19 Oct Is Green Energy A Luxury Good
Is green energy a luxury good? My spouse made this startling observation and I think she might be onto something. Here’s why.
WHAT MAKES A LUXURY GOOD A LUXURY GOOD?
What she actually said was “it’s a luxury to be a greenie”, while observing yet another Tesla on the highway as we drove from Calgary to Vancouver (and we’re marinating in green election ads from the upcoming British Columbia election).
I get that. My spouse and I are not big into luxury goods, although years ago we leased a BMW 323, and when we were living in Australia, we drove a 10 year old Audi TT. Both of these cars met my internal criteria for a luxury good (at least, relative to my old Smart Car). We see Teslas as green, luxurious, and considerably more expensive to purchase (but perhaps less costly to own), than other cars in its class.
But that’s not how economists view luxury. An economist defines a luxury good as a good whose demand rises more than proportionately with rises in income – the richer you are the more you buy it. Being “green” absolutely meets this definition. To be truly green, as espoused by the green lobby, you need to spend more, much more, for your energy basics — heat, light, fuel for transportation — and a whole lot more if you want to ensure that everything you consume (all food, clothing, everything) is also purely green. You can do it, but you’d really pay. Only the truly rich can actually afford to be truly green.
Green energy satisfies my more uneducated definition. To me, a luxury good is typified by its scarcity and exclusivity by which it can command a high price. It has a limited market of price insensitive buyers. It is made in small lot sizes, using specialty manufacturing techniques. It meets the highest standards of cleanliness, purity, simplicity, functionality. It inspires a degree of awe, perhaps from its beauty. It’s viewed as highly desirable but unaffordable by a significant portion of the population.
Luxury goods usually have readily available, perfectly good and usually far cheaper alternatives. I could by a Tesla, but instead I’m driving a much cheaper used Subaru.
Green energy fits the description of a luxury good – both mine and the economists.
Luxury goods are perfection, and pure renewable green energy is the nearly perfect fuel. You might call it Triple-A – available, affordable and abundant. Sunshine is clean, relative to fossil fuels. It has zero emissions. It’s pretty safe to handle (as we’re bathing in it all day). It is imprecise energy unless it is first converted to electricity, after which it can be delivered exactly where you want it at your desired intensity and in the dark when the sun isn’t shining. As electricity, it is highly controllable, well understood, and reliable. It’s fast (as in it’s instant on). It’s highly desirable – as nations get richer, their populations are prepared to pay for cleaner energy to provide for cleaner air.
Sounds pretty luxurious.
THE CONVERSION COST OF SUNSHINE
The price of solar energy conversion has utterly collapsed, particularly for utilities. The IEA has observed that solar energy looks be a beneficiary of Moore’s Law of exponential change. The more we manufacture solar panels, the cheaper they get, and the more efficient they become (they convert more collected sunshine to useful energy). Manufacturing learning curves, scale economies, supply chain sophistication — these all play into changing the conversion cost.
You have to wonder why, with the collapse in prices for roof-top solar panels, that so few homes seem to have them installed (save parts of Australia). I don’t have them. I do know that Canada has sunshine, and plenty of it, if the size of our agriculture sector is any indication, along with the energy we devote to supporting farmers. We have lots of private homes that could be graced with solar panels. Only a little rewriting would be needed since virtually every Canadian home has utility supplied electricity available in it for lighting, power, and occasionally heating.
To my knowledge those homes were never designed to maximise roof top solar power generation, which would require the roof to have ample southern exposure. I would be surprised if any building code in Canada specifies the building design be optimised for solar collection, internal battery placement, electrical power for an electric car, no grid connection, and no gas supply. Just drive around lost in Somerset Calgary (as I did this weekend, trying to return the key to an AirBnB rental), and you quickly figure out that energy optimisation from sunshine was not on the design menu.
The huge stock of legacy homes in Canada was never:
- wired for rooftop solar
- oriented towards the sun
- configured to sell excess power, and
- financed with major enhancements in mind.
Many homes are rented, and landlords have no ability to undertake such major structural enhancements to their stock without disrupting the tenants, and, more importantly, being able to “up the rent” to cover the cost of the upgrades.
Net net, the market penetration of renewable solar energy is curiously low, considering how long we have known that it works, lowers costs and reduces emissions. It meets the criteria for a luxury item – small exclusive markets.
Green energy is kept scarce by the market structure. You can buy green energy from your local utility but you’ll pay extra, and you can’t be sure that the energy you actually use is green. It’s only available through the monopoly utility, and utilities are incentivised to maximise the utilisation of their existing assets.
You could generate your own energy from all that sunshine, but you’d have to pony up thousands to equip your house with solar panels, install battery storage, rewire your garage to power your car, and replace your car, and you might still need to pay for a grid connection charge that you might not use that much. And right now your only road transportation options look like expensive late model battery cars.
You have to be rich to finance all that capital upfront. These days, with record levels of unemployment, and job uncertainty, who has the risk appetite to divert their capital towards green?
Selling the excess power you produce is complicated — how do you price it, who do you sell to, and how do you collect? Most of us have neither the sophistication nor the ambition to become electricity entrepreneurs.
For many years, airlines have offered customers the option to purchase green credits on flights, but these are always extra. “Please pay more to be green”. Take a look at the organic counter at your grocery store and the extra money you need to pay to get something suspiciously labeled as organic without any reliable proof.
FROM LUXURY GOOD TO MASS MARKET
Mass markets will not purchase green energy as premium price elite fuel but will purchase green energy as a medium-low price clean fuel. To get there, we need the Henry Ford of green energy — someone to figure out how to mass produce integrated green energy that the masses can afford. Both China and Elon Musk have the right idea — roof top solar, battery storage, battery cars — but Telsa’s price is beyond reach for the masses, and China is a questionable partner. How do we improve the attractiveness of renewable energy as an inexpensive fuel?
BUILD INFRASTRUCTURE LIKE A CHINESE HIGH RISE
We need to accelerate the build of home-side power (solar collection, wiring enhancements, garage upgrade). The slow pace and high cost of construction, the disruption to the owners, the risk associated with major renovations, and the tight seasonal window, all contribute hugely to the barrier to adoption. Faster builds mean shortened time to value, faster return on the capital, more installations in the tight seasonal window.
TRANSFORM THE CAPITAL MODEL
Distributed green energy needs a new financing model. Individual home owners do not have the capital moxy to move on deployment now, but at the same time, there’s lots of capital available for green investment. A future model could leverage digital technologies to allow for fractional ownership and financing of the capital required (solar capacity, storage, and transportation), particularly when transport becomes autonomous so that the risk of the transportation element can shift from the asset owner/driver to the service provider.
CHANGE THE CODE
Urban building codes need to accelerate the integrated energy model (rural building codes will have little impact on emissions). You shouldn’t have to be rich to hire an architect to design your house for energy purposes. Building codes could require as a priority that community subdivision projects, layouts and building plans place a priority on solar energy capture, and community utility models. Developers could be required to incorporate community utility models where residents on the sunny sides of the streets generate power to wheel to the shady sides, where parking spots can both store and supply power, depending on conditions.
Being a greenie should not be a luxury, but structural barriers mean that green is priced at a premium. In economically challenging times, governments should confront the structural barriers to the green ambition that raise green costs. A crisis should not be wasted.
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