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Davos: The energy mix - Henley Business School Suomessa

Davos: The energy mix

The World Economic Forum took place in Davos this week. Amongst the topical areas of discussion on this global stage was the energy sector and how industries, institutions and innovation can together shape the future of energy systems. Professor Yelena Kalyuzhnova looks at this issue in more detail.

The energy mix for any country is a complicated issue, which should be supported by the ‘correct’ state energy policy. This process is especially challenging in resource-rich countries, where the temptation to use fossil fuels that are readily available becomes much easier. Although it is possible to track the beginning of a shift towards cleaner energy in a number of resource-rich countries at the present time.

We have realistically evaluated (from the long-term stability of the present development model) the implications of the global shift to cleaner energy in the countries whose economies have centred on hydrocarbon exports. Here, the country’s resource endowment and its accurate assessment of the cost of energy must be taken into account. Countries also have to consider not only the volatility of oil prices, but also the economic implications of such uncertainty. Understanding what this means for longer term trends is also crucial.

Drivers towards renewable energy sources

The last decade has been characterised by a number of studies that have clearly made a case for large-scale renewable energy plans. There are a number of drivers towards renewable energy sources, which are all related to the long-term future.

  • One particular drive is related to the desire of governments to establish secure local supplies and to protect their economies from the volatility of world oil prices. Policy frameworks worldwide that aim to decarbonise the economy in response to climate change and pollution concerns must be formed.
  • The other drivers include the problems of managing hard-to-reach or absent resources (in the case of resource-poor countries), and finite resources (in the case of resource-rich countries). The requirement for increased electricity generation could also add to the list of the drivers for renewables, since the emerging gap in supply and demand, that needs to be closed, continues to grow.

The use of fossil fuels

Sustainable development of a country in the long term requires a reduction of dependence on fossil fuels, which ultimately will lead to a reduction in greenhouse gas emissions. In this respect, governments need to produce robust plans and have the political determination to make such changes. However, for resource-rich countries this might not be an easy option, since the temptation to use fossil fuels will be always there. There is a notion that cheaper oil competes directly with renewable energy for electricity production. This is not true, cheaper oil can bring lower natural gas and coal prices with wider impacts.

Petroleum subsidies

Finally, there is a problem with reducing petroleum subsidies, especially in the oil-exporting countries. There is a danger that subsidies could increase unemployment since energy might be substituted for labour, and this would create over-investment in energy-intensive industries at the expense of other sectors. In addition, energy subsidies also translate into forgone revenues and the inefficient use of energy.

Transition barriers

While the government is adopting new legal frameworks to encourage the transition towards renewables and more profound energy mix, there are still significant barriers. Overall the main obstacles to adoption of green technologies can be divided into four groups:

  1. Commercialisation barriers (which the new technologies are facing in the competition with the old technologies)
  2. Market barriers (e.g. lack of information, lack of access to capital and high transaction costs for making small purchases)
  3. Price distortions (these come from subsidies and unequal tax burdens between renewables and other energy sources)
  4. Failure of the market to appreciate and understand the public benefits of renewables.
Professor Yelena Kalyuzhnova - Henley Business School

Yelena Kalyuzhnova

After working as an Economic Adviser to the President of Kazakhstan, Yelena founded and is Director of the Centre for Euro-Asian Studies at the University of Reading. She has a wide knowledge of the transition and emerging economies, was an economic adviser on Caspian issues to the Rt. Hon. Lord Fraser of Carmyllie, Q.C., House of Lords and an economic adviser to All-Party Parliamentary Group on Kazakhstan (2006-2010).

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