How Transitioning to Clean Energy is a Matter of Economics

by Stuti Sharma - University of Delhi

A common concept that is a prerequisite to understanding any economic parameter is the concept of cost-benefit analysis. A cost-benefit analysis is a process of comparing the projected or estimated costs and benefits (or opportunities) associated with a project decision to determine whether it makes sense from a business perspective and surprisingly it is this concept that has presented itself as an impediment for Energy Industries to transition from Carbon Intensive options to clean energy alternatives. 

Before delving deeper into the correlation mentioned above it is essential to establish what is meant by clean energy. The term often used synonymously with renewable energy or green energy is as a matter of fact a perfect crossover between the two i.e the mix that occurs when green energy meets renewable energy.

Thus, clean energy is the energy gained from natural sources that can be constantly replenished i.e solar, wind, geothermal, biomass etc and the production of which does not have any negative effects on the environment. The United States gets 81% of its total energy from oil, coal, and natural gas, all of which are fossil fuels. In 2019 the electricity sector's grid supply for the United Kingdom came from 43% fossil-fuelled power (almost all from natural gas), these statistics construct reasonable doubts such as - does the developed world have no alternative to fossil fuels to power itself; has there been no technological advancement in the clean energy sector? The answer to both these questions is given by well you guessed it right Statistics itself -Investment into renewable energy technologies has registered a significant increase from 59 billion US dollars in 2019 to 11.3 billion U.S. dollars in 2005. Additionally, leading tech behemoths in the US including Amazon, Apple, Facebook, Google, and Microsoft are increasingly signing green PPAs with the aim of expanding their renewable power consumption and reducing their carbon footprint.
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The UK is continuing to make appreciable efforts as well  Over £42 billion invested in Renewables, Nuclear and CCS since 2010 with more to come by 2020. So why is the developed world over-dependent on fossil fuels to power their nations when they have the resources to make an efficient transition?

Circling back to how economics affects the transition to sustainable clean energy resources- a typical solar farm runs at only about 15% of capacity, and when compared to a  coal-fired plant Seven solar plants would be needed to produce the same amount of electricity over time as a similar-sized coal-fired plant. Further, the efficiency and sustainability of an energy source are determined by the fuel used, the cost of capital, the time a plant operates, and whether it generates power at times of peak demand. The issue of intermittency also needs to be taken into account  – wind power isn’t generated on a calm day, or solar power at night, resulting in the need for conventional power plants to be kept on standby. A familiar solution that comes to mind when reading about the issue of Intermittency is to store the electricity in batteries. However, the energy density of a pound for pound, gasoline or diesel fuel contains about 40 times as much energy as a state-of-the-art battery. Consider the example of an electric car-gasoline carries much more energy per unit of weight than a battery. A gas-powered car with a 12.4-gallon tank carries 77.5 pounds of gasoline that has the capacity to fuel the car for a distance of 360 miles. A 77.5-pound battery, in contrast, would only carry an electric car 21 miles. 

Another point of contention that needs to be factored in is the amount of land area being utilised to produce the electrical output a typical solar plant requires. The land requirement for a coal plant is found to be 29.7 acres for 2x500 MW whereas the solar power plants occupy at least 5 acres of land per 1 MW output, which means for generating 5 MW energy, an area of 25 acres is required. This disparity in capital costs is not an economically viable incentive for the investors.

Moreover, improved drilling techniques such as hydraulic fracturing, have staggeringly increased the competence of the natural gas extraction sector thereby lowering energy prices making the switch to clean energy even difficult.

The future of clean energy presently seems nebulous but it can metamorphose into an excellent source of powering the planet if appurtenant policy changes and incentives for investors are brought into place. Policies, business-friendly measures and innovative financing mechanisms. Examples of some transparent and predictability policies include allowing independent power producers (IPPs), initiating standardized power purchase agreement (PPA) templates; some business-friendly measures include tax policy (such as not withholding taxes on profits, and no VAT on clean power sales), allowing foreign direct investment (FDI), improved permitting processes, and foreign currency/ability to resettle profits. Other financial innovations being considered seek to create more renewable energy investment opportunities. Examples include 1) synthetic corporate power purchase agreements (CPPAs), which can offer an advantage against a corporate buyer’s fluctuations in power cost while providing demand for renewable energy; and 2) an energy transition mechanism (ETM), which gives investors the opportunity to buy high carbon-emitting assets, retire them and replace them with renewable energy (financial returns in an ETM investment come from operating the high carbon and renewable-energy assets supplemented by, for example, carbon credits for accelerated retirement). 

What has become a common trend in a diverse group of policy formulation and decision making spheres is the supremacy monetary benefits are accorded. Corporations are willing to bend philanthropic and environmental systems to get on top of their targeted profit for the year but when a climate catastrophe strikes due to the collective action and more appropriately the inaction of these very same organisations the consequences are borne by people belonging to the very end of the social economic order .While economics is central to  transition to cleaner options of energy generation what is twice as more important is to maintain the ecological equilibrium that is the very reason these organisations have the resources to exist and functions effectively in the first place. Banks and Financial systems need to take into consideration that while taking positive steps to switch to greener forms of energy does not provide immediate fiscal benefits it is essential to sustain the very apparatus that supports life on our planet.

We currently live in a Globalised Capitalist Economy and as long as we conform to the logic its fundamentals rest on we cannot deal with the overall planetary climate crisis. To borrow words from John Bellamy Foster - “We have to go against the logic of the system even while living within it”. The inherent tendency of capitalism is to degrade the environment that sustains life. So, it becomes a question of immediate concern - do we choose to steer society toward putting people and nature before profits or continue to choke the life out of it and choose what capitalism does, i.e. putting profits before people and nature.

References

1. DevelopmentEducation.ie. (2021, November 30). The energy debate: Renewable energy cannot replace fossil fuels. 
2. Gross, S. (2021, June 16). Why are fossil fuels so hard to quit? Brookings. 
3. Gross, S. (2021b, June 16). Why are fossil fuels so hard to quit? Brookings. 
4. House, T. W. (2021, December 13). FACT SHEET: President Biden Signs Executive Order Catalyzing America’s Clean Energy Economy Through Federal Sustainability. The White House. 
5. Vara, V. (2021, May 24). US tech giants to lead renewable energy business in the next five to ten years: Poll. Power Technology | Energy News and Market Analysis. 
6. Waaree Energies Ltd. (2021, September 29). 5 MW Solar Power Energy Plant in India.