Innovation for Sustainable Electricity Systems: Exploring the Dynamics of Energy Transitions (Sustainability and Innovation)

Sustainability and Innovation Coordinating Editor: Jens Horbach

Series Editors: Eberhard Feess Jens Hemmelskamp Joseph Huber René Kemp Marco Lehmann-Waffenschmidt Arthur P.J. Mol Fred Steward

Sustainability and Innovation Published Volumes: Jens Horbach (Ed.) Indicator Systems for Sustainable Innovation 2005. ISBN 978-3-7908-1553-5 Bernd Wagner, Stefan Enzler (Eds.) Material Flow Management 2006. ISBN 978-3-7908-1591-7 A. Ahrens, A. Braun, A.v. Gleich, K. Heitmann, L. Lißner Hazardous Chemicals in Products and Processes 2006. ISBN 978-3-7908-1642-6 Ulrike Grote, Arnab K. Basu, Nancy H. Chau (Eds.) New Frontiers in Enviromental and Social Labeling 2007. ISBN 978-3-7908-1755-3 Marco Lehmann-Waffenschmidt (Ed.) Innovations Towards Sustainability 2007. ISBN 978-3-7908-1649-5 Tobias Wittmann Agent-Based Models of Energy Investment Decisions 2008. ISBN 978-3-7908-2003-4 R. Walz, J. Schleich The Economics of Climate Change Policies 2009. ISBN 978-3-7908-2077-5

Barbara Praetorius • Dierk Bauknecht Martin Cames • Corinna Fischer Martin Pehnt • Katja Schumacher Jan-Peter Voß

Innovation for Sustainable Electricity Systems Exploring the Dynamics of Energy Transitions

Physica-Verlag A Springer Company

Dr. Corinna Fischer Verbraucherzentrale Bundesverband e.V. (vzbv) Markgrafenstr. 66 10969 Berlin Germany [email protected]

Dr. Barbara Praetorius DIW Berlin - German Institute for Economic Research Energy & Environment Division Mohrenstraße 58 10117 Berlin Germany [email protected] Dierk Bauknecht Öko-Institut e.V. - Institute for Applied Ecology Energy & Climate Division Merzhauser Straße 173 79100 Freiburg Germany [email protected]

Dr. Martin Pehnt IFEU Institut für Energie-und Umweltforschung Wilckensstr. 3 69120 Heidelberg Germany [email protected]

Martin Cames Dr. Katja Schumacher Dr. Jan-Peter Voß Öko-Institut e.V. - Institute for Applied Ecology Energy & Climate Division Novalisstr. 10 10115 Berlin Germany [email protected] [email protected] [email protected]

ISBN 978-3-7908-2075-1

e-ISBN 978-3-7908-2076-8

Sustainability and Innovation ISSN 1860-1030 Library of Congress Control Number: 2008933550 © 2009 Physica-Verlag Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permissions for use must always be obtained from Physica-Verlag. Violations are liable for prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg Printed on acid-free paper 987654321 springer.com

Contents

Preface........................................................................................................ix 1 Introduction............................................................................................. 1 1.1 Electricity Systems under Transformation ......................................... 2 1.2 Shaping Innovation Towards Sustainability ....................................... 3 1.3 Empirical Foci of the Book................................................................. 4 1.4 Structure of the Book.......................................................................... 6 References ................................................................................................ 7 2 Transformation and Innovation in Power Systems ............................. 9 2.1 Systems in Flux: An Everlasting Path of Electricity Innovation ........ 9 2.2 Are we Locked in a Carbon (and Nuclear) Trap?............................. 13 2.3 Current Stimuli for Change .............................................................. 17 2.3.1 Impacts of Liberalization ......................................................... 17 2.3.2 Increasing Climate Change Concerns ...................................... 20 2.3.3 Impulses from Technological Change ..................................... 21 2.4 Actors and Institutions of Change .................................................... 23 References .............................................................................................. 24 3 Towards a Systemic Understanding of Innovation............................ 29 3.1 Conceptualizing Innovation.............................................................. 29 3.2 Sustainability .................................................................................... 34 3.3 Systemic Perspectives on Innovation in Literature........................... 37 3.4 Design of the Innovation Case Studies ............................................. 39 References .............................................................................................. 41 4 Micro Cogeneration.............................................................................. 45 4.1 Micro Cogeneration as an Innovation Cluster .................................. 45 4.2 Design Options and Sustainability Potential .................................... 48 4.2.1 Technological Variations......................................................... 48 4.2.2 Operating Schemes.................................................................. 49 4.2.3 System Level Impacts ............................................................. 51 4.2.4 Ecological Performance........................................................... 51

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4.2.5 Economic Performance............................................................ 53 4.2.6 Micro Cogeneration Scenarios................................................ 55 4.3 The Innovation Process of Micro Cogeneration ............................... 56 4.3.1 Evolution of the Innovation System ........................................ 57 4.3.2 Market Setting and Situation to Date....................................... 59 4.3.3 General Reasons for Slow Diffusion in Germany ................... 61 4.3.4 Actors and Coalitions .............................................................. 62 4.4 Shaping the Innovation Process........................................................ 67 4.5 Conclusions ...................................................................................... 71 References .............................................................................................. 74 5 Carbon Capture and Storage............................................................... 77 5.1 CCS as an Innovation to the Electricity System ............................... 77 5.2 Design Options and Sustainability Potential .................................... 78 5.2.1 Technological Variations......................................................... 78 5.2.2 Ecological Performance........................................................... 84 5.2.3 Economic Performance............................................................ 88 5.2.4 CO2 Mitigation Scenarios for the Electricity System .............. 91 5.3 The Innovation Process of CCS........................................................ 93 5.3.1 Research and Development Activities..................................... 93 5.3.2 CCS Actors and Constellations in Germany ........................... 96 5.3.3 Development of the Institutional Framework........................ 101 5.4 Shaping the Innovation Process...................................................... 103 5.5 The Future of CCS in a Sustainable Electricity System ................. 106 References ............................................................................................ 109 6 Consumer Feedback through Informative Electricity Bills............ 115 6.1 Introduction .................................................................................... 115 6.2 Description of Innovation and Design Options .............................. 116 6.2.1 General Design Options ........................................................ 116 6.2.2 Example: Design Options for Electricity Bills in Germany .. 118 6.3 Effects and Sustainability Potential of Consumer Feedback .......... 123 6.3.1 Electricity Conservation ........................................................ 124 6.3.2 Satisfying Consumer needs ................................................... 126 6.3.3 Case study: Informative Energy Bills in Heidelberg ............ 126 6.3.4 Some Conclusions for Feedback Design............................... 130 6.4 Process of Innovation and Factors Influencing It ........................... 131 6.4.1 Origin and Transfer of the Innovation ................................... 131 6.4.2 Implementation in Germany.................................................. 134 6.5 Possibilities for Shaping ................................................................. 140

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6.5.1 Short-term and Long-term Options....................................... 140 6.5.2 Introducing the Informative Electricity Bill: Problems......... 141 6.5.3 The Role of Actors Other than Politics and Utilities ............ 143 6.6 Conclusions .................................................................................... 144 References ............................................................................................ 147 7 Emissions Trading .............................................................................. 151 7.1 Introduction .................................................................................... 151 7.2 Design Options ............................................................................... 152 7.2.1 Scope and Coverage: What Sources Shall be Included?....... 152 7.2.2 Cap: How Much is Allowed?................................................ 153 7.2.3 Allocation: Who Gets what and how?................................... 153 7.2.4 Banking: When can Allowances be Used?............................ 158 7.2.5 Commitment Periods: What is the Planning Horizon? ......... 159 7.2.6 The Interplay of Design and Sustainability ........................... 161 7.3 Process of Innovation: Networks, Politics, Institutions .................. 164 7.3.1 The Innovation Journey of Emissions Trading ..................... 164 7.3.2 Gestation: Emerging Practices of Flexible Regulation and New Options in Economic Theory ................................. 165 7.3.3 Proof of Principle: Creating Spaces for First Developments at US EPA in the Shadow of the Old Regime ....................... 166 7.3.4 Embedding a Prototype: Project 88 and the Transformation of US Clean Air Policy .......................................................... 168 7.3.5 Regime Formation: Linkage with International Climate Policy, the Carbon Industry and EU Emissions Trading ....... 170 7.3.6 The Allocation Process .......................................................... 173 7.3.7 Possible Future Developments ............................................... 178 7.4 Shaping the Innovation Process for the Sustainable Development of Electricity Systems............................................... 179 7.5 Conclusions .................................................................................... 181 References ............................................................................................ 185 8 Network Regulation............................................................................ 191 8.1 Introduction .................................................................................... 191 8.2 Design Options and Sustainability.................................................. 192 8.2.1 Design Options ...................................................................... 192 8.2.2 Sustainability ......................................................................... 197 8.3 Process of Innovation ..................................................................... 201 8.3.1 Development of the ‘Standard Model’ of Network Regulation............................................................................. 202 8.3.2 Reopening the ‘Standard Model’: Drivers of Change and the British Case.............................................................. 205

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8.4 Possibilities for Shaping ................................................................. 214 8.4.1 Room for Change in the Standard Model .............................. 214 8.4.2 Developing Alternatives ........................................................ 215 8.4.3 Broadening the Actor Arena .................................................. 216 8.5 Conclusions .................................................................................... 218 References ............................................................................................ 221 9 Innovation Dynamics in the Electricity System: Progressing Towards a Sustainable Path? ............................................................ 227 9.1 Overview and Summary ................................................................. 227 9.2 Explaining the Innovation Dynamics ............................................. 232 9.2.1 The Dynamic role of Institutions, Actors and Networks ....... 232 9.2.2 The Role of Blocking, Competing and Matching Innovations .............................................................................236 9.3 Shaping the Environment for Innovation Dynamics ...................... 239 9.4 Some Final Remarks....................................................................... 243 References ............................................................................................ 245

Preface

Innovation is a complex issue. It involves much more than a new idea to be realized, sometimes even the reconfiguration of reality. Successful innovations involve ‘creative destruction’ of existing patterns and the formation of new configurations that work. Such reconfigurations comprise cognitive, institutional, technical and behavioral elements. They also involve the collective action of concerned actors, organizations and networks in order to be successful. The focus of this book is on the conditions and implications of sustainable innovation in the electricity system. Our interest is to better understand the conditions and opportunities for innovation that could bring about a more sustainable situation than the current fossil and nuclear fuel-based electricity system in Germany. We look at various innovation processes that are ongoing and continuously shape the system of the future. Our intention is to analyze and assess these processes with a view to identifying possibilities to shape innovation in the electricity system for sustainable development. To this end, we assess the potential of selected technological, societal, and institutional innovations, among others. This book is the final publication of more than five years of research in the interdisciplinary project “Transformation and Innovation in Power Systems” (TIPS). It is also the result of collective action. The authors would like to thank Markus Duscha and Johannes Henkel for their contributions. The book benefited immensely from proofreading by Vanessa Cook. We also appreciate the helping hands of our team assistant Cornelia Wolter, our student assistants, Alexandra Börner, Nadine Braun, Katherina Grashof, Sebastian Knab, Anke Mönnig, and Christoph von Stechow. We gratefully acknowledge funding of the TIPS research team (2002–2008) by the German Ministry for Education and Research within its Social-Ecological Research Framework. Barbara Praetorius, Dierk Bauknecht, Martin Cames, Corinna Fischer, Martin Pehnt, Katja Schumacher, Jan-Peter Voß Berlin and Heidelberg, May 2008

1 Introduction

Innovation is key to achieving a sustainable electricity system. New technologies and behavioral change are needed to bring about radical reductions in carbon emissions, and to enhance energy security for today and the future generations. Also, innovation is a continuous process: it happens every day and builds a future in which coming generations will live. Innovation not only comprises new technology, but also new forms of organization, new practices, new discourses and new insights on global and local concerns. Innovation is therefore deeply entwined with sustainable development. This is especially important in electricity where fundamental changes are ongoing while some great challenges lie ahead. There is climate change and there is still ongoing restructuring from liberalization. Classic issues like security of supply and affordability become reframed with geopolitical changes and a stronger role for market competition. What are the processes driving these changes? How is the future of electricity being shaped? What will this future look like? Will it be in line with various societal aspirations grouped together under the heading of “sustainable development”? If not, what are the options to change course, to shape ongoing processes of innovation so as to bring about a sustainable transformation of electricity systems? In this book we make an attempt at answering these questions by digging deeper at some selected points, aiming at laying bare some crucial processes of renewal which are beneath the overwhelming impression of system transformation in electricity. These processes comprise the creation of novelty in areas as diverse as small distributed generation technology, large scale carbon clean-up technology, consumer information and feedback methods, innovative forms of electricity market regulation and public policies for reducing the environmental burden of electricity production by issuing tradable emission certificates. We maintain that the future of electricity is brought about through these (and other) ongoing innovation processes and their interaction. We understand electricity transformation as the result of such diverse innovation processes. If we want to shape the future of electricity, we need to understand the dynamics and identify the specific potential for sustainable development in each specific process of innovation,

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1 Introduction

and to mirror it against the evolving future electricity system as a whole. This is what we are going to embark on with this book.

1.1 Electricity Systems under Transformation Electricity brings the pulse and rhythm to modern societies. It fuels industrial development and public administration and energizes private comfort. This has legitimized a policy of protection for the electricity industry for more than a century. Governments all over the world sheltered their emerging national electricity infrastructure from any competition, supported it with generous grants and provoked (over-)investment by price regulation based on guaranteed returns to investment. Innovation activities focused on introducing new, large scale, capital-intensive technologies, such as nuclear power. With the exception of distinct environmental crises (such as health impacts from local air pollutants, acid rain, risks of nuclear catastrophes or landscape destruction), the sustainability of the electricity system was not an issue. This picture and the perception of the electricity industry have changed substantially over the last few decades. The economic paradigm of liberalization pervaded the system, and topics such as market restructuring, institutional and regulatory reform, reorientation of business strategies, technology emergence and diffusion, customer reinvention are now on the agenda, possibly provoking a reconfiguration of the entire socio-technical architecture of electricity generation and consumption. At the same time, the awareness of environmental problems, particularly the risks associated to climate change, has increased. In response to the new economic and environmental challenges, the electricity sector has been substantially restructured, having been de- and re-regulated in many countries. New players emerged and disappeared, and new formal and informal constellations of actors formed, including major mergers and acquisitions among electricity suppliers – on both national and international levels. One decade later, the process is still ongoing; however, most markets are not as competitive as originally hoped for, and the incumbent actors and technological structures are still persisting and dominating in many countries. This is one reason why electricity systems are still being associated with notions like inertia and resistance towards sustainable change – be it with respect to economic efficiency, environmental integrity, or societal justice. The electricity system is a complex system, consisting of much more than just the technical infrastructure for the generation, transmission and

1.2 Shaping Innovation Towards Sustainability

3

distribution of electricity. Electricity is an invisible and indirect consumption good, providing energy services such as light, heat, and power. A manifold system is responsible for transforming physical energy sources for human purposes and delivering those fundamental energy services to business, public bodies and private households. Its material aspects (resources extraction and use, technical infrastructure for generation, distribution and consumption) and symbolic aspects (values, ideas, knowledge, institutions) are closely interwoven. The electricity system is the intermediate structure between multiple forms of individual actions and their aggregated material and social effects. It involves a multitude of actors, networks and institutions equally interlinked with the other system components. They include organizations such as appliance manufacturers, electricity utilities, financial institutions and consumers, and also rules and rule-setting bodies such as governments, regulators and the related politics. Electricity systems are thus a typical case of large technological systems (Hughes 1983, 1987), characterized by high capital intensities of parts of the system, and a high degree of technoeconomic interlinks. The complexity of the system structure and its inherent dynamics make it difficult to determine the influence of individual factors and to estimate future development paths. It is clear, however, that for the maintenance and development of such complex systems, powerful and effective forms of societal organization are a fundamental precondition. This points to the crucial role of actors, networks and institutions in initiating change: without the flexibility of the actors and institutions, combined with pushes through (external) crises and challenges, change will rarely take place, and the electricity system may run into the risk of being a major source of societal destabilization, due to its non-sustainable character.

1.2 Shaping Innovation Towards Sustainability Today’s electricity systems are not sustainable. Global electricity generation is responsible for some 41% of greenhouse gas emissions worldwide, and is expected to increase further: The IEA expects global electricity generation from fossil fuels to double until 2030 as compared to today levels (IEA 2006, 2007). Most of the non-renewable fuels burned in electricity generation end up as lost heat, due to poor conversion efficiencies and the absence of excess heat usage, such as district heating systems. The release of pollutants and radioactive waste, the use of finite resources, the impacts of fuel mining, and manifold other environmental and social impacts present

4

1 Introduction

challenges of our current energy system. On the other end of its life cycle, electricity is being consumed lavishly. Most ecological consequences of electricity generation and consumption become evident only a long time after they have been caused. Innovation, the process of generating and – even more importantly – of disseminating novelties can be considered an integral part of a transformation towards sustainable development. A sustainable electricity system requires significant energy savings, improvements in energy efficiency and the substitution of fossil fuels by less problematic energy carriers such as renewable technologies. The technical and theoretical potential for improved efficiency and sustainable generation has been analyzed in a number of scenario studies (Voß and Fischer 2006). Its translation into reality, however, is difficult. Shaping the transformation path towards a sustainable electricity system remains a major challenge today. The successful diffusion of innovation depends on many interlinked factors and elements. For understanding innovation-led transformation processes, it is necessary to understand the heterogeneity of the underlying innovation processes, the factors that influence them and the way they interact with each other. On the one hand, innovations involve uncertainty and risk for pioneers and for society as a whole. On the other hand, path dependencies may pre-determine certain innovation paths and impede a flexible adaptation of the system to new knowledge and new developments. The societal and policy challenge is therefore to provide for a setting that motivates change towards the “right” direction, while accounting for the risk of failures. Developing such a strategic approach for shaping innovation is an ambitious task. The challenge starts with the definition of appropriate targets and criteria for appraisal and continues with a wide range of complexity and momentum of the diffusion of innovations. The desire to tackle these challenges and better understand the dynamics of and the conditions for shaping the transformation process towards a sustainable electricity system is the starting point for this book.

1.3 Empirical Foci of the Book As innovation in the electricity system is a large research field, we decided to focus our investigations on certain topics and questions. We strived to select innovation cases which each represents a specific kind of innovation category (in order to grasp the full spectrum of innovation) in the ongoing transformation of the electricity system.

1.3 Empirical Foci of the Book

5

On the supply side, one trend in the electricity sector is the increasing share of distributed power generation, particularly in terms of small cogeneration plants, including fuel cells in the more remote future, and also small renewable energy technologies. Cogeneration allows heat and power to be produced on site or close to consumption with much higher efficiencies than their separate generation. When produced in small and micro units on the level of households and buildings, such distributed generation may transform the whole electricity system structure, blurring the traditional roles of consumers and producers. This affects a broad set of stakeholders (consumers, electricity supply companies, etc.) and presumes technological innovation, in particular with regard to grid regulation and information technologies and small-scale cogeneration technologies themselves. The other supply-side trend points towards promises of central “clean coal” electricity generation technologies by means of carbon capture and storage (CCS) which have lately gained increasing attention in the energy policy debate. There are still many open questions regarding the technology, its economics and the risks related to underground storage, but the network of researchers, politicians and industry involved in CCS development activities has been ever increasing during recent years. One possible reason behind this dynamic is that it would allow for conservation of the incumbent architecture with large fossil power plants of most electricity systems worldwide. At the other end of the chain, the evolution of the electricity sector is also influenced by developments on the demand side. Demand side energy efficiency and electricity saving are potentially important building blocks for a sustainable electricity system. In liberalized markets, consumer information is crucial for influencing consumer behavior and allowing them to better control their consumption. Therefore, we studied innovative ways of improving feedback on electricity consumption with a special focus on more informative electricity bills. The policy framework is another vital component of the system and a possible lever for enhancing its sustainability. This is particularly true for the international climate change policy framework. The European carbon emissions trading scheme (EU ETS) is considered one of the most important instruments for mitigating climate change. The EU ETS was introduced in 2005. It is supposed to stimulate innovations towards a sustainable electricity system, and also trigger structural change within the system, for example towards more distributed and more highly efficient energy supply technologies. If designed inappropriately, however, it may also lead to adverse effects and an undue preference of certain fuels or technologies.

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1 Introduction

A major link between the supply and the demand side is the electricity grid, an often underestimated yet essential element of the electricity system. The related network regulation is an innovative by-product of liberalization and unbundling of the former vertically integrated electricity industry. It also forms an important framework for any innovation activity in the electricity system. We looked at the role of network regulation in shaping and enabling innovation diffusion, and at the process of designing and implementing grid regulation. An issue of overall relevance is the behavior of actors, in particular with regard to the process of decision making, in the liberalized electricity market. With liberalization, we can observe changes in the composition of the actor network and the terms for individual actors’ decisions. New actors emerged and disappeared again, like electricity traders and small production firms. Existing actors confront changing opportunities, like consumers facing greater choice, and companies having to deal with the risks and chances of heightened competition. In all case studies, we explored how different actors deal with these changes and in what respect they influence their innovation activities. Most case studies presented in this book focus on the German electricity system. Nevertheless, they are embedded in an international perspective, as experience abroad is always an important angle for framing national case studies. Evidently, the German electricity system is part of the larger European electricity system and experiences similar external influences as other countries. As in many other European countries and beyond, the German electricity system experienced substantial changes during the last decade or so, partly caused by the liberalization directive of the EU commission and the subsequent liberalization of the German electricity market in 1998. Also, Germany has been participating in technological trends and advances that developed across many industrialized countries. The intention of profoundly assessing innovation dynamics, however, needs a focus on selected components of the electricity system, either with a national focus or a thematic focus. Otherwise the complexity is simply too high. In our case studies we therefore chose to focus on the German electricity system. Where helpful, however, we compare experiences in Germany with those in other European countries and beyond.

1.4 Structure of the Book The book is organized as follows. In Chap. 2, we prepare the empirical and conceptual ground for the innovation cases. The current and most recent

References

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trends in transformation and innovation processes in the electricity sector in Germany are sketched. In Chap. 3, our approach to understanding innovation dynamics is positioned within the range of concepts offered from technology and innovation diffusion studies. This is followed by five innovation cases. In Chap. 4, the potential contribution of micro cogeneration in Germany is analyzed as an example of distributed generation. Chapter 5 focuses on carbon capture and storage (CCS) as potential climate mitigation option on the central level of generation. The third case study in Chap. 6 looks at the consumer side and at the potential role which more informative electricity bills may play in changing consumer attitudes and thus improving electricity efficiency on the consumer side. We continue with an assessment of two innovative policy instruments, first the development of the European emissions trading scheme (EU ETS) and its effects on innovation in the electricity industry (Chap. 7), and then of network regulation as a governance innovation in the UK and Denmark (Chap. 8). In the final chapter (Chap. 9), we compare and discuss the case studies and our approach, and draw some conclusions regarding the possibilities and needs for shaping sustainable innovation in the electricity system. This book is the result and the synthesis of both individual and collective contributions from the interdisciplinary research team “Transformation and Innovation in Power Systems” (TIPS). All chapters were prepared by 2–3 main authors indicated in the first footnote of each chapter and then went through a thorough review process by other members of the research team and a revision by the main authors.

References Hughes TP (1983) Networks of power: electrification in western society 18801930. The Johns Hopkins University Press, Baltimore Hughes TP (1987) The evolution of large technological systems. In: Bijker WE, Hughes TP, Pinch T (eds) The social construction of technological systems. The MIT Press, Cambridge, MA, pp 51–82 IEA (2006) World Energy Outlook 2006. OECD/IEA (International Energy Agency), Paris IEA (2007) World Energy Outlook 2007 – China and India Insights. OECD/IEA (International Energy Agency), Paris Voß J-P, Fischer C (2006) Dynamics of socio-technical change: micro cogeneration in energy system transformation scenarios. In: Pehnt M, Cames M, Fischer C, Praetorius B, Schneider L, Schumacher K, Voß J-P (eds) Micro cogeneration. Towards decentralized energy systems. Springer, Berlin, Heidelberg, pp 19–47

2 Transformation and Innovation in Power Systems

The electricity system has been innovating itself from the beginning onwards – albeit with a long period of stabilization and incremental growth in between. It is with upcoming crises and impulses from inside and outside that the incumbent system is challenged and that marginal and innovative options (such as renewable technologies, or Combined Cycle Gas Turbines) have made their way into the system up to now. In this chapter, we provide a brief sketch of the transformation process in electricity systems as a context of our more focused case studies. We outline the development of electricity systems in the last one and a half centuries, look at the related innovation cycles and the outcome in terms of the current electricity system.

2.1 Systems in Flux: An Everlasting Path of Electricity Innovation Today’s electricity system is the result of more than 100 years of innovation in progression. In the early days of electricity generation at the beginning of the nineteenth century, electricity was produced by steam engines, fuelled with coal. At first, electricity was only used for a few industrial purposes and for the lighting of public streets and buildings. In Germany, electric light started to enter private households between 1900 and 1910. The process was rather one of supply push than demand pull: Electricity utilities provided customers with free electric lamps and installations and with subsidized tariffs, especially for industry, in order to create connections and increase demand. Early micro grids were linked up with other isles of electricity generation and supply. Later on, large companies protected by government built up the eventual grid architecture dominated by large power stations and the long-distance transport of electricity. Eventually, by 1920, electricity replaced steam as the major source of motive power in industry, and in 1929, electric motors represented 78% of total capacity for driving machines (Ruttan 2001).

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2 Transformation and Innovation in Power Systems

On the demand side, the corresponding trend was an ever increasing demand through a variety of novel appliances and applications, a trend that was actively promoted by the electricity supply industry. One important building block of demand was industry motors, another the electrification of railways. In private households, innovations like electric razors, refrigerators, and vacuum cleaners had been promoted since the 1920s. The use of electricity for cooking and heating purposes was heavily advanced from 1925 onwards, and until the end of the 1950s, electric stoves, refrigerators, water heaters and washing machines had arrived in most households (Zängl 1989). The electrical age had arrived. Since the early twentieth century, the dominating patterns of electricity generation and supply, made up of centralized power plants of an increasing size, did not change in principle until the second half of the twentieth century (Ruttan 2001). The standard boiler-turbogenerator process was only developed with respect to its scale and improved in terms of thermal efficiency. New advances in material research allowed for shifts towards higher temperatures and to reheat cycles in the period of 1948–1957, and higher pressure until the late 1960s. R&D activities have focused on socalled supercritical high temperature thermal processes, with the aim of reaching efficiencies of more than 50% and steam temperatures of up to 700°C, for which new special metals are required. Fig. 2.1 visualizes the Gross electricity generation divided by primary energy consumption for electricity generation 45% West Germany

40%

Germany

Hard coal: y = 0,0594Ln(x) + 0,1757 R2 = 0,9663

35% Lignite: y = 0,0533Ln(x) + 0,1638 R2 = 0,9644

30%

25%

Lignite

20%

Hard coal Logarithmisch (Hard coal) Logarithmisch (Lignite)

15% 1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Fig. 2.1 Development of average electrical generation efficiencies in Germany (VIK 1991; AGEB 2007a, b). The vertical line in 1990 marks German reunification, which is the reason for the temporary drop of average lignite efficiencies in Germany

2.1 Systems in Flux: An Everlasting Path of Electricity Innovation

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continuous increase of average electrical generation efficiencies in West Germany between 1950 and the mid-1970s. Since then, it has remained more or less constant, with hard coal technologies continuously showing higher efficiencies than lignite. Since the level of 40% electrical efficiency was approached, technical and economic barriers hindered further advances in efficiency. To date, the coal and lignite industry has been making major efforts to improve the generation efficiency of their central power plants, targeting at supercritical thermal processes. Net Efficiency 65% CCGT: y = -0,0001x2 + 0,4782x - 481,5 2 R = 0,9133

60% 55% 50% 45% 40%

Coal: y = 0,0024x - 4,3478 R2 = 0,7002

Lignite: y = 0,0026x - 4,79 2 R = 0,7676

35% 30%

Lignite Coal CCGT

25% 20% 1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Fig. 2.2 Development of generation efficiency of new thermal power plants (authors’ own compilation)

The numbers in Fig. 2.1 reflect the efficiency of the average mix of existing coal and lignite power plants respectively. Figure 2.2 provides an idea of the state of the art of new power plant efficiency, which is some 5% points above the average existing mix of plants. The figure also shows the impressive increase in generation efficiencies of gas-based power generation, which have recently reached almost 60%. Gas turbines are innovative to the electricity sector, as they only entered the market in the 1990s when combined cycle gas turbines (CCGT) became commercially available. Box 2.1 discusses the usefulness of other innovation indicators to understand innovation dynamics.

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2 Transformation and Innovation in Power Systems

Box 2.1 What can we learn from innovation indicators? Typical innovation indicators are R&D resource inputs, the number of patents granted to a firm, patent applications, and bibliometric data on patterns of scientific publication and citations, in which the data stem from surveys, company accounts and intellectual property rights statistics. Simple input and output indicators, however, have restricted explanatory power. R&D expenses measure the input into innovation, but not the outcome. Patents do not say much about the actual deployment or diffusion of an innovation, and even less about non-technological innovations. And bibliometric analyses of publications on research outcomes do not say much about innovation dynamics and outcomes either. All of these indicators tend to overemphasize invention of new scientific or technical principles as the point of departure of a linear innovation process (Smith 2001). Moreover, they are indicators for product or process innovations with a technical focus rather than for other forms of innovation, such as organizational or policy innovations, consumer-side advances and the like. More recent conceptual and empirical approaches also try to capture the environment for technical innovations, both inside a company (environmental management systems, changes in corporate strategy, advanced management techniques, new marketing strategies) and with regard to its environment (quality of educational systems, university-industry collaborations, or availability of venture capital). Other indicators include market research related to new product development, and capital investment related to, for example, new product development. The methodological and empirical problems associated with quantifying such indicators and forming composite indicators form the subject of numerous research projects on innovation indicators, and surveys such as the European Innovation Monitoring Initiative, the European Innovation Scoreboard, or the Community Innovation Survey (CIS) – both under the auspices of the European Commission, just as the most recent initiative “Pro-Inno Europe” (www.proinno-europe.eu). The results of CIS, for example, demonstrate that R&D is but one component of innovation expenditures, and by no means the largest (Smith 2001). Innovation, however, has also taken place on the demand side. Unfortunately, things are even more complex in this regard, and useful indicators are hard to define. For example, some indication of innovation could be drawn from market penetration rates of efficient appliances, such as efficient refrigerators or washing machines. Here, however, a major problem on the consumer side becomes apparent: Not every innovation is sustainable as it may create new electricity consumption. Also, besides market penetration rates of efficient appliances, indicators for measuring innovative behavior are difficult to define and identify. Similarly, the assessment of indicators for institutional, policy and other societal innovation denotes a considerable research challenge with a questionable outcome. In all of these cases, it seems more fruitful to take an in-depth look at the evolution dynamics of exemplary innovations such as emissions trading in the case of an innovative energy and climate policy tool, and network regulation in the case of governing the electricity grid.

2.2 Are we Locked in a Carbon (and Nuclear) Trap?

13

One single major innovation – which fitted well into the prevailing system architecture – was the development of nuclear energy from the 1950s onwards. The first nuclear power plant started operating in 1961. The vision emerged that nuclear energy could be the solution to any energy supply problem. Yet the economics of scale and related cost reductions were not realized as anticipated, and the technology needed to be bolstered by massive subsidies from government and financing institutions. Also, due to the related nuclear risks for society, nuclear energy triggered massive political conflicts from the mid-1970s onwards.

2.2 Are we Locked in a Carbon (and Nuclear) Trap? Innovation depends on previous historical development steps. Many improvements in efficiencies are based on advances in materials and other technological or organizational elements. Thus, innovation is, among other factors, also a result of experience. From the beginning onwards, increasing economics of scale seemed to be a natural law in electricity generation. Belief in the advantages of ever-larger power stations integrated in the electricity network, dominated the perception and institutional design of the electricity system until the 1980s. Consequently, most electricity systems worldwide were completely protected from competition. Highly concentrated markets of state-owned monopolies, public–private partnerships or private companies were established and protected, all in similar ways. In Germany, for example, the Federal Energy Management Act of 1935 set the seal on this structure for more than 60 years – until its revision in 1998. The related phenomenon of decreasing specific investment costs for ever-larger electricity generating technologies and companies, and the consequences of learning and experience for technology choice, have been extensively investigated in the last few decades, both theoretically and empirically. Learning is a cumulative process on both the level of the firm and of the sector (or industry, or country). It is a phenomenon that benefits society, but that also contributes to explaining the existence of path dependencies and lock-in, for example in a carbon (and nuclear) based electricity system. Therefore the question is: What role does learning then play in explaining the current system structure, and what does that mean for the future development and innovation opportunities? Does it mean that the likelihood to switch to a more sustainable low carbon society is smallest? In his theoretical assessment of competition between alternative technologies, Arthur (1989) prepared the theoretical ground for this phenomenon

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2 Transformation and Innovation in Power Systems

by highlighting the incidence of increasing returns to adoption (IRA), or falling specific cost of technology deployment. Arthur (1989) proposes a positive feedback between adoption and competitiveness. The more a technology is adopted, the more likely it is to be further adopted. This is due to increasing returns to adoption, which in turn can be traced back to four factors: scale economies (declining unit costs), learning effects (experience, learning by doing), adaptive expectations (adoption reduces uncertainty), and network economics (the more users, the more useful a technology is). Together with other driving factors such as R&D, knowledge spillovers, and exogenous market dynamics, cumulative learning or experience is a major factor for IRA (Ibenholt 2002; Nemet 2006; Papineau 2006). As a consequence, once a technology has gained an advance compared to alternatives, this leads to self-reinforcing and self-stabilizing dynamics of technology adaptation. In short, these dynamics may lead to path dependencies and even to a situation of technological lock-in, as has been shown by David (1985) for the QUERTY keyboard design, and by Cowan (1990) for the light water nuclear reactor in the case of the electricity system. As a matter of fact, power generation in Germany in the early twenty-first century is still dominated by large scale coal, lignite and nuclear power plants, which is also an example of system lock-in (Unruh 2000, 2002; Unruh and Carrillo-Hermosilla 2006). Another indicator for the dominant technology choice and priorities on national and international levels can be found in the composition of R&D expenses. Table 2.1 demonstrates the major strategic relevance still allocated to research in both nuclear fission and fusion. Considerably more research funds are flowing into these technologies than into future ones such as small-scale renewable technologies. But the numbers also show the increasing relevance of alternatives: Renewable energy sources, for example, enjoy a rising share, amounting to 24% in 2005. Research in energy efficiency, by comparison, has been neglected ever since. Yet these numbers already indicate that path dependency does not necessarily lead to an everlasting carbon lock-in. In fact, the prevailing paradigm of ever increasing sizes of power generation slowly became obsolete in the 1980s. The case of conventional steam turbine power plants shows that learning rates can decrease or even stagnate over time (Helden and Muysken 1983). At around the same time, the dominating setting of large generation plants increasingly became complemented by smaller and more distributed technologies. Combined Cycle Gas Turbines (CCGT), for example, allowed for smaller investment capital needs (and thus risks), shorter building periods and higher flexibility in reacting to fluctuations in electricity demand, as they can more easily

2.2 Are we Locked in a Carbon (and Nuclear) Trap?

15

Table 2.1 Composition of German federal R&D costs regarding energy (IEA 2007) 1995 Mill € %

2000 Mill € %

2005 Mill € %

Energy efficiency

15.2

3.6

9.5

2.3

19.6

4.7

Fossil fuels

13.6

3.3

9.6

2.4

11.5

2.8

Renewable energy sources of which – Photovoltaics

74.9

17.9

76.9

19.0

99.4

24.1

31.5

7.5

38.9

9.6

41.0

9.9

3.5

0.8

1.5

0.4

5.0

1.2

166.7

39.9

153.0

– Solar thermal power Nuclear fission and fusion Hydrogen and fuel cells of which – Stationary fuel cells Other power and storage technologies Total other R&D Total Energy R&D

37.7

137.2

33.2

–

n.a.

–

n.a.

21.5

5.2

–

n.a.

–

n.a.

19.3

4.7

0.0

0.0

22.1

5.4

3.3

0.8

120.6

29.2

12.8

3.1

11.5

2.8

417.4

100.0

405.8

100.0

413.2 100.0

adapt their output. Also, renewable energies gained increasing attention from politicians and, as a result of advantageous framework conditions, also a rising share of electricity generation. In consequence, continuous learning effects were reported for most renewable energy technologies, allowing for a sustained decrease in generation costs (except for fuel-based systems such as biomass). Impressive examples of the decline in cost with increasing cumulative production of innovative technologies are renewable energies such as wind and photovoltaic. In a recent survey, the IEA (2006) reports learning rates1 of between 4 and 8% for the production of wind turbines in Denmark and Germany, with slightly higher rates for the complete process including installation. For PV modules, the decrease in price has been steady for more than three decades now, with a learning rate of about 20%. Nevertheless, PV is still not competitive. Germany is a good example when studying the effects of public support for an innovation on deployment numbers in the case of renewable energy. Guaranteed feed-in tariffs and other subsidies have attracted investment capital for production sites in Germany. As a result of these incentives, electricity generation from renewable energies more than doubled between 1

A learning rate of 10% reflects a 10% cost reduction with each doubling of installed capacity.

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2 Transformation and Innovation in Power Systems

1999 and 2006 (from 30.5 to 70.4 TWh). This was mostly accounted for by hydro- and wind power, despite the growing number of small-scale installations. The cumulative capacity of PV cells, for example, grew from 2 MW in 1990 to 2,740 MW in 2006, but PV still accounted for only 0.4% of total electricity generation, or 2,220 GWh, in 2006 (Fig. 2.3). And despite its geographical and climatical disadvantages, Germany ranks among the leading countries in the world in terms of both the construction and use of solar cells (modules) and wind turbines. Also, distribution and marketing structures are well developed, with numerous information sites and services, and large amounts being continuously invested in new production sites. 2500 2000

GWh

1500 1000 500 0 1990 1992 1994 1996 1998 2000 2002 2004 2006

Fig. 2.3 Electricity generation from PV in Germany, 1990–2006 (BMU 2007)

New technologies can also begin their market penetration in a process of hybridization, that is, starting from a rather complementary relationship of established and new technologies. In the UK, for example, CCGT developed its potential in such a process of hybridization with incumbent technologies, first offering peak load capacities and then taking over due to its economic advantages, as its only economic risk was (and is) the gas price (Islas 1997). The technology led to a “dash for gas” (Winskel 2002), increasing its share from 0 to some 30% of generation capacity within a decade and changing the structure of electricity supply substantially. Also, despite the increase in gas prices, 33.5% of total generation in the UK still stems from CCGT in 2006 (BERR 2007).

2.3 Current Stimuli for Change

17

Thus, change is indeed happening, and alternative technologies are entering the scene. These rather optimistic examples, however, should not distract from the fact that the incumbent system of fossil fired and nuclear plants is still dominating the supply side of the electricity system, which supports the idea of inertia in large technological systems. In many cases, such as renewable technologies and CCGT, the technology or idea as such already existed for a while before it was able to enter a broader market. The question therefore arises as to what exactly pushed them into broader deployment.

2.3 Current Stimuli for Change Major impulses for change in the dominating system design can be expected to arise from frictions or bottlenecks in the existing architecture of such large technological systems. Such “reverse salients”, as Hughes (1983) calls them, form a limitation to the development of the system. Substantial or disruptive challenges to an everlasting linear development of the system could originate from, for example, technological or demand-side factors, or from changes in the external setting. Two major changes on the macro-level became relevant for the electricity sector in the 1990s: market liberalization on the one hand, and the international climate protection regime on the other hand. Both macro-processes – liberalization and climate change concerns – add to the enduring impulse stemming from the oil crises of the 1970s, which raised awareness of supply security and resource depletion issues. These macro-level events are both accompanied and accommodated by a third component, which are technological developments that are relevant to the electricity sector. 2.3.1 Impacts of Liberalization In the 1990s, a spate of liberalization processes made their way across Europe and the rest of the world, changing the institutional setting for electricity generation and consumption. While the designs differ substantially with the country contexts, the underlying economic paradigm is the same: After decades of protected monopolies, based on an understanding of the vertically integrated electricity system as a “natural monopoly”, competition on the generation and distribution levels are now expected to create more choice, more diverse supplier structures, and thus less expensive electricity for consumers. Germany formally liberalized its electricity sector in April 1998 on all levels, including final customers, in one fell swoop. Box 2.2 provides an overview of today’s electricity system in Germany.

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2 Transformation and Innovation in Power Systems

Box 2.2 Structural characteristics of the German electricity system The German electricity system is carbon intensive, with coal and lignite as major inputs into generation; 43% of German CO2 emissions are related to electricity overwhelmingly generated in large fossil fired plants. Germany has committed itself to a CO2 reduction of 40% by 2020 compared to 2005 levels. Stringent policy targets for renewable energies and an accommodating Renewable Energy Sources Act are one means to reach this target; others are efficiency improvements and clean coal technologies as well as – recently – the development of CCS. Electricity reform in Germany took place in several steps. In April 1998, full competition on all levels was introduced in the formerly protected market. In 2005, an electricity regulator was installed to formulate and implement an incentive based regulation of grid access and grid use. Legal unbundling of generation, transmission and distribution/sales activities was compulsory by 1 July 2007. The development of key indicators for the state of competition is disappointing. Prior to liberalization, the electricity system consisted of about 900 local utilities, some 60 regional distributors and about nine large generation and transmission companies. Now a wave of major mergers reduced the number of large players to four, E.ON, RWE, Vattenfall, and Energie Baden-Württemberg (EnBW), plus some large municipalities and regional suppliers. The big four own the long-distance electricity grid. In 2006, E.ON and RWE supplied 53%, and all big four together supplied 80% of total electricity generated in Germany; they have at their disposal 286 shareholdings (>10%) in regional and local utilities (Monopolkommission 2007). Both horizontal and vertical concentration increased after liberalization (Brunekreeft and Twelemann 2005; Öko-Institut 2005; London Economics 2007). Investigations into factual market power based on the Lerner Index 2 estimated a mark-up on marginal cost pricing of about 20% for 2005 (Hirschhausen et al. 2007; Zimmer et al. 2007). One reason is the poor regulation of network access after liberalization. Grid access was initially organized by self-regulation (socalled “negotiated grid access”), which was an effective means of restraining competition and newcomers. In 2005, motivated by an intervention by the European Commission, an independent regulator (Bundesnetzagentur, Federal Network Agency) was established, which went on to implement an incentive oriented regulation. On the consumer side, despite increasing debate about exaggerated electricity price rises, the supplier change rate of household electricity customers is much below those in, for example, the UK. Depending on the data source, 7–12% changed their supplier, with an increasing trend. The numbers are higher in the case of commercial customers. Also, independent power producers, energy traders, Third Party Financing institutions and the like started entering the markets in 1998. However, the number of newcomers decreased again after 2000. 2

The Lerner Index relates the difference between market prices and marginal cost to the market price. It has a value between 0 and 1, where 0 indicates that no market power is exercised.

2.3 Current Stimuli for Change

19

In the real world context, the outcome of the different liberalization experiments worldwide has been mostly disillusioning to date. In his review of liberalization processes and results, Thomas (2006) lists a large number of failures and deviations from the competitive model when re-regulation is introduced in order to balance the desire for a secure and reliable electricity system with the investment risks related to competitive markets, or network access for newcomers in vertically integrated systems as in Germany. Thomas concludes that “all that is left of the competitive element of the model is the free market rhetoric” (Thomas 2006). There are several signs underlining this pessimistic perception: electricity prices are as high as they used to be under monopoly conditions; market actors now play oligopoly or duopoly rather than a free competition game; and vertical integration is still pervasive. Yet investment is indeed more risk related than it used to be under monopoly conditions, and with liberalization, this risk has been increasing. With regard to innovation, market liberalization can be expected to transform the selection environment for search and innovation decisions and changes, and may thereby weaken prevailing technological regimes (Markard and Truffer 2006). This is due to two effects: First, new market entrants may pursue new technology paths and thus cause technological competition, and second, competition theoretically also creates a need for more diversified, trendy products and services offered on the market in order to survive in competition, as is the case with many goods and services. It thus has the potential to increase innovation activities and variation on the firm level. On the other hand, competitive pressures may also reduce the efforts to risky and costly innovation. Pollitt and Jamasb (2005) review a broad body of literature on the effects of deregulation, unbundling, privatization and general restructuring of electricity systems on innovation and find that they are linked to a significant decline in R&D expenses, while R&D productivity increased with electricity reforms. Among the factors responsible for the decrease are smaller firm sizes, organizational diseconomies of vertical disintegration, and a decreasing propensity of private firms to take risks in an environment of increased uncertainty and a competitive market environment. On the other hand, a price cap regulation tends to increase technical progress, at least compared to rate of return regulation. Despite this rather pessimistic account, a number of indirect innovation incentives can be observed and related to national electricity market reforms, and at the same time show the differences between countries. One example is the generous provisions for cogeneration plants in Germany, which are unique in Europe. Germany introduced a bonus for electricity from cogeneration in order to protect it from too much competition. Another

20

2 Transformation and Innovation in Power Systems

example is the rise of CCGT in the UK which is also a result of liberalization, which sees newcomers succeeding on the market with an innovative technology. In Germany, by comparison, structural dynamics and the coalition of actors in coal mining and coal-based electricity generation were powerful in holding back CCGT, namely in the conflict relating to the taxation of gas for power generation. Neither coal nor lignite has ever been subject to input taxation, but in the case of gas, such taxes existed and were relieved only for highly efficient plants. The underlying political negotiation process created considerable uncertainty for investors and thus troubled the early CCGT investors (Stadthaus 2001). In both countries, CCGT has suffered from high gas prices since 2005, which caused the window of economic opportunit ies for CCGT to be closed again. 2.3.2 Increasing Climate Change Concerns Parallel to market liberalization, a second major – or macro – impact developed momentum: societal awareness of the risks of climate change increased continuously and thus also started impacting on the course and focus of innovation activities. Concerns about the environment are raising new heights with the upcoming awareness of human-made climate change. Up to now the increasing concern about the climate and the environment has led to a number of institutional innovations and a changing framework for technological and organizational innovations. A whole new business stream for environmental improvements developed. Building on the impulses from the oil shocks in the 1970s, an intense debate about the future of our energy supply started in the 1990s. Environmental concerns activated the use of more or less the whole environmental policy toolbox, with all possible instruments seeing their realization in one form or another: Ecological taxes and voluntary agreements, efficiency labeling, labeling of electricity, “green” electricity, funding of R&D in new technologies, emissions trading, feed-in remunerations for renewable energies and cogeneration, and all forms of market information and introduction programs and so forth were introduced. Governments set themselves targets for renewable technologies and for efficiency. This gave a major impulse for renewable energies and energy efficiency, and is likely to continue doing so, inspiring innovative actors to become dynamic innovators. The United Nations Framework Convention on Climate Change (UNFCCC) and its 1997 Kyoto Protocol formed the first international institutional framework for global climate change mitigation. International reports, such as the four IPCC assessment reports as well as a number of national reports (e.g. the Stern report on the economics of climate change)

2.3 Current Stimuli for Change

21

raised awareness and called for immediate action. The 2005 implementation of an EU-wide emissions trading system is a direct offspring of this process. The main impact of the EU ETS is to give CO2 emissions a price, thereby altering the setting for investment decisions. This, in turn, is a premise for technological innovations such as distributed generation or CCS. With the continuous growth of global emissions and growing concerns about global climate change, the European Union initiated a number of processes to keep the global temperature increase below 2qC. These include specific mid-term targets for emissions reductions, renewable energy shares, biofuels, and improvements in energy efficiency. An integrated energy and climate program, including a directive for the continuation of the EU ETS, for renewable energy, for CCS etc., is under development to ensure that these targets will be fulfilled. Similarly, the German government initiated an integrated energy and climate policy package to ensure that these targets and additional more stringent national targets are met. In the field of energy efficiency, the EU directive on energy efficiency and energy services (Directive 2006/32/EC) has been a major policy initiative. It is currently triggering, among other things, innovations in consumer feedback on their electricity consumption via improved electricity bills and other means. In the wake of these developments, interest in renewable energy sources and energy efficiency grew. “New” renewable energies beyond the established hydropower started developing momentum in terms of technological development, learning curves and related cost reduction, and market penetration. Supported by governmental programs and legislation, they entered into commercial electricity generation, albeit with different shares in total electricity supply in different countries, depending on the respective form and level of support. In Germany, for example, renewable energy took off with the Federal Feed-in Law in 1990 and even more with the Federal Renewable Energy Sources Act of 2000, which guarantees operators of renewable electricity generation technologies preferential treatment for their electricity feed-in as well as a fixed feed-in remuneration for usually 20 years. The share of renewable technologies rose to around 14% by the end of 2007 (BMU 2007), and Germany now ranks among the leading innovator and producer countries in the world in terms of the development and construction of solar cells (modules) and wind turbines. 2.3.3 Impulses from Technological Change A third major factor impacting on transition processes in the electricity sector is technological change. New technological developments can be

22

2 Transformation and Innovation in Power Systems

specific to the electricity sector, such as new or improved power generation technologies. They can also be of a rather generic type (e.g. information and communication technologies (ICT)) or progress in materials research and other fundamental science. Generic technological advances are flexible in their deployment and may, for example, enable improvements in generation and related technologies (such as high temperature conventional coal or gas plants) or increase the options available for consumer feedback (e.g. via smart metering, or smart houses). Technological change can interact with and even stimulate institutional change and influence the societal setting for innovation (Werle 2003; Rohracher 2007; Dolata and Werle 2007). In particular, modern ICT can be considered a prerequisite or even be core to stimulating regulatory and organizational reform in the electricity system. The operation of electricity exchanges, for example, is unimaginable without ICT. Liberalization of the electricity markets, in particular the unbundling of electricity generation, transport and distribution, and the implementation of electricity exchanges, presumes the existence of technological solutions for handling the enormous amount of information involved – which again is unthinkable without ICT. In fact, the universal character and impact of ICT can even be interpreted as a change in the ruling techno-economic paradigm (Freeman and Perez 1988; Dolata 2007), which – in the case of electricity – has the possible (or even unavoidable) consequence of major amendments in the institutional and technical architecture of the system. Similarly, the discovery and development of new material allows for better and more efficient generation and transmission technologies. The commercial development of inventions – such as the fuel cell or small-scale Stirling motors, renewable technologies as well as the development of more efficient fossil-based power plants (with or without integrated carbon capture) – is based on and entails further advancements in materials and mechanics. Technological change also has the potential of triggering change in the current generation structure of the electricity system. An example is the interplay of new technological developments on the level of generation. After decades of increasing returns to scale (with the result of ever increasing sizes of power stations), new generation technologies are rather smaller scaled or even of a distributed nature, such as small or micro cogeneration units and small or medium-size renewable energies. These technologies are often fluctuating in their provision of electricity to the grid and – so far – need to be balanced by other, quickly and permanently available, generation technologies. In this context, new technology developments and ICT solutions are important for integrating such sustainable technologies into a reliable overall electricity system.

2.4 Actors and Institutions of Change

23

It was also with liberalization in the 1990s that a comparatively new and highly efficient generation technology managed to spread successfully into the market and disarrange the incumbent system of large-scale electric power plants. The combined cycle gas turbine (CCGT), fired with natural gas, allowed electrical efficiencies of 56% and more to be reached, coupled with much lower investment costs of about 450–550€/kW, compared to 1,100–1,300€/kW for lignite or coal plants (Erdmann and Zweifel 2008). In the absence of advanced electricity storage technology, CCGT offered the “missing link” to fluctuating energy generation technologies. However, despite its comparatively low specific investment costs and its high efficiency, CCGT suffered more and more from increasing prices for natural gas. Its competitive advantage now lies in the peak load segment of electricity generation. In consequence, after an initial “dash for gas” (Winskel 2002) in the UK in the 1990s, followed by announcements of increasing numbers of CCGT in Germany, the number of actually commissioned and newly planned gas plants decreased in Germany, and also in the UK. Interestingly, in the UK, the advantages of CCGT were not attractive to the incumbent actors; it was newcomers to the market who realized its enormous potential in a mix of coincidence and contingence (Winskel 2002: 585). This highlights the role of both liberalization as a setting to change, and of actors taking their chances in such a changing environment, in successful transition processes – an aspect to which we shall now turn.

2.4 Actors and Institutions of Change All of the above “macro” impact factors are interlinked. Also, the coevolution of technological advancements and institutional change as stipulated by Hughes (1987) or Nelson (1994), and its relevance to sector transitions, are already at hand. Transition, moreover, needs action, and the role of actors and actor networks in realizing possible changes deserves more attention than it receives in many cases. The institutional setting forms a framework for innovation, but is also subject to change and innovation itself. It is both external and internal to the electricity system and its components. It consists of the regulation and administration of grid access, standards and technical norms, plus the setting of political regulation such as feed-in remuneration, priority grid access, policy instruments such as ecological taxes or emissions trading, and fiscal law, for example with respect to energy taxes and exemptions or subsidies in general. In addition, new institutions like power exchanges or independent system operators (in, for example, the UK but not in Germany)

24

2 Transformation and Innovation in Power Systems

are also relevant framework factors. Institutions impact on the administrative, technological and economic feasibility and viability of innovations and their implementation. It seems superfluous to point to the fact that actors are core to any change, be it of institutions or by introducing new artifacts to the electricity system. Actors are responsible for inventing and for spreading novelties. Actors are equally accountable for blocking unwanted innovation. What is more, actors tend to form networks, and networks are usually more powerful and more successful in pushing their ideas through than individual actors. They are even stronger when they manage to integrate complementary or even competing forces such as research actors, politicians and industrial stakeholders. In the case of innovation policy and politics, this insight led to governmental support for the formation of knowledge networks, as can be found in the fields of renewable energy and CCS, for example. Also, ministerial or interministerial “working groups” on energy legislation and policy formulation, with invitees from industry, NGOs and inputs from the research community, are a popular means to advance innovation and innovation policy. The system of actors in electricity and innovation is complex to grasp and varies, depending on the specific innovation. It includes the whole product and process chain, starting from the manufacturers of generation and transmission technologies, the electricity utilities themselves, the appliance and engineering equipment industry, and eventually the commercial, industrial and household consumers. These actors are surrounded by regulating and stimulating institutional and policy actors, and by a research community as diverse in their focus and interest as the other different elements of this large technological system. Also, many of the concrete impulses for changes on the national level stem from international sources and the European Commission, a prominent example being the EU ETS or CCS. All in all, there are multiple forms of potential linkages and networks and their innovation impacts; assessments of the respective sub-networks or settings of actors will be presented in the innovation cases that follow.

References AGEB (2007a) Bruttostromerzeugung in Deutschland von 1990 bis 2006 nach Energieträgern. Arbeitsgemeinschaft Energiebilanzen, Berlin AGEB (2007b) Einsatz von Energieträgern zur Stromerzeugung in Deutschland. Arbeitsgemeinschaft Energiebilanzen, Berlin Arthur WB (1989) Competing technologies, increasing returns, and lock-in by historical events. The Economic Journal 99 (394): 116–131

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BERR (2007) Digest of United Kingdom energy statistics 2007. Retrieved 21 January 2008, from http://www.berr.gov.uk/ BMU (2007) Erneuerbare Energien in Zahlen – nationale und internationale Entwicklung. Stand: November 2007. Bundesministerium für Umwelt, Naturschutz und Reaktorsicherheit, Berlin Brunekreeft G, Twelemann S (2005) Regulating the electricity supply industry in Germany. The Energy Journal 26 (Special Issue: European Electricity Liberalisation): 99–126 Cowan R (1990) Nuclear power reactors: a study in technological lock-in. Journal of Economic History 50 (3): 541–567 David PA (1985) Clio and the economics of QWERTY. American Economic Review 75 (2): 332–337 Dolata U (2007) Technik und sektoraler Wandel. Technologische Eingriffstiefe, sektorale Adaptionsfähigkeit und soziotechnische Transformationsmuster. Discussion Paper 07/3. Max-Planck-Institut für Gesellschaftsforschung Köln, 2008/01/22 Dolata U, Werle R (eds) (2007) Gesellschaft und die Macht der Technik: Sozioökonomischer und institutioneller Wandel durch Technisierung, Campus, Frankfurt Erdmann G, Zweifel P (2008) Energieökonomik. Theorie und Anwendungen. Springer, Berlin Freeman C, Perez C (1988) Structural crisis of adjustment, business cycles and investment behaviour. In: Dosi G, Freeman C, Nelson R, Silverberg G, Soete L (eds) Technical change and economic theory. Pinter, London, pp 38–66 Helden GJv, Muysken J (1983) Diseconomies of scale for plant utilisation in electricity generation. Economics Letters 11 (3): 285–289 Hirschhausen Cv, Weigt H, Zachmann G (2007) Preisbildung und Marktmacht auf den Elektrizitätsmärkten in Deutschland. Grundlegende Mechanismen und empirische Evidenz. im Auftrag des VIK, Dresden Hughes TP (1983) Networks of Power: Electrification in Western Society 18801930. The Johns Hopkins University Press, Baltimore Hughes TP (1987) The evolution of large technological systems. In: Bijker WE, Hughes TP, Pinch T (eds) The social construction of technological systems. The MIT Press, Cambridge, MA, pp 51–82 Ibenholt K (2002) Explaining learning curves for wind power. Energy Policy 30 (13): 1181–1189 IEA (2006) Energy technology perspectives. OECD/IEA (International Energy Agency), Paris IEA (2007) IEA Energy Technology R&D Database Edition - Database Tables RDD Budgets, Vol 2007 release 01. Retrieved 2 June 2008, from http://oberon. souceoecd.org/vl=6972643/cl=26/ini=rcse/nw=1/rpsv/ij/oecdstats/17266564/ v355n1/s1/p1 Islas J (1997) Getting round the lock-in in electricity generating systems: the example of the gas turbine. Research Policy 26 (1): 49–66

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London Economics (2007) Structure and Performance of Six European Wholesale Electricity Markets in 2003, 2004 and 2005, Part II: Results for Germany and Spain, London Markard J, Truffer B (2006) Innovation processes in large technical systems: market liberalization as a driver for radical changes? Research Policy 35 (5): 609–625 Monopolkommission (2007) Strom und Gas 2007 – Wettbewerbsdefizite und zögerliche Regulierung. Sondergutachten 49, Berlin/Bonn Nelson R (1994) The co-evolution of technology, industrial structure and supporting institutions. Industrial and Corporate Change 3 (1): 47–63 Nemet GF (2006) Beyond the learning curve: factors influencing cost reductions in photovoltaics. Energy Policy 34: 3218–3232 Öko-Institut (2005) Power generation market concentration in europe 1996–2004. An empirical analysis, Berlin Papineau M (2006) An economic perspective on experience curves and dynamic economies in renewable energy technologies. Energy Policy 34: 422–432 Pollitt M, Jamasb T (2005) Deregulation and R&D in network industries: the case of the electricity industry. Cambridge Working Papers in Economics 0533. University of Cambridge, Cambridge, UK Rohracher H (2007) Die Wechselwirkung technischen und institutionellen Wandels in der Transformation von Energiesystemen. In: Dolata U, Werle R (eds) Gesellschaft und die Macht der Technik: Sozioökonomischer und institutioneller Wandel durch Technisierung. Max-Planck Institut für Gesellschaftsforschung, Köln, pp 133–51 Ruttan VW (2001) Technology, growth, and development. An induced innovation perspective. Oxford University Press, New York Smith K (2001) Innovation indicators and the knowledge economy: concepts, results and policy challenges. In: Thuriaux B, Arnold E, Couchot C (eds) Innovation and enterprise creation: statistics and indicators, Proceedings, 23–24 Nov 2000, Sophia Antipolis, France. European Commission, DG Enterprise, Brussels, pp 14–24 Stadthaus M (2001) Der Konflikt um moderne Gaskraftwerke (GuD) im Rahmen der ökologischen Steuerreform. FFU-report 01-03, Forschungsstelle für Umweltpolitik, Berlin Thomas S (2006) The grin of the Cheshire cat. Energy Policy 34 (15): 974–1983 Unruh GC (2000) Understanding carbon lock-in. Energy Policy 28 (12): 817–830 Unruh GC (2002) Escaping carbon lock-in. Energy Policy, 30 (4): 317–325 Unruh GC, Carrillo-Hermosilla J (2006) Globalizing carbon lock-in. Energy Policy 34 (10): 1185–1197 VIK (ed) (1991) Statistik der Energiewirtschaft, Verband der Industriellen Energieund Kraftwirtschaft e.V., Essen Werle R (2003) Institutionalistische Technikanalyse: Stand und Perspektiven. Discussion Paper 03/8. Max-Planck Institut für Gesellschaftsforschung, Köln Winskel M (2002) When systems are overthrown: the ‘dash for gas’ in the British electricity supply industry. Social Studies of Science 32: 563–598

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Zängl W (1989) Deutschlands Strom. Die Politik der Elektrifizierung von 1866 bis heute. Campus, Frankfurt/New York Zimmer M, Lang C, Schwarz H-G (2007) Marktstruktur und Konzentration in der deutschen Stromerzeugung 2006. Zeitschrift für Energie, Markt und Wettbewerb 5: 64–69

3 Towards a Systemic Understanding of Innovation

So far we have discussed selected aspects of the electricity system and its transition over time. We surveyed the evolution of the technological, institutional and structural components of today’s electricity system in Germany, and assessed indicators for the diffusion and success of innovation as well as for its path dependency. All of these aspects are a necessary background for our research. However, both statistics and standardized indicators miss explanatory power with regard to the dynamics of innovation. While they are an important ingredient in capturing the innovation history and technological developments, they fail to capture the coevolutionary dynamics within the process of innovation and the interactive relation between the different elements of the electricity system in the innovation process, and they fail to indicate possible drivers and driven, and barriers to innovation in the electricity system. As we are interested in identifying options and the need for shaping the innovation and transformation path towards a sustainable future electricity system, we need a more complex conception of innovation and a more systemic understanding of the processes involved. For this purpose, we first clarify the concept of innovation used in this book, and also the definition of sustainability as applied in analyzing the innovation cases. We then discuss suggestions for systemic perspectives on innovation dynamics with regard to their usefulness for the purpose of the innovation cases analyzed in this book. From this basis we derive the research design applied to the innovation case studies in this book.

3.1 Conceptualizing Innovation A sustainable transformation of electricity systems can be thought of as the aggregate result of appropriate innovations at the level – or on various levels – of the elements that make up its overall structure. In our understanding, innovation is not restricted to technological advances of products and processes. It also includes changes in the organizational and conceptual dimension of electricity provision. Innovations in

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electricity are of a very diverse nature. They comprise new generation, transmission and end-use technologies, new management concepts, product offers, industrial processes and forms of business organization, new user routines, imageries and attitudes, new roles and identities of electricity customers, new policy problems, regulatory concepts, institutions and governance arrangements. Hence, for understanding the transformation of electricity systems, it is necessary to understand the heterogeneity of the underlying innovation processes, the factors that influence them and the way that they interact with each other. Starting from these thoughts, and based on a literature review and intensive discussion, we defined a concept of innovation as common frame of reference and guide of our research: We understand innovation to be the intentional, goal-oriented invention, development and implementation of socio-technical novelty in the electricity sector that is seen to solve a problem or is perceived as an improvement by a social group or actor (TIPS 2003). Intentional, goal-oriented. To qualify as an innovation, a novelty must be promoted by intentional, goal-oriented human action. A discovery may be made by chance, but to count as an innovation, there must be conscious considerations on how to develop and implement it. However, the qualification of innovative action as intentional and goal-oriented does not imply that the process and its final outcome are fully under control. On the contrary, innovation is a complex process full of unintended side effects that may turn in completely unexpected directions. New actors may join the process and lend it a new twist, new properties of the innovation may be discovered, political or economic factors may change the course of the process, or interactions between all of these factors may take place. The actual innovation journey can therefore be understood as a “trans-intentional” result of goal oriented interaction. Invention, development and implementation. An innovation process has different phases. The innovation is not completed with the invention (cognitive construction or discovery) of a novelty. The invention needs to be developed into a model or prototype which is adapted to the actual conditions of its practical realization. These conditions include availability and physical features of materials, requirements of the production process, organizational procedures, needs and routines of users, aesthetical predispositions, institutional framework conditions, etc. In order to actually contribute to the solution of a perceived problem, however, the innovation also has to set into effect (i.e. be implemented) within real world contexts. In our case, this means that the model or prototype needs to become effective as part of the operational working of the electricity system. For a product innovation, this means market introduction and diffusion; for a

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policy innovation, it refers to the actual implementation and enforcement of measures, for a social innovation it means the diffusion and stabilization of social attitudes and norms of behavior among relevant parts of society. For the selection of innovation cases, this meant that we did not only consider “new” inventions, but also looked at ideas or prototypes of technologies, or innovative behavior or policies that have been known for some time, but have not yet completed their respective “innovation process”, as its implementation (either market introduction, diffusion or policy enforcement) is still under way. In conceptualizing innovation by a phase heuristic of invention, development and implementation, some implications need to be clarified. First, it is important to realize that the heuristic distinction of phases is not always as clear in empirical reality. Phases may be temporally or spatially detached: an invention may be made at a specific point of time in a certain country, and only be implemented much later or in a different country. Moreover, the phases may not appear in a linear order but include iterative cycles and feedback between the different phases. Such is the case when changing conditions of implementation require adaptations of a prototype or when development capacities (e.g. laboratory infrastructure or political alliances) guide increased efforts in search of new inventions. Another problem is to determine at which point of implementation an innovation process is completed. Certainly, there is a point in time when a (former) novelty is so firmly established that effects from further diffusion or improved implementation are only marginal, meaning that they cannot count as part of the innovation process any more. But where exactly is this point? A helpful guideline is to consider the point at which an innovation starts having effects that are relevant to the operation of the electricity system. Naturally, the definition of this point depends on the type of innovation. A new product may become effective when it has reached a certain market share, when its potential market is saturated, or when market penetration has reached its climax and starts to slow down. Behavioral change may be defined as effective when it is firmly established among a sufficient number of people to have an effect on markets or on the environment. A policy becomes effective through guiding social interaction processes. Social, technical and socio-technical. Our concept of innovation comprises both social and technical novelties. Technical novelties may be new materials, product components, products or production processes. Social novelties comprise new lifestyles, habits, attitudes and values, social relationships, routines, organizational processes, institutions, political regulations, organizations and the like. In modern societies, many innovations are of a sociotechnical nature, necessarily combining social and technical elements. To

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have an effect, technological developments on the one hand depend on their social context (for example, appropriate legal frameworks or a reorganization of the work flow). On the other hand, they influence and re-shape the social world (for example, by generating new patterns of use). In complex innovations like the World Wide Web or mobile phones, technological solutions interact and coevolve with behavioral changes, new habits, reorganization of work processes, the development of adequate legal frameworks, operating arrangements and more. Novelty. To qualify as a novelty, we require that something is new to the context to which it is being introduced. It need not be new to the world. Since the conditions for adaptation, development and implementation differ, the process of innovation needs to be studied separately for varying contexts. Solving a problem or being perceived as an improvement by a social group or actor. Many theorists define innovation normatively, claiming that they lead to more effectiveness or efficiency, improve living conditions or make society more humane. In our research, however, we stress that the expectation of improvement or problem solving is the core motivation for deliberately undertaking innovation activities. That means innovation can be triggered by a problem that cannot be solved in the context of the existing system architecture (similar to the notion of reverse salients by Hughes 1983). However, there is no such thing as “objective” improvement or problem solving. Improvement is always improvement for a certain actor; a problem is somebody’s problem. One group’s solution may be another’s problem; one group’s improvement another’s impairment. In the electricity sector. To identify an innovation, it is important to specify the system of reference which is supposed to be affected. In our research, we concentrated on innovations that have an effect on the sector level in the electricity sector. Thus, we exclude certain novelties from scrutiny which may usually count as innovations. For example, we do not deal with the restructuring of the production process in an individual power plant if it is not potentially relevant for the whole sector or has little or no potential effect on sector processes and structures. In practice, these different components make up a seamless web of innovations. But for analytical purposes, it is helpful to distinguish a cluster of core innovations from impacting innovations and induced innovations (Fig. 3.1). The core innovation is the product, technology, institution or policy strategy that forms the focus of a particular study. Impacting innovations are innovations that influence the core innovation’s functioning or development process. Induced innovations are further innovations that are influenced by the core innovation.

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Fig. 3.1 Innovation cluster as analytical framework

However, there is no unidirectional cause-effect relation between the core innovation on the one hand and the promoting (or enabling) and induced innovations on the other hand. Innovations mutually influence each other in the sense of coevolution. The above distinction between “core”, “promoting” and “induced” innovation is therefore rather analytical, intended to depict the dominating direction of influence. If, for example, we focus on micro cogeneration as a core innovation, we find that a combination of technological change, such as the development of a new energy converter (fuel cell, Stirling engine), and changing user and producer patterns and practices (on-site power production, thirdparty services, etc.) are necessary to bring it into effect. Innovations in the institutional framework, retail and service infrastructure, social image, housing patterns, etc. can be considered inducing or enabling innovations in so far as they facilitate the development of the core innovation. Its effective implementation, on the other hand, may influence further innovations such as integrated facility management, building standards or new business models of service provision. If we choose informative energy bills as a core innovation, we can identify smart meters and internet-based information and billing techniques as enabling innovations and the diffusion of new energy saving devices as induced innovations.

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3.2 Sustainability The fundamental definition of sustainability as applied in most concepts can be traced back to three constitutive elements: an inter- and intragenerational justice, a global and an anthropocentric perspective (Brandl et al. 2001). A general scientific definition would refer to the long-term viability of social systems within an ecological context. However, the transformation of this concept into concrete targets, rules derived from these targets or even indicators describing the state and the dynamics of our society with respect to these targets has since been controversially discussed. For instance, the discussion of the substitution of natural by human made capital (strong and weak sustainability), of the relative importance of the environmental, social and economic dimension, of the manner in which the integration of these dimensions is accomplished and of ways how to deal with conflicts between the dimensions is still ongoing. In all of these discussions, a compromise between explanatory power and dilution, between universality and applicability, and between transparency and complexity of the sustainability concept has to be found. For the purpose of this book, in which innovation and transformation processes were identified, described, assessed and anticipated, thus combining descriptive and normative elements, the sustainability concept can serve to: x exclude certain aberrations and assess what Bossel calls the accessibility space (Bossel 1999): a space of possible future developments as constrained by physical conditions (carrying capacity, laws of nature, etc.), by social conditions (ethics, institutions, actor constellations, etc.), and by the dynamics of the system. For this purpose, sustainability helps to provide “guardrails” for development trajectories under the conditions of profound scientific uncertainty, e.g. to define “safe minimum standards” for certain problem areas to avoid developments which otherwise would turn out ex post to be unsustainable. x assess the dynamic viability of societies and their constitutional parts to characterize the ability – under the condition of profound uncertainty and changing social values – to cope with internal transformation and with different developments of the environment (“a sustainable society must allow and sustain change” (Bossel 1999: 4)). This means that for the purpose of this book, a balance of two objectives must be achieved:

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x To allow for change, sustainability has “to build on an ongoing process of defining objectives” (Minsch et al. 2000), i.e. sustainability cannot provide a defined set of instructions for our actions, but rather has to give us the direction for possible solutions and guarantee that the search process of society and the required flexibility and adaptability are present. Therefore sustainable development is rather “a regulative idea that should be able to lead the political discussion into the right direction without determining it” (Minsch et al. 2000). x To provide the necessary guardrails, however, the concept needs to be substantiated to make available a framework for analysis. Numerous attempts to define sustainability and its underlying rules as well as sets of indicators, both generally and for the energy sector, have been undertaken. The notion of sustainability referred to in this book is based on the guidelines for a sustainable energy system developed by the HGF project on sustainable development in Germany (Nitsch et al. 2001) and further elaborated by the German Enquête Commission “Sustainable Energy System” (Enquête 2002). These two long-term research and consultation processes represent probably the most comprehensive review and discourse of defining sustainability for electricity in Germany. A summary of the criteria and guidelines is provided in Box 3.1. Defining and agreeing upon such guidelines is not as straightforward as it may seem. To go one step further, i.e. to delineate precise preconditions for electricity to be sustainable, is almost impossible. Trade-off effects between material wealth, security and environmental protection are subject to societal and economic value assessments. Knowledge and values may develop over time (Walker and Shove 2007). Also, the effects of a particular innovation within the context of the electricity system as a whole cannot be easily predicted (Grunwald 2007). Any assessment is based on planned designs which, however, may change significantly until the innovation is actually implemented on a large scale. Sustainability effects also depend on the interaction with many other innovations. Therefore, although we used advanced methods to evaluate the sustainability impact of innovations and tried to take these aspects into account, our assessment must remain preliminary and probably also incomplete.

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Box 3.1 Guidelines for a sustainable energy system. Source: adapted from Nitsch et al. (2001) and Enquête (2002) Distributional justice: Access to energy resources/services for basic needs, such as heat, light, sanitation and cooking, but also to information, for all people. Needs-oriented use and stable security of supply. The energy required for satisfying sustainability-compatible needs must be supplied permanently, in adequate amounts and according to the geographic and temporal demand. This implies a geographic and fuel diversification and security margins to allow adaptability to unforeseen crises and sustain or enlarge the future window of opportunity. Resource protection. This is essential for future generations. It implies increased energy productivity, the use of renewable energy resources and closed material flows. The use of biotic resources should not exceed their growth rate. Environmental, climate and health compatibility. The capacity of nature to adapt and regenerate should not be stressed. Climate gas and other emissions must be drastically reduced, water quality be secured and radioactive waste be ceased. Risk reduction and fault tolerance. Unavoidable risks and hazards of energy conversion and distribution have to be minimized principally and constrained in terms of geographic and temporal range. Mistaken conduct, improper handling and willful demolition have to be taken into account. Social compatibility. Concerning the design of future energy systems, participation of all concerned people in decision making must be guaranteed. This implies democratic, decentralized decision structures as well as know-how building. Minority rights must be protected. Social compatibility also means a socially acceptable transition towards future energy systems. Adaptability. Any shaping of the energy system must leave scope for flexible adaptation to unpredictable future developments. In order to increase societal learning capacities, sustainable energy generation and use must become an integrated topic in higher education. Comprehensive economic efficiency. Energy services – in relation to other economic activities – must be supplied at acceptable total costs, where “acceptable” means both the preservation of microeconomic viability, and reflection of total societal costs, including external social and ecological costs. International cooperation. On an international level, future energy systems must be designed in such a way that they do not destabilize the world due to, for example, unfair distribution of resources, and promote peaceful cooperation. Leapfrogging of modern technologies shall help emerging countries to grow energy efficiently.

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3.3 Systemic Perspectives on Innovation in Literature We now turn to concepts of innovation and its dynamics that have been recently put forward by other authors. These approaches partly form the background for the case study design and therefore require a short description and discussion. Among them, perhaps the most influential approach in conceptualizing innovation is the evolutionary economics perspective as advanced by Nelson and Winter (1982). In combining a system perspective with a micro perspective on the actors of innovation, they show that innovation is a process of coevolution on different levels. Decision making on the level of the individual and of the firm is restricted by bounded rationality (Simon 1957; Williamson 1985). Information is costly and sometimes not available. Decision makers are hence confronted with significant uncertainty and risk. The resulting challenge for the firm is to use decision-making rules to deal with information deficits and minimize the related risk, and adjust these rules when they turn out to be inappropriate. The evolutionary perspective also introduces notions such as path dependency, learning and irreversibility to the analysis. On the system level, the established technological paradigm and trajectory (Dosi 1982) form a stable frame which tends to be reluctant to substantial change. In addition, the specific characteristics of large technological systems such as the electricity system, in particular the size and interlinks of the system elements, imply a certain inertia to change (Hughes 1983, 1987) and thus a considerable risk of lock-in in the well-established structures. The idea to conceptualize innovation dynamics in more complex systems of innovation can be traced back to Lundvall (1985), followed by a number of authors such as Nelson (1993), Freeman (1987, 1991) and Edquist (1997). Innovation systems can be categorized by geographical terms (e.g. national, regional, local) or by focus (technological or geographical). For example, the concept of national innovation systems has increasingly been operationalized by governmental and related bodies in order to frame innovation processes on geographical levels (OECD 1997, 2001). Compared to this, technological innovation systems are an analytical category for understanding the underlying dynamics and identifying starting points for forming innovation processes. Carlsson and Stankiewicz (1991) define technological innovation systems (TIS) as “network(s) of agents interacting in a specific technology area under a particular institutional infrastructure for the purpose of generating, diffusing, and utilizing technology” (Carlsson and Stankiewicz 1991), thereby not restricting a TIS to a specific technology but to a set of contextual factors around a technological core. Innovation system studies capture the elements and the structure of technological

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innovations. However, for the analysis of change and its determinants, such a static approach is not sufficient. The multilevel perspective put forward by Rip and Kemp (1998) and further developed by Geels (2002, 2005) goes one step further, following on from the idea of technological regimes of Nelson and Winter (1982). They conceptualize innovation as a dynamic, multilayer transformation or transition process. In their perception, the start and breeding point for any innovation are niches of deployment. From there, a successful innovation may succeed to diffuse into the broader regime and trigger adjustments on the “socio-technical regime” level which are required for its broader diffusion. The regime level captures the prevailing technological regime and related actors networks and thus captures the incumbent, well-established elements and inertia of (large) socio-technical systems. In fact, technologies become innovations only when they are actually deployed in more than a niche, and for this they need to be embedded in existing socio-technical contexts. The top layer or “landscape” level is even more resilient to change: it describes the societal setting of values, general or macro trends and other, rather persistent factors. This heuristic framework has been applied to many innovation studies (Elzen et al. 2004; Mahapatra et al. 2007; Raven 2007). In fact, the concept is so open and flexible that it allows integration of different streams of thinking, such as actor network theory, social constructivist approaches, or LTS concepts, to explain the emergence and stabilization of technology on the one hand, and economic, sociological and socio-technical diffusion analyses to explain successful diffusion dynamics on the other. Even the idea of long waves of technology regimes may be combined with describing developments on the landscape level (Geels 2004: 40). Both the multilevel heuristic and Hughes’ large technological systems framework are descriptive in their nature and were mainly developed using historical case studies. In contrast, the innovation functions approach put forward by Jacobsson and Bergek (Jacobsson and Bergek 2004; Bergek et al. 2008) focuses on a set of functions required for the creation and success of a new technological innovation system whose assessment forms the starting point for strategic or policy considerations. They suggest that the performance of the TIS is assessed with the help a set of functions, capturing core preconditions and dynamic features of a successful TIS. One such important precondition (and thus function) for a successful TIS is a proper level of legitimacy, which may find its expression as public concern, social acceptance, interest groups and, in the best case, as governmental statements and actions such as a policy target. Other functions include the need for the development and diffusion of knowledge, the availability and mobilization of financial and other resources for fostering the innovation, or

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the emergence and development of entrepreneurial experience in the new technology, which goes hand in hand with market formation (Jacobsson and Lauber 2006). Methodologically, the mapping of these functions can lead to a storyline of the different functions and their evolution over time. Based on this, drivers and barriers of the innovation can be traced and patterns of the innovation be identified. Insights into these patterns can then help to formulate policy recommendations for shaping the course of innovation dynamics (Hekkert et al. 2007).

3.4 Design of the Innovation Case Studies The above literature overview shows that the academic discourse on the sources and dynamics of sustainable innovation processes in the electricity system is far from offering a one-off, single, path-breaking concept. The overall dynamics and direction of transformation of the electricity system are too difficult to grasp. Drivers of innovation can be multifold and interdependent, and so is the perception of drivers and driven by scholars. Focusing a research project on only one perspective – be it ecological, economical, technical, or political – runs the risk of producing answers which ignore important influences on the remaining parts of the system. Integrating the different perspectives, therefore, appears to be crucial for producing research results which address real world interdependencies and offer answers relevant to societal problem-solving. The research challenges increase even further in terms of complexity when the idea of an assessment of the sustainability of an innovation becomes an integral part of the analysis. To this end, an interdisciplinary approach to integrate social and natural science perspectives is required. There have been a few attempts to integrate or combine different disciplines. One line is the attempt to conceptualize and compile the conditions of long-term change in large technical systems like electricity provision (Mayntz and Hughes 1988; Kemp 1994), or the above-mentioned multilevel and multiactor heuristic of socio-technical change as developed by Rip and Kemp (1998) and Geels (2002). Other approaches are more directly based on the idea of path dependency and lock-in, and thus also at the idea of a self-sustaining process of cumulative causation (Jacobsson and Bergek 2004) once an innovation is successfully initialized or implemented in a niche. However, many of these (and other) approaches are rather multithan interdisciplinary, and it is no surprise that disciplinary backgrounds continue to be formative for the perception of the world and the relevant analytical variables, even in the case of interdisciplinary researchers. The

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result is that the employed conceptual setting and the related analytical outcome varies with the discipline (Geels 2006). The approach followed in this book borrows from several of the above conceptions and integrates the idea of a detailed sustainability assessment into the analysis. In five case studies, we study the sustainability impact and potential of innovations on the level of governance, technology and consumers. The aim is to learn about common features and differences in order to better understand the overall dynamics of innovation processes in the electricity system. We analyze the potential contribution of our innovation examples to a sustainable electricity system transformation and point out the challenges and the unexpected, tricky aspects. We study the course of the innovation and assessed the potential of shaping the implementation process with regard to a sustainable electricity transformation path. We try to understand success and failures as a basis for deriving starting points for strategic action by government. An important level of analysis is to understand the role and influence of actors and networks, and of politics. Innovations may also compete or even conflict with each other. Such areas of conflict are identified and conclusions for possible paths to the future be depicted with reference to the conditions under which they would be likely to unfold. The cases represent examples of innovation processes from different areas of the electricity system, namely technology, user practices, and governance. Empirically, we look at innovations in the areas of distributed generation, central clean-up technology, consumption practices, environmental regulation and electricity network regulation. Despite evidently fundamental differences in the characteristics of the considered innovations, a comparable analytical structure for the innovation cases was designed, so that all case studies follow the same structure. We first describe and assess the innovation with regard to its sustainability or contribution to a more sustainable electricity system. We then trace the innovation process and eventually analyze the potential for shaping the respective innovation process. The main components of each case study are thus: (1) a description of the respective novelty, its innovativeness and its different design options, (2) an assessment of its expected sustainability and electricity system impact, (3) an analysis of the innovation process, with the aim to describe the origin, the factors and structures forming the process of innovation development and diffusion, and to identify the inducing and blocking mechanisms, and (4) an essay on the options of shaping the respective innovation, given its sustainability potential and the existing dynamics and barriers to its diffusion. Major descriptors of the innovation dynamics are the origin and transfer mechanisms of the innovation, context factors, and the setting of actors. We look at inducing and impeding factors, and conclude with suggestions

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for shaping the underlying dynamics. A brief summary of these aspects is presented in a table at the end of each case study. A comparison and discussion of these cases with respect to the lessons learned on innovation dynamics in the electricity sector is provided in the last chapter of this book.

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Geels FW (2005) Technological transitions and system innovations: a co-evolutionary and socio-technical analysis. Edward Elgar, Cheltenham, UK Geels FW (2006) Report of KSI-workshop ‘Understanding processes in sustainable innovation journeys’ (2-3 October), Utrecht Grunwald A (2007) Governance for sustainable development: coping with ambivalence, uncertainty and distributed power. Journal of Environmental Policy and Planning 9 (3/4): 245–262 Hekkert MP, Negro S, Suurs R, Kuhlmann S, Smits R (2007) Functions of innovation systems: a new approach for analysing technological change. Technological Forecasting and Social Change 74 (4): 413–432 Hughes TP (1983) Networks of Power: Electrification in Western Society 1880–1930. The Johns Hopkins University Press, Baltimore Hughes TP (1987) The evolution of large technological systems. In: Bijker WE, Hughes TP, Pinch T (eds) The social construction of technological systems. The MIT Press, Cambridge, MA, pp 51–82 Jacobsson S, Bergek A (2004) Transforming the energy sector: the evolution of technological systems in renewable energy technology. Industrial and Corporate Change 13 (5): 815–849 Jacobsson S, Lauber V (2006) The politics and policy of energy system transformation - explaining the German diffusion of renewable energy technology. Energy Policy 34 (3): 256–276 Kemp R (1994) Technology and the transition to environmental sustainability. The problem of technological regime shifts. Futures 26: 1023–1046 Lundvall B-Å (1985) Product innovation and user-producer interaction. Aalborg University Press, Aalborg Mahapatra K, Gustavsson L, Madlener R (2007) Bioenergy innovations: the case of wood pellet systems in Sweden. Technology Analysis and Strategic Management 19 (1): 99–125 Mayntz R, Hughes TP (1988) The development of large technical systems. Campus, Frankfurt/New York Minsch J, T. Schulz, et al. (2000) Teilprojekt Volkswirtschaftslehre: Ökologische Wirtschaftspolitik zwischen Selbstorganisation und Fremdsteuerung – “Erfindungen” gegen die umweltpolitische Blockade. Institut für Wirtschaft und Ökologie (IWÖ), University St. Gallen Nelson R (ed) (1993) National Innovation Systems – A Comparative Analysis, Oxford University Press, New York, Oxford Nelson R, Winter S (1982) An evolutionary theory of economic change. Belknap Press of Harvard University Press, Cambridge Massachusetts and London (HD) Nitsch J, Nast M, Pehnt M, Trieb F, Rösch C, Kopfmüller J (2001) Global zukunftsfähige Entwicklung – Perspektiven für Deutschland (HGF-Projekt). DLR-Institut für Technische Thermodynamik; FZ Karslruhe, Institut für Technikfolgenabschätzung und Systemanalyse, Stuttgart, Karlsruhe OECD (1997) National innovation systems. OECD, Paris OECD (2001) Innovative networks. Co-operation in national innovation systems. OECD, Paris

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Raven R (2007) Niche accumulation and hybridisation strategies in transition processes towards a sustainable energy system: an assessment of differences and pitfalls. Energy Policy 35 (4): 2390–2400 Rip A, Kemp R (1998) Technological change. In: Rayner S, Malone EL (eds) Human choice and climate change. Battelle Press, Columbus, Ohio, 2, pp 327–399 Simon HA (1957) Models of man. Social and rational. John Wiley & Sons, New York TIPS (2003) Innovation – An integrated concept for the study of transformation in electricity systems. TIPS Discussion Paper 3, Berlin Walker G, Shove E (2007) Ambivalence, sustainability and the governance of sociotechnical transitions. Journal of Environmental Policy and Planning 9 (3/4): 213–225 Williamson OE (1985) The economic institutions of capitalism. The Free Press, New York

4 Micro Cogeneration*

4.1 Micro Cogeneration as an Innovation Cluster Micro combined heat and power (micro cogeneration) is the simultaneous generation of heat (or cold) and power on the level of individual buildings, based on small energy conversion units (below 15 kWel) which are usually fuelled by natural gas or heating oil. The heat is used for space and water heating inside the building, whilst electricity is used within the building or fed into the public electricity grid (Fig. 4.1). With the help of modern communication technologies, micro cogeneration could also be controlled centrally and integrated into an ensemble of other generation or load management technologies, forming a so called “virtual power plant”. Energy converter Energy converter

Energy converter

Communication technology

Data

Electricity Fuel supply

Fuel

Energy converter Heat

Grid access Energy management

Energy service to customer

Fig. 4.1 Technological components of a micro cogeneration system

Micro cogeneration could contribute to the transition of the traditionally centralized energy supply system towards a more sustainable system. It has the potential to enhance overall efficiency, to reduce carbon dioxide (CO2) emissions and to contribute to a more reliable energy system and a more competitive energy market. The generation of power close to the point of *

By Martin Pehnt and Barbara Praetorius. This chapter is a summary and update of Pehnt et al. (2006). We would like to thank Katja Schumacher for comments on an earlier version.

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use in individual homes and the subsequent decentralized structure of supply reduces the need to transport power over long distances and could increase the reliability of power supply. Micro cogeneration increases consumers’ choice with regard to their energy provision and has the potential to increase competition depending on the mode of deployment (e.g. by the introduction of energy service contracts for micro cogeneration). Despite these expected benefits, deployment of cogeneration has been slow to date. This chapter looks at the dynamics of micro cogeneration diffusion, with a particular focus on the German market. We explore structural and functional elements of the related innovation system and analyze the functions and factors that promote or prevent the emergence of such an innovative technology within the existing German energy system. Micro cogeneration was chosen as the subject of the case study because it offers a rewarding opportunity for studying the conditions facing innovations in potentially unfavorable regime contexts (Pehnt et al. 2006; Praetorius et al. 2008). The innovativeness of micro cogeneration goes beyond the conversion unit as a technical artifact. It may rather be conceptualized as a sociotechnical innovation cluster and not as a technological innovation alone, even more so since the technologies it builds upon have been available for a long time (Pehnt et al. 2006). Within this cluster, the development and diffusion of conversion technologies for micro cogeneration interact with other innovations which may promote or inhibit the application of micro cogeneration. Vice versa, these innovations may be promoted or inhibited by developments in the conversion technology for micro cogeneration. The cluster comprises various interdependent innovation processes, of a social as well as technical nature. Figure 4.2 provides a schematic sketch of the micro cogeneration innovation cluster. The technical artifact “micro cogeneration”, i.e. the energy conversion unit, is the focal innovation at the core of the cluster. In a first step, other technological, institutional, or cultural innovations which are linked to the focal innovation can be divided into three types, according to the dominant kind of relational influence they have with respect to the focal innovation. Promoting innovations such as Third Party financing schemes, maintenance and service networks, remuneration of avoided transmission costs by network regulation, or heat storage technologies, provide favorable conditions for the focal innovation. Micro cogeneration technologies may also act as a driver for and induce other innovations, such as virtual power plants, integrated facility-management services, or adaptive networks. At the bottom of the figure, a number of competing innovations are listed, such as district heating, thermal solar collectors, long-distance import of solar electricity. They belong to rival socio-technical configurations and

4.1 Micro Cogeneration as an Innovation Cluster

47

Fig. 4.2 Micro cogeneration innovation cluster

may impede micro cogeneration development – or become inhibited by it themselves, depending on which innovation is leading the technological competition for deployment or for resources. The remaining chapter is organized as follows. In the next section, we introduce technological design options and sustainability potentials for micro cogeneration. This includes a discussion of operation schemes and system level impacts of an increased introduction of micro cogeneration. An analysis of the environmental impacts and economic viability of technological design options highlights differences between the distributed supply of electricity and heat, i.e. micro cogeneration, and the centralized supply of electricity and heat. The results are reflected in scenario analyses of the potential contribution of micro cogeneration to a more sustainable electricity system. Against this background, we then outline the innovation process and the inducing and blocking mechanisms inherent to this process, and thereby explain the (slow) diffusion of micro cogeneration in Germany. We draw conclusions for shaping the innovation process in order to improve the prospects of micro cogeneration. We end with a summary of the state and perspectives of the innovation system micro cogeneration in Germany.

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4.2 Design Options and Sustainability Potential 4.2.1 Technological Variations The technological roots of micro cogeneration date back to the early development of steam and Stirling engines in the eighteenth and nineteenth century, respectively. Today, there are several technologies which are capable of providing cogeneration services. The conversion process can be based on combustion and subsequent conversion of heat into mechanical energy, which then drives a generator to produce electricity (e.g. internal combustion reciprocating engines, Stirling engines, gas turbines, steam engines). Alternatively, it can be based on direct electrochemical conversion from chemical energy to electrical energy (i.e. fuel cells). Other processes include photovoltaic conversion of radiation (e.g. thermo photovoltaic devices) or thermoelectric systems (see Pehnt 2006 for a detailed review of available technologies). The various technological micro cogeneration systems are at a differ ent development stage today (Fig. 4.3). Reciprocating engines are welldevelopded technologies; based on products from the car or appliance industry, they have been adapted to the requirements of micro cogeneration. Reciprocating engines are mostly conventional piston-driven internal combustion engines. For micro cogeneration applications, spark ignition (Otto-cycle) engines are typically used, comparable to those used in automobiles. Stirling engines are currently entering the market. Unlike spark-ignition engines, for which combustion takes place inside the engine, Stirling engines generate heat externally. Owing to continuous combustion, Stirling engines offer lower emissions, and, due to the fact that fuel combustion is carried out in a separate burner, high fuel flexibility. This makes them suitable for bio-fuels, and, in principle, for other heat sources, such as concentrated solar irradiation. Fuel cells are still in the R&D phase, with a variety of designs being developed, and a number of pilot plants currently being tested. A fuel cell converts the chemical energy of a fuel and oxygen continuously into electrical energy. In the case of hydrogen, the energy incorporated in the reaction of hydrogen and oxygen to water will be partially transformed into electrical energy (Pehnt 2002). Fuel cell micro cogeneration units are either based on Polymer Electrolyte Fuel Cells (PEFC; also Proton Exchange Membrane Fuel Cell, PEMFC), using a thin membrane as an electrolyte and operating at about 80°C, or Solid Oxide Fuel Cells (SOFC), which are high-temperature fuel cells operating at 800°C. As hydrogen is not yet broadly available, fuel cells in stationary (micro cogeneration) applications are typically fuelled by natural gas which is converted into hydrogen in a

4.2 Design Options and Sustainability Potential

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so called reforming reaction. This takes place either in a separate device, the reformer, or, as in the case of high-temperature fuel cells, inside the stack (internal reforming). In the last decade, considerable efforts have been made to further develop the fuel cell technology, mainly by research institutions and small firms, partly supported by larger boiler manufacturers or energy utilities. Challenged by long development times and capital costs that were still high, a number of companies had to stop their development or drastically shift their anticipated market entry date. Currently, the PEFC appears to become the dominant design for small-scale (residential) applications. A number of other technologies for micro cogeneration energy conversion are currently under development (such as steam expansion or Rankine steam cycle engines, or thermo-photovoltaics), but they will not be discussed here in more detail. Research and development Development of a new idea Lab-scale development

Demonstration Scale-up to commercial size Prototypes, field tests

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Stirling engine Fuel cell Steam expansion engine Further technologies e. g. Thermophotovoltaics

10 years or more

Time to market introduction 5 years

1 year

0 years

Fig. 4.3 Status of market development of micro cogeneration technologies (Pehnt 2006)

4.2.2 Operating Schemes Micro cogeneration may potentially change the traditional roles attributed to the private consumer. Typically, households purchase and consume electricity from the grid and produce heat with a heating unit owned by

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them (or the house owner). With a micro cogeneration unit installed in their house, they become electricity producers and may sell electricity to the grid. Micro cogeneration systems can be run in two different modes, either electricity-driven or heat-driven. In the first case, the unit is designed to satisfy the electricity needs of a customer, and the heat is used to contribute to water and space heating. In this case, a supplemental peak boiler may be required to meet total heat demand. In the second case, the micro cogeneration unit is sized to meet the heat demand while electricity is either used internally or exported to the public grid. The decision for either mode depends on the economics. The last few years have witnessed an increasing variety of ownership and deployment models for any form of energy supply in buildings, such as contracting and third party financing schemes. Similar to energy efficiency investments, such schemes aim at sharing financial risks (and potential gains) and at appropriating the economics of experience and of scale incorporated in professional external operators. Depending on their accumulated know-how and the number of establishments they contracted, professional external operators are able to negotiate better conditions for the initial investment (e.g. by purchasing larger numbers of machines), and they benefit from experience in related administrative and operational maintenance issues. In Germany, this has been the typical model for micro cogeneration up to now, involving local energy agencies or contracting sub-units of the electricity or gas industry; they usually own and operate the micro cogeneration unit. The availability of such external operator schemes obviously depends on the margin they are able to realize when offering their services. Given the economic features of micro cogeneration today, this model is mostly not (yet) viable for smaller-scale micro cogeneration units. Some other operating schemes and variations of this model are also thinkable. To give an example, Sauter et al. (2006) suggest a “Plug and Play” model in which the micro-generation unit is owned and financed by the homeowner. They also discuss a “Community Microgrid” model in which consumers choose to set up a local network of micro cogeneration units. In addition, either operation scheme could be combined with leasing concepts and with different operation modes. For example, the units may either be operated to serve households needs, with some surplus electricity sold to the grid occasionally, or – as a “virtual power plant” – according to the needs of an energy company so as to help balance supply and demand, and to avoid buying electricity from other sources. The latter would presume that the heat generated by the micro cogeneration unit can be used

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by the customer or stored within a suitable medium, such as water heat reservoirs. 4.2.3 System Level Impacts Whether or not micro cogeneration can contribute to a sustainable system depends – among other factors – on its impacts on the system level, and on its environmental and economic features. On the system level, a broader diffusion of micro cogeneration would have major technical impacts which need to be considered. The distributed nature of micro cogeneration systems influences the various technical systems involved in its deployment (e.g. electricity network) and markets (e.g. heat market). The impact of micro cogeneration on the electricity network is mostly beneficial. As generated power is mainly consumed on site, congestion of the distribution and transmission system is lowered. As a consequence, distribution and transmission losses are decreased and upgrades of the system may be deferred if micro cogeneration plants are properly sited. However, increased market penetration of micro cogeneration could also raise several challenges for network operators. The capacity of equipment (transformers, power lines, fuses, switches, etc.) may not be suitable due to changed or reversed power flows. With many dispersed generators, the voltage could vary beyond established limits and, in some cases, protection of the distribution network – e.g. in cases of maintenance work – may become more difficult with distributed generators (Jenkins et al. 2000). These restrictions can in some instances be overcome by improvements to the power plants, such as filters, current limiters and, in the case of fuel cells, smart AC/DC converters. In other cases, the restrictions may necessitate modifications of the grid (Schneider and Pehnt 2006). For energy supply security, the broad diffusion of micro cogeneration will primarily have positive effects, both in terms of fuel supply security and in terms of the reliability of electricity networks. Micro cogeneration may reduce the dependence on fossil fuels by enhancing energy efficiency. Nevertheless, with natural gas being the preferred fuel at present, risks associated with gas dependency must be kept in mind and reduced in terms of importance by means of fuel diversification and development of renewable fuel micro cogeneration. 4.2.4 Ecological Performance The ecological performance of micro cogeneration units is assessed using the life cycle analysis (LCA) method. It leads to somewhat ambiguous

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results (Pehnt and Fischer 2006): Compared to separate generation and supply, the combined production of electricity and heat in micro cogeneration units clearly results in primary energy savings and greenhouse gas (GHG) benefits. Based on natural gas as a fuel, GHG emissions per kWh electricity and heat produced are typically 20% – and under certain circumstances up to 45% – lower in comparison to a combination of condensing boilers in the household, and electricity generated in modern gas fuelled combined cycle power plants. The emission reduction is even more obvious if compared to the total generation mix in Germany. In some cases, however, only a small amount – if any – of GHG mitigation can be achieved, compared to separate heat and power production with state-of-the-art technologies (Fig. 4.4). This is, for example, the case with regard to technologies with low electrical and total efficiency such as for small Stirling engines. Compared to district heating systems, micro cogeneration does not offer significant energy and GHG emissions advantages. District heating systems have the disadvantage of potentially high heat distribution losses Electricity w/o CHP

700 1030

600 500 400

Mix MixGermany Germany 2010

Lignite Lignite

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Fig. 4.4 Life cycle GHG emissions of micro cogeneration technologies compared to large cogeneration and conventional electricity production in 2010; functional unit 1 kWh electricity at low voltage level; co-produced heat is credited (Pehnt and Fischer 2006). Cond: Heat condenser available. LowNOx: system optimized for low NOx emissions. Lean: lean burn engine operating with air access. Lambda = 1: engine operating at air-fuel ratio 1.

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(depending on the quality of the heat grid and the density of the customers); but these are offset by significantly higher electrical efficiencies compared to micro cogeneration. Therefore, we regard micro cogeneration not as a competing, but rather as a supplementary technology to district heating, meaning that it should optimally be applied in cases where larger district heating is not viable for infrastructural or economic reasons. In rural areas, for instance, building density is often low, causing long transport distances and thus high investment costs and large distribution losses for district heating networks. Another relevant parameter for ecological performance is the fuel on which a micro cogeneration system runs. Heating oil, liquefied petroleum gas (LPG), and renewable fuels (such as vegetable oil, biogas, gases produced from solid biomass), and other primary energy sources may also be used. Reciprocating engines based on heating oil are widespread and exhibit similar GHG advantages as natural gas based engines when compared to conventional modern oil heating systems. However, the nitrogen oxide (NOx ) emissions of these systems are significantly higher than in the case of other micro cogeneration technologies (see Pehnt 2006). The most flexible technology regarding the choice of fuels is the Stirling engine. It could also run on biomass; the first Stirling engine fuelled by wood pellets has been available since 2006. However, the use of biomass (e.g. wood) is more complex in micro cogeneration than in larger plants because the required process components (e.g. gasification, gas clean-up, biomass burner) are more difficult to realize on a small scale. Integration of renewable energy carriers into micro cogeneration systems will, therefore, be less straightforward unless it takes place via an increased feed-in of renewable gases (biogas, wood gas, etc.) into the natural gas grid. 4.2.5 Economic Performance Compared to conventional heating systems and external electricity supply, the economic performance of micro cogeneration is characterized by higher upfront investment costs. These are compensated by continuous energy cost savings over time. In addition, micro cogeneration in Germany benefits from regulations in the 2002 Combined Heat and Power (CHP) law. For small-scale cogeneration, the CHP law provides that electricity fed into the grid receives at least a “usual price” based on the average base load electricity price traded at the European Energy Exchange (some 3–5 cents), plus a bonus payment of 5.11€ cent per kWh fed into the grid and a

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bonus for avoided grid losses. Furthermore, electricity1 and natural gas2 tax exemptions are granted. This, however, does not cover full generation costs which are in the range of 8–12.5€ct/kWh. As a result, micro cogeneration plants are only economically attractive if most of the electricity is used on site and not primarily fed into the grid.

Reference scenario

140%

Micro cogeneration scenario (best plant)

130%

Small DH scenario

120% 110% 100% 90% 80% 70% 60% Single-family Single-family house house (low heat (avg. heat demand) demand)

Apartment building (low heat demand)

Apartment building (avg. heat demand)

Hotel

Fig. 4.5 Heat and electricity supply costs for the reference buildings from the independent operators’ perspective (DH = district heating) (Schneider 2006)

Schneider (2006) set up a detailed economic model and showed that under German conditions, micro cogeneration could be an economically interesting option for operators. For a single family household with low heat demand, a micro cogeneration unit would be economically attractive if suitably small systems were available on the market (Fig. 4.5). Similarly, larger units in apartment buildings show net cost reductions. In the case of apartment buildings, however, given the rules of the liberalized electricity market, tenants may choose to be supplied by an external energy company and thus jeopardize the economic viability of the cogeneration unit. Currently, micro cogeneration is best suited to serve apartment buildings or hotels rather than single family homes. However, smaller systems of about 1 kWel are about to break through. They could fully substitute boilers in single family houses. Therefore, single family houses are a particularly promising market segment. 1 2

For plants below 2 MW capacity. Only for CHP plants with an average energy efficiency of over 70%.

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The economic viability of micro cogeneration also depends on the attractiveness of competing heat and electricity supply options. In urban areas with high heat densities, district heat is often an economically (and ecologically) more attractive option, whereas micro cogeneration is more promising in areas with low heat densities. Currently, however, none of the micro cogeneration technologies assessed here would be economically viable without the regulatory support schemes applied in Germany. Also, the above calculations do not yet include the transaction costs which add to the conventional costs. These additional costs include search and evaluation costs, authorization and reporting demands, contract negotiations, and other legal aspects. Complicated rules and lack of access to information give rise to relatively high transactions costs and reduce the economic attractiveness of micro cogeneration plants (Meixner 2006). The operating schemes discussed here are a means to overcoming these barriers. Also, learning and experience processes, together with improvements in the institutional framework setting, may further reduce transaction costs over time. Furthermore, with state-of-the-art micro cogeneration technologies, a trade-off between environmental and economic performance must be acknowledged. In particular, small Stirling engines designed for single family houses have a rather good economic performance, but a relatively low electrical efficiency. Reaching the highest electrical and total efficiencies possible is crucial for achieving emission reductions at a reasonable cost. 4.2.6 Micro Cogeneration Scenarios Given the above analysis, what might the future of micro cogeneration look like? There are only few scenario analyses which explicitly include micro cogeneration, showing that it could indeed contribute to a sustainable future energy system (Voß and Fischer 2006). The potential depends on demand drivers such as population development, building stock and structure, heat demand, and the structure of heating systems. Most scenarios expect a future decrease in overall heat demand, thereby reducing the potential for micro cogeneration. As stated above, micro cogeneration also faces competing and ecologically attractive supply options such as larger CHP, biomass technologies, or solar heat and power. To give an example, in a sustainability scenario developed by Krewitt et al. (2004), some 3.3 GWel of micro cogeneration systems would be installed in Germany by the year 2050. This corresponds to one million systems, assuming an average system size of 3.3 kWel. If an increase to a

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yearly production rate of 50,000 systems within 10 years were assumed for the German market, this market size would be reached in 2030. Thus, by 2030 the share of micro cogeneration would be about 50 times larger than today. Assuming average full-load hours of 4,000 h/a, 3.3 GWel would correspond to an electricity production rate of 13 TWh/a. This represents almost 3% of the electricity demand expected for 2050 in the sustainability scenario (Table 4.1). Table 4.1 Installed power of decentralized cogeneration systems (15,000 detached homes have since been equipped with it. British energy supply company Powergen (E.ON UK) announces the installation of 80.000 Whisper Tech Stirling units in the UK by 2020. Senertec produces the 15,000th “Dachs” cogeneration system; PowerPlus sells its 2000th Ecopower. The Swiss company Sulzer announces that it is to stop the development of SOFC micro cogeneration devices. Sunmachine announces series production of the first wood pellet Stirling, but experiences a delay in market entry. Closure of Microgen and Solo Stirling, major technology developers. Whisper Tech announces a series production of Stirling engines in cooperation with MCC, a Spanish group of companies.

In the following decades, advances in power plant development and electricity transport put the development of local or micro generators to one side. It was not until the 1970s and early 1980s that the idea of decentralized structures (“small is beautiful”) – and thus the development of smaller generation units, and more specifically cogeneration – gathered speed again, and local utilities started setting up district heating grids. In 2004, with an installed capacity of 20.8 GW, cogeneration contributed 57 GWh or 9.3% to total electricity generation in Germany (Ziesing et al. 2006).

4.3 The Innovation Process of Micro Cogeneration

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Particular momentum for this phenomenon stems from the first “oil crisis” which put energy savings and thus the cogeneration of heat and electricity on the agenda. This fuelled the development of small-to-medium size cogeneration units, so called Blockheizkraftwerke (BHKW) suitable for building complexes such as several apartment buildings or industrial factories. Again, it was not until the mid 1990s that smaller – or micro – cogeneration units, designed for single houses, entered the market. Not only historically, but also recently, common to most micro cogeneration technologies is that the product itself was developed as a spin-off of, or at least in close collaboration with, other product groups. The reciprocating engine was developed for automotive purposes, and then for refrigerators or other applications. The Senertec “Dachs” engine, for instance, was developed by Fichtel & Sachs, originally an automotive supply company, for the purpose of an air-water heat pump. When this development was stopped, a group of engineers left Fichtel & Sachs and founded Senertec, a new company which developed the “Dachs” as micro cogeneration unit for use in households and buildings. Similar synergies between the development of consumer products and appliances and micro cogeneration applications occur for Stirling engines (e.g. chillers), steam engines and fuel cells (power trains for transport applications, auxiliary power units in automotive applications; emergency power supplies). 4.3.2 Market Setting and Situation to Date Micro cogeneration has to succeed in different sub-markets simultaneously, notably the electricity, gas, and heat market. Since the late 1990s, these markets have been changing rapidly. The structure of the energy market, which traditionally had a technical architecture based on large central power stations and an institutional structure based on regulated monopoly, has been undergoing a fundamental transformation – a situation which potentially offers new opportunities, but also new risks for distributed generation. In April 1998, the German electricity market was fully liberalized. Subsequently, due to a substantial decline in electricity prices, energy efficient cogeneration plants, as located in many cities and managed by local utilities, struggled to survive. As a consequence, a strong advocacy coalition around cogeneration3 formed and put pressure on policy. 3

The advocacy coalitions comprise, among a number of politicians and researchers, industry and local utility associations like AGFW, B.KWK, VKU, as well as BUND, an environmental NGO, and – for reasons of their personal contacts – the trade union ver.di. On the international level, COGEN Europe is a very active advocate.

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This resulted in the first (2000) and second (2002) CHP law, which obliges network operators to connect all CHP installations and to buy the electricity provided by these installations, and guarantees a remuneration for electricity fed into the grid as described above. In Germany, the market for micro cogeneration technologies has been characterized by a handful of small- and medium size manufacturers. Micro cogeneration represents a rather insignificant part of the German power generation portfolio. The number of installed units is in the range of 20,000, which is marginal given that there are almost 40 million households in Germany. Globally, the consultancy Delta Energy & Environment reports some 21,600 units (38 MW) being sold in 2006, which is 23% up on the number sold in 2005 (Delta 2007). While the market for reciprocating engines is in a phase of slow but steady growth, both the developers of Stirling and fuel cell machines are undergoing a phase of uncertainty and delay. In the case of fuel cells, this is mainly due to the unresolved technological and cost issues, which lead to further R&D being required prior to market entry. In the case of Stirling engines, this development came somewhat as a surprise. The closure of Microgen and Solo Stirling, both being leading European developers, are partly owing to the inability to find larger companies manufacturing their components at appropriate costs, but also due to an uncertainty of investors regarding the market volume of micro cogeneration. All in all, however, the trend seems generally positive. The number of small micro cogeneration units installed in Germany has been growing steadily. Since liberalization of the electricity market in 1998, there has been a steady increase in installed units in Germany, with 50% more plants being installed in 2004 compared to 2002. The Senertec “Dachs”, the most successful technology, produced 15,000 units, the “Ecopower” from Power Plus some 2000 units up to late 2006. Both technology producers have experienced increasing annual sales to date. In Fig. 4.6, the installation of new micro cogeneration plants (