tion to renew­able ener­gies will be enabled by infor­ma­tion tech­nol­o­gy, smart tech­nol­o­gy, pol­i­cy frame­works and mar­ket instruments.

There­fore, it is tech­nol­o­gy and insti­tu­tion­al and mar­ket con­di­tions that stand out. Some of my research has already made some con­tri­bu­tion to under­stand­ing how inno­va­tion and tech­nol­o­gy in its var­i­ous aspects and out­comes inter­act with the nat­ur­al envi­ron­ment and energy.

The con­cept of insti­tu­tions is wide­ly used in the lit­er­a­ture. But it’s a mul­ti-faceted one. It is less under­stood as it lacks tan­gi­bil­i­ty. How­ev­er, econ­o­mist Dou­glas North has giv­en a com­pre­hen­sive but still straight­for­ward definition:

… the for­mal and infor­mal rules of the game and their enforce­ment characteristics.

Then there’s the qual­i­ty of insti­tu­tions. Econ­o­mist Allard Bru­in­shoofd says insti­tu­tion­al qual­i­ty con­sists of the fol­low­ing dimensions:

  • Voice and account­abil­i­ty. This cap­tures the extent to which a country’s cit­i­zens can select and chal­lenge its gov­ern­ment, thus lim­it­ing exec­u­tive power.
  • Polit­i­cal sta­bil­i­ty and absence of vio­lence. The low­er the prob­a­bil­i­ty of polit­i­cal insta­bil­i­ty or polit­i­cal­ly-moti­vat­ed vio­lence, the more a country’s cit­i­zens are incen­tivised to invest in their own pros­per­ous future.
  • Gov­ern­ment effec­tive­ness. This refers to cap­tur­ing the qual­i­ty of pub­lic ser­vices and the degree of its inde­pen­dence from polit­i­cal pres­sures. In turn this fos­ters a benign con­text for pri­vate investment.
  • Reg­u­la­to­ry qual­i­ty. This refers to the abil­i­ty of the gov­ern­ment to for­mu­late and imple­ment sound poli­cies and reg­u­la­tions that per­mit and pro­mote pri­vate sec­tor devel­op­ment. This lays down uni­form rules of eco­nom­ic engagement.
  • Rule of law. This cap­tures par­tic­u­lar­ly the qual­i­ty of con­tract enforce­ment, prop­er­ty rights, the police, and the courts (that is, the enforce­ment of the rules of society).
  • Con­trol of cor­rup­tion. The stronger the con­trols on cor­rup­tion, the more eco­nom­ic suc­cess as a func­tion of effort and com­pe­tence, rather than con­nec­tions and bribery.
  • Ease of doing busi­ness. This cap­tures a mul­ti­tude of aspects that deter­mine the extent to which the reg­u­la­to­ry envi­ron­ment is con­ducive to busi­ness operations.

Pol­i­cy­mak­ers inter­na­tion­al­ly are in pur­suit of sus­tain­able solu­tions for the envi­ron­men­tal cri­sis. The val­ue of good gov­er­nance should be seen as the first and main tool for achiev­ing cli­mate change mit­i­ga­tion. Part of the lit­er­a­ture con­sid­ers the ener­gy transition’s reg­u­la­to­ry con­text, stress­ing the need for pub­lic inter­ven­tion to pro­mote renew­able ener­gy use.

Research has found that renew­able ener­gy projects like any oth­er invest­ment, ben­e­fit from gen­er­al polit­i­cal sta­bil­i­ty, sound reg­u­la­to­ry frame­works, effec­tive gov­er­nance and secure prop­er­ty rights.

In addi­tion, invest­ment in renew­able ener­gy projects can be held back by com­plex and lengthy bureau­crat­ic pro­ce­dures and corruption.

Design­ing an appro­pri­ate mar­ket struc­ture for a coun­try plays a major role in the per­for­mance of the ener­gy sec­tor. It affects deci­sions and pol­i­cy imple­men­ta­tion on prices, effi­cien­cy, sup­ply and inno­va­tion. Gov­er­nance mech­a­nisms play a direct role in mar­ket struc­tures, influ­enc­ing invest­ment deci­sions. Bad mar­ket struc­ture designs and pol­i­cy deci­sions may increase the costs of the sec­tor unnec­es­sar­i­ly. They can also impact neg­a­tive­ly on the wel­fare of consumers.

The South African econ­o­my is no excep­tion. It also faces the chal­lenge of bal­anc­ing eco­nom­ic growth and min­imis­ing envi­ron­men­tal degradation.

Con­clu­sion

In gen­er­al, ener­gy tran­si­tions have focused on ener­gy tech­nolo­gies, in par­tic­u­lar their use in com­bi­na­tion to min­imise costs. Social foun­da­tions and human behav­iours are also impor­tant com­po­nents for the future sus­tain­abil­i­ty of the plan­et. With­in this, the rules of the game (insti­tu­tions) can set ours – and future – gen­er­a­tions up for suc­cess or failure.

This arti­cle is drawn from the author’s inau­gur­al lec­ture, Inter­na­tion­al ener­gy tran­si­tions and the role of insti­tu­tions and mar­ket struc­tures, at the Uni­ver­si­ty of Pre­to­ria on 31 August 2021.The Conversation

Roula Ingle­si-Lotz, Pro­fes­sor of Eco­nom­ics, Uni­ver­si­ty of Pretoria

This arti­cle is repub­lished from The Con­ver­sa­tion under a Cre­ative Com­mons license. Read the orig­i­nal arti­cle.