An increasing number of countries have formulated policies to introduce renewable energy sources into their electricity supply in order to combat global warming or to decrease their dependency on imported fossil fuels. A positive side effect of this development has been the macro-economic benefits gained by each society that starts this transition to a solar- and wind-powered economy. Green jobs and regional value creation, better air quality and health benefits, and many more positive results can be observed all over the world.
Of course, the transformation of the energy system isn’t free. Investment is needed to introduce new technologies and build the infrastructure that suits the requirements of renewable energy sources. Governments all over the world have developed different kinds of incentives to encourage the private investments that are needed to reap these climatic and economic benefits. While there are many approaches to the issue, the most successful and cost-effective method to date is a feed-in tariff system.
Over the course of more than 20 years, Germany has experimented with all sorts of policy incentives — tax credits, quota systems, loan programs, and, for several years starting in the year 1991, there was a primitive feed-in tariff system in place. These programs worked somewhat, but the results were rather mediocre.
The real breakthrough came with the “Renewable Energy Sources Act” and the comprehensive feed-in tariff system in included. It created the necessary investment environment for new participants and has allowed them to create entire new industries and exponential growth in renewable energy generation ever since.
Micro-Economic Benefits Too?
The macro-economic benefits of this successful law are obvious. More than 375,000 jobs in what is now called the “renewable energy industry sector,” a reduction of energy imports and environmental damage worth several billion euros, and a significant reduction of CO2 emissions. Due to the way renewables are being integrated into the conventional energy system, they have actually lowered the price of electricity at the European Energy Exchange.
However, the micro-economic effect of this successful policy — the down-side, if you will — is increased end-consumer electricity prices due to a surcharge that pays for the feed-in tariff. Today, the mix of all renewable energy sources paid for by the feed-in tariff produces electricity for approximately 16 ct/kWh. Compared to the average 6ct/kWh required for electricity generated by the mix of conventional steam-powered power plants, it’s no surprise that investing in such a system must seem like economic non-sense, especially in our current culture of tunnel vision economics that has taken root in the minds of our political elite.
It’s About Tomorrow, Stupid!
The typical result of this tunnel vision, is that most critics of renewables are totally ignorant of the fact that it’s beyond stupid to compare building blocks of a new system with the results of a system that has been established and subsidized for over a century.
Most nuclear reactors are reaching the end of their lifetime, powerlines are becoming outdated, and many fossil fuel power stations are approaching closure. That means that, over the course of the next few decades, almost the entire conventional energy system has to be replaced simply because of old age. Since this is a long-term process, it’s important to look at the long-term trends. And, boy, it doesn’t look good for the conventional energy sources. Across the board, a combination of necessary new standards and rising fuel costs increase the cost of electricity generation of new conventional power plants.
With renewable energy sources, it’s the other way around. Technologies to harness renewable energy are getting cheaper to install every year. PV solar prices fell by more than 60% within just a few years and wind power is now cheaper than new coal or nuclear. The trends are very clear.
So, What about 2030?
Now, a recent study commissioned by the German Ministry of the Environment has come to the conclusion that the transition to renewable energy sources will lead to cheaper electricity prices over the course of the next two decades.
Some of the leading German research institutes were asked to analyse the feasibility of the renewable energy goals of the German government and the economic implications of this transition. Among the institutes was the German space agency DLR and the famous “Fraunhofer Institute for Wind & Energy Systems” (IWES).
Using learning curves for renewable technologies based on experience of similar technologies and recent developments, the study tried to look into the future. Based on experience and the probable mix of renewables in the years to come, they simulated the price per kWh.
With the rate of introduction of renewables continuous till 2030, and the goals being met, the average price of electricity generated from a mix of renewable energy sources will be at an average of 7.6 cents per kWh by 2030. The trend at that time will continue to be downward. At the same time, the price of “conventional” fossil-fuel-powered electricity generation will already be at approximately 9.0 cents per kWh. That means that renewable electricity supply will be cheaper by 2030 or earlier.
Even though the numbers are the result of computer simulations and countless hours of work, it has to be noted that predictions of the future in terms of facts and figures are the modern-day equivalent of looking into a crystal ball. But where do you think prices and the wider national economy (macro economics) would be headed if we stuck with a dying conventional energy system that will only get more expensive over time? 2030 is just 18 years in the future, so most of us will be around to see how it turns out.
One thing is certain: Beginning the inevitable transformation of the energy system at conventional energy costs of 6 cents per kWh is definitely cheaper than starting at 9, 12 or 15 cents per kWh.
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