Introduction to Energy and
Environment Economics
Sourav Mohanty
Assistant Professor
Gokhale Institute of Politics and Economics
Introduction to Renewable and Alternative Energy
• Definition: "Alternative energy" refers to energy forms outside conventional
energies
• Includes both renewable and non-renewable sources
• Focus on modern renewable energies
Historical Context
• Renewable energies have been used since ancient times
• Traditional uses had low direct consumer costs
• Modern conversion processes increase supply costs
• Funding patterns related to oil market fluctuations
Key Drivers of Renewable Energy Development
• Oil price shocks triggered new interest in renewables
• "Petrodollars" facilitated research funding
• High oil prices in international markets drove development
• Global climate change concerns
• Sustainable development goals
Current Market Status
• According to Ember (2024): ~30% of global primary energy supply came from renewables
• The global installed capacity has nearly doubled from 4,420 GW in 2007 to approximately
8,000 GW in 2023.
Economic Considerations
• Transition from traditional to modern usage methods
• Increased costs due to sophisticated conversion processes
Global Share of Non-Hydro Renewables
• As of 2023, renewable energy sources contributed just over 30% of global
electricity generation.
Global Installed Capacity (2007 data)
Non-hydro renewable electricity: 161 GW
Total installed capacity: 4420 GW
Wind capacity: 94 GW
Geothermal capacity: 9.9 GW
Solar PV capacity: 9.2 GW
Economics of Renewable Energy
The economics of renewable energy explore the costs, benefits, and market dynamics of
producing and consuming energy from renewable sources like solar, wind, hydro,
geothermal, and biomass.
As technology advances and environmental concerns grow, the economic case for
renewables has become stronger.
Cost Structure
∙ Capital Costs: High upfront investment in infrastructure (e.g., solar panels, wind
turbines). However, these costs have been declining rapidly.
∙ Operational & Maintenance Costs: Generally lower than fossil fuels due to fewer
moving parts and no fuel costs.
∙ Fuel Costs: Essentially zero, as sunlight, wind, and water are free resources.
∙ Decommissioning Costs: Costs related to safely dismantling and recycling renewable
energy systems at the end of their lifespan.
Levelized Cost of Energy (LCOE)
∙ LCOE measures the average cost of producing electricity from a specific source
over its lifetime.
∙ The LCOE for renewables like solar and wind has decreased significantly, often
becoming competitive or cheaper than fossil fuels.
Market Dynamics
∙ Grid Parity: Many renewables have reached or surpassed grid parity, making them
cost-effective compared to conventional energy sources.
∙ Subsidies and Incentives: Governments often provide subsidies, tax incentives, and
feed-in tariffs to boost investment in renewable energy.
∙ Carbon Pricing: Imposing a price on carbon emissions increases the cost of fossil
fuels, making renewables more competitive.
Economic Benefits
∙ Job Creation: The renewable energy sector creates more jobs per unit of electricity
generated compared to fossil fuels.
∙ Energy Independence: Reduces reliance on imported fuels, enhancing energy
security.
∙ Stable Energy Prices: Unlike fossil fuels, renewable energy prices are less
vulnerable to market fluctuations.
Challenges and Limitations
∙ Intermittency: Wind and solar depend on weather conditions, requiring energy
storage or grid improvements.
∙ Initial Investment: Despite declining costs, the upfront investment remains a barrier
for some regions.
∙ Land and Resource Use: Large-scale projects can face land-use conflicts and
environmental concerns.
Sources of Renewable Electricity
• Wind, geothermal and solar PV as major sources
• Mini and small-hydro capacity is significant
• Biomass-based sources contribute substantially
Regional Distribution
• Asia: Highest amount of hydro-based capacity
• Europe: Largest share of non-hydro renewable electricity capacity
European Leaders
• Hydropower: Norway, France, Sweden, Spain
• Non-hydro renewables: Germany, Spain, Italy
Main Drivers of Renewable Energy
Reduction in CO₂ Emissions & Climate Change Mitigation
o Primary driver of renewable energy adoption
o GHG concentration increasing due to fossil fuel dependence
o Without mitigation, CO₂ concentration could double by 2050
o Renewables (carbon-free or neutral) help reduce GHG concentration
• Security of Energy Supply
• Growing concern due to: Rising fossil fuel prices Global depletion of fossil fuels
• Increasing import dependence
Competition from emerging economies
• Production decline in US and UK
• Political instability in resource-rich regions
• Renewables using local resources reduce import dependence
Improved Energy Access
• 2+ billion people lack access to clean energy
• Particularly acute in rural areas of poor countries
• Renewables offer advantages:
• Reduced environmental damages
• Time savings in fuel collection
• Improved working conditions
• Better income opportunities
• Poverty reduction
Employment Opportunities
• Direct benefits: Decentralized structure, local operations
• Indirect benefits: Improved working conditions, reduced drudgery
Macroeconomic Stability Benefits
• Reduced import dependence
• Improved trade balance
• Lower vulnerability to external economic shocks
These drivers highlight the multifaceted advantages of renewable energy beyond
just environmental benefits.
Cost Reductions in Renewable Energy
• Significant decreases over the past decade
• Trend expected to continue
• Some technologies (e.g., wind) now economically competitive with
conventional power
• Darmstadter (2003): Cost reductions were higher than expected
Paradox of Renewable Energy
• Despite advantages and cost reductions, renewables still have limited
market share
• Explained by persistent barriers to adoption
Barriers to Renewable Energy Adoption
• Barriers can be analysed at multiple levels
• Four broad categories identified by Reddy and Painuly (2004):
a) Technological Barriers
▪ Related to intermittency of supply
▪ Uneven playing field caused by externalities of fossil fuels
b) Marketplace Barriers
▪ Access to grid challenges
▪ Regulatory obstacles
c) Financial Barriers
▪ Inappropriate tariffs
▪ Inadequate incentives
d) Non-Market Barriers
▪ Administrative difficulties
▪ Lack of long-term commitment
▪ Information gaps
These points highlight the economic progress of renewable energy technologies
while explaining the challenges that still prevent their widespread adoption
despite their advantages.
Future Trends
∙ Technological Innovation: Advances in battery storage, grid management,
and AI-driven energy systems are making renewables more efficient.
∙ Decentralization: Growth in distributed energy systems like rooftop solar.
∙ Investment Growth: Increasing interest from institutional investors in
green finance and sustainable projects.
