Renewable Energy: The Price Problem
Going green seems great in theory — until it comes time to pony up the cash. Energy producers say the technology is untested and too expensive. Cash-strapped governments can’t earmark sufficient funding. And consumers love the idea of clean energy — until they have to pay for it. Chazen Global Insights recently spoke with Dan Potash, senior financial analyst with Advanced Engineering Associates International in Islamabad, Pakistan, to parse the possibilities.
What do you see as the obstacles to the widespread adoption of renewable energy?
The primary obstacle is financial. The technology exists currently for those consumers who can afford it, but it has to become available on a smaller scale.
So independent household units are still too expensive. What about renewable energy that’s fed into the grid? Isn’t it cheaper?
That’s true in some places. The way we sell wind energy in America is that when you build a plant, you sell the electricity at a relatively low price but you get tax benefits. So the rule of thumb in the US is the return to investor is one-third selling energy, one-third carbon credits, and one-third tax benefits. The consumer pays a low price for energy but taxpayers subsidize the returns to investors. But in Germany you just have a high price for electricity without any fancy convoluted tax deals. As a result, the consumer is rewarding the investor for the green aspect of the electricity by paying a higher blended price of the renewable and brown power.
So it seems the European consumer has a greater tolerance for higher energy prices.
No question. Consumers in other countries spend much more on energy. American consumers want independence, cheap energy, and choice. The consumer has a sense of entitlement in these respects.
But I have an argument with the free market choice movement as it applies to green energy in the US. For example, Marin County [in California], my old home, has started a program called Community Choice Aggregation, where they’ve tried to influence who their power suppliers are in order to source green energy at an affordable rate. But it faces challenges because you’ve got this amazingly complex grid in terms of using technologies, timing the dispatching of the plants, ensuring the loading of transmission lines are balanced, etc. It’s not like buying Jif peanut butter instead of Skippy. There’s this idea to give people choice so they can make their vote known in the marketplace, but it’s difficult in energy.
Other than the affordability obstacle do you see any other barriers to widespread adoption?
Related to affordability is the financing issue. People are used to thinking of their energy costs as a monthly bill. But with a home solar system there is a large upfront expenditure. So the bankers need to develop new financial products that facilitate the investment, and the mortgage lenders have to find a way to account for the increased value in the house. Tailored financial products will have a big impact on the adoption of this technology on a household level.
You started your career in the United States, but later shifted internationally. What are the major differences you see between US policies concerning renewable energy and policies elsewhere?
In general, there’s a lot more support internationally than in the US. China supports their wind turbine manufacturers with low-cost financing and easy access to land. Other countries directly support utilities with state ownership. For example, Èlectricitè de France went big into renewable energy in 2002 through acquisitions and investments all over the world. Most American private utility companies have been much less successful abroad than state-owned companies. From my experience working on privatization in Moldova and in India, I saw these state-owned companies work very closely with their respective embassies, forming one marketing team. But America limits the commercial service of the embassies from working in conjunction with private companies.
So what can be done to improve the system in the United States?
We could have more streamlined approvals for small projects. Currently, it’s very difficult for small projects. The technical and legal expertise is so expensive that it often makes a 5- or 10- megawatt project unfeasible.
It seems like innovations designed for bottom-of-the-pyramid consumers in emerging markets might offer some solutions.
Absolutely! I was recently in Tanzania and saw compact $200 solar systems for houses that provide enough power for five 8-watt compact florescent light bulbs. All it does is give light at night but totally transforms somebody’s life. What I learned from Tanzania is that you don’t always have to expand the grid. If a village doesn’t have electricity the question may not be how do we extend the state-owned power company to that village; the question is how to empower individuals and communities to take responsibility for their own power needs.