The Obama Administration, with the support of most environmental groups and many business leaders, insists that the US must make a quick transition to “green” energy sources to replace oil, natural gas and coal. This sounds great, but reality is stubborn. An article by Carl Shockley in the January 22 issue of “National Review Online” highlights the problem. Entitled “France’s Solar Bubble Pops,” this article provides an excellent lesson in the problems of “green energy”.
By way of background, solar energy seems like a no-brainer. We simply turn an infinite supply of free solar radiation into electricity with virtually no carbon or pollution. Energy problem solved. The difficulty, of course, is cost. The current generation of residential solar photovoltaic panels cost about $7 per peak watt installed. Each watt of capacity can produce about 1 kilowatt-hour (kWh) a year, the equivalent of running at peak power 12% of the time. The rest of the time it’s dark, rainy or cloudy, or the solar panel is dirty or blocked by trees or something else. To earn a 12% discounted cash flow return (low for venture capital) on a $7 investment, would require a sales price of over $0.50 per kWh of electricity. By comparison, the current residential price of electricity in the US is about $0.12 per kWh.
Ask anyone in Washington about the exorbitant cost of solar power, and they’ll give you the standard answer: No problem. Research and economies of scale will bring these costs down to a competitive level. After a half a century and billions of dollars of taxpayers’ research money, this claim is starting to wear a bit thin. Semiconductor solar cells are reaching the theoretical limits of physics, and further reductions will have to come mainly from reduced manufacturing costs. It’s a long way from $0.50 to $0.12. So what do we do with solar energy in the meantime when it’s far more expensive than other forms of electricity?
Here’s where Mr. Shockley’s article is so instructive. The French government decided to force solar energy into their electric power grid by means of a “feed-in tariff” – a requirement that state-owned Electricite de France (EdF) buy electricity from solar energy suppliers at a price set by the government. Residential electricity in France costs about $0.08 per kWh, a relatively low price resulting from France’s extensive nuclear capacity and government price regulations. The feed-in tariff for solar is $0.76 per kWh, nearly 10 times higher. Who pays for this expensive power? Everyone who uses electricity in France is assessed a surcharge.
Programs like this one have some political value provided they’re kept very small. If 0.1% of France’s electric power supply comes from solar systems subsidized in this way, the price of electricity would increase by around $0.001 per kWh. Politicians could then claim that they were making major strides on green technology, are optimistic about the future and yada, yada, yada without causing any real economic damage. France’s problem is that the feed-in tariff is so attractive that it’s actually working. Applications for solar permits rose from about 20 per day before 2008 to 3,000 per day last December. Great result, right? Not exactly. Every French customer now faces a 12% surcharge of $0.01 on every kWh consumed just to pay for the solar panels. Even this high renewables charge isn’t enough; EdF is about $80 billion in debt.
How does this program advance the cause of “green energy”? So far, the contribution of solar to the French national energy balance is negligible. Is the “feed-in tariff” leading to further technology improvements or reduced manufacturing costs that will ultimately make solar energy competitive? Not really. Solar panels have become cheaper in the last few years, but not because the technology is significantly better. The Chinese have decided that if Western countries are happy to force their citizens to buy an uncompetitive technology, then China is happy to oblige. Since labor is a significant cost component in solar panel production, the Chinese have a huge advantage and are thus coming to dominate this industry. Lots of green jobs being created, but only in China.
Here then is the dilemma. We could wait until solar (or any other new energy source for that matter) has actually progressed to a point of commercial viability, and allow market forces to work. That option carries no near-term political benefits to elected officials and is therefore unacceptable. At the other end of the spectrum, we could force into the marketplace enough renewable energy to replace a significant amount of fossil fuel. That option would drain so much money from consumers and capital markets that the economy would collapse. The political compromise the French (and the US) have chosen is to force enough solar power into the market to cause moderate economic damage, but not enough to have any meaningful impact on either the environment or on our use of fossil fuels. The only people benefiting from this compromise are our elected officials and the Chinese.
Computers are a wonderful invention, and they have brought enormous productivity improvements around the world. The only real drawback is that computers have given too many people a distorted sense of technology development. Computer chips have followed the famous “Moore’s Law”, named after Intel co-founder Gordon Moore. Moore’s Law states that the number of transistors that can fit on a computer chip doubles every two years. More transistors mean more computing power at lower cost. Half the US population is under 35 years old and has grown up seeing computers get better and cheaper every year. Today, we can buy for a few hundred dollars a computer far more powerful and reliable than a machine that cost thousands just a few years ago. Many people seem to have concluded from this experience that all technologies behave that way or, in a similar vein, that research dollars can force technologies down a steep cost curve like Moore’s Law. The unique characteristic of computer chips is that they can be miniaturized. In fact, the smaller the better. That, not smart people or lots of research money, is what makes computers follow Moore’s law.
Refrigerators are much better than they were fifty years ago, but they are not very much cheaper. General Electric could sell a one cubic foot refrigerator for a very low price, but size is one of the performance characteristics of refrigerators. The same is true for cars, houses, airplanes, furniture and many other things. You can’t make them better just by making them smaller. Some technologies, like nuclear power, have actually become more costly over time, as public fears have required ever greater safety and security systems not to mention constant costly litigation over siting and licensing. We cannot assume that technologies will always commercially viable with enough research dollars. If that were true, why bother with solar energy when we could have matter-antimatter energy? Why bother with electric cars when we could have transporter beams?
Government subsidies which create captive markets may actually impede technological progress. Investors and venture capitalists invest lots of money in new ideas with the hope that an invention can be commercialized. Most of these ideas fizzle, but the successes can be worth a lot. Bill Gates, after all, is a multi-billionaire. Government subsidies for solar power encourage people, particularly the Chinese, to build massive current-generation manufacturing facilities which can be highly profitable even if the technology cannot stand on its own. Why put those profits at risk in a high-risk effort to improve the technology? Better to pocket the profits as long as governments are willing to give them to you. How does that benefit consumers?
The real political value of green energy programs is that they create the illusion of progress when there may in fact be none at all. Elected officials don’t necessarily care. As long as they can point with pride to these programs during the next election cycle, they’re happy. Sooner or later, technological fantasies will catch up with the rest of us when we discover that we have been wasting large amounts of money for no results.