After a comparatively successful climate conference in Paris, there has been much optimism in a low-carbon future. There is certainly reason to be optimistic: Alternative energy sources have been more efficient and affordable in recent years. Solar energy, especially, has been seen as the major competitive contender to fossil fuels. In fact, solar’s potential is more than 200 times larger than all other alternative resources combined. In September 2015, Shell’s CEO, Ben van Beurden, claimed, “solar will be the dominant backbone of our energy system, certainly of the electricity system.” Solar energy is certainly an attractive alternative: Compared to traditional fossil fuels, solar power generation has virtually no carbon emissions or variable cost. Additionally, increasing solar in the U.S. energy mix would render the U.S. less susceptible to foreign fossil fuel price shocks, a common national security concern.
While there may be compelling environmental, social, and political reasons for a transition to solar, macroeconomic conditions in the current energy landscape suggest that fossil fuels are far from irrelevant in the near future. In fact, the US Energy Information Administration has noted that the three fossil fuel sources (petroleum, natural gas, and coal) have, for the past century, made up at least 80% of total U.S. energy consumption and are likely to continue being predominant sources in the U.S. energy mix. What, then, is preventing solar from achieving economic competitiveness?
Due to health concerns and efforts of environmental groups – as well as growing economic competitiveness of natural gas – coal-fired power plants have been phased out or limited by pollution controls. Because coal has the highest carbon content of all fossil fuels, this phenomenon has been undoubtedly positive for curbing carbon emissions. Oil and gas prices, on the other hand, have reached record lows. Anyone who has visited a gas station to refill a tank recently could not have missed the drastic drop in fuel prices. While this price drop may be good for budget-constrained consumers, it makes it more difficult for alternative energy expansion to gain momentum. To get a sense of this drop, consider this: for much of the last decade, the price of a barrel of oil in the U.S. has fluctuated between $90 and $100. As of March 20, 2016, the price is at $39. This price drop is mostly fueled—pardon the pun—by an increase in supply of the commodity. There are many reasons for this drop, including the shale revolution in the U.S. during the last decade, which has propelled the U.S. towards becoming a formidable oil and natural gas producer.
Further, unsubsidized solar power is still very expensive. The conventional metric for a generator’s cost of producing power is the levelized cost of electricity (LCOE), a measurement of a system’s lifetime costs over the system’s expected power output. The U.S. Energy Information Administration predicts the LCOE in $/MWh for plants entering service in 2020. The predicted LCOEs range from 109.8 for solar PV to 60.4 for conventional coal and 40.7 for natural gas-fired power plants. While technological improvements, increasing economies of scale, and the availability of a 30% investment tax credit have reduced the price of solar, it is evident that unsubsidized solar would not be competitive with conventional fossil fuels in the near future.
Perhaps the time is not right for a transition to solar, but it does beg the question of whether conventional fossil fuels are correctly priced. Currently, the U.S. does not have a federal tax policy correcting for the externalities of carbon emissions. Carbon pricing is controversial because identifying the universally accepted “correct” price on curbing climate change is difficult. As such, traditional policy mechanisms such as carbon taxes are difficult to implement. However, other policy instruments, such as cap-and-trade, use a market-based approach and do not rely on carbon pricing. Yet legislation proposing a cap-and-trade system was voted down multiple times in the Senate in 2003, 2005, and 2008.
Last year, due to partisan gridlock in Congress, President Obama and the EPA took executive action, issuing the Clean Power Plan, which mandates state specific carbon emission targets. This plan is flexible in that each state has the autonomy to formulate its own plan of achieving mandated levels. According to some economists, the plan may not be as efficient as a federal cap and trade policy, but the advantage is its ability to bypass legislative gridlock. However, the Supreme Court has put a hold on the implementation of CPP, citing potential overstepping of EPA authority.
Evidently, the energy landscape is very complex and a transition to a renewable energy mix is not as simple as creating more solar panels. Legitimate economic and political pressures make an overnight transition to a renewable energy mix neither feasible nor desirable. However, we still ought to question whether the rate at which we are approaching a sustainable energy mix is sufficiently responsible and consistent with environmental concerns.
Image courtesy of Flickr. Originally published by S&S on March 30, 2016.