Energy Economics and Policy Research

1. FOUR GLOBAL ENERGY CHALLENGES The Industrial Revolution in the 18th and 19th centuries was driven by a transition away from traditional energy sources such as wood and animal power to fossil fuel energy. If humanity is to achieve a sustainability revolution in the 21st century, it will be driven by a transition away from fossil fuel energy to renewable sources such as wind and solar power. Modern economies are absolutely dependent on a continual supply of energy. While energy expenditures only represent about 6% of GDP in the United States, the other 94% of the economy would collapse without sufficient energy supplies. 1 The great transition away from fossil fuels is already underway, being driven by changes in technology, prices, and government policies. But the transition is not occurring fast enough to prevent unacceptable climate change – the world’s first energy challenge we consider in this section.2 Currently the world obtains over 80% of its energy from fossil fuels, as shown in Figure 1 – a percentage which has remained essentially constant over the last few decades. While the amount of global energy obtained from wind and solar power has tripled in the last 10 years, these sources are still only a small percentage of total energy use. 3 According to a 2019 report: Figure 1. Global Energy Supplies by Source, 2018 Source: International Energy Agency, Data and Statistics, “Total Energy Supply by Source”. 1 U.S. EIA, 2019a. Climate Action Tracker, https://climateactiontracker.org/. 3 International Energy Agency, Data and Statistics, https://www.iea.org/data-andstatistics?country=WORLD&fuel=Energy%20supply&indicator=TPESbySource. 2 ENERGY ECONOMICS AND POLICY the energy transformation must happen much faster. To meet global climate objectives, the deployment of renewables must increase at least six-fold compared to current government plans. This would require the impressive progress that we are already witnessing in the power sector to accelerate even further, while efforts to decarbonise transport and heating would need to be stepped-up significantly.4 The challenge of transitioning away from fossil fuels raises the related challenge of electrification of the world’s energy system. Fossil fuels provide energy both directly through combustion and indirectly by generating electricity. For example, when gasoline is burned in a car engine or natural gas is burned in a furnace, we use the resulting energy directly to drive a car or heat a home. Indirectly, fossil fuels can generate electricity that is then used for various purposes. The energy from renewable sources such as wind and solar energy can also be converted to electricity for final use. Currently only about 25% of the world’s energy comes from electricity, including electricity generated from renewable and nonrenewable sources. For a large-scale transition to renewable energy, processes that currently rely on the direct burning of fossil fuels will have to be converted to electric power. For example, rather than powering vehicles by burning gasoline we can switch to electric vehicles powered indirectly from wind or solar energy. Fortunately, electric technologies for transportation, heating, industrial production, and other uses are developing rapidly, along with battery technology to store electric energy. (See Box 1 for more on electric vehicles.) The global infrastructure to deliver electricity will also need to be expanded and modernized. BOX 1: THE ADVANTAGES OF ELECTRIC VEHICLES Electric Vehicles (EVs) are starting to penetrate the global automobile market. A step beyond hybrids and plug-in hybrids, which use both gasoline and electric power, fully electric vehicles use electricity only. EVs offer numerous advantages over traditional vehicles. According to an analysis by the Union of Concerned Scientists, over a vehicle’s lifetime EVs produce less than half the greenhouse gas emissions of a typical vehicle, even when the higher emissions of EV production are taken into account.5 As a greater share of electricity is generated from renewable sources, the environmental benefits of EVs will increase further. With fewer moving parts, EVs also require less maintenance. For example, EVs require no oil changes or tune-ups, and have no exhaust systems, belts, or complex transmissions. Another advantage of EVs is lower fuel costs. According to a 2020 analysis from the U.S. Department of Energy, a driver can save as much as $14,500 in lower fuel costs over 15 years by driving an EV instead of a comparable gas vehicle. 6 4 IRENA, 2019a, p. 3. Nealer et al., 2015. 6 NREL, 2020. 5 ENERGY ECONOMICS AND POLICY EVs are generally more expensive to purchase than comparable gas vehicles, primarily due to the high cost of the batteries. But the cost savings from lower maintenance and operational costs means that total vehicle ownership costs tend to be less for EVs. For example, a 2020 report by Consumer Reports compared the total ownership cost of nine popular EVs to similar gas-powered vehicles. The results showed that for “all EVs analyzed, the lifetime ownership costs were many thousands of dollars lower than all comparable ICE vehicles’ costs, with most EVs offering savings of between $6,000 and $10,000.”7 Also, EV battery costs are rapidly declining—dropping by 87 percent between 2010 and 2019.8 With expected further declines in battery prices, EVs are expected to become cost-competitive with gas vehicles based on purchase price alone as soon as 2023. Once this occurs, “electric vehicles will probably move beyond niche applications and begin to penetrate the market widely, leading to a potential paradigm shift in vehicle technology.”9 While sales of EVs are growing, they still comprise only about 2% of all new vehicle sales. 10 A 2020 forecast developed by the consulting company Deloitte projects that annual EV sales will increase more than ten-fold during the 2020s, reaching about one-third of all new vehicles sold by 2030.11 Norway is an example of how government incentives can dramatically boost the sales of EVs. EV owners in Norway are exempt from purchase taxes, including a 25 percent value-added tax, and pay reduced fees for parking and tolls. EV drivers can use bus lanes and have access to an extensive network of charging stations. 12 As a result of such policies, in the first half of 2020 EVs comprised 48% of all new vehicle sales in Norway.13 While technological changes and market forces increasingly favor renewable energy and electrification over fossil fuels, government policies will ultimately determine how fast the transition occurs. Policies that focus on changing a society’s energy mix, such as shifting from fossil fuels towards renewables, are referred to as supply-side energy management. For example, Germany has set a target of obtaining 65% of its electricity from renewable sources by 2030. The world’s energy challenge is not simply about switching energy sources. Global energy demand has been increasingly steadily, as shown in Figure 2. While the world’s consumption of renewable energy increased by a factor of 13 between 2000 and 2019, overall demand for fossil fuels is also increasing. During this same period, the global demand for oil increased by 30%, and demand for natural gas increased by 56%. Despite growth in renewables (seen as the top two sections in Figure 2), the main trend of recent decades has been overall growth in almost all energy sources. (An exception is nuclear energy, with global demand declining slightly in the 2010s.) 7 8 9 10 11 12 13 Harto, 2020. Gearino, 2020. Nykvist and Nilsson, 2015, p. 330. McKinsey & Company, 2020. Woodward et al., 2020. Norwegian EV Policy, https://elbil.no/english/norwegian-ev-policy/. Doyle, 2020. ENERGY ECONOMICS AND POLICY Figure 2. Global Energy Demand by Source, 1965-2019 Source: BP Statistical Review of World Energy, various editions Most projections indicate that global energy demand will continue to increase. The U.S. Energy Information Administration (EIA) projects that the world’s energy demand will increase by 66% between 2020 and 2050, as shown in Figure 3. Most of this increase is expected to occur in low- and middle-income countries, with energy demand increasing by 71% in China, 116% in Africa, and 293% in India. Figure 3 illustrates the world’s third energy challenge – a focus on demand-side energy management, or policies that seek to reduce energy demand (or at least reduce the growth in demand). The projection in Figure 3 is from the EIA’s “reference case” which is based on current national energy policies and specific assumptions about future energy prices, technology, and economic growth. Later in the module we will consider whether significant growth in global energy demand can be avoided through energy efficiency improvements, energy pricing, and other policies. Efforts to slow the increase in global energy demand should complement policies that transition the world’s energy mix away from fossil fuels, speeding the attainment of a sustainable energy system. supply-side energy management energy policies that seek to change the energy mix in a society, such as switching from fossil fuels to renewables demand-side energy management energy policies that seek to reduce total energy consumption, such through energy efficiency improvements ENERGY ECONOMICS AND POLICY Figure 3. Projected Global Energy Demand 2020-205, by Country/Region Source: U.S. EIA, 2020. One interpretation of Figure 3 is that policy efforts should be directed toward limiting the growth in energy demand in developing countries such as China and India. But this perspective neglects the world’s fourth energy challenge – addressing the global disparity in access to, and consumption of, energy. About 800 million people across the world lack access to electricity. 14 According to the World Bank, as of 2018 there are 28 countries, most in Sub-Saharan Africa, where less than half of the population have access to electricity. 15 While the majority of households in developed countries have access to personal vehicles, a 2015 survey found that only 17% of households in China own a car, 6% in India, and 2% in Bangladesh.16 The global disparity in energy consumption is illustrated in Figure 4, which shows annual energy consumption per capita in various countries. The average American consumes more than twice as much energy as the average European, three times as much as the average Chinese, and over 10 times as much as the average Indian. And compared to the average person in Sub-Saharan Africa, Americans consume about 50 times as much energy. A 2020 paper finds that the world’s lowest-income 50% consume less than 20% of all energy, while the richest 10% consume nearly 40% of the world’s energy. The authors note that: 14 IEA et al., 2020. World Bank, World Development Indicators database. 16 Poushter, 2015. 15 ENERGY ECONOMICS AND POLICY Energy provision is considered a fundamental and integral development challenge. A minimum level of energy consumption is required to enable decent well-being. Our results demonstrate that energy consumption is far from equitable and varies to extreme degrees across countries and income groups. … Many people suffer from energy deprivation and quite a few are consuming far too much.17 Figure 4. Annual Energy Consumption per Capita in Select Countries/Regions, 2019 Source: BP Statistical Review of World Energy 2020. Most economic studies find that access to energy is an important factor explaining long-term economic growth.18 Thus reducing disparities in access to energy is critical to reducing global economic inequality. The world cannot meet its first two energy challenges – transitioning to renewables and demand-side energy management – by limiting the development aspirations of the world’s poorest. But developing countries cannot take the same energy path that the developed countries took, which has been heavily dependent on fossil fuels. International cooperation between rich and poor countries will be required to ensure that developing countries can utilize their energy resources in a sustainable manner. In summary, the world’s four major energy challenges are: 1. The transition away from fossil fuels toward renewable energy sources needs to be accelerated if the world is to avoid unacceptable climate change. 17 18 Oswald et al., 2020. See, for example, Ouedraogo, 2013. ENERGY ECONOMICS AND POLICY 2. Expanding the world’s reliance on renewable energy will require the electrification of most of the world’s energy system. 3. This transition needs to be accompanied by efforts to restrain the growth in energy demand, mainly in developed countries. 4. Progress toward the other goals must coincide with a reduction in global energy inequality, ensuring that developing countries have access to the clean energy that is needed to increase their well-being. Accordingly, the United Nation’s Sustainable Development Goal #7 is to “Ensure access to affordable, reliable, sustainable, and modern energy for all.” While these challenges are significant, as we proceed through the module we will see there are reasons for optimism. In the next section we will discuss nonrenewable energy sources – fossil fuels and nuclear energy. Then we will discuss renewable energy sources, including wind, solar, and hydroelectric energy. In the final two sections we will focus on energy economics and policies to address the world’s energy challenges. 2. NONRENEWABLE ENERGY Nonrenewable energy sources are those that do not regenerate through natural processes, at least on a human time scale. We consider four nonrenewable energy sources in this section: 1. 2. 3. 4. Oil Coal Natural gas Nuclear energy The first three energy sources are fossil fuels, formed from the fossilized remains of plants and animals that lived millions of years ago. As these energy sources are nonrenewable, one issue to consider is the availability of supplies. Is running out of any of these sources a significant concern? We also need to consider the environmental impacts of relying on these sources. Average prices, along with the volatility of prices, is another important factor to consider when evaluating different energy sources. nonrenewable energy sources energy sources that do not regenerate through natural processes, at least on a human time scale, such as oil and coal. 2.1 Oil Oil is a broad term including all liquid petroleum products such as gasoline, diesel fuel, aviation fuel, and motor oils. Oil is predominately used for transportation – currently about 95% of the world’s energy for transportation comes from oil. 19 As an energy source for transportation, oil offers the advantages of being easier to store than other fossil fuels and having a relatively high 19 BP, 2020a. ENERGY ECONOMICS AND POLICY energy density (i.e., a high energy to weight ratio). In our evaluation of oil we consider three main issues: oil supplies, oil prices, and environmental impacts. From the mid-20th century until recently, many oil analysts expressed concern over limited oil supplies. Like other fossil fuels, oil is ultimately a nonrenewable resource that is available in a fixed global quantity. The idea of “peak oil” production states that global oil production will eventually peak and then decline as supplies are depleted. Along with rising demand, declining oil production would lead to rapidly rising oil prices, along with broader negative economic and social impacts such as economic recessions and conflicts over limited oil supplies. While the global quantity of oil is ultimately limited, new discoveries and technologies can expand the known reserves. Current proven oil reserves are actually 2.5 times larger now than they were in 1980, even as global oil demand has steadily increased. Proven reserves could meet global demands for nearly 50 years at current consumption rates, and new discoveries continue to be made.20 Given that oil supplies do not appear to be a limitation on production for the foreseeable future, the focus in oil markets has shifted from the supply side to the demand side. As transportation becomes less reliant on oil and more reliant on electricity and other energy sources, oil market experts are now asking when peak oil demand, rather than peak oil production, will occur. For example, the 2020 World Oil Outlook, published by the Organization of the Petroleum Exporting Countries (OPEC), predicts that global demand for oil will peak sometime in the late 2030s.21 But the most stunning prediction is that peak oil demand may have already occurred! The COVID-19 pandemic reduced global oil demand in 2020 by about 9%, and the oil company BP (British Petroleum) has predicted that oil demand may never recover to its 2019 peak. As one 2020 energy analysis indicates: Until the pandemic none of the major oil forecasters had seen an imminent demand peak. … Most analysts had only predicted declining demand for oil in improbably green scenarios that could only be achieved with far stronger global climate policies. … Like any forecast, only time will tell if peak oil demand happened already or won’t come until 2040. That inescapable uncertainty is less important than the newfound agreement that a turning point is here.22 One of the other reasons for oil’s historical dominance in the transportation sector is that it is normally quite affordable. But the price of oil is also highly volatile, as shown in Figure 5. We see that after adjusting for inflation oil prices were particularly high in the late 1970s and early 1980s, and again in the late 2000s and early 2010s. More the price of oil is more difficult to forecast than any other energy source, as the price depends not only on economic conditions but also on political factors such as conflicts in the Middle East. Significant uncertainty about future oil prices complicates long-term investment decisions between energy sources. Consider, for example, a delivery business trying to decide whether 20 BP, 2020b. OPEC, 2020. 22 Randall and Warren, 2020. 21 ENERGY ECONOMICS AND POLICY to purchase a fleet of delivery vehicles that operate on gasoline or electricity from renewable energy. The business may reasonably assume the price of renewable energy will decline in the future, but will not be able to predict the future price of oil with any certainty. Thus even if the current price of oil is slightly higher than the price of renewable energy, a business may favor renewables as future costs will be known with more certainty. Figure 5. Crude Oil Prices in Constant Dollars, 1970-2020 Sources: U.S. Energy Information Administration, Crude Oil Spot Prices; U.S. Bureau of Labor Statistics, Historical Consumer Price Index for All Urban Consumers All fossil fuels are carbon-based, meaning they emit carbon dioxide (the main greenhouse gas) when burned. Using fossil fuels generates local air pollutants including nitrogen oxides, particular matter, and sulfur oxides. The environmental impacts of fossil fuels also include habitat destruction and water pollution from mining and the damage from accidental spills. Table 1 compares the human health impacts and greenhouse gas emissions of various energy sources per unit of energy generated. We see that coal is the most environmentally destructive energy source. Oil is the second most-damaging energy source per unit of energy, both in terms of human deaths and greenhouse gas emissions. Oil is responsible for about 34% of the world’s carbon emissions.23 While large oil spills receive a great deal of media attention, the majority of oil that is released into coastal and marine environments comes from runoff that washes oil from roads and parking lots and leakage from ships other than oil tankers. 24 23 24 Our World in Data, CO2 Emissions by Fuel, https://ourworldindata.org/emissions-by-fuel. Global Marine Oil Pollution Information Gateway, http://oils.gpa.unep.org/facts/sources.htm. ENERGY ECONOMICS AND POLICY 2.2 Coal Coal is the world’s second-largest source of energy, behind only oil. Coal is primarily used to generate electricity – it provides over one-third of the world’s electricity, more than any other source. China is by far the world’s largest consumer of coal, with 52% of global demand in 2019. China’s rapid expansion of coal consumption, particularly after 2000, is shown in Figure 6. While the United States was the world’s largest coal consumer up to 1985, it has since fallen to third after being overtaken by China and then India in 2015. Russia and Germany rank fourth and fifth in coal consumption, with demand less than one-third of the U.S. Table 1. Human Health Impacts and Greenhouse Gas Emissions of Various Energy Sources, per Unit of Energy Energy Source Coal Oil Natural Gas Biomass Nuclear Hydropower Wind Solar Human Deaths from Accidents and Air Pollution per Terawatt of Energy 24.6 18.4 2.8 4.6 0.07 0.02 0.04 0.02 Greenhouse Gas Emissions per Gigawatt of Energy (Tons) 820 720 490 78-230 3 34 4 5 Source: Ritchie, 2020. Figure 6. Coal Consumption, Top Five Coal Consuming Countries, 1970-2019 Source: BP, 2020b. ENERGY ECONOMICS AND POLICY Although coal is a nonrenewable resource, the world’s coal reserves are extensive. Coal is the most abundant fossil fuel, with known reserves sufficient to meet current global demand for more than 130 years.25 As shown in Table 1, it also the most environmentally destructive energy source. Even though the world obtains more energy from oil than coal, coal is responsible for 18% more CO2 emissions than oil.26 Coal is also the main source of local air pollutants such as sulfur dioxide and nitrogen oxides. The World Health Organization estimates that local outdoor air pollution kills over 4 million people per year, mainly from burning coal, with over 90% of these deaths in middle- and low-income countries.27 Coal pollution is also a significant source of premature mortality in developed countries. Each year burning coal kills an estimated 15,000 people in the United States, and is responsible for over 10% of the country’s health care costs.28 Prior to the COVID-19 pandemic, global demand for coal was anticipated to peak sometime before 2030. But as a result of the pandemic, global coal demand fell by about 7% in 2020.29 Like oil, global demand for coal may never recover to pre-pandemic levels as the world transitions toward more reliance on renewables. Projections revised in the wake of the pandemic by the International Energy Agency show that global coal demand will recover slightly in the short-term as economic activity increases (but not to its 2019 peak), and then gradually decline.30 Forecasts developed by BP show global coal demand falling more rapidly – by 25% in 2050 under a business-as-usual scenario but by 85-90% in a more aggressive policy scenario.31 2.3 Natural Gas Natural gas is frequently touted as a “transitional” or “bridge” fuel as societies move away from coal and oil but are not able to expand renewable energy rapidly enough due to technical or financial reasons. Natural gas’s main advantage over other fossil fuels is that it is generally less environmentally damaging, as we saw in Table 1. Natural gas is more flexible than other fossil fuels. It can be burned directly to power vehicles, heat buildings, and operate industrial machinery. It can generate electricity more efficiently than coal, and generally at lower cost per unit of energy. The displacement of coal by natural gas has been facilitated by new natural gas extraction technologies, specifically improvements in hydraulic fracturing (or “fracking”). Fracking involves injecting water and chemicals deep underground to fracture surrounding rock, releasing pockets of natural gas, and potentially oil as well, that are then pumped to the surface. While fracking has been used to a limited extent for several decades, it became much more common in several countries starting in the 2000s and 2010s. In 2000 only about 10% of the natural gas produced in the U.S. came from fracking, but by 2015 that share rose to two-thirds.32 25 26 27 28 29 30 31 32 Ibid. Our World in Data, CO2 Emissions by Fuel, https://ourworldindata.org/emissions-by-fuel. WHO, 2018. Conca, 2017. IEA, https://www.iea.org/news/a-rebound-in-global-coal-demand-in-2021-is-set-to-be-short-lived-but-noimmediate-decline-in-sight. IEA, 2020a. BP, 2020a. U.S. EIA, 2015. ENERGY ECONOMICS AND POLICY Despite (or perhaps because of) this rapid expansion, fracking is a controversial technology, and some countries have banned the practice (see Box 2). BOX 2. TAINTED WATER AND EARTHQUAKES LINKED TO HYDRAULIC FRACTURING FOR NATURAL GAS Fracking can contaminate drinking water supplies in several ways. The chemicals injected during fracking or the natural gas extracted can leak through the well casing, normally constructed out of steel or cement, into groundwater aquifers. Fracking wastes are temporarily stored in above ground ponds, with toxic chemicals that can leach into drinking water supplies. Final disposal of fracking wastes is commonly done by deep well injections, presenting another opportunity for water contamination. A comprehensive 2016 report on fracking by the U.S. EPA concluded that it “can impact drinking water resources under some circumstances.” 33 Regulation of fracking in the United States is largely left to the individual states, with different requirements regarding disclosure, containment, and monitoring. Another concern with fracking is that disposal of the wastes in deep wells increases pressure on underground rock structures, leading to an increase in earthquakes. Fracking activities have been linked to a 900-fold increase in earthquakes in Oklahoma starting in 2008. Four of the state’s five largest recorded earthquakes have occurred since then. As a result of stricter fracking regulations, the number of earthquakes in Oklahoma have fallen by about 90% from a peak in 2015.34 Some energy analysts assert that fracking for natural gas is an important tool in reducing carbon emissions (as compared to using coal) and can be done safely with better regulations. 35 For example, stricter requirements for the lining of wastewater ponds can reduce leakage into water supplies. Stronger standards for well casing construction can also reduce leaks. Other analysts conclude that the risks of fracking outweigh any benefits, and that the practice should be banned. Both Vermont and New York have banned fracking, along with four of Canada’s 10 provinces. Countries that have banned fracking include Germany, France, and the United Kingdom.36 The switch away from coal toward natural gas in the United States is shown in Figure 7. Up to about 2005 both coal and natural gas provided about one-quarter of the U.S.’s energy supply. But as improvements in fracking technology reduced the cost of natural gas extraction, a rapid increase in natural gas consumption coincided with a reduction in coal consumption. As the total energy obtained from coal and natural gas has changed little since 2005, it is accurate to say that natural gas has been directly displacing coal in the U.S. According to the International Energy Agency, switching electricity generation from coal to natural gas reduces greenhouse gas emissions by 50% on average.37 The displacement of coal by natural gas in the U.S. is 33 34 35 36 37 U.S. EPA, 2016. Kuchment, 2019. See, for example, Gold, 2014. https://en.wikipedia.org/wiki/Hydraulic_fracturing_by_country. IEA, 2019. ENERGY ECONOMICS AND POLICY largely responsible for the country’s 14% decrease in greenhouse gas emissions from 2005 to 2019. Figure 7. Energy Consumption in the United States, by Source, 1980-2019 Source: U.S. EIA, 2020b. The environmental benefits of natural gas relative to other fossil fuels, however, are not always unambiguous. Natural gas is primarily composed of methane, which is a greenhouse gas that causes about 25 times the warming effect of an equivalent amount of CO 2. When burned, methane is converted into CO2, but methane can be directly released to the atmosphere during natural gas extraction and transportation by leaking production facilities and pipelines. Recent analyses indicate that methane leakage rates are higher than previously estimated. A 2019 journal article found that methane emissions from major cities along the East Coast of the U.S., which rely upon natural gas for heating and electricity, are more than twice the levels reported by the U.S. Environmental Protection Agency. 38 Methane monitoring by satellites has recently revealed several large pipeline leaks, including along the Yamal pipeline that supplies natural gas to Europe from Siberia, and from facilities in Northern Africa. A leak identified in Turkmenistan in 2019 is the largest on record, releasing greenhouse gases equivalent to one million cars.39 The other concern with switching to natural gas as a transitional energy source is that it postpones the adoption of renewable energy. Though natural gas is generally “greener” than coal or oil, it is clearly more environmentally damaging than renewables (see Table 1). As a 2020 paper explains: 38 39 Plant et al., 2019. Nasralla, 2020. ENERGY ECONOMICS AND POLICY Although natural gas might help the energy transition by reducing emissions compared to coal, there are other long-term implications of investing in natural gas which can work against reaching climate goals. One concern is that investments in natural gas might crowd out investments in renewable alternatives. … Our research warns that natural gas’ negative delayed and global effects can easily outweigh the positive immediate and local effects unless precautions are taken.40 Further, natural gas’s role as a transitional fuel rests on the assumption that it should be used until renewable energy technologies develop to the point where they can be widely deployed and cost competitive. As will see shortly, renewable energy technologies have progressed much faster than anticipated, leading to dramatic price reductions. The role of natural gas as a transitional fuel thus appears unnecessary, as a direct transition from all fossil fuels to renewable energy becomes more feasible. 2.4 Nuclear Energy The final nonrenewable energy source we consider is nuclear energy. Nuclear is a nonrenewable energy source as its fuel, normally plutonium or uranium, is a nonrenewable mineral. In the 1950s nuclear power was promoted as a safe, clean, and cheap source of energy. Proponents of nuclear power stated that it would be “too cheap to meter” and predicted that nuclear power would provide about one-quarter of the world’s commercial energy and most of the world’s electricity by 2000. 41 Currently, nuclear power provides only about 4.9 percent of the world’s primary energy consumption and about 10 percent of the world’s electricity. Most of the world’s installed nuclear power capacity predates 1990. The decommissioning of older plants, which had an expected lifespan of 30 to 40 years, has already begun. Recently, however, some people have called for a “nuclear renaissance,” mainly because carbon emissions from the nuclear power life cycle are much lower than with fossil fuels (see Table 1). The catastrophic 2011 Fukushima accident in Japan caused many countries to reconsider their nuclear power plans. Japan is currently re-evaluating its use of nuclear power, with most of its reactors sitting idle. Germany has decided to phase out the use of nuclear power entirely by 2022. In Italy, the debate over nuclear power was put to voters, with 94 percent rejecting plans for an expansion of nuclear power. But other countries are moving ahead with plans to expand their use of nuclear power, particularly China. Currently 11 nuclear plants are under construction in China. Other countries currently expanding use of nuclear power are India, Russia, and South Korea. The role of nuclear power in the future global energy mix thus remains uncertain. The Fukushima accident has lowered baseline projections of future energy supplies from nuclear power. While some see the accident as evidence that we need to focus more on renewables like wind and solar, others worry that a decline in nuclear power will make it more difficult to meet 40 41 Gürsan and Gooyert, 2020, p. 1. Miller, 1998. ENERGY ECONOMICS AND POLICY climate targets. Despite the initial promise of affordable nuclear energy, the cost of building and operating nuclear power plants has generally increased, while the cost of renewable energy has declined. Ultimately, economic factors, rather than safety concerns, may present the main barrier to a nuclear renaissance. As a 2018 MIT report explains: we contend that, as of today and for decades to come, the main value of nuclear energy lies in its potential contribution to decarbonizing the power sector. Further, we conclude that cost is the main barrier to realizing this value. Without cost reductions, nuclear energy will not play a significant role. 42 3. RENEWABLE ENERGY SOURCES Renewable energy sources are those that are supplied by nature on a continual basis. They are clearly less environmentally damaging than fossil fuels, both in terms of air and water pollution and greenhouse gas emissions (see Table 1). That doesn’t mean renewable energy isn’t without negative environmental impacts, including damage to river habitats from hydroelectric dams, bird deaths from wind turbines, and land degradation from mining minerals for solar panels. 43 renewable energy sources energy sources that are supplied on a continual basis, such as wind, solar, water, and biomass energy In one sense, renewable energy is unlimited, as supplies are continually replenished through natural processes. The total amount of energy embodied in renewable sources is also extremely abundant. The world’s current electricity demands could be entirely met by installing wind turbines on an area smaller than Spain. 44 Even more impressive, enough solar energy reaches the earth in a single day to power the planet for an entire year! 45 But solar energy and other renewable energy sources are limited in the sense that their availability varies geographically and across time. Some regions of the world are particularly well suited to wind or solar energy. For example, solar energy potential is highest in areas such as the southwestern United States and northern Africa. Geothermal energy, energy from the heat of the earth, is abundant in countries such as Iceland and the Philippines. A further limitation with renewable energy is that its embodied energy is much less concentrated than for fossil fuels. Consider that the energy density, or the amount of energy stored within a given weight, of gasoline is about 100 times higher than the energy density of the electricity stored in a lithium-ion battery in an electric car. 46 Renewable energy sources are also intermittent – the wind isn’t always blowing and the sun isn’t always shining. This suggests that either renewable energy needs to be supplemented with another source, such as natural gas, in order to provide a continuous supply of energy, or that renewable energy needs 42 Buongiorno et al., 2018. See, for example, UCS, 2013a. 44 Garfield, 2016. 45 Chandler, 2011. 46 Schlachter, 2012. 43 ENERGY ECONOMICS AND POLICY to be stored in batteries to make up for the times when the energy flow isn’t sufficient to meet demand. Perhaps renewable energy’s main historical weakness compared to fossil fuels has been price. For example, in 2009 the cost of electricity from solar panels was about three times higher than for coal.47 But the price of renewable energy has been declining dramatically, making comparisons that are even a few years old obsolete. Rather than being uncompetitive in price, renewable energy is increasingly achieving a price advantage over fossil fuels that will make an energy transition inevitable. Other limitations of renewable energy are also being addressed with improvements in technology, such as higher energy density in batteries and wind turbine designs that reduce the threat to birds. We now consider various renewable energy sources, focusing on wind and solar power. We will discuss each source’s advantages and disadvantages, along with relevant trends. 3.1 Wind Energy For hundreds of years humans have harnessed wind energy to perform tasks such as pumping water and grinding grain. Modern wind turbines, some more than 500 feet tall, generate electricity by spinning a geared generator. Wind energy currently provides about 1% of the world’s energy total supply, and about 5% of its electricity. Wind energy can be harnessed from onshore and offshore turbines. Onshore wind energy is generally cheaper. Onshore turbines are easier to access for maintenance and repairs, and less subject to damage from severe storms and salt water. On the other hand, winds tend to be stronger and more consistent offshore. As some people consider onshore wind turbines unsightly, offshore turbines may be more aesthetically acceptable, especially if they are located far offshore. Offshore wind turbines are less likely to harm bird populations, although the number of birds killed by onshore wind turbines is rather low. According to a 2015 journal article, collisions with vehicles kill 350 times as many birds as wind turbines. Domestic cats are the largest source of bird mortality, killing over 4,000 times as many as wind turbines. 48 As mentioned above, wind energy is more abundant in certain regions of the world, such as the central United States, northern Europe, Russia, and southern South America. 49 China has the most installed wind energy, with 36% of the world’s capacity. Other top wind energy countries include the United States (16%), Germany (9%), and India (6%). 50 As wind energy technologies have improved costs have declined and installed capacity has increased, as shown in Figure 8. From 2000 to 2019 the global capacity of wind energy has increased by a factor of 36. During the same period, the cost of generating electricity from wind has declined by 63%. 47 Lazard, 2018. Loss et al., 2015. 49 Lu et al., 2009. 50 https://en.wikipedia.org/wiki/Wind_power_by_country. 48 ENERGY ECONOMICS AND POLICY Figure 8. Global Wind Energy Installed Capacity and Average Cost, 2000-2019 Sources: Capacity data from BP, 2020b. Cost data from IRENA, 2019b. Although wind energy currently produces a relatively small share of the world’s energy, it is the fastest-growing energy source in many countries, including the United States. 51 Considering only the new energy capacity installed globally in 2019, about 25% was wind energy.52 This suggests that the share of energy obtained from wind will continue to increase, as we will discuss further later in the module. 3.2 Solar Energy While there are several ways to convert solar energy into electricity, photovoltaic (PV) cells (i.e., solar panels) are the most common. PV cells transfer solar energy to electrons, creating an electrical current. Solar energy currently provides only 0.5% of the world’s total energy and 3% of the world’s electricity. photovoltaic (PV) cells devices that directly converts solar energy into electricity (i.e., solar panels) Solar panels, like wind turbines, are often arrayed in large “farms”. But unlike wind turbines, solar panels can also be employed at smaller scales, such as on household roofs. In general, 51 52 EIA, 2019b. Bloomberg NEF, 2020. ENERGY ECONOMICS AND POLICY larger “utility-scale” solar energy is more efficient and less costly than residential-scale solar. But household solar has become increasingly popular, appealing to many people as a way of avoiding dependence on grid electricity. Smaller-scale solar projects can also reach areas not connected to modern energy infrastructure. The potential for solar energy tends to be greatest in equatorial and arid regions, including the Middle East, most of Africa, Australia, and desert regions in the United States and Central America. China is the world’s leader in solar power, with about one-third of the world’s capacity. Other leading solar countries include the United States (12%), Japan (10%), Germany (8%), and India (7%).53 Solar energy is a particularly appealing option for addressing energy needs in developing countries. Low-income countries tend to have relatively abundant solar resources. A 2020 report by the World Bank found that many of the world’s poorest countries are also those with the highest solar potential, including Namibia, Lesotho, Afghanistan, and Sudan.54 Solar panels can be installed in remote rural areas not connected to existing energy infrastructure such as power lines and gas pipelines. As a 2018 paper explains: [For developing] countries, particularly the poorest ones, modern energy is necessary to stimulate production, income generation and social development plus reduce the serious health issues that are caused by the use of fuelwood, charcoal, animal dung and agricultural waste. Solar energy is the best answer to energy poverty and it can provide excellent opportunities for reduction of GHG emissions and indoor air pollution through substituting kerosene for lighting and firewood for cooking. Solar photovoltaic (PV) can be an appropriate technology for a source of renewable electricity in developing nations especially in remote rural areas where grid extensions are financially or technically not viable.55 The World Bank’s Lighting Africa has provided energy to 32 million people by 2020, primarily through the development of solar powered “mini-grids” connecting several homes. Households then pay for the electricity they use at subsidized rates.56 China has made large investments to provide solar power to low-income rural areas of the country. Their Solar Energy for Poverty Alleviation Program (SEPAP) seeks to provide solar power to about 35,000 remote villages. A 2020 journal article finds that the SEPAP program has a positive and significant effect on income levels in the years after solar panels are installed in a village. The potential for solar power to alleviate poverty under the SEPAP program is the largest in the poorest regions. 57 Particularly when compared to fossil fuel energy, the environmental impacts of solar energy are minimal. The main environmental impacts of solar power include the land used to install PV panels and the impacts of producing the panels. Unlike wind power, where land can be used simultaneously for energy and agricultural production, land used for large-scale solar farms 53 54 55 56 57 https://en.wikipedia.org/wiki/Solar_power_by_country. World Bank, 2020a. Shahsavari and Akbari, 2018, p. 275. World Bank, 2020b. Zhang et al., 2020. ENERGY ECONOMICS AND POLICY generally cannot be used for agricultural purposes. PV panels are largely constructed of silicon, a mineral that can harm mining workers when breathed in small particles. Large-scale mining of silicon can also decrease biodiversity and create air and water pollution. Toxic materials such as hydrochloric acid are used in the production of PV panels. Proper environmental regulation can mitigate these impacts. No other energy source has seen such dramatic changes in prices and installed capacity in the past decade as solar. As PV technology rapidly improves, the cost of solar energy has plummeted. As shown in Figure 9, the cost of solar energy has decreased by more than 90% since the late 2000s (the increase in solar energy costs in the mid-2000s was due to a temporary shortage of silicon). Solar energy is world’s fastest-growing energy source, with global capacity up by a factor of 900 from 2000 to 2010. Figure 9. Global Solar Energy Installed Capacity and Average Cost, 2000-2019 Sources: Capacity data from BP, 2020b. Cost data from Lazard, 2020 and Shahan, 2014. As recently as 10 years ago solar energy was widely considered a niche product that was heavily dependent on subsidies. Now, with costs rapidly declining, solar energy is poised to dominate energy markets in the coming decades. Nearly half (45%) of all new energy installed globally in 2019 was solar.58 And while the expansion of solar energy is a critical tool in addressing climate change and air pollution, the primary driver of solar energy’s growth is cost. 58 Bloomberg NEF, 2020. ENERGY ECONOMICS AND POLICY As we will see in Section 4 solar energy has now become, on average, the world’s cheapest energy source. 3.3 Other Renewable Energy Sources Other sources of renewable energy include hydroelectricity, biomass, and geothermal. Hydroelectricity (or hydropower) involves using the energy from moving water to spin an electric turbine. Most commonly turbines are installed inside a dam that creates a reservoir of water behind it. The passage of water through the dam and turbines is regulated, producing a relatively reliable, constant supply of electricity. Hydropower currently provides about 3% of the world’s energy. hydroelectricity (or hydropower) using the energy from moving water to spin an electric turbine and generate electricity Hydropower offers a number of advantages. First, it doesn’t create local air pollution or direct carbon emissions. While building a hydroelectric dam entails a significant capital investment, its low operating costs make hydropower one of the lowest-cost energy sources on a lifecycle basis. Hydropower doesn’t suffer from the intermittency problems of wind and solar energy; hydroelectric dams operate continuously. Dams reduce flooding and can provide a reliable supply of water for irrigation and municipal needs. Finally, reservoirs can provide recreation benefits such as boating and swimming. Despite these benefits, the amount of energy generated globally from hydropower is not expected to grow significantly in the future due to its drawbacks. Hydropower dams block the natural flow of rivers, which degrades aquatic habitats. Migrating fish species such as salmon are particularly affected as dams block their movement upstream to spawn. Dams also block the downstream flow of sediment, which builds up behind dams. This not only impacts aquatic species, it also reduces the storage capacity of the reservoir and can affect the operation of turbines. Finally, many of the best locations for hydropower dams have already been developed, especially in the United States and Europe. Besides large dams, other types of hydropower are available with lower environmental impacts, including “run of river” installations that store little to no water in reservoirs and wave and tidal plants in coastal areas. While these technologies appear worthwhile in certain locations, they are not expected to provide a significant share of the world’s future energy. Biomass energy is a broad term referring to the burning of plant or animal material to generate heat or electricity. It includes burning wood or animal dung for cooking, using ethanol made from corn to power a vehicle, and burning agricultural wastes to generate electricity. Biomass currently provides about 9% of the world’s energy. biomass energy generating heat or electricity from burning plant or animal material Biomass energy is a renewable resource with some advantages but also some significant disadvantages. Many low-income households in developing countries, without affordable access to electricity or fossil fuels, rely on biomass for cooking and heating. Some materials used for biomass energy, such as crop residues and animal dung, can be considered waste ENERGY ECONOMICS AND POLICY materials and thus a “free” energy source. Biomass energy can also allow a country to reduce its dependence on imported energy. Biomass energy is sometimes touted as being carbon neutral. For example, the CO 2 emissions from a wood-burning electricity plant can in theory be offset by planting new trees that will eventually absorb a similar quantity of CO2. But numerous scientific papers have found that increasing our reliance on biomass energy will result in a significant net increase in carbon emissions.59 One problem is that there is no assurance that enough new biomass will be created to fully offset current carbon emissions. A second problem is timing – even if current carbon emissions are fully offset by future biomass absorption, in the interim that atmospheric carbon will contribute to climate change. When standing forests are cut, the resulting surge in carbon emissions will last for fifty years or longer, even if the forest eventually regrows. Burning biomass also emits local air pollutants such as carbon monoxide, nitrogen oxides, and particulate matter. This is particularly unhealthy when biomass is burned indoors without adequate ventilation. The World Health Organization estimates that 1.6 million people die each year in developing countries from indoor burning of biomass, with over half of these deaths being children.60 Finally, geothermal energy is energy from the subsurface heat of the earth. In some locations, this heat reaches the surface as hot water or steam. In other locations, wells can be drilled to tap into geothermal reservoirs. Geothermal energy can be used directly to heat water and buildings, or used to generate electricity, normally by using steam to power an electric turbine. Geothermal energy currently provides less than 1% of the world’s energy. geothermal energy energy from the subsurface heat of the earth. The main limitation of geothermal energy is that it is cost-effective only in certain regions of the world. One country with extensive geothermal resources is Iceland, which relies on it for about half of its total energy supply, including almost all its heating needs. While the world’s geothermal resources are mostly untapped, further development of geothermal is normally not the lowest-cost or least environmentally-damaging energy source. Per unit of energy generated, geothermal energy tends to emit more carbon than solar or wind energy. 61 Tapping into geothermal reservoirs can also release air pollutants such as hydrogen sulfide and ammonia. Another concern with developing geothermal sites is that it may increase the risk of earthquakes.62 59 60 61 62 Catanoso, 2020. WHO, Indoor Air Pollution and Household Fuels, https://www.who.int/heli/risks/indoorair/en/#:~:text=Indoor%20air%20pollution%20generated%20largely,u nder%20five%20years%20of%20age. Li, 2013. UCS, 2013b. ENERGY ECONOMICS AND POLICY 4. ENERGY ECONOMICS: CURRENT ANALYSES AND ALTERNATIVE FUTURES The main reason that fossil fuels currently provide over 80% of the world’s energy is that they have historically been cheaper than other energy sources. But the economics of energy is changing rapidly – more rapidly than most energy experts have predicted. Energy cost comparisons from just a few years ago, which showed that fossil fuels had a clear cost advantage over renewables, are now obsolete. Various economic analyses in 2020 reached the stunning conclusion that “the era of cheap wind and solar has arrived.” 63 4.1 Cost Comparisons of Energy Sources Comparing the costs of different energy sources is not straightforward. Capital costs vary significantly—a new nuclear power plant can cost $5 billion to $8 billion. Some energy sources require continual fuel inputs, while other sources, such as wind and solar, only require occasional maintenance. We also need to account for the different lifespans of various equipment and plants. Cost comparisons between different energy sources are made by calculating the levelized cost of obtaining energy. Levelized costs include the present value of building and operating a plant over an assumed lifetime, expressed in real terms to remove the effect of inflation. For energy sources that require fuel, assumptions are made about future fuel costs. The levelized construction and operations costs are then divided by the total energy obtained to allow direct comparisons across different energy sources. levelized costs the per-unit cost of energy production, accounting for all fixed and variable costs over a power source’s lifetime. Figure 10 presents a 2020 comparison of the levelized costs using various energy sources to generate electricity, without any subsidies. The horizontal bars show the typical range of levelized costs worldwide for new energy construction. We see that utility-scale solar and wind energy is clearly cheaper than new nuclear energy, and cheaper than new coal plants in most cases. On average, solar and wind energy is also cheaper than constructing new natural gas plants. In other words, solar and wind energy are now, on average across the world, the two cheapest energy sources, without any subsidies. 63 Fieber, 2020.