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Electricity is an odd thing. Modern life depends on a constant supply of the stuff, but it’s almost impossible to store. We can make vast amounts of it, send it across the country into every home – but, unlike any other commodity, we can’t put it aside for later use. We can hold water in a reservoir, petrol in a tank, food in a freezer, but electricity is all flow and no stock. This is an inconvenience, to say the least.

The main way around this limitation is the battery – especially if you want to use electricity on the move. Advanced batteries that are light enough and fast enough to use in electric cars are expensive, which is why we’re still stuck with the internal combustion engine – that noisy, dirty and dangerous beast.

However, the story of the industrial age is one of products coming down in price as a result of technological innovation and economies-of-scale. According to Katie Fehrenbacker of the Gigaom website, this process is set to transform the economics of battery production:

“This week Tesla revealed more details about its plans to build a massive — the largest of its kind in the world — battery factory in the U.S…. the company said that by 2020 the battery cell output of the factory would be 35 gigawatt hours per year…”

Tesla is a successful manufacturer of luxury electric cars. By the end of the decade the company expects to sell half a million of them every year. The slight catch is that the world doesn’t currently make enough advanced batteries to equip that many vehicles – hence Tesla’s need to build its own manufacturing capacity:

“Let’s put these production numbers in perspective… battery factories in the world produced close to 27 gigawatt hours of advanced batteries… in 2012. The bulk of those batteries — 23 gigawatt hours — were for consumer electronics, like our laptops and cell phones.” 

Therefore Tesla is planning to more than double global production with just one factory. If other manufacturers – especially the Chinese – get in on the act, then the potential for economies-of-scale are vast (even without further breakthroughs in the underlying technology).

Thus, before long, we may have the ability to store and release large amounts of electricity in a way that is affordable and available to ordinary consumers. The implications are profound. For a start, there’ll be a transformation in the economics and practicality of electric vehicles. But we’ll also see new opportunities open up for the generation of electricity:

“Lower-cost lithium-ion batteries could make clean energy much more viable. Pairing battery farms with wind and solar panel farms would enable clean power to store energy when the wind stops blowing and the sun goes down.”

Solar panels are a present-day example of how economies-of-scale can bring prices tumbling down. Cheaper batteries and solar panels would be a potent combination, enabling energy consumers to own and control their own electricity supply – a prospect that must fill the existing energy suppliers with dread.

There are a number of lessons here for government policy.

Firstly, that there’s a case for tax breaks and subsidies to help new technologies establish a toe-hold in the market. With a customer-base, companies like Tesla can then put in the investment required to bring prices down.

Secondly, in deciding whether to provide upfront public support for a new technology we need an assessment of its potential for cost reduction. The key question is whether it is capable of being manufactured at scale as a commodified, pre-fabricated product in a diverse and competitive sector. If it’s not, then we shouldn’t expect to see cost reductions and thus shouldn’t support it in the first place.

Thirdly, new technology needs early adopters – that is to say people who provide a market for products when they’re still expensive and experimental. Even with government help, Tesla wouldn’t have achieved what it has without customers willing and able to buy its (so far) pricey cars. To put it crudely, innovation requires rich people – and any balanced discussion about inequality should take this into account.

17 comments for: Government should provide support for new energy technologies, but not all of them

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