Notes on "Economics of Energy"(James L. Sweeney)

Economics of Energy

James L. Sweeney

Market forces may guide a transition back to renewable energy

Types of energy

1. Chemical energy
2. mechanical energy
3. thermal energy
4. radiation
5. electrical energy
6. the potential to create energy through nuclear reaction

Lead economic agents to supply energy resources to convert those resources into other useful energy forms, to transport them to the users, to use them, and to dispose of the residuals.

1. energy is neither created nor destroyed but can be converted among forms
2. energy comes from the physical environment and ultimately return there

Humans now routinely harness complex sequences of energy conversion processes to provide desired services.

Demand for energy is derived from wishes to use energy to obtain desired services.

It is not desired from preferences for the energy commodity itself.

Energy demand depends on :

• demand for desired services
• availability and properties of energy conversion technologies used for conversion
• costs of energy and technologies used for conversion

Efficiency of energy conversion equipment determined energy demand.

The substitutability of energy is made possible by and is limited by the available set of energy conversion technologies.

Energy: essential good

BUT neither particular energy commodities nor any purchased energy commodities are essential goods.

In depletable resource theory, market prices would increase gradually to the cost of producing substitutes, reaching that cost only as the depletable resource were nearing depletion

Technology impores often unpredictable

Given the complexity and uncertainty, it is not obvious that markets will automatically and optimally guide the system to a smooth transition to a renewable resources.

Energy conversion industries, for economic success, must be able to sell  their product at a price higher than the cost of energy commodities used as inputs plus per unit capital and operating costs of the facilities.

(energy conversion is never perfectly efficient)

The reasons for state ownership or control :

1)     electricity is fundamental to economic activities and many people have not trusted private industry.

2)     Production, transmission, and distribution of electricity have shown significant increasing returns to scale and the industry has been viewed as a natural monopoly.