In their new book Electricity Transition(s), Jean-Pierre Hansen and Jacques Percebois lay out a historical panorama of electricity in Europe. Their analysis criticizes the trials and errors of market advocates, although without being tinged with nostalgia of the past era of monopolies. The characteristics specific to the power sector create a complex articulation between state interventionism and free market functioning. Their refreshing and thorough analysis helps inform and underline conditions for a successful low-carbon transition of the economy.
Three questions to Jacques Percebois, Scientific Director of the Climate Economics Chair:
Why do market and interventionism negatively interact in the power sector?
Electricity is both a strategic good and a public service. A share of the electricity chain, that is kWh generation and supply, can well be left to the market and thus governed by market competition. Transportation and distribution, however, are ‘natural monopolies’ – for instance, building and running grids in parallel would be costly. Additionally, power investments, both at plant and network levels, need to be scheduled well in advance and have long lifespans. Sufficient guarantees on their long-term profitability are thus required, which explains why market incentives and state interventionism coexist. Market liberalization was initiated 20 years ago and changed the playing field. The balance between market and interventionism, however, is not satisfactory: we expected too much from the market while distorting its natural functioning. Indeed, short-term market prices do not send the right signals to investors and excessive state interventions by way of fixed prices or too generous subsidies have distorted market incentives. The results, therefore, are mixed.
Will renewables deployment and digitalization make a difference?
The massive development of renewables (wind and especially solar powers) will not only affect the structure of power generation; crucially, it will also alter the structure of the entire value chain. The rise of both collective and individual self-production and self-consumption (via blockchains) will allow the emergence of small production and distribution networks at a local scale that could be closed systems, that is without connections to a nation-wide grid. This calls into question the future role of large utilities (EDF, Engie, Eon, etc.) and network operators (RTE, Enedis, etc.). The digital revolution will also make possible a better power demand management at the level of final consumers – for instance, load management. The great leap forward resides in coupling renewables, whose unitary costs are decreasing, with power storage, whose performances are increasing. This should encourage digital firms (GAFA, that is Google, Amazon, Facebook and Apple) to increase their focus on power-related services for final consumers.
Has your involvement at the Climate Economics Chair influenced your perspectives for the future of the power sector?
Broadly speaking, the Chair’s contributions revolve around climate change policies and notably the impacts associated with carbon emissions. The increasing role of the carbon price on energy-related choices will inevitably affect the power sector, its production of course, but not only, and across the entire chain, that is from the grid level to the final consumers. We are taking the direction of an increasingly ‘decarbonized, decentralized and digitalized power’. The internalization of a carbon cost in the form of a carbon price or tax will change the electricity mix by penalizing coal as well as hydrocarbons (gas and oil). Let us bear in mind that, at the global scale, 40 percent of electricity is produced from coal, which accounts for the fact that power is responsible for 40 percent of CO2 emissions. A coal-free future necessitates a high carbon price.