The True Costs of Conventional Energy

"Renewable energy is expensive -- we cannot afford it." I have heard this argument many times over. But those who bring it up are wrong. The costs of renewable energy are not higher than those for conventional energy. Instead people confuse costs with prices and need to be better aware that the market price of conventional energy does not tell the truth.

Costs vs. Prices
The price of the most commonly used energies -- electricity and automobile fuel -- is listed on your monthly electricity bill or displayed at the gas station. This price is well known and the consumer pays for it individually. At first glance, renewable energy really seems more expensive than conventional energy. This changes as soon as one looks at the complete energy-supply chain where renewables are in a better position cost-wise than conventional energies. In addition, renewable energy protects air, water, soil, flora and fauna from pollutants, saves resources and uses less land. Clearly, renewable energy installations can be deconstructed and recycled easily at the end of their lifetime, while societies worldwide are burdened with financial liabilities caused by the use of such conventional energies as nuclear and coal and by the environmental damages resulting from uranium and coal mining and the storage of radioactive waste.

Carbon emissions from fossil and nuclear energy are considerably higher than those from most renewables. Costs to mitigate climate change, 50 per cent of which is caused by carbon emissions, have only recently been brought to the attention of a broader public by the Stern Review on the Economics of Climate Change. The use of renewables on the other hand, as the report says, leads to decreasing costs. For instance, wind, hydropower and biomass emit an average of 40 grammes CO2 per kilowatt-hour of electricity (kWh), while a nuclear power plant, depending on the origin of the uranium fuel, emits 31-130g CO2 per kWh and a coal-fired power plant emits 800-1400g CO2 per kWh.

Add-on costs caused by conventional energies, such as remedying environmental, climate and health damages, are not yet reflected, for instance, in monthly electricity bills. Nevertheless, the general public has had to share the burden of these add-ons. We therefore start out on the wrong foot if we only look at prices and choose the cheapest form of energy without factoring in add-on costs. Unlike conventional energy prices, renewable energy speaks the ecological truth and reduces the macro-economic costs of energy supply.

There is a Huge Market Failure
Price distortions go even further. For many decades, renewable energies have been at a disadvantage because of low research and development (R&D) support, minimal subsidies and global energy structures that are tailored to the needs of conventional energies. Comparing renewable with conventional energy prices therefore does not do justice to the financial and political support which conventionals gained in the past and the advantages they still enjoy.

Between 1974 and 1992, the countries of the Organization for Economic Co-operation and Development (OECD) spent, for example, $168 billion on nuclear energy R&D and only $22 billion on R&D in renewables. Between 1990 and 2004, R&D expenditure on renewables in the European Union rose from 9 per cent to only 20 per cent. An estimated $1 trillion was spent on nuclear energy subsidies in the form of preferential credit, investment grants, tax exemption for fuels and release from liability obligations. In contrast, for renewable energy, subsidies amounted at the most to $40 billion over the past 30 years.

In spite of the apparent lack of public support, renewable energy technologies have performed exceedingly well in the past years. Economies of scale as well as R&D by many small- and medium-sized companies have led to considerable cost reductions in technologies. Since 1990 these have amounted to 68 per cent for solar power, 60 per cent for wind power and 40 per cent for solar heat, averaging a 50 per cent reduction in total costs. The industry is aiming at an additional 40 per cent reduction by 2020 -- today's prices will not be tomorrow's!
In September 2009, experts in Germany announced that within one year, the price of electricity from solar panels will equal the price of electricity from conventional energy sources. Similar developments can be witnessed in Spain. In the past few years at the Spanish Energy Exchange, wind energy has reduced the overall electricity price on windy days and was sold at a lower price than electricity from the most expensive coal-fired plant. The same has happened in Germany. In 2006, while consumers had to pay an extra €3.3 billion for renewable energy, this sum has been more than covered by the €5 billion revenue from renewable energy. And renewables have another, very important side benefit: they are veritable job-creating machines. In Germany, the number of people employed in the renewable energy sector has quadrupled since 1998; worldwide, two and a half million people now work in this sector.
However, despite remarkable technological development in solar panels and wind turbines, these are still at a disadvantage because the global energy infrastructure -- built around the requirements and characteristics of coal, gas, oil and uranium -- favours conventional fuel. Countries and scientific institutions recognized the problem and began to focus R&D on smart grid infrastructure and integrating renewable energy into the grid, storage technologies to balance different renewable sources, and grid extensions to connect locally produced renewable energy to the main grid. A redesign of the global energy market's regulatory structures might become necessary to accommodate the decentralized and fluctuating production of renewable energies, along with a new global regulatory regime for renewable energy technologies. Renewable energy prices will come down further when the global energy system takes heed of their cheaper costs.

How To Set Things Right
An approach that focuses solely on current market prices does not adequately reflect the benefits from renewable energy. Moreover, we have to remedy the existing imbalance. I suggest a two-fold approach:
Publishing sustainability analyses: We need to raise the awareness of the add-on costs of conventional energies. IRENA, the International Renewable Energy Agency, will promote the existing sustainability analyses of all energy sources, display their respective carbon footprint, the amount of water they require for production and follow-up costs, and make them accessible to the general public. IRENA will establish a knowledge base and gather sound information on the global energy sector. In its outreach to governments, the public and other stakeholders, IRENA will continuously argue against well-established prejudices -- one being that renewables are expensive.

Internalizing the externalities: Carbon-emitting energy technologies have to come up with a way to lessen the impact of the add-on costs they create. To that end, a carbon tax is an adequate instrument. Another solution is direct support for renewable energies. A feed-in tariff for electricity that decreases over time to account for technological development guarantees that renewable energies can make their contribution to lowering greenhouse gas emissions. A tax exemption for sustainably-produced biomass is another solution. It is up to each country to decide which path to take. IRENA will assist its members in designing the right political, economic and social framework conditions to ensure that their policies, programmes and regulations have the desired impact.

Although renewables have been "underprivileged" in the past, they have been developing exceedingly well. Considering their benefits to society, the environment and the global climate, it is definitely not too expensive to introduce them on a large scale in the global economy. IRENA will assist its members in accomplishing that, heading for a world that is powered 100 per cent by renewable energy. I am sure that renewable energy equipment will be on sale in large supermarkets in the future -- like notebooks and mobile phones today.