The price of renewable energies

One of the main drawbacks attributed to renewable energies is that presumably they cost more than fossil sources. Their opponents therefore assert that widespread consumption of renewable energies would bring about a substantial increase in consumer cost. This argument has two weak points, which I would like to hereby address.

The first one is that even if it is true that the price paid today for a unit of renewable energy is higher than that of an identical unit of fossil energy, it is easily understandable that this situation is transitory and due to the fact that renewable technologies represent, for the most part, a budding industry. Over the course of time, the technology will evolve and costs will come down, just as what happened, for example, with computers twenty years ago, or like the case of cellular phones ten years ago. The experience curve, together with economies of scale, can give rise to a reduction in production costs by an order of magnitude. And in light of this all, we must not lose sight of the fact that renewable energy sources, unlike the case of oil, are free and inexhaustible as long as our planet continues to exist.

The price of renewable energies

The second, and perhaps most important, argument is that when we talk about the “price of fossil energies”, we are only taking into account how much it costs us to buy them, but we are not considering other associated costs such as, for example, the environmental impact resulting from contamination or the greenhouse effect they generate. This is something that economists have known about for a long time, technically referred to as a negative externality [1]: when we consume a given product or service, we generate harm to third-party stakeholders without its mediating any kind of economic compensation. The way to resolve this is simple: we must internalize this cost by having the fossil energy consumer take it over, by creating, for example, an emissions market the cost of which is attributed to the price of energy. In other words, we must include in the price of fossil energies the economic cost of the environmental detriment arising from its utilization, harm that affects everyone [2]. Furthermore, we must also include in the price of renewable energies the positive externalities entailed, such as greater energy independence, increased supply security or local job creation. It is quite possible that, after having put this into practice, we will be surprised by the fact that renewable energies are much cheaper than fossil sources.

Finally, I must mention another criticism which is frequently heard in certain specialized circles when referring to subsidizing renewable energies. It is obvious that consumers are unwilling to pay more for a kilowatt hour from a coal-fired electric plant than for a solar power-based kilowatt hour, which means that the State has to be the one to equalize the prices paid by the consumer for one type of energy or the other through subsidies.

This measure, moreover, will help to attract private investment from the very first stages in creating renewable power plants, thereby enabling the creation of a market with enough critical mass, while allowing the required technology to take off at the same time. Once this occurs, the politics of subsidization can be done away with, letting the market develop autonomously.

[1] In economics, an externality is an impact (positive or negative) on any aspect which is not involved in a given financial transaction. Externalities occur when a decision taken produces costs or benefits for third-party stakeholders that are not involved in the transaction.

[2] According to the Stern Report, the total annual economic cost of climate change (caused by greenhouse gas emissions) is over 1 percent of world domestic product. A large portion of this cost is due to the emissions deriving from the use of fossil energies.

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