Academic journal article International Issues & Slovak Foreign Policy Affairs

Promoting Renewables - Not Simply a Question of Money

Academic journal article International Issues & Slovak Foreign Policy Affairs

Promoting Renewables - Not Simply a Question of Money

Article excerpt

Renewable energy can be produced from a wide variety of sources including wind, sun, water, tides, geothermal heat and biomass. By using more renewables to meet its energy needs, a country lowers its dependence on imported fossil fuels and makes its energy production more sustainable, creating opportunities for industry and employment. There are a number of barriers and market failures that might impede the ability of new technologies, including renewables, to compete with established technologies. They are well described in theoretical approaches. The EU has one of the most ambitious frameworks for supporting renewable energy sources [RES], and it has led to one of the most impressive increases in RES capacity and production in recent years, but it also contributes to increases in final electricity prices impacting on the competitiveness of European companies and the affordability of energy for citizens. State support for renewable energy sources and the form it takes is a hotly debated issue. This article therefore analyzes theoretical approaches to regulation and regulatory risks and identifies how they can be used to promote renewable energy sources. The theories suggest that market and regulatory failures, along with entry barriers, often prevent new products and services from entering the market. This article will examine to what extent financial support is still needed and what other barriers against RES could be removed so that financial support can be decreased/removed. The article also assesses whether the Renewable Energy Directive and Slovak national legislation have led to the removal of these obstacles and whether the market for RES is now functioning.

Theoretical basis

Market failures

The market mechanism only works effectively in conditions of perfect competition. There are many factors that disrupt market functioning in real life. The result is the imperfect functioning of the price system with impacts on efficiency in the utilization of production factors. Market failures can be broadly divided into four groups: imperfect competition, positive and negative externalities, public goods and asymmetric information. Many public goods may be excessively used resulting in negative externalities affecting all users e.g. air pollution or traffic congestion. "Public goods problems are often closely related to the 'free-rider' problem, in which people not paying for the good may continue to access it."

Theories of regulation

Public interest theory explains regulation from viewpoints not restricted to imperfect competition and unbalanced market operation. For a number of reasons, markets may not exist for some goods for which the utility or the "willingness to pay" exceeds the production costs. Markets might not exist as a result of information problems and transaction costs in the case of external effects and public goods. In these cases, regulation can improve the allocative efficiency of the economy. The public interest can be further described as the best possible allocation of scarce resources for individual and collective goods.1

There are criticisms that question whether there are market failures and/or whether there is an effective corrective mechanism via the creation of an artificial institution.

In practice it appears that the market mechanism itself is often able to compensate for any inefficiency. In the second place, the original theory assumes that government regulation is effective and can be implemented without great cost. So precisely the transaction costs and information costs, which underlie market failure, are assumed to be absent in the case of government regulation.2,3

The Theory of Economic Regulation4 was published in 1971, introducing which the theory of regulation also known as the economic theory of regulation or the Chicago theory of government. Its

central proposition was that 'as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit'. …

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