The Increasing Returns on Investment of Solar Energy
What’s the difference of investing in fossil fuel based energy and investing in solar?
One is subject to the economics of extraction (fossil fuels), whereas the other to technology and its constant performance and cost improvements (renewables).
Guess which one is better? 🤔
If you’re in the extraction business, the returns on your investment are going to decrease over time, while returns on renewables will increase. Why is that?
First of all, what does that even mean?
The law of diminishing returns states that when you add more production units, while all the other remain constant, they will inevitably yield decreased per-unit incremental returns.
How does this translate into fossil fuel investments?
Investing in fossil fuels requires a lot of heavy lifting. First of all, you have to invest a large amount of money and resources to get to the fuel that you’ll eventually burn to generate electricity.
The problem is that once you dig up the hole to extract the resources, the hole will start to dry up. As you pump up the oil or gas, returns are going to go down.
After this hole dries up (yes, the one in which you already invested a ton of money), you’re going to have to go look for another one and repeat the same process all over again. You’re going to drill holes all over the Earth. I’m sure Mother Earth doesn’t appreciate that.
By doing this, supply is eventually going to dry up (fossil fuels are a finite resource). The less oil there is, the more the price is going to go up and the more costly it’s going to be to find more fossil fuels because you’re going to have to go deeper or to further away places to find it.
For example, digging oil in Saudi Arabia or Texas is way cheaper than sending huge ships out to the Arctic to drill up a hole in the middle of the ocean.
Less supply, means higher prices. The more we demand electricity and fuel for our cars, the more demand. The more demand combined with less supply, translates into higher prices for consumers.
This means that the more you extract, the more each unit of energy will cost in the future.
On the other hand, renewables offer increasing returns.
How does that work?
Once you make the initial investment you won’t have to invest in fuel, ever. It’s going to be free (and clean) for the rest of its useful life. After you recover the investment, you will produce or consume electricity for free. The only costs will be the operation and maintenance costs, which are pretty low. You won’t have to keep on looking for resources to generate your electricity (unless the sun decides not to come out).
And this is where it gets interesting. This is where the beautiful math of solar comes into play.
Solar PV has a learning curve, that’s based or correlated with deployment. As solar installations double, solar PV production costs fall by 26%.
Source: Bloomberg New Energy Finance
This leads to a virtuous cycle
As more solar is deployed, costs keep on going down. As costs keep going down, it’s more feasible (economically) for people to install solar. As they install more, prices are going to keep coming down.
It’s a beautiful virtuous cycle.
As we saw earlier, it’s the other way around with fossil fuels.
There you have it, the more we do good for the planet by installing solar, the easier it’ll become.