Monday, February 26, 2007

Economics of Alternative Energy

In a previous post, I noted that the U.S. currently gets only about 2% of its electricity from renewables. Is coal, which supplies about 50% of U.S. electricity, significantly cheaper than alternative energy sources? In this post, I will present two different estimates of power generation, both of which show an improving cost picture for alternative energy.

Since coal and natural gas account for about 70% of electricity in the U.S., they probably drive the current price environment in which alternative energy sources must compete in. At the end of 2005, the cost of residential electricity was 8.4 cents per kilowatt hour (kwh):

(To enlarge a particular image, click on it.) Rates vary considerably across the country:

I found estimates for the cost of generating electricity from two sources: the Wall Street Journal (subscription required), and Scientific American. In both cases, Solar Photovoltaic technology did not appear to be cost competitive. Photovoltaics use solar cells or photovoltaic arrays to convert sunshine into electricity. Thermal or Concentrating Solar Power (CSP) technologies, collect sunlight to generate heat. Traditionally used to provide hot water, Solar Thermal electric plants are proving to be more cost competitive than Photovolatics.

For each source of electric power, we give a range (low/high and average) of estimates for the cost per kwh. The first set of cost estimates from the WSJ are given below:

The graph with Solar Photovoltaics (Solar PV's) included, can be found here. This set of estimates indicate that while coal is cheaper, the "alternative" sources (except for Photovoltaics) are becoming competitive. Although Solar Thermal is a lot cheaper than Solar PV's, it is still currently the most expensive source of "alternative energy".

Here are the estimates I culled from the Scientific American article:

The corresponding graph with Solar Photovoltaics (Solar PV's) included, can be found here. The estimates from Scientific American position wind as an increasingly viable alternative to coal and natural gas. The estimate for nuclear had a large variance "... because experts disagree on which expenses to include in the analysis".

Finally, the WSJ article also contained estimates from the DOE's Energy Information Administration, for plants entering service in 2015:

Unlike the previous graphs which presented a range (low/high) of likely costs, these are "point" estimates for the likely future cost per kwh.

CONCLUSION: Estimates for cost per kwh vary by site and the type of technologies deployed. While coal and natural gas appear to still hold a price advantage over alternative sources of electricity, at least one set of estimates indicated that wind (and to a lesser extent, biomass) energy technologies are shrinking the price differential. Solar Thermal while still more expensive than coal and natural gas, is dropping in price. As alternative energy technology improves, and economies of scale take hold, price per kwh will continue to fall. Triple Bottom Line accounting would clearly make nuclear, coal, and natural gas way more expensive than the alternative sources. The fact that alternatives are starting to eat away the cost advantages of fossil fuels, makes the argument in their favor even stronger.

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