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.

Pricing solar energy – the marginal cost factor

 The costs of solar energy are falling quickly and will probably soon be cheaper than more conventional sources.  Does this mean we will once again have large quantities of cheap energy and a return to economic growth?  Maybe and maybe not.

There may not be an immediate drop in the consumer price of power.

The maybe is because of the economic principle that price is equal to the marginal cost of the last unit produced and sold.This means solar will not influence the grid price until the whole current power infrastructure has been replaced. Until then the price will be set by whatever is the most expensive conventional power still being produced.  

It also means firms producing solar power for the grid  will be able to reap some windfall  profits as their costs of production will be lower and falling. Given the current corporate culture that firms have an obligation to maximize their profits regardless we have to anticipate most firms will take full advantage of the windfall. We observe that lots of oil reserves can be extracted at costs much lower than the current marginal cost for more expensive oil. This means some firms and/or governments are reaping windfall profits

The bright spot will be if and when the cost of solar falls enough for small units to be economical and for consumers to be able to afford them.

A further complication is the debt factor.  How much of the debt used to build the current infrastructure is outstanding?  If a large amount has to be written off, it will probably come out of what is called high power money.  If this declines rapidly  it could affect the money supply and cause some economic decline.

As the price of solar falls no doubt lots of large companies will get involved but sadly most if benefits may go to the one per cent in profits and the rest of us will be left out in the cold.  Expect turmoil rather than growth.

Peak oil and energy costs

Our civilization has been built upon energy stored in the earth’s crust and which has been easily extracted.  The continuation of the lifestye we know depends upon a continuing supply of cheap energy.

Therefore this article on peak oil on the Scientific American website is of particular interest.  It appears we are relying more and more on oil which is expensive to extract.

In evaluating energy sources the key question is how many units of energy does it take to acquire 100 units of energy.  Clearly for new sources of oil this figure is increasing.

The next question is what proportion of the energy comes at the higher cost and what is happening to this figure.  As the proportion goes up there will be less energy with which to maintain our lifestyle.

A further complication is that price is equal to the marginal cost, i.e. the cost of producing the last unit.  As the price goes up to pay for the latest discoveries the owners of the remaining  easily extracted energy will receive windfall profits.  This will be a transfer of purchasing power from consumers to the original owners.

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