Is Clean Energy Really More Expensive Than Traditional Energy?

By Leonard Hyman & William Tilles - May 07, 2023

• The claim that clean energy is more expensive than traditional energy sources is frequently repeated and on the surface certainly appears true.
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• If you delve deeper into the total costs and future costs of clean energy, it is a far more reasonable proposition than it may originally appear.
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• There are multiple projects with the potential to completely disrupt energy markets, making even this debate about the immediate cost of clean energy obsolete.

Judging from the news story, a PR firm had an assignment: to inform the world that clean energy prices exceed dirty energy prices, just as Republicans in Congress try to repeal large parts of the Inflation Reduction Act (which boosts clean energy). Maybe a coincidence. Politics is not our area of expertise. But the arguments that were made sure read like talking points that politicians repeat in cable news interviews:   

• Clean new industries will need workers, especially engineers, and won’t get them by raiding staff from fast food restaurants. This is true, of course. The new industries will have to compete for experienced workers, attract American students into engineering, entice engineers from abroad, and offer competitive wages. The old industries will have to compete for the workforce with the new industries. That’s what happens in markets.
• The new policies will upend our decades-long dependence on global markets to provide goods and services at the lowest prices. Well, isn’t the point of going local to protect our national security? Extra security costs money, just as insurance does. So, do you want security or low prices?
• Government handouts to particular technologies distort the market. Economists agree that the least market-distorting way to deal with the problem is to tax carbon and let the market figure out how to reduce emissions. But let’s be realistic. Congress will not approve any new tax. So Biden had the choice of a sub-optimal policy or doing nothing. As Voltaire said, “The perfect is the enemy of the good.”

These dazzlingly unhelpful bullet points don’t mention a principal reason why clean energy prices may exceed dirty energy prices: the latter do not include costs borne by society, not the producer or user.  If the cost of damage to health or the environment were included, the dirty product might cost as much as or more than the clean product. So, switching to a clean product might affect the price paid but not the cost to society. 

Marketers and product developers might brush off the argument altogether. New products often sell for more than seemingly similar old products. Consumers who want to be first on the block willingly pay more, especially for a product they see as different. And the cost and price of new products decline as producers attain economies of scale. What’s the big deal, then?

Maybe a big part of the problem is that incumbent energy companies, which have political influence and money don’t spend much on research and development, relatively speaking, do not develop new products and will lose out if the new competitors succeed. So they have every reason to lobby against the new competitors, especially if the government is giving them a boost.  ExxonMobil, Shell, and Chevron, between them, spend only 0.3% of revenues on research and development, and the electricity and natural gas industries in the United States around 0.1% of revenues. On the other hand, automotive giants General Motors and Ford, together, spend 5% of revenues on research and development, and fuel cell manufacturers Bloom Energy and Plug Power 13%. Our point is not that when you don’t spend on your future, you might not have one, but rather if you don’t spend on improving your products you may not find ways to reduce their costs or improve their attractiveness, while your competitors are doing just that.

Projections show a continued decline in the costs of alternative energy that will soon bring them below legacy energy costs. But that analysis does not take into account  any number of projects that could disrupt the energy market even more:

• Co-fire fossil fuel plants with ammonia. (A project that involves 

   major Japanese utilities and global ammonia producers.)  

• Improve perovskites, which could substantially reduce solar costs and   

   revolutionize its uses. (Work ongoing in China and USA.)  

• Turn hydrogen into the new storage, fuel, and energy transfer medium. (Huge projects underway throughout the world.) 
•  Establish the existence of commercial deposits of renewable hydrogen underground. (A small-scale Australian enterprise with potentially big prospects.) 
• Demonstrate via an expensive exploratory drill hole in Utah the possibility that we can tap deep, dry rock geothermal energy (enough to replicate the U.S. generating fleet 500 times over). 
• Build superconductor grids to connect renewable energy. (A European energy firm wants to do just that, arguing that the existing grid cannot do it. What about here?)   

Any of these possibilities could dramatically raise the prospects for decarbonization, largely by improving the cost and reliability of electrification. We would get a better notion of future costs by looking forward not backward.

By Leonard S. Hyman and William I. Tilles for Oilprice.com