Market based instruments for a sustainable energy sector

Costly learnings

In the liberalised energy sector there may have been too much wishful thinking and too little consideration of how markets work in reality. A report from the "Nordic energy perspectives project" has studied some of the instruments used and their consequences. The most obvious case is the ETS where they note that power generators have passed on the (alternative) costs for their free-of-charge ("grandfathered") emission rights to their customers and that has led to higher prices without any investment incentives. And worse no real incentive to keep prices low either since there is a substantial windfall profit in the carbon-free generation that is priced with the carbon-bonus. This has been a costly learning for the industry that buys the energy.

Another case of market-based instruments that they have studied is the RES-support that is applied either as quota-system or price-based systems.

A detailed study of the Swedish green certificates raises the issue of price-stability and investors expectations and incentive. The study goes as far as saying that there is a risk for a collapse when a predicted deficit drives prices up, attracts investments and is then followed by a price decrease that makes the investments un-profitable.

It seems as if it has been a little bit too easy for politicians to ask for market-based instruments and a little bit more difficult to deliver such in a format that allows a healthy market to develop.