The handsoff myth Government intervention only undermines the proper working of markets

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Markets are good at doing what they are designed to do. They cannot do what they are not designed to do. It is often said that they are good servants, but poor masters. Governments have a fundamental role, perhaps responsibility, to establish the market conditions.

Is email a good innovation? Not if you sell fax machines. Was the fax machine a good idea? Not if you sold stamps. In fact the fax machine was better than letters in various regards and email is better than a fax machine in all but a few ways. However, 'better' can be highly subjective.

While renewable energy sits in the realm of the better, its position there is not unequivocal. Renewable energy is better than conventional generation because the fuel is free, inexhaustible, less polluting, is generated indigenously, and because it creates more employment, among other reasons. However, it can be considered inferior to current conventional supplies and systems in that some renewable forms are less energy intensive, the sources are nature-dependent and not as controllable, and some are harvested on a smaller scale which may increase complexity.


Note: The pie chart for sales to the end of 2003 shows Japan and Germany have secured dominant positions in the global PV market, with the US early lead being lost due to lack of government market development intervention. Source: EPIA (2005)

Figure 2.4 Developing countries are exploiting an opportunity to take a leading manufacturing position in the solar technology from the outset, with India and China leapfrogging to the fore of the global PV industry

With renewable energy the notion of 'better' depends on the relative importance placed on the various advantages and disadvantages. For renewables many of the advantages sit within the social and environmental arena while the disadvantages sit in the purely business and industry sectors.

In a standard power market, must the powers that choose technologies consider the social or environmental impacts of pollution? No, the taxpayer and insurance companies pick up that tab. What about the effects of carbon emissions? No, this pollution is not geographically specific and its costs are deferred to future generations and governments. As for the benefits to the environment, employment and industrial development, these accrue at a national or regional level outside the power sector. Since it is not possible for Swiss Re or the government of Tuvalu to set energy pricing and environmental loading around the world, or even sue for damages, another bridge must be found.

Why would a sector adopt a technology if the benefits offered did not accrue to the businesses involved? It would be financial dereliction to do so. Therefore, for business to act, there must be benefits or penalties set up to create an incentive for change.

Governments aiming to harness the benefits of renewables must intervene because the power sector and energy markets lack ways to incorporate the benefits into their decision-making. The required intervention must create price signals that allow companies to reflect the external benefits in their balance sheets and thereafter leave markets to maximize efficient delivery.

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