The Demand and Supply of Renewable Energy Essay Example

Currently, most nations rely on fossil fuels for energy since their cost of production is lower. At the same time, the world has experienced a reducing cost advantage of the fossil fuels over renewable energy and the latter now competes with other energy sources on financial terms. In the future, the cost of renewable energy will reduce while fossil fuels will spiral. Even without policies to promote the transition to renewable energy, economic factors such as costs and demand will inevitably move people into that direction. As world economies continue to develop and become more complex, energy needs also increase. Demand for the supply of green energy started with biomass energy, hydropower, coal and then to oil and natural gas in the latter half of the twentieth century. The 21st century is steadily moving into renewable energy and the economics surrounding it show that there is a higher demand and limited supply.

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Transition into renewable energy is an inevitable phenomenon especially since there are technological advancements and climate change concerns. Most renewable energy sources are common resources and thus unlike the past energy transitions, the 21st-century transition is a global goal. Solar and wind have considerably moved from mainstream sources to demand due to their cost efficiency and consumer demand (Timmons, Harris & Roach, 2014). As a result, they are competing on par with other conventional sources due to enabling trends such as technology and demand trends such as emerging markets, cities and communities. In terms of supply, fossil fuels are limited and human demand for energy increases daily. Therefore, renewable energies will offer the best alternative since their cost of supply is not high. Developed nations will have an absolute advantage in terms of producing and supplying renewable energy while the developing countries will enjoy a comparative advantage because they will have the capacity to produce renewable sources at a lower opportunity cost. The depletion of fossil fuels is not as immediate as the need to repair the damaging effects of climate change (Timmons, Harris & Roach, 2014). Therefore, as the knowledge and environmental awareness continue to increase, the demand for renewable energy also increases begging the need for more supply. Consumers are seeking to have the most reliable, affordable and energy sources that are environmentally responsible.

There are also externalities associated with renewable energy and they can be both negative or positive. one excellent example is wind energy. Through the construction of a wind turbine, homeowners have expressed concerns that there is a substantial decrease in house values. In the Netherlands for instance where the government installs wind turbines and hopes to reach a 14% share of renewable energy, property values are decreasing at an estimated EUR 50.000 thousand per house (Droes & Koster, 2014). Although funding for renewable energy is implausibly cheap they create externalities that require rectification before they interfere with the demand curve for renewable sources. Other externalities include the cost of infrastructure that should be in place for transporting the energy to other remote areas and supply imbalances that the intermittency of wind and solar creates. As a result, the concomitant costs of wind and solar and their externalities are felt by the consumers who are in high demand for renewable sources of energy. Although these externalities are not naturally reflected in market prices for clean energy, they sometimes present a misguided perception that renewable energy could be the vanguard for a green future (Bartczak, Chilton, Czajkowski & Meyerhoff, 2017). There is a need to rectify the distortions in the renewable energy industry so that there can be the elasticity of demand and supply in a perfect competition market for energy.

Using the assumptions of the production possibilities analysis, the unavoidable externalities, and the present technologies, the world still grapples with both the renewable and non-renewable energies. The production possibility curve can, therefore, present the alternative combinations of renewable and non-renewable energy that a given economy can produce with its technologies. Production and supply of renewable energy can, therefore, be technically efficient when economies fully utilize available resources. However, the production of more non-renewable energy than renewable energy would present a monopolistic competition since households and corporations are extensively using the former (Miller, Richter & O'Leary, 2015).

Demand

The graph in Figure 2 illustrates how a demand/supply curve for renewable energy should look like. However, due to various factors such as monopoly by nonrenewable energy, the demand is higher than the supply. The limited supply can also be explained by the steady transition into clean and sustainable energy from the use of nonrenewable energy. Currently, the aim of encouraging the use and increased supply of renewable energies is not for profit maximization although this should the goal of any economic good or service. When renewable energy suppliers are able to maximize their profits from the supply of clean energy, it will be an indication of increased supply to meet demand and energy providers will be reduced to price takers. As a result, the energy market, whether supplying renewable or non-renewable energy will have a perfectly competing market.

Conclusion

In conclusion, the economics behind renewable energy cycle around its demand and supply. The 21st century has witnessed immense technological advancement as well as environmental concerns of climate change that have together pushed the need for energy transition. Therefore, with increasing consumer demand for clean energy, there is an even higher need for supply, rectification of externalities and monopoly from the nonrenewable energy sources for perfect competition.

References

Angelopoulos, A. (2017, August 24). Act on externalities in the renewable energy market. Retrieved from https://www.ft.com/content/48629cb0-8733-11e7-8bb1-5ba57d47eff7

Bartczak, A., Chilton, S., Czajkowski, M., & Meyerhoff, J. (2017). Gain and loss of money in a choice experiment. The impact of financial loss aversion and risk preferences on willingness to pay to avoid renewable energy externalities. Energy Economics, 65, 326-334. Retrieved from https://eprints.ncl.ac.uk/file_store/production/237694/EB26A36A-5EED-4794-8514-ED15129E7FD7.pdf

Consultancy. eu. (2018, July 9). European countries top WEF and McKinsey Energy Transition Index. Retrieved from https://www.consultancy.eu/news/1304/european-countries-top-wef-and-mckinsey-energy-transition-index

Droes, M. I., & Koster, H. R. (2016). Renewable energy and negative externalities: The effect of wind turbines on house prices. Journal of Urban Economics, 96, 121-141. Retrieved from https://www.econstor.eu/bitstream/10419/107839/1/14-124.pdf

Miller, C. A., Richter, J., & O'Leary, J. (2015). Socio-energy systems design: a policy framework for energy transitions. Energy Research & Social Science, 6, 29-40.

Timmons, D., Harris, J. M., & Roach, B. (2014). The economics of renewable energy. Global Development And Environment Institute, Tufts University, 52. Retrieved from http://www.ase.tufts.edu/gdae/education_materials/modules/renewableenergyecon.pdf