Chapter 1 - China‟s Transition to Clean Energy
1.5. Theoretical Background – Evolutionary Economics
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1.4.3. Integration of Systems Into the Energy Markets
High penetration of PV in the grids – With small amounts of PV connected to the grid, most of the electricity produced is consumed at the site or in the immediate neighborhood. Studies show that PV could account for up to 20% of supply without affecting the grid, after which broad technical development will have to be made. Also, since PV depends on the sun it is variable and needs to be balanced by other sources of power. Although irradiation prediction is quite accurate and much easier than wind forecasts it still remains a challenge, especially on a small scale.
From centralized to decentralized energy generation – Many countries are now starting an
evolutionary process of moving from a mainly centralized electricity generation to a decentralized form. However as electricity grid operators need to rethink how to guarantee the quality of
electricity delivery some areas need to be further improved and developed. The major areas concerned are peak load shaving, global management of the super grid to better capitalize on the natural resources of greater areas, transition to more efficient smart grids, storage and demand management.
1.5. Theoretical Background – Evolutionary Economics
As mentioned above, transition to alternative sources of energy consumption cannot be achieved over night and requires comprehensive changes within a variety of elements within the industry and market. This paper will approach the issue of China‟s transition to PV electricity usage from the perspective of evolutionary economics. The significance of the usage of the word „transition‟ as in contrast to „change‟ is that this term links up with the notion of sustainable development and shifts the attention to the process itself as a more concrete step.
Transitions can be described as either spontaneous or goal oriented as well as by their degree of complexity. Spontaneous transition all hold a major degree of complexity and include the invention and use of fire, the rise of agriculture and the industrial revolution. These transitions have not been planned in advance and have been impossible to predict. Intermediate kinds of transition would be electrification and transitions in transport, from horse and wagon to cars for example. The green revolution is a considered a minor transition, the only kind of transitions that are goal oriented. The strive for a minor transition compensates for major transitions being out of the reach of public regulation by man.
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The term evolutionary economics was first used by Thorstein Veblen in 1898, but it was Joseph Schumpter that became the first influential of evolutionary economics. Schumpeter showed a great interest in the dynamics of economics and considered qualitative economic and technical change in a wider context of social change. He used the term creative destruction to describe a process in which revolutionary forces from within the economy destroy old processes and create new ones.
This process of change follows a major invention that encourages the formation of clusters of derived innovation.
In 1982 Richard Nelson and Sidney Winter have published “An Evolutionary theory of Economic change”, which has become the most influential text dealing with evolutionary transition in economics. This publication deploys the three core Darwinian principles, variety, inheritance and selection, which make the building blocks of their theory. In this text Nelson and winter claim that as changes continuously occurs in technology and routines, the mechanisms that provide these three elements need to be identified and structured.
Based on this and other works in the field of evolutionary economics, Jeroen van den Bergh and Frans Oosterhuis from the institute of environmental studies of the Free University in the
Netherlands have introduced six core concepts of evolutionary economics. These concepts are Bounded Rationality, Diversity, Innovation, Selection, Path Dependence and Lock In and Co-Evolution. These six concepts will be used in this paper as guidelines in assessing the process of structural change taking place in China‟s PV industry and market.
An overview of each concept will be provided first: (van den Bergh and Oosterhuis, 2008)
Bounded Rationality
Bounded rationality replaces the traditional neoclassical assumption of rational and optimizing behavior. This implies that agents are not fully informed and will not include all possibilities in their considerations for performing any behavioral or economic act. Gathering complete set of information is constrained by time and energy and therefore agents are inclined to rely on routines, heuristics and imitation. A satisfactory decision is often as good as or better than a perfect decision in terms of costs related to achieving a solution. Bounded rationality therefore takes the form of routines, habits, imitation and limited time horizon. As will be shown below, in the capital intensive market of PV the short time horizon of investors plays a major role. PV projects‟ financial
performance is highly dependent on the discount rates or payback period applied by investors.
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Diversity or heterogeneity in strategies of an economic agent is a consequence of bounded rationality. It is a central concept in the evolutionary framework as it is regarded as a measure for the flexibility and evolutionary potential of an economic system (also referred to as fitness).
Diversity relates to economic strategies, technologies, knowledge, agents and institutions. It can be categorized by the number of options on a portfolio, the evenness of representation of the different options and the degree to which the options differ one from the other. Diversity is high in the PV electricity world as companies dealing with PV technology display a large variety in size and type of industry. A range of technologies exist and within a wide range of applicative areas.
Innovation
Innovation and selection are two concepts that influence diversity directly. Innovation implies an increase in opportunities for creative combinations that contribute to the system‟s survival and fitness. Innovation is often the result of serendipity, the combination of insight and expertise with chance. Knowledge and systematic search are the two methods in which the chances for innovative combinations can occur. Incremental innovation refers to improving the performance of existing technologies whereas radical innovation usually involves the combination of very different concepts and technologies. Serendipity, cross fertilization and niche markets have played an important role in the development of PV so far, although the lack of a coherent future perspective on the role of PV technology has been a restraining factor up until the second half of the last decade.
Selection
Selection is a process that reduces diversity. It refers to the survival and reproduction of successful agents or strategies in a system. Selection environments are complex, with technological, organizational, economic and institutional dimensions. It is difficult to plan and forecast transition in such an environment, especially since each kind of economic evolution has its own unique environment. PV is still an expensive technology, as mentioned above, therefore is dependent on subsidies and other preferential policy measures. As will be shown below, governmental policies play a crucial role in the selection process of PV.
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17 Path Dependence and Lock-in
Repeated selections causes changes in the population systems. This can occur because of scale advantages, imitation or bandwagon demand side effects, technological interrelatedness or
complementarities etc. In competition against technologies whoever gets a larger market share first will have an advantage and could grow relatively quicker. Increasing returns can give rise to the dominance of a particular technological or economic regime that does not let other (efficient and inefficient) technologies arise – these dominant technologies are called a lock-in. Other systems outside the lock-in look irregular and lack repetition, and therefore are considered as path dependent - adaptations need to be made before they are cumulated. Since technology tends to follow
irreversible pathways it requires a major effort to shift away from lock-ins and promote path dependence technologies. PV systems hardly benefit from economies of scale and are suitable for systems of decentralized electricity supply. It is a great challenge to fit the grid system for this kind of technology.
Co-evolution
This concept refers to the mutual influence and interference between two or more systems or populations. The pressure exerted by one system over the other leads to related evolutionary developments. Co-Evolution is thus a particular concept of dynamic interaction between two populations with internal diversity. Solar PV technology, having an intermittent character due to fluctuations in solar energy influx, will have implications for other components of the energy system such as energy storage devices. Solar PV technology also requires development in other BOS components that are technologies shared with other fields such as inverters and smart grid.
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Figure 1.4 A Schematic Representation of the Evolutionary Economy
Source: Jeroen van den Bergh and Frans Oosterhuis, 2008. An Evolutionary-Economic Analysis of Energy Transitions, in Managing the Transition to renewable Energy: Theory and Practice from Local, Regional and Macro Perspectives. Pg. 149-173. Ed. By Jeroen C.J.M. van den Bergh and Frank R. Bruinsma. (Great Britain:
MPG Books LTD)