Despite the intriguing title this essay is not going to deal with thermodynamic definitions and neither with speculative Free Energy generators, but with the actual possibility of exponential decline in solar energy production costs in line with a parallel decline in energy storage costs to near zero values. Looking at modern economy we see a complex interdependent system bound in a matrix of positive and negative feedbacks. In many cases, product demand is driving a healthy competition, making manufacturers and supplies to decrease costs, streamline and innovate, consistently bringing cheaper and better products to consumers. Notably, the price of economically sustainable products is not only the function of demand and supply, but also of manufacturing expenditures. Interestingly, the costs of crude materials and the costs of processing can be roughly defined by the amount of energy invested. Here, we would ask whether one can analyze a long-term trend in manufacturing expenditures and essentially market prices of products, based on long-term energy cost projections.
Typically, when a person is aiming to buy a product, he takes a look into his wallet or his digital account and decides whether he is ready to pay the price. In case the price is too expensive, the competitive free market allows one to look for a cheaper alternative, whereas in non-competitive markets there is a fixed price. The cost of a product is thus a game of demand and supply - a fact which is known to any person, who has studied the basics of micro-economy. This is though not the whole picture, as market cost of a product is ought to be greater than its production cost in order to create profit for manufacturer and thus be economically sustainable. In many cases, product demand is driving a healthy supply competition, making manufacturers and wholesalers to decrease costs, streamline and innovate, consistently bringing cheaper and better products to consumers. Rarely, however, it happens that certain products become too expensive for an average citizen (what we call a market failure), but states take action to either supply those via the government apparatus or provide subsidies to keep such products within the reach of their citizens. In such cases, monopolization is usually taking place, creating price stability but also resulting market stagnation, which is in turn suppressing innovation. The bottom line of this basic micro-economic discussion is that the price of economically sustainable products is not only the function of demand and supply, but also of manufacturing expenditures.
Without going too deep into the maze of financial theories, a product manufacturing expenditure or carrying value can be defined as gross expenditure or cost of goods sold (COGS) - including the cost of crude materials, processing costs and human labor expenses, whereas in case of services the gross expenditure typically sums up human labor expenses and processing costs. The product manufacturing expenditure is thus excluding net profit, taxation, funding expenses, capital and management expenses and marketing expenses. At this point, lets take an example of a plastic toy, which is produced somewhere in East Asia and delivered to the Western World: first there are crude material costs, labor costs and processing costs to produce this toy; then the toy is sold to a wholesale distributor at a price according to demand-supply balance but above carrying value (with the price gap covering net profit, taxation, funding, capital and management expenses and marketing); the distributor then ships the toy to a secondary distributor or directly to customers at a higher price, which is set according to a slightly different supply-demand ratio. If a toy manufacturer is aiming to earn money and be financially sustainable, he must profit and thus his gross profit would be the gap between carrying value and demand-supply balance pricing. Now, let's make a break and ask how can a manufacturer increase his net profit. There are of course financial options like decreasing management costs, reducing financing expenditure or improving marketing efficiency. However, for large volumes the most effective mean is to bring down the product carrying value in order to increase gross profit, since operational, financing and taxation are mostly derivative to the carrying value. Furthermore, the digital revolution is anyway decreasing operational expenses in the long-run with a growing role of computers in management and financing.
There are several aspects to consider, when bringing the product carrying value (gross expenditure) down: overall, the options are reducing the costs of human labor, reducing the costs of crude materials or reducing the costs of processing. Interestingly, the costs of crude materials and the costs of processing can be roughly defined by the amount of energy invested - the mining and pre-processing of crude materials, the electricity or fuel-driven production process and post-production transportation and storage. Energy prices are therefore forming the baseline for pricing the manufactured products in line with human labor costs. A shift in energy prices is hence affecting the baseline pricing of products, despite the dominant role of demand-supply balance. It is not only an issue of physical products - even services have become heavily dependent on baseline energy costs, with data storage for example consuming large amounts of electricity for operation and cooling. Moreover, energy costs and computing abilities have so far limited the exchange of humans by robots in most manufacturing locations. However, computing abilities of robots are now reaching a crucial threshold in many areas and efficient energy use could make those machines a preferred substitute for human labor. At this point, let's bear in mind the global price spike during the 2008 commodity crisis and try to project whether a change in the opposite direction is also feasible.
Figure 1. The trend of solar utility PV costs (utility scale plants are estimated to compose 40% of all PV electricity production) and the relative share PV in global electricity production according to International Energy Administration's Hi-Ren 2014 scenario.
The conclusion from the above thought experiment is that it is plausible to assume that global economy may be driven into a long-term energy cost decline. The reason is simple - the renewable power technology is gaining dominance and its costs are radically decreasing, in line with the coming revolution in the energy storage business. Furthermore, solar and energy storage sectors have so far presented a fair competitive market, with little threat of monopolization. This is of course not a total solution for global energy needs, but solar energy combined with cheap energy storage, including dominance of electric transport systems could potentially bring down energy prices by a significant margin. Even more conservative models, like the IEA Hi-Ren 2014 scenario, project a significant "take-over" by the solar power technology - to reach 16% of global electricity production by 2050 at a cost of almost 0.5$/Wh. Perhaps we cannot speak of a truly "free energy" in this scenario, but the source of most energy on Earth is a huge thermonuclear reactor, burning hydrogen in the core of our sun, which notably works for free. The sun produces sufficient energy quantities to supply the needs of modern human civilization and much more, while technology now allows us to directly trap this energy for utilization. The rapid revolution in the power market is therefore positioned to radically alter the economy of individual states as well as the economy of the entire world, with many business sectors potentially facing a grave threat from such a transition. This transition to cheaper energy, which is basically almost at the same weight as "free energy", requires rethinking strategy in most existing business models. Lamedh Energy takes a profound consideration of possible implications for such a transition, including strategic planning for the scenarios of long-term deflation and rapid decline of certain industries.