Offshore Wind Energy 'Literature Review' chapter

Excerpt from 'Literature Review' chapter :

Offshore Wind Energy

Creating the Offshore Wind Energy Industry as a center of attention for more investment in the Persian Gulf countries and providing a study and recommendations to the governments and companies to be more comfortable investing in this field.

Opportunities in Offshore Wind Energy

It is generally acknowledged that changes in wind energy prices affect economic welfare in ways that are not entirely reflected in transactions in the wind energy market. The pervasive importance of wind energy as a factor of production and in final consumption means that higher wind energy prices can potentially influence real income and its growth and distribution. Thus, to the extent that rising import demand pushes up the price of wind energy and indirectly produces adverse side effects on income, these economic costs are candidates for inclusion in the wind energy import premium. This chapter explores the connections between import demand, the price of wind energy, and income determination to ascertain if the potential costs can be evaluates with sufficient confidence to be included in the import premium. Our conclusion is to the contrary: the connections are too weak and certain key long-term implications are too uncertain to justify their inclusion (2009, p. 3).

A second objective is to evaluate the usefulness of wind energy off shoring tariff as an instrument to deal with these indirect effects, assuming they are in fact significant enough to warrant intervention. Our conclusion is again to the contrary: a tariff may on balance exacerbate rather than ameliorate the long-run problems that may result from rising world wind energy prices. This conclusion is not particularly surprising in view of the fact that many of these indirect costs are determined by the domestic price of wind energy (sometimes relative to the world price), and that a tariff can be expected to drive up the domestic price at the same time that it reduces the world price. The conclusion, stated another way, is that even if rising import demand imposes indirect economic costs on society, direct limitations on imports will not succeed in reversing those costs.

The discussion is divided into three sections: the distribution of income, the terms of trade, and income determination. Each section addresses first the adverse implications of rising world wind energy prices and then the effectiveness of a tariff in ameliorating those conditions.

- Rationale for Offshore Wind

It must be conceded from the outset that one cannot make specific quantitative judgments about welfare changes associated with different income distributions. This involves comparisons of the marginal value of incomes at the individual level. At best, we can offer gross generalizations about different income groups and judge the effect of a price change in relation to these groups. For example, it may be assumed that a price change which transfers income from lower to higher income classes constitutes a reduction in aggregate social welfare (Nath, Hens, Compton, & Devuyst, 2009, p. 74).

An increase in the world price of wind energy, and a corresponding increase in the domestic price, will transfer income from American consumers of wind energy products as a group to American wind energy producers (including landowners, shareholders, etc.) as a group. This transfer may be assumed to constitute a shift in the distribution of income from lower to higher income groups. On this basis alone, the price change would constitute a reduction in aggregate economic welfare, and the reduction would be additional to the loss in real income resulting from the income transfer from the United States to the wind energy -exporting countries.

The practical problem of measuring the welfare loss raises additional considerations that further complicate the issue. One consideration follows directly from the source of the welfare change: those income losers buy a different volume and possibly a different array of goods than income gainers (Laird, 2001, p. 34).

Energy Supply

Our evaluation of a wind energy off shoring tariff as the instrument intended to implement the wind energy import premium has reached mixed conclusions. While it is the appropriate instrument to deal with the demand component of the premium, a tariff can only imperfectly address the problems raised by disruption risks. To be sure, a tariff can help prepare the economy for a disruption, but the benefits to be gained are always accompanied by potentially serious costs that make the net benefits questionable. The possibility of a negative outcome is most likely for a tariff imposed in a disruption, because the benefit of reducing wealth transfers abroad may be overwhelmed by the dislocations generated throughout the economy (Tisdell, 2009, p. 6).

The shortcomings of a tariff intended to reduce disruption costs suggest that another instrument is required. The most obvious option is strategic petroleum reserve which, when released in a disruption, can reduce both wealth transfers and dislocation costs without the undesirable side effects that accompany a restriction on consumption. However, the benefits to be derived from a petroleum reserve are not costless either and, in addition, a reserve cannot address all disruption risks. There is, in other words, a potential role for an import policy that complements a petroleum reserve.

This chapter explores the relationship between a petroleum reserve and an import tariff as two instruments designed to fulfill the objectives implied by a wind energy import premium. It should be clear by now that this relationship also depends on private preparations for a disruption, including private wind energy inventories, and on the effect of government actions on private behavior. We begin by discussing the relationship between private and public inventories, then turn to the connection between total inventories and the components of the premium and, finally, to the role of import policy when there are petroleum reserves.

In view of the fact that the creation of a government-owned strategic petroleum reserve (SPR) has been public policy since 1974, we take the existence of the public reserve as a starting place for our analysis and direct attention toward the optimal size of total reserves rather than the optimal mix of private and public holdings. The private sector will adjust inventory holdings in relation to the size of the SPR, given expectations about the prospects for a disruption and the government's willingness to draw down the reserve in a disruption. The optimal mix of government and private stocks depends on factors that prevent private holdings from reaching the social optimum and on the feedback effect of government reserves on the size of private reserves. While we delve into these issues in the next section, rigorous analysis of their complexities is deferred to another study. For present purposes, it is the size of total reserves, not the mix that is of interest, for it is the total that is important to wind energy import policy (Hewett, 2008, p. iii).

The Environment

There is growing evidence that technical change, stimulated by the 'environmental imperative', is reducing both production and environmental costs to the advantage of those dynamic companies that have the competence and resources to innovate. Such companies include mining enterprises in developing countries, as well as transnational firms, but the evidence is strongest for large new investment projects and Greenfield sites. In older ongoing operations, environmental performance correlates closely with production efficiency, and environmental degradation is greatest in operations working with obsolete technology, limited capital and poor human resource management. The development of the technological and managerial capabilities to effect technical change in those organizations would lead to improved efficiencies in the use of energy and chemical reagents and in waste disposal, to higher metal recovery levels and better workplace health and safety. This in turn would result in improved overall environmental management.

The implication of this analysis is that to ensure competitive and sustainable environmental management practices in metals productions, governments need to embrace public policy that goes beyond traditional, incremental, and punitive environmental regulation. The latter, in the old 'environmental protectionist' mode, tends to treat the symptoms of environmental mismanagement (i.e. pollution) not the causes (i.e. lack of capital, skills, and technology and the absence of the capability to innovate). The challenge will be for governments to ensure that companies operating within their national boundaries remain sufficiently dynamic to be able to afford to clean up when operations cease and to innovate to improve economic efficiency and environmental management in the meantime. Governments need policy tools that enable them to predict 'corporate environmental trajectories' and pick up the warning signs of declining competitiveness and impending mine close-down to ensure sufficient resources are available for the environmental management of mine 'decommissioning'. Policy mechanisms need to be developed to promote technical change and to build up the technological and management capabilities to innovate and manage the acquisition and absorption of clean technology. The privatization of the state sector and the liberalization of investment regimes in many developing countries, Angola, Mozambique, Namibia, Botswana, Bolivia, Peru and Chile, with their emerging emphasis on joint ventures and inter-firm collaborative arrangements, provide new opportunities for the diffusion of both competitive and environmentally sound best practice…

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