Why are solar and wind energy scarce commodities?
One of the characteristics of renewable energy sources like solar and wind is their abundant supply. The sun shines forever – at least from a human perspective. Hence, solar energy will always be there. The same holds for wind energy, which is kinetic energy coming from the movement of air resulting from differences in atmospheric pressure. The wind always blows, albeit not at a constant speed.
Because both solar energy and wind energy have a permanent character they are called renewables. This means that using this energy has no effect on the availability of energy in the future. In other words: solar and wind energy are unlimitedly available. To stress the permanent character of the availability of renewables they are also called non-depletable resources. This name explicitly makes clear the fundamental difference between renewable energy and the so-called depletable resources. The latter include fossil resources as coal, natural gas and oil. Depleting these resources has as a result that their future availability declines. The fact that depletable resources are limited in size does not necessarily imply, however, that these resources are viewed as scarce resources in economics. And the other way round: the fact that non-depletable resources are unlimitedly available does not imply that these are not viewed as scarce commodities.
In economics, a commodity is called scarce if using that commodity in one specific way implies that it can no longer be used in any other way. Using such a commodity means that opportunity costs are made. These opportunity costs are equal to the benefits of using that commodity in the best alternative way. In case of depletable resources, the opportunity costs are clear: if a barrel of oil is consumed in a specific way it cannot be used anymore for another purpose. But what about renewable energy? If wind energy is used to produce electricity at a specific moment, this type of energy can still be used for another purpose in the next moment. This indeed means that wind in itself is not a scarce commodity. The same holds for solar energy.
Producing electricity by solar cells or wind parks, however, does involve opportunity costs. After all, solar cells and wind turbines have to be produced and installed before one is able to utilize solar and wind energy as a source of electricity. Producing these renewable-energy assets requires the use of economic resources, such as capital and labour. The benefits of using these resources for alternative purposes form the opportunity costs of renewable energy. The fact that producing the solar cells and wind turbines has these opportunity costs means that solar and wind energy are scarce resources.
A consequence of the fact that the opportunity costs of renewable energy are related to producing and installing the renewable-energy assets is that renewable energy has only fixed costs. The variable costs of renewable energy are, however, negligible, since using sunshine or wind does not create (opportunity) costs. Here again we see the major difference between renewable electricity and electricity produced by using depletable resources: the latter type of generation not only causes fixed costs, but also variable production costs because of the opportunity costs related to using fossil fuels.
So, we see that the notions of scarcity and opportunity costs are helpful to better understand the fundamental characteristics of renewable energy.
Author: Machiel Mulder
The link to the video below explains in a different way the concept of opportunity costs, while the links to the two papers give a more in-depth analysis of the economics of fossil fuel resources as well as renewable energy.
Economics Mafia. Scarcity, Choice, Opportunity Cost. Why successful women tend to postpone marriage plans. YouTube.
Krautkraemer, J. and M. Toman (2003). Fundamental economics of depletable energy supply. Resources for the Future, 03-01.
Timmons, D., Harris, J. M., & B. Roach (2014). The Economics of Renewable Energy. Global Development and Environment Institute, Tufts University.
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