Common Tragedies

Thoughts on Environmental Economics

Renewable energy penetration – it’s all relative

Posted by Rich Sweeney on December 31, 2007

I’m finally back in DC after heading home for Christmas and skiing in Maine. Though a lot has happened since we last posted, I wanted to start off with an obvious, but oft-forgotten observation: when projecting market penetration of a given product, what matters is relative price changes, not absolute ones.

The National Academy of Sciences recently sponsored a panel on renewables as part of its America’s Energy Future project. When I started doing some research for the electricity component of this project, my boss directed me to an interesting survey paper she did at RFF a few years ago. Though cost effective energy from renewable sources has received a lot of attention in the popular press lately, its been an academic and DOE goal since the 1970s. Yet over the ensuing years, renewable sales and capacity have consistently fallen short of government projections. Most policy makers and passive observers simply attribute these persistent shortcomings to technology holdups, ie they assume that the technological development hasn’t met projections. But when Palmer and her co-authors looked at the performance of renewables projections from the 1970s and ’80s they saw a different story. While renewables market share has consistently fallen short of predictions, cost reductions have largely exceeded or met expectations. This is because during the same period, the costs of conventional sources fell by even more. Therefore the culprit in this tale isn’t technological delays on the renewables side, but technological advancements and input price reductions on the conventional side.

These days it seems everyone wants to know how much the market for renewable energy is going to grow in the coming decades (Yesterday the NYTimes ran a chart depicting the EIA’s 2030 market share projections). While most fossil fuels will probably remain high for the foreseable future, we need to remember that clean energy sources are still chasing a moving target. Given the market’s past experience, this uncertainty alone could be significantly deterring investment (periodically allowing the PTC to lapse probably isn’t helping either). Though it wouldn’t alleviate all the variance in price, firmly committing to some sort of carbon tax or cap would counter this uncertainty.

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