Last week the UK Energy Research Council produced a big report on the route to a demonstration of carbon capture and storage (coordinated by my Sussex colleague Jim Watson), informed by past experience of stimulating innovation in similar types of large scale energy engineering technology. In theory, the UK has a great combination of factors for trialling CCS, including a good energy engineering skill base, an offshore oil industry, and most crucially, big depleted oil and gas fields near at hand. Few other European countries have all these together. Yet so far progress has been painfully slow. It took the current and previous governments 5 years to put in place a competition for an end-to-end demo project that first attracted only one serious entrant and then had to be abandoned. A new start has now been made, but the UK ERC report argues that the way ahead will be difficult.
This is for a number of reasons, including the basic problem of cost (although £1-2 billion for a technology that may save the planet and create a major industry for the UK doesn’t seem that much) and public acceptance. But as I am currently reading Catherine Mitchell’s excellent book on the Political Economy of Sustainable Energy, another dimension of the problem also strikes me.
Catherine’s analysis of the UK energy system, and the underlying reason for its inability to handle system change, is that it is managed within a “regulatory state” paradigm. She takes this concept from Michael Moran, who developed it to describe the way the state developed under Thatcherism and following privatisation (a process also picked up on by Dieter Helm, as I blogged on recently). the point about Britain’s regulatory state is that it has come to manage sectors of the economy like energy through arms length regulation. This has worked reasonably well for containing costs through sweating assets, but less well for maintaining investment and absolutely not well for innovation, especially in areas (like CCS, but also including smart grids or even offshore wind) where costs are not really known by the private sector itself.
To be more effective on an issue like CCS, requiring coordination and working more closely with the private sector to discover costs, a different kind of state is required, following a different type of policy. Such an approach has been described by Harvard economist Dani Rodrik, based on his observation of successful industrial policy (which he argues is simply a version of innovation policy) around the world. As he puts it:
“…the right way of thinking about industrial policy is as a discovery process – one where firms and governments learn about underlying costs and opportunities and engage in strategic coordination. The traditional arguments against industrial policy lose much of their force when we view industrial policy in these terms. For example, the typical riposte about government’s inability to pick winners becomes irrelevant. yes, the government has imperfect information, but…so does the private sector. It is the information externalities generated by ignorance in the private sector that creates a useful public role-even when the public sector has worse information than the private sector.”
Crucially, this kind of problem requires a different relationship between public and private sectors:
“Similarly, the idea that governments need to keep private firms at arm’s length to minimize corruption and rent-seeking gets turned on its head. Yes, the government needs to maintain its autonomy from private interests. But it can elicit useful information from the private sector only when it is engaged in an ongoing relationship with it.”
This, of course, is precisely what the regulatory state model can’t do, and is why it has found it so hard to generate innovation in the energy sector (where the private sector does not do on its own). This is true not only in CCS but also in smart grids, where a similar arm’s-length competition (the Low Carbon Network Fund) has been awkwardly placed within a regulator (Ofgem) whose historical remit and culture has been about keeping prices low, not stimulating innovation.
This is not to say that a regulatory state might not get there in the end, more to say that the sense in which the UK’s institutions governing energy are not aligned for innovation goes very deep. Which is just the theme of Mitchell’s book.