Weighing the long-term economics of energy
Analysing the economics of commodities so you can can compare one to another is a tricky business. Make a mistake, and your decision could affect market growth for the worse, generating short-term benefits but long-term losses. Let’s consider some of the difficulties involved in the economics of energy policies, and see how the industry might deal with them best.
Take, for example, the UK energy market as it stands today. There are many questions we should be asking about how to support the various energy technologies. The biggest question at the moment involves, on the one hand, conventional sources we have relied upon for years – gas, coal and nuclear power for electricity production – and, on the other hand, renewables like wind, solar and biomass.
The main driver pushing us from old sources to new ones is the need to become carbon-neutral so we can prevent the worst effects of climate change. But renewable energy technologies, compared to conventional ones, remain substantially more expensive kilowatt for kilowatt. That means they require government support to encourage further development and to help drive down costs.
Such support, of course, poses an immediate threat to utilities, which have built up considerable influence in the energy market. Their business model is a centralised one, while renewable technologies tend to lead to a decentralisation of energy sources. Conventional energy sources are also much easier for utilities to control, and each generating plant they build contributes a significant amount of energy.
Renewables, on the other hand, demand a different business model. They reduce the need for large, centralised sources and so reduce the opportunity for market dominance by a few firms.
In the UK, the “Big 6” utility firms continue to control the majority of the energy market, which means it’s difficult for renewables to compete. This environment creates challenges for Ofgem, the energy regulatory body.
And here’s another problem: we really can’t treat energy as a standard commodity like coffee, lumber or gold. That’s because of energy’s potential impact on climate change in a business-as-usual scenario. While often misunderstood, the economic effects of continuing to rely on fossil-fuel sources (and the resulting climate change) will be far greater than the investment needed to develop carbon-neutral and renewable energy sources. Furthermore, it’s not just climate change that’s driving the market; the increasing global demand for energy also requires new sources to become available.
With so many factors and parameters to consider, the economic potential of the future, long-term energy market is extremely difficult to analyse. Several renewable technologies are currently competing with conventional sources thanks to government policies, and it’s only a matter of time before some of these will be able to compete without incentives. New technologies might also come into play, or fossil-fuel energy might be improved with carbon capture and storage (CCS), reducing carbon dioxide emissions and, hence, reducing the costs of climate change.
The costs associated with conventional energy sources now include a “carbon cost,” and this will only increase as the availability of these sources declines and the impacts of climate change accelerate. Renewable sources, on the other hand, do not have this burden. And with further research, development and implementation, their costs will continue to decrease. So, even as some people continue to complain about renewables being too expensive or express doubts about carbon emissions driving climate change, market forces will drive energy toward renewables purely because of cost.
Energy influences society on every level. As soon as there is a shortage, the impact of this reliance becomes immediately obvious; for an example, look no further than increasing transport costs due to uncertainty in the Middle East and North Africa. Energy production also has environmental implications that are longer-term and more difficult to interpret. Fossil-fuel sources and nuclear as well carry a much higher environmental cost than renewables, and this impact too will drive developed markets toward a future increasingly dependent on renewable energy.
The problem here, however, is that many fossil-fuel sources still receive abundant subsidies from governments around the globe. This clearly distorts the market and reduces the ability of renewables to compete economically. Subsidies and incentives are suitable only for markets that require help to grow, and conventional energy sources long ago passed that point. Renewables, on the other hand, are still relatively young and need support. We need to re-quantify the environmental costs associated with fossil fuels and adjust policies accordingly to enable sustainable energy development.
So which technologies are best able to provide a long-term, low-cost solution for society’s energy needs? Viewed from the perspective outlined above, the only answer possible is renewable energy sources.
