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The Cost Of Energy Is The Key To Sustainability

Forbes Technology Council

Alex Lidow, Ph.D., is CEO and co-founder of Efficient Power Conversion.

Developing economies are struggling to build energy infrastructure to support industry and bring electricity to far-flung villages. At the same time, industrialized economies are straining to balance conflicting demands for more power while decreasing the environmental impact. Finding ways to meet the rising demand for energy without plundering natural resources poses one of this century’s greatest global challenges.

As a graduate student, I had a life-changing conversation with a professor. He emphatically pointed out that, although supply and demand determine the price of goods, it is the total cost of the energy used to produce the goods that determines the cost of goods.

He used the example of his eyeglasses. The cost of the glasses was the buildup of the cost of the energy it took to melt the glass, the energy it took to dig the iron out of the earth, the cost of gasoline that went into the tank of the trucks used to transport the materials and the finished products and so on. If you add all the energy that went into the supply chain leading up to its current state, you have the total cost of the product. Geopolitics, supply chain imbalances, various subsidies and finally, pricing leverage, will determine the price paid by the consumer.

The principle my professor conveyed was simple and clear: The standard of living is inextricably linked to the cost of energy. In fact, they are inversely proportional. The lower energy costs, the more goods can be put in reach of more people.

Six Factors For Determining Cost

The true cost of energy needs to be separated somewhat from the price paid for energy. The pricing may be distorted by politics, supply shortages and surpluses or subsidies. The cost, however, is a construct of six stages of cost as follows.

• Generation.

• Distribution.

• Storage.

• Conversion.

• Consumption.

• Cleanup.

Each of these six stages has a cost that varies with the type of energy and the way it is used. For example, the cost of generating electricity from oil, gas, wind, solar or nuclear fission all have different values. The cost of distribution and storage for each of these sources is also vastly different. The cost of energy conversion is very different for fossil fuels (think refinery) compared with electricity supplied to a server farm (think power supplies).

The cost of consuming fuels also differs greatly depending upon the specific usage. For example, an internal combustion engine has costs associated with maintenance and the wearing out of components that might be very different from an electric motor.

Finally, the cost of cleanup can radically change the total “cost of ownership.” For example, the cleanup of the environment from coal usage is worse than natural gas, and solar panels are better than gasoline backup generators. Unfortunately, the cost of cleanup may not be adequately factored into the cost as it is often, partially or completely, ignored.

Consider, for example, the cost of cleanup from the consumption of gasoline in vehicles. How does the cost of cleanup of the environment cycle back to the person making the decision of which car to purchase? To use an accounting term, this cleanup cost is an “out of period cost.” It is easy to defer this cost into the future, and it, therefore, creates an artificially low cost for certain types of energy that might have higher cleanup costs than other types.

This dynamic becomes extremely vulnerable to politicization as the increase in the cost of energy sources factors back into our standard of living.

How To Synchronize The Cost Of Energy

Distorting the true cost of the energy we consume can lead to poor choices that have a long-term adverse impact. If we do not create a system that captures the total energy cost we consume, we will create an effective debt burden on future generations.

There are many ways to synchronize all the elements of energy cost. Two that are most commonly proposed are carbon taxes and carbon exchange.

From my perspective, as a leader in the energy and technology industries, a global carbon exchange might be preferable. With this model, a certain amount of credits would be given to each nation to distribute as they see fit, which sets the global limit of carbon discharge into the atmosphere. (As an aside, we now have the technology to monitor carbon discharges via satellite). Nations and industries would be free to sell and exchange credits. Each year, developed nations can purchase credits that get permanently retired, thereby forcing a global reduction in carbon pollution. This approach would make it straightforward to set carbon targets and consistently monitor their achievement.

With this approach, industrial and political incentives would be realigned towards actual energy efficiency as calculated using the true cost of energy. Subsequent generations would not be forced to pay for the out-of-period energy costs created by the current generation and would be consistently pointed in the right direction to both improve the global standard of living and avoid a climate crisis.


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