When See Solar?

Paul Krugman:

Progress in solar panels has been so dramatic and sustained that … prices adjusted for inflation [have been] falling around 7 percent a year. … If the downward trend continues — and if anything it seems to be accelerating — we’re just a few years from the point at which electricity from solar panels becomes cheaper than electricity generated by burning coal. And if we priced coal-fired power right, taking into account the huge health and other costs it imposes, it’s likely that we would already have passed that tipping point.

Joshua Gans responds:

According to Ramez Naam in Scientific American, the cost of solar photovoltaic models has been falling at an exponential rate since 1980. Installation costs have been falling too. So much so, in fact, that in a decade, solar would outperform the average kilowatt energy cost in the US. A decade after that and it will be approaching the cheap baseload fuels.

Tyler Cowen responds:

If a solar breakthrough is now likely, in which market prices do we see it reflected? It is true that fossil fuel prices took a steep tumble in the last few months, but I’ve never heard anyone suggest that price plunge had to do with a forthcoming solar revolution. … Those shale oil and natural gas discoveries … will further raise the bar against solar power. … Is there a bubble in the stock prices of solar power specialists?  What’s the total market cap of companies selling solar panels?  Or is there a bubble in the share prices of companies which supply cheap and reliable power storage?  The evidence on these points seems weak to say the least.  Keep in mind that other countries can make the switch even if you think political conspiracy will prevent it here. …Is there any reason, based in industry-wide market prices, to be optimistic about the near-term or even medium-term future of solar power?  I don’t see it.

(I posted on this in March.)

When solar is cheaper than coal or oil, that will include the cost of supporting infrastructure, such as building power plants. But since we’ll still have lots of old plants and infrastructure, we’ll still use a lot of carbon. And since places vary in the relative attractiveness of using carbon or solar power, we may even build more carbon plants after that point. Solar getting cheaper than carbon would show up in a gradual fall in global investment in coal infrastructure relative to an alternative still-full-carbon history, and a gradual rise in investment in solar infrastructure.

A transition driven by price lines crossing in twenty years would have very little impact on current stock or commodity prices. At ordinary discount rates used for business investment, returns after twenty years hardly matter. And changing tech and business conditions make today’s top solar firms a poor vehicle for investing in a transition twenty years hence. Of course current stock prices would probably show signs of a price-line crossing if investors expected it to happen in five years. So that scenario can probably be excluded.

This is one of the reasons we could really use long term prediction markets, to more clearly see our distant future. They only require that enough folk care enough about that future to pay to create and subsidize such markets. Alas, few care.

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  • David E

    I question the value of prediction markets for a time horizon much more than a year, in some cases less. To take a recent example, look at the Republican primary field. Six months ago the Intrade results were not that valuable. Now, I expect them to turn out to be quite accurate. To take another example, stock price is a much better predictor of what you can sell the stock for in 6 months than the value of the company in a couple years.

  • DW

    Wrong link to your old post.

    Here’s the correction:

  • David, forecasts are always less accurate further back in time. Should we only ever forecast an event immediately before it happens? Also, Intrade puts an unnecessary extra tax on long term bets.

    DW, thanks fixed.

    • Albert Ling

      I think the longer the time-frame of the bet, the larger the subsidy should be. It’s reasonable to assume that longer-term bets are more illiquid and thus less desirable to wager on (you demand a greater “edge” to compensate for this lack of liquidity), so greater bid/ask spreads and less trades.

      Robin, what would you wager to be the top 3 global energy sources 50 years from now?

  • tribsantos

    I’ve been thinking about this for a while, and this post is a good opportunity to bring the idea. Have you ever thought about launching a campaign around something like “if you care, bet”?
    My idea is not make a campaign to prove that people don’t really believe what they claim to believe, otherwise they would bet. I think there’s plenty of that around. The hypocriticals get exposed but, because they are hypocriticals, they pretend they haven’t, and everything stays the same.
    I mean a “Bono Vox-We are the world” campaign to engage the small percentage that actually cares about having the best available predictions. You could search for a large donor that would run a prediction market with lower transaction costs than Intrade (or that could finance Intrade so it would lower its costs). You could encourage people to just bet on something they consider important, explaining that that bet, even if it’s wrong, attracts better informed individuals and contributes to the public good.
    Campaigns work, they are just so often focused on the wrong problems. Other times, campaigns work so well that they make a huge problem become minor, and seem silly in comparison. If somehow we could turn into common sense the idea that betting is a selfless act of caring, instead of an act of cynicism, we would have a lot of better predictions.
    I am telling you this because I think nobody else is in a better position to launch such a campaign.

  • billb

    The problem with long term prediction markets is that they don’t pay dividends or otherwise appreciate in a regular way. Betting money on an event 20 years down the road makes no sense if that money will be tied up doing essentially nothing in the mean time. Investors demand returns. Easy bets (e.g., the US will exist in 20 years) will start and stay near their true odds giving investors no incentive to bet. Long shots will stay long, and bets that could either be a push or at most double your money really suck when your money could be consistently earning 3% or 4% in traditional investments over 20 years you’re waiting for your long term bet to pay off.

    You want people who have knowledge to come and bet on propositions about the future, but you’re not willing to pay them for the use of their money in the meantime. Given that prices are usually supposed to represent the probability of the event directly and are therefore bounded above, the room for appreciation is small. Investors are likely to shy away from investments that don’t have large potential upsides. It seems to me that only in the case where insiders possess significant hidden contrary information do they have any incentive to try to make some money on a bet. Otherwise, you’re just operating on uniformed sentiment, which isn’t what you want for the market to be predictive.

    • You can bet stocks or any other assets that appreciate. You money can be doing work, in addition to supporting your bet.

      • billb

        I’m not sure I understand your point. Are you saying that there are prediction markets that accept pledges of stock or other assets in order to buy contracts? If that’s true, then why won’t they just loan me the money (at 0 interest) to make my bets? If they won’t do it at 0 interest, then we’re back to my problem. What happens to my bet if the stock loses all its value in the 20 years we’re waiting?

        Or did you mean something else?

        Maybe you should make it clear: How can I make a long-term bet about a future event and have some hope that the money I bet will be working for me while the bet is pending?

      • Someone from the other side

        Generally, futures exchange value your collateral regularly (just think what they would do if someone had pledged PIIGS bonds before the crisis) and issue margin calls if it lost too much of its value. Just like they do if you need to add margin because the market moved against you.

      • You pay an exchange, they using the money to buy an asset like a stock index fund, then the winner gets that fund, or its final cash value, at the end.

  • Robert Koslover

    Even as prices fall, solar is still very expensive compared to fossil fuels and also only works when the sun is shining, which introduces serious power utilization and energy storage issues. Personally, I look forward to those issues being overcome at least in part by advances in ultra-capacitors. But meanwhile… Drill baby drill!

  • Eid

    Why should we think markets are an accurate predictor of all events?

    • They aren’t, and they won’t be for all events.

      Even for some very popular events, they won’t be good prediction markets unless there are a sizable number of participants.

  • The problem is that there is already an economic bubble built around fossil fuels.

    Fossil fuels have a value in the ground that reflects their extraction cost and the expected value of those fossil fuels if they are burned as fuel. However the atmosphere cannot withstand combustion of all of those fossil fuels without global warming causing catastrophic damage.

    Some of those fossil fuel reserves are not worth what they are valued at by the stock market because they can’t be burned, yet economically they are valued as if they can be burned.

    This is a bubble, but with trillions in inflated bubble asset valuation, that asset can be used to borrow a lot of money and it is someone else that will end up with nothing when the bubble pops.

    • @daedalus2u,

      1. How could we, in the future, verify that a fossil fuel bubble has been burst?

      2. In what year is this most likely to occur?

      3. What probability do you assign to it happening in that year?

    • Wonks Anonymous

      Not only can it be burned, Robert Laughlin assures us that from a geological perspective, it WILL be burned.

  • Michael Wengler

    I would expect long term prediction markets to behave close to identically to the stock market when predicting some 20-year-out business trend.

    First reason: why should the discount rate in a betting market be any lower (biased towards longer term payoffs) then in the stock market?

    Second reason: it would see if there was a material difference in prediction between the betting and stock markets there would be an arbitrage opportunity. And arbitrage is WAY easier to make money at than predicting the future correctly 20 years out.

  • majus

    I have two questions about solar: what are the capacity and the real cost when production is scaled up to terawatts?

    First, capacity: to replace other energy sources we’d have to blanket staggeringly huge swaths of the planet with solar collectors, the implication being that even if it the panels were free, the impact would be severe. And at least some of the technologies require rare earths which have a limited supply. Even if we wanted to build 50000 square miles of collectors, could we?

    As to real cost: if 50% of our energy generation depends on photovoltaics (an arbitrary number), what impact does that have in terms of pollution from building and then discarding them? Would measures to control pollution drive up costs to a degree that could make their use impractical?

    • Michael Wengler

      As to capacity and scalability, I do know that most houses in California can make the meter “turn backwards” just using part of their roofs for solar. So the area to be covered with PV is not necessarily any more than the area already covered by humans.

      I don’t know about disposal per se, but I do know design life is 25 years, with plenty of reason to think they will work with degraded efficiency somewhat longer than that. So at least in volume per year of “emissions” PV is gigantically below combustion based energy sources.

  • Pingback: Why solar panel prices are falling — Marginal Revolution()

  • Dan Hanson

    My guess is that predictions made for 20 years out on anything that isn’t obviously going to happen will have a success rate not much different than a coin flip would generate.

    Can anyone point to someone who made a statistically significant series of predictions 20 years ago that have come true today, for events which were non-obvious or controversial at the time?

  • ezra abrams

    The “market” doesn’t price in health and environmental costs;
    health costs are clearly an externality – the coal plant electricity in OHIO doesn’t pay for athsma in NY.
    Also, we don’t properly account for military costs to keep the straights of hormuz open (to put it another way, if Iraq and Libya didn’t have oil, do you think we would be spending hundreds of millions of dollars there ?)
    I admit that there are load mismatch issues (sun in AZ doesn’t shine during midnite in NY in Dec).
    What is most curious is that “red” states have the most wind and solar – if the GOP could spend 10% on solar/wind etc that they spend on tax breaks for goldman sachs, AZ and MT and other red states would be the new persian gulf.
    Gotta admire the GOP’s adherence to values
    (nuclear of course is the worst; without the explicit insurance guarantee of the US Gov’t, every nuclear plant would shut down tomorrow)

    PS: anyone who uses the word “exponential” is usually not to be trusted, unless they are a physicist or physical chemist