GLOBAL ENERGY TRANSITION

The Oxford Institute for Energy Studies- 04.04.25 - From Scarcity to Scale: The New Economics of Energy

1. Introduction

The global energy sector is exhibiting fundamentally different characteristics compared with two decades ago. The key components of renewable energy systems (solar panels, wind turbines, batteries, electrolysers) are manufactured goods. We see production concentrated in certain regions (e.g., solar PV in China) not because of rare natural resource endowments, but due to industrial policy, supply chain efficiencies, and economies of scale. The potential for such production exists wherever there is industrial capacity and investment. Governments worldwide are recognising the economic and strategic benefits of controlling supply chains for low-carbon technologies. Specifically, China’s dominance in solar PV module production (almost 85% of global production as of 2023) (Statista, 2024a) and battery manufacturing (79% of global EV Li-ion batteries as of 2021) (Statista, 2024b) has spurred rival policies. The U.S. Inflation Reduction Act (IRA) (U.S. Department of Energy, 2022a) and the EU’s Net-Zero Industry Act (Sciencebusiness, 2024) offer subsidies, tax breaks, and other incentives to attract clean tech manufacturing. Japan’s “Green Growth Strategy” (Ministry of Economy, Trade and Industry, 2024) and South Korea’s “Green New Deal” (Intralink, 2021) outline specific targets and incentives for hydrogen and battery technology manufacturing, indicating that competition for future manufacturing leadership is escalating across Asia as well.

As a result of these new industrial strategies, solar panel and battery manufacturing is gradually expanding beyond traditional hubs (e.g., China) to regions like the U.S., EU, India, and Southeast Asia. Some nations (e.g., Vietnam, Malaysia) have grown PV production by leveraging advantages such as access to skilled labour, supportive policies, and existing manufacturing bases (Asian Development Bank, 2023). Similarly, battery production for electric vehicles (EVs) is scaling across multiple countries (e.g., South Korea, Japan, the United States, Germany) (Invest KOREA, 2025), underscoring that manufacturing is “footloose” relative to fossil fuel extraction. The key resources (e.g., lithium, nickel, cobalt) can be shipped, and battery assembly can take place wherever policy and market conditions are favourable. This stands in sharp contrast with fossil fuels, where extraction is tied to specific geological formations; low-carbon manufacturing relies on technology and supply chains that can be established globally, reducing geographic constraints. Nations are actively competing to capture market share, reflecting a profound shift from resource control to industrial strategy.

This transformation has redefined our understanding of energy security. Governments are increasingly framing energy security in terms of stable access to clean energy technologies—solar panels, wind turbines, batteries—rather than merely securing oil or gas supply routes. For instance, the U.S. Department of Energy’s supply chain reviews highlight vulnerabilities in imported solar cells and battery components and emphasise domestic production capacity (U.S. Department of Energy, 2022b; White House Council on Supply Chain Resilience, 2024). The COVID-19 pandemic and the war in Ukraine exposed vulnerabilities in global supply chains, including those for clean energy technologies, highlighting the importance of domestic manufacturing capacity and resilient supply chains. Countries are also seeking to secure intellectual property and manufacturing know-how for emergent technologies like solid-state batteries or hydrogen electrolysers. Furthermore, policymakers are increasingly using export controls on advanced technologies to protect domestic industries, demonstrating the shift towards technology control as a tool of energy security. As renewable energy systems become more integrated with digital grids, cybersecurity emerges as a critical aspect of energy security—a technology-focused concern rather than a traditional fuel-access issue. These developments signal that technology leadership is becoming a core pillar of energy security strategies.

The nature of innovation in the energy sector is also changing dramatically. Manufacturing innovation is becoming more critical than resource extraction innovation. In the fossil fuel era, innovation primarily focused on discovering new reserves and extracting them more efficiently. In contrast, renewable energy innovation centres on improving manufacturing processes, reducing costs, and enhancing technological efficiency. Consequently, countries are gradually shifting their R&D investments and talent pipelines to address manufacturing and technological challenges of renewable energy, rather than traditional fossil fuel extraction. Data from the International Energy Agency (IEA) indicate that over the past two decades, renewable energy patents have grown at a faster rate than fossil-fuel-related patents (IEA, 2024)1. While fossil fuel patents historically outnumbered those for renewables, the gap has narrowed or reversed in many technology categories. Since approximately 2010—and particularly after 2015—renewable technologies, including solar, wind, and enabling technologies such as storage, have driven most energy-sector patent growth. However, recent trends suggest a slowdown in renewable energy patent growth, indicating the maturation of some technologies, while innovation in traditional fossil fuel extraction continues to decline.

The faster growth of renewable energy patents is significant, as the dramatic cost reductions in solar PV over the past decade have primarily resulted from manufacturing innovations—such as larger wafers, thinner silicon, and improved cell designs—rather than breakthroughs in discovering new “solar reserves.” Similarly, intensive R&D efforts are focused on improving battery performance (energy density, charging speed, and lifespan) and reducing costs through advances in materials science and manufacturing processes. The development of larger, more efficient wind turbines has been driven by innovations in advanced materials, aerodynamics, and manufacturing techniques, rather than new methods of “finding wind.” As a result, expertise in materials science, manufacturing engineering, and systems integration is becoming increasingly vital for the energy sector.

These shifts carry profound implications for decarbonisation strategies. Countries have realised that simply subsidising renewable energy deployment (e.g., feed-in tariffs) does not automatically reduce vulnerabilities and dependencies. Consequently, emphasis has shifted to coordinating deployment support with manufacturing development. Countries are increasingly coupling deployment incentives with local content requirements, tax credits for local manufacturing, or R&D support. For example, the IRA conditions some tax credits on domestic content (IRS, 2025). This need for coordination is also evident in trade disputes, where countries have begun imposing tariffs on imported clean energy products to protect domestic manufacturers, highlighting the tension between promoting deployment (which may favour cheaper imports) and fostering domestic production.

The trends observed in the global energy system signal a fundamental shift in the economics of energy, diverging from the fossil fuel era’s core principles—scarcity, geographic constraints, and resource control—and embracing new dynamics driven by technology, manufacturing scalability, innovation, and policy coordination. This transformation necessitates a new framework for understanding energy economics, as traditional models rooted in fossil fuel paradigms fail to capture the unique characteristics of low-carbon systems. This paper conceptualises the transition from conventional energy economics to a new paradigm and explores its implications for markets, policy, and the strategic decisions of market participants.

The structure of the paper is as follows. Section 2 provides a historical background on traditional commodity-based energy markets, with a focus on the Hotelling model. It presents key insights from the Hotelling model, highlights its shortcomings, and discusses the economic features of traditional energy markets beyond scarcity. Section 3 introduces the new economics of energy, explains its emergence, and explores its key economic characteristics through the concept of the learning curve. Section 4 examines the implications of this technology-driven energy economics. Finally, Section 5 offers concluding remarks.

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