Creating a Sustainable Future
The Economics of Renewable Energy
“We . . . must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.” —Dwight D. Eisenhower, January 1961
Almost all the significant advances we make to improve our lives have resulted from, or been accompanied by, more efficient ways to produce and use energy. Even developments in fields not directly related to energy use, such as agriculture and medicine, are limited by our ability to transport them economically to where they are most needed. The discovery of new energy sources has on balance been so beneficial that developing and using them has gone on largely unchecked. But we are now at a crossroads. To paraphrase a statement made by the Intergovernmental Panel on Climate Change in 2014, “Continued emission of greenhouse gases will increase the likelihood of severe, pervasive and irreversible impacts for people and ecosystems.”
So we must change how we generate and use energy in order to fight climate change. But will this hurt the world’s economy? How will it affect the lives and aspirations of the poor? Will subsidizing renewable energy create new jobs, or destroy high-paying jobs that depend on the fossil fuels? Can renewable energy sources stand on their own without subsidies? These are all questions that concern governments and individuals alike. But, whatever the answer, the cost of not taking action now spells disaster for our planet.
Power plants vary greatly in how much they cost to build and operate. Operating a wind turbine is almost free, but building an offshore wind farm costs about 3 times as much as building a coal-burning plant that produces the same power. A hydroelectric dam, for example, uses a large area of land, while a geothermal plant covers relatively little. Any realistic comparison of costs must include the costs of borrowing capital, construction, operation, maintenance, and eventual decommission; and take into account when these costs are incurred – before, during, or after the plant is producing energy.
Renewable Energy in the US and in Europe
The cost of building and operating a renewable plant depends strongly on where it is located. A good place to study these costs is the United States, the second largest energy-consuming nation in the world. The average American today uses about 4 times as much energy as someone in China, the world’s greatest consumer of energy, and more than 16 times the average consumption in India, the third largest energy user. But no doubt it would also surprise many people to learn that in the last ten years the United States has reduced both its total energy consumption and its average consumption, and has reduced its greenhouse gas emissions more than all of the other nations of the world combined.
To make a fair comparison between the costs of different types of energy sources, economists use a factor called the “levelized cost of energy,” or LCOE. The LCOE estimates future fuel costs, interest rates, and similar factors. To be of interest to a utility company, renewable sources must produce electricity for the grid at an LCOE comparable to the cost from fossil fuel plants, called “grid parity.” (This is different than a homeowner’s rooftop solar system that becomes competitive at retail rates, which are two or three times higher than the wholesale costs paid by utility companies.)
This table, from the US Energy Information Administration, lists the costs in dollars per unit of energy for newly constructed plants.
You can see from the LCOE column of the table above, onshore wind energy is clearly among the lowest cost. Geothermal is the cheapest, but suitable sites are very limited. A lack of new locations limits hydroelectric dam construction as well – no major new hydroelectric dams are likely to be built in the United States. As for natural gas, it has been rapidly replacing coal, thanks to the fracking revolution that has cut gas prices in half. This has made enormous benefits in reducing US carbon emissions, but, while it is much better than coal, natural gas is still a carbon-emitting fossil fuel. In addition, gas prices historically are very volatile; and it is still an open question whether methane leaking from fracking operations offsets the benefit of lower carbon emissions.
The high capital costs of solar sources shown in the table are the major barrier to their development. This is a problem for solar thermal plants especially, since these are large installations that focus sunlight to heat special fluids to power generators. Developers risk heavy investment losses if these plants fail to produce as intended, as may be the case at the world’s largest solar plant at Ivanpah in California. Additionally, large installations tend to be hard to adapt to improved technology, whereas wind farms and photovoltaic installations, which are modular, can be readily upgraded. In summary, the LCOE of onshore wind energy explains why wind power is the fastest growing source of new energy.
Renewable sources are usually far from the grid and so incur extra connection expense, plus their intermittent nature requires other sources to be available to provide power when needed. Even so, in areas where sun and wind are plentiful, the retail electric rates from renewable sources have fallen below those from fossil fuels. In US, states like Oklahoma and Texas that have abundant sun and wind, the unsubsidized price of wind energy is about two-thirds that of coal or gas, and electricity from solar plants is roughly on par. When factoring in government subsidies, the price of electricity from new wind sources in these regions is cheaper even than electricity from already existing fossil fuel plants. This raises a crucial question – how much do these subsidies cost taxpayers?
To compare the true cost of electricity from renewables and fossil fuels, subsidies for fossil fuels must be taken into account. This is difficult, because the oil industry in particular has benefited from generations of direct and indirect tax credits and deductions, favorable land leases, infrastructure including roads and highways, and much else. In the simplest analysis, the US Treasury recently identified eleven annual fossil fuel tax subsidies that it recommends for termination which are equal to the government subsidies for solar energy – and include an oil depletion allowance, that totals about $5B! And that’s every year!
But even this simple comparison ignores the many other ways in which fossil fuels are subsidized in the US; and it overlooks their hidden costs to the economy, to public health, and to the well-being of the nation. The National Academy of Sciences estimates that burning fossil fuels results in 20,000 premature deaths every year in the United States from emissions alone. This does not account for fatalities resulting from coal mining, offshore drilling, or transporting the fuel; it does not account for deaths from black lung disease which is very common among coal miners, with outcomes for its victims similar to those from tobacco smoking; nor does it include the human costs from the decades-old, ongoing strife in the Middle East. These are the costs in human mortality.
But there is also the harm to general health. Mercury pollution, acid rain, water pollution, oil spills, smog and particulates not only cause serious illness but also damage the environment. And these pollutants have financial consequences: they reduce crop yields, impact fishing and timber harvests, and even degrade building facades and infrastructure. While the total costs of fossil fuel usage cannot be expressed in monetary terms alone, estimates by organizations like the International Monetary Fund and the World Bank put the worldwide total in the trillions of dollars annually. From economic considerations alone, replacing fossil fuels with renewable energy is imperative.
Plants that burn fossil fuels are going to remain in operation for decades to come. New coal burning plants have a 40-year lifespan, and today 1200 new coal plants are planned or under construction in 60 countries. Emissions from these plants will need to be controlled in some way to benefit the public health of these nations; but this will reduce the energy output of the plants and their profitability. So the customers of these utilities, including industry and commerce, will end up paying higher rates for electricity than they would if it were generated by renewables.
Utility companies will not reduce greenhouse gas emissions unless it is their financial interest to do so. To accelerate the transformation, limits on emissions can be mandated, in the same way that car companies must meet smog emission limits in order to sell their vehicles. Mandates are the best way of dealing with pollution when it poses an imminent threat to public health, as say smog does to the Los Angeles basin, but they allow no flexibility to enterprises that provide essential services.
Businesses prefer incentives to reduce emissions either by imposing a carbon tax, which many – including some “super major” oil companies – prefer for its comparative simplicity; or by implementing a cap-and-trade system. Each has advantages and disadvantages. With the tax on carbon, the tax rate is set by the government and consumers pay a price for the energy they use based on the amount of carbon dioxide they produce when using it. A carbon tax allows businesses to plan for a known added cost for energy and leads providers to shift to energy sources that have lower carbon content and are therefore cheaper. If all goes according to plan, over time a free market will choose renewable energy over fossil fuels. Many countries, including Japan, India, and the United Kingdom, have instituted a carbon tax.
But a carbon tax does not guarantee emission reductions. If renewable costs stay high, or if fossil fuel costs are kept artificially low, little or no change is likely to occur. Since it provides a source of revenue for the government, a poorly designed carbon tax may even be an incentive not to reduce emissions. Additionally, determining the correct tax rate is difficult – because it should reflect the cost to society of fossil fuel use, including climate change, while not harming the economy. Adjusting the tax rate to changing economic conditions can be politically difficult. It may also impose a disproportionate outlay for low-income earners, a burden that can be mitigated in industrialized nations, but which can fall heavily on the poor in developing countries where options are often limited.
Cap-and-trade, or emissions trading, is a government regulatory program designed to limit or “cap” greenhouse gas emissions for a period, at the end of which the limit is lowered as emissions are reduced. The cap is usually measured in billions of tons of carbon dioxide per year, and covers emissions from all sources, including oil generation, natural gas generation, electricity generation, large manufacturers and transportation companies. In the US, Congress instructs the EPA to establish and enforce specific pollution standards for individual polluters. Permits are allocated to these enterprises and operating without a permit is against the law. Companies that do not conform to their pollution limit have to pay. The government can issue permits for free, especially to companies or factories which are more vulnerable to competitors from areas that are not under the cap-and-trade system. It can also sell permits to raise revenue to allow it to administer and enforce the program.
“Trade” refers to the ability of companies to sell and buy carbon permits. A key element in this scheme is that the number of permits issued is fixed, so that if an enterprise needs to increase its emissions, it must buy permits from others companies who have already reduced their emissions enough to be able to sell those they don’t need. Companies that achieve the largest reductions accrue increasingly valuable credits for resale. Over time the number of permits issued is reduced, which enforces a decrease in total emissions.
Typically permits are sold on an exchange similar to a stock market called a carbon credit market, which many countries now have. Enterprises that specialize in capturing greenhouse gas emission and selling these “carbon credits” are a feature of cap-and-trade. The European Union has the largest market and their experience to date has been mixed – in hindsight it is clear that emission caps were set too high and many more credits were issued than were required, which reduced their value. As a result, cap-and-trade in Europe produced no CO2 reductions in its first eight years of operation. Adjustments to the program appear to have reduced emissions more than 20% in 2013, but the economic slowdown makes determining cause and effect difficult.
Cap-and-trade enables the government to authorize the exact amounts of reductions it desires to see in any given area. But, it’s more complicated than the carbon tax, and that can lead to mistakes and manipulation. At times it has enabled heavy polluters to reap windfall profits. Some firms that had produced high levels of emissions in the past were granted a large number of cap-and-trade credits so that they could continue to operate. Then, after implementing the most simple mandated improvements, these firms owned an abundance of unneeded credits that they then resold. Similarly, fraudulent or poorly planned allowances, such as claiming as a credit the carbon saved by not harvesting trees in forests that were already being preserved, have undercut the credibility of some of these trading markets.
Nevertheless the success of cap-and-trade programs in controlling non-carbon emissions shows it has great promise. In 1990 the US introduced cap-and-trade to reduce the acid rain produced by coal power plants. This program succeeded both in diminishing acid rain and, contrary to expectations, actually decreased the cost of electricity when energy plants were motivated to reduce their emissions. Operators found they were able to use less fuel to produce the same energy, which also lowered their costs. Reducing carbon dioxide emissions is technically much more difficult than capturing the sulfur dioxide emissions that make rainwater acidic, and it will likely raise electric rates for consumers, though not as much as the industry claims.
According to the Nobel prize-winning economist Paul Krugman, there is a general consensus among economists that strong measures to fight global warming would cause a small reduction in the growth rate of the US economy. By these estimates, the US economy in the year 2050 would be between 1.1% and 3.4% smaller than if we continue business as usual. Some industrialized countries, particularly in Europe, are already well on their way to controlling greenhouse gases, so additional reductions may not reduce their economies by even this small amount. By incorporating new efficient renewable technologies, developing nations would most likely see improved growth, because their present infrastructures typically waste significant amounts of energy. Losses due to global warming are unknown, so cannot be included in the comparison; but they could include rising sea levels, increases in drought, forest fires, hurricanes, and much else.
Converting to a Carbon-free Energy Economy
People who live in an industrial economy produce greenhouse gases when they do almost anything. So, the question is, would drastically reducing emissions also drastically reduce their employment? According to Mark Jacobson, professor of civil and environmental engineering at Stanford, the answer is a resounding “no.” In a series of articles beginning in 2009, a team led by Jacobson claims that converting to 100% renewable energy would create two million new jobs the United States. The Jacobson study was designed to find out if it’s possible to convert to a completely carbon-free energy economy soon enough to eliminate the greatest climate change risks. The team extended their study to the entire world with a country-by-country plan for how to achieve zero emissions.
Their view is that it is entirely possible for the US to replace its fossil fuel infrastructure by 2050 using only the energy generated by wind, water and solar power. The success of the plan depends heavily on fully implementing smart grid technology and energy efficiency measures. Renewable sources are excluded from the plan when they do not reduce greenhouse emissions to near-zero. The US would use electricity for all its energy needs, even for transportation and heating. About half of the total energy would come from wind turbines, nearly half from solar plants and the small remaining fraction from hydroelectric dams and a few other already existing renewable sources, such as geothermal. Surprisingly, widespread energy storage is not thought to be needed, as an intelligent grid will be capable of balancing the intermittency of solar and wind against each other, with hydroelectric power able to fill in when needed.
Some of their proposals for eliminating fossil fuels are easy to visualize because they have already begun:
For transportation needs, the plan depends on the development of fuel cells that use hydrogen produced by electrolysis (passing an electric current through water). Since this is a fundamentally inefficient process, these fuel cells would be used only where they were essential because of their light weight and high energy storage; for example in long-distance transport by heavy vehicles like trains and ships. Airplanes would be powered by burning liquid hydrogen, which is extremely inefficient to produce but which has an energy density needed for flight that is even beyond that of fuel cells.
“If properly harnessed, there's enough sunlight that falls on the earth in just one hour to meet the world's energy demands for a whole year.”
In 2011 in collaboration with the actor and activist Marc Ruffalo, Jacobson and other scientists, business people and cultural figures founded The Solutions Project, whose stated mission is “to use the powerful combination of science and business and culture to accelerate the transition to 100-percent clean, renewable energy.”
They have developed an interactive map that is a gift to those interested. It provides state-by-state estimates of which new energy sources will be needed and the net number of jobs that will be created to reach the 100% renewable goal by 2050. It includes not only estimates of jobs created and potential cost savings, but also the costs of illness and mortality that could be avoided by adopting the program, rather than continuing “business and usual.”
Using California as an example, by 2050 the state would receive 55% of its power from various types of solar power and about 35% from wind farms. Clicking on the state in the site map reveals more details, including the number of deaths per year from air pollution that will be avoided (about 12,500 in California), and the savings in health care costs (about 3% of the state’s GDP, which is very significant since California has one of the world’s largest economies).
The details for California show that changing to renewable energy would reduce the cost of electricity about 10% from projected 2050 levels, and that the state would gain more than 450,000 new jobs. Unfortunately this site does not report net jobs added; but this is provided in the full report. When the jobs lost from fossil fuel industries are factored in, California nets only 45,000 new permanent jobs. Still, adding tens of thousands of new jobs in just one state is far different from claims by the fossil fuel industries that changing to renewable energy would devastate employment.
Unsurprisingly some states fare better than others as regards employment. Texas would lose over 500,000 fossil fuel jobs and suffer a net loss of more than 60,000 jobs. But next door in Louisiana, more than 180,000 net jobs would be created by the construction and operation of thousands of offshore wind turbines. An exciting feature of renewable energy is that the best sites are often to be found in areas that would benefit from an infusion of industry. Many of the poorer states, like Mississippi and Kentucky, would experience the greatest new job creation. In total, two million net new permanent jobs would be created in the nation.
Some of the assumptions of the Jacobson plan raise questions even among those well disposed toward its goals. For example, it would be very difficult, as the plan requires, for a liquid hydrogen infrastructure to be completed in this country by 2025 (liquid hydrogen needs to be kept below −253°C, and hydrogen causes metals to become brittle). The plan does not claim to cover every aspect of mitigating climate change; and it does not, for instance, address agriculture or other types of land use that are major sources of methane. The plan calls for 156,200 new five-megawatt offshore wind turbines. Far more will needed if the 2050 energy needs are not reduced by 39%, as described; and it is commonly estimated that the nation’s energy needs will actually double by that time.
The Solutions Project and the subsequent 100% Campaign do much to raise public awareness and encourage action. Starting in NY, and rolling out across the country, the 100% Campaign features activities, events and calls to action that drive demand, and accelerate the growth of clean efficient energy. From a 100% Hotline that provides clean energy concierge services, to celebrity events, to leader spotlights, to policy work, the campaign aims to make it easier and cheaper for consumers to switch to clean energy. (https://100.org/)
As Goes India, So Goes the World
For many nations that are not as wealthy as Europe or the US, the situation is much more difficult. At the forefront of these nations is India – it is said that India will determine the future of the world’s environment.
India’s leaders are determined to bring development to the hundreds of millions of its people who have no access to electricity. Unlike in the United States, in India the reality of the climate change threat is widely accepted. The government has introduced new pollution standards for coal plants that are as strict as any in the world, and has plans to increase solar energy by 30 times its present output in only seven years. This would provide India with about five times the projected total of solar power in the US over that same period. No country has ever installed solar capacity at anything approaching this rate.
The Jacobson study estimates that India could provide 75% of its energy needs from solar in 2050, compared to the 33% of its current plan. If this were achieved, 13% of its GDP in health costs and an incredible 750,000 deaths per year could be avoided. However, the current government has plans to more than triple coal consumption. By 2040, the International Energy Agency estimates that India will consume more energy than all of industrialized Europe combined. India depends on coal for about two-thirds of its energy right now, and if it sticks to this plan, in spite of its efforts in solar, about one-third of this greatly increased energy consumption will still come from burning coal.
The LCOE for solar power in India is already close to grid parity because of the nation’s tropical location – a solar panel in India will produce about three times as much energy as the same panel in northern Europe. But without improved storage capacity, solar’s intermittent output plus the country’s inability to turn to other renewable sources, will mean that coal will still be used to provide India’s basic electricity supply.
Though a large coal producer, India’s domestic production of coal has lagged behind the demand, increasing the country’s dependence on imports, which are in the region of 180 million tons a year, mostly from Indonesia. India is already the world’s third largest emitter of carbon dioxide, and has vast reserves of an especially polluting type of coal. The popular sentiment is that the nation has a right and even a moral obligation to use its coal reserves, and there is a strong popular and political resistance to sharing in international efforts to limit carbon emissions.
In the next five years, a new coalmine in India will open every month. Many of the richest untapped reserves lie in heavily forested areas, so mining this coal will not only add emissions from burning it, but also destroy the benefit that the forests provide in absorbing excess carbon. India’s coal mining industry has been especially pernicious. Although immediate steps to increase energy levels is intended to support the poor, coal mining has produced great wealth for a few, while many of the mining villages themselves do not even have electricity. Tests of villages in mining areas show high levels of mercury – drinking water in one village had 26 times the maximum safe limit, and symptoms of mercury poisoning are commonplace. All of the worst health effects of coal mining are readily apparent among the miners and their families.
“The bulldozer entered our village at 10 am. At the time, many of us had left for our fields and our daily work. Hearing that demolitions had begun, we ran home as fast as we could. By the time I reached, my house had been broken down. They didn’t even give us time to remove our belongings from our home – everything was destroyed, including a year’s worth of grain. It rained for a week after. In the next two days, we scraped together whatever we could. Our clothes were torn, belongings scattered – we built whatever shelter we could from what remained.
Where do we go? How do we survive? Who will listen to us now?
I understand that some people must make sacrifices for the nation, but why must it always be us?” —Nirupabai, forcibly evicted from her home in Barkuta village, Chattisgarh, Coal Mining and Violations of Adivasi Rights in India, April 2014 © Amnesty International.
“The brunt of the coalmine expansion, according to Amnesty International, is being borne by India’s Adivasi aboriginal communities. Aruna Chandrashekhar, a researcher at Amnesty, said interviews with 124 people in the three states reveal human rights violations. ‘Adivasi communities in these areas have been routinely shut out from decision-making processes around their traditional lands, rights and resources. Many have had to wait for decades for the compensation and rehabilitation they were promised when their land was acquired. The violations of their rights to consultation and consent – around land acquisition, environmental impacts, indigenous self-governance and the use of traditional lands – has led to serious impacts on their lives and livelihoods,’ she said.” https://www.theguardian.com/global-development/2016/jul/13/coal-india-accused-of-bulldozing-human-rights-mining-operations-amid-production-boom-amnesty-international.
Crucial to coal expansion is the role of the giant Coal India Limited (CIL) – the country’s primary state-owned coal mining company and the world’s largest coal producer. CIL and its subsidiaries are estimated to have displaced nearly 87,000 people since 1973, including over 14,000 Adivasis.
The company supplies coal at discounted prices to nearly every coal-based thermal power plant in India. Thus the Indian coal mining industry is a quasi-government enterprise that greatly incentivizes the development of new mines – groups that oppose this development have had their funding frozen and been subjected to other sanctions. Yet the country itself is at risk for some of the worst effects of a changing climate. If the monsoon cycle is altered, as evidence indicates may already be happening, it could result in catastrophic crop failures and famine in a region of Asia that is heavily militarized and in constant conflict.
For the world as a whole in 2050, the Jacobson study estimates that total needs could be met by a combination of 50 percent wind, 40 percent solar, and the remaining 10 percent existing hydroelectric and other clean sources. Based on estimates from the World Health Organization, this would save as many as seven million lives per year. Twenty million new jobs would be created worldwide. This new infrastructure would provide power to four billion people who currently do not have access to electricity. Most of the impoverished countries of the world would gain energy independence, and even make available widespread desalinization for supplies of drinking water.
There will obviously be numerous obstacles to achieving these goals on a worldwide or national scale, but it is an exciting model of a possible path forward, given at a time when the threat of increased disasters caused by climate change seem inevitable and we the helpless victims. It is possible to implement these goals on a smaller scale, and ensure that our efforts are duplicated. Proposals like The Solutions Project and the 100% Campaign give everyone a positive roadmap to the future and the ability to get involved and contribute. That has to be a good thing.