Anthonares

Perhaps you may have seen this story floating about: RAND (a non-partisan research institute, or think tank) released a study today concluding that the most likely scenario is that renewable energies will cost no more than nonrenewables in 2025. To be a little more explicit, if the nation gets 25% of its transportation and electricity (and thus 18% of total energy) from renewables, up from just 8% today, this will likely have no impact on energy expenditures.

I’ll go even further than that. Combining this study with studies investigating the health impacts of fossil fuel burning, along with somewhat speculative estimates of global warming economic effects we arrive at this very important conclusion: significantly expanding our renewable energy usage over the next two decades will reduce the amount of money we spend on energy.

It’s time to shift the debate. It’s not about cost anymore, and no one can really even make that claim honestly. The oil, coal, and natural gas industries are sustaining their apparent price advantage only through discounting environmental and health effects. The debate is now between entrenched economic interests and the greater common good. We need to move beyond that to the point where we are answering this question: on a regional basis, what is the mix of energy supplies that will a) produce the greatest health benefit, b) move us toward energy independence, and c) reduce our CO₂ by the greatest amount?

The RAND Report

Assumptions

I want to start by talking briefly about the range of assumptions in the RAND study. Basically, they produced a model of energy expenditures that takes into account the cost of transporting energy supplies, the cost of the technology to produce energy, and the cost of fuel supplies. They did not include mis-named “externalities” including healthcare costs related to fuel burning or environmental damage related to fuel extraction, energy generation siting, or carbon emissions. Also, the RAND study did not include the price feedbacks between increased renewable use and decreased fossil fuel prices as they are currently not well understood.

Because the study looks at energy expenditures of the nation as a whole, it ignores any taxes or subsidies that might be involved in the decisions at the market level (because those are all “inside the box” of the analysis, so they can be ignored). Taxes and subsidies are policy available to the government that are generally assumed to introduce inefficiencies into the market. The inefficiencies are not necessarily that, however, if you correctly include all costs in the analysis–rather than simply true market costs. For instance, by realizing that today’s CO₂ emissions might become really damned expensive for us someday down the line, we can force a temporary inefficiency to produce a long-term greater efficiency. Also, the RAND study ignores them because determining the actual effect of a particular subsidy or tax on today’s market price is fiendishly difficult. For instance, a $0.051-per-gallon tax on E10 has clearly helped sales of E85. But, as production of E85 increases, non-linear cost reductions will further amplify the effect of that smallish tax.

Scenarios

The next most important analysis of the RAND report is to examine the range of scenarios they considered. First, their models were run across the range of scenarios, about 1500 model runs all told. The parameters that varied between model runs were the following: 1) the price of non-rewenable technology, 2) the price of non-renewable fuel, and 3) the price of renewable technology (note that the price of renewable fuel here is considered negligible, as most renewable scenarios the fuel, if it exists, is a byproduct of some other process).

Their baseline fuel cost estimate comes from the latest Their report examines a few specific set of master fuel price scenarios generated by a model within the Energy Information Administration (EIA), part of the DOE. The EIA model forecasts prices of major fossil fuels over the period 2006-2025. The RAND study uses those model results but examines scenarios in which fuel costs 50% more and 50% less than EIA model forecasts. This approach to modeling characterizes the extreme situations, between which lies the most likely case. Exactly what the most likely case is very difficult to know for sure. But here, the most likely case is assumed to be one in which the price of renewable technologies continues to decrease at its recent historical rate, and fuel prices are those forecast by the EIA. They assume that non-renewable technology prices remain constant.

Results

First, the most likely scenario. Given the scenario conditions above, if renewables provide 18% of total energy supplies by 2025, the net cost will most likely be zero. That’s a very important conclusion because it flies in the face of earlier, less comprehensive studies that looked at the effect of using today’s technologies only.

But, let’s dig a little deeper into those results. There’s one figure in particular that I want to show from the report because it helps understand the range of possible outcomes we’re facing. The figure on the left plots all three of our free parameters simultaneously. Brown colors represent scenarios in which renewable energy use has increased total energy expenditures, and blue reductions in expenditures. Note that, if the technology of either energy type becomes cheaper or more expensive, this effects the relative expenditures (these are costs relative to today’s technologies). Note the general diagonal trends in both plots. So, if the costs rise or decrease in tandem, this will have little net effect on total expenditures.

The exact expenditure changes are affected by the cost of fuel as well. The plot on the left shows the EIA-50% scenario, while that on the right is the EIA+50%. Keep in mind, these two plots are intended to produce a range of estimates. So, if the technology cost changes are nil, then going the renewable route will increase energy expenditures between 0 and 4%. As another example, if non-renewable technology becomes more expensive (as it will as carbon sequestration and greater pollution controls become a necessity), and renewable technology gets cheaper (economics of scale lead naturally in that direction), the picture is very different. Let’s pick +10% non-renewable and -10% renewable, a very conservative estimate I think. Then the energy expenditure outlook becomes -2% to +2%, depending on fuel prices.

Implications

Given this analysis, I would conclude that the best current prediction is that renewable energy use at the 18% level will have no net effect on energy expenditures of the next 20 years. Now, factor in the costs associated with environmental effects and health effects, and suddenly the picture becomes much brighter if we include lots of renewables in it. As an aside, by health effects I mean the cost to the economy of the estimated 40,000 annual deaths attributed to releases from fossil fuel burning, and associated respiratory illnesses. Not only that, but renewable expenditures are far more likely to remain in the country, as they can be sent largely to domestic producers of equipment. This money will go then to producing high-quality manufacturing and technology jobs. Fuel will to a very large degree still require importation even if we manage to tap deep Gulf of Mexico and Alaskan North Slope deposits.

Then, there are the other advantages including reducing our military exposure to international conflicts, and sheltering our economy from the buffeting winds of large developing economies. Those two alone are perhaps inestimable in improving the state of the world and our relationship to it. Also, if the US takes a leadership role in deployment of renewable energy and CO₂ emissions reductions, the world will follow suit. We are still at a point where we can stave off the most dangerous effects of global warming–hopefully–but only if we act very soon.

The Bottom Line

It’s time to stop worrying about the dollar costs of renewables versus non-renewables, because no one really knows, and the best evidence is that there’s not going to be a big difference. Let’s focus instead on how to best reduce our emissions, improve national health, and add vital jobs to our economy. It’s time to talk about what mix of renewables each region will be encouraged to produce, and let the markets sort out how best to meet those goals. Profits will be made by all, except for maybe the entrenched energy interests (at least in the short term until they can get in the game). And, more importantly, our country will be better off for it.

*Major Disclaimer: This analysis does not consider Nuclear fuel a renewable fuel source, and the estimates of price changes are not explicitly included in the EIA model as far as I can tell. I think nuclear needs to be a major part of the mix as well. It serves the role of a large coal-burning plant quite well, so perhaps that’s the niche it can fill. But, whatever the final distribution, I think nuclear will be a major part of the reductions in emissions and increase in health in this country over the next few decades.