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The Oxen Report: Daily Musing - The Failure of the Fossil Fuel Market and The Alternative Part 2

|Includes: CSIQ, CSUN, ESLRQ, First Solar, Inc. (FSLR), HQCL, JASO, LDK, SPI, TSL, WEST, YGE
In the late 1970s, after success in satellites launched during the space age, solar energy began its young life as a domestic energy source. Solar power was first used to “provide electric power via photovoltaic devices in certain remote applications…where inaccessibility otherwise ma(de) equipment operation and maintenance involving other energy sources extremely costly.” Applications were used in railroad signs,water pumps, and power systems in remote locations where other energy was not able to provide. Solar energy soon began to become a reliable energy source and was on its way to being a viable energy source for rural homes. Over time, the energy source has gained more and more market share and is important in all geographical areas. Today, solar energy accounts for under 0.05% of the world’s energy production around 0.02%.
Solar energy is used in two main methods. The first is to harness the sun’s energy through photovoltaic (PV) cells. These cells convert solar radiation given off by the sun into usable energy. The PV cells capture the electromagnetic radiations and transfer it into DC voltage, which can then be used by electronics or transformed into AC voltage, which is what is used to power most homes. The other major use of solar energy as a power source is in solar water heaters, which capture the heat from the sun and transfer it to water to heat it. Also,solar energy can be harnessed by heating solar thermal collectors, which heat fluids that produce steam that turns turbines and generates electricity.
Solar energy is a viable alternative energy source to fossil fuels because of a number of benefits that it possesses that are heightened when considering their ability to respond to the negatives and market failures of oil. The main benefits that solar energy can provide are that it is a clean energy that emits literally no emissions (except during production) and generates no waste, it reduces energy dependence and creates domestic energy sources, hedges against future price rises in fossil fuels, and provides numerous quality of life improvements.
The first major benefit of solar energy is that is a clean energy source, meaning that it emits no emissions or creates any waste while producing energy. This benefit is important as a solution to the problems that are presented by fossil fuels.
Production of solar energy does create some negative externalities, but its consumption and use is completely emission free. Since the energy harnesses natural radiation in the air and converts it into energy, the energy source gives off no byproducts. A 5 kWh PV system can produce, for example, 700 kWh of clean, renewable energy that emits no emissions or causes any pollution. The average home, in 2007, used over 900 kWh per month of polluting energy from one of the fossil fuels. A typical solar panel system can provide the American household with nearly all the energy it needs per month with no pollution.
One can value this benefit of solar energy using the damage function method. The number of contaminants produced by energy sources would be reduced by increasing the number of households, businesses, factories, etc. that use solar energy over homes being fueled by fossil fuels. By decreasing the level of contaminants, thenumber of total damages would also be released. The reduction in total damages, thus, can then be given a monetary value in its ability to reduce health costs, pollution costs, reduction in greenhouse emissions, which would increase crop yields, curb natural disaster costs, and provide many other benefits, as well. Obviously, these results are indirect, but in the same way one can measure costs of fossil fuels through negative externalities, one can value the positive externalities and avoidance of other negatives that would have been created.
The market failures of public goods discussed earlier would be also alleviated, which would reduce that market failure. Further, the benefits of clean energy have both user and existence value. On the user side, there is direct value that using cleaner energy has for the user, which include health benefits and aesthetic benefits. There is also indirect user value associated with receiving utility by free riding on those that do have solar energy in a society. Existence value also exists in the sense of vicarious consumption and stewardship. By allowing others to receive the benefits of clean energy, there is utility associated with knowing that others can enjoy the energy and cleaner environments. The most beneficial value, however, is most likely stewardship. By cleaning up our environment and providing cleaner energy sources, individuals can satisfy their sense that they are obligated to preserve our world for the future.
Another major benefit of solar energy is that it reduces energy dependence. One country that best recognized this capability of solar power was Germany. In 2000, Germany passed the Renewable Energy Act. This Act has helped propel Germany into the second largest solar powered nation in the world. Germany, like many other European nations, for years was severely bound to Middle Eastern countries and Russia due to their dependence on these nations for oil that was not available in their own nation. Germany, recognizing an opportunity in solar energy, passed the Act to help promote the growth of its solar industry and other non-renewables with the goal to be completely divested in non-renewable energy sources by 2050. 
The Renewable Energy Act required that utility companies help solar startups by purchasing their electricity at high rates that would subsidize these startups to help them make profits. What occurred was that Germany was able to greatly reduce its dependence upon foreign energy, create energy jobs at home, and create economic opportunities for itself by becoming a leader in solar technology. The country, in 2006, exported 15% of the world’s sale of solar panels and PV equipment, which was a $9.5 billion industry, which, at the time, was growing 20% annually. The reduction on foreign oil, however, is one of the crucial benefits of solar energy. Since the energy needed for solar panels (the sun) is available to all nations, nations are not caught up in the imperfect competition of the oil industry and the constant price shifts of the oil industry. By reducing foreign dependence, the country can control its own energy industry, which is an economic and political relief. The political benefits are somewhat immeasurable, but economically, Germany was able to shift paying for their energy through imports and now are able to make money off their expertise and production through exports.
The benefit here of solar energy is the elimination of the market failure of imperfect competition, which causes uncontrollable prices and unknown supplies. The reduction in foreign oil allows for growth of clean industry in one’s own nation. This benefit can be assessed through contingent valuation methods. By asking individuals of a nation their willingness to pay for taxes to create subsidies in their country to bring solar energy into the nation, one could see if people truly value both the reduction in foreign dependence and further see their willingness to reduce emissions that would be had by keeping fossil fuel energy.
Further, if in the CVM surveys, one could gage the amount of money that would be saved and reverted back into an economy and pose this question to individuals, one could see a tangible benefit of solar energy. For example, if the industry creates a certain number of jobs and a certain level of industry that was not there before, one can ask individuals how much would you want that industry to pay you indirectly in order for us to move towards energy independence indirectly through aggregate wages. The CVM would be able to assess whether or not individuals are willing to pay or accept payments in order to move towards the cleaner and independent energy market and value this benefit.
A reduction in foreign dependence on oil would have user value and existence value. On the user side, the direct value to having all the benefits of energy independence would be beneficial to those that were most greatly affected by the switch - those that gained jobs and saw reductions in energy prices. The switch would, however, have even greater existence value. Knowing that your entire nation is better off for energy independence produces vicarious consumption in society. Additionally, developing a nation’s own energy source has a sense of stewardship in that a society will be better off to thrive in the future.
Good Investing,
David Ristau
Tomorrow we begin our investigation into the final benefits of solar energy and some investment opportunities in the sector…

Disclosure: none