Alternative Energy: Can It Compete?
posted on: August 27, 2007
It's no secret that alternative energy is an emerging market with enormous potential for growth; fossil fuel depletion, political volatility in oil producing nations, and the effects of greenhouse gasses have become pressing issues for many in recent years. But for all the hype, the question remains: Can it compete?
The dig against alternative energy has always been costs. Yes, solar power is nice, but if it costs 10X more than burning oil, we'll stick with our dinosaur fuels.
Technological advancements over the past few years, however, have significantly decreased production costs. With rising prices for fossil fuels, solar power, wind power, hydropower, bio-diesel, and ethanol have seen tremendous growth. Thanks to increased cost efficiency, alternative energy sources have caught the eyes of many governments and energy producing companies across the globe, which are throwing increasing amounts of money at the concept. Is this money over the bridge, or have alternative energy sources turned the corner to become cost effective?
Solar
Of all the alternative energy sources, solar power in particular has seen tremendous production cost decreases.
The going rate for solar power in the 1980s was around 95 cents per kilowatt-hour.
That price has decreased significantly, falling to between 20 and 25 cents per kilowatt-hour as of 2007.
Even with such a large decrease, however, solar power still cannot compete with coal or natural gas, which produces energy at around 2 cents and 8 cents per kilowatt-hour, respectively. That puts solar rates at a 2.5-12X disadvantage to fossil fuels --- better than in the past, but still high. Still, solar energy is gaining popularity among individual, environmentally conscious consumers looking to ease the tax that carbon gasses put on nature, and they may be willing to continue to pay a premium for this "perfect" fuel.
Wind
In terms of alternative energy production for the masses, wind power and hydropower are more prevalent. Particularly in Europe, wind power has become extremely popular. In Denmark, wind energy makes up 20% of total energy produced, in Spain 5%, and in Germany 6%.[ii] Domestically, the U.S. installed more wind power capacity than any other country in the world in 2005.[iii] Although environmental factors (wind, coastal environmental factors) play into wind energy production, if done properly it can be almost as cost efficient as coal power, and less expensive than natural gas.
In Denmark, as of 2006, the cost of wind power has declined 75% since 1970 (the price was approximately 34 cents per kilowatt-hour in 1970) when Denmark's wind energy program began.[iv]
US wind energy cost 6.1 cents per KWH in 1999, and has decreased to approximately 4.5 cents per kilowatt hour in 2007.[v]
Wind energy is 30% efficient and releases nothing into the environment.[vi]
Wind energy accounts for just over 1% of energy production globally, but energy companies are starting to explore and develop off-shore and near-shore locations to capitalize on the high wind speeds on the open ocean and in costal regions.[vii]
Water
Unlike the relatively new arrival of wind power in the U.S., hydropower has been a staple in the American energy infrastructure for years. It accounts for roughly 7% of total energy production in the U.S. and 73% of all alternative energy produced in the U.S.[viii] Globally, hydropower represents 21% of energy produced.[ix] Along with the U.S., Canada, China, and Brazil are the world leaders in hydropower production.
The production cost of hydropower is under 1 cent per kilowatt-hour, making it the most efficient form of energy production available.[x] However, dam and reservoir building disrupt aquatic ecosystems and decrease biodiversity. Thus, hydropower plant licensing has become increasingly difficult and expensive to achieve in recent years, and this "alternative fuel" does not share the positive environmental associations many people shower on the sector.
Ethanol
Another alternative energy option gaining hold in the U.S. is ethanol. Made primarily from corn in the U.S. (other countries use other crops), ethanol has been much discussed in recent months. Although production costs for ethanol and bio-diesel (diesel fuel's environmentally friendly counterpart) are generally higher than for gasoline and diesel fuels, rising demand for oil, political volatility in oil producing nations, and fear of fossil fuel depletion are making ethanol and bio-diesel more attractive to consumers than in the past. In fact, with gasoline surging above $3/gallon in some places, ethanol has appeared downright cheap to dome.
During the first quarter of 2007, ethanol was less expensive than gasoline, costing an average of $2.10 per gallon compared to gasoline's average price of $2.30 per gallon
B20* and B2-B5** bio-diesel were less expensive than diesel fuel during the first quarter of 2007. B20 bio-diesel's average price was $2.53 per gallon, B2-B5 bio-diesel averaged prices of $2.60 per gallon, and diesel fuel was $2.63 per gallon.
B99-B100 (99-100% bio-diesel) bio-diesel averaged $3.31 per gallon in the first quarter of 2007.
Fuel Type
Cost ($ per gallon) as of end 1st Quarter 2007
Gasoline
$2.30
Diesel
$2.63
Ethanol
$2.10
B2-5 Bio-diesel
$2.60
B20 Bio-diesel
$2.53
B99-100 Bio-diesel
$3.31
These numbers are somewhat deceiving, as engines run less efficiently on ethanol as compared to gasoline or diesel fuel, gaining fewer miles per gallon and less horsepower. Still, the long-term trajectory for fossil fuel prices is up, while most expect bio-fuel prices to decrease with improved technology. Over time, ethanol could be a significant threat to the fossil fuel industries.
Conclusion
Advancements in technology and fossil fuel market conditions have made growth and capital gains in the alternative energy sector possible, and show signs of continuing to do so. Wind and solar energy have seen rapid growth in recent years, and tidal energy is an emerging sector across the globe. Until recently, large scale alternative energy production hasn't been an option mainline energy companies were willing to explore, but because production costs have lowered and fossil fuel prices have climbed, even the oil majors are starting to look. We're not on par yet for all alternative energy prices yet, but the trend is in the right direction.
*B20 is a diesel blend comprised of 20% bio-diesel and 80% No. 2 diesel.
** B2-B5 is a diesel blend comprised of 2-5
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