America's Potential for Renewable Energy
America has enormous potential for renewable energy sources that may be harnessed at reasonable costs while also assuring environmental sustainability. Despite the high costs compared to traditional energy sources such as fossil fuels, empirical and theoretical research has proven that the majority of citizens can afford renewable energy sources (Faninger, 2011).
Challenges in Developing Solar Energy
Yet, economic theories and experience show that unless the government intervenes through special regulations, multiple market barriers and failures may impede the development of such energy sources as solar energy. Solar power consumption in the United States, in particular, faces significant commercialization challenges from traditional energy sources such as oil and nuclear power (Faninger, 2011). Solar energy also suffers from underdeveloped infrastructure and limited access to capital and information to research the economic benefits of using renewable solar energy in the country.
Energy Crises and the Need for Renewable Energy
The international community and the U.S. in particular may face significant energy crises in the near future. The shortages emanate from high population growth rate and rising industrialization levels in the county, which translate into high fossil fuel consumptions. Notably, the U.S. consumes up to 25% of the total global annual fuel consumption (Energy.gov, 2017). However, the country does not have enough fuel reserves forcing it to import about half of the fossil fuel used in the country (UCSUSA, n.d.). The state's overreliance on foreign fuel has substantial economic consequences on its economy and security, thus the need for research and development on renewable energy resources to supplement such traditional sources. Depletion of conventional energy reserves may necessitate the U.S. to turn to solar energy to help it conserve its environment to avoid global warming and promote environmental sustainability.
Policy Interest and Incentives for Solar Energy
Policy interest in the use of solar energy to curb the dwindling power supply in the U.S. has attracted several scholars in the recent past. Many studies have vividly pointed out that increased incentives and funding for solar energy remains the panacea for different problems associated with fossil fuel such as environmental quality, employment creation, and the nation's security. According to Gillingham and Sweeney (2010), the U.S. and the international community have put in place various strategies to assist in the transition from fossil dependent electricity to renewable power sources. To this end, the country has implemented federal and state based initiatives aimed at promoting renewable solar energy usage among the citizens. For example, California Solar Initiative (CSI) is a program of the state, which gives cash as the reward for consumers, who install solar energy in their homes (Gillingham & Sweeney, 2010).
Market Failures Associated with Renewable Solar Energy
Market Failures associated with Renewable Solar Energy
Economies of Scale
Even though solar power can help in solving energy issues in the U.S. and beyond because of its cost effectiveness, it may only account for three to six percent of total electricity generated in America by 2020. Solar industry experiences numerous difficulties familiar with emerging sectors. For instance, solar energy faces stiff competition from both renewable and non-renewable energy sources that compete to win the lowest-cost laurels in the country (Lorenz, Pinner, & Seitz, 2008). Economies of scale may force organizations to sell solar energy at lower prices, despite the risks it causes to the firm. On the other hand, companies may not take advantage of selling at lower prices due to capital constraints. Gillingham and Sweeney (2010) observe that economies of scale experience "chicken and egg" challenges that require many corporations to team up and carry out research on new technologies, which delays investment.
Unequal Government Subsidies and Taxes
The government and development partners allocate limited amount of money towards research and development of the renewable energy sources such as solar compared to traditional power sources such as fossil fuels and nuclear. Apart from receiving adequate government subsidies, conventional energy sources enjoy tax incentives, with the money spent on fuel subtracted from their taxable income (Myers & Kent, 1998). Renewable solar energy, therefore, faces higher tax burden of up to 50% above the non-renewables. Additionally, surveys and explorations on renewable solar energy are further inhibited by lack of access to depletion allowance offered to companies in fossil fuel sectors. Depletion allowance refers to a tax concession applicable to oil extracting organizations whose operational costs reduce the, value of their assets (UCSUSA, n.d.). Markedly, these government incentives and subsidies have resulted in non-renewable energy sources exploration and lower prices, while limiting the growth and expansion of renewable energies like solar.
Undeveloped Infrastructure
Developing renewable solar energy sources require huge initial capital investment to construct the necessary framework needed in exploration. Development of solar energy requires firms to utilize publicly approved locations with readily accessible transmission lines, leading to difficulties in prospecting solar power (Byrnes & Brown, 2015). Obtaining permission for operation and installation of large scale renewable solar energy presents a challenge to most corporations, unlike the non-renewable sources that have well-established permitting and review procedures. Marketing offers another barrier to adoption of renewable solar energy. Oftentimes, solar power generating companies must provide public education to consumers to convince them on the benefits of solar power over conventional fossil fuel and hydro electric energy (Byrnes & Brown, 2015). Moreover, organizations should train consumers on installation, operation, and maintenance procedures of new technologies such as solar photo-voltaics.
Institutional Barriers and Lack of Information
Marketing and consumption of renewable energies must occur within the existing frameworks of non-renewables. However, a majority of stakeholders do not understand the inherent relationship between these two power sources. Byrnes and Brown (2015) suggest that customers do not have adequate information to make sound decisions concerning energy choices. Those, who generate information, rarely share it with the interested parties. Consequently, some clients may not adopt solar energy out of fear that it can only supply power during day. Institutional barriers ostensibly affect organizations' access and usage of renewable electricity, because many corporations primarily work on strategies for reducing operating costs and in-house pollution (Byrnes & Brown, 2015). Therefore, most institutions invest little resources in R&D regarding renewables and how to reduce cost by using them alongside other options.
Possible Economic Solutions to Market Failures
Possible Economic Solutions to Market Failures
Increased Financial Funding and Equal Tax Incentives
Firstly, the government should increase financial funding for research and development on renewable energy sources in the country. Similarly, the federal and state administrations should ensure equality in the provision of tax incentives and subsidies to both conventional fuel and renewables (Nasirov, Silva, & Agostini, 2015). In so doing, renewable energy sources will have fair competition with traditional sources of power. Furthermore, the government should initiate different policies that engage energy intensive companies to set aside funds for pilot projects and research in possible renewable energy types like solar power. The international financial institutions and donors in the U.S. can also help by pumping more money into the development of clean energy projects to supplement fossil fuel and hydro power.
Risk Insurance and Technological Transfer
Other economic solutions include the provision of risk insurance and technological transfer funds to solar power producing firms. Similarly, the government can introduce carbon credits as an equivalent to depletion energy reserves offered to fossil fuel extracting industries. Carbon credits should include tax reduction to all companies that work on renewable solar energy and other renewables aimed at reducing the emission of carbon gas that significantly contributes to greenhouse effects (Müller, Brown, & Ölz, 2011). Apart from direct financial incentives, the government should provide risk insurance to companies working on clean energy projects because of various risks they face. Provision of such insurance coverage will assist in improving credit conditions and attract private investors. Finally, various stakeholders in energy sector provide technology transfer funds and work as a team to allow new information sharing among countries and researchers to enhance renewable power sources innovation and invention.
Conclusion
The explorations in the paper suggest that over reliance on fossil fuel and other non-renewable energy sources may lead to their depletion shortly. Besides, increase in American population coupled with high rates of industrialization creates high demands for electricity. As a result, renewable solar energy should be harnessed to supplement conventional energy sources. Despite solar energy's environmentally friendly aspects, research shows that it faces a lot of market failures due to economies of scale, unequal government taxation and subsidies allocation, institutional barriers, and inadequate information to consumers to help them in making sound decisions about their energy choices. These challenges can be addressed through an equal distribution of taxes and subsidies to both renewable and non-renewable research and development approaches.
References
Byrnes, L., & Brown, C. (2015). Australia’s Renewable Energy Policy: The Case for Intervention. The University of Queensland, St Lucia, Qld, 4072, Australia.
Faninger, G. (2011). Economic Perspectives of Renewable Energy Systems. Energy economics Group (EEG), Institute of the Energy Systems and Electric Drives, Vienna, University of Technology, Lecture, 2012.
Gillingham, K., & Sweeney, J. (2010). Market failure and the structure of externalities. In J. Padilla, R. Schmalensee, & B. Moselle (Eds.), Harnessing Renewable Energy in Electric Power Systems: Theory, Practice, Policy, pp. 69-92. Routledge.
Lorenz, P., Pinner, D., & Seitz, T. (2008). The economics of solar power. The McKinsey Quarterly, 40(22), pp. 66-78.
Müller, S., Brown, A., & Ölz, S. (2011). Renewable Energy: Policy Considerations for Deploying Renewables. Paris, France: International Energy Agency.
Myers, N., & Kent, J. (1998). Perverse Subsidies: Tax Undercutting our Economies and Environments. International Institute for Sustainable Development, Canada.
Nasirov, S., Silva, C., & Agostini, C. A. (2015). Investors’ perspectives on barriers to the deployment of renewable energy sources in Chile. Energies, 8(5), pp. 3794-3814.
Energy.gov. (2017). Solar Energy in the United States. Retrieved on August 28, 2017 from https://energy.gov/eere/solarpoweringamerica/solar-energy-united-states
UCSUSA. (n.d.). Barriers to Renewable Energy Technologies. Retrieved on August 28, 2017 from http://www.ucsusa.org/clean_energy/smart-energy-solutions/increase-renewables/barriers-to-renewable-energy.html#.WaRDefojG1s
