In the US, after lagging the rest of the world for many years, utility scale PV has grown rapidly over the last few years. The initial impetus was the drop in PV panel prices in 2010-2011. This coincided with stimulus money from the recovery act and the combination jump started a utility scale solar business that had not previously existed. Investment reduced BOS costs significantly, especially for large scale utility scale projects. This coincided with a historically low interest rate environment. As utility scale PV became accepted as a low risk investment the cost of finance reduced significantly. This was a combination of two factors; low interest rates and a higher ratio of debt to equity. Historically utility scale energy projects have had a 50/50 debt to equity ratio, but some PV projects are now 80% debt to 20% equity. For the project developer this is a very high leverage which magnifies the return on his investment. Projects in Qatar have low 2% financing at 4 to 1 debt to equity ratio. This enables decent investment returns with an unsubsidized LCOE of $0.05/kWh.  The low financing and high leverage are not generally available and are a form of subsidy.

The US is not as supportive as Qatar, but the investment tax credit (ITC) and accelerated depreciation have enabled profitable projects with PPAs of $0.05/kWh. As well as reducing BOS costs and increasing efficiency with 1 axis tracking, large developers like SunEdison have been playing with leverage and may be in the 80% debt, 20% equity category for some projects. All of these developments show the rapid acceptance of utility scale PV as a safe investment. However, they have created the impression that PV prices are on a continuous trend of cost reduction that will continue indefinitely at the current rapid rate. This is highly unlikely. PV panel prices have not reduced significantly since 2011. The reduction in BOS costs cannot continue at its previous rate and the favorable financing regime has little room to reduce further. Optimists in the industry forecast that continuing improvements will make PV viable without the 30% ITC when it is reduced to 10% over the next five years.  This is unlikely, but acceptance will only come after prices have failed to decline, not before.

The establishment of the utility scale PV business is positive for StratoSolar. However, it seems likely that PV will have to actually encounter its problems with cost and intermittency before the need for a solution like StratoSolar will become accepted. To replace fossil fuels just for electricity generation PV will have to grow to over 10 times its current US yearly installations. To replace all fossil fuels is two or three times more again. PV without low cost storage can only replace less than half of current generation and even this will involve a lot of curtailment of PV generation which will increase the cost. Normally theses issues are brought up by opponents of alternative energy as an argument for eliminating it. Advocates take the attitude that problems will be solved and naysayers should be ignored. This attitude has proven successful so far. However, the issues are real and ignoring them will not solve the problems. StratoSolar, by solving PV problems is a savior of PV, not a naysayer. 

​By Edmund Kelly

A previous post discussed the 50 plus year trend in the decline in productivity growth from 3%/y to 1%/y. This post introduced a model that ascribed all productivity growth to the “goods producing” part of the economy. As the “goods producing” sectors become a smaller fraction of overall GDP, GDP growth declines. The model also shows it takes an additional declining productivity of the goods producing sector from 5% to 3.5% to replicate the observed declining growth rate.

A succeeding post showed how the non-goods service sector has become dominated by sophisticated rent seeking.

As the title of the first post indicates, I originally saw the overall decline in productivity as an aberration or a problem. After some deliberation I have come to the conclusion that declining GDP growth is not a sign of a problem, but an inevitable consequence of technological progress. 

Economists segregate GDP into services and other non-services categories, largely for accounting purposes. Services are any category that does not produce a physical output. However, many services are a part of the goods producing sector of the economy. When we buy a product we are paying for everything including sales and distribution and other business service expenses. The pure service sectors are government, healthcare, finance, education, and a few others.

Technology has made the goods producing part of the economy increasingly efficient. As time has passed fewer people are needed to make more goods, reducing the employment in the goods producing sector. This first happened in agriculture, where employment has gone from around 90% a century or so ago to less than 4% of all employment today. Goods producing has declined from 70% in 1945 to less than 35% today, and the trend continues unabated. By 2025 it will be less than 20%.

The improvement trend has slowed from 5% to 3.5% because not all parts of the goods sector are improving productivity at the same rate, so the slower improving sectors are reducing the overall rate of productivity improvement. Notable slow sectors are construction, where the small scale, regulatory impediments and cultural expectations have slowed overall productivity. The wholesale and retail sectors have suffered from low wages, reducing incentives to invest in improved productivity. Rent seeking patents and copyright have also contributed in certain industries. The overall increased consolidation of business along with lax government oversight of anti-trust and anti-competitive behavior has also contributed.

When historians examine economies before the industrial revolution, they break things into the 90% plus producers of everything, tied to the land and the 10% or so of elites in control who extract the small surplus of these low productivity agrarian economies. These old elites can be regarded as the government services sector of their time. In the modern US economy, the pure services sector runs on the surplus generated by the goods producing sector. The overall services sector has no productivity growth as measured by GDP. GDP growth only comes from the goods producing sector. Ultimately as technology continues to improve, the goods producing sector will shrink to a small percentage of the economy, much like agriculture has already shrunk and GDP growth will slow to very little. Economists have wrestled with the problem of measuring services sector productivity, as the output is impossible to quantify for most services. The answer is simply that services as a whole are a zero sum game with no measurable productivity. They compete for the surplus and “rent seekers” are the big winners. We need the equivalent of anti-trust and anti-competitive regulation for service sectors to control rent seeking. The classic remedy has been to allow rent seeking but tax high incomes. This is a blunt instrument.

Reducing GDP growth is an inevitable outcome, not a fundamental problem. Technology continues to advance, reducing the cost of goods and increasing the effectiveness of the services that are the vast majority of the economy. GDP just does not grow. The looming problem comes from behaving as if GDP growth will continue and basing borrowing on that assumption. For example, at the end of world war two the US had a large government debt. It never paid off that debt. Massive GDP growth made the debt as a percentage of GDP diminish to a small fraction of GDP over time. Today, GDP growth is slow and will get even slower over time. This means that increasing government debt will become an increasing drag on the economy and deficit spending which has become the norm based on growth expectations will have to reduce and eventually stop.

Also, its not just government debt that is a problem. Overall US debt, over two thirds of which is in households, business and the financial sector will not be able to rely on increasing GDP as an engine of debt reduction. Given that total US debt is about 350% of GDP, deleveraging is inevitable as GDP growth declines. Much of this deleveraging will likely involve debt write offs in some future financial crisis. The financial system will have to adapt to a low debt, low leverage world. 

This post and the last two started from an attempt to quantify the effect of the declining productivity of energy production on the overall US economy. While energy is a contributor to declining growth, it is clear the US economy has far bigger immediate issues. This reinforces the perspective that the biggest problem with energy is the longer term problem of CO2 emissions and the growing evidence of their influence on climate change. The long term costs of dealing with the negative consequences of climate change will ultimately lead to a dramatic and perhaps existential threat to the economy. 

By Edmund Kelly