Overview

OK, we are now out of the deep end of the class and moving into the frameworks for design and valuation of the solar resource. We will be developing a second major arc through Lessons 5, 6, and 7, working through economic and financial issues. So you should see connectivity among these three lessons.

In Lesson 6, we will discuss ways to meet the Goal of Solar Energy Design and Engineering: to maximize the solar utility for a client or group of stakeholders in a given locale. We will dig into a short statement, and find a nearly infinite variety of options for design. But first, we need to find out about our clients or stakeholders as "utility maximizers" in Lesson 5; what makes people demand solar energy products, and how easily will they change their minds? Are there any losses or risks that people are avoiding by choosing solar energy goods and services? Essentially, what are the driving forces for people to adopt solar energy?

Solar Energy Economics helps us to establish the following argument: just because one perceives the solar resource to be weak in a region does not mean that it cannot be successful as a technology in that society. The solar resource is ubiquitous, and we make use of it whether we decide to or not. What is interesting for solar energy is that our raw "product'' is the photon. We apply technologies and skilled effort to convert photons into a diversity of goods that society is interested in purchasing.

Figure 5.0. Diagram of Solar Energy Economics

Credit: Jeffrey R. S. Brownson

The economics of solar technologies helps us to address why we make decisions to use the Sun. We make use of the Sun throughout our lives, but in solar design, we work to develop compelling arguments to the client to increase their marginal demand for the Sun. There is a sense that energy is somewhere between a product and a good in demand by society, and it must be supplied by non-trivial mechanisms, at some cost for the exchange of goods. In order to make marginally (or incrementally) more use of the Sun, we have to learn about the skills to measure and predict the variable phenomenological behavior of solar irradiance as well as the dependence of the variable irradiance on the location of the client in question.

By the end of this lesson, you should be able to:

• identify the key features of supply and demand for energy systems;
• list the two general motives that shift the value of any commodity;
• list the three specific drivers that will affect the valuation of light as a quantified mineral reserve;
• list the four main factors affecting the price elasticity of demand;
• describe the hypothesis of the energy constraint response for solar energy.

What is due for Lesson 5?

This lesson will take us one week to complete. Please refer to the Course Syllabus for specific time frames and due dates. Specific directions for the assignment below can be found within this lesson.

Questions?

If you have any questions, please post them to the Lesson 5 General Questions and Comments Discussion Forum in Canvas. I will check the forum regularly to respond. While you are in a discussion, feel free to post your own responses if you, too, are able to help out a classmate.

Energy Supply and Demand

The readily accessible energy that can be used to "do work" in society is still considered a limited natural resource, or good. In economic terms, we would say that many of our useful energy goods are scarce.

As we read in EBF 200, "What is Economics?" Prof. Gregory Mankiw lists seven microeconomic principles. Recall that microeconomics refers to individual economic actors considered as people and firms and their corresponding interactions in markets.

1. People face tradeoffs.
2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
   (Watch the following YouTube video of Thinking at the Margin by Prof. Mario Villarreal-Diaz.)
   Thinking at the Margin

   Click Here for Transcript for Thinking at the Margin Video.

   MARIO VILLARREAL-DIAZ: Individuals make choices and tradeoffs based on comparisons. When they are trying to decide what is the best choice, depends on those comparisons. One alternative versus the other. Let's think about ordering some fast food.

   If you go to a restaurant and they have the combo number one, and the combo number one includes a hamburger and some French fries, and the price is 10 dollars, then you can take a look at the combo number two. And the combo number two includes the hamburger and the fries and a milkshake. And it's 13 dollars.

   So, immediately when you think about it, you say, well, what am I going to get from those extra 3 dollars? A milkshake. So, that extra unit of food is going to cost me 3 dollars. So, the question you are trying to answer is, is that milkshake worth 3 dollars for me or not?

   And then, you make your choice. You make your decision of combo number one versus combo number two. That's thinking at the margin. At the margin means to think about the next increment, the next unit. That relatively small change, the net addition or subtraction when I make a choice.

   Marginal thinking helps us understanding puzzles such as why diamonds are so much more expensive than water, given that water is indispensable and essential for life. And the answer is that the marginal utility of water compared to the marginal utility of diamonds decreases way faster.

   Think about the first glass of water if you're thirsty-- very satisfying. Think about the second one. Think about the 20th or 50th glasses of water. Maybe you will be not that happy with getting that 50th glass of water. And now think about diamonds. What is the marginal utility of that extra unit of diamonds?

   Probably will not decrease at all. Probably will even increase. What I'm trying to say here is that if you compare the value of the extra unit of water versus the value of the extra unit of diamonds, it is obvious why diamonds are much more expensive than water.

   Individuals make choices at the margin all the time. This is part of the way we think, even though we don't notice. But not only individual decisions such as buying combo number one or combo number two are made thinking at the margin. Businesses also make decisions with this way of thinking.

   For example, if a business wants to hire an extra employee, they think exactly about the same way. How much is it going to cost me, that extra employee? Well, it's going to cost me his or her salary. Well, now we need to compare it versus what? How much he's going to produce.

   What is going to be the value added for having an extra employee? What is his or her marginal production? And then, of course, if his or her marginal production is larger than how much I'm going to pay his or her marginal cost, then it's a good business decision to hire that extra person.

   These basic tools, such as incentives, matter, opportunity cost, and thinking at the margin are not substitute. They complement each other. They are intertwined in the way economists see the world. Thus, when somebody is deciding about the combo one versus the combo two and thinking, should I get the milkshake? That is worth for me three more dollars?

   She's not only thinking about that extra pleasure that the milkshake is going to give her but about the opportunity cost of using those $3 to buy that milkshake. And what is the alternative use of those three dollars? Maybe some popcorn at the movies. Maybe candy at the movies or what have you.

   So, at the same time that is thinking at the margin is thinking at the opportunity cost of that money, how to allocate those resources. So, we do that all the time. For a public official, it might be the case that marginal analysis doesn't come that naturally because there is not that attachment.

   However, it should. Because still there is an alternative use of those public funds. So, public officials should think, if I allocate these resources in this project, how much I'm going to get out of it? And maybe I'm not going to get enough, and I should invest that money in somewhere else.

   Credit: Learn Liberty
4. People respond to incentives.
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Governments can sometimes improve market outcomes.

In solar systems design, we work to Maximize Solar Utility for the client or stakeholders in a given locale. We will describe the methodologies to do so in the next lesson. But our clients are individuals who are in demand of a solar good. The firms developing or deploying SECSs are supplying access to the solar goods.

• Consumers (clients) can be thought of as "Utility Maximizers;" they want to achieve the highest preference for given goods or service.
• Suppliers (designers/engineers/builders) can be thought of as "Profit Maximizers."

Forms of Energy in Demand

Across the planet, there are non-uniform, ever-increasing demands for energy as thermal heat and electrical power. Light, as electromagnetic radiation, is another form of energy, used as well for visual comfort and indoor activities. The photon can be harvested via a solar energy conversion device. To be clear, photons are ephemeral (flows); they are not collected like fuel in a tank (not stocks).

Energy can be described in terms of sources (as in energy re-sources) and in terms of forms (as in energy trans-form-ations). Think of it this way, an energy source is a resource system, from which we appropriate useful resource units in a given form. Energy is neither created nor destroyed, so if the energy is in a less useful form, we must use an Energy Conversion Device (ECD, not a very technical term, but useful here) to transform one form into a more useful form.

• Thermal (heat)
• Radiant (electromagnetic, light)
• Motion (kinetic)
• Electrical (also called power in the industry)
• Chemical
• Nuclear
• Gravitational

Energy scarcity is partially related to the loss of energy quality with successive transformations. Light happens to be an incredibly high quality of energy, which is then transformed into chemical energy by plants (photosynthesis), or into thermal energy by opaque materials, or kinetic energy via wind, or electrical energy via photovoltaics. (Nuclear and gravitational energy are not linked so directly to radiant energy here.)

Our society is used to beginning with "concentrated sunshine" (geofuels from stored photosynthesis in coal, oil, and gas), and then transforming the chemical form to the thermal form (hot steam), which is then transformed into the motion form (to spin a turbine-generator) and finally transformed into electrical energy.

Sidenote on Heat and Power

The terms Heat and Power have been adopted by several industries to have a specialized trade meaning.

• Power is electrical energy (as opposed to a rate of energy use), and
• Heat is thermal energy (as opposed to the transfer of energy).

Thus, in the energy industry, we hear about Combined Heat and Power (CHP) for energy conversion systems that provide two useful forms in one system.

Flow vs. Stock Energy Reserves

Stocks and flows exist in nature and in society. We see stocks in business. In nature, a lake is a stock of water, with a river flowing into it. And the Sun is a stock of nuclear fusion yielding a flow of radiant energy.

• Potential: a driving force for flow.
• Flow: a dynamic entity connected to a stock that either supplies or depletes the stock; can be a change in mass, energy, or information with respect to time.
• Stock: an entity that has accumulated over time due to flows; can be stored potential, or a resource system that replenishes itself (like the fusion in the Sun).
• Resource system: often an environmental stock (and could be a human institution).
• Resource units: the flow of a useful resource that a client may appropriate from a resource system.

A resource system is considered renewable if the rate of withdrawal from the stock does not exceed the rate of resource replenishment. In the case of shortwave light, the solar resource system has physical conditions that define an upper limit of flow without disturbing or harming the constitution of the stock. We can't really withdraw sunlight at a faster rate than it comes to us. Hence, sunlight is flow-limited.

A resource system is considered non-renewable if the rate of withdrawal from the stock exceeds the rate of resource replenishment. In the case of geofuels, the process to make them takes 10s-100s of millions of years (and heat/pressure underground), yet the rate of withdrawal can be almost as fast as we want. Hence, geofuels are stock-limited.

The "Quantity" of Light

Compared to what is available on Mars, the quantity of light is abundant on Earth! Even between the Arctic Circles ($\varphi <60°\text{ or }\varphi >-60°$), there is a great abundance of light available to society to do work. As a society, we are not as skilled at transforming light into useful work as we are at transforming fuel into useful work. We are still struggling to frame light as a valued good, especially as it is all around us every day. So, let's take a look at that value structure.

The value of light from the Sun is variable. There is "less" of an energetic resource from the Sun in the annual irradiation budget for Germany than in the US state of Georgia, yet the value of solar power (as electricity) is much higher in Germany than in Georgia. So is the value of the light to the clients relative to the "quantity" of light, or relative to other parameters.

In the mineral economics of commodity goods, the value of the resource units will vary with respect to two general driving forces:

1. demand for the good or service, and
2. cost of alternatives.

If the demand for a good goes up, the value of the resource units will go up. If the cost of an alternative good goes up (like the price of geofuels), then the value of the resource units (like solar) will go up.

Light as a Mineral Resource (Commodity)

An increased demand for a mineral commodity will increase the value, and a high cost of alternative goods will increase the value.

Value and quantity are joint properties here. As such, the "quantity" of a mineral reserve can expand or shrink in response to three main pressures. Solar resources follow the same commodity trend. In the case of the solar resource framed as a type of mineral reserve, the solar reserve is available when it is economically feasible, expanding and contracting in response to the following three pressures. That is to say, there are three levels that open up, or expand, the solar reserve in a given locale.

The value of an unconverted photon is a variable quantity, much like the value of a mineral resource in a geologic formation. Once again, the value of any commodity varies with the demand for the good and the costs of alternatives. The three main drivers that affect the valuation of light as quantified mineral reserve are:

1. increased demand by clients seeking to avoid fuel costs (choosing an alternative to fuel);
2. technological advances that reduce materials costs and/or installation costs;
3. presence of incentives (often government incentives).

Let us compare the way in which light is valued with the way that a metal ore (in this case, zinc) is valued. An ore is an unrefined rock composed of minerals, which contains a raw metal that is valued, but which must be processed to access that metal. In our reading from the USGS Commodity Statistics [11], Appendix C, we see that an entire lexicon has been developed for classifying mineral resources. (This site as a whole is also an excellent public resource for evaluating mineral reserves from the US perspective.) We have since classified geofuels as "minerals" in the commodity perspective. So, why not extend the concept outward to the commodity of light, and the derived goods and services?

The following terms are within the textbook reading, and were developed from the U.S. Geological Survey Circular 831, Principles of a Resource/Reserve Classification for Minerals (1980). Note the difference among a resource, a reserve base, and a reserve.

• Resource: material or energy source occurring natively in or on the Earth, with a form, concentration, and quantity such that economic collection and/or conversion of that commodity is currently or potentially feasible. (We could apply this to light, right?)
• Identified Resources: specific resources where the location, grade, quality, and quantity are known from specific meteorological evidence, or where the resource has been estimated. Identified solar resources encompass regions that are economic, marginally economic, and sub-economic. As a reflection of the degrees of meteorological confidence, the economic divisions can be subdivided into components of measured, indicated, and inferred.
• Reserve Base: an identified resource meeting minimum criteria related to a specified solar energy conversion technology practice currently employed to convert to useful work.
• Reserve: the portion of the reserve base that can be economically converted at the time of determination (the locale).

Figure 5.1 The potential valuation of the solar resource in a given locale, but framed as a mineral resource, in accordance with USGS commodities structure for mineral resources

Click Here for a text alternative to Figure 5.1

A table shows a two-axis categorical relationship between knowledge of the solar resource and the ability to economically exploit the resource.

On the first axis, three categories describe decreasing levels of knowledge of the resource: “Measured” (measure a few ground sites well), “Indicated” (satellite mapping of resources) and “Inferred” (geospatial mapping by interpolation). The combination of Measured and Indicated resources are termed “Demonstrated,” while all three categories together are termed “Identified Solar Resources.”

The second axis also contains three categories, which describe decreasing levels of economic return from the resource. “Economic” resources are described with the terms: fuel costs are high/annual resource is high/incentives exist/solar tech costs dropping. “Marginally Economic” resources are described with: fuel costs exist/resource is significant/solar tech costs dropping. “Subeconomic” resources can be described by: fuel costs very low/resource may be significant (or not).

Intersections between these category axes are described with text labels. Reserves are shown at the intersection of Demonstrated and Economic resources, while Inferred and Economic resources are termed Inferred Reserves. Marginal Reserves and Inferred Marginal Reserves occur for Marginally Economic resources that are Demonstrated and Inferred respectively. Demonstrated Subeconomic Resources and Inferred Subeconomic Resources are the last two labelled combinations, and are self-explanatory. An example of Demonstrated Subeconomic Resources is given as those occurring beyond the arctic circle. Arrows and text indicate that as the Reserves move from Economic to Marginally Economic to Subeconomic, the reserve base is expanding. A final category of resource is listed separately from the main table with the heading “Other Occurrences,” and lists non-conventional and low-grade light sources.

A final text box is shown separate, but alongside the table, which describes Cumulative Production of the resource as exponential growth with doubling deployed production every 1-2 years.

Credit: Jeffrey R. S. Brownson

Discussion Activity

We have been discussing the value of goods in an economic sense so far. The tendency in the public is to judge the value of a solar technology in a given locale based on metrics (perceived or measured) of the quantity of light (MWh). But I would like you to consider an alternate valuation system related to the value of a mineral resource.

So, in this discussion,

1. Please offer your perspective and supporting analysis for: the valuation of light as a mineral resource relative to the quantity of light in a given locale, where the unit cost is in $/W_p (dollars per peak watt).
   
   Here the subscript "p" stands for "peak", meaning that system performance is measured at AM1.5 lab conditions of 1000 W/m² solar shortwave spectrum irradiance and cell temperature of 25°C. It is a way to normalize performance when comparing modules/systems. The peak watt is also used to describe the "installed capacity" of solar farms or rooftops.
2. Which metrics - irradiation (MWh) or dollars per peak watt ($/W_p) do you think will be more important to communicate to a client and stakeholders for solar energy project design?

Take time to think about this based on our reading and post your thoughts on the forum.

This discussion will take place in the Lesson 5 Discussion Activity 5.1 Forum in Canvas.

Elasticity of Demand

In economics, the measured response (in the market) of how the quantity of a product in demand is changed by the incremental change in the price of that product is termed price elasticity of demand. The demand is considered elastic if a small change (like a decrease) in price leads to people demanding more of the product. The demand in considered to be inelastic if a large change (again, a decrease) in price does not lead to people demanding more of the product. The elasticity of demand for solar power will depend on a few general rules, and we will try to contain our examples to solar scenarios for a client or group of stakeholders.

Criteria for Elasticity

The price of PV just changed. What do you do? Do you go out and invest in a PV system for your roof, or do you wait and see? Clients and consumers (us too!) are influenced by several criteria. The four main factors affecting the price elasticity of demand are:

1. availability of close substitutes;
2. whether the form of energy is a necessity or luxury;
3. how large a share of a consumer's income the good will consume; and
4. the time horizon over which the change occurs.

First, one evaluates the availability of close substitutes for the particular SECS of interest. If the desired useful energy form or technology has many available close substitutes, then it will be easier for clients/stakeholders to switch among goods for the same desired feature, and the demand will tend to be elastic.

Next, we ask, is the energy form a necessity or a luxury? Our electricity from the coal/nuclear power plant is typically a necessity right (and thus inelastic)? Is there anything about residential PV that seems to be a luxury to families? When did mobile phones stop being a luxury and become a necessity in modern society?

What share of income can an individual or firm (as clients) devote to paying off a loan for solar technologies or directly purchasing a SECS? If a SECS consumes a large share of my income, what tradeoffs will I need to consider (what will I have to give up in return)?

Finally, when making decisions for energy systems, we must consider the time horizon, or the period of evaluation. For energy consumers, when the cost of energy (in dollars per kilowatt-hour, $\$/kWh$) goes up briefly (on the order of hours or days, or for one month) there's not much that they can do to respond. As such, the price elasticity of demand is said to be inelastic for shorter time horizons. In contrast, when the period of evaluation is framed in terms of decades, as is done for PV systems that have productive life cycles of 30-50 years, then the client perspective can shift and become more elastic. When you buy a house, you're in it for the long-term, right? Similar thinking with SECSs.

Video Perspectives

And now for two short perspectives on the Price Elasticity of Demand to complement the reading. Please watch the following two videos: "Episode 16: Elasticity of Demand" by Dr. Mary J. McGlasson, and "Elasticity - Characteristics that determine elasticity" (Dr. McGlasson is an economics faculty at the Chandler-Gilbert Community College [13].) I want you to think about solar energy and the resource units derived from the conversion of shortwave light.

Hypothesis of the Energy Constraint Response

When fuels (geofuels, biomass) are effectively:

• accessible,
• unconstrained, and
• inexpensive,

light and the associated Solar Energy Conversion Systems are not perceived as a viable alternative. Light is framed as diffuse and insufficient to do work.

However, when fuels are:

• constrained, or
• inaccessible,

then light and the associated Solar Energy Conversion Systems are counter-interpreted as ubiquitous and vast, and capable as a viable alternative.

Fuel Constraints

Our energy use in society is coupled to the locale and to our comfort expectations. Energy use is also coupled to the availability of inexpensive fuel resources. The four main factors constraining fuels are described below:

1. physical inaccessibility due to regional resource depletion (e.g., deforestation) or supply chain disruptions (e.g., oil embargo),
2. exceptionally high demand for fuels that outstrips supply,
3. fuels being accessible, but only at high risk to the community, and
4. fuels constrained by socially restraining policies, regulations, and laws.

Discussion Activity

For this discussion, I want you to discuss your own observations of energy constraints, and your local area's perception of solar energy.

• Does your family or do your friends in the area feel that you have "enough" sunlight?
• What is the cost of electricity in your area (0.06/kWh is low, and 0.12/kWh is considered high)?
• Are there any incentives in your area for solar energy?
• Do you observe any factors that seem to support the hypothesis of the energy constraint response?
• Any factors that appear to disprove the hypothesis that we can discuss, too?

Supplemental Tools for the USA:

• The Open EI site has quick access to many utility rates [14]
• The DSIRE site has quick access to state incentives [15]

I am trying to gauge your ability to think about the solar resource in an economic framework. Please describe the conditions that you observe around you, rather than what you think "ought" to be happening. Most of us have not really framed the solar condition in rational terms. Maybe you have conflicting ideas about light and irradiance from your own backgrounds that we can discuss? Or, perhaps this new terminology is confusing and we need to take a few communications to sort through things.

This discussion will take place in the Lesson 5 Discussion Activity 5.2 Forum in Canvas.

Good work completing our first lesson dealing with solar economics! We have transitioned from the dense topics of spherical trigonometry, meteorology, and component modeling (Lessons 2, 3, and 4) into the driving forces for our clients to make the decision to adopt a solar energy conversion system. In this lesson, we learned that our clients are situated on the demand side of the energy economic framework, and consumers such as our clients are called utility maximizers.

We saw that there are two general motives to shift the value of any commodity from the perspective of a consumer: demand for a good and the cost of alternatives. Specifically, within the solar field, the three main drivers that affect the valuation of light are:

1. Increased demand by clients seeking to avoid fuel costs (choosing an alternative to fuel);
2. Technological advances that reduce materials costs and/or installation costs;
3. Presence of incentives (often government incentives).

Each of these should make sense within the framework by Mankiw for microeconomic principles. We also observed how light can be put in the context of a mineral commodity, much like the USGS has done for geofuels. The solar resource as a reserve is a variable quantity depending upon the value of that resource in a given locale. As such, value and quantity are joint properties.

Also, the measured response (in the market) of how the quantity of demand is changed by the incremental change in the price is termed price elasticity of demand. The demand is considered elastic if a small change in price leads to people demanding more of the product. The demand is considered to be inelastic if a large change in price does not lead to people demanding more of the product.

Finally, we tied all of the economic forces and responses together with the Hypothesis of the Energy Constraint Response. There is historical evidence across many locales, in the USA and abroad, for solar adoption tied to fuel constraints. We can even consider the pressure of climate change as a new fuel constraint for society, leading to increased demand for solar energy resource units.

Reminder - Complete all of the Lesson 5 tasks!

You have reached the end of Lesson 5! Double-check the to-do list on the Lesson 5 Learning Outcomes page to make sure you have completed all of the activities listed there before you begin Lesson 6. (To access Lesson 6, use the link in the "Course Outline" menu.)