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Tuesday, November 11, 2014

Strategic CSR - Alternative energy

The article in the url below presents a fascinating breakdown of the costs (and relative efficiencies) of different energy sources. In doing so, it makes a compelling argument that government subsidies are hurting as much, if not more, than they are helping us transition away from fossil fuels:
"Billions are spent nursing the infant solar- and wind-power industries in the hope that they will one day undercut fossil fuels and drastically reduce the amount of carbon dioxide being put into the atmosphere."
On the face of it, government subsidies are working:
"Photovoltaic panels have halved in price since 2008 and the capital cost of a solar-power plant—of which panels account for slightly under half—fell by 22% in 2010-13. In a few sunny places, solar power is providing electricity to the grid as cheaply as conventional coal- or gas-fired power plants."
In reality, however, they are encouraging the most inefficient alternative energies—wind and solar:
"… whereas the cost of a solar panel is easy to calculate, the cost of electricity is harder to assess. It depends not only on the fuel used, but also on the cost of capital (power plants take years to build and last for decades), how much of the time a plant operates, and whether it generates power at times of peak demand. To take account of all this, economists use "levelised costs"—the net present value of all costs (capital and operating) of a generating unit over its life cycle, divided by the number of megawatt-hours of electricity it is expected to supply."
What the government should be doing is helping set a penalty for burning carbon (via a carbon tax) and then allowing the market to determine which alternative energy source provides the greatest overall benefit. When you consider all the costs involved in generating the energy (such as transporting it to where it is needed) and all the potential benefits (such as emissions avoided), the graphic that accompanies the article makes it clear that natural gas is the most cost effective alternative currently known to humanity, while nuclear is the most effective zero emissions energy source:
"If all the costs and benefits are totted up … solar power is by far the most expensive way of reducing carbon emissions. It costs $189,000 to replace 1MW per year of power from coal. Wind is the next most expensive. Hydropower provides a modest net benefit. But the most cost-effective zero-emission technology is nuclear power. The pattern is similar if 1MW of gas-fired capacity is displaced instead of coal. And all this assumes a carbon price of $50 a tonne. Using actual carbon prices (below $10 in Europe) makes solar and wind look even worse. The carbon price would have to rise to $185 a tonne before solar power shows a net benefit."
Emissions of carbon dioxide should not be the only criteria on which an energy source is chosen (as the article notes), but the article does make clear that our current understanding of these issues is limited and is certainly not at a level where the government should be picking winners and losers via misguided subsidies.
Take care
David Chandler & Bill Werther
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Sun, wind and drain
July 26, 2014
The Economist