ENSURING a successful energy transition is crucial as we try to limit temperature rise to no more than two degrees Celsius by the end of the century, as agreed to at the Paris Climate Summit in December 2015. It is also now clear that though more difficult, the need for an energy transition is far greater in large developing countries such as China and India. Since the energy demand in these countries is growing rapidly, a transition to low carbon and sustainable sources would not only help avoid a huge lock-in with expensive and high carbon energy infrastructure, but also demonstrate the possibility of a different path to others in the developing world who are looking for development and prosperity in this century.

Technology holds the key to enabling an energy transition. Technology development in renewable energy has already driven down the cost of wind turbines and solar PV panels to about one-tenth of what it was even a decade back. In countries such as Germany, US and China where these technologies are mass manufactured and installed, generation costs from these renewable energy sources are increasingly becoming competitive in comparison to the traditional coal and gas fired power plants. Electric vehicles are quietly changing people’s preference in many countries, and sales have grown exponentially in the last few years so much so that there is growing concern among oil producers about possible impacts on oil price, not in the distant future, but as soon as 2030. Finally, with improved energy storage and smart grids, the world is also steadily moving away from the old school of having robust, centralized energy systems to decentralized generation and networks to improve the security of power supply.

A common mistake made by most developing countries is to assume that acquisition of technology by itself would automatically lead to an energy transition. This may explain why they focus more on getting the technology rather than on modulating policy, regulatory systems and business environment that nurture the technology in the first place. This has also resulted in intensive discussions on technology transfers between the industrialized world and emerging countries such as China and India. Drawing upon experiences from China’s successes and difficulties in traversing this course could provide some useful insights to other developing countries.

To better understand this argument, we need to ask the following questions. Will technology transfer necessarily facilitate the development of improved technology capacity in the recipient country? Second, can improved technology by itself facilitate an energy transition?

The answer to the first question is a clear no. Technology transfer involves three different streams, each operating at different levels. The first relates to the transfer of equipment, service and design to be used, basically making available the technology to users. The second stream involves the transfer of skills and know-how for operation and maintenance, knowing why the technology operates the way it does. These two streams together help the recipient country to build new production capability. The third, and the most critical stream, involves acquiring the knowledge and expertise behind the technology, thereby enhancing the capacity of national innovation systems which is what will enable invention to take place and accumulate for further improvement.

Previous cases of technology transfer to China, India and countries like Malaysia have mostly focused on the first two streams or, sometimes, only on the first stream. However, without the third stream of technology transfer, a country is unlikely to see significant improvement in its technology capability. It is, however, insufficiently realized that for the third stream of technology transfer to be operational, a country needs both a vibrant culture of entrepreneurship and an enabling market environment, as well as requisite government support to be able to develop its own national innovation system.

 

Experience from China also suggests that it should be business and not the government which manages the innovation. Government interventions in industrial decisions and ill-designed subsidies that attempt to hasten the innovation process often result in poor outcomes. The process works much better when companies have a strong incentive to acquire certain technologies and invest resources of their own to absorb the technologies most suitable for the local market. Simultaneously, governments must realize that technology learning is a process that works better if it is bottom-up rather than top-down. In the technology transfer framework agreed to in Paris, a greater effort needs to be made to increase the engagement of local business so that they can drive the process instead of taking it as given.

The degree of preparedness in the market too needs to be given due consideration before the recipient governments make their request for low carbon technologies from the countries /firms which have them. There are also bound to be significant differences in requirements for national technological capacity when seeking transfer of sophisticated technologies such as gas turbines, which only five companies in the world possess, as against more readily available ones such as biomass and solar PV panels. It also requires very different conditions to facilitate such technology transfer, further adjusted and improved to suit a country’s specific conditions, and taking into account the needs of local partners. Thus, the answer to the second question too is a clear no.

 

As a global leader in renewable energy, China has benefited a lot from technology transfers from the industrialized countries by ensuring a combination of strong policy support by government, a large domestic market, and the presence of vibrant entrepreneurs investing in these energy technologies. Even then, it took more than a decade for China before the resources it invested in these sectors started to pay out. In the first decade of the new millennium when China acquired advanced wind and solar energy technologies and emerged as a world leader in renewable power installation there was no energy transition. If anything, the share of coal in China’s energy mix actually increased during that time.

Though wind technology got an early start in China, it did not become popular until the government started to promote it by providing special concessions which ensured a guaranteed return to developers for their investment. The government also pushed technology transfer through joint ventures by specifying a high local content requirement for wind farms supported by government subsidy. The most significant technology transfer of wind power actually took place when leading Chinese wind manufacturers went on to purchase second tier wind power companies in Europe after the economic crisis, as did the Indian leader, Suzlon. But acquisition of this technology by itself did not lead to much change, mainly because consumers who prefer green electricity realized that a large share of electricity generated from wind was not readily accessible to the power grid due to various conflicting interests in the system. This is why even though China has installed the world’s largest wind power generation capacity, the actual generation from wind power is about one-third less than the US. In 2015, the output of wind power generation was only as much as the generation from the giant Three Gorges Dam.

 

The story of the solar PV industry is similar to that of the wind sector. Initially taken up by local manufacturers, considerable effort has been expended both by the government and the business sector in making huge investments to absorb the technologies. Unlike in the case of wind turbines, which were not only regulated through licencing and technologies had to be sourced from international competitors, a lot of money was invested into the innovation of the solar PV technology as it is relatively simple. Technology transfer thus followed a different route to that of the wind industry, though in the end China was able to create a world class manufacturing capacity with advanced technology, despite a few setbacks during the trade disputes with the EU and USA.

In both the cases of wind and solar PV, the dominant players driving the technology capacity improvement were private investors, though policy support and certainty in development targets was helpful. However, when it comes to more sophisticated low carbon technologies such as high speed railway and third generation nuclear power, the technological and institutional barriers are so high that, at least in China, only state owned enterprises (SOEs) are interested in and in a position to pursue the technology. Yet, despite the huge influence and deep pockets of Chinese SOEs, success is far from guaranteed in the pursuit of technology for the reasons discussed above. Often one may need the support of a charismatic figure to break through the political and institutional barriers to facilitate the penetration of the new technology into a sluggish system.

 

What we have also seen in China, despite becoming a global leader, is that none of these technologies has necessarily led to an energy transition. Even as low carbon energy technologies have enjoyed a fast growth in China in the last decade, so too has coal, understandable at a time when China is desperate for increased energy and thus looking at all options. So if new technologies are growing, it is more because of the increased demand for energy and not because they are the favoured choice in the given market conditions and currently, renewable energy accounts for only a small slice of the market. Huge investments were poured in renewable energy based on the government promised subsidies, but over-reliance on subsidy in turn led to the creation of excess capacity in the industry as neither its domestic deployment nor overseas market could be guaranteed by the government. Thus investment in low carbon technology that was occasioned by government policies has now become a liability instead of serving as the foundation for further innovation, as fast changes in low carbon technology have made these appear as locked-in assets in last generation technologies.

The energy transition in China that we are now talking about only happened because of two unrelated developments. The first is the severe smog prevailing in Beijing and North China which became a matter of huge concern to the middle class and possibly resulted in a small-scale political crisis. The second was the slowing down of the economy, in part resulting from a serious overcapacity in heavy industries. Further, because of the environmental measures needed to improve the air quality, as also for addressing the slowing down of the economy, China has seen a reduction in coal consumption and a lowering of carbon emission on an annual basis for the first time in decades. The continuous increase in the use of renewable energy in this context may lead to a more noticeable change in China’s energy structure, with implications for its energy future.

 

So, what lessons does China offer for other developing countries? First, low carbon technology transfer comes with different streams, and the best way of acquiring the low carbon technology will depend on the nature of technology, the capacity of the recipient country and its business environment. Governments need to focus more on building a supportive environment for the technology and let business drive the process, instead of choosing for them.

Second, improvements in technological capability by itself cannot lead to a successful energy transition, especially when, at least so far, without government subsidies renewable energy is not a favoured choice. Developing countries seeking a low carbon energy transition must understand that critical for success is changing the operating conditions of the market so that it favours low carbon technology and embracing the transition early instead of delaying it until some external event makes it imperative.

Third, since the process of innovation cannot be rushed, the government needs to exercise patience. The key is to strengthen the foundations of a national innovation system in which innovation can emerge and flourish, rather than pick the winner by distorting the market. For example, levying a uniform carbon tax will both result in reducing carbon emissions and favour renewable energy over fossil fuels. Providing additional support (subsidies) for using a specific low carbon technology is unlikely to promote innovation.

Fourth, for a new technology to be mainstreamed, the greater need is to focus on the business model instead of the scale of its deployment. Large-scale use that is only made possible by public funding support risks a lock-in at the early stages of technology. This is likely to be costly especially when developments in low carbon technology are picking up pace. Nurturing a viable business model is a better way to create an enabling environment, which is far more important than merely meeting a prescribed target.

 

This is a good time for countries like India, Brazil, and other emerging economies to follow suit in the pursuit of low carbon energy transition, not only because the cost of low carbon technologies – from wind turbines to solar PV panel – have declined by more than 90 per cent over the last decade, but also because the world now knows more about and is willing to accept those technologies. There is also new thinking about decentralized energy and its contribution to the safety of the electricity system. Entrepreneurs, who are key if one is to ratchet up the development of these technologies, are waiting eagerly for policy support for the market for new low carbon technology.