Alternative Energy Sources and Energy Conservation - Essay Example

Alternative Energy Sources and Energy Conservation Oil has been the principle source of energy in the world sincethe beginning of the twentieth century. Majority of the important industries in the world depend on oil products, thus, the supply and price of oil products have become an integral determinant of the global economy. The problem with oil has been its reliability in terms of supply and price, with the latter often experiencing abrupt changes because of crises in exporting countries (on a national and international nature). Moreover, the fact that oil is a natural-occurring commodity threatens its perpetual supply. Additionally, consumption of oil as a source of energy is non-renewable, and results in environmental pollution. As such, leading economies in the world have been seeking to adopt alternative sources of energy and measures to conserve energy, though with minimal success (World Bank, 2010:190). This paper discusses three key barriers that impede the adoption of alternative energy sources and energy conservation. Three key barriers deter the adoption of alternative or renewable sources of energy: cost and pricing, market performance, and legal and regulatory (Martinot and Beck, 2004:13). Majority of these barriers are a form of market distortion that work to discriminate against alternative energy sources, while others result to high costs of developing and adopting alternative sources of energy. These barriers are situation-specific in any country or region. The first and most significant barrier category is pricing and cost. Alternative and renewable sources of energy cost more than the traditional oil, leading to policies and decisions that avoid alternative energy sources based on cost. The price comparison depends on an array of factors. For instance, there may be public subsidies that lower the costs of competing sources of energy. Despite the fact that alternative energy sources have higher costs based on cost-per-unit, a fair comparison depends on the total lifecycle cost (Elliot, 2003:184). Lifecycle costs account for future fuel costs, future maintenance and operation costs, initial capital cost, equipment lifetime, and decommissioning costs. The problem of comparison lies in such concerns as the future costs of the fuel, and future cost discounts based on interest rates. Therefore, the difference in subsidy provision may result to competitive disadvantage of an alternative energy source. Despite the fact that renewable energy sources may have significant cost-competitive advantages on the life-cycle basis, the high initial costs often mean that they provide lower installed capacity per initial dollar investment than conventional sources of energy. Thus, capital markets may require lending rates premium in order to provide finances for these alternative energy sources. Moreover, the alternative energy source faces high import duties and taxes. Consequently, this may result to high first-costs compared to other sources (Dell and Rand, 2004:240). Another significant factor is transaction costs. Alternative energy source projects are relatively smaller than those of conventional sources are, primarily because of their unfamiliarity or uncertainty in performance. Consequently, transaction costs for alternative energy sources, including assessment, permitting, power-purchase contract negotiations, and financing packages assembly, result to enormous per-kilowatt capacity basis than conventional energy sources. Higher transactional costs are not an economic distortion barrier, but rather another way of making alternative energy sources extremely expensive. The last notable sub-category is environmental externalities. The conventional energy sources have real costs on the society, including infrastructure decay, human health and, probably, climate change costs (Edenhofer, Madruga, ans Sokona, 2011:884). However, environmental externalities dollar costs are hard to evaluate, thus, subject to discretion and interpretation. Though economic comparisons consider environmental impacts, decisions are rarely based on environmental costs. The second barrier category is regulatory and legal. The main challenge is that power utilities still dominate monopolies on electricity distribution and production in most countries. Therefore, the absence of a legal framework may hinder independent power producers from investing in alternative energy sources and sell the energy to third parties or the utilities under the common “purchase power agreements”. Alternatively, utilities may the duties to negotiate on behalf of the private investor (ad-hoc basis), presenting the developers with challenges in planning and financing based on consistent and known rules. The other consideration is transmission access. Utilities may impose policies that do not allow favorable transmission of alternative energy, including high transmission prices. Alternative energy sources require transmission because some resources may be far from population, such as biomass fuels and windy sites (Elliot, 2003:186). Distribution or transmission is also very important as it enables direct third-party sales between final consumer and alternative energy producer. Remote alternative energy may face transmission barriers because of right-of-way disputes or transmission-access rulings. Other significant barriers in this category include utility interconnection requirements and liability insurance requirements. Often, commercial systems or individual home with connection to utility grids face unclear, inconsistent, and burdensome utility interconnection requirements. Absence of uniformity may lead to additional transaction costs (Martinot and Beck, 2004:13). Despite the legitimacy of power-quality and safety concerns, utilities tend to set interconnection requirements beyond the practical or necessary scope of small producers. In the efforts to understand and comply with interconnection requirements, alternative energy producers may need to hire technical and legal experts, raising the costs of transaction. The last category of barriers is market performance. Project developers or consumers may face barrier to credit facilities to invest or purchase renewable or alternative energy because of poor creditworthiness, distorted capital markets, or lack of collateral. Furthermore, available terms of loan may not match the investment lifetime or the equipment. Actually, project developers in some countries encounter difficulties in obtaining funds from banks because of the uncertain nature of their investment, the main issue being the probability of utilities honoring power-purchasing agreement with the developers. Perceived technology risk and uncertainty is still eminent in the market, such that people may still perceive proven, cost-effective technologies as risky, particularly when they have little experience in new regions or application (Dell and Rand, 2004:242). The fact that there are few or no familiarity and visible installation of alternative energy technology may lead users to perceive them as having greater technical risks compared to other energy sources. The limited or lack of commercial or technical information and skills may also act as a barrier to adoption of alternative energy sources. Markets operate optimally when the players have access to requisite skills and good information. However, the alternative energy source has limited number of skilled personnel capable of operating, maintaining, and installing these technologies. In conclusion, the adoption of alternative energy sources and energy preservation suffer from the three significant barriers. Despite the development of alternative energy sources in recent times, the process of adopting those that are renewable, thus, conservable, continuously face difficulties, from market distortion to high costs (Elliot, 2003:191). There is need to develop mechanisms that will encourage the society to embrace other sources of energy, especially those that are conservable, otherwise, the global market will soon face another price shock from looming the oil and energy crisis. Bibliography Dell, R., & Rand, D. (2004). Clean Energy. Cambridge: Royal Society of Chemistry. Edenhofer, O., Madruga, R., & Sokona, Y. (2011). Renewable Energy Sources and Climate Change Mitigation: Special Report of the Intergovernmental Panel on Climate Change. Cambridge: Cambridge University Press. Elliot, D. (2003). Energy, Society, and Environment: Technology for a Sustainable Future. New York: Routledge. Martinot, E., & Beck, F. (2004). Renewable Energy Policies and Barriers. Encyclopedia of Energy. [online] Available at http://www.martinot.info/Beck_Martinot_AP.pdf [Accessed March 13, 2012] World Bank. (2010). World Development Report 2010: Development and Climate Change. New York: World Bank Publication. Read More