Commodity Cycles and Renewable Energy Costs

It's an article of faith for many that the costs of renewable energy sources will continue to decline, even while the costs of many other forms of energy increase. This view is supported by the impressive experience with both wind turbines and solar photovoltaic (PV) installations over the last couple of decades. The latest survey of US solar cost trends from the Lawrence Berkeley National Laboratory (LBNL) showed that between 1998 and 2009, the capacity-weighted average cost of PV installations fell by more than 30%, from $10.80/Watt to $7.50/W, with another drop of roughly $1/W occurring during 2010. However, it's important to think about what's behind these trends when assessing their future progression. Continued cost declines are subject to many uncertainties, not the least of which is the current rising tide of commodity prices as the global economy recovers.

The rationale for continued cost declines that I encounter most often is based on volume: If we install more wind and solar capacity, costs will fall in a virtuous cycle, making subsequent installations cheaper and prompting even more of them. The underlying logic behind this argument derives from empirically observed "experience curves", in which cost components such as manufacturing fall by a set percentage for each doubling of cumulative output. The problem with these curves is that they tend to flatten out fairly quickly, delivering their maximum effect in the early years of a technology, when doublings are frequent. Then they slow significantly as the technology gains scale and the interval between doublings grows. A look at global wind turbine capacity shows that it doubled four times between 1996 and 2008. At the currently expected pace of additions, the next twelve years could produce just two or three doublings. And as the experience curve effect slows, other factors including commodity costs can overwhelm it.

We saw that a few years ago, when the boom economy stoked by the inflating global financial bubble drove up commodity and construction costs to such a degree that wind project costs stopped falling and began to rise. These pressures eased after 2008, mainly because the recession and financial crisis reduced overall demand for construction and raw materials, while the rapid growth of renewable energy equipment manufacturing, especially in Asia, led to overcapacity and stronger price competition. That probably accounts for much of the effect that LBNL saw in its solar trends in the last two years, rather than the sort of scientific and engineering improvements that drive experience curve effects.

So what is likely to happen as the economy rebounds and the slack that developed is taken up? We're already seeing the early results in higher prices of raw materials such as steel. And higher prices for oil and coal, which are important inputs in the extraction and processing of many other raw materials, should intensify the pressure already being felt from the demand in developing Asia. For renewables, this could be further complicated by tightening supplies of critical materials such as rare earth metals, Tellurium, Lithium and other key ingredients of electric motors, thin-film solar modules, and electric vehicle batteries. Toyota and other makers of hybrid and electric vehicles are working on ways to circumvent these materials, but the results might not come fast enough to prevent a crunch.

The renewable energy industry is counting on a return to economic growth to boost demand for electricity. Together with government-mandated renewable energy targets, that should translate into increased demand for equipment like wind turbines and solar panels. However, if the underlying source of that demand increases their material and construction costs just as governments are coming under increasing pressure to reduce subsidies for the industry, the result might be that the end-users of these products could see their effective costs go up for the first time in several years. That would be a rude shock for those who believe that these costs must inevitably fall as installations grow.

Recharging the Electric Car

An article in yesterday's Wall St. Journal prompted some thoughts about the relative merits of entirely-electric cars (EVs,) compared with hybrids employing varying degrees of electric boost. It's interesting that Honda and GM, both of which have marketed all-electric cars in the past, should arrive at such different conclusions on the subject. Honda now apparently finds pure EVs superior to hybrids and plug-in hybrids (PHEVs,) while GM, which invested close to a billion in today's dollars in its EV-1 in the 1990s, is not convinced. Although some of the factors that led to the failure of the EV-1 might no longer apply, others look daunting, except perhaps to environmental regulators, who would naturally find zero-local-pollution EVs preferable to hybrids.

When you consider the experience of GM's EV-1, a few things stand out--after setting aside the unfounded allegations that it was killed by a conspiracy. As the testimonials from its former lessees attest, the EV-1 was a terrific car, as long as your driving needs didn't exceed about 75 miles, or you didn't need to transport more than one additional passenger. The latter was a design issue, constrained by the size of the original lead-acid battery pack and the body shape GM selected. But while the range was largely a function of the available battery technology, it also reflected the challenge of quickly recharging a partially-drained battery, even with a small number of high-voltage recharging facilities that GM and its partners installed around Southern California. How many of us would have really wanted a car that couldn't go more than 100 miles without stopping for a charge that might take an hour?

Batteries have improved a lot since the first EV-1 left the factory. If the lithium batteries around which GM is planning its Chevrolet Volt PHEV are able to deliver 40 miles of gasoline-free driving, surely a larger array of the same batteries could take an all-electric version of the same car 200 miles or more. That's the basis of the Tesla, which claims a range of 245 miles for its sleek electric roadster, running on thousands of laptop batteries.

Paradoxically, that range is both good news and bad news. Because it easily exceeds what most of us require for our daily commutes or errands, it effectively severs the chicken-and-egg infrastructure dependency that I believe really killed the EV-1: you can't sell EVs without recharging facilities but can't justify the recharging facilities without lots of EVs already on the road. A 200+ mile range eliminates the need for most recharging away from home, workplace or other predictable sources of electrical outlets and reduces the inconvenience associated with the lengthy intervals required for low-voltage recharging. In the process, though, it also eliminates most of the incentive to build a fast-recharging infrastructure to meet the needs of longer-distance travel.

It's arguable that this isn't a real impediment. When I first started looking at these issues in the mid-1990s, I saw compelling data that suggested that American motoring habits were evolving towards each household owning a mini-fleet of specialized vehicles: the commute or train car, the kid-hauler, the weekend sports car, etc. That meant that a car like the EV-1, which couldn't fill all of these roles but excelled at one, had great potential. Unfortunately, that view turned out to be wrong, or at least premature. This is still a key question today. Would millions of consumers be happy to own a car that they couldn't sensibly drive from Boston to Washington, DC, let alone from Washington to Minneapolis?

If the answer is yes, then a pure electric car looks pretty good, and the added complication and expense associated with a plug-in hybrid might not be justified, provided the cost per Watt-hour of batteries keeps falling. Personally, though, I think the flexibility of a PHEV able to run on gasoline, E-85 or electricity will appeal to more folks than a simpler battery car. I also doubt that the target market for the six-figure Tesla will tell us much about that trade-off. But isn't it nice that technology is finally providing multiple choices for our future transportation needs? EVs and the various hybrids may compete for market share, but they could also coexist nicely, all furthering the gradual electrification of automobiles.