f eb rua r y 2011

BIO-ENERGY AND PHILIPPINE AGRICULTURE

Getting policy and economics to talk

Ricardo G. Barcelona*King´s College, University of London

and

Liborio S CabanillaCollege of Economics and ManagementUniversity of the Philippines Los Baños

We posit in this three-paper series that bio-energy, food, and trade are complementary opportunities, and that innovative firm strategies and market-based policy actions can be transformational. In this first paper we examine how false dichotomies of food vs fuel arise from flawed energy premises, relying on a policy fiat that could result in a demand-investment paradox. To understand this paradox, we focus on the agribusiness value chain, using lessons from energy transitions, to inform firms’ strategic options.

Bio-energy fuels and renewable power policy predicates promotion of achieving energy autarky by replacing fossil fuels (Avery, 2006 and Ponti and Gutierrez, 2009),

reducing carbon dioxide (CO2) emissions (IPCC, 2007); and creating equitable access to income opportunities (RA 9513, RA 9367, RA 8749, and Zhang et al., 2010). These premises lead policy to prefer administrative measures and interventions instead of market mechanisms as ways to effect deployment. However, outcomes are often diametrically opposed to policy’s “good intentions,” while interventions frequently engender failure among firms.

*Corresponding author:: RBarcelona@iese.edu or Ricardo.barcelona@kcl.ac.uk

INDUSTRY UPDATES AND ANALYSES FOR SOUND BUS INESS PLANN ING

A publication of the School of Economics, University of Asia & the Pacific, Philippines

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In this series of three papers, we examine (a) how such premises come to influence policy; (b) its impact on free market economic incentives or penalties on investments; and (c) how alternate framing could reconcile food, fuel and trade as complementary opportunities. Specifically, we focus on examining (1) how flawed policy premises result from resource economics fallacies, causing a (2) demand-investment paradox, and (3) what lessons can be learned, through strategic diagnosis, from energy transitions. This first paper serves as a conceptual foundation for tackling economic and policy issues. Its effects on firms’ strategies will be taken up in the two papers that follow.

Policy and economics refer to specific levers of wealth creation, or the accumulation of resources that serve to optimize utility under a functional free market. Policy encompasses a state´s “power to prohibit or compel, to take or give money” that “selectively benefits or hurts a vast number of industries” (Stigler, 1971). For energy, administrative measures such as subsidies, price support, fiscal incentives and quantitative targets (Stern, 2006) form the bases of programmatic intervention to allo-cate resources. Policy is formulated through some form of compro-mise or consensus that articulates ideals (i.e., rural diversification and development). In the process, certainty in resource access through a predict-able legal framework is intended through a state´s coercive actions or generosity.

In contrast, econom-ics operates within the realm of optimizing utility (i.e., returns or value) under uncertainty, while contending with oppor-tunities for arbitrage that policy inefficiencies may pro-vide. As a consequence—part of the task of optimizing utility under free markets—interest groups that oper-ate in both policy and economic realms may attempt to shape regulation and influence the use of “government´s coercive powers in a way that is beneficial to them” (Stigler, 1971). Given the intertwining influences of policy and economics, Friedman´s (1962) contention resonates when he argued that freedom in economic ar-

Source: Adapted and modified from Doornbosch & Steenlik, 2007 and Ponti and Gutierrez, 2009

Waste

Advance Biofuels Technology

Current Biofuels Technology

Pellets or methane Biogas or power

Biomass

Food Sugar / Starch Processing Food products

Milling and hydrolysis

Ethanol - Fermentation and

Lignocellusoic

Fats / Oil

Starch / Sugar

Gasification

Pre-treatment

Diesel - Fischer -Tropsch synthesis

Processing or extraction

Biodiesel - Fatty acids transesterification

Land Cultivation Harvest

Figure 1 • Agriculture to food and bio-energy value chain

Source: Adapted and modified from Doornbosch & Steenlik, 2007 and Ponti and Gutierrez, 2009

sugar

rangements is an end in itself, while serving as a means to achieve political freedom. Hence, when policy fails to speak to economics (and vice versa), pseudo dilemmas such as “food vs fuel” become the central focus of policy formulation.

In this first paper, we examine the dynamics of the agribusiness value chain, set out policy experiences and show how resource economics fallacies present pseudo dilemmas, reframe the debate in the context of technology diffusion and energy transitions, and suggest a strategic view on energy’s long game and how firms could profit.

The agribusiness value chain: Missing food-energy linkages?Traditionally, agriculture is associated with food production and food processing. Under this limited perspective, agribusiness—which is concerned with food cultivation, transformation and logistics to market—is viewed only in terms of food sufficiency, employment and income. Almost by neglect, agriculture’s role in energy supply is ignored.

Agribusiness’ role in bio-energy derives from agriculture as a source of feedstock from biological products and its residues (i.e., biomass) that are naturally replenishing. Indirectly, wind, hydro, and geothermal resources may be harnessed depending on location (i.e., wind and water flows) and resource endowment (i.e., geothermal). Figure 1 represents an overview of the how agriculture transforms inputs such as land, seeds, and fertilizer into outputs that supply food and energy needs. Aside from these outputs, waste from plants,

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animals,and humans form part of the ecosystem of agriculture that is broadly similar globally.

Let us focus on biomass and waste as inputs to the production of bio-energy.

1. Sugarcane juice and molasses are primary feedstock for alcohol production. Food-grade alcohol is used for spirits and pharmaceutical and industrial applications. Ethanol for biofuels (i.e., alcogas) is distilled and purified to fuel grade.

2. Starch is produced from various root crops such as sweet potato and cassava. Rice is excluded as a viable raw material for starch as it is a staple in the Filipino diet.

3. Fats and vegetable oil produce use coconut as the primary raw material with wide applications in food and pharmaceuticals, with bio-diesel seen as a competing use.

4. Agricultural and animal waste such as sugarcane stalks, leaves, and coconut fronds are among the few examples of agricultural waste that are left unutilized post-harvest in most Philippine farms. Agricultural wastes are burned to clear the farm in preparation for the next planting and cultivation period.

Animal and human waste are used in small-scale applications to produce methane gas. On an industrial scale, animal waste from piggeries are converted into organic fertilizer as substitutes for imported chemical (i.e., petroleum-based) fertilizers. To a limited extent, methane gas is used for cooking and small-scale distributed power generation.

Under existing farming practices, agriculture as a food-focused venture is deemed as offering scope for substantial profit expansion. However, reality is far from fully reconciling agriculture’s marginal state, and how these bio-energy opportunities are hidden in plain sight of agribusiness.

Policy’s good intentions—bio-energy’s experienceSubsidies and price support are seen as sine qua non to bio-energy and renewable power’s diffusion. For this reason, policy focuses its programmatic intervention on discrete objectives, with a preference for an activist approach that converts government into capitalist (i.e., subsidies and price support) and regulator (i.e., pricing and quantum targets). However, reliance on public assistance distorts the bases of rewards for innovations or penalties for inefficiency. As a result, rent seeking is encouraged by maximizing returns from “socialized” capital at minimum private risks (i.e., bankruptcy or losses). Paradoxically, such an unholy alliance between policy and economics often results in bankrupt industries.

Overly reliant on subsidies, inefficiency is shielded from competitive pressures, while eliminating incentives for innovation. In the process, as inefficiency results in mounting losses, increasing subsidies are needed to keep afloat. When subsidies are withdrawn, returns collapse as a precursor to eventual bankruptcies.

To perpetuate this rent seeking, the predominant model pursues large-scale deployment of bio-energy and renewable energy programs. This usually involves (a) capital subsidies to encourage technology adaptation; (b) land allocation for cultivation to secure access to feedstock and sites; or (c) quotas to ensure pre-established demand levels. With the focus on replacing fossil fuel with bio-energy substitutes, agro-based energy programs tend to emphasize liquid biofuels.

Extending this logic, the issue of food vs fuel emerges. Large-scale deployment requires access to large tracts of land, implying a trade-off between food production and agro-energy feedstock cultivation (Holt-Gimenez and Shattuck, 2009). For this reason, developed countries such as the United States and those in Europe, constrained by land availability and costs, look to developing countries as logical production bases. (Sicard, 2009; and Ponti and Gutierrez, 2009). Under this “symbiotic” co-existence, capital flows to countries with supportive governments and legal structures. Trade facilitates movement of feedstock and fuel to monetize agricultural produce.

This economic relationship is not novel. During colonial and neo-colonial eras, agribusiness already operated under this model for commodities supplies. Relative costs and efficiency drove the allocation of resources, with the government´s coercive force complementing market mechanisms to balance supply and demand.

Policy attention, however, is directed at large-scale capital investments such as biofuels for liquid fuels and wind farms for power generation. In contrast, economics seeks the flexibility to invest in aspects of bio-energy or chooses to profit from the portfolio benefits within the agribusiness value chain that combines food, energy, and utilizing waste as fuels. Inadvertently, with policy earmarking support to specific technologies or segments, a free market’s ability to allocate capital and resources could be impaired. In effect, by taking on a role of capitalist (i.e., subsidies provider) and regulator (i.e., in setting quotas), policy “socializes” and guarantees returns at minimal private risks.

False dichotomies and energy autarky Twenty-first century “Salvationist” ethos is faced with a contradictory

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stance. By subsuming economic mechanisms of rewards or penalties to secure humanity’s future energy needs, subsidies are justified as “social” costs. In so doing, subsidies and price support, and any form of public support, become sine qua non to bio-energy and renewable energy diffusion.

While there are success stories, generous public support delivers mixed results on deployment. Framing policy as the means to achieve energy autarky—with biofuels and renewable power chosen to replace fossil fuels as beneficiaries of financial support—spawns a number of false dichotomies: food vs fuel (Holt-Gimenez, 2008); industrial North´s capitalist benefits vs global South´s welfare gains1 (Sicard, 2009); and environmental catastrophe vs human salvation (IPCC, 2007). Consequently, bio-energy and renewable power funding, increasingly seen as “social investments” (Stern, 2006), are justified where economic mechanics of rewards or penalties prevalent in free markets (Nordhaus, 2007) are subsumed under collective actions working for a nebulous “common good.”

CO2 emissions reduction (i.e., to limit to +/- 2 °C temperature changes by 2050) has become the “holy grail” upon which environmental policy is predicated (IPCC, 2006). Hence, any means to reduce CO2 emissions is seen as a social good that transcends economic constraints. This is true until budgetary constraints force policy to reconsider its stance on subsidies and financial support. As a consequence, policy´s activist stance as social investor and regulator, with finite funding and shifting priorities, could only result in a volatile investment environment. Paradoxically, an environment of greater uncertainty results given that weakly enforced policy heightens regulatory risks that economics tend to penalize.

Under conditions of uncertainty, policy´s administrative measures are too limited to deal with economics´ dynamic environment of rapidly changing technology, shifting competitive advantages, and geo-politics (Amram and Kulatilaka, 2009). Hence, in deciding to subsidize a technology, policy chooses a “winner” a priori by extrapolating status quo to deal with a potentially different future state. Secure in its returns expectations, innovation and portfolio risks-returns choices take a back seat, while placing rent-seeking strategies firmly in the driver’s seat.

1 “Industrial North” refers to the United States, European Union, and developed economies seeking to deploy capital to developing countries in Asia, Latin America and Africa to promote agriculture and bio-energy.

Neo-Malthusians and the environment The enthusiasm for subsidies and price support stems from two policy beliefs: First, Peak Oil’s alarm bells on energy supply in security; second, neo-Malthusian fears that humanity is running out of everything from food to energy. Such fears underpin perceived competition for resources, where agribusiness is given a stark choice of achieving autarky in food or energy. Consequently, policy becomes an exercise in forceful allocation of scarce resources under inherently uncertain outcomes. In the process, subsidies replace prices and trade as resource allocating mechanisms.

Proposition 1. Autarky as policy objective derives from pseudo food vs fuel dilemmas. Seen as an agribusiness portfolio, fuel, food, and trade are complementary opportunities.The rise of the Green Agenda is ascribed by Barcelona (2009) to the United Nations´ push for actions to mitigate the effects of climate change. Hence, the UN Framework for Climate Change (UNFCC) in 1992 crystallizes the global official consensus that sees “anthropogenic influence as leading to catastrophic climate change.” These views are reinforced by the “bias milieu of global Salvationism”2 (Henderson, 2008) that embodies Pachauri´s work (IPCC, 2007) at the UN Intergovernmental Panel on Climate Change (IPCC). Official consensus prescribes collective actions and detailed interventions by governments. Thus, the Kyoto Protocol (UN, 1998) was ratified, with the United States reluctantly joining the official consensus by introducing ACELA (2009), a comprehensive legislation on clean energy. The failure to produce a successor framework to the Kyoto Protocol at the Copenhagen Climate Change Conference in December 2009 is followed by similarly inconclusive outcomes at CanCun, Mexico in 2010, and Durban, South Africa in 2011. Some observers see this failure as offering business with new impetus to move the climate change agenda from its Salvationist bias into a framework for creating economic opportunities (Barcelona, 2010).

Climate change concerns are premised on IPCC´s scientific certainty of catastrophic consequences. The disclosures of errors in methodology, data manipulation and bias (Mendick, 2009 and Hickman and Randelson, 2009, among others), and direct challenges (Wojick, 2001; Monckton, 2009; Murray, 2008; Laframboise, 2011) to IPCC’s scientific claims are making dissenting

2 In this paper, global Salvationism refers to the view adopted by ecological activists that human interference causes climate change that leads to catastrophic consequences. This conclusion is reached on “certainty” of scientific evidence that accurately predicts into the distant future (i.e. 2050) how human activities impacts ecological conditions.

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voices heard. As a result, greater recognition of uncertainty around “climate science” and the value of a flexible strategy (Amram and Kulatilaka, 2009; Dixit and Pindyck, 1994) are replacing Al Gore´s AnInconvenient Truth (2007) as the predominant compass for policy thinking.

The demand-investment paradox Demand for biofuels appears secure and assured of growth. A paradox, however, is apparent in demand and investment. Regardless of significant supply gaps to meet mandated demand, capacity expansion is hardly as robust as markets would suggest. Judging from the slow uptake of investments, economics is clearly questioning policy’s credibility.

Figure 2 • Biofuels production daily surplus/deficits

Source: US Energy Information Administration, 2011

Proposition 2. Innovative firm strategy within a sup-portive policy framework can be transformational, while reliance on subsidies encourages rent-seeking behavior that distorts incentives for innovations. That there is a supply shortage is apparent from declared policy targets. Figure 2 shows the biofuel pro-duction-con-s u m p t i o n surplus/defi-cits of select-ed markets (E I A ,2011 ) . While pro-d u c t i o n showed rapid e x p a n s i o n since 2004, the supply of biofuels account for less than 2% of global daily production and demand for energy.

The regional experience, however, tells a different story. Heavily supported by government, Brazil accounts

for most of the region’s production surplus, whereas China and South Korea are broadly balanced (see Table 1). In contrast, the United States’ ambivalence to long-term subsidies show capacity additions only from grants of public funding to bio-fuels. Europe’s capacity additions also follow subsidies payments, with demand catching up to supply growth and oil substitution encouraged by rising oil prices. The Philippines and Thailand, together with their peers in Europe and Canada, are clear cases of the demand-investment paradox.

A common theme emerges from regional experiences: Capacity additions are driven by subsidies and price support, while demand is a function of oil-biofuels substitution when oil prices are high. Anecdotally, capacity closures account for a narrowing of supply surplus in some markets (i.e., Spain and Italy), where surpluses are now turned into deficits (i.e., Germany, France, Spain and Italy).

The growth in biofuels production and consumption, while impressive, is not immune to economic and oil price cycles. Ponti and Gutierrez (2009) noted that 90% of 2007 biofuels supply is accounted for by Brazil (32%), the United States (43%), and the European Union (15%). Kammen et al. (2008) attributes bio-energy´s rapid growth from a virtually nonexistent industry in 2004 to the confluence of rising oil prices, supportive legislation, and generous subsidies. The reversal of sustained rise in oil prices impacts the competitiveness of biofuels relative to fossil fuels. Declining demand for biofuels because of lower oil prices and the credit squeeze resulted in surplus observed in some countries (Holt-Gimenez and Shattuck, 2009; and EIA, 2010b).

Outside Brazil, the United States and the European Union, Asian countries such as China, Thailand, and Malaysia assert their leadership in bio-energy (see Table 1). What is less obvious is the implied “positioning” of

Table 1 • Major global biofuel-producing countries and markets

Biofuels production Biofuels consumption

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countries into three broad clusters. Given dynamic shifts in production, consumption, and investments, these positions are likely to be transient and inadvertent. Future shifts could be dictated by economic factors. Specifically:

1. Autarky as energy policy objective. China exemplifies the drive for self-sufficiency where production is planned to meet pro-grammed consumption. Cognizant of its rising thirst for energy, this appears to be a case of production chasing pent-up de-mand. The Philippines aspires for supply-demand bal-ance, while hampered by limited financing access and rising sugar prices (i.e., a principal feedstock).

2. Global supplier as leverage for cost advantage. Some countries employ an export-oriented strategy to expand volume and reinforce scale economies. Brazil is generally recognized as a low-cost producer (Avery, 2006). With Brazil´s proximity to the US, exports potentially offer a lucrative avenue to crystallize value from scale efficiency and competition.

3. Arbitrageur on price and supply. Costs competitiveness is determined by access to cheap feedstock that may not be readily available in-country. The UK and Japan appear to fit this profile. Hill et al. (2009) highlight constraints on land, local production, and technology that determine competitiveness of biofuels, with Hamelinck and Faaij (2006) estimating a !2.00–3.00 ($2.80–4.20) per GJ increase in biofuel costs for every !1.00 ($1.40)/GJ increase in feedstock prices.

Optimists point to increasing policy acceptance of biofuel as a viable alternative to oil. To tran-sition into a biofuel economy, governments legislate a gradually increasing percentage of biofuels to be blended with fossil fuels. Coyle (2007) summarizes the ma-jor markets´ biofuel targets rang-ing from 5% for ethanol (Canada and Malaysia) to 10% by 2010, and from 2% (Brazil) for biodiesel to 20% (India). Bra-zil at present has the highest blending ratio at 25% for ethanol and gasoline. Few countries (if any) are close to achieving their objectives for 2011 biofuels blend.

Asian mandated consumption (Table 2) are estimat-ed from existing legislation, where blending targets are expressed as percentage of biofuels required for blend-ing with fossil fuels (i.e., 1% to 10% within a decade). Viewed from a Philippine policy perspective, a likely reaction to these estimates is akin to despair. With pres-ent production lagging well behind its modest 1% blend target, the temptation to offer more subsidies, fiscal in-centives and programs to lure investors can become ir-resistible.

Such temptation is at the core of why subsidies and price support are unlikely to be sustained. As capacity deployment increases, higher public support is needed. As cash transfers come at greater costs to consumers, the public is unlikely to accept bearing the burden (i.e., subsidies and price support) of socialized costs at minimal risks for private gains. In effect, subsidies become the determinant and future constraint for biofuels and renewable energy deployment.

The Philippine experience, lucidly illustrating the demand-investment paradox, gives an early indication of how policy actions can give unintended results (see Table 3); far from converting the Philippines into a major

implied consumption

000 bbls per dayConsumption - Fossil Fuels

Biofuels Production

2009 2009 1,0% 2,0% 5,0% 10,0%Asia and Oceania 24.977,59 77,47 250 500 1.249 2.498

Philippines 313,00 1,38 3 6 16 31

Potential Regional Markets 18.969,19 46,44 190 379 948 1.897

China 8.200,00 37,53 82 164 410 820Hong Kong 359,00 0,00 4 7 18 36India 2.980,00 4,84 30 60 149 298Japan 4.367,21 0,18 44 87 218 437South Korea 2.184,97 3,22 22 44 109 218Singapore 878,00 0,68 9 18 44 88

Biofuels - Implied Consumption

Source: EIA (2010) and authors´ calculations

Table 2 • Asian biofuels potential consumption

fossil fuels productionimplied consumption

Potential regional markets

Thousand bbl Equivalent 2005 2006 2007 2008 2009 2010 Q1Australia 15,80Brazil 15,70 11,60 24,30 9,40Cambodia 64,50China 1,40 59,30India 25,60 55,60Indonesia 1,50 5,20 6,70Korea 1,90 70,10 57,60Netherlands 22,20 20,90Pakistan 8,00 7,90Singapore 8,50 49,70 23,00Thailand 6,70 14,00Subic - bonded imports 91,10 81,20

Total 15,70 17,20 19,80 78,90 403,70 224,10

Philippine Imports of bio-ethanol

Source: Demafeliz (2010) and Philippine Department of Energy

Table 3 • Philippine imports of bio-ethanol

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supplier, its bio-energy policy is succeeding in making the country a fast-growth import market. Interestingly, “autarkic” China and “resource-constrained” Korea are among the major suppliers, while trading centers such as Singapore and Subic Bay are becoming important trading hubs.

Technology diffusion and energy transitionsMoving away from the global Salvationists ethos, let us examine the validity of “peak oil” arguments. Scarcity of oil is used to justify promoting biofuels and renewable energy. The logic follows a neo-Malthusian reasoning of extrapolating the present to deal with a future ceteris paribus: increasing use of resources of finite availability will lead to scarcity that leads to ever increasing costs of extraction before the resource is finally exhausted (see for instance Simmons, 2005).

Figure 4 shows the historic transitions from coal to oil, followed by oil to gas and hybrid energy system. In each case, technology played a decisive role. For example, when automobiles opted for combustion engines (i.e., users of oil) and replaced trains (i.e., users of steam coal) as the dominant mode for mobility, oil rapidly replaced coal as the preferred fuel. In power generation, the shift is more radical, from a predominantly coal and oil system to a gas, nuclear, and multiple fuels energy mix. What emerges from a century of energy transition is a dynamic energy system that accommodates diverse supplies with varying efficiencies, cost structures and exposures to fuel prices that are complementary (Barcelona, 2009).

Contrary to the neo-Malthusian view, scarcity plays a minimal role in energy transitions. What Lewis (2008) refers to as “natural resources false alarms” is best captured when quoting Stanley Jevons´ 1865 paper on “The Coal Question.” Jevons argued that British industrial pre-eminence was doomed to decline, given that coal could only be mined at ever greater depths and spiraling costs that would “cripple industries dependent on it.” He boldly declared “it is useless to think of substituting any other kinds of fuel for coal.” This is a serious flaw in the neo-Malthusian logic: a policy prescription based on a linear projection of Jevons’ present (i.e., only coal as fuel) that ignores technology and adaptation to a future that bears little resemblance to it (i.e., nuclear and gas did not exist then) is bound to be off the mark.

Barcelona (2009) pointed out that since 1865, British industrial pre-eminence, while eclipsed by the US, remains in the company of prosperous nations. Coal ceded its predominance to technology and fuels that did not exist in 1865. Unfortunately, Jevons´ intellectual

descendants continue to sway the policy process. For instance:

1. 1914 forecasts of peak oil by the US Bureau of Mines suggested American oil would last no more than a decade.

2. 1972 Club of Rome report on“Limits of Growth” (Meadows et al., 1972) predicted the entire global oil reserve of 550 billion barrels could be used up within a decade; by 1990, consumption reached 600 billion while reserves stood at 900 billion thanks to new discoveries, better extraction technologies, and investments.

3. “Beyond the Limits” (Pestel, 1989), trying to rectify the errors of “Limits of Growth,” follows tradition by predicting that oil will run out by 2031 and gas by 2050,yet EIA (2010b) forecasts oil and gas will fuel world energy at least until 2035, with no obvious trigger for oil´s sudden demise in 2031. Similarly, the fuel mix for power generation (see Figure 3) suggests a similar expected pattern.

What can we learn from these historical precedents—their impact on technology diffusion and decision-making?

Convenience, cost, and efficiencyThe transition from coal to oil was driven by preferences for convenience, technology and emergence of supporting infrastructures. Aspirations for clean energy and secure supply gave rise to prevalent use of nuclear energy and gas. However, external shocks that brought specific supply and technological issues to the forefront of public debate became catalysts for accelerated adaptation. Specifically:

1. Coal use reduction in the UK. Notorious for its “London fog,” smog was a known problem since 1948. Attempts at lobbying for government action started when the National Smoke Abatement Society was formed, but it was not until 4,000 people died in 1952 from smog that serious action was taken by government. The Clean

Figure 4 • Technology shifts and energy use

Source: US Energy Information Administration, 2011

Technology adaption and energy transitions

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Air Act was passed in 1956, and coal emissions were banned in London and most urban areas.

2. Nuclear power as panacea to 1973 oil shock. Supply security amid geopolitical re-alignments led a number of governments to embrace nuclear power as panacea. “Too cheap to meter,” France, Spain, Germany, Belgium, United Kingdom, Sweden, and the United States, among others, embarked on massive capacity building alongside coal fired plants to wean themselves from oil dependency. With the exception of Brazil´s alcogas program (i.e., alcohol as fuel additive), most transport-related initiatives in biofuels and electric/hybrid cars fizzled with falling oil prices, the Philippine alcogas program being an example. Citing past experience of stalling cars using pure bioethanol, Demafelis (2010) noted that the Philippines’ program painted a bad image (see also www.biofuels.com).

3. Harrisburg and Chernobyl nuclear disasters. While not directly linked to transition to gas, the pre-eminence of natural gas as preferred fuel proceeded in parallel with nuclear. The nuclear moratorium allowed CCGTs space to develop, bringing capital costs down from $1,500/kW in the 1970s to $450/kW in the 1980s from higher deployment rates. Thus, when power markets were liberalized in the 1990s in Europe, Australia, New Zealand, Chile, Argentina, and parts of the United States, CCGTs went on to dominate power generation given low capital costs and gas prices.

These experiences weigh against scarcity as decisive pathways for bio-energy and renewable power adaptation. But despite massive government support, why did some technologies prosper while others flounder?

State intervention in some cases does more harm given its inadvertent consequences. While the impact of the 1973 oil crisis is well known, its causes were not entirely geopolitical. US investments in oil exploration, production, and refining capacity were deterred by the 1968 Supreme Court ruling against price increases, making the US more reliant on middle east oil supplies. Limited domestic oil supply made the US more vulnerable to geopolitical actions (Golub and Townsend, 1977). In fact, losses from low oil prices inspired the creation of OPEC3 IN THE 1960S. This was counter-balanced by a less successful Club of Rome established by second tier oil companies, who see in their government limited capacity to support their interests.

Technology choices are another example. The gas turbine and combustion engine were not short of critics when both were introduced to market. State

3 Oil Producing and Exporting Countries.

support for gas and the combustion engine was at best tentative, but usage increased with experience, results and understanding of technology´s benefits.

In the course of technological transitions in energy, shifts in costs, efficiency, and convenience trigger exploration for alternative resources. Hence, while coal may remain abundant, society´s preference for cleaner energy favors use of gas while creating an impetus for two generic strategies: developing alternative forms of energy (i.e., renewable energy) as a game-changing approach, and experimenting with clean coal and carbon capture technology to extend the resource´s economic usefulness. This process, however, tends to be iterative and uncertain and does not easily fit policy´s often linear and programmatic interventions.

In essence, markets for energy are not created by legislative fiat. Hence, despite supportive legislation, investments will be committed on the basis of meeting the tests of (a) convenience, (b) relative costs given technological advances, and (c) availability given efficient infrastructure and logistics to bridge supply and demand. In a dynamic technological and socio-economic milieu, the neo-Malthusians´ reliance on “extrapolated certainty” assuming ceteris paribus is ill equipped to inform policy and economics.

Biofuels and renewable power: The long gameRenewable power focuses on technologies producing energy that rely on natural processes without consuming exhaustible resources such as oil, gas, coal, and uranium. This includes wind, solar, geothermal, biomass, wave and other emerging non-CO2 emitting technologies, with hydro treated as a mature technology.

For agro-energy based programs, biomass using organic waste remains an under-utilized resource. In policy circles, biomass is seen as an adjunct to renewable power that is biased toward wind, solar, and (in countries with the resource) geothermal energy.

Similar to biofuels, renewable power has higher targets set by governments, with 20% of power supply seen as an unwritten rule of thumb to aim for. Notwithstanding this apparent official consensus, long-term forecasts from official sources (EIA, 2009) appear unconvinced. In Table 4, EIA estimates hydro power, biomass and renewable energy could account for no more than 15% of energy supply, with oil, gas, and coal remaining dominant. This is notwithstanding the higher growth rates expected for biomass and renewable energy.

Gathering funding to comply with a 20% supply target could overwhelm national budgets, as

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Source: EIA, International Energy Outlook 2011

Table 5 indicates. The size of investments varies with technological innovations and site selection that (a) increases capacity utilization rates because of resource quality; and (b) lowers unit capital costs for renewable energy technologies (Barcelona, 2009). These estimates are on the optimistic side. Wiser and Bollinger (2010) noted that generous subsidies spark rapid deployment in the United States, creating capacity constraints in wind turbine production that offset costs decline from scale economies. China and India (GWEC, 2010) experience similar dynamics.

“Socialized” funding is frequently done through sub-sidies in the guise of employment creation. Deploying wide-rang-ing tools—subsidies, portfolio standards, feed-in tariffs, green certificates, incentives and taxa-tion—governments have mixed records in delivering on their CO2 reductions under the Kyoto Proto-col and renewable power deploy-ment. In fact, poor policy hinders rather than facilitates adaptation. Examine for instance:

1. US periodic setting of port-folio standards for renewable energy led to a boom-bust cycle in investments, given that regulatory uncertainty hinders commitments by firms looking for regulatory certainty (Wiser et al., 2007).

2. Demand, costs, and capital spending remain un-certain, notwithstanding the US government´s ability

to regulate power tariffs. US tax incentives, applied from 1978–1985, failed to in-crease energy conservation investments, given contin-ued uncertainty on benefits that vary with power tariffs, costs, demand and capital spending (Dixit and Pin-dyck, 1994; and Jaffe and Stavins, 1994).

3. Renewable en-ergy technologies´ declining capital spending and subsi-dies pose a dilemma on the merits of “early mover’s” advantage (Amram and Ku-latilaka, 2009) that delays investments, unless gener-ous subsidies (or threat of

its removal) encourage earlier exercise of investment op-tion.

Government subsidies, however, when used with supportive transformational strategies by firms, facilitates technology diffusion (Stenzel and Frenzel, 2008). They attribute Spain and Germany´s transformation as global leaders to supportive regulation that firms use as backdrop for developing their capabilities for renewable energy. In contrast, the UK´s uptake of renewable energy by utilities was less enthusiastic in spite of a similarly supportive package of incentives (see Table 6).

By 2010, wind power growth remained concentrated. Close to three quarters of cumulative capacity and increments are accounted for by five markets, with growth having shifted from Europe to the US, China, and India. In contrast, in spite of UK’s better wind resource endowment (GWEC, 2010) and the Philippines´

Table 6 • Ranking in global wind markets, 2010

Source: BTM Consult; AWEA; Lawrence Berkeley National Library

2010 End year

Rest of the world

Annual additions Cumulative capacityEstimated

penetration rate

MW % total MW % total %

Energy Supply - % Share 2010 2011 2012 2015 2020 2025 2030 2035Total Supply - 000 Quad Btu 75.421 75.086 75.812 78.193 82.992 86.722 90.318 93.998

Crude Oil and Condensates 15,52 15,23 15,46 15,75 15,67 14,36 13,84 13,10Natural Gas 3,50 3,50 3,61 3,64 3,70 4,01 4,01 4,10Dry Natural Gas 29,01 28,79 28,58 29,00 28,46 27,96 28,06 28,49Coal 29,84 28,81 28,31 26,93 26,65 27,34 27,40 27,49Nuclear Power 11,13 11,18 11,21 11,22 11,11 10,63 10,21 9,78Hydro Power 3,18 3,43 3,51 3,73 3,61 3,49 3,40 3,29Biomass 5,06 5,52 5,65 5,97 6,84 8,22 9,05 9,55Wind and other renewable 2,04 2,29 2,83 2,79 2,78 2,94 3,13 3,33

Table 5 • Estimated costs of 20% target compliance by 2020 (OECD)

2009 2020 2009 2020 GW 2,000 / kW 1,500 / kW 1,000 / kWPower Supply Estimates 0,28 2,38

Capacity Utilization:50% 66 551 485 970 728 48535% 94 787 693 1.386 1.039 69325% 132 1.102 970 1.940 1.455 970

Source of data: EIA and author´s estimates.

Renewable Energy (TWh) Estimated Capacity (GW)OECDImplied Capex ($ bln)

Source: EIA, International Energy Outlook 2011

Table 4 • Global forecasts for energy mix, 2010–2035

Source: EIA, and authors’ estimates

Power supply estimates

Capacity utilization:

Renewable energy Estimated capacity Implied capex

Energy supply - % shareTotal supply - 000 Quad Btu

Crude oil and condensatesNatural gasDry natural gasCoalNuclear powerHydro powerBiomassWind and other renewable

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similarly generous administrative measures (RA 9513 and RA 9367), both markets lag in deployment.

Strategic reframing and lessonsLearning from the history of energy transitions, Stigler´s (1971) views on policy intervention and Friedman´s (1962) discourse on capitalism may serve as a useful framework. Contrary to the neo-Malthusian precept of scarcity as a trigger for transitions, where “socialized” capital needs to be committed in the search for alternatives, history paints a very different picture.

Firms can learn from these lessons. “Peak oil” and neo-Malthusian theorists underpin their world-view on scarcity as their strategic platform. Hence, as humanity runs out of everything from food and energy, agriculture is made to face a pseudo dilemma between food vs fuel. As a consequence, policy is kept occupied by demands to favor one technology over another through the mechanisms of subsidies.

Human capacity to innovate is far greater than neo-Malthusians give humanity credit for. While technology

is available to address the issues of resource scarcity, companies can profit from evolving agriculture and energy landscape. They can start by reframing agribusiness as a portfolio of opportunities, rather than seek to profit from specific subsidies. Hence, looking at the full agribusiness value chain, food, energy, and trade complement rather than compete for resources. The choices of approach are functions of pricing signals as market mechanisms for resource allocation, while management deals with uncertainty and strategic judgments. Seen in this light, they become a continuum of opportunities or linked sources of value. These opportunities are examined specifically in the next two papers.

Under an open market economy, where energy transitions occur, technology innovations play decisive roles. The state´s assistance to successful innovation is less obvious; its role in successful transitions is at best supportive rather than crucial. Arguably, in a number of instances, state intervention not only hinders but proves catastrophic as Cuba and the former Soviet Union learned to their grief. IM

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