Cost or Cleanliness?
The market penetration of alternative energy sources depends on the difference in price between the alternatives and conventional fuels, such as oil and gas. This is a pretty standard assumption, but the New York Times recently suggested otherwise. This assertion rests on two foundations: first, that the cost of alternatives has become much more competitive in recent years, allowing other considerations to play a major role in project decisions, and secondly, that environmental concerns have increased to become the paramount driver of such projects.

I think there is merit in both of these arguments, particularly where wind power in concerned, but I also think the article is too cavalier about the influence of historically high natural gas prices over the last several years.

During the 1980s and 1990s, natural gas became the fuel of choice for power generation, because it was both clean and relatively cheap. For most of this period, gas averaged between $1.50-$2.00 per million BTU at the wellhead. But since 2000, the price of natural gas has been considerably higher, often a multiple of the historical average. This changes the economics of generating electricity with natural gas. So for any alternative energy projects considered since 2000, the main competitor has been costlier, and more importantly, the general perception is that gas will not become cheap again, anytime soon. The main beneficiary of this change has probably been coal, as I suggested last week, but it had to help wind power, too.

The other factor in this equation is the difference between the wholesale and retail cost of electricity, which plays out differently for wind and for solar power. Because wind is a medium-scale technology, unsuitable for small applications, it competes with wholesale power on the grid. That means prices in the range of 3-5 cents per kilowatt-hour, typically.

Solar competes in a different arena. Because it is scalable from the size of your calculator to an entire factory roof, it is an alternative to retail power from the local distribution company, which costs upwards of 10 cents per kW-hr. Solar still costs a multiple of this, but brings other benefits in terms of reliability, at least when the sun shines.

When these issues are taken into consideration, it is much less clear that the cost of conventional energy no longer matters in the development of alternatives, as the Times suggests. Too many other things have changed to be able to assert this confidently, without a deeper understanding of the motivations of consumers and energy project developers.