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The Valley of Death for New Energy Technologies

Abstract:
It is often claimed that a difficulty of raising investment funds prevents promising new energy technologies from attaining commercial viability. We examine this issue using a dynamic intertemporal model of the displacement of fossil fuel energy technologies by non-fossil alternatives. Our model highlights the fact that since capital used to produce energy services from fossil fuels is a sunk cost, it will continue to be used so long as the price of energy covers merely short-run operating costs. Until fossil fuels are abandoned, the price of energy is insufficient to cover even the operating costs of renewable energy production, let alone provide a competitive return on the capital employed. The full long-run costs of renewable energy production are not covered until some time after fossil fuels are abandoned.

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Energy Specializations: Renewables – Wind ; Renewables – Solar ; Renewables – Policy and Regulation; Renewables – R&D and Emerging Technologies; Electricity – Generation Technologies; Electricity – Transmission and Network Management

JEL Codes:
Q51 - Valuation of Environmental Effects
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
O32 - Management of Technological Innovation and R&D
Q2 -
D44 - Auctions

Keywords: Energy innovation, energy transition, valley of death

DOI: 10.5547/01956574.38.3.phar

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Published in Volume 38, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.