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Energy services

Innovations are usually costly and perform imperfectly when they are launched but provide benefits to users and entail numerous adaptations which reduce costs and improve performance. This process, in time, also holds true for innovations in the energy business. In addition, these innovations in the energy sendees enable other businesses to increase their value due to costs reductions or performance enhancements. For instance, innovations in the fuel refining and electricity industries duidng the 1990s enabled larger pressures, finer mechanics, better ventilation, faster motion, more light, stronger sound and others performances in the energy consumption in nearly all businesses and households. More recent innovations in wind and solar power, as well as power storage in batteries, generated off-grid, non- polluting and flexible applications for energy consumption which are highly appreciated despite their high costs. For instance, the off-grid applications are presently many times costlier than the on-grid ones, but these innovations enable communication and sensing in space, mobility and housing in remote areas, distributed energy systems in communities and other valuable maimers of energy consumption. Hence, larger expenditures on costlier energy sendees based on low-carbon technologies can be explained by higher performance of energy consumers.

Higher performance in energy consumption generates benefits for individuals, businesses and communities, which is obseived throughout the past two centuries. Substitution of biomass for coal in

England and the USA enabled energy-efficient heating in households and powerful machines (Allen,

2012). They were major drivers of the income growth; herewith, scarce wood and pollution prevention were important incentives of that substitution (Rosenberg 1973 (1977)). Electricity networks delivered power on-grid which enabled income growth in manufacturing and commerce due to machines and tools for fine mechanics, light and sound during the last century (Fouquet, 2014). Electricity production emerged in the USA in the late 1800s despite the fierce opposition of the gas companies. The authorities invoked the introduction of the electric city lights in a bid to avoid city fires caused by the gas lights (DiLorenzo. 1996); note that the introduction of wind and solar power has some similarities. Electricity is meanwhile considered as a basic good though it is several times costlier per energy unit than other fuels. Such innovations are pursued by the civil society, scientists and entrepreneurs who sense pressing issues and envisage opportunities despite higher costs than the available alternatives, opposition of the r ested interests and high risk of failures. Similar impediments are encountered in the low-carbon technologies.

More recently, various benefits or low carbon technologies and off-grid systems are mentioned in literature but systematic cost-benefit assessments of these innovative energy sen-ices in comparison to the vested ones are rare. Herewith, a few examples are mentioned. A broader review can be found in the Additional file in Krozer (2019). The benefits of the innovative energy sen-ices can be divided into ones for the individual interests of producers and consumers, and for their collective interests. For individual energy producers, the illustrative benefits are a spread of investment risks and deferring of costly infrastructure when off-grid applications are introduced. The collective producers’ benefits are lower price volatility and fewer losses when power sources are diversified, as well as lower costs of pollution controls and others. Consumers can benefit individually due to combustion-free energy consumption, and collectively when new businesses are vested and jobs created in then community. In effect, many off-grid applications of low carbon technologies emerged and multiplied despite ten to hundred times higher costs per energy unit compared to electricity on grid or small-scale generators based on fossil fuels. These applications grow quickly, measured by the capacity of batteries, because they enable flexile, autonomous, clean activities (REN21, 2017).

An innovator generates high income due to its temporary monopoly in sales of applications, given quality demands on energy market. Unless that innovator is entitled by authorities to keep its monopoly position due to patents and other regulations of the sort, its high income is challenged by Anns that developed alternatives and imitations at lower unit costs entailing a specialized business, such as the solar energy business. As the unit costs of applications decrease, entailing lower prices, the total business incomes fluctuate per year because the sales prices decrease whilst the sales volumes grow. The innovator often holds a high market share in the business due to its high income in the past because it can put efforts in the specialized manufacturing of adaptations and deliver low unit costs whilst the Anns that maximize profit or that are unsuccessful in then specializations experience loss of the market share; the few Anns that adapt their alternatives remain.

Herewith, the cost-reducing adaptations are illustrated for the low-carbon technologies in the USA duiing 2005-2015. based on the private data (Statista, 2019). Table 5 shows the annual consumption of wind and solar power in GWh and revenues due to that consumption in US$200J million during 2005-2015 in the USA. These data are used for estimation of the costs per unit energy in USS1005 per kWh per year and annual income of the energy sen-ices in US$,005 per year. The fluctuations in business income are show by comparison of two subsequent years. The cost-reducing adaptation in low-carbon technologies evolved fast. As the sales volume of solar power increased 45 tunes, the unit costs decreased seven times and the volume of wind power increased nearly 11 times whilst the unit costs decreased by about 30% according to the data from Statista. Although the business income oscillated from highly positive to negative, the business income throughout those ten years was positive and grew. The energy sen-ices based on solar power increased then income by US$,005 49 million annual average while the energy sen-ices based on wind power by USS,00,164 million. Apparently, firms put efforts into the cost-reducing adaptations despite those fluctuations of income. A similar situation can be obseived with respect to batteries, but good data over several years is not available. At present, batteries are costly but increasingly produced and used. As this production grows, the unit cost decrease and can meet the price on grid within a few decades (UCSUSA, 2019).

Italic: own estimate

Solar power (PV)

Wind power

GWh

US$ min

US$/kWh

Additional income of subsequent years*

GWh

US$ min

us$/

kWh

Additional income of subsequent years*

Share in the total renewable energy

2005

551

36

0.07

17,811

767

0.04

5%

2006

508

39

0 08

-5

26,589

1,169

0 04

-25

7%

2007

612

43

0.07

4

34,450

1,783

0 05

-268

10%

2008

S64

47

0.05

14

55,363

2,718

0.05

146

15%

2009

892

54

0.06

-6

73,886

2,965

0.04

663

18%

2010

1,212

69

0 06

4

94,652

3,465

0 04

334

22%

2011

1,818

125

0.07

-22

120,177

3,997

0 03

403

24%

2012

4,327

150

003

148

140,822

4,301

0 03

383

29%

2013

9,036

165

0.02

148

167,840

4,691

0.03

434

34%

2014

17,691

172

0.01

151

181,655

5,213

0.03

-135

37%

2015

24,893

189

001

54

190,719

5,767

0 03

-295

40%

Sum

61,853

1,053

490

1,086,153

36,069

1,640

*st= (cf-c ) • V, s is additional value a year, cf unit cost for ct =Rf/Vfand Vt is volume of electricity a year.

Prices of energy services increase whenever innovations that are beneficial for consumers are introduced. Such innovations are followed by the cost-reducing adaptations when production grows. The growing production enables innovators to generate value added and maintain a competitive position during a long period of time if they are able to allocate efforts towards those adaptations.

Indicators of valorizations

The total benefit due to the innovative energy sendees in economy is often indicated by the energy- intensity, i.e., GDP per unit of energy consumption. That benefit increased regarding the global growth of energy-intensity by 0.6% to 2.2% per year throughout the last half century (WEC, 2010). However, it should be noted that the GDP growth is not primarily driven by better energy consumption, as shown by the decoupling from the income growth and energy consumption but better allocation of labor, capital and knowledge, which are prime resource in all modem economies. Another indicator of those benefits is the electrification, measured by the electricity consumption and access to it. Table 6 shows those indicators for 2015 and growth duiing 1990-2015, divided into periods 1990-2004 and 2005-2015; all data are per capita.

The energy-intensity was globally US$2005 0.7 per kWh in 2015, which was 4 to 5 times higher in Philippines and Bangladesh than in Ethiopia, Russia and China and it grew in all countries, except Brazil. However, the energy-intensity grew slower than energy consumption in China, Indonesia, India and Bangladesh, which implies that energy is increasingly wasted in these large, growing economies; it is presumably related to large price subsidies for the energy consumption. Much carbon emission is caused by wasteful energy consumption. High fuel prices increased the energy-intensity in all countries, except Brazil and China, where costlier resources were even more wasted. Applications of low-carbon technologies contributes to these benefits as their growth correlates with the growth of energy intensity (the cross countries correlations were R: = 0.50. 0.41. and 0.81 during 1990—2015, 1990—2004 and 2005— 2015, respectively). The energy-intensity converged across countries, albeit slowly.

The average electricity consumption was 3 mWh globally, which was 173 times higher in the USA than the 75 kWh in Ethiopia. Electricity consumption is in line with the income growth (the cross countries correlations were R- = 0.74, 0.65 and 0.82 during 1990-2015, 1990-2004 and 2005-2015, respectively). Faster growth of the electricity consumption than energy consumption duiing those periods indicates high appreciation. The appreciation varied, however, because the growth of electricity consumption in China was about 300 times higher than in Russia. During high prices of fossil fuels, the electricity consumption in high income countries declined and the growth slowed down in all other countries except in Brazil, China and India, which suggests that the electricity consumption has a high sensitivity to prices. The growth of electricity consumption diverged across countries.

Access to electricity was globally about 86%, but varied from 29% in Ethiopia to 100% in many countries. It grew in all countries except high-income ones and Russia. Higher income enlarged that access (the cross-countries correlations are high) but higher prices of fossil fuels impeded it. The growth of access to electricity also diverged.

Energy sendees provide benefits to economies in nearly all countries. In particular, the electricity consumption is highly appreciated in all countries. Higher benefits of energy and electricity consumption can be attained in the fast-growing economies when the energy consumption becomes less wasteful and higher value products are generated. The growth rates of energy consumption and electrification diverge.

Emerging markets

What markets for low carbon technologies can be expected? This question is discussed based on the assumption that the trends during 1990-2015 continue duiing 2015-2040, along with substitution of fossil fuels for renewable energy. The IEA data are used for the extrapolation of those trends.

The real income per capita would grow globally about three times and the energy consumption one and a half times. Most mid-income countries would catch up and surpass the high-income ones; China and India would become the largest economies and energy consumers. The energy production would

Table 6. Energy intensity and electrification of consumption in USS,M5.

Total and annual average growth

Energy-intensity

Electricity consumption

Electrification

US$/kWh

Annual average growth Bold: Higher growth during high fuel prices

kWh/capita

Annual average growth Bold: Higher growth during high fuel prices

Access percent people

Electricity to energy growth

2015

1990-2015

1990-2004

2005-2015

2015

1990-2015

1990-2004

2005-2015

1990-2015

2005-2015

World

0.69

1.5%

1.3%

1.6%

3,147

1.6%

1.4%

2.0%

86%

2.7%

USA

0.65

1.8%

1.8%

1.9%

12,975

0.5%

1.0%

-0.3%

100%

1.20%

Japan

0 91

0.9%

-0.1%

2.3%

7,651

0.6%

1.5%

-0.6%

100%

11.7%

EU

1 02

1.8%

1.3%

2.4%

5,752

0.6%

1.4%

-0.5%

100%

1.3%

Russia

0.45

1.7%

1.1%

2.5%

6,666

0.0%

-1.1%

1.6%

100%

0.0%

Mexico

0.9S

1.0%

0.8%

1.3%

2,101

2.5%

3.5%

1.1%

98%

11.7%

Brazil

0.86

-0.3%

-0.2%

-0.3%

2,651

2.5%

2.1%

3.0%

100%

1.3%

China

0 51

4.5%

5.3%

3.4%

4,081

8.9%

8.5%

9.6%

100%

1.9%

Indonesia

0 99

1.4%

0.1%

3.2%

851

7.0%

8.0%

5.5%

98%

3.3%

Philippines

1.19

2.0%

1.2%

3.2%

713

2.9%

3.5%

2.0%

91%

17.9%

India

0.73

2.2%

2.1%

2.3%

846

4.6%

3.7%

5.9%

81%

1.8%

Nigeria

0.67

2.4%

2.0%

3.1%

146

2.8%

3.2%

2.2%

60%

6.8%

Pakistan

0 84

0.9%

0 1%

2.0%

460

2.3%

3.2%

1 0%

100%

2.8%

Bangladesh

1.17

0.9%

0.7%

1.2%

328

8.2%

9.1%

6.9%

63%

3.1%

Ethiopia

0.26

3.3%

0.4%

7.5%

75

5.0%

2.4%

8.6%

29%

29.1%

better balance consumption in all countries, except Japan, which would need more import. Electricity would become the largest global energy sen-ice measured by energy units, particularly large in China, India and the EU, though smaller in low-income countries. The composition of energy resources would change dramatically. Fossil fuels would decline globally by half. They would decline close to nil in China. India and Ethiopia but triple in Bangladesh, double in Pakistan and grow in Indonesia, Philippines, Nigeria and Mexico. All renewable energy would grow globally about 100 tunes but hardly at all in Russia and Mexico and its share in all energy consumption would decline in low-income countries, though gr ow in total. Within renewable energy, the applications of low carbon technologies would grow globally by a factor of 792. These would grow by a factor of 2794 in China, 589 in India, 15 in the EU and 14 in Russia, contrary to low-income countries, where the applications would remain scarce. CO, emissions would decline globally to 46% of the 2015 level. Whilst China, India and Ethiopia would become nearly emission-free due to low-carbon technologies and the EU reduce to 23% of its 2015 level, the CO, emissions would increase in other mid-income and low-income countries. The divergence in the growth of CO, emissions poses a challenge to the Paris Agreement on climate change.

Another issue is whether those large applications of low-carbon technologies are feasible. From the economic perspective there is reason for optimism because the unit costs decrease roughly 1.5 times per doubling of markets. If this continues, all available low-carbon technologies become cheaper than coal in energy production, whose costs would also decrease. Cheaper technologies attract investments. Scarce space can be an impediment in the populated countries but designs can resolve this issue. For instance, all Chinese consumption of 10,386 million ton oil equivalent in 2040, i.e., 1.2 * 1014 kWh, can be covered with the available solar technologies of 18% capture of irradiation and low average irradiation of 1.200 kW/m2/year on about 100,000 km1, which means on 0.1% of the Chinese laud surface or on 4% of its urban surface (Demograpliia, 2019). The spatial allocation needs innovative solutions but if cities are adequately designed and developed most solar technologies can be integrated in buildings and roads, which are already proven technologies though still costly.

It should also be expected that the global energy market would be highly diverged by 2040. While the real incomes converge across countries, the energy consumption and resource composition diverge because fossil fuels are replaced by renewable energy in a few countries, but not in others. In addition, it should be expected that the power sen-ices on-grid and off-grid become by far the largest energy sen-ices measured by volume and value because the electricity consumption expands in nearly all countries and low-income countries catch up. Another expectation is that CO, emissions are substantially reduced due to fast growth of low carbon technologies in a few countries, but they increase in most mid- and low- income countries. This can cause a conflict of interests in the climate change policies. Higher global real income and energy intensity imply the valorization of energy sen-ices across countries. Lower fossil fuel consumption in a few countries due to fast growth of low-carbon technologies enhances low-carbon economies but the composition of energy resources diverges.

 
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