Posted by Rich Sweeney on April 8, 2008
This week’s Economist has a good article on the German solar experiment. The story is both good and bad. In one sense, the results have been impressive. Using feed-in-tariffs, which are essentially long-term price floors for renewables, Germany (hardly a sunny place), has outpaced the rest of the world in solar installations. However, as many economists would have predicted, this experiment has also been markedly inefficient. By guaranteeing solar a price that’s around 7x the average wholesale price, the tariff has raised consumer electricity bills by around 5%.
While you should definitely check out the article for yourself, I did want to point out one section which highlights the limitations of such programs aimed at “jump starting” clean energy.
The problem is not just the expense of the existing law. Cheerleaders for solar had hoped that the increased demand for panels would help manufacturers reduce unit costs, and thus make solar more competitive in the long run. Instead, the rush into solar has led to a shortage of the high-grade silicon used to make the cells, which has soared in price from $25 per kilogram in 2003 to around $400 today.
Like a lot of things, economies of scale are more complex than the renewables lobby would have you believe (Joseph Romm makes the scale argument a lot, and recently Daniel Weiss made a similar claim). Government can’t always induce cost reductions by just simply promoting scale (I think Stalin made a similar miscalculation). Especially when one of the production inputs is scarce, as silicon is (at least in the short run).
Diseconomies of scale are actually even more of an issue for wind, as I’ve been meaning to post for some time. The technology itself, ie wind turbines, have been around for awhile and could probably be best characterized as mature (at least for high-speed winds). So the potential for cost reduction is probably relatively limited on the capital side. The other main input, however, is finite – wind. Moreover, not all winds (?) are created equal, with some sites being much harder to get to and further away from the grid. So for wind energy, there’s a real possibility of decreasing returns to scale, depending where you are on the supply curve.
None of this is to say that wind or solar aren’t viable technologies. They are. I’m just sick of hearing people matter-of-factly say that government mandated scale will drive down average cost. Supply curves are still upward sloping; and in the case of some renewables, they’re often very steep at scale.