Technology neutrality and the pursuit of net zero
Energy 2024: a year in review

Technology neutrality and the pursuit of net zero

Adopting a mix of technologies makes economic sense but faces practical and political hurdles.

The technology neutrality principle has increasingly gained support from various voices within the European Union.

In his report on the future of European competitiveness, Mario Draghi emphasises that a technology-neutral approach is the most effective way to accelerate decarbonisation efficiently.

However, the interpretation of technology neutrality is sometimes nebulous and sparks considerable debate at the political level, especially in the energy sector. An example is whether EU funds should be used to support nuclear energy, as advocated by the European Nuclear Alliance, a group of 14 EU member states including France, Sweden and Poland. 

During his introduction hearing, Energy Commissioner Dan Jørgensen reaffirmed his commitment to a technology-neutral approach for his legislative term, following an explicit reference to that principle in his mission letter (which was subsequently updated to include reference to a 2040 renewables target).

Stakeholders typically frame technology neutrality so that it fits in with their respective energy policy interests. If we take a step back from political positioning, what does economics have to say about the merits of the idea?

Benefits of technology neutrality

Typically, technology neutrality is understood as policymakers allowing the market to bring forward the least costly solutions to achieve their policy goals. The underlying principle is straightforward: policymakers should not pick winners, but rather provide the frameworks that enable the best options to emerge.

Our recent study for Eurogas illustrates the potential benefits of technology neutrality, taking the example of transitioning to carbon neutrality by 2050. Using our energy systems optimisation modelling tool (COMET), we considered the costs associated with alternative routes to a net zero EU energy system by 2050. Some pathways, such as those used by the associations for European energy grid operators in their medium-term planning process, make a priori assumptions regarding the energy mix and the role different energy carriers and technologies are allowed to play. Our model, on the other hand, can more freely select the cheapest technology options and fuels (except for regionally specific constraints on lignite, coal and nuclear plants), leading to significant cost savings for society.

Another example is our 2022 study on pathways to sustainable mobility in Europe, which produced similar findings. Given potential supply chain bottlenecks, allowing for a mix of drive-train technologies can help accelerate progress towards carbon-neutral vehicle fleets.

Practical trade-offs

However, the practical application of technology neutrality in the real world is rarely straightforward.

First, establishing a level playing field requires participants to bear all relevant costs – not just the benefits - associated with their investments. The aim is to ensure that the resulting technology mix is least cost from the perspective not only of private commercial interests but society as a whole. This is the organising principle of the EU Emissions Trading Scheme (ETS), which requires polluters to pay for their carbon emissions.

But technologies may have other effects that are more difficult to price in. For example:

  • As well as the climate threat, policymakers have become sensitive to other dimensions of sustainability, such as biodiversity. Internalising these impacts requires a value to be placed on the services provided by nature; and
  • Technologies often have very different risk profiles. Large-scale nuclear power has a significantly longer lead time and longer lifetime than, say, solar PV. As a result it faces greater uncertainty over future costs such as decommissioning and waste disposal, materially affecting its apparent relative cost effectiveness.

Second, ensuring a level playing field may lead to the selection of technologies that are least cost today but may not be the cheapest long-term option if other, currently immature technologies fulfil their innovative potential.

Third, in some cases, strategic decisions taken by authorities can constrain technology neutrality. Network investment plans approved by energy regulators, for example, determine whether and where a particular technology can be profitably deployed.

Finally, policymakers may be concerned about the distributional drawbacks of technology neutrality, Specifically, remunerating all technologies identically may lead to some energy providers extracting rents (i.e. getting more than they “need” in order to invest). These costs will be borne by consumers and taxpayers.

To reduce rents and thus limit the impact on voters, policymakers may opt, in effect, for price discrimination and remunerate technologies according to what they need. Since such price discrimination rarely works perfectly, it risks sacrificing efficiency by constraining deployment of cheaper technologies. This trade-off, ultimately, is a political one. 

Technology neutrality is efficient in principle, but achieving it in practice is hard work. Even where the conditions for success exist, strategic decisions (for example regarding energy network investments) often involve implicitly taking a view on the technology mix. And policymakers’ concern for voters’ wallets may mean they choose to sacrifice efficiency.

At EU level there is an increasingly complex array of sector-specific targets and policy measures that favour certain groups of technologies over others. In deciding on such targets and measures it is not always clear how the various trade-offs described above are negotiated.

If Europe is serious about lowering energy costs, policymakers should carefully consider the justification and evidence behind any new technology preferences and restrictions. Once objectives have been defined, it is also important to harness the full range of technologies that can help meet those objectives. In some cases, such as the example of vehicle fleet decarbonisation targets, this will involve careful design of more detailed underlying market rules and regulations to achieve a level playing field.