Renewable Energy Technologies

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
 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.
 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.
 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.
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
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
• 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
 18

Policy Options
• 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
DISCUSSION QUESTIONS

1. In your local community, what types of energy

are being used to generate your electricity?
How might the deployment of renewable energy
power systems affect communities?
2. What appliances and electronics in your house
do you think use the most energy? Which ones
use the least?
3. What role do you think individuals play in the
broader picture of renewable energy in their
community? Country?