Improvements in resource allocation and efficiency of our energy systems are needed to attain sustainability. How can we obtain increasing utility value for a much larger number of people with shrinking resources? Energy systems produce commodities that are an essential part of industrial production systems and people’s lives all over the globe. Thus energy systems need to be reliable and affordable, and transfor­mation of their organization should not put security of supply at risk.

Energy systems are complex, composed of a variety of technologies for energy generation, distribution and use which can cause significant impacts. Even if indi­vidual technologies can sometimes be uncomplicated, the internal logistics of energy systems can be quite intricate. Single technological improvements are seldom sufficient to accomplish the extent of efficiency improvements needed. It is at systems level, in which various specific technologies are included and resources well managed, that such improvements can be achieved. Dematerialization and better allocation of financial and human resources are obviously needed.

The various dimensions of energy systems, including technical, logistical, institu­tional and end-use aspects, are reflected in the infrastructure built over the centuries. Intra-system relations have also evolved, providing both opportunities and con­straints to the renewal of the energy infrastructure. Opportunities, because it is at the systems level that major innovations can make most difference; constraints, due to the usual sectoral approach to management and innovation. In addition, established systems generate jobs, economic output and social welfare, and any disruption of this balance is bound to create protest, unemployment and diseconomies.

The decentralization of ownership and management in infrastructure sectors has gradually led to institutional changes. Electricity and heat markets have been created. Besides increasing competition, energy companies have to respond to stiffening environmental regulations, changing service demands, and new technolo­gical choices. This forces companies to define innovative business strategies. Con­siderable attention has to be given to the size and quality of the demand, and there is now a stronger focus on the economic and financial dimensions of the business in contrast with the technological options at hand. This has contributed to increased efficiency within the sector but has not yet proven to offer the dynamics needed to innovate the sector at a systems level.

The political role has changed from planning the expansion and operation of the technical system per se to regulating and guaranteeing the overall balance of the system, and designing policies to foster the development of sustainable energy systems. Within this new context, new energy markets are maturing and energy infrastructure is evolving as a result of decentralized decision-making based on the given policy frameworks. If policies are ineffective, there is a risk that decisions on investments and calculations on returns become very short-sighted, leading to a less than optimal overall result. Governments need, therefore, to orchestrate energy policy in such a way that good ground is given not only for new investments but also for innovation.

The new context of energy markets is conducive to the introduction of renewable energy options and the inclusion of users as important actors in the operation and development of energy systems. Obviously, they have always been important, only the traditional engineering view of energy systems used to focus on the large-scale technological solution, often forgetting to try and understand the motivations and practices of the users. We have broadened the considerations on resource avail­ability, technology choice and reliability and are now asking questions about acceptability, cost return and profitability. More attention to the users is necessary in a competitive market thus hopefully also resulting in better service provision.

Certainly, energy research and planning have taken a new direction due to a broadening of the energy systems perspective to include the human dimension in terms of behavior and their role in the formation of energy service markets. However, conceptual changes are not enough. The present conditions can simply lead towards further development of conventional technologies in a short-sighted market approach. In contrast, markets can be used to promote innovative energy systems if the policy framework and incentives are there to help direct the responses of markets and users.

Markets have to be created for new alternatives which are considered desirable by society but which will not easily take off unless a policy framework is put in place to promote them. IEA (2003b) talks about the three perspectives through which we analyze market formation, these being (1) the research, development and deploy­ment perspective which focuses on innovation and industrial strategies; (2) the market barriers perspective which is the economist’s perspective and focuses on decisions made by investors and users; and (3) the market transformation perspective which looks into the whole chain from production to use. IEA concludes that the three perspectives are complementary and they are all needed to help define good policies that can transform visions into practice through the discipline of markets.

Within well-functioning markets, incentives for innovation have to be created, for example to promote better resource management and increase energy efficiency. Yet there are potential synergies which may not easily occur because it would require efforts that are marginal to the core activities of the industries affected. Since the potential for efficiency improvement of each single innovation is limited, optimi­zation at the unit level only gives relative gains compared with the gains that could be reached at a systems level (FRN, 1998). This is very relevant to consider in the context of climate change mitigation. Most greenhouse gas emissions come from the energy system and significant changes will have to take place in the way we organize energy infrastructure as a whole and in each unit. However, synergy effects exist within other sectors which affect energy demand and use. The scale of emissions reduction needed will require a broader view of possibilities for systems integration, for example, considering how urban and regional spaces operate.

There is a great stock of knowledge in the energy sector about the potential for raising efficiency. A number of measures and technologies that could contribute towards reducing greenhouse gas emissions are also known. But how will improved material efficiency affect energy intensity in industry and finally affect the demand for energy and transport, for example? How will information technology affect the demand for transport, the urban structure, and the use and demand for energy? The answers to these questions are not trivial and markets cannot provide them. The answers lie in innovative thinking as much as in technological innovation. Increased understanding of the interplay between the systems that compose our economy is needed to identify and implement the innovations that will lead to breakthrough.