The New Math of Alternative Energy

(Posted by Cyrus)

Does going green finally make economic sense?
By REBECCA SMITH
February 12, 2007; Page R1
Wall Street Journal

The numbers are starting to look promising. For years, the big criticism of alternative energy was cost: It was too expensive compared with energy based on traditional fuels like coal and natural gas.

Even though the fuel was often free -- such as wind or the sun's rays -- alternative-energy producers had to plow lots of money into finding the best way to capture that energy and convert it into electricity. Fossil-fuel producers, on the other hand, could draw on billions of dollars in infrastructure investments and decades of know-how.

Now the equation is showing significant signs of change. Costs are falling for some alternative-energy sources, driven by new technology and renewed development interest.

Alternative energy still can't compete with fossil fuels on price. But the margins are narrowing, particularly since oil and gas prices have been rising. The math looks even more favorable if you consider the environmental cost of fossil fuels -- which most purely economic calculations don't.
Alternative energy still faces obstacles to mainstream success. Many projects need government or utility subsidies and incentives to be viable. Generating costs have risen recently for some types of renewable resources, pushed by higher materials prices, labor costs and demand. Supply chains are prone to hiccups, and wind and solar-energy resources need backup sources of power to compensate on windless or cloudy days.

For all its promise, relatively little electricity currently comes from renewable sources, other than hydropower. According to the Energy Information Administration, renewable resources produced 2.3% of the U.S. electricity supply in 2005. Bio-mass was responsible for 1.5%, wind for 0.44%, geothermal for 0.36% and solar power for a scant 0.01%.

Ed Crane takes a look at how New York City is trying to merge affordable housing with environmental stewardship by sponsoring a green housing development. In contrast, coal-fired generation produced 49.7% of U.S. electricity supplies in 2005, followed by nuclear power at 19.3%, natural gas at 19.1%, hydropower at 6.5% and oil-fired generation at 3%.

But alternative energy stands to gain a larger share in years to come. Driven by concerns about global warming and energy security -- as well as the rising cost of electricity generated by fossil fuels -- regulators are forcing electric utilities to broaden their resource mix to include more "green" power.

At the same time, the federal government is requiring oil companies to blend more plant-based biofuels like ethanol with gasoline. Equipment makers are expanding their production lines, which should ease recent shortages of some materials -- like the polysilicon used in solar panels -- and take pressure off prices.

Here's a look at the economics of the various alternative-energy sources -- how much they cost now and what developments could make them more competitive.
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