International Renewable Energy Development

Having recently studied the theory and application of Comparative Advantage in International Trade, I began thinking about the application of this principle in renewable energy development. I am interested in the extent to which the following approach is possible. Upon briefly Googling the topic, I haven't seen evidence of current pursuit.

Given: Renewable energy output per investment dollar is a function of geography.

Given: Exchange rates and differences between labor rates and production efficiencies between developed and developing countries may provide even further increase of capacity per investment dollar.

Proposition: The most responsible and efficient growth of renewable energy, and further the most responsible and efficient reduction of carbon emissions (which is a broader pursuit than just renewables, when considering conservation opportunities), will be achieved by building renewable energy where we achieve the greatest output for the investment dollar, and by using income from the resulting Renewable Energy Credits (RECs, or Green Tags) to fund conservation efforts wherever renewable energy is not lowest cost. In international application, this would likely also achieve economic development and international relations benefits.

The domestic application of this principle would play as follows: Wind and solar energy are not optimal in Kentucky, therefore these investments would not only be less than optimal in Kentucky, they would be irresponsible, such that the premium renewable energy development dollars could otherwise be spent in Texas for a better overall environmental benefit, and for the benefit of the renewable energy development industry. In other words, considering the opportunity cost of greater output for the money, wind and solar investments in Kentucky are generally counter-productive if the desire is to advance renewable energy development and reduce carbon emissions (and increase energy security) at the greatest pace possible. The key to this premise is that existence of the REC (Renewable Energy Credit, or Green Tag) market makes geography relatively insignificant. The Kentucky developer can invest in the more productive Texas wind turbine, and the RECs can be sold to Kentucky residents as their means of either buying renewable energy, or "carbon offsets" or compliance with any regulations they have for buying renewable energy. People who challenge this general approach of treating RECs as energy will say that it does nothing to actually effect the energy supply (or reduction) on the Kentucky grid. The following is the part of this proposition that addresses this concern:

Still using the example of Kentucky investment dollars building Texas wind energy, the income from the energy component (from Texas energy consumers) can fund the maintenance and growth of the wind energy, while the income from the RECs (from Kentucky businesses and consumers) can be applied toward energy efficiency programs (high-efficiency appliance rebates, energy monitors, etc.) which will achieve carbon-emission reduction on the demand side of the equation instead of the supply side.

Further, and this I think is the most interesting application of the comparative advantage principle in the above scenario -- as it is optimal for a Kentucky developer to build renewable energy in Texas, it is optimal for a Texas developer to advance their efficiency technologies in Kentucky (where there is a higher carbon-emission-reduction value for energy reduced).

In short: it is more responsible to pursue conservation (demand-side solution) in Kentucky and renewable energy (supply-side solution) Texas. Of course, this is an illustrative example, therefore the supply-side and demand-side solutions might be optimal in other states.

Now extend the principles of this proposition to an international application. It is essentially the same, but in addition to searching for the geographic areas of the world where we can achieve optimal renewable energy capacity for the dollar, we also consider exchange rates and relative costs of labor and equipment, etc. Additionally, the business cases become more complex as we begin to consider that corruption, energy theft, tariffs/taxes and other issues of international commerce. However, as discouraging as these issues may seem to a prospective U.S. developer of renewable energy abroad, here is the final element of this proposition that made the concept of international renewable energy development interesting to me:

No matter where the renewable energy is built, a REC (metered proof of 1,000 kWh of electricity produced) is 1,000 kWh everywhere. Additionally, RECs have a carbon-emission-reduction value (determined by whatever the local carbon intensity of energy is), and one unit of carbon-emission reduction is one unit (usually a metric ton) of carbon-emission reduction everywhere. Therefore, we get the income from the sale of the energy, but we also get the RECs, which we can sell wherever they have the greatest value. As an example, a Kentucky developer builds solar energy capacity in Africa, he gets the income from those energy consumers, and then perhaps the best market for the RECs may be in England at the time being. As in the domestic example, he uses the energy income to maintain and grow the renewable energy capcity, and he uses the income from the RECs (or from RECs in the form of Carbon-Emission-Reduction Credits in a Kyoto protocol market), to develop efficiency programs in Kentucky. Therefore, the environmental benefit is optimally achieved in Africa and Kentucky.

When applied internationally, additional benefits of economic development and improvement of welfare in developing countries is achieved. Therefore it's a model that jointly contributes to optimal/efficient pursuit of environmental and economic development interests.

The economic modeling of this proposition may not be very complex: the inputs are cost assumptions for the capital projects (renewable energy projects), exchange rates, operating and labor expenses, renewable energy production efficiency (Megawatt hours per dollar), revenue assumptions in terms of local energy costs and values of RECs, and several sensitivity inputs for theft and other inefficiencies, etc. It may certainly result in a conclusion that there is too much risk for the capital investment, and insufficient return the the REC and energy sales, however there is a wildcard yet to be played. What is Obama going to do? If the United States establishes a cap-and-trade approach to carbon-emission-reduction goals, the international CERC market will change drastically ... for the better (meaning that the value of RECs will increase dramatically). One way of looking at it: our current high levels of carbon intensity (from lots of coal energy) will be a good thing for us in the beginning, because the carbon-emission-reduction value per REC will be very high, and the massive increase of these credits in the international CERC market will put the U.S. in a commanding supply position.

Regarding the policy considerations at a national level, U.S. carbon legislation will further force the issue that we should be looking at international renewable energy development, international REC (or CERC) trading, and domestic energy efficiency development. Although President Obama has expressed caution in terms of free trade, he might want to consider how the international renewable energy development opportunities could advance his agenda for domestic energy security, the building of a green collar industry and advancement of peaceful international relations.

Finally, I'm not assuming that this proposition is original, neither in its parts, nor in whole, however as I mentinoed out the outset of this entry, I don't haven't seen evidence of a study or an international renewable energy development model. If there is such work being done, I would appreciate a link. Otherwise, anybody up for working on the cost/benefit model?

- CW