- As governments around the world identify how to cost-effectively align their stimulus packages with their energy security and climate goals, here are 5 key lessons from 2008.
- From investing in breakout technologies like hydrogen electrolysers, to focusing on smaller projects that are limited by financial support.
Governments around the world are considering massive stimulus packages to try reboot their economies after the worst of the Covid-19 pandemic has passed. These huge spending programmes are likely to be once-in-a-generation in scale and will shape countries’ infrastructure for decades to come.
As the IEA has highlighted, the Covid-19 crisis is having a major impact across the energy sector and threatens to undermine efforts to accelerate clean energy transitions. Governments can counter this risk and achieve both short-term economic gains and long-term benefits by making clean energy part of their stimulus plans. In an earlier article, I highlighted key areas for action on this front.
Time is of the essence: this is the biggest economic collapse since the Great Depression. Leaders are eager to move as quickly as public health constraints allow to start repairing the staggering damage suffered by millions of workers and businesses. Policy makers are having to make enormously consequential decisions in very short order.
The IEA is already helping governments around the world identify how to cost-effectively align their stimulus packages with their energy security and climate goals. As we do so, I thought it would be useful to highlight some of the key lessons we can draw from the last wave of major government stimulus plans, which followed the global financial crisis in late 2008.
From an economic standpoint, the extra spending on clean energy following the 2008 crisis contributed positively to the broader recovery, especially through efficiency programs, which bolstered the badly hit construction sector. Government money also helped spur the development of key low-carbon technologies, unlocking the spectacular growth in wind and solar PV that we have witnessed over the past decade. Meanwhile, stimulus-funded projects to improve gas and electricity networks enhanced the resilience of energy systems.
From an emissions point of view, however, the recovery from the 2008 financial crisis was energy and carbon intensive. Although carbon dioxide (CO2) emissions declined by 400 million tonnes in 2009, they rebounded by 1.7 billion tonnes in 2010, the sharpest upswing in history, driven mainly by developing Asia. A pandemic-driven drop in emissions is almost certain this year, but would be nothing to celebrate. We need to learn from what happened in 2009 and 2010 to make smart policy decisions that can put emissions into structural decline this decade.
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Here are five key lessons:
1) Build on what you already have – and think big
Clean energy investment has stood at around 1% of GDP in most major economies in recent years, and it was much lower than that in 2009. Back then, governments took some strong steps in certain areas. At one stage in 2010, the US Department of Energy was providing as much project financing for renewables as the 10 biggest private green investment funds combined. Germany scaled up energy efficiency financing to several times the pre-crisis level.
Given the size of today’s economic shock, the clean energy investment push will need to be done on a major scale. Policies that have an existing legal and institutional structure are the easiest to scale up. The two key measures that mobilised renewable investment in Europe and the United States – namely, feed-in tariffs and production tax credits – were both initially introduced well before the financial crisis. But their scope was significantly expanded during the crisis management period.
Action is also required to address financial weakness in key parts of the energy industry. After the 2008 crisis, a combination of weak demand and low prices put a serious strain on the balance sheets of energy utilities and key manufacturers. Stimulus programmes helped address this by pushing significant funding into areas where essential corporate investors were too financially weak to fulfil their normal role. This included wind and smart grid projects in the United States, and offshore wind projects and natural gas and electricity interconnections in Europe. The financial weakness already caused by the Covid-19 crisis in the utility sector justifies a similarly proactive financial stance this time around.
2) Choose technologies that are ready for the big time
Wind power and solar PV were at a critical stage in 2008-2009: the technologies were well understood, but manufacturing was still small scale and costs were high. Although not all projects in these areas were successful, a positive feedback loop was triggered through stimulus-fuelled investment that helped drive cost declines as the technologies progressed rapidly. This then made investment in wind and solar desirable in major new markets, such as India, where the technologies’ high original costs would have been unaffordable.
Today, wind and solar are cost-competitive in large parts of the global energy system in their own right, but their continued growth still needs supportive policy frameworks, especially in the case of offshore wind, which is now ready for massive investment. Accelerating wind and solar PV can be pillars of post-pandemic stimulus efforts, making a vital contribution to efforts to accelerate clean energy transitions. Meanwhile, two important emerging technologies for clean energy progress – lithium-ion batteries and hydrogen electrolysers – are at the stage in their development where wind and solar were in 2008-2009. They have the potential to be the coming decade’s breakout technologies.
Their major cost reductions in wind and solar could arguably have been achieved at less expense if a different policy design had been adopted. In a number of countries, particularly in Europe, policies were slow to follow the radical decline of solar PV costs. This triggered unsustainable “solar bubbles” that resulted in windfall gains for certain investors and put a strain on prices for consumers. The remarkable success of wind and solar does not guarantee that every single technology backed by stimulus packages will follow the same path. There were also cases where the stimulus attempt was too early and technologies failed to develop as expected.
3) Be wary of large, highly complex projects
In both Europe and the United States, substantial efforts were made to invest stimulus funds in very large, complex engineering projects, often with difficult licencing and social acceptance dimensions. In many cases, the results were disappointing. The lessons from these past experiences are being integrated into some of the approaches to scaling up technologies today. For example, support for carbon capture, utilisation and storage needs to focus on the infrastructure required for transporting CO2 and on high-density sources such as the petrochemical industry, whose activity – and emissions – have not been hit hard by the current crisis.
Given the economic situation in 2008-2009, policymakers had a preference for “shovel ready” projects that could rapidly start construction, absorb funding and stimulate the economy. Unavoidably, this generated debate about whether stimulus funding was going to projects that would have happened anyway. This concern can be overstated – the bigger risk is that investment doesn’t happen at all. One way forward is for policymakers to focus on projects that are relatively simple to implement but where access to financing is constrained. Energy efficiency projects in the residential and municipal sectors are a good example. A high number of standardised, small efficiency projects – such as retrofitting municipal buildings and replacing electric engines used by small businesses – are less likely to get bogged down than a single large and complex development.
4) Make sure your industrial policy plays to your strengths
Practically all the environmentally focused stimulus programmes in 2009 aimed to foster the emergence of manufacturing clusters for clean energy equipment. The competitive global market for such equipment played a major role in driving down the costs of clean energy technologies, with some clusters benefitting significantly from comparative advantages and technology spillovers. But these intertwined manufacturing hubs didn’t always emerge as policy makers intended. In Europe, for example, very similar deployment policies for wind and solar PV led to the rise of a competitive, export-orientated wind energy cluster, particularly in offshore wind – but not of a solar panels equivalent. Wind turbines are based on mechanical engineering in which European countries, especially Germany, have a comparative advantage. But solar panels are an extension of semiconductor electronics, an area where China already had a competitive edge.
5) Consider the bigger picture
By distributing funds on a project-specific basis following the 2008 crisis, policy makers triggered an intense competition for resources that required a delicate balancing of regional interests. The interpretation of those regional interests was often too narrow and focused only on the geographical location. This neglects the broad benefits of energy infrastructure development for energy security and the achievement of wider sustainability objectives – and the economic benefits of investment. An unexpected upside from stimulus-funded infrastructure in Europe came years later during the Russia-Ukraine conflict. Projects that were designed to help EU energy security were used to maintain energy security in Ukraine. The same “big picture” approach would make sense today when assessing the benefits of a direct-current cable system in Europe supporting both cross-border interconnection and offshore wind.
Also, if an industry needs bailouts, this gives governments the opportunity to attach conditions linked to its broader policy objectives. A good example was the approach of the US government in tightening car efficiency standards as it bailed out the auto industry in 2009.
Why this time is different
Even when time is short, policy makers can benefit from looking back before they move forwards. Experiences from a decade ago offer some vital policy insights. As the global authority on energy, the IEA is looking closely at responses to previous crises to gather insights that still have relevance today – what worked well before, what didn’t, and why. This helps inform the expert advice we are providing to multiple governments that have requested our input as they craft their recovery plans.
Yet the current situation does have some key differences from the one faced by governments in 2008 and 2009. The economic crisis is far more severe, and the decarbonisation challenge is even more urgent. Energy technologies have also moved on: some vital components for building a clean energy future are more mature and ready to scale up.
Once the immediate health crisis is behind us, there is no more important task facing the energy world than to plan for a recovery that achieves maximum economic impact, creates large numbers of jobs and results in much cleaner and more resilient energy systems. We should keep in mind the lessons of the past as we tackle this momentous challenge.