Renewable Energy Technologies

Renewable Energy Technologies

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0.20

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1.00

PV Installed Capacity (GW)

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5

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25

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Wind Annual Installed Capac-ity (GW)

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1.00

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Geothermal Installed Capacity (GW)

Renewable Energy Technologies

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Biomass Installed Capacity (GW)

Biomass

•Currently, this is the largest source of renewable energy.▫However, much of this is low-technology uses in

developing countries.  Presumably usage of these fuels will fall as countries grow.

•Other fuels include things such as ethanol.▫Is there enough farmland to grow the needed

feedstocks as well as supplying necessary food supply?▫Recent concerns over corn prices is an example here

Biomass

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Biomass LCOE CEC

Hydropower

•Used for 16% of world electricity production.•Does not require technological breakthroughs.•However, political acceptance is an issue.•Small hydro is cost competitive

Geothermal

•Uses heat from the earth, which is captured as steam or used to heat water that is piped below the earth.

•The technology is mature, but cost reductions are needed to make it competitive.

1970 1975 1980 1985 1990 1995 2000 2005 2010 201502468

10121416

Geothermal LCOE (¢/kWh) CEC

Wind• Costs of wind fell by a factor of four between 1981-1999

▫ Wind is now competitive in favorable locations. Now about 5-8 cents/kWh Competitive with traditional fuels with a $25/ton CO2 tax

▫ Study shows wind is competitive at $38/ton CO2 near Chicago, and  could be situated further away with a price of $76/ton CO2.

• Distance from center decreases intermittency, but increases transmission losses.

• Because wind is intermittent, storage is an issue.▫ For instance, excess power could be used to compress air

in a reservoir as storage. Currently feasible at about $93/ton

▫ Denmark and Norway work in tandem to provide power. When winds are favorable, Denmark exports wind energy to

Norway.  When not, Norway exports hydropower to Denmark. 

Wind• R&D needs include:

▫ Continued cost reductions▫ Understanding extreme wind conditions▫ Integrating wind turbines to the electric grid▫ Storage

• Are there enough acceptable sites?▫ Good sites have sufficient wind or solar resources, are

near where energy demanded (to avoid transmission losses) and are not ruled out politically.

▫ Offshore sites take advantage of stronger, more consistent winds.

▫ However, these are more expensive and require better technologies.

▫ Barrett cites a source saying that wind could provide 100x the necessary power for the world. However, there is no universal agreement on this. Finding appropriate sites is a limitation.

Wind

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Wind LCOE (¢/kWh) CEC

Solar

• Solar is the most expensive of currently used renewable sources.

• In addition to improving technology to lower cost, storage of solar energy is also an issue.

• As with wind, are there enough acceptable sites?▫ However, because high pressure areas have fewer

clouds and less wind, solar is most abundant in places where wind energy is scarce.

• Concentrated solar uses mirrors to produce heat, which turns a turbine.▫ In prime locations, could be competitive at $35/ton C.

Solar

1970 1975 1980 1985 1990 1995 2000 2005 2010 20150

20406080

100120140160180200220

PV LCOE (¢/kWh) CEC

LCOE Comparisons

Source: EIA Annual Energy Outlook 2010

U.S. Energy Sources

1 kWh = 3,412 Btu

U.S. Energy Sources (EIA AER 2011)

Renewable Power Capacities 2010

Peak Oil Theory

M. King Hubbard predicted in 1956 thatthe US oil productionwill peak in 1970s.

Peak Oil Theory

•USGS 2000 survey estimated 3 T. barrels of recoverable oil existed on Earth and that 710 billion barrels were consumed by 1995.

•Optimists point to the role of improved technologies and substitutes.▫These become more viable, and receive more

investment, when prices are higher.•Pessimists note that consumption has outpaced

production over the past 20 years.▫New sources are harder to find, and are in less stable

regions of the world.

The Role of OPEC•The Organization of Petroleum Exporting Countries

(OPEC) is a cartel of oil producing countries ▫They control the price of oil by agreeing on how much

oil each member nation will produce.▫Formed in 1960.

•OPEC can be analyzed using a dominant firm model. ▫Note that if the supply of oil in the rest of the world

increases, OPEC's price will fall.

The Role of OPEC• This has happened since the oil embargo of 1970.

▫ In 1979, OPEC provided 50% of the world's oil.▫By 1986, OPEC supplied only 30%.▫ In 2009, OPEC supplied 40% of the world's oil.

• Higher prices increase the supply of the rest of the world.▫Because marginal extraction costs are higher elsewhere, non-

OPEC producers will not be profitable when prices are low. Marginal extraction cost per barrel:

Middle East $2 Venezuela $7 Gulf of Mexico $11 North Sea $11 Russia $14

Global supply and demand of Petroleum

•2009 demand for oil▫Global: 84.04 million barrels/day▫US: 18.69 million barrels/day

•2009 oil production▫Global: 84.17 million barrels/day▫US: 9.06 million barrels/day▫Persian Gulf region: 22.89 million barrels/day

9.76 million barrels/day come from Saudi Arabia alone.▫OPEC: 33.88 million barrels/day

Energy Efficiency- Demand side response

• Cheapest, cleanest, surest, and most rapidly expandable option,” but lack of knowledge limits diffusion.

• In the IEA’s “greenest” energy projection, energy efficiency accounts for 2/3 of averted emissions

• Many profitable measures currently exist▫Could earn average returns of 10-17%

• Some investments have been made▫  Energy intensity falling 2%/yr in US, 1/5%/yr globally

• Potential concern is the “rebound effect”▫Higher efficiency makes using energy cheaper▫Thus, demand for services increases

For example, drive more when cars use less gasoline▫Two British studies suggest the rebound effect cancels out 26-

37% of the gains from energy efficiency

Energy Efficiency- Demand side response

Environmental Technology Innovations• As the previous section makes clear, all clean technologies face

technological hurdles.▫ Overcoming these will lower costs, and make these technologies more

competitive.▫ Until the past few years, energy R&D efforts have remained relatively

flat since the 1970s.• Current efforts

▫ $5-6 billion/year in US This is 1% of what US spends on electricity and fuels $3 billion comes from the federal government Revkin notes that government R&D funding for health and the military

has grown much more rapidly. Note that much of this R&D, particularly from industry, focuses on

traditional fossil fuels.▫ Global efforts around $15-20 billion

This is 0.5% of energy expenditures, and about 0.03% of world GDP Only Japan has increased R&D efforts recently

Technological Change and the Environment

• The process of technological change includes three steps:▫Invention – the birth of an idea▫Innovation – commercialization of an idea▫Diffusion – Adoption and utilization of the innovation

• Note that technological change is uncertain.▫We don’t know whether research will be successful, or

which projects will be successful.▫While some patents are worth billions of dollars, most

have little commercial value.▫This suggests that a diversified strategy is desirable.

“Picking winners” can be costly E.g. synfuels in the 1970s.

Technological Change and the Environment

• Technological change and the environment is complicated by the presence of multiple market failures.▫ Of course, one concern is environmental externalities.

Even if R&D markets functioned perfectly (which they don’t), firms will not have incentive to develop environmentally-friendly products if the costs of pollution are not internalized.

▫ In addition, market failures affect the process of technological change more generally.

• Market failures for knowledge▫ Knowledge is a public good.  

Alternatively, we can consider the results of innovation a positive externality. Once an idea is in the public domain, others can make use of it. 

As such, the inventor is not able to capture all of the social benefits of the innovation.

As a result, the social returns to R&D are greater than the private returns to R&D. Studies typically find that the social returns to R&D are about 4X higher

than the private returns to R&D.

Market Failure – Knowledge as a public good

• Implications:• Underprovision of R&D.

▫ Firms only care about the private returns.  They invest in R&D until the marginal private rate of return equals the marginal cost.  At this point, the marginal social rate of return will be higher than the marginal cost.

▫ Thus, even if environmental externalities are corrected, there will still be insufficient R&D.

• Opportunity costs are important▫ This high social rate of return is true for all R&D, not just

environmental R&D.▫ Thus, if we design policy to enhance environmental R&D, we must

consider where those resources come from.▫ At least in the short-run, resources available to do R&D are inelastic.

Firms may face revenue constraints. More importantly, R&D requires highly-skilled scientists and engineers.

Policy issues – Knowledge as a public good • Because of the public goods nature of knowledge,

government policies are used to foster invention and innovation:

• Intellectual property rights (e.g. patents, copyrights)▫Give inventors a temporary monopoly, which enables

them to capture more of the returns to their invention.▫In return, the patent document makes the invention public.

As such, not every inventor chooses to patent an invention.

▫Because of the temporary monopoly, patents encourage innovation, but slow diffusion. Concern over the high price of patented drugs, as compared to

generic drugs, is an example.

Policy issues – Knowledge as a public good• Government R&D funding

▫The government can provide research funding to firms and universities, or can perform research itself in government laboratories. Many of the government laboratories are for the Department of

Energy (DOE).▫ In 2007, the US government provided $112.8 billion of

federal R&D funding.  Of that: $24.7 billion performed directly by govt. $9.6 billion performed by Federally Funded Research and

Development Centers (FFRDCs) $46.5 billion performed by industry $25.0 billion performed by universities $5.8 billion performed by nonprofits

Policy issues – Knowledge as a public good •Tax credits•Tax credits lower the cost of R&D for

firms.•However, they give the government less

control over the projects done.▫Firms will still choose to do the most

profitable projects first, so tax credits are unlikely to stimulate basic research.

Market Failure – Incomplete Information• Incomplete information

▫Uncertainties for R&D are particularly large.▫This makes raising capital to invest in projects difficult.▫This may be a particular problem for projects with long

term payoffs, such as basic research.▫Also problematic for long-term environmental

problems like climate change.

Market Failure- Adoption externalities • Potential adoption market failures

▫ Information As more people use a technology, others learn about it (epidemic

effects) There are transaction costs to learning about new technologies.  However, recent research suggests firm characteristics are more

important than epidemic effects in explaining adoption.▫ Learning by doing & learning by using

As firms or consumers gain experience with a product, costs may fall. If this learning benefits others as well, there is a positive externality.

▫ Principal-agent problems▫ Lock-in

Switching to new technologies can be expensive Thus, to adopt, the technology must not only be beneficial, but the

benefits must justify the costs of switching. Lock-in is particularly problematic when there are network

externalities. Network externalities are when one person’s usage of a product

affects others. As a result, asking whether the society would have been better

off if another technology had been chosen.

Policy options for energy efficiency• Investment subsidies

▫ Deal with concern over up-front costs•  Product labeling

▫ Energy Star labeling is an example▫ Deals with the information problem

• Product standards (e.g. product efficiency standards)▫ Forces consumers to make choices that they are not currently making

• Tradable “white certificates”▫ Projects that improve energy efficiency are certified▫ Utilities required to have minimum investments in energy efficiency

Can buy and sell certificates to meet requirements

• Utility regulation▫ Because operate in regulated markets, utilities face little incentive to encourage

efficiency▫ One way to do so is to decouple sales and profits▫ Regulators forecast demand and set a price that earns profits at that price▫ If demand is lower than expected, regulator lets price rise▫ If demand is higher, regulator cuts prices

Policy Options for Environmental Market Failure•Renewable energy targets (RPS)•Price guarantees

▫Feed-in tariffs (24¢/kWh for solar, and 8.9¢/kWh for wind )

•Renewable Energy Certificates• Investment subsidies

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•Simulations suggest the largest efficiency gains come from environmental policies, rather than R&D policies.

•R&D policies help encourage research on alternative technologies, but they do not encourage diffusion.

•However, policies such as taxes and subsidies will encourage use of technologies closest to market

Policy Options

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Natural Gas and Electricity Price Data (1960-2010)

U.S. Natural Gas Wellhead Price (Dol-lars per Thousand Cubic Feet)electricity price(¢/kWh)