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The intertemporal economics of photovoltaics

Abundant newspaper analysis point out the higher costs of renewable energies (e.g. Cost of Green Power Makes Projects Tougher Sell, New York Times, 7 November). However, both industry employees and economists who analyse intertemporal dynamics understand renewable energies to be long-term cost effective and socially desirable. What is the source of this conceptual divergence?

A recent paper by Christian Breyer and colleagues highlights a possible source of this divergence, by looking at the photovoltaics (PV) industry (Breyer et al., 2010). Cost reduction is mostly influenced by growth rates and technological learning curves. A technological learning curve shows the cost reduction achieved by technological progress, economics of scale and market volume growth. Annual growth rates for PV have hovered around 30% for the last three decades, learning rates at 20%. Hence, initially PV was economically unviable but can by now successfully compete on an industrial scale at geographically advantageous locations, and within a few years, in Western Europe and the northern US as well. In contrast, conventional electricity-generating technologies have lower growth rates, lower learning rates, or – in the case of nuclear energy – may even have negative learning rates (Grubler, 2010). Meanwhile, PV achieved a manyfold cost reduction with only 2% of the R&D costs of nuclear-power plants.

There is possibly a deeper explanations underlying these observations. PV is a highly sophisticated technology that relies heavily on knowledge, experience and research but less on resources. By contrast, economies of scale for nuclear and fossil-fuel technologies are fundamentally bounded by their respective fuels. In fact, because they are resource-based technologies, conventional technologies are more subject to decreasing returns to scale, whereas PV as very knowledge-intensive technology is more subject to increasing returns to scale.

Another crucial property of PV – in comparison to coal and nuclear power plants – is its modularity and also its lower energy density. As a result, PV allows for and requires many agents (including homeowners) and diffusion over many sites. Interestingly, rent seeking by investors can be (but is not necessarily) more equally distributed across the population, contrasting with rent seeking of a few highly leveraged investors in resource-based, conventional technologies. This opposing view of not only environmentally technologies, but also of socially desirable economic systems, is exemplified by the recent protests and demonstrations around Gorleben in Germany, with thousands of people blocking a nuclear-waste transport in cold November weather for several days and nights (Despite Protests, Waste Arrives in Germany New York Times, 8 November).

Posted by Felix Creutzig on November 10, 2010 7:48 PM | Permalink