Thursday, February 5, 2009

Pricing Green Energy

I have been reading an interesting paper about alternative energy investing. It was authored by the World Economic Forum, that supra-national, self-congratulatory establishment pow-wow held annually at Davos, Switzerland. It's called Green Investing: Towards a Clean Energy Infrastructure and can be accessed here in PDF form. When this most exclusive Club of Clubs for the PTB crowd takes Green to heart - as it apparently has - it is time for everyone to realize that it's no longer an activist issue but has gone 100% mainstream.

Within the paper appears this sentence: "It should be noted that any comparison of levelized costs of different energy sources is a minefield". Never one to be easily dissuaded by risk of explosion (or is it exposure?), I put forward a simple formula for calculating the cost of "green" energy when comparing it against "black" energy.

Here it is:
P= Pb - Of - Oc
  • P is the price of green energy.
  • Pb is the "basic price" of green energy, without subsidies, as normally calculated for any project including cost amortization, financing, operating expenses, etc. For example, right now onshore wind energy costs 9-13 US cents per kWh .
  • Of is the current value of options to lock in the price of a conventional fuel (e.g. coal or natural gas) at today's prices over the entire expected lifetime of the green energy plant (e.g. 30-50 years).
  • Oc is the current value of options to lock in the cost of carbon taxes/permits at today's prices of an equivalent-sized conventional power plant - again over the expected lifetime of the green plant.
Obviously, option prices should be calculated on a per kWh basis.

In this way green energy prices will reflect two crucial adjustments:

a) Stripping out the risk (i.e. cost) of fuel price volatility. Most green energy alternatives, such as wind, solar, tidal and geothermal, use no fuel and thus are not subject to "black" fuel price adjustments.

b) Stripping out the risk (i.e. cost) of carbon permit price volatility. Green energy is obviously not subject to carbon emission costs.

Comments invited.


  1. Hey there Hell.
    We're on similar topics today. Feel free to stop by.

    Alt Energy Chapter 2 – Net Metering by Rich Hartmann - Miss America

    Miss America

  2. Is it just possible that the lack of serious interest in green sources of energy (and I'm not talking about biocarburants, a case study in smoke...) stems from the serious advantage/disadvantage of the fact that costs and thus, PROFITS are difficult to fit into this picture ?

  3. Dear Debta,

    I beg to disagree. There is VERY VERY serious interest in green energy. Follow the money, as they say, and you shall see there is lots of it going there...


  4. H,

    I understood that the commercial scale deployment of alt-energy sources (ex-nuclear) required a specific, minimum input of fossil fuel for both production and maintenance. Is this correct?

    The paper is a tad long, I shall read it over the weekend.

    It will be interesting to read the commentaries on theOilDrum.

    Brian P

  5. Hell, have you ever Googled 'sudden debt'? I did today to get to your site and noted Google says there have been 6.5 Million searches looking for you- Kudos.

    I mention this for the simple reason that as you get bigger readership, you also have (even if you never wanted it), a larger responsibility- kind of one of those 'is what it is' things.

    I support your advocating alternative energies, but why focus on them at what seems often TO THE EXCLUSION of conservation? For subsidizing alternative energies right now means the anons of your blog, worried about their food stamps running out as we read on your other post, really do need to worry whether the collective will cut them off as it says "no" to use resources elsewhere. But focusing on conservation means anon can have their food stamps while the collective focuses on other issues.

    I understand alternative energy is a whole lot sexier than conservation, but facts are what they are.

  6. Dear Thai,

    Thanks for your kind words. Actually I had no idea that so many "hits" were coming my way..

    I do speak about conservation and efficiency: for example, localization, sustainability, the smart grid, organic food and even the Greenback monetary system are all ultimately about conservation..


  7. link to an article in the NYT regarding green energy:

  8. OK, perhaps I misunderstand you at times, my bad, my apology.

    I know in health care it is a whole lot more exciting (and profitable) for health care workers to treat aortic aneurysms than it is to treat (say) the hypertension that gave a person an aneurysm in the first place. And that it is WAY more interesting to treat aneurysms and even hypertension (and again profitable) than it is to treat the lifestyles that gave a person hypertension in the first place. This issue of 'focus' is not immaterial... And I am not blaming health care workers for this dilemma either as it is not at all clear that health care workers can change lifestyle behaviors in meaningfully lasting ways in a cost effective manner (it is a VERY complex subject (especially the non-linear issues in it) so please don't misunderstand the statement).

    And it is what it is.

    It does sometimes seem like the green energy community, peak oilers, and to some degree you do commit the same sin. Biofuels, windpower, etc... are just so much more interesting (and potentially profitable to investors) than simply 'switching off the light' is (where an investor would make no money at all except for the fact they might get more back from taxes not spent).