Posted by: Francis Koster Published: April 14, 2009

Renewable Energy Supply

When you opened this document, a list of tested alternatives to current national practice was revealed in the main menu.

Background on the economics of renewable energy

If you are thinking about starting a renewable energy or energy conservation program, here are two lessons you need to absorb.

The total subsidy granted to existing hydrocarbon and nuclear power industry totals up to

$689 annually per U.S. household per year. Prior to the passage of the 2009 “stimulus package”, the subsidy for Renewable Energy was around $56.00 per household per year. [1] This sends false signals to consumers who think that what they pay at the pump, or in their electric bill is in fact the “cost”, when it isn’t.

The next fact one needs to learn is that even within the traditional fuels category, not all energy costs the same – it just looks like it. In fact, some cost more, some costs less, and mostly the customer pays the average of the two. For example, if an old well and old refinery have already been paid off, and produce 100 gallons of gasoline for 30 cents per gallon, and a new well and new refinery are very expensive, and they produce a second 100 gallons for 2.70 per gallon, the gasoline company cannot set two different prices at the pump. They pour the two 100 gallon barrels into one big 200 gallon barrel, and sell it for the average price of $1.50 per gallon.

Here is where this becomes important. If you are contemplating building a bio-fuel station, using seaweed, or corn (I know folks don’t like this, but let’s hold that discussion for the moment so you don’t miss the key lesson), you don’t need to produce your product for $1.50 per gallon. You only need to beat our hypothetical $2.70. The problem comes in when someone challenges your costs as non-competitive, and you don’t know you are competing against an artificially low number.

The same thing happens with electricity, but it is a bit harder to understand. Basically, most electrical customers have only one meter, and it can only read the volume of electricity used. It cannot detect what the cost was of creating and getting that electricity to you at any point in time. The big secret is that not all electricity costs the same to make. For example, in a state like Florida, electricity is cheap to make at midnight, and expensive to make at 2PM. This is because electricity load is not flat… rises when people get out of bed, rises when they turn on the air conditioning, and goes down when they go to bed, in a bell shaped curve. Because electricity at midnight is made by large, efficient, but sort of steady producer central generating stations called “base load” plants, it is cheaper to make. When the load gets higher in the afternoon on a hot day, the base load plants cannot produce enough, so in order to meet the demand for hot day electricity, the utility turns on what are called “peaking units”, which are small very expensive generators (which make lots of pollution). The utility takes the cheap power generated by the “base load” plants, and the expensive power generated by the “peaking” plants, averages the cost, and that is what you are billed. Large commercial and industrial customers often get what is called “time of day” pricing, but that still leaves a very large percentage of users on “average cost” billing – and this average masks the true cost of about half of the power you consume.

Now, if you want to compare the costs of the energy from a solar water heater at 2 pm with that of a “peaking” unit, you will find a very favorable comparison. But the electric utility may state that renewable energy is too expensive, and then go on to compare the cost of the solar “peaking” unit to the average cost at the meter – not the cost of the real economic competitor, the “peaking” generator.

If you wish to make a business plan involving either reducing the amount of energy purchased from a traditional producer, or replacing some of it, it is critical that you find out what the economists call the “marginal” cost of the energy you are replacing with renewable. That is your real competition. If you can sort that out, and be rigorous about the numbers, the utility should be much more open to your business proposition, even if the energy you produce costs more than the average cost the customer sees. Bottom line – your energy only has to be cheaper than its real competition. This is one of those wonderful situations where the utility actually makes more money if it sells less power. This is because it sells its peaking power at a loss….for the average cost….and if you can help them sell less peaking power you are their friend.

On the web pages which follow you will find a number of examples of groups which have broken the code.

1) Calculating a subsidy per household per year requires the use of two sets of data: First, one determines the subsidy, and then divides by the number of households. The household data is taken from the U.S. Census Bureau data at The question of what fits the definition of a subsidy is a complex one. (Is accelerated depreciation a subsidy? Free use of federal lands? Federal loan guarantees? Insurance at less than market rates?) Depending on how one answers that, the dollar amount totals of subsidy changes. Since the purpose of this educational material is to point in broad ways to substantive policy issues, we used the average of a) the broadest reasonable estimate, and b) the lowest reasonable estimate. Frankly, this understates the subsidy, because even the high estimate does not in any way count either the health costs of air and water pollution, or the military cost of defending supply lines.

For a detailed read on the topic, see Subsidies in the U.S. Energy Sector: Magnitude, Causes, and Options for Reform by Doug Koplow, which can be found at Earth Track, Inc.

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Francis P. Koster Ed.D.

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