ENERGY MARKET

AN ECONOMIC ACTIVITY ILLUSTRATING THE MARKET

CONDITIONS THAT CAN HELP OR HINDER

RENEWABLES IN THE QUEST TO COMPETE WITH

NON-RENEWABLES

OBJECTIVESThe student will understand the difference

between renewable and non-renewable energy sources.

The student will observe that the relative price of renewables changes according to environmental regulations, renewables’ availability, economic infrastructure, and the price of fossil fuel and nuclear power.

The student will be able to explain how these economic conditions affect the price of renewables.

The student will understand why most utilities do not opt for renewables even though many have price parity with non-renewables.

ECONOMIC CONCEPTS

Market DeterminantsCompetitionBarriers to EntryExternalitiesEconomies of Scale

TERMSNon-Renewable EnergyRenewable EnergySolar ThermalPhotovoltaicHydropowerBiomassGeothermal

NON-RENEWABLE ENERGY

Energy sources that are limited and can eventually run out. These cannot be replaced on a time span of human significance.OILCOALNATURAL GASNUCLEAR

RENEWABLE ENERGY

Energy sources that are replaced

by natural processes at a

rate comparable to their use.

Biomass

Hydropower

GeothermalWind

Solar Thermal

Photovoltaic

WIND BLOWS ON A TURBINE

POWERING AN ELECTRICITY GENERATOR.

THIS IS A CHEAP ENERGY SOURCE THAT PRODUCES

NO POLLUTANTS. WIND FARMS

REQUIRE LOTS OF LAND AND AMPLE WINDY

DAYS. Shilo Wind Power Plant in Solano County, California

WIND POWER

IN A HYDROELECTRIC DAM, FALLING WATER TURNS A TURBINE, CREATING ELECTRICITY. BUILDING LARGE NEW DAMS AND FLOODING EXTENSIVE AREAS CAUSES SOCIAL AND ENVIRONMENTAL DISRUPTION. A hydroelectric facility in

China

HYDROPOWER IS ENERGY FROM MOVING WATER

GEOTHERMAL

Heat energy stored underground in the earth’s crust, in water, rock, or magma. Geothermal energy from water reservoirs is cheap, although there are limited areas where it can be tapped.

The Pohutu Geyser in New Zealand erupts with a natural blast of the Earth's interior heat.

SOLAR THERMAL

Mirrors concentrate sunlight on a liquid heating it into steam. This steam turns a generator. Solar thermal energy is not yet widespread and will probably be practical only in sunny regions.

This solar thermal power plant, built in Lancaster, Calif., was inaugurated last August

PHOTOVOLTAICS

A cell converts sunlight directly into electricity without any polluting by-products. Solar cells are practical for applications that are isolated from major power lines, but they are still expensive for utility scale use.

Today’s solar cells make use of just under a third of the energy hitting them, overheating to create “hot electrons” that escape before they can be converted into electricity.

BIOMASS

Plant matter that can be burned to produce heat and electricity or converted to liquid and gaseous fuels. Biomass can be organic material from trash or it can be grown specifically for energy use. Burning biomass creates CO2 but the replanted fields remove equal amounts.

BARRIERS TO ENTRY

In the U.S. today, some renewable sources can generate electricity at a price competitive with fossil fuels, but most utilities do not opt for renewables.

WHY?

OIL, COAL, AND NATURAL GAS ARE CHEAP AND EASILY ACCESSIBLE

UTILITIES ARE UNFAMILIAR WITH RENEWABLE ENERGY TECHNOLOGIES

RENEWABLES CAN OFTEN

REQUIRE LOTS OF LAND OR PARTICULAR

CLIMATES THAT ARE NOT ADVANTAGES FOUND IN ALL COMMUNITIES

. RENEWABLES ARE NOT APPROPRIATE IN ALL AREAS

EXTERNALITIES

Environmental costs are not reflected in the economic costs of fossil fuels and nuclear power.

EXTERNALITIES

The social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product.

ECONOMIES OF SCALE

Traditional energy is well established and renewables are comparatively small. The renewables are harder to get and, in some cases, more expensive.

ROUND 1: BUSINESS AS USUAL

The U.S. uses fossil fuels such as coal, natural gas, and oil for most of its electricity. Nuclear power provides 21% of U.S. electricity. Renewable energy provides only 10%, mostly from hydropower. The U.S. government subsidizes the fossil fuel and nuclear power industries. Neither the utilities nor these industries have to pay fully for environmental problems caused by these energy sources.

ROUND 1: BUSINESS AS USUAL

By contrast, the renewable energy industry is poorly funded by the government. Renewable energy sources are not as well developed as they could be. However, some renewable sources, though not widely used, are already economically competitive with other sources for generating electricity.

ROUND 1: BUSINESS AS USUAL

ENERGY SOURCE PRODUCTION COST AVAILABLE UNITS

COAL $6/UNIT 50

OIL $8/UNIT 10

NATURAL GAS $6/UNIT 25

NUCLEAR $10/UNIT 25

SOLAR THERMAL $9/UNIT 1

PHOTOVOLTAICS $25/UNIT 1

WIND $8/UNIT 1

HYDROPOWER $6/UNIT 6

BIOMASS $5/UNIT 2

GEOTHERMAL $5/UNIT 2

ROUND 2: NEWS FLASH!!!

Growing concern over global warming has caused Congress to approve a “carbon tax” that will affect all utilities that burn fossil fuels. When implemented, this tax will require utilities that burn coal, oil, and natural gas to pay a fee for each ton of carbon dioxide they produce. This tax will make energy from fossil fuels more expensive and will encourage the development of renewable energy technologies.

ROUND 2: CARBON TAX

ENERGY SOURCE PRODUCTION COST AVAILABLE UNITS

COAL $10/UNIT 50

OIL $10/UNIT 10

NATURAL GAS $7/UNIT 25

NUCLEAR $10/UNIT 25

SOLAR THERMAL $9/UNIT 2

PHOTOVOLTAICS $25/UNIT 2

WIND $8/UNIT 2

HYDROPOWER $6/UNIT 7

BIOMASS $5/UNIT 3

GEOTHERMAL $5/UNIT 3

ROUND 3: NEWS FLASH!!!

In an unexpected move, Congress removed research and development subsidies for the nuclear power industry. Over the last decades, the Department of Energy spent a large portion of its R&D budget on nuclear energy. Over the next decade, the nuclear power R&D budget will be reduced by five percent per year, bringing nuclear research in line with research on renewable energy. Congress also repealed the Price-Anderson Act, which limits a nuclear plant’s liability in case of a nuclear accident. Nuclear plant insurance rates will now skyrocket.

ROUND 3: NUCLEAR HAIRCUT

ENERGY SOURCE PRODUCTION COST AVAILABLE UNITS

COAL $10/UNIT 50

OIL $10/UNIT 10

NATURAL GAS $7/UNIT 25

NUCLEAR $13/UNIT 15

SOLAR THERMAL $9/UNIT 3

PHOTOVOLTAICS $25/UNIT 3

WIND $8/UNIT 3

HYDROPOWER $6/UNIT 7

BIOMASS $5/UNIT 4

GEOTHERMAL $5/UNIT 4

ROUND 4: NEWS FLASH!!!

In what is perceived as a victory for the renewable energy industry, Congress today passed big new tax credits for renewable energy development. Power producers that build new renewable energy plants instead of fossil fuel or nuclear plants will receive a large tax break. Congress enacted the tax credits to spur the development of clean, sustainable, renewable energy. As a result of the tax credits, electricity from renewable sources is expected to become much more available. It should also be less expensive.

ROUND 4: RENEWABLE BOOST

ENERGY SOURCE PRODUCTION COST AVAILABLE UNITS

COAL $10/UNIT 50

OIL $10/UNIT 10

NATURAL GAS $7/UNIT 25

NUCLEAR $13/UNIT 15

SOLAR THERMAL $6/UNIT 15

PHOTOVOLTAICS $15/UNIT 10

WIND $5/UNIT 15

HYDROPOWER $6/UNIT 8

BIOMASS $5/UNIT 10

GEOTHERMAL $5/UNIT 6

ROUND 5: NEWS FLASH!!!

Cloudy spell in California enters sixth week; confidence in solar energy plummets. Thirty-six days of clouds, rain, and fog in most of California have caused utilities in that state to reconsider their heavy investments in solar energy. The freak weather has made electricity from California’s solar thermal and photovoltaic power plants virtually unavailable, while increasing demand for electricity as people spend more time indoors.

ROUND 5: NEWS FLASH!!!

Approximately 10% of California’s energy is now provided by solar. Unfortunately, this electricity is only available when the sun is shining, as adequate methods of storage have yet to be perfected. Concern over the reliability of solar energy has caused utilities to cancel orders for new solar thermal and photovoltaic plants. These cancellations are expected to cause bankruptcies and business failures in the relatively young solar industries.

ROUND 5: FUTURE OF SOLAR CLOUDY

ENERGY SOURCE PRODUCTION COST AVAILABLE UNITS

COAL $10/UNIT 50

OIL $15/UNIT 5

NATURAL GAS $13/UNIT 25

NUCLEAR $20/UNIT 15

SOLAR THERMAL $6/UNIT 7

PHOTOVOLTAICS $11/UNIT 5

WIND $5/UNIT 15

HYDROPOWER $6/UNIT 9

BIOMASS $5/UNIT 10

GEOTHERMAL $5/UNIT 6

ROUND 6: NEWS FLASH!!!

Iran invades Saudi Arabia and oil prices soar. In a sneak attack, Iranian troops pushed across the Persian Gulf into Saudi Arabia late last night. Tensions between the two countries over embargoes and oil-production quotas had been mounting over the past year. Hostilities between the two countries, which could be lengthy, are expected to impede the flow of oil from the Middle East to the U.S. In early trading on international markets today, the price of oil was up $20/barrel. Skyrocketing oil prices are almost certain to mean an increase in the cost of electricity. Although only 1% of the nation’s electricity is generated from oil, a rise in oil prices has historically produced a parallel rise in the price of natural gas. Oil and gas together account for 25% of the nation’s electricity production.

ROUND 6: WAR AND ENERGY

ENERGY SOURCE PRODUCTION COST AVAILABLE UNITS

COAL $10/UNIT 50

OIL $18/UNIT 5

NATURAL GAS $16/UNIT 25

NUCLEAR $13/UNIT 15

SOLAR THERMAL $6/UNIT 15

PHOTOVOLTAICS $11/UNIT 10

WIND $5/UNIT 15

HYDROPOWER $6/UNIT 9

BIOMASS $5/UNIT 10

GEOTHERMAL $5/UNIT 6