Renewable Energy Costs

RAND Institute report on renewable energy costs:
The RAND Institute just released a report that predicts what the cost to the American economy would be if by 2025 we increased our use of renewable energy to a level of 25% of electical generation and 25% of ground transportation (which would make for about 18% of our total energy consumption—ie, 28% of our energy consumption is not included in this plan to increase renewables). http://www.rand.org/pubs/technical_reports/2006/RAND_TR384.pdf
They find that energy prices will be about the same whether we proceed down this aggressive path to renewable energy adoption or move much more slowly (to 10-12% renewable by 2025). They base this conclusion on the assumption that the price of renewable energy will decline at historical rates through the prediction period and on the further assumption that this rapid adoption of renewables will cause the price of fossil fuels to drop to a lower level than would have been seen with slower adoption (ie, lower demand = cheaper supply). Of course, in reality, such a price drop would probably slow the adoption of renewables by making them less price-competitive. Also, note that if fossil fuel prices are lower in the aggressive scenario and overall energy prices remain the same, this means that the renewables replacing some of the fossil fuel supply are proportionately more expensive than the fuels they replace. It is quite clear that the 25% mark would constitute an entirely artificial imposition upon the energy market and could only be achieved (barring some incredible near-term technological breakthrough) by major government intervention. Nevertheless, it must be encouraging to policymakers that a faster imposed adoption rate can be marketed to constituents as essentially cost-free. What manner of madman would want publicly to make the counterargument that he prefers coal power plants to wind farms, given that both cost the same (it’s a bit more complicated than that, but this is how it would play in political, editorial, and television debates).
One debatable assumption embedded in the RAND analysis is that nonrenewable energy sources will become moderately more expensive over the twenty year period. Historically, despite the anomaly of the last few years, such energy prices have shown a long-term downtrend. Based on EIA (Energy Information Administration) figures, RAND estimates that these prices will rise due to the costs of environmental regulations, possibly including taxes or specific limitations on greenhouse gas emissions. This type of thing is already in progress at the state and local level—as well as internationally, under the Kyoto treaty and associated agreements. In other words, this assumption merely extrapolates from current trends. It seems highly likely, though, that nonrenewable energy prices would decline if government did not interfere in the market, particularly because we have currently plenty of quality, accessible coal, there is no foreseeable shortage of coal, and coal-to-liquids processes have become competitive in the market (largely eliminating concerns about peak-oil).
RAND completed 1,500 different scenarios that result in 25% renewable use by 2025. Under the worst case, they estimate that energy expenditures would exceed the base case by only 4%. It is also highly relevant to note that energy expenditures in the U.S. are projected by the EIA to be 5% of total GDP by 2025, down from 8% today. So, under the worst case, this means our energy expenditures would be 0.2% of GDP higher with aggressive renewables adoption. This sounds like a prescription for a no-regrets policy—it reduces greenhouse gas emissions, is as likely to save money as to cost money, provides a hedge against energy price volatility (renewables’ prices are much more stable than nonrenewables’), and enables us to reduce dependence upon foreign sources of energy.
The authors note some significant areas of uncertainty. One that they stress is the potential for renewables to become more costly than historical trends would suggest due to encountering higher marginal costs as they reach higher rates of market penetration. I consider this concern to be exaggerated. Wind power will probably form the major part of renewables emplaced between now and 2025, and there are plenty of good locations for wind farms in the U.S. The emergent issue here is rather the extent and quality of transmission infrastructure available to transport electricity from prime high wind locations to population centers. Proper long-term planning for efficient transmission routes should keep this expense modest. Also, the authors do not seem to fully recognize the potential of offshore windfarms to provide a massive addition to the high-efficiency locations available to utilities. The technology here is still unproven, but the wind quality offshore is generally higher than that onshore--which means there is signficant potential for cost-effectiveness if the technological hurdles can be overcome. The problem of rising marginal costs really does not apply to solar (at least not in the 2005-2025 time frame), especially as solar-generated electicity parallels peak demand, limiting concerns about storage. Thermal solar has relatively low storage costs, but upgraded transmission lines would be necessary here as well to take full advantage of the best locations for energy production. There will be some costs involved in upgrading the electrical grid, though much of that money would have been necessary just to maintain our aging grid.
The study is limited by its inability to calculate the costs/benefits of externalities (like pollution) and government subsidies—the former because the value cannot be objectively monetized and the latter because it's impossible to predict what they will be. Obviously, not counting the former makes fossil fuels appear more attractive; but, this is counterbalanced by not counting the latter, which makes renewables seem cheaper than they are. Yet, even with their dependence on government subsidies, renewables receive far less largesse in absolute terms than the oil majors and other established players in the old energy game.