Cost Effectiveness

In the previous blog (September 24) I outlined a “victory,” based on IPCC (Intergovernmental Panel on Climate Change) projections, which will allow us to stabilize the composition of the atmosphere at levels that adaptation will be able to handle. I said:

We can declare ‘victory’ and exit the battlefield if by toward the end of the century we can derive more than half of our global energy from non-fossil sources, a development that would approximately follow the dynamics of B1 in Figure 4.

“Victory,” following this analysis, requires that by toward the end of the century, at least half of our energy come from sources that do not change the atmospheric chemistry and thus do not destroy our energy balance in a way that will result in destructive climate change. In the prior two blogs (September 10 and 17), I tried to take advantage of the two political conventions to figure out whether the candidates that are asking for our votes in November are promising to pursue policies that move us closer to that objective.

As we saw, both Governor Romney and President Obama have promised to develop sustainable, alternative (to fossil fuels) energy sources and thus, hopefully, move us in the direction of “victory.” However, there are differences in their approaches, including Governor Romney’s added condition that any alternative energy resources used must be cost-effective. President Obama, meanwhile, has added no such condition.

Here is a summary of the two positions as related to this issue:

Republican Platform:

The current Administration – with a President who publicly threatened to bankrupt anyone who builds a coal-powered plant – seems determined to shut down coal production in the United States, even though there is no cost-effective substitute for it or for the hundreds of thousands of jobs that go with it as the nation’s largest source of electricity generation

We encourage the cost-effective development of renewable energy, but the taxpayers should not serve as venture capitalists for risky endeavors. It is important to create a pathway toward a market-based approach for renewable energy sources and to aggressively develop alternative sources for electricity generation such as wind, hydro, solar, biomass, geothermal, and tidal energy.

Speeches during the convention:

Governor Romney:

And unlike the President, I have a plan to create 12 million new jobs. It has 5 steps: First, by 2020, North America will be energy independent by taking full advantage of our oil and coal and gas and nuclear and renewables.

President Obama promised to begin to slow the rise of the oceans and heal the planet. My promise…is to help you and your family.

President Obama:

We’re offering a better path – a future where we keep investing in wind and solar and clean coal; where farmers and scientists harness new biofuels to power our cars and trucks; where construction workers build homes and factories that waste less energy; where we develop a hundred year supply of natural gas that’s right beneath our feet. If you choose this path, we can cut our oil imports in half by 2020 and support more than 600,000 new jobs in natural gas alone.

And yes, my plan will continue to reduce the carbon pollution that is heating our planet – because climate change is not a hoax. More droughts and floods and wildfires are not a joke. They’re a threat to our children’s future. And in this election, you can do something about it.

The first question to ask is, “cost-effective” relative to what? Why do we feel that we should pay next to nothing for energy and its delivery?  Is it because we feel that it’s somehow our “right” to do what we will with “nature” and that transactions that revolve around energy should be free or very cheap?  We willingly pay huge sums to people for handling our finances, and for many other things.  Why should this be any different?

 Table 1.

Electricity cost as fraction of GDP/Capita in various countries

Table 1 shows the cost of electricity as fraction of the GDP/Capita of various countries. I took most of the electricity prices from a Wikipedia site that includes the primary references. All the GDP data is taken from the World Bank. For some reason or another, India’s data didn’t show up with the rest in Wikipedia, so the rate of Indian electricity was taken from a primary source here instead.

In developed countries, electricity accounts for half of all primary energy usage.  So, electricity rates in those countries are the best indicators of the effects that energy prices have on a both a country’s economy and its citizens’ daily lives.

In most countries, electricity prices are regulated so as to provide the most cost-efficient use. Gasoline prices, on the other hand are subject to various policies that are designed to either encourage or discourage its use. In most countries, high priced gasoline use for vehicular transport often has alternatives in the form of more energy efficient public transportation.

It is not surprising (at least to me) that such an analysis of the cost of electricity shows that the average price of electricity in the United States is the lowest among the countries that are listed inTable 1.

More than that, as a glance at the primary data shows, the 2011 average electricity cost in the United States is 12 Cents/kWh. However, in Hawaii the price is as high as 36 Cents/kWh, while in my own state of NY it is 19 Cents/kWh – way above the average. Hawaii’s income per capita is 97% of the US average, while that of NY is 115% of the US average.

Table 1 also shows that the relative electricity costs in developing countries are significantly higher than those in developed countries. Yet, over the last 20 years most of the developing countries enjoyed much higher GDP growth as compared to most developed countries.

We need to specify the frame of reference when we decide on policies to develop cost-effective energy. Can we focus on research and development of better (and more “cost effective”) energy sources and postpone implementation until we decide that we have reached some limit in improving these devices? In the next blog I will examine the issue of timing.