The Valley of Death for New Energy Technologies


It is often claimed that scarce financing 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.