Alternative Energy's Economic Hurdles

 

Takeaway

  • Renewable energy accounted for just 8 percent of U.S. energy consumption and 10 percent of electricity generation in 2010
  • The cost of solar energy production has decreased significantly in recent years but is still not considered economically viable
  • The U.S. has been slow to embrace nuclear power, not because of safety concerns but rather due to the low price of natural gas

With the average price of gasoline once again approaching $4 a gallon, the conversation about alternative energy sources is becoming increasingly animated and complex. Consumers and politicians alike recognize a need to reduce the country’s dependence on conventional fuels in the long term, yet there is much disagreement about how this goal should be accomplished. To what extent should the government be involved in spurring innovation of wind and solar energy technologies? How can we overhaul our existing power grid? How do we pay for it?

All of these uncertainties create obstacles in the transition from fossil fuels to renewable sources, which accounted for just 8 percent of U.S. energy consumption and 10 percent of electricity generation in 2010, according to the U.S. Department of Energy. At the UT Energy Forum in February, experts weighed in on the reasons alternative energy has yet to gain significant traction.

“I don’t see the political will or the understanding in the general population — not only in this country but worldwide — to understand how you solve that problem,” said Fred Beach, a research fellow at UT’s Center for International Energy and Environmental Policy. “Right now we are not willing to demand anything better than what we’re getting.”

High Cost of Alternatives

At the root of the alternative energy debate is economics: Solar, wind, and nuclear energy are more expensive to produce and distribute than natural gas and oil, at least for now. The Department of Energy estimates that in 2016 the cost of generating electricity at conventional natural gas plants will be about $66 per megawatt hour and $95 at conventional coal plants. This compares to $97 for wind, $114 for advanced nuclear, $210 for solar photovoltaic, and $312 for solar thermal.

While these costs are high, several factors — rising demand, fluctuating oil prices, the possibility of a carbon tax, and advancements in smart grid technology, to name a few — are likely to change the energy landscape in the U.S. in the not-too-distant future.

“We can clearly see that there’s a transformation going on in the electric power sector, and it holds huge promise if we manage it correctly,” said Gary Gibbs, manager of governmental and environmental affairs for American Electric Power at the Energy Forum. “But it will come at a cost, regardless. It just depends on how big that cost is.”

Low Cost of Conventional Fuels

Beach said the relatively low cost of traditional energy sources has made Americans complacent and unmotivated to seek out sustainable alternatives.

“Energy is too cheap, and it’s cheap because of our reliance on fossil fuels,” Beach said. “Plain and simple: We’re all lazy, and we like cheap. … We do not pay the proper price for energy based on the impact it has environmentally.”

McCombs Finance Professor Sheridan Titman notes the low cost of natural gas in particular gives energy providers an incentive to maintain the status quo for a while longer. 

“Cheap natural gas holds back development of alternatives because cheap natural gas means cheap electricity, which means solar looks expensive in comparison,” he said in a March interview.

But the cost gap appears to be narrowing. The prices of solar and wind energy have fallen recently, thanks mainly to technical improvements and a glut of capacity for manufacturing photovoltaic cells and wind generators.

“The cost of solar has come down something like 70 percent in last few years,” Titman said. “But even though the cost has fallen considerably, it’s still not economical — even in Phoenix — without subsidies.”

Nuclear Complexities

In addition to solar and wind, nuclear energy is an alternative that comes with its own set of pros and cons. Although nuclear’s reputation has improved since the Cold War, incidents such as Japan’s Fukushima disaster in 2011 keep safety concerns fresh in the public’s mind.

But expense is an even bigger impediment to the widespread adoption of nuclear power than safety risks, said Dale Klein, associate vice chancellor for research at UT. Because the U.S. can produce natural gas domestically for a low price, it is less eager than the rest of the world to go down the nuclear path.

“The economics in the U.S. right now do not favor nuclear at all,” Klein said at the Energy Forum.

The sharp drop in the price of natural gas has been an economic boon for the U.S. as a whole, said Robert Bryce, a senior fellow at the Manhattan Institute. From 2003 to 2008, natural gas cost about $7 per 1 million BTUs, while today it’s less than $3. Bryce estimates that that decrease is saving the national economy $260 million a day.

With that level of economic benefit, the proposal to invest in more expensive alternative energy sources is a tough sell.

Results of the next installment of the University of Texas Energy Poll, an ongoing measure of how Americans think and behave about energy, will be released in April.

 

Faculty in this Article

Sheridan Titman

Walter W. McAllister Centennial Chair in Financial Services McCombs School of Business

Sheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic...

About The Author

Rob Heidrick

Writer, McCombs School of Business

Born and raised in Austin, writer Rob Heidrick has spent several years as a contributor and editor at local magazines and community newspapers. He...

Comments

#1 Rob, As the President & COO

Rob, As the President & COO of a company in this space, let me add some food for thought. My company won an $80m DoE grant in 2008 to develop some next gen technology in conjunction with Con Edison of NY. What we knew going in, and all the learning's have reinforced it, is that the biggest challenges facing utilities are not generation or transmission related. They are distribution related. You will occasionally hear about black/brown outs caused by disruptions in supply but the long term issue, the thing that utilities struggle with every day, is distribution. Everyday cities demand significantly more power at peak time than they do in the middle of the night. Utilities, as a result, must dramatically oversize there transmission generation capabilities to match this highest part of the demand curve since reliability is, by a large margin, their #1 goal. No other system exists where humans create something the instant they need it on this kind of scale. Food is stored. Liquid fuels are stored. Data is stored. Clothing and essentials are stored. Electricity is created on demand. Due to these inefficiencies, the infrastructure required to support this is very expensive. Then you add things like solar. What happens if you make more power at noon than you need? It is thrown in the garbage, an hour later a cloud system rolls in and you could use some of that power but its gone. Same for wind, same for geo-thermal. If the energy is not consumed on the spot it is wasted. Valueless. See: Eastern Washington Wind farms for exhibit A. The solution, we believe, is in distributed energy storage systems and I think it is starting to take root. Through a series of incentives (rebates, etc) and strong disincentives (Demand Charges, TOU rates) retailers (like 7-Eleven) are beginning to purchase and operate stored energy systems, mainly Li-Ion systems. These can be charged during off peak times and discharged during times of high electrical congestion. I see this as an enabling technology that opens the door to many of the generation related technologies you outlined above.

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