The cost of renewable energy: time to disprove the myths

Article by Dr. Hermann Scheer published in the Climate Action Book 2009 for the UN Climate Change Conference in Copenhagen, December 2009

Among the many myths about our energy supplies, one of the most insidious is the high price of renewables. If all energy alternatives are too expensive, the argument runs, then the world should continue on its course of dependence on fossil-based sources. In this article Hermann Scheer debunks this myth and explains why we must keep developing the renwables, describing how each affected industry can make the most of the new opportunities.

When talking about renewable energies, there always follows – like a pavlovian reflex – the question of costs. The basic assumption still predominates that renewables are not affordable; that they cost too much in comparison with conventional energies. In other words, there is a negative economic myth about renewable energy. This assumption acts as a permanent excuse not to adopt a grand strategy to actively deploy renewable energy. It is argued that the time for renewables has not yet come. Investments in the field of renewable energy are considered an economic burden that no one is willing to shoulder. Those arguments are short-sighted, superficial and highly misleading.

They are short-sighted because they ignore the fundamentally different economic prospects of conventional energies on the one hand and renewables on the other. It is obvious that conventional energies will become more and more expensive over time, whereas the costs for renewables steadily decrease. Rising fuel costs from depleting resources (oil, natural gas, coal, uranium) inevitably result in increasing costs for the conventional energy supply. Extraction costs will rise because the remaining resources become harder and harder to extract, necessitating complex technical efforts. What is more, due to the depletion of conventional energy resources, the fuel supply is coming from fewer and fewer sources in an ever-decreasing number of countries, which increases the monopolisation of resources. Suppliers of conventional fuels gain more and more opportunities to raise prices.

The inevitable price rises apply to oil, natural gas, coal and uranium. They evolve in escalating wave movements. At present – in the year 2009 – we are once again in a downswing compared with 2008, but this results from the critical global economic situation triggered by the financial crisis. These comparatively low fuel prices are only short-lived and not permanent. The mid-term trend of fuel prices is undoubtedly pointing upwards.

Extra cost factors

Another factor that must be taken into consideration is price increases when erecting new large energy production facilities. Because there only exist a few producers of the necessary materials and holders of the relevant know-how, the large number of developing countries with rising energy consumption rely on these few producers. And last but not least, rising costs associated with climate protection measures resulting from international liabilities (Kyoto I and in the future perhaps Kyoto II) that will be reflected in energy prices.

Many countries are faced with additional costs: investment will be necessary to provide for cooling water in nuclear and fossil power plants in countries that have insufficient water resources. Those countries where the distribution of mains electricity does not cover the whole territory (roughly two billion people) are facing high costs associated with the extension of a grid infrastructure.

Seeing the whole picture

Prices for renewable energy are decreasing constantly, on the other hand, because – with the exception of biomass – only costs for technology are relevant. These decline due to mass production of renewable energy installations that comes about by mobilized market introduction and continuous technological improvements. Since installations producing renewable energy (in particular wind and photovoltaics) can be directly set up in those regions that need it, a widespread transmission infrastructure will be superfluous. What is more, wind and solar – except in the case of concentrated solar power (CSP) power plants – do not need water for cooling and produce no emissions. The conclusion is inescapable: investments in renewable energy today are the only chance to reach a cost-effective energy supply for everyone everywhere.

The negative myth of high costs that accompany the use of renewables is superficial and misleading because it does not differentiate between micro- and macroeconomic assumptions – that is between expenses for a single investor on the one hand and for the whole national economy on the other. However, this distinction is crucial for the question of whether governments stick to conventional energies or decide to orient their activities towards renewable energies.

The comprehensive economic benefits accompanying the switch to renewable energy are manifold and evident – especially so if the renewables that are employed are harvested nationally, that is, if they are indigenous resources that do not have to be imported. The magnitude of these social benefits results from the macroeconomic costs of the conventional power supply, which can be avoided by employing renewables.

From a macroeconomic perspective, the step towards indigenous renewable energies boasts advantages. Nevertheless, macroeconomic benefits do not necessarily bring microeconomic benefits for all producers and consumers. This results in the imperative to translate the macroeconomic benefits with the right political instruments into microeconomic incentives for producers. These instruments have to aim at regulating prices to the advantage of renewable energies. The best instruments are:

-  Tax-differentiation between renewable and conventional energies. That means a lowering of taxes for renewables, possibly down to complete tax-exemption policies. It would be optimal to this end to generally replace taxation on energy by taxation on pollution. Like this, only polluting energies will be taxed.

-  Low or zero interest rates for renewable energy investment credits. The result of this investment will be that the state only covers the difference between normal interest rates and the interest rate reduction. As a result, the investment creates benefits for the whole society and its economy.

-  Feed-in tariff regulations in grid-connected areas with a priority access for power produced from renewable sources and a guaranteed fee. This results in an ever-increasing contribution of renewable energy, substituting conventional energies.

Unexpected potential winners

The spectrum of potential winners from a shift in energy, however, goes well beyond the producers of renewable energy technologies. It also encompasses the vast majority of all other businesses, only a few of whom (admittedly) have recognised that they have a self-interest in achieving independence from the conventional energy business. Many companies would appear to be substantially more fitted for a role of their own as renewable energy technology producers than are the big corporations of the energy business.

Thus, it is in the interest of the car industry to overcome its 100-year alliance with the petroleum industry. Cars and, by extension their manufacturers, are regarded as an environmental danger largely because of the fossil fuels used to drive them.

When it comes to bottlenecks and price explosions as a result of scarce petroleum in the near future, this will affect the car industry immediately – in contrast to the petroleum suppliers, which have profited from every price increase so far. In the interest of securing their long-term existence, therefore, the car companies need to become a driving force pushing for the use of renewable energy. In their hand they hold a trump card they can use to facilitate this reorientation, namely by producing and marketing energy-saving cars that can be driven with biofuels and/or electricity. This trump can help the car companies clear the way for society to undertake the shift to renewable energy.

To do this they need to use their economic weight to create political parameters that will facilitate introducing biofuels into the market. Even more, the car industry might even become a producer of stationary motor power plants, whether we are dealing with communal heating plants, motors operated using fuel cells, or with Stirling or compressed air motors. Not only can the car industry contribute its experience in motor development; it can also bring in its experience marketing decentralized installations using a wide-reaching network of dealers and workshops. For this reason too, the car industry should no longer leave the design of energy laws exclusively to legislators in the electricity companies' sphere of influence. The more energy laws favour the introduction of decentralised facilities for producing electricity, the greater the market opportunities for motor manufacturers, including the small power station market.

The electrical and information technology industry should not have to wait for government to pass laws promoting its participation in renewable energy. It is already within its power to optimise electricity storage battery technologies, to develop new ones and put them up for sale. It is not just the market for existing renewable energy plants (a market that grows faster as storage technologies become better and less expensive) that awaits these new products; they are also anticipated by the market for improvements in the way today's electricity supply systems are serviced. Extra costs that might be incurred will hardly play a role in this group's purchasing decisions. Such additional costs can only be small, and it is easy to convey to the users of these devices that savings in electricity costs make up for the added expense. So what is this industry waiting for?

It is in the interest of the railway companies and the rail vehicle industry to make a commitment to developing locomotives operated with fuel cells. This opens up the possibility for powering locomotives with electricity produced on board, so that overhead train wires would no longer be needed. This would help save substantially on infrastructure and maintenance costs in railway operations.

It would be in the interest of airline companies and the aircraft industry to prepare intensively for the time when fossil aircraft fuels will be subject to taxation or perhaps no longer even be available. Aircraft also need a foundation in renewable fuels. In light of the importance of freight transport by air, moreover, it is incomprehensible that neither the air travel industry nor the airline companies have shown more interest in reviving the dirigible. It is also in the self-interest of the shipbuilding industry and of ocean shipping companies to convert to renewable energy. Many seagoing shipping companies would have already introduced biofuels to operate their ship motors if fossil fuels had not been available to them tax-free. Large passenger and transport ships can also avail themselves of special opportunities to produce renewable energy on board, whether it be from wind power, which can also be used for electricity production without free-standing rotors, or from solar electricity devices integrated into ship roofs or into walls on board. Hydrogen electrolysis on board is also a technical option.

Agriculture also has a unique opportunity to revive and turn itself into the economy's most important resource once deemed inconceivable) through the integrated cultivation of plants for foodstuffs, energy and raw materials – a 'three-field economy'. In the cultivation of plants for raw materials, there lies a chance to 'ecologise' the chemical industry for a fundamental 'metabolism'. Plants will replace petroleum as the diverse basic material of the future. In my book 'The Solar Economy' (under the heading 'Forwards: towards the primary economy') I described the fundamental importance of this development as a reorientation whereby agriculture’s marginalisation since the industrial revolution will be permanently ended, and a sociological decentralization (in place of further centralisation) will be introduced into our mega-cities. Opportunities for a natural second line of business and for increased productivity will also open up for the foodstuffs industry if it proceeds systematically and vigorously to commercialise its biological residues and waste – to produce electricity on its own or to produce and market bio-fuels.

Next to agriculture, it is the construction business, including the building materials industry, that will experience the largest upswing if it seizes the opportunities provided by solar construction. Numerous new building materials and construction methods – from glass that insulates as it produces electricity to energysaving wood constructions – could be employed. If every building is going to be capable of using cost-free solar energy optimally for heating and cooling purposes, it needs to adapt these new materials and methods to the conditions of the local topography and bio-climate – each with its own special solar plan. Solar retrofitting of the existing building stock plus new solar buildings are a goldmine for the construction trades, architecture and building engineers.

And, finally, there is the municipal (or local government) and regional energy business, which is taking electricity production back into its own hands and, as a partner for regional agriculture, is discovering the production and marketing of biofuels as a new line of work. The same holds true for the 'energetic' marketing of organic waste in cities and local governments. On the basis of local government marketing of all energetically useful biomass and waste material, as well as on the basis of direct utilisation of the local potential for solar radiation energy, wind, water, terrestrial and atmospheric heat, it is possible to come up with integrated utilisation plans that have short routes from production to consumption, plans with which a centrally organised energy business (with all the expensive outlays for its wide-ranging infrastructure) cannot compete.

In these local schemes, the public’s energy outlays remain in circulation inside municipal and regional economic channels. Even large energy corporations might be able to reconcile themselves with renewable energy by transforming themselves into holding companies for independently operating enterprises at the local and regional level; this way, they would also be able, in the words of Joseph A Schumpeter, "to avoid … coming down with a crash", and instead "turn a rout … into orderly retreat". As matters stand, however, they will probably be the last to attempt this.

In short, not only will new industrial enterprises emerge when renewable energy prevails, renewable energy will also open up opportunities for old branches of industry. The more autonomous investments flow into renewable energy, the faster old plant and equipment will be replaced by a new generation of decentralised energy facilities – and the better it will be for the industrial economy. What the energy business experiences as the destruction of capital breathes new life into industry and reinforces the economy at large.

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