STUDY PICKS WIND, GEOTHERMAL AS BEST NEW ENERGIES

Wind, Geothermal Are Most Efficient Renewable Energy Sources – Study
July 17, 2009 (SustainableBusiness)

SUMMARY
Technology S-curves in renewable energy alternatives: Analysis and implications for industry and government, by Melissa A. Schilling and Melissa Esmundo of the Stern School of Business at NYU, uses technical mathematical scales to compare energies according to how much is returned on research and development (R&D) investment.

The basis of the study is the analysis of technology S-curves and technology cycles to better understand how investment affects the improvement of energy technologies. With international data on R&D investment, the study produces an “S-curve” for each of the primary Old Energy and New Energy technologies.

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Examination of the S-curves shows 3 very important things: (1) Wind and geothermal energies are on the verge of becoming better investments than fossil fuels, (2) not enough money for R&D is being spent on wind and geothermal, considering what good investments they are (from a purely statistical point of view) and (3) too much money is being invested in fossil fuels, considering their diminishing value (from a purely statistical point of view).

This is reportedly the first study to quantify the path of performance improvement in the New Energies.

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In comparing the New Energies, the study also concludes that wind and geothermal are much better investments than solar right now. The study showed the single most cost-effective New Energy is geothermal. Wind is second.

The study used data on R&D investment by 9 governments (the U.S., the UK, the Netherlands, Norway, Japan, Canada, Spain, Sweden and Switzerland) and identified the cost-reducing improvements in the energy technologies for which it was spent to draw its conclusions.

The New Energies studied were solar (photovoltaic, heating and thermal power), wind, geothermal, total bio-energy, ocean energy and total hydropower. The fossil fuels studied were coal, natural gas, crude oil and oil composites.

2 key conclusions were that New Energies suffer in comparisons with Old Energies because (1) being newer, production volumes are much lower, and because (2) the New Energies have yet to achieve economies of scale and therefore remain expensive.

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COMMENTARY
According to the study, 2007 statistics show that almost 85% of the energy used in the U.S. (for all purposes, not just electricity generation) was from fossil fuels. Approximately 40% came from petroleum, 23% from natural gas and 22% from coal. Nuclear energy provided ~8%, and renewable energy sources (including hydroelectric, geothermal, biomass, solar energy, and wind energy) was just over 6%. This energy mix makes the U.S. one of the world's 2 biggest generators of greenhouse gas emissions as well as leaving it subject to market price volatilities and the political instabilities of the oil-producing regions of the world.

While an S-curve analysis proves the New Energies, especially geothermal and wind, are becoming more efficient in the way their costs come down with R&D investment, fossil fuel technologies are no longer doing so. Fossil fuels appear to have reached their performance limits. The implication is that R&D investment in them is not a profitable way to use R&D monies, though the federal government continues to do so.

S-curve analysis shows that a $3.3 billion investment in geothermal energy can be expected to make it cheaper than fossil fuels. Investment in wind will also make it competitive with fossil fuels. Nevertheless, geothermal and wind are less adequately funded than solar technologies.

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Despite the diminishing returns for R&D investment in them, fossil fuels remain cheaper than the New Energies, which explains why they remain the dominant source of energy production.

Investment by fossil fuel companies with vested interests in existing infrastructure remains warranted by the S-curve findings. Pre-exiting assets and commitments can make R&D investment profitable for such companies in the short term.

The study describes government R&D investment in geothermal and wind technologies as “diminutive.” It found the total R&D from 1974 to 2005 for geothermal to have been ~$2.6 billion and for wind to have been ~$4.1 billion in the 9 countries studied. In the same 30 years, there was ~$38 billion spent for fossil fuel technologies R&D.

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The U.S., Norway, Japan and Canada continue to invest more in fossil fuel technologies R&D than in New Energy technologies.

The good news is that Spain, Sweden, Switzerland, and the UK now spend more for R&D on New Energy than for the fossil fuel technologies.

For businesses coming into the energy sector, however, R&D investment in wind and geothermal technologies is more likely to be profitable than spending on fossil fuels, biomass, or solar technologies.

More importantly, returns are likely to get even better with further spending on wind and geothermal technologies while they are likely to get worse despite spending on fossil fuels.

The study's authors contend that the only justification for staying with obsolescing technologies is a harvesting strategy. If further investment allows fossil fuel companies with vested interests to get more out of existing infrastructure, it is justifiable to stay with the plan until the profitable resources are expended. Otherwise, it is time to transition to New Energy.

Limitations of the study: (1) Estimates are dependent on a wide variety of factors and necessarily imprecise. (2) Data from only 9 governments was used.

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QUOTES
- From the Schilling and Esmundo study: “Using data on government R&D investment and technological improvement (in the form of cost reductions), we show that both wind energy and geothermal energy are poised to become more economical than fossil fuels
within a relatively short time frame. The evidence further suggests that R&D for wind and geothermal technologies has been under-funded by national governments relative to funding for solar technologies, and government funding of fossil fuel technologies might be excessive given the diminishing performance of those technologies…”
- From the Schilling and Esmundo study: “Analyzing renewable energy alternatives from a technology S-curve perspective builds on the tradition of using experience curves to analyze ‘‘learning by doing’’ in renewables (e.g., Neij, 1997), but emphasizes instead the ‘‘learning by searching’’ accomplished through R&D expenditure (Huber, 1992; Kobos et al., 2006), which can provide an especially valuable lens to view the improvement of relatively immature technologies…”

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- From the Schilling and Esmundo study: “…incumbent firms should begin (if they have not done so already) to develop strategies for transition to renewable energy options lest they become victims of disruptive technological change…”
- From the Schilling and Esmundo study: “While it can sometimes be shareholder-wealth maximizing for a firm to practice a harvest strategy of sticking to an obsolescing technology until the firm’s demise, the complementary asset positions of oil and gas companies in energy production infrastructure and distribution probably make transitioning to renewable energies a more attractive option from both shareholder and social welfare perspectives.”