Government intervention needed to shape markets for clean energy innovation

Government intervention needed to shape markets for clean energy innovation

3 November 2021

A new report launched at COP26 as part of the EEIST* project shows that to drive the rapid change necessary to meet international climate targets, governments must intervene to shape markets for new clean energy technologies.

'New Economics of Innovation and Transition: Evaluating Opportunities and Risks' shows how targeted policy support and investment has led to dramatic cost reductions and huge market growth in wind and solar power and LED lighting, and calls on governments to adopt the same approach to accelerate new low-carbon industries, such as electric vehicles and steelmaking. Market-shaping policies can play a key role in supporting global ambitions to accelerate new clean energy technologies, encouraging international collaboration to drive rapid innovation and scale this decade - a central pillar of the COP26 conference.

The report illustrates how the greatest successes in the clean energy transition so far have come from government policies to shape markets - often through policies that the economic analysis at the time generally did not recommend:

  • Since 2010, wind energy has grown from supplying less than 1% to 10% of electricity in Brazil, 15% in Europe, and 24% in the UK. Costs have plummeted; onshore wind is now less expensive than fossil fuels and offshore wind - once seen as impossibly complex and expensive - is increasingly competitive with fossil fuel alternatives.

  • Solar PV - described as “the most expensive way of reducing carbon emissions” as recently as 2014 - has expanded to similar levels globally as costs have plummeted by 85% over the past decade, to become competitive with fossil fuel alternatives. In China alone, solar has grown from just 0.3 gigawatts of generation in 2008 to 253 gigawatts in 2020.

  • Low energy LED lighting in India has seen prices fall more than 90% since 2010, moving from the most expensive to the cheapest technology on offer.

These historic transitions were driven by a strategic mix of policies that shaped new markets and led to rapid cost declines and accelerated deployment. They are now among the cheapest ways to generate electricity, and light, across much of the world. Almost two-thirds of wind and solar projects built globally last year will generate cheaper electricity than even the world’s cheapest new coal plants.

Delivering the Paris climate targets now requires unprecedented, policy-led transformations in multiple technologies and sectors. Focus on immediate costs and benefits used by many analysts around the world to assess policy interventions can create a bias towards inaction. This is because they cannot predict with confidence the benefits of low-carbon innovation, and may therefore underestimate or even exclude them, and fail to capture the positive impact that market shaping policies can have. In contrast, risk opportunity analysis can lead to better decision making when dealing with transformational change, by considering how policy affects processes of innovation and transformation.

*The Economics of Energy Innovation and System Transition (EEIST) Project, a partnership between world-leading research institutions in the UK, EU, Brazil, China, and India, including the Post-Carbon Transition programme at the Oxford Martin School, is funded by the UK Government and the Children's Investment Fund Foundation. EEIST is a three-year project using new economic approaches to support better decision making on policy relevant to low carbon transitions in high emission, fast growing emerging economies, with a focus on China, India and Brazil, which are home to more than half of the world’s population.