Solar energy – excitement and challenges

The most exciting, and challenging, economic news of recent days has been that in some parts of the world solar is now lower cost than other forms of energy and that is without subsidies. (One, two, three.) This is exciting because so much of what we call civilization is dependent upon cheap energy.  There are indications that the cost of solar energy will decrease even further and that it will become  available to most of us.

This is also challenging because of the economic changes which will have to be made including the writing off of a lot existing infrastructure.

We must start this discussion by noting that energy is only one input into economic growth.  A shortage of other minerals, agricultural land and over population may make a return to economic growth difficult.

A major problem in adapting to lower electricity costs will be the existing infrastructure. The price of an item is equal to the marginal cost of producing the last unit.  This means that if solar energy can be produced cheaper than other forms of electricity the producers of that energy will have to lower their prices or go out of business.  It may take time to work out but we can anticipate a lot of infrastructure will become obsolete.  Do not be surprised if there are demands for subsidies to protect firms from unfair competition.

The falling marginal cost may be a problem for the production of solar energy.  With fossil fuels we have been used to rising marginal costs which means the owners of cheaper oil have been reaping windfall profits as the price of oil has gone up.  This writer is not aware that much economic thought has been put into dealing with falling marginal costs on this scale but some people will have more expensive solar energy than others or will have to write off their initial investment.

Another interesting feature of solar energy is it is unlikely any corporation will get an exclusive license to use it.  With costs falling to the point where most people will be able afford their own solar collector(s) decision making power will be transferred to individuals.  No longer will bankers and governments be making decisions for us.

I am skeptical that cheap solar energy is going to mean a return to economic growth and the way our economy is currently organized requires growth for most of us to live in comfort.  Changing our economic organization will be far more difficult that introducing solar technology.

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