NEW YORK, NY – Fossil fuel emissions are continuing to rise at an alarming rate. According to the International Energy Agency (IEA), last year boasted the highest number of global energy-related carbon dioxide emissions on record. A study from Columbia Business School Professor Geoffrey Heal sheds light on the affordability of an alternative energy source that can reduce emissions, electricity. The study finds that renewable electricity is less costly than that from fossil fuel, so that the transition from fossil to clean electricity can reduce energy costs.

The study also notes that the current utility business model causes electricity to be priced above its marginal cost, the cost of producing another unit of electricity. Instead, utility companies charge consumers these costs plus an additional amount to recover the costs of the company’s investment in operations. Economically it makes sense for electric power to be close to its marginal cost, however the business model of utility companies leads to prices that are too high and limits the incentive consumers have to switch from fossil fuels to electricity in heating and transportation. Heal suggests that the costs of the power grid be recovered in other ways, such as taxation or connection charges.

“Recent experience with the political fall-out from attempts to raise fuel prices suggests that few politicians would venture to propose carbon taxes to reduce emissions. If we are going to decarbonize the economy, then we must electrify the economy,” said Geoffrey Heal, the Donald C. Waite III Professor of Social Enterprise at Columbia Business School. “In order to achieve that, the price of electricity should be closer to its marginal cost, which raises questions about the current business models of utility companies and why consumers are paying exorbitantly high electricity bills.”

In the study, Economic Aspects of the Energy Transition, Professor Heal estimated the costs of renewable energy that consumers need by using the value and cost of energy from 2017. He then calculated the amount of wind and solar capacity that consumers need to produce all of the electricity that coal and gas plants produce. Finally, he estimated the cost of storage for the electricity by the amount of capacity necessary, yielding the gross cost. The results found that the annual net cost of a transition to renewable energy over a 29-year period would be $6.1 billion. This is a fraction of the cost that the U.S. currently spends annually, which is roughly $50 billion. 

Key Findings Include:

• Phasing out coal and gas in electricity generation would reduce CO2 emissions by about two billion tons per year.
• The share of electric power generated by coal in the U.S. has fallen from over 50% to 20% in the last fifteen years.
• In 2017 Professor Heal estimated it would cost $3.97 trillion, net of fuel cost savings, to transition from fossil fuels to renewable energy. With the cost of renewable energy dropping, his estimation today stands at $179 billion annually from now to 2050.

To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.

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