Large-scale introduction of renewables will not lead to higher energy prices - RAND report

A while ago, the RAND corporation published a study on the possible role and effects of renewables in the US energy portfolio. Most media focused on the fact that these renewables - biomass, wind, solar, geothermal - could satsify up to 25% of America's energy needs by 2025. But in fact, the report looked more at what the price effects on energy are when renewables are introduced on a large scale. It is these conclusions that might be more interesting for non-US readers.

The debate on use of renewable energy has largely centered on the tensions between some seeing renewables as socially desirable and others seeing them as economic losers. Even advocates for renewable energy based on environmental benefits have had to acknowledge that these alternative energy sources have been too expensive to compete economically with nonrenewable fossil fuels on a broad scale. However, the idea that renewables are too expensive has most often been based on the current situation or on very short-term projections. When a longer time-frame is taken, the picture changes radically: if 25 percent of the electricity and motor vehicle fuels used in the United States were replaced by renewables by 2025, then this would happen at little or no additional cost. Preconditions: fossil fuel prices must remain 'high enough' and the cost of producing renewable energy must continue to fall in accord with historical trends. The study also deduces that, under these same conditions, it is not necessarily expensive to reduce greenhouse gas emissions.

Uncertainty about long-term fossil fuel prices
The RAND study, entitled “Impacts on U.S. Energy Expenditures of Increasing Renewable Energy Use” [*.pdf] examined 1,500 simulated cases of varying energy price and technology cost conditions for renewable and nonrenewable resources. The high number of simulations is due to the high degree of uncertainty about future fossil fuel prices. The US Energy Information Administration's (EIA) own projections about future prices have been more often wrong than right, and the EIA outlook changes considerably from year to year. Whereas in its 2005 Annual Energy Outlook, the EIA anticipated that the price of crude oil would fall to around $33 per barrel by 2025, in its 2006 projection, the price of crude was predicted to be at $54 a barrel by 2025 - a difference that makes or breaks the case for renewables:
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The same uncertainty holds for natural gas prices, which have increased sharply over the past few years.

For this reason, the RAND study created a model that takes into account these uncertainties and allows for the simulation of a great variety of fossil fuel price and technology cost curve interactions. The analysis of these simulations then helps to identify the circumstances under which the specified renewable energy target (25% by 2025, "25x'25") raises or lowers total energy expenditures for the US.

Results: renewables bring no additional energy expenditures
Renewable energy is shown in the simulations to lower total energy expenditures in virtually all cases in which current energy price and technology cost trends continue. Under a range of plausible futures, therefore, the model results indicate that expanded use of renewables could be achieved at acceptable costs.

Shifting to renewables had adverse impacts on total energy expenditures in cases when (a) fossil fuel prices are lower than current forecasted projections; (b) costs of renewable energy technologies increase or decline less than historical trends as renewables use scales up, and (c) nonrenewable technology costs drop relative to the cost of renewables, the reverse of what has tended to occur as renewable technologies improve.

If renewable technologies continue to improve at historic rates, leading to roughly 20 percent lower renewables costs by 2025, then future energy expenditures in a 25x’25 future might be 0.5 percent higher or lower than the nonrenewables case, essentially breaking even.

One of the more interesting findings of this analysis is the relatively narrow range of expenditure impacts in percentage terms across cases, though the absolute amounts are of note. Indeed, the most extreme of the 1,500 scenarios produced no more than a 6-percent change in energy expenditures, or about US$75 billion in 2025. This includes the most favorable scenario for nonrenewable energy simulated—in which the costs of renewable energy technology rise 30 percent during the next 20 years, while natural gas, oil, and coal prices fell 50 percent from current projections. However, as the Energy Information Administration has shown in recent projections such as its Annual Energy Outlook report, such a rise in energy expenditures would have little or no impact on long-term economic growth (EIA, 2006).

In 2025, such an increase in energy expenditures would amount to roughly one-quarter of a percent of gross domestic product (GDP) in the United States. Similarly, in the best-case scenarios for renewable energy, our renewables case could reduce energy expenditures by about 3 percent, or $40 billion. (All scenarios assume least-cost implementation of the goal at a national scale.) This narrow range helps justify our focus on direct energy expenditures versus broader macroeconomic implications.

In essentially all of the cases considered, electricity expenditures rise. But those increases are more than cancelled out in the cases where total expenditures fall by reductions in the costs of oil, gas, and coal. As renewable energy supplants nonrenewable energy, demand for fuels declines, and this drives down the prices of fossil fuels in the model. The renewables case could displace about 2.5 million barrels a day of petroleum products in the United States in 2025, or 20 percent of total consumption in EIA projections (EIA, 2006).

It is interesting to note that in the computer runs of the renewables goal, more scenarios have lower energy expenditures in 2015 than in 2025. Those findings suggest that, while cost savings from renewable energy will not materialize overnight, they also will not take decades to achieve. These somewhat unexpected findings are due to the fact that, as the penetration of renewable energy rises from 10 percent of the market in 2015 to 25 percent in 2025, the most favorable renewable sites will already be taken; therefore, costs rise as we increase the share of renewables, even while costs per unit fall due to technical advances.

Reducing CO2 is not expensive
The simulations also indicate that, in most cases considered in this study, significant reductions in CO2 emissions can be achieved at a relatively low cost. In 2025, under the 25-percent renewables goal, CO2 emissions from the electricity and fuel sectors would fall by one billion tons. That reduction is equivalent to eliminating one-seventh of the total U.S. CO2 emissions projected for that year and two-thirds of the projected increase expected between now and 2025, according to EIA forecasts (EIA, 2006). It would also reduce emissions of other pollutants or the prices of emissions permits, depending on how the different pollutants are regulated.


In short, if looked at on a longterm scale, the introduction of renewables will most likely not bring additional energy expenditure costs, and allows for the reduction of greenhouse gas emissions at no extra cost.

The RAND study is a welcome piece of ammunition in the arsenal of renewable energy advocates. For too long, proponents of a green energy future have been ignored and painted as idealist treehuggers who lack insight into the hard economics of energy. The contrary is true.

More information:
RAND press release on the study: Rand study says renewable energy could play larger role in U.S. energy future under right conditions - November 13, 2006
The study itself: Mark A. Bernstein, Jay Griffin, Robert Lempert, “Impacts on U.S. Energy Expenditures of Increasing Renewable Energy Use” [*.pdf], RAND Infrastructure,
Safety, and Environment (ISE), technical report prepared for the Energy Future Coalition.