Investing in
Alternative Power

Wind Power

Is there a way to assess the relative merit of investment in power technologies? What if it were possible to determine which technologies may be poised to make a big leap in cost-effectiveness, and which technologies have reached their peak?

Melissa Schilling, a professor at the Stern School of Business at New York University, analyzed electricity-production technologies using a method that’s been applied to technologies as diverse as steam engines, vacuum tubes, and computer disk drives. Schilling’s paper on these results, written with Melissa Esmundo, was published in the May 2009 issue of the journal Energy Policy.

According to Schilling, both wind and geothermal power are poised to become more economical than fossil fuel, needing just a relatively small infusion of additional capital. More investment in solar technologies, though, is not likely to bring their costs down significantly in the near future. Her analysis also indicates that further investment in fossil fuel technologies looks to be money wasted.

Wind Power

Wind Power

Schilling’s work is based on the widely held observation that the performance of a technology, when plotted against the cumulative research and development money directed toward it, follows a fairly predictable S-shaped path: flat at the beginning, steep in the middle and flat again at the top. “When people teach innovation and strategy in economics, the S-curve is a given,” she said.

Schilling decided to apply S-curve analysis to sort out alternative energy, a fragmented field where alternatives compete against each other as well as fossil fuels.

Geothermal Power

Drawing on data from a number of sources, including the U.S. Department of Energy (DOE) and the Electric Power Research Institute, Schilling compiled cost data for various renewable energy systems as well as for coal, natural gas, and petroleum-burning thermal plants. The data told a familiar story: fossil fuel power was considerably cheaper than renewable, although the cost of solar, wind, and geothermal had come down markedly over the past 25 years.

Fossil Fuel Power
The performance of many technologies follows an S-curve, when years of slow gains precede rapid improvements that eventually flatten out at a physical limit. Wind and geothermal power appear to be entering their most fruitful phase, while fossil fuel power looks to be stagnating

Schilling then found data on the levels of research and development funding via the International Energy Agency, which gathered data from nine governments—including the U.S., Canada, Japan and six European countries. The IEA data show that since 1974 those governments have invested almost $40 billion (in 2005 dollars) toward fossil fuels and roughly $25 billion on all renewable energy technologies combined.

The results for solar were not promising. Even after decades of R&D investment, both solar thermal and photovoltaics seemed stuck on the lower tail of the S-curve and were still improving very slowly.

Wind was doing much better. With the cost of energy for wind power now around 5 cents per kilowatt hour and dropping fast, wind was climbing up the steep slope of the S-curve. Based on the performance data, Schilling projected that another $3 billion of R&D would get the costs of wind power to around 2 cents per kilowatt hour—within a penny of coal and cheaper than gas.

Geothermal held even more promise. Although the cost of geothermal power was falling quite rapidly, the technology appeared to be just at the beginning of a long period of improvement. Schilling estimated that investing $10 billion in geothermal technology will take energy costs below half a penny per kilowatt hour, vastly better performance than any technology we currently have.

Since the cost of fossil fuel energy had been getting more expensive toward the end of her data set, which cut out at 2005, it was impossible for Schilling to make a good fit of the data on an S-curve. This indicates that fossil fuel power technologies are at or near their technological limits and any additional improvements would be marginal.

[Adapted from “S Marks the Spot,” by Jeffrey Winters, Associate Editor, Mechanical Engineering, December 2009.]

Schilling decided to apply S-curve analysis to sort out alternative energy, a fragmented field where alternatives compete against each other as well as fossil fuels.  


February 2011

Jeffery Winters

by Jeffrey Winters