Thursday, March 15, 2012

A story about how a inefficienty insitituation mechanism encourages the development of renewable energy

Institution, culture and their impacts on the cost of renewable energy utilization

Comparing with using the conventional sources, a significant disadvantage of using renewable energy for electricity supply is its relatively higher cost. Usually, people focus on the operation cost and financial cost, and discuss the cost-reduction effects of technology innovation and the pro-renewable policies on the utilization of the renewable utilization. However, some other factors might also significant influence the cost of using renewable energy for power generation. Here I give an example in China to show how the institutional factors impacts on the opportunity cost of the renewable energy using.

The institutional arrangement of coal-power supply chain pushes up the cost of using coal to generating power, and encourages the replacement of the fossil fuel by renewable resources. 

After 1990, Chinese government began to use the market mechanism for coal supply to instead of central planning mechanism. Private funds are allowed to enter the coal market and coal mining sector.  In this way, the competition was introduced into the power market, and the coal price is partly determined by the market clearing mechanism. In contrast, the power system is still central planed. The power plants are paid by a fix rate, which is determined by the Development and Reform Committee in the beginning of every year.  People call the system which consists of the coal market and the planned power-system as the “coal-power coiled structure”. Obviously, because of the central planned power system, this structure is a inefficient institutional arrangement for energy supply.

With the rapid economical development, the demand to electricity grows dramatically.  As the coal is the main source of power generation, the fast-growing demand to electricity pushes up the demand to coal use. The high demand to coal causes a significant increase in the coal price.  However, the electricity price is still fixed at a low level, which cannot be used to balance the increased coal price. This problem has caused big losses for many coal power plants.

The coal-power coiled structure raises the cost of using coal, and reduces the opportunity cost of using renewable energy sources to generate electricity correspondingly.  The loss caused by the coal-power coiled structure have became one of the main incentives for replacing fossil fuel by renewable sources such as hydro and nuclear.

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