The patterns of induced diffusion: Evidence from the international diffusion of wind energy

Abstract

Recent years have seen growing academic interest in the concept of induced diffusion as efforts to address concerns about energy security and climate change have intensified. Research on induced diffusion explores whether policy tools or interventions can incentivise the diffusion of innovations. This body of literature has explored the effectiveness and efficiency of various policy interventions and as such has been mainly concerned with the determinants of diffusion. This paper is, by way of contrast, concerned with the patterns of diffusion when diffusion is induced. Drawing on the Bass and Davies models of innovation diffusion we develop a number of propositions that suggest that the patterns of diffusion are different when policy plays a role in the diffusion process. These propositions are then econometrically tested in the context of the international diffusion of wind energy in 25 OECD countries. We find that, as predicted, without effective and strong policy interventions, countries will have conventional logistic diffusion with very similar speeds of diffusion. However, as expected the patterns of diffusion take on a different functional form (Bass curve) when there is a strong policy inducement. We conclude by discussing the implications and limitations of these results and suggesting avenues for further research.

Introduction

Recent years have seen growing academic interest in the concept of induced diffusion as efforts to address concerns about energy security and climate change have intensified (see [1], [2]). Research on induced diffusion explores whether policy tools or interventions can incentivise the diffusion of, inter alia, environmental innovations. This body of literature has explored the effectiveness and efficiency of various policy interventions and as such has been concerned with the determinants of diffusion. This paper is, by way of contrast, concerned with the patterns of diffusion when it is induced.¹ The paper, therefore, explores the question of whether the patterns of induced diffusion are different to the conventional patterns observed when diffusion is unaffected by policy interventions. We do so by examining the international diffusion of wind energy in 25 OECD countries.

Examining the patterns (time paths) of wind diffusion allows us to test established theory on innovation diffusion in the context of induced diffusion. This is because even though wind energy is on a cost basis in the same order of magnitude as incumbent electricity generation technologies, for it to diffuse sufficiently widely to reflect social objectives, externalities such as pollutants should be internalised into the prevailing regulatory regime (see Section 1.1, below). However, if wind diffusion requires policy designed to internalise these externalities, then it is not a ‘natural’/unfettered market process. This raises the question of whether this alters the pattern of innovation diffusion? Drawing on the Davies [5] and Bass [6] models of innovation diffusion we develop a number of propositions that suggest that the patterns of diffusion are indeed different when policy plays a role in the diffusion process.

If the patterns of induced diffusion are found to be considerably different to when there are no policy interventions this would imply that policies to induce diffusion do work. This in turn would contrast with assertions by some that interventions have little or no impact on diffusion [7] and would be broadly in line with the preponderance of the evidence that diffusion can be induced [1]. Prior to exploring in more detail the two literatures which this paper draws on and seeks to develop (on induced diffusion and on the pattern of diffusion), it is useful to provide some more sectoral and policy contextual background.

As the most viable large scale ‘new’ renewable generating technology, wind energy is at the centre of the energy policy debate in a large number of countries. Proponents of wind energy argue that it offers the potential to meet environmental goals, such as those of the Kyoto Protocol, whilst at the same time helping to assuage security of supply concerns by reducing reliance on imported fossil fuels from unstable regions of the world. Detractors of wind energy point to a myriad of issues to argue that its wide spread diffusion will run counter to energy policy goals of having affordable and secure energy supplies. These include: intermittency, low load factor, high cost, visual intrusion, noise disturbance and concerns about the public's acceptance of projects, such as ‘Not In My Backyard’ (NIMBY) objections.

There is a great deal of evidence showing that, even before accounting for diversification effects [8], [9], energy security concerns and environmental externalities, wind generation, on a cost basis, has been over the past decade in the same order of magnitude as more conventional generating technologies [10], [11]. Indeed, the cost of electricity generation from wind energy has declined dramatically over the last few decades (Fig. 1). There are numerous factors for this cost decline including:

• Scale economies: Substantial economies of scale have been derived from ever larger turbines. Turbines in the 1980s tended to be 15 m tall whereas by 2006 they had reached up to 150 m in size [12]. Fig. 1 shows the effect of larger turbines in Denmark has been to increase the generating capacity of individual turbines twenty fold between 1987 and 2006.

• Technological advances: There have been considerable technological advances in a range of areas including materials and blade and generator design [12]. These developments have played an important role in enabling ever larger and more efficient turbines (Fig. 1).

• ‘Learning By Doing’: Numerous studies have shown that ‘learning by doing’ has also played an important role in these cost reductions with most studies reporting progress ratios between 80% and 95% [13], [14].

The decreasing cost of electricity generating from wind energy, as well as higher fossil fuel prices from around 2003 onwards, has made wind energy increasingly competitive with the most economic forms of generation (gas or coal). As a result wind energy is increasingly seen as a cost effective alternative. For instance, Dale et al. [11] estimate that having 20% of generation from wind energy in the UK would add 5% to the average electricity bill.

Despite the improved cost performance of wind energy relative to other generating technologies, it is broadly acknowledged that for it to diffuse sufficiently widely to satisfy environmental concerns, these environmental externalities, most notably CO2, need to be internalised so as to induce sufficiently rapid diffusion. Accordingly a whole range of policies have been developed to provide investment support for renewable energy projects, including the EU Emission Trading Scheme, tax breaks, the Kyoto Clean Development Mechanisms, Feed In Tariffs (FIT) and Green Certificate Markets (GCM). There has been a good deal of debate about the efficacy and efficiency of the two main policy options used in practice to support renewables investment, namely FIT and GCM (see [15], [16]). In this debate surprisingly few contributions have been framed within a formal diffusion framework. One exception is Soderholm and Klaassen [17] (see Section 2 for a discussion of this paper).

The increasingly favourable cost attributes of wind energy, rising fossil fuel prices and heightened concern about global warming and energy security mean that wind energy is growing into a substantial global industry. Up to recent years the industry has been dominated by European manufacturers such as Vestas, Gamesa, Enercon and Siemens reflecting the fact the preponderance of the diffusion of wind energy had happened in Europe. In 2002 European manufacturers accounted for approximately 90% of the capacity sold worldwide [18, p. 125]. Further, Beise and Rennings [19] observe that the ‘lead market’ effect of the early use of strict regulations (FIT) in Denmark meant that high wind energy penetration rates translated into industrial policy benefits, namely; a large export market in wind turbines. The last few years have, however, seen the turbine manufacturers from other parts of the world, most notably GE Energy from the US, Suzlon Energy from India and Goldwind from China, becoming increasingly important in the sector. This trend reflects a rapid acceleration of wind energy diffusion in the rest of the world, with approximately equal amounts of wind energy being installed in 2008 in Asia (8579 MW), Europe (8877 MW) and North America (8884 MW) [20].

The remainder of the paper is structured as follows. Section 2 reviews the literatures on induced diffusion and on the pattern of diffusion curves. Section 3 outlines the theoretical framework taken in the paper in the form of four propositions. Section 4 discusses research design and the data used, whilst Section 5 reports and Section 6 discusses the results of the econometric modelling. Section 7 concludes by discussing the implication and limitations of these results and suggesting avenues for further research.