Thursday, November 18, 2010

UC Davis study suggests lots of work ahead to bring renewables to market

By Alex Trembath. Originally published at Energetics.

A recent study from the Department of Civil and Environmental Engineering at U.C. Davis builds a pricing model that relies on resource availability and market capitalization to determine that global supplies of oil are likely to run dry roughly 100 years before renewable technologies are capable of replacing them. The paper, from authors Nataliya Malyshkina and Deb Niemeier and published in Environmental Science and Technology, uses IEA estimates of petroleum estimates and cumulative financial data for major oil and alternative energy companies, including market capitalization, share number, share price, and net income per share. Unlike typical technological projections based on learning curves or Hotelling predictions, the study develops its own method for determining the path forward for resource availability based on three market-expectation-based steps:
  1. Identify traded securities, whose future cash flows strongly depend on the appearance of a new technology of interest (e.g., a viable replacement of crude oil, or a technology for reducing CO₂ emissions).
  2. Specify a model for pricing these securities.
  3. Collect historical and current market data on the securities (e.g., share price, number of shares outstanding, dividends paid, etc.).
The model they created gives the value T ≈ 131, where T is the time horizon "until the appearance or adoption of new technologies related to important sustainability problems." With a base year of 2009, this predicts 2140 as the year we can economically expect renewables to become suitable replacements for traditional fossil energy. Malyshkina and Niemeier also rely on IEA estimates of peak oil, which suggest that the rate of global oil production will begin to decline in some distinct time between 2010 and 2030. Put it all together, and we get a world tapped out of oil a full century before replacement technologies can meet expected demand.

Specific observations on the market for clean technology are similarly stark. For instance, the paper makes the point that even the most successful clean tech companies fall short in their own market to fossil fuel giants with relatively minor budgets for renewables.
In a recent article analyzing when renewable energy companies might occupy significant market share, it was pointed out that Exxon Mobil's current market capitalization was 28 times that of First Solar and 26 times that of Vesta Wind Systems, both among the largest renewable companies. Even for major corporations like General Electric, with a large stake in wind power, stock prices are driven by other parts of the company.
All in all, the Davis paper combines econometric, financial, geophysical and policy-oriented data to create a compelling, if alarming, model for resource replacement. Their work confirms the narrative offered by a new report called "Post-Partisan Power", which makes the claim that "America will make little sustained progress in transforming the U.S. energy economy or fully capturing the economic opportunities in new clean energy export markets until alternatives to conventional fossil fuels become cheaper." These two reports, in addition to a growing consensus following the demise of cap-and-trade this summer, at least implicitly identify the large price gap between renewable technologies and fossil fuel resources as the single largest obstacle to a fully decarbonized economy.

The pricing model and theory proposed by Malyshkina and Niemeier employs the concept of path dependency--where we have been matters for where we are going. After over a century of development on our modern carbon infrastructure, the momentum of the global economy will not shift course towards more sustainable technology easily. However, the difficulty is not a reason not to pursue smart and aggressive policy, according to the authors.
If policy interventions such as new major investments in the alternative-energy sector are made, then we would expect that the alternative-energy companies market capitalization would increase, with the net effect that the estimated value of T would decrease.
The next step, of course, is identifying those policy interventions and employing them effectively.

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