doi:10.1093/oxrep/grz005
The age of electricity
Dieter Helm* and Cameron Hepburn**
Abstract:  The age of electricity is coming, driven by rapid technological change. On the demand side,
the digitalization of many processes is leading to technologies that require electricity, rather than liquid
or solid fuels. On the supply side, renewable energy technologies provide electricity directly, at falling
cost. Electrification, directly and indirectly (e.g. using electricity to produce hydrogen fuel) can aid the
decarbonization of the economy; strong climate policy would accelerate electrification. The big question
is when, not if, and the transition is not occurring anywhere near fast enough to meet the Paris
climate goals. The immediate impact of the coming age of electricity is the transformation of electricity
markets, which need to adapt to near zero marginal costs and intermittency. In the longer term, the
impact on fossil fuels will be radical. Fossil fuel prices will fall with demand, and the oil and gas majors
will either completely transform themselves or will harvest profits and exit.
Keywords: electricity markets, climate change, fossil fuels, intermittency, capacity markets
JEL classification: Q40, L94, O13
I. Introduction
Access to energy, along with food and water, is a prerequisite for all economic activity.
Major economic advances are often strongly associated with advances in energy (Toman
and Jemelkova, 2003; Bacon and Masami, 2016). From human labour to horse power,
to coal and then oil and gas, each transition to more advanced energy technologies has
pushed the frontiers of population and economic growth. The industrial revolution was
built on coal, and the great twentieth-century transformation was built on coal, plus oil,
and then gas (Smil, 2010).
Fundamental changes in energy markets are caused by fundamental technological
advances. In the nineteenth and twentieth centuries it was the steam engine, the coal
power station, the internal combustion engine, and the Haber–Bosch process for manufacturing
artificial fertilizers. Aircraft, modern petrochemicals, and the gas turbine provided
the subsequent boost to the great age of fossil fuels.
*New College, Oxford; e-mail: dieter@dhelm.co.uk
**Smith School, Oxford; e-mail: cameron.hepburn@smithschool.ox.ac.uk
Dieter Helm is Professor of Economic Policy, University of Oxford, and Cameron Hepburn is Professor
of Environmental Economics and Director of the Smith School of Enterprise and the Environment,
University of Oxford. We would like to thank Chris Adam, Simon Cowan, Niall Farrell, Ken Mayhew,
Jacquelyn Pless, Alex Teytelboym, and David Vines for useful discussions and comments, Kaya Axelsson for
excellent research assistance, and Alison Gomm for valuable editing.
© The Author(s) 2019. Published by Oxford University Press.
For permissions please e-mail: journals.permissions@oup.com
Oxford Review of Economic Policy, Volume 35, Number 2, 2019, pp. 183–196
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
In the twenty-first century, it is again technical change which is driving the next
transformation. This time it is digitalization and electrification of the economy. The
emergence of the internet and rapid falls in computing power have enabled mass digitalization
and connectivity of economic processes, which has thrown up great opportunities
in big data, machine learning, and artificial intelligence, along with advances in
robotics and cutting-edge manufacturing.
All these technologies overwhelmingly consume energy, some of them intensively, in
the form of electricity, rather than primary oil, gas, or coal. Fossil fuels are, of course,
transformed at scale into electrical energy, but alongside the electrification of the demand
side has come a host of new and renewable electricity technologies on the supply
side. These technologies produce electricity directly from the sun or the wind, without
the need for combustion of a fuel (with its associated environmental pollution), and
without conversion of heat into electricity using a turbine (with associated efficiency
losses). While such technologies are typically intermittent, the very same digitalization
enables a smarter and more responsive demand side, and rapid advances in storage
technologies look set to be able to better manage the imbalances between supply and
demand. It is a technical transformation of both the economy and the energy sector.
This paper first reviews the main reasons for the forthcoming age of electricity
(section II). We then turn to the environmental issues, particularly the carbon constraint
and why reducing emissions requires not just the shift to renewables for electricity
generation, but greater direct or indirect electrification of other key sectors,
too (section III). While previous transitions have happened without the need for
much by way of energy policy to facilitate take-up, the shift to electricity raises special
questions about market design and regulation, and hence may require significant
interventions. These are made more urgent because of the pressing decarbonization
agenda. This paper describes the main policy strands—on innovation and R&D,
on market design, on capacity and security of supply, and on the allocation of the
largely fixed system costs (section IV). The impact of near zero marginal cost technologies
on wholesale markets necessitates revisiting not just the market designs,
but also the corporate landscape and the associated market frameworks (section V).
Once appropriate market designs and system operators are in place, the coming of
the age of electricity will depend on the speed of technical change. Oil-producing companies
assume that the peak in oil demand will not come before 2040, and that gas
will continue much further into the second half of the century. Some argue that coal
will persist, too. This is too late for the climate change agenda, but it also fails to take
account of the speed of not just the technical advances but the falling costs of renewables
(section VI). Finally, we draw together policy recommendations to set the framework
for the great transition to the age of electricity (section VII).
II.  Why we are entering the age of electricity
There has always been a close relationship between the energy industry and economic
activity. Access to energy has been a question of life or death for humans for millennia.
More recently, the major industrial revolutions have been correlated with advances in
energy technologies. The causal link remains debated by economists, but it is likely
bidirectional—the energy system evolves to support the demands made of it by the
Dieter Helm and Cameron Hepburn184
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
economy as a whole, while at the same time innovations in the energy sector can facilitate
or enable important new technologies and production processes in the wider
economy (Burke et al., 2018).
Major technology revolutions often have a long fuse, and the age of electricity is no
exception. The transition now under way has its origins in concepts from physics, built
on phenomena observed in antiquity and gradually understood in the nineteenth century
by the great scientists Coloumb, Faraday, Ampère, and Maxwell, among others.
Great innovators, such as Edison and Tesla, worked out the practical applications of
these new concepts in the mid-nineteenth and at the beginning of the twentieth century.
Electric vehicles, for instance, are not entirely novel, having emerged in the late nineteenth
century (Kirsch, 2000).
The invention of these technologies, however, only gradually led to an increase in demand
for electricity. Electricity’s share of final energy demand has risen from roughly 0
per cent a century ago to around 20 per cent today (IEA, 2018). The remaining demand
is met through the direct use of coal, oil, and gas, particularly in heating, industrial applications,
and transport.
From 20 per cent today, electricity’s share of final energy demand is projected by the
International Energy Agency (IEA) to rise gradually to 25 per cent by 2040 (IEA, 2018).
The World Energy Council (2016) expects demand for electricity to at least double,
while others model this possibility at over 60 per cent of energy demand by 2060, in a
world where energy demand continues to grow, implying a fivefold increase in electricity
generation (Energy Transitions Commission, 2018). While there is much uncertainty
over longer timescales, and in particular in respect of the speed of the electrification of
transport, all projections show a strong rise in electricity’s share.
The drivers of this increase in electricity production and consumption are to be
found on both the demand and the supply side.
On the demand side, the advent of computing technologies, networks, and the internet
has led to the gradual digitization of much economic activity. These enabling technologies
have created large-scale opportunities across a range of economic sectors. In
manufacturing, the increasing use of robotics and advanced manufacturing methods is
augmenting the physical capital base. These technologies do not run on oil or gas—they
all require electricity, which is the energy carrier for a digitized world. These very same
enabling technologies are conveniently increasing the flexibility of the demand side for
electricity, just at the moment the electricity supply side is becoming more inflexible.
Increasingly, manufacturing facilities will be able to speed up production when power
prices are low on windy or sunny days, and slow down or even come to a pause as power
prices rise in calm weather or when the sun is down (Beier et al., 2015; Keller et al.,
2016; Helm, 2017a).
While electrification has many advantages, some parts of the energy system are easier
to electrify than others, and in some sectors complete electrification along the entire
chain seems unlikely. For instance, Cédric Philibert (2019, this issue) reviews the prospects
for electrifying heat, industry, and transport, either directly or indirectly.1 The
1  The idea of indirect electrification is that energy demand is met through solar and wind energy, harvested
by the production of electricity which is subsequently converted by electrolysis to hydrogen or another
liquid fuel. Indirect electrification is likely in situations characterized by either long-duration storage, and/
or long-haul transportation, including the transport of energy itself from resource-rich areas to consuming
centres.
The age of electricity 185
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
key technologies to meet demand—such as the use of renewable electricity for electrolytic
generation of hydrogen and hydrogen-rich fuels from water—are available, and
the challenges of meeting heat, transport, and industrial needs from renewable energy,
with electricity serving as an energy carrier at some point, are far from insurmountable.
On the supply side, the cost of renewable electricity generating technologies and
storage has fallen sharply over the last decade2 (IRENA, 2017). This has been driven by
a combination of fundamental research and development (R&D), with breakthroughs
achieved despite relatively low levels of public R&D support, and with generous subsidies
for deployment (Kammen and Nemet, 2005; Gan et al., 2007).
Renewables subsidies have been both sharply criticized and praised. Although they
have contributed to declining costs, many subsidies were arguably far from efficient—
cheaper strategies might have been deployed (Popp, 2006; Toke, 2007; Lesser and Su,
2008; Frondel et al., 2010; Helm, 2015; Newbery, 2018). Irrespective, one of the challenges
is that any policy aimed at deploying renewable electricity technologies must
account for two conflicting challenges. First, investors in subsidized long-lived generation
assets require some level of policy credibility (Helm et al., 2003) and confidence
about the commitment to maintain the support and the returns on investment. They do
not want policy frameworks to change in a way that undermines their investments. On
the other hand, technological progress in the sector is happening so rapidly that policymakers
rationally value the flexibility to adjust incentive structures as the facts unfold.
In principle, a well-designed renewable subsidy regime could navigate these trade-offs.
However, in many instances, policy-makers have failed spectacularly. In Spain, subsidies
were offered and then retroactively removed once investors had sunk capital
(Espinosa and Pizarro-Irizar, 2018). The scandal surrounding the Northern Ireland
Renewable Heat Incentive scheme brought down the Northern Ireland Executive.3 The
challenge is tackled analytically by Erik Gawel and Paul Lehmann (2019, this issue),
who compare flexibility embedded ex ante in ‘policy design’ by formulaic changes as
a function of unfolding events, with ex post, ad hoc ‘policy adjustment’. They argue
that some combination of both sorts of flexibility is optimally required to manage the
inherent trade-offs in the transition to a decarbonized power grid. Retroactive interventions,
which can also only undermine sovereign credibility, are not a sensible part
of the policy mix.
In sum, for powerful reasons both on the demand and the supply side, an age of
electricity now appears to be inevitable. The only question is the pace of change. It will
not be stopped by policy errors, but could be accelerated by sensible interventions. And
acceleration matters enormously for the environment.
III.  The carbon constraint and air pollution
The pace of the coming of the age of electricity is of central importance to future
climate stability. Left alone, the technological and economic forces discussed in the
2  Battery costs have fallen 79 per cent since 2010.
3 Seewww.ofgem.gov.uk/environmental-programmes/non-domestic-rhi/about-non-domestic-rhi/northern-
ireland-renewable-heat-incentive
Dieter Helm and Cameron Hepburn186
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
previous section will electrify production and consumption at a reasonably rapid rate.
But this is not fast enough to meet internationally agreed climate goals.
There are two central points in the economics of decarbonization. First, emissions
must reach net zero for temperatures to stabilize at any level, whether well below or well
above 2°C (Rogelj et al., 2018). The implication is that to stabilize temperature, the entire
global economy must be decarbonized, implying an unprecedented rewiring of economic
production processes and supply chains. There is scant evidence that this is going
to happen on the required timescale: most projections have oil production holding up
until at least 2040 (McGlade and Ekins, 2015; IEA, 2016; Rogelj et al., 2018) and the
IEA anticipates continued high coal production, too, through the 2020s and into the
2030s (IEA, 2018). Much faster decarbonization would be required to meet the Paris
objectives.
Second, and a corollary to the first point, there is a given carbon budget that should
not be exceeded for any given level of warming. So to meet the 2oC or 1.5oC target, the
total remaining carbon budget can be calculated (Millar et al., 2016). This provides an
indication of the necessary speed of decarbonization of the electricity sector and electrification
of the economy.
Such calculations have, indeed, been made for the electricity sector (Pfeiffer et al.,
2016, 2018; Smith et al., 2019). Assuming that all sectors are perfectly on track to meet
a 2°C budget (which they are not), and assuming that the power plants in existence
operate for their normal economic lifetime at normal levels of carbon intensity, the
installed electricity generating capital stock from fossil fuels is near or already exceeds
the Paris budgets (Pfeiffer et al., 2016, 2018; Smith et al., 2019). Moreover, while it is
notable that, in 2018, 70 per cent of the new electricity generating capacity installed was
renewable (REN21, 2018), this implies 30 per cent was not—the installed fossil capital
base is still increasing, not decreasing as it would need to be. To give further perspective,
China will soon reach 1,000 GW of coal generating capacity, is building 250 GW
more, and sponsoring over 200 more coal projects abroad through the Belt and Road
Initiative (BRI) (Peng et al., 2017).
To meet the Paris goals, the electricity sector would need to provide a significantly
greater share of demand than it does currently—many sectors of the economy need
to decarbonize by electrifying themselves, directly or indirectly, as noted above. Much
of transport might end up being electrified; so too with many industrial applications.
The energy required for fertilizer for agriculture, currently delivered from natural gas
to ammonia to urea-based fertilizers, might come from solar and wind to hydrogen before
the transformations to ammonia and urea by the Haber–Bosch process. In short,
not only does electricity need to be decarbonized, but other economic sectors need to
be electrified, directly or indirectly, in order to be decarbonized. The gap between what
is likely, on a business-as-usual trajectory, and what is required to meet the targets is
enormous.
Finally, a less global but perhaps more potent environmental consideration is favouring
electrification based on renewable sources—local air pollution. The latest World
Health Organization report estimates that 7m people per annum lose their lives prematurely
from air pollution (World Health Organization, 2018). In heavily polluted urban
areas of China and India, air pollution reduces GDP due to days off work (0.3 per cent)
and lower productivity at work (8.5 per cent), and also because there are fewer workers,
given the early deaths (World Bank, 2016). By way of comparison, the air in many of
The age of electricity 187
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
these areas has the equivalent health impact to smoking a packet of cigarettes every day
(Rohde and Muller, 2015).
So, climate change will be helped by the transition to the age of electricity (provided
the sources of electricity are low carbon), but the transition is not occurring at the pace
required to solve our pressing environmental challenges. Efforts to solve these environmental
challenges are likely to further accelerate the prevailing trend to electrification.
IV.  Policy and political economy in the age of electricity
In order to have a functioning energy system in an age of electricity, four omnipresent
market failures need to be addressed by policy and regulation. First, environmental
externalities (especially carbon, but also air and water pollution) need to be correctly
priced. Second, market power needs to be controlled—in particular the natural monopoly
of the electricity networks (the poles and wires). Third, security of supply, as a
system property and hence a public good, needs to be ensured. Finally, there are market
failures related to R&D and wider knowledge spillovers that need to be addressed.
Dieter Helm (2019, this issue) examines these failures in the context of considering
the political economy obstacles to the reform of energy policy in Britain and specifically
the Cost of Energy Review. One of his core points is that governments have not
addressed these market failures, in part because the changes he proposes would reduce
the significant economic rents in the system. The vested interests that benefit from
such rents have successfully lobbied against change, resulting in higher total costs to
consumers.
Helm sets out a set of solutions. On carbon, he recommends bolstering the existing
carbon floor price (CFP) to a level to ensure that the UK’s domestic carbon budgets are
met, and coupling this price with a border carbon adjustment to achieve a level playing
field between domestic and foreign emissions. With a higher and border-adjusted price,
many of the other carbon-related subsidies could be reduced or eliminated. The net
costs of decarbonization would be lower.
On both market power and security of supply, Helm argues for a fully independent,
publicly owned, national system operator (NSO), as is currently in place in Australia,
for instance, and a network of publicly owned regional system operators (RSOs). At
present in Britain, National Grid both operates the system and owns many of the assets,
creating conflicts of interest.
In the British context, the problems are unlikely to be rapidly addressed. Helm critiques
the November 2018 response to the Review by the Secretary of State, Greg Clark,
arguing in particular that while some of the principles in the Cost of Energy Review
are accepted, Clark keeps open the door to retaining, or even adding to, the existing
‘thicket’ of interventions (Clark, 2018).
Interests that prevent efficient markets in energy are unlikely to vanish overnight,
either in the United Kingdom or elsewhere. However, given the more even distribution
of renewable electricity, compared to the geography of fossil fuels, and given the declining
costs due to strongly competitive markets in solar and wind, it appears likely that
the rents in the energy sector may gradually decline, eventually reducing resistance and
enabling policy change.
Dieter Helm and Cameron Hepburn188
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
V.  Near zero marginal cost and market design
A key feature of renewable electricity generating technologies is that they have close to
zero marginal costs. Unlike thermal electricity generation, which requires the purchase
and combustion of coal, oil, or gas, the incoming energy from the sun and the wind is
free, and marginal costs are limited. This represents a radical departure from the conventional
cost structure of electricity markets.
Industries with high fixed costs and close to zero marginal costs are, in fact, increasingly
common. Interestingly, many of the new digital industries share precisely this feature—once
a digital product has been produced, the cost of making a copy or supplying
it to an additional consumer is close to zero, given the non-rival nature of digitized
information (Anderson, 2009; Rifkin, 2014). In such markets, prices cannot equal marginal
costs of zero (as they do in a perfectly competitive market). If they did, companies
could not recover any of their fixed costs.
There are a number of possible functional structures for a market with zero marginal
cost. Producers can seek to charge a subscription for access, after which the consumer
can consume without limit. This is not dissimilar to the structure in place in broadband
markets. Alternatively, producers can seek to bundle other value-added products with
the zero marginal cost product. Tiered pricing can also work in some instances, where
there is a ‘freemium’ alongside a ‘premium’ service, that might be volume or quality related
(Anderson, 2009).
In the electricity industry, it is unlikely that the conventional market structure will
persist in the long term. Rather, some form of capacity mechanism (CM) or payment
has already been grafted on to the existing markets, so that consumers pay for both energy
and the availability of the capacity to generate that electricity. By contrast, Frank
Wolak (2019, this issue) advances a largely conventional market structure, arguing that
standardized futures markets for energy can still ensure security of supply, without the
need for a CM. He cites findings that a standardized and liquid futures market can increase
competition and drive prices down towards marginal cost. With strong liquidity,
new players can enter the retail market and hedge their risk with a portfolio of forward
contracts, enabling them to compete with incumbent suppliers.
Wolak argues that his approach is ideally suited to markets with a significant share
of intermittent renewable generation, on the basis that the concept of ‘firm capacity’
makes little sense in a world of intermittent generators. However, his approach effectively
pushes the requirement of security of supply on to market participants. Without
government intervention, the private penalties involved for breach of contract (e.g.
when a renewable generator fails to deliver as promised) are unlikely to be equal to the
social costs of the lights going out.
In contrast, Paul Joskow (2019, this issue) is more sceptical of current electricity
market structures. Even before the challenges created by large-scale deployment of
wind and solar, wholesale electricity markets have not been particularly effective at incentivizing
investment in new power generation. Joskow argues that to deal with the
challenges created by intermittent renewables, traditional wholesale markets should be
extended to include capacity markets, scarcity pricing mechanisms, and linkage of spot
wholesale and retail prices to facilitate demand-side response. Instead of these more
market-oriented extensions, however, he fears more direct government interventions,
because non-market support for intermittent generation is incompatible with relying
The age of electricity 189
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
on markets for the rest of the electricity generating portfolio. Joskow thus argues that
a separate market of long-term contracts is required to attract investment desired by
governments.
This is largely consistent with the idea advanced by Helm (2017b), who also advances
a CM in the form of an equivalent firm power (EFP) auction for capacity. Helm argues
that such a mechanism could replace all the current mechanisms for supporting new
electricity generation, such as feed-in tariffs for renewable energy, and contracts for
difference to resolve security-of-supply concerns. The mechanism would de-rate, or discount
the value of, intermittent capacity as a function of its contribution to overall
system security at times of peak demand. As a result it places the costs of intermittency
with those who cause it and incentivizes those intermittent generators to try to improve
their re-rating factors by contracting with back-up suppliers, demand-side reductions,
and storage directly and in secondary markets. The EFP proposal is not radically different
from the current CM that was put on ice on 14 November 2018, following a procedural
decision on state aid by the European Court of Justice.4 The core differences are
in the full integration of renewables into a single capacity market and in the calculation
of the de-rating factors.
It is, indeed, likely that CMs will also be put in place to ensure security of supply,
and this is already happening in Europe, as Fabien Roques (2019, this issue) observes,
but in a somewhat ad hoc and uncoordinated manner. He provides a helpful taxonomy
of the different sorts of CMs used across different countries (see his Figures 1 and 2).
This patchwork of capacity markets is not conducive to rational energy market integration
across Europe. In some cases, market design choices may even undermine
the very objective the mechanisms are aimed at meeting—security of supply. The core
issue arises from the requirement on the part of the EU that CMs must be open to
cross-border participation, such that foreign capacity can bid into such markets. But
will the foreign capacity be there in a crisis? Provided there is no crisis in the neighbouring
country, foreign capacity may well come to the rescue. But what are the odds
of crises happening in both countries at the same time? Unfortunately, those odds increase
as more renewables, subject to correlated availability of sun and wind, are added
to grids.
This is not to say that wind and solar availability are always and everywhere positively
correlated across neighbouring countries. But the brute reality is that in the event
of power shortages in two neighbouring countries, each country is likely to keep crucial
power supplies at home.
In theory, part of the solution to such problems is a fully-fledged cross-border capacity
mechanism as part of the Internal Energy Market. In practice this is not going to
happen in the short term, and Roques (2019) sets a more plausible pathway forwards to
implement coordinated CMs.
4  See the decision of the General Court of the Court of Justice of the European Union in Case T-793/14
at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.C_.2015.081.01.0021.02.ENG&toc=
OJ:C:2015:081:TOC.
Dieter Helm and Cameron Hepburn190
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
VI.  The implications for gas, oil, and coal companies of
the age of electricity
The transition to the age of electricity, as the previous sections demonstrate, threatens
the very existence of powerful incumbents. Companies focused on mining coal and extracting
oil and gas from the ground for combustion will, over the course of the next
few decades, need to change business model or face closure. There are two main drivers:
the impact of zero marginal costs on market structures; and the climate-change goals.
The first is sufficient to trigger major changes in company structure and strategies;
the second would speed these reactions to the technology-induced changes in the cost
structures of the industries.
The structure of conventional fossil fuel producers, and incumbent large electricity
utilities, has been vertical integration. The internalization of production, generation,
transmission and distribution pipelines, wires and ocean transport, and supply is a response
to large upstream sunk costs and the dominance of wholesale energy markets.
As more zero marginal cost electricity generation comes on to the market, and as the
share of electricity rises, the future role of the electricity wholesale market will gradually
shrink to balancing in response to intermittency, providing price signals to batteries
and other forms of storage, along with digitalized demand flexibility.
The shift in cost and market structure creates an environment in which new business
models can develop and emerge, threatening the vertically integrated incumbent electricity
companies. These players now face serious economic and financial challenges. The
organizational structures and competencies of the incumbents will need to evolve to
adapt to the new and emerging underlying cost conditions.
For the conventional oil and gas companies, whether national oil companies (NOCs),
which control 90 per cent of global reserves (Tordo, 2011), or the international oil companies
(IOCs), their future is constrained by their history and corporate specialisms,
and by the prospect of eventual peak oil (and possibly even gas) demand, and falling
long-term prices as they compete with excess supply and diminishing demand.
Though there are examples of companies that have made a transition from one set
of corporate skills to another, the new context of decentralized renewable electricity,
storage and demand management, is not one for which they are currently well equipped.
The lessons from BP and Shell’s past forays into alternative energy are salutary (Miller,
2013), and although many IOCs have returned to renewable electricity markets, the
bulk of their financial returns (and corporate) emphasis at this stage remains in their
conventional fossil fuel markets.
On a business-as-usual basis, the IOCs are well placed to continue to extract profits
and dividends over several decades to come. The main projections from the IOCs point
to a growth in demand through to around 2040 (ExxonMobil, 2017; Shell Oil, 2018;
British Petroleum, 2018; IEA, 2018), even allowing for potential bans to internal combustion
engines (British Petroleum, 2018; p. 45) and since the IOCs comprise a small
proportion of the total market compared to the NOCs, and have technological advantages
over these NOCs, remaining in oil and gas production with links to transport and
the rapidly growing petrochemicals is a profit-maximizing strategy for them. The challenges
to such a strategy are largely confined to global politics and policies to address
climate change, since their projections are wildly incompatible with the 2oC or 1.5oC
climate targets.
The age of electricity 191
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
From a profit-maximizing perspective, are they right to assume that, notwithstanding
the Paris agreement, not much is actually going to be done? The key increases in demand
for energy are in China, India, and Africa. The growth in all three is still based
upon fossil fuels. China, as already noted, is expanding its coal capacity, India is 80 per
cent dependent on fossil fuels, and Africa depends heavily on mining and coal. Global
carbon dioxide emissions have not peaked as environmentalists hoped (Le Quéré et al.,
2018). Russia has little or no interest in curtailing emissions: on the contrary, it has
much to gain from opening up the Arctic north-eastern passage, enabling liquefied natural
gas (LNG) exports to increase. It is investing in eight nuclear-powered icebreakers
to speed this process (Brokeš, 2018).
Conventional oil and gas companies might consider themselves unlikely to face serious
policy measures to reduce emissions in the fastest growing markets over the short
to medium term. What does, however, pose a serious challenge is the impact of zero
marginal costs in electricity feeding through into transport markets and more generally
undercutting the growth in demand for fossil fuels as the electricity share rises in final
energy demand. It is the technological changes, and the growing share of electricity,
which are likely to have the more immediate impact on the incumbent companies and
their strategies. The most important of these is the prospect of falling oil and gas prices.
Until the price falls in 2014, many political leaders, policy-makers, and pundits argued
that oil supplies would peak (Parthermore and Nagl, 2010; Aleklett, 2012; Helm, 2015).
In fact, there is no practical limit on the supplies of hydrocarbons (Maugeri, 2012;
Helm, 2017a). Technological progress is not only found in the renewable industry, and
the coming of large-scale shale oil and gas production (only a decade old) has already
transformed global energy markets, with the US quickly moving to be the largest producer
just ahead of Saudi Arabia and Russia, and heading to the number three slot in
LNG exports (behind Qatar and Australia). As and when demand peaks, and with shale
technology gradually globalizing, the supply–demand balance will shift towards falling
prices. With the marginal costs of oil production at less than $10 in Saudi Arabia, with
very large production potential in Iraq and Iran, and if and when Venezuela starts serious
production again, with Russian marginal costs around $20, the scope for price falls
is considerable.5 Indeed, the recognition that oil tomorrow might be worth less than oil
today might accelerate the scramble for market share (Sinn, 2012; Helm, 2017a).
There is an obvious and challenging feedback from falling oil (and gas) prices to
electricity and the decarbonization agenda. The ‘break even’ price at which renewables
are competitive with fossil fuels is a moving target. It is not enough to be cheaper than
current fossil prices, given prices will eventually fall towards the extraction costs of the
cheapest barrel. Recognizing this, the appropriate policy answer is to internalize the
damage from carbon emissions with a carbon price accompanied by border carbon
adjustments (BCAs) (Helm et al., 2012). Indeed, the case for BCAs is all the more urgent,
given the prospect of long-run falling fossil fuel prices. For oil companies, the
strategic question is whether there is much chance that carbon taxes and BCAs will be
applied. While carbon prices are expanding around the world (World Bank and Ecofys,
2018), they are a very long way off what is required, both in coverage and in price level.
Investors in conventional oil and gas companies are likely to be relaxed about this threat
5 See http://graphics.wsj.com/oil-barrel-breakdown/
Dieter Helm and Cameron Hepburn192
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
to their profit-maximizing strategies. From their perspective, harvest and eventual exit
may be a dividend-maximizing strategy. (It is not surprising that IOCs tend to be high
dividend paying companies.) They might eventually just ‘burn out’ (Helm, 2017a).
VII.  Conclusions and policy recommendations
The age of electricity is coming. It is a question of when, not if. It is the product of
deep technical change, involving the digitalization of many economic processes on the
demand side and increasing direct sources of renewable electricity on the supply side.
The world of the future is one that, directly or indirectly, will be overwhelmingly based
upon electricity.
The fossil fuels will not, however, vanish overnight. The long lead times in two of the
key markets for oil and gas—transport and petrochemicals—and the widespread failures
of climate mitigation agreements and policies ensure that the fossil tail is likely to
be decades long.
The most immediate impact of the coming of the age of electricity is the transformation
of electricity markets. Near zero marginal costs and intermittency together
create fundamentally different cost structures. The economic arrangements to reflect
these new cost structures are already manifesting themselves in the emergence of new
companies and business models, and especially in market structures and contracting
arrangements.
There is much dispute about the future of wholesale electricity markets and the edifice
of electricity and energy market policies erected upon them. Capacity markets have
re-emerged, and the wholesale electricity market faces a declining relevance.
The transition is inevitably going to be a long one, but there are market interventions
that aid this. Two key measures are to develop the capacity market designs, notably
through addressing intermittency (and incentivizing firms to tackle it through peaking
generators, storage, and demand-side technologies), and ensuring coordination of capacity
markets between countries.
The papers in this issue provide a range of solutions, from increasing market depth
and liquidity, to Equivalent Firm Power auctions, reforming system operation in markets
like Britain’s, where the operator and asset owners are not separated, and reforming
the European internal energy market arrangements to explicitly address the harmonization
of capacity markets and cross-border trading. These policies have the advantage
of being efficient interventions, whether or not the wholesale markets wither away, and
independently of how quickly the age of electricity is upon us.
References
Aleklett, K. (2012), Peeking at Peak Oil, New York, Springer Science and Business Media.
Anderson, C. (2009), Free: The Future of a Radical Price, New York, Hyperion.
Bacon, R., and Masami, K. (2016), ‘Energy, Economic Growth, and Poverty Reduction, A Literature
Review’, World Bank Group.
The age of electricity 193
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
Beier, J., Thiede, S., and Herrmann, C. (2015), ‘Increasing Energy Flexibility of Manufacturing Systems
through Flexible Compressed Air Generation’, Procedia CIRP, 37, 18–23.
British Petroleum (2018), BP Energy Outlook Report, available at https://www.bp.com/content/dam/
bp/en/corporate/pdf/energy-economics/energy-outlook/bp-energy-outlook-2018.pdf
Brokeš, F. (2018), ‘Russia’s Alternative Trade Route’, Central European Financial Observer, 15 February,
available at https://financialobserver.eu/cse-and-cis/russias-alternative-trade-route/
Burke, P. J., Stern, D. I., and Bruns, S. B. (2018), ‘The Impact of Electricity on Economic Development:
A Macroeconomic Perspective’, International Review of Environmental and Resource Economics,
12(1), 85–127.
Clark,  G. (2018), ‘After the Trilemma—4 Principles for the Power Sector’, transcript of speech,
Department for Business, Energy & Industrial Strategy, available at https://www.gov.uk/
government/speeches/after-the-trilemma-4-principles-for-the-power-sector
Energy Transitions Commission (2018), Mission Possible; Reaching Net Zero Carbon Emissions from
Harder-to-abate Sectors by Mid-century, http://www.energy-transitions.org/sites/default/files/
ETC_MissionPossible_FullReport.pdf
Espinosa,  M.  P., and Pizarro-Irizar,  C. (2018), ‘Is Renewable Energy a Cost-effective Mitigation
Resource? An Application to the Spanish Electricity Market’, Renewable and Sustainable Energy
Reviews, 94, 902–14.
ExxonMobil (2017), ‘Summary Annual Report’, ExxonMobil, Irving, TX, https://cdn.exxonmobil.
com/~/media/global/files/summary-annual-report/2017-summary-annual-report.pdf
Frondel, M., Ritter, N., Schmidt, C. M., and Vance, C. (2010), ‘Economic Impacts from the Promotion
of Renewable Energy Technologies: The German Experience’, Energy Policy, 38(8), 4048–56.
Gan, L., Eskeland, G. S., and Kolshus, H. H. (2007), ‘Green Electricity Market Development: Lessons
from Europe and the US’, Energy Policy, 35(1), 144–55.
Gawel,  E., and Lehmann,  P. (2019), ‘Should Renewable Energy Policy be “Renewable”?’, Oxford
Review of Economic Policy, 35(2), 218–243.
Helm, D. R. (2015), The Carbon Crunch, New Haven, CT, Yale University Press, revised and updated edn.
—	(2017a), Burn Out—The Endgame for Fossil Fuels, New Haven, CT, Yale University Press.
—	(2017b), Cost of Energy Review, London, Department for Business, Energy & Industrial Strategy.
—	 (2019), ‘The Cost of Energy Review and its implementation’, Oxford Review of Economic Policy,
35(2), 244–59.
—	 Hepburn, C., and Mash, R. (2003), ‘Credible Carbon Policy’, Oxford Review of Economic Policy,
19(3), 438–50.
—	 — Ruta, G. (2012), ‘Trade, Climate Change, and the Political Game Theory of Border Carbon
Adjustments’, Oxford Review of Economic Policy, 28(2), 368–94.
IEA (2016), World Energy Outlook 2016, International Energy Agency.
—	 (2018), ‘World Energy Outlook 2018 Examines Future Patterns of Global Energy System at a
Time of Increasing Uncertainties’, International Energy Agency, available at https://webstore.iea.
org/world-energy-outlook-2018
IRENA (2017), Electricity Storage and Renewables: Costs and Markets to 2030, International
Renewable Energy Agency, Abu Dhabi, available at https://www.irena.org/-/media/Files/IRENA/
Agency/Publication/2017/Oct/IRENA_Electricity_Storage_Costs_2017.pdf
Joskow,  P.  L. (2019), ‘Challenges for Wholesale Electricity Markets with Intermittent Renewable
Generation at Scale: The US Experience’, Oxford Review of Economic Policy, 35(2), 291–331.
Kammen, D. M., and Nemet, G. F. (2005), ‘Reversing the Incredible Shrinking Energy R&D Budget’,
Issues in Science and Technology, 22(1), 84.
Keller,  F., Schultz,  C., Braunreuther,  S., and Reinhart,  G. (2016), ‘Enabling Energy-flexibility of
Manufacturing Systems through New Approaches within Production Planning and Control’,
Procedia CIRP, 57, 752–57.
Kirsch, D. A. (2000), The Electric Vehicle and the Burden of History, New Brunswick, NJ, Rutgers
University Press.
Dieter Helm and Cameron Hepburn194
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
Le Quéré, C., et al. (2018), Carbon Budget and Trends 2018, Global Carbon Project, available at www.
globalcarbonproject.org/carbonbudget
Lesser, J. A., and Su, X. (2008), ‘Design of an Economically Efficient Feed-in Tariff Structure for
Renewable Energy Development’, Energy Policy, 36(3), 981–90.
McGlade, C., and Ekins, P. (2015), ‘The Geographical Distribution of Fossil Fuels Unused When
Limiting Global Warming to 2°C’, Nature, 517, 187.
Maugeri, L. (2012), ‘Oil: The Next Revolution, The Unprecedented Upsurge of Oil Production and
Capacity and What it Means for the World’, Harvard Kennedy School, Belfer Center, available at
https://www.belfercenter.org/sites/default/files/legacy/files/Oil-%20The%20Next%20Revolution.
pdf
Millar, R., Allen, M., Rogelj, J., and Friedlingstein, P. (2016), ‘The Cumulative Carbon Budget and its
Implications’, Oxford Review of Economic Policy, 32(2), 323–42.
Miller, D. (2013), ‘Why the Oil Companies Lost Solar’, Energy Policy, 60, 52–60.
Newbery, D. (2018), ‘Evaluating the Case for Supporting Renewable Electricity’, Energy Policy, 120,
684–96.
Parthemore, C., and Nagl, K. (2010), ‘Fueling the Future Force Preparing the Department of Defense
for a Post-Petroleum Era’, Center for New American Security, available at http://citeseerx.ist.psu.
edu/viewdoc/download?doi=10.1.1.174.9080&rep=rep1&type=pdf
Peng, R., Chang, L., and Liwen, Z., (2017), China’s Involvement in Coal Fired Power Plants Along the
Belt and Road, Global Environmental Institute, available at http://www.geichina.org/_upload/file/
report/China’s_Involvement_in_Coal-fired_Power_Projects_OBOR_EN.pdf
Pfeiffer,  A., Hepburn,  C., Vogt-Shilb,  A., and Caldecott,  B. (2018), ‘Committed Emissions from
Existing and Planned Power Plants and Asset Stranding Required to Meet the Paris Agreement’,
Environmental Research Letters, 13, 054019.
— Millar,  R., Hepburn,  C., and Beinhocker,  E. (2016), ‘The “2 C Capital Stock” for Electricity
Generation: Committed Cumulative Carbon Emissions from the Electricity Generation Sector and
the Transition to a Green Economy’, Applied Energy, 179, 1395–408.
Philibert, C. (2019), ‘Direct and Indirect Electrification of Industry and Beyond’, Oxford Review of
Economic Policy, 35(2), 197–217.
Popp, D. (2006), ‘R&D Subsidies and Climate Policy: Is There a “Free Lunch”?’, Climatic Change,
77(3–4), 311–41.
REN21 (2018), Renewables 2018 Global Status Report, Paris, Renewable Energy Policy Network for the
21st Century, available at http://www.ren21.net/wp-content/uploads/2018/06/17-8652_GSR2018_
FullReport_web_final_.pdf
Rifkin, J. (2014), The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons,
and the Eclipse of Capitalism, New York, St Martin’s Press.
Roques, F. (2019), ‘Counting on the Neighbours: Challenges and Practical Approaches for Crossborder
Participation in Capacity Mechanisms’, Oxford Review of Economic Policy, 35(2), 332–349.
Rogelj, J., Shindell, D., Jiang, K., Fifita, S., Forster, P., Ginzburg, V., et al. (2018), ‘Mitigation Pathways
Compatible with 1.5 C in the Context of Sustainable Development’, in IPCC Special Report on the
Impacts of Global Warming of 1.5°C in the Context of Sustainable Development, Geneva, World
Meteorological Organization.
Rohde, R. A., and Muller, R. A. (2015), ‘Air Pollution in China: Mapping of Concentrations and
Sources’, PloS one, 10(8), e0135749.
Shell Oil (2018), Shell Energy Transition Report, available at https://www.shell.com/energy-
and-innovation/the-energy-future/shell-energy-transition-report/_jcr_content/par/toptasks.
stream/1524757699226/f51e17dbe7de5b0eddac2ce19275dc946db0e407ae60451e74acc7c-
4c0acdbf1/web-shell-energy-transition-report.pdf
Sinn, H. W. (2012), The Green Paradox: A Supply-side Approach to Global Warming, Cambridge, MA,
MIT press.
Smil, V. (2010), Energy Transitions: History, Requirements, Prospects, ABC-CLIO.
The age of electricity 195
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021
Smith,  C.  J., Forster,  P.  M., Allen,  M., Fuglestvedt,  J., Millar,  R.  J., Rogelj,  J., and Zickfeld,  K.
(2019), ‘Current Fossil Fuel Infrastructure Does Not Yet Commit Us to 1.5° C Warming’, Nature
Communications, 10(1), 101.
Toke, D. (2007), ‘Renewable Financial Support Systems and Cost-effectiveness’, Journal of Cleaner
Production, 15(3), 280–7.
Toman, M. A., and Jemelkova, B. (2003), ‘Energy and Economic Development: An Assessment of the
State of Knowledge’, The Energy Journal, 93–112.
Tordo, S. (2011), National Oil Companies and Value Creation, Washington, DC, World Bank.
Wolak, F. A. (2019), ‘The Benefits of Purely Financial Participants for Wholesale and Retail Market
Performance: Lessons for Long-term Resource Adequacy Mechanism Design’, Oxford Review of
Economic Policy, 35(2), 260–290.
World Bank (2016), The Cost of Air Pollution: Strengthening the Economic Case For Action, Washington,
DC, World Bank Group.
—	 Ecofys (2018), ‘State and Trends of Carbon Pricing 2018 (May)’, Washington, DC, World Bank.
World Energy Council (2016), World Energy Scenarios Report, 2016, https://www.worldenergy.org/wp-
content/uploads/2016/10/World-Energy-Scenarios-2016_Executive-Summary-1.pdf
World Health Organization (2018), ‘How Air Pollution is Destroying Our Health’, Geneva, World
Health Organization.
Dieter Helm and Cameron Hepburn196
Downloadedfromhttps://academic.oup.com/oxrep/article/35/2/183/5477307byCharlesUniversityuseron30April2021