Term Paper on "Questions About Managerial Economics"

Term Paper 20 pages (4218 words) Sources: 1 Style: Let the writer choose

[EXCERPT] . . . .

Most of the solar projects that have been implemented thus far have been based on some broader metric than simply considering the market prices alone; with the rare exception that infrastructure requirements and prohibitions that can actually make solar power cheaper than the alternatives in remote locations and specific applications. There have also been many research efforts that attempt to identify all of the different value added benefits gained from solar power that a community could expect to reap from a diversified energy portfolio in the long run (Makridis, 2011). If it were somehow easier to quantify all of the externalities that were related to the different types of power production, then it is likely to suspect that more organizations would consider these benefits in their power decisions and this would further boost the solar energy in general.

Yet, even with the advantages, solar power has in regards to being a clean and sustainable energy source, there are even further obstacles that will be present in any attempt to further accelerate solar implementations. Challenges to solar energy, as well as other renewable energy technologies (RET), include many factors that relate to storage challenges, higher research and development costs, and energy intermittency for example that will likely prevent this technology from being able to completely replace alternative choices. Still, when viewed only as a single piece to a more comprehensive energy strategy that is viewed from a long-term perspective, using solar power to meet future energy demands has many intangible benefits associated with it since it does not produce any significant pollution as well as suffer from any resource depletion from its use. Such considerations have been the primary drivers that have led governments around the world to incentivize solar projects into their existing grid systems.

The best case study of this so far, in terms of its overall potential impacts, is definitely China. China has been installing more renewable power capacity than fossil fuels for several years, a gap that's growing; in 2015, China will install 15 gigawatts to 18 gw of solar power alone, double the solar deployment in the U.S., according to an analysis by Bloomberg New Energy Finance (BNEF) (Randall, 2015). Many believe that China will have more renewable energy capacity in following years than the entire energy production needed to fill the total demand for the entire United States collectively.

Although solar may still be cost prohibitive at present, its future contribution to global energy needs is readily recognized by many of the largest U.S.-based corporations. In fact, Apple Inc., one of the U.S.'s most recognized companies, has been one of the forerunners in investing in solar technology production in China. Apple has made a recent investment of a 40-megawatt solar power generating facility in China that is one of the biggest individual projects based on foreign capital planned in the world. Yet, by comparison, this massive solar power plant will only produce what could be described as a mere drop in the bucket when it's compared to China's domestic solar power industry capacity in total.

For example, some research has indicated that every day in China there is about 41mw capacity added to the total solar energy production capabilities. The scale of this industry in China will make this one of the key factors in developing a global market for solar power, as well as in regards to the sustainable development of the world's future power production technologies in general. Still, it should also be noted that China is also the world's largest carbon emitter, it burns more coal than any other nation, and its solar capacity is only a small fraction of its total energy portfolio in total (Martin, 2016). Furthermore, it's also because of the country's intense air pollution levels that have resulted from the overuse of dirty fuels that has led to its dedication to sustainable technologies. Yet, whatever the case may be, China will be the likely key player in the future of solar power who will drive the costs down and develop an export market for these goods. Figure 1 - China's Estimated Capacity

For example, an econometric model could be developed that determines the amount of effective tax would have to be charged to make solar electricity a feasible alternative. However, if externalities are factored into the equation, it was found that solar will, in fact, be cost-effective in comparison to traditional energy production; if they are not already. Thus it is necessary to identify the actual scope of the various externalities involved with electricity generation that is based upon the use of fossil fuels.

Methodology

Data was collected about the average retail prices, based on total consumption and total revenues, for the commercial sector that were available in Illinois between the years of 1990 and 2014. There is a trove of data collected about all of the United States collected by the U.S. Energy Information Administration that is made available to the public online. Illinois has a surprisingly unique energy profile that includes many items of national importance; its contributions to crude production and nuclear energy for example, as well as its average consumption rates. Although the state does not provide an estimate the average prices of solar over time, it does provide estimates based on solar output in terms as mega-watt hours as well as a proportion of the total energy consumption. Some of the quick facts related to Illinois energy profile include (EIA, 2016):

Illinois is a key transportation hub for crude oil and natural gas moving throughout North America, with eight crude oil pipelines, nine petroleum product pipelines, more than a dozen interstate natural gas pipelines, two natural gas market centers, and two oil ports.

Illinois leads the Midwest in crude oil refining capacity and ranked fourth in the nation as of January 2015.

In 2013, Illinois ranked second in the nation in recoverable coal reserves at producing mines.

With a production capacity of 1.5 billion gallons per year, Illinois is the third largest producer of ethanol.

Illinois ranked first in the nation in 2015 in both generating capacity and net electricity generation from nuclear power. Generation from nuclear power plants in Illinois accounted for more than 12% of the nation's nuclear power.

Annually, Illinois households use 129 million Btu of site energy per home, 44% more than the U.S. average, according to EIA's Residential Energy Consumption Survey.

Data was also collected regarding the average prices of solar power over time. However, this data is far less accessible and was difficult to find. There was only one data set that was found and this set was published by the National Renewable Energy Laboratory (NREL) and only included estimates that dated back until 1998 (NREL, 2015). Furthermore, commercial prices only appear in this data from the years 2002 through 2014 and the data included in the analysis were based on the residential prices from 1998 through 2001. The unavailability of any credible data based on the historical averages of PV prices over time was a major limitation to the study and actually changed the study's design. For example, instead of comparing the solar price and output over time, the study had to instead focus on the traditional energy prices and the total output of solar power. It is reasonable to suspect that, since the average costs related to PV technologies are difficult to estimate, this could explain why such reliable data was difficult to find. The data that was identified was converted from dollars/megawatt to cents/kWh to be consistent with the units of the other variables. The data set that was used for the study is as follows:

Year

mW/hr IL Total

Revenue ($1,000)

Retail cents/kWh

Commercial PV (trillion Btu)

PV cents/kWh

The price of solar has fallen dramatically since 1998 according to the data collected. For example, you could purchase roughly sixteen times as much energy produced from conventional sources in 1998 than you could from PVs, however in 2014 this figure had dropped to a factor of three-to-one (as opposed to sixteen in '98).

The first regression model focuses on the price of conventional fuel as the independent variable and the total output of PV as the dependent variable. It was hypothesized that the higher the price that traditional energy prices averaged in the market, the bigger the total output of PV would be. However, after considering what data was available, it was also hypothesized that a ratio that consisted of the price of PV in regards to conventional sources would more likely explain the trend more accurately that the price of conventional power sources alone and thus a second regression was also conducted.

Results

The regression model based on the price of traditional fuel sources relative to the total output solar output is represented in the following illustration.

Figure 2 - Conventional Energy Prices and Solar Output

The R square value in this analysis is relatively low at .304… READ MORE

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