Environmental stewardship, energy efficiency and renewable power generation offer limitless opportunities to reenergize the economy. But with nearly universal consensus on the need to take better care of the planet, why is government policy at the center of the discussion? Why can’t the “invisible hand” of the market push us along? The answer is that it can, but our policies need to get the market pushing in the right direction.
A key challenge to the adoption of new energy technologies is insufficient scale. Lack of scale keeps production costs high and prevents companies from benefiting from competition. High-volume producers can capture efficiencies through large batch optimization and improved equipment design, lowering costs for consumers. Competition from other companies pressures incumbents to innovate and to cut costs in pursuit of market share.
The energy industry is one of the largest industries in the world with scale unparalleled in geography and production volume. Traditional energy companies using fossil fuels like petroleum, natural gas, and coal have had decades to expand their breadth and scale. This head-start, combined with a long history of using fossil fuels as our primary energy source, has allowed them to become more efficient and cost effective. In order for new energy technologies to mature and gain adoption, they too need to scale-up.
Scale is also a factor in creating “network effect,” a phenomenon where the usefulness of a product increases along with the number of people who use it. The information technology sector is heavily influenced by network effects because the value of social websites, online gaming communities, and word processing software all depend on wide-scale adoption. Without a sizable base of users, there is little perceived value, and without value, users won’t adopt. This paradox can sometimes be overcome by giving products or services away for free.
Unfortunately, this tactic does not work well for energy projects. Even though greater transmission capacity would encourage wind farm development and more charging stations would boost demand for electric cars, building this type of infrastructure is not as cheap. Unlike renting server space, it costs billions of dollars to implement.
This is where government intervention can make a positive difference by creating the conditions for scale to develop. By funding energy infrastructure expansion and energy research, government can overcome the challenge of adoption. Using cap-and-trade to put a price on carbon, establishing renewable portfolio standards (RPS) to boost clean-energy generation and providing temporary subsidies to push wind, solar, gasification and other technologies to a competitive scale of production, can send much-needed pricing signals to the marketplace and put clean energy sources on equal footing with fossil-fuel-based energy sources.
Done smartly, the government can play an important role in stewarding the advent of clean energy production into the economy. By deploying funds and enacting incentive-based policies, we can actively transform how we make and use energy by jumpstarting market mechanisms.
