Climate

The Little-Known Reason Renewable Prices Are Dropping

Plummeting costs for renewable energy have finally made solar and wind a viable alternative to fossil fuels. But what’s responsible for the drop in price? Technological innovation and expanded manufacturing share some of the blame, but less examined is the low cost of intellectual property.

According to a report from the International Center or Trade and Sustainable Development (ICTSD), “the basic approaches to solving the specific [clean energy] technological problems have long been off-patent. What are usually patented are specific improvements or features.” Competition between sellers brings the price of these components “down to a point at which royalties and the price increases available with a monopoly are reduced.”

Put another way, renewable energy is like pizza. The fundamental ingredients — dough, sauce, cheese — are cheap and widely available, but toppings are sold by individual grocers. You can only buy pepperoni from Sal, and you can only buy sausage from Geno. Sal and Geno have monopolies on their respective toppings. But, because you can decorate your pizza with either pepperoni or sausage, Sal and Geno must still compete with each other. That keeps the price of toppings and, by extension, pizza, at a reasonable level.

Compare this to the way the pharmaceutical sector operates. If a drug company owns the patent to a life-saving drug with no substitutions, it can charge extortionate sums for essential medicine. Patients are left with no choice but to pay whatever the pharmaceutical company demands. The renewable energy market suffers no such distortion. Innovation and competition — including competition with fossil fuels — have consistently driven down costs.

“Today, renewable energy is competing directly with coal, nuclear, natural gas and other sources,” said Jigar Shah, president and co-founder of Generate Capital. That’s true even in emerging markets like India. The upshot is that developing countries can now afford to share in the wealth of clean energy technology.

“Most of the patents in renewable energy were in the 1970s, and so they’re off-patent now,” said Shah. “So, if India wants to manufacture solar panels in India, they can.” As India moves to expand solar energy production, it will be able to produce solar panels near where they are sold.

There is still a role for Western countries to play in this process. Developing countries are still importing renewable energy technology from wealthy countries. China scaled up solar production by purchasing manufacturing equipment from suppliers in Germany and the United States.

“The reason there’s still a decent trade balance between the U.S. and China,” said Amit Ronen, director of the GW Solar Institute, “is that there are still a lot of proprietary materials that are made by U.S. firms that go to China and are used there.” Today, China is the leading producer of solar panels and also the leading consumer.

As developing countries expand manufacturing of clean energy, renewables will reach the economies of scale needed to further suppress costs. Falling costs in the solar industry will benefit U.S. developers by expanding the market. This will further drive innovation.

“There are many opportunities for the U.S. solar industry to innovate — all along the supply chain — that are created by growth in solar anywhere in the world,” explained MIT Professor of Energy Studies, Jessika Trancik. “And falling costs due to innovation in components sold in a global marketplace, regardless of where that innovation happens, drives the growth of solar markets.”

Last year, renewables accounted for nearly half of all new generating capacity worldwide. The Paris climate agreement will lead to further growth in the renewable energy sector. In a recent report, Trancik and her colleagues estimated that by 2030, wind generating capacity could multiply threefold and solar generating capacity could multiply fivefold. This could lead to significant reductions in cost — 25 percent for wind and 50 percent for solar photovoltaic.

What are needed now are policies that will level the playing field for renewables. And, while the politics of climate change are often dismaying, policymakers understand the potential for clean energy.

“People are saying this is cost-effective,” said Shah. “[Developing countries] are ready to take help from the Western world to come into emerging markets to actually accelerate the deployment of renewable energy faster than anyone can imagine it.”

Jeremy Deaton writes about the science, policy, and politics of climate and energy for Nexus Media. You can follow him at @deaton_jeremy.