4 Costs of Free Electricity

Written by David Simmons on . Posted in 5: Anatomy of Destruction, Books

Anatomy of Destruction
Chapter Four: Costs of Free Electricity

 

I have electricity.

I have never bought an ounce of coal, oil, gas, uranium, or any other fuel for it. My fuel costs are zero. The panels don’t have any moving parts to maintain or lubricate. Lubrication and maintenance costs are zero. Nothing wears out that might need to be repaired or replaced. My repair costs are zero. My capital set-asides for replacement of worn out parts are zero.

If you own a device that has any moving parts, you have to set aside money to replace them in order to break even. For example, when I was in the trucking business I knew motors would last about 250,000 miles before they would need a rebuild that costs $5,000. I set aside 2¢ for every mile into a fund. When the rebuild time came, I had the money in the fund to pay for it. People who run capital intensive businesses know that they incur repair costs over time, not at the instant everything breaks. I knew a lot of other truckers who didn’t set aside money. When rebuild time came they didn’t have the money, couldn’t afford to fix the trucks and couldn’t run them. They went out of business. A good businessman will determine set aside amounts for each wear item and set aside the appropriate amount. This is a true cost. Solar panels don’t wear so they don’t have set-aside costs.

Depreciation is the amount that must be set aside to replace the entire item when it is so worn out it is cheaper to replace than it than to repair it. (See footnote above for set-aside description.) The units don’t depreciate so these costs are also zero.

 

In only have a 2 KW system that covers about ¼ of my roof. I don’t need much because I designed my house in concert with the ecosystem to take advantage of natural (called “passive”) energy flows. In the winter, my south-facing windows keep the house warm so I don’t need heat (except on cloudy days, which are very rare in Tucson). My pool and spa both have thermal panels to heat them and don’t need any supplementary heat. (If the weather is cloudy I have to go without a Jacuzzi until the sun comes out. My pool is large enough it can stay warm several days without heat.) I live in a canyon with westerly winds constant all summer long. I built a system that allows the wind to blow through pads that a pump system keeps wet, cooling the house all summer long with evaporation. I only need AC in the very few days that are both hot and humid, during the monsoon season. This little system provides all he electricity I need.

 

Let’s add all that up. (I’ll wait if you want to get a calculator.) I get zero.

Each year these panels give me about 4,000 KWH of electricity.

Total cost per KWH exactly 0¢.

 

Why Don’t We Use Solar?

 

I wanted to explain how everything works so you can see there isn’t any magic. No advanced technology. No alien help. No help from God or any Great Spirit. It is very simple: the sun generates electricity, whether or not we use it. The semiconductor simply makes it usable. We make the semiconductor out of the most abundant and by far the cheapest material on earth. And we don’t even need very much of this raw material. The total amount of silicon in the semiconductors of my panels is only about 3 pounds, about the weight of a liter bottle of water. Consider that your house has perhaps 30,000 pounds of concrete in it (just about all homes built in the last hundred years have foundations made of concrete) and concrete is almost entirely silicon. If just 1/10000th of this silicon were on your roof in the proper configuration, you would have all the electricity you ever want, totally for free.

Sounds good. Why don’t we do it?

The answer is unique to the type of society we have. Our current societies have flows of value that distort the real costs and benefits of options in ways that make people who want to use solar pay massive artificial costs to the little pieces of paper with numbers on them (or tokens made of gold or silver in some societies) used as “money.” These artificial costs, called “capital costs” are not costs of anything valuable to humankind that is needed for solar. They are costs of replicating a flow of value that these societies naturally have.

These flows of value are entirely artificial. The only way to fully understand this is to realize that some societies do not have them, some societies have very tiny flows, some have larger flows, and some (the ones we live in) have extremely large flows. When you understand all of these options (the topic of Chapter Three) you will realize that these flows only exist in societies structured a certain way, as ours are. They are not natural costs of solar in any way. They are simply flows of value that the realities of current types of societies require people to replicate, in order for these societies to function.

Here in this appendix, I want to tell you two things. First, how do the systems work? Second, why don’t we use them in current systems? Much of this book is about where the value that makes solar and other non-destructive processes uneconomic comes from and why it flows as it does. Here I just want to tell you what the flows are and allow you to confirm for yourself that they exist:

We live in societies where the rich get richer without doing anything, without effort and without risk. (Again, don’t worry about why this happens yet. I explain this in the text. The only point is that it does happen.) There is a flow of value called the “risk-free returns” paid to money every year. This flow takes place at a rate called the “risk-free return rate.”

A flow of money is called “risk-free” is there is no chance of default or no chance the person who is supposed to pay will decide not to pay and you won’t get it. In the United States, the government guarantees almost all mortgage so if you make a mortgage loan to someone through these programs, you know you will be paid the interest and principle of the loan. If you want to find the current rate, look up the rate for FNMA or GNMA bonds. This is the rate that people who invest in these mortgages get. You can invest money in these bonds at the current rate. There is no chance you will not get paid back, with the full promised interest, so these investments are free risk. You don’t have to do anything to get this money, so they are also free of effort. (In fact, you could be dead. You would get the exact same return.)

The amount that the mortgage holder pays is higher, exactly 5/8 of 1% higher in the United States. Of this extra, 1/8 of 1% goes to pay paperwork processing costs. This goes to the company that sends out the mortgage coupons, sends out late notices, processes the money and sends it through to the people who get it, and deals with problems and repossession if necessary. The other ½ of 1% goes into a “loss reserve fund” to cover potential loan losses. If someone doesn’t pay on time, they still have to pay bond-holders on time and they use the money in the fund to pay these amounts, until they can repossess the property and sell it to recover the amount owed. When the United States government set up this system in 1954, loss rates had never been greater than ½ of 1% times total outstanding debt, so the government thought it never would and this insurance premium would cover all losses. This happened for many years and the government decided to get out of the mortgage business and sold the companies that put the deals together as “Fannie Mae” and “Freddie Mac.” These companies put together the loans, sold the bonds, collected the loss reserve amounts, and paid out losses out of the reserve fund. Any money left over was profits and went to the shareholders. This worked fine until 2008 when losses soared from their typical ¼ of 1% per year to more than 10% per year. The government had to take over the mortgage companies and pay the losses themselves. They had to do this because they had essentially cosigned for the loans. The companies both went bankrupt and the government had to take over all their debts. As I write this, the government is responsible for these debts, roughly $20,000,000,000,000 ($20 trillion) in addition to its “regular” debt.

If the government doesn’t have the money to pay these obligations, it can and is obligated by law to print the money to pay them. This is what makes these obligations risk free: There is no chance of default. As long as there is a United States government, the rich will get richer without risk or effort. (Don’t think this is a capitalist thing. Communist countries do the exact same thing.)

The exact rate changes from time to time, but for most of my life it has been about 10%, so I want to use this figure for the sake of example. Now I will give you the short answer, and long answer to the above question: Why don’t we use solar?

Quick answer: Solar panels generate at 2% return on investment. Money generates a 10% return, or five times as much. If you want to borrow money to make the investment, you have to pay five times more as interest than you get from the panels in the form of free electricity. You lose massive amounts of money. If you use your own money, you have to give up the 10% you would have collected as automatic, effort-free and risk-free returns. Giving up money is paying a cost. You give up 10% a year times the amount you could be collecting returns on, the invested amount in the panels. You only get a 2% return on the panels in the form of free electricity. So it costs you five times more each year to own the panels (in the form of lost free money you would have gotten) than the panels produce.

The solar electricity is not expensive. It is free. Nothing could be cheaper than free. But it is “uneconomic.” This is because of the flows of money that take place in the type of society we live in. Not because of any cost of anything valuable to humankind that has to be paid to make free solar energy usable.

 

The Long Version:

 

Seems impossible. It is free. Yet it is uneconomic? How can that be? Let’s look over the exact numbers to see why:

If you look on Ebay, you will see hundreds to thousands of solar systems for sale. The size of this worldwide market leads to a very narrow “spread” of prices, or a very small difference between the maximum and minimum prices of the panels. A lot of people are always looking for deals. If the offered price of a system is extremely low, people will bid it up. If the offered price on a system is higher than people know they can get a similar system for, they won’t bid and it won’t sell. The only systems that actually sell, therefore, are neither overpriced nor underpriced. The market makes sure prices stay in a very narrow range. The cost for a 2kw turn-key system has been about $14,000 for several years. If you want it installed with an inverter, going through government for permits, taxes, inspection fees, and other bureaucratic costs, you will also have to pay local costs that depend on labor rates. In most places in the United States, this will add another $6,000 to the system, for a total investment of $20,000, right at $10 per watt of capacity.

My system produces just over 4,000 KWH per year. Where I live, the electricity costs exactly 10¢ per KWH, so I get slightly more than $400 worth of electricity every year from the system. It required an investment of $20,000, so I get a return of 2% on the investment. You can do the same thing. I get a 2% return. You can get a 2% return if you want. Anyone can.

Why don’t people do this?

There is a very simple reason. We live in societies that have mechanical flows of value that make the rich richer at a certain rate. One such flow of value is called the “risk-free return rate.” This is the rate at which people can get richer without any effort, any work, any skills, or any risk. The exact risk-free rate varies over time, but for most of my life it has averaged about 10% so I want to use this figure for the sake of examples. (The above footnote shows you how to check the rate at the current time. It has never been below 4 %..)

So here’s your decision. You know you can get a 2% return investing in solar. Anyone can. This return is not risk-free of course. Your home may be hit by a hurricane that rips the roof apart or hit by a meteor that destroys it. It is not entirely without effort. (At the very least, you have to watch the wiring to make sure the birds haven’t chewed through the insulation on the wires, for example). If the risk-free rate is 10%, you can get five times the return on investment without risk and effort by simply choosing not to invest in solar. Just keep the money. Put it in a government backed mortgage security and collect free money, without doing anything.

Even superficially, “not-solar” has a big advantage over solar. But actually the advantage of “not solar” is much larger than it appears because of compounding. The risk-free return does something that solar return could never do: It grows at an exponential rate. Let’s consider what happens over an average working life of 50 years if you go with solar or choose to simply sit back and collect free money. If you go with solar, you will get $400 worth of free electricity every year for fifty years, a total of $20,000 in value, as returns on your investment. You will still have the panels, which are still worth the same amount (you don’t have to take them down; they add $20,000 to the value of your home). So if you invest in panels, you essentially get $20,000 worth of free electricity, and then get every dime you invested back at the end of this period.

To calculate this, use the function future value in a spreadsheet. Put in 10% for the rate, 50 for the time in years, 0 for the payment because you aren’t paying anything into or out of the account except interest, and $20,000 for the present value or starting investment. This leads to a formula =-FV(10%,50,0,20000). You calculate this and should get $2,347,817. (Calculations are quite complex and some computers do them differently leading to slightly different end figures. This is from Excel.)

Now say you agree not to invest in solar. You put the money into government insured mortgages at 10%. The first year you get $2,000. But the second year you get interest on the principle and interest on the interest. Then you get interest on the interest plus interest on the interest, and then interest on the interest on the interest on the interest. This kind of growth is called “exponential” and is the same rate that the nuclear reactions called “explosions” take place. The money grows at a fantastic rate. After 50 years you wind up with an amazing $2,347,817. Compare this to the (pathetic) $40,000 you would have wound up with ($20,000 in panels and $20,000 in electricity) if you had invested in the panels. You wind up with more than 70 times more by choosing to not invest in solar and not generate free electricity than if you had chosen solar.

 

What If We Had A Society That Worked Differently?

 

In current systems, the rich get richer at a very, very, very rapid rate. In 2010, about $40,000,000,000,000 ($40 trillion) flowed to money as risk-free returns. You don’t have to do anything to get this money. You don’t even have to take on risk. You get paid for having something, not doing something.

Chapter Three explains that we can make mechanical changes in our societies that alter the rate at which the rich get richer. By adjusting a variable called the “price/rent ratio” we can cause some part of the money that had gone to make the rich richer to an entity I call the “community of humankind,” to use to meet the needs of the human race. If we cause this to happen, the amounts paid per dollar of existing wealth will fall. They get less free money for each dollar they already have, so their rate of return will fall.

For example, we might choose a system where the rich still get richer without effort or risk, but they only get richer at an average rate of 4% a year, not the 10% they average in republics. Now the solar return is only half of the prevailing risk-free rate people can get not investing in solar. People who might have been willing to justify some loss on investment, but not the full 8%, may choose solar now.

Let’s say that we choose a system where the rich still get richer without effort or risk, but they only get richer at a rate of 2% a year. Now people are comparing a 2% return with solar with a 2% return for doing nothing and ignoring solar. Solar now breaks even. Many people will chose solar.

We can also choose a system where the rich get richer automatically at only 1% a year. If we have a system like this, people will compare a 1% free return doing nothing and collecting a return from an already-existing asset to double that return making an investment in a system that will produce free electricity forever. If people are self-interested, if they are greedy and selfish and want as much as they can get for themselves and the people they love, people will build solar.

I will also explain an entire range of options where the free wealth of society doesn’t go to the pieces of paper with numbers on them called “money” at all. It all goes to the community of humankind to help advance the interests of the human race as a whole. If we choose a system in this broad range, the rich will still be able to get richer. But not without taking on risk, putting out effort, or doing something. In a society like this, people have to compare a perpetual flow of electricity that they can produce totally free and sell for market rates, to nothing. Invest in solar and get free electricity. Don’t invest and get nothing. In this system, people will have very powerful incentives to invest in solar. They can get free money investing in solar.

They get free money investing in solar in any system. But in current systems, they get more free money if they don’t invest in solar.

Our current societies have flows of value that send more than $16 trillion a year to money as risk-free returns. Is this right or wrong? That is a value judgment. You must decide that for yourself. I am just comparing societies. If we choose this option for society, we must accept that people will not choose non-destructive technologies, even those that lead to totally free electricity.

 

The Rest of the Story

 

The flows of value that lead to destructive incentives come from markets.

In the United States, the government wants to appear to encourage solar so they set up a system to pay subsidies through a tricky mechanism that appears to encourage solar, but actually encourages coal. Here’s how it works: If I put up solar, my utility can buy the “capacity” from me. They don’t buy the panels or electricity: I still own them. They really own nothing but the right to say their utility produces electricity with solar. For each unit of solar capacity they add, utilities can get free pollution permits. They can use these permits to emit more pollution or sell them to people who want to build a destructive pant and wouldn’t ordinarily be allowed to because of the pollution. The more solar they can claim to have, the more they can pollute and the more money they can make selling pollution permits to others. So, of course, they want the maximum in capacity they can get. They therefore buy the capacity of anyone in their systems. This makes it appear that the utility (together with the government) is subsidizing solar. In fact, they are subsidizing coal.

Our governments could take steps to counteract these incentives. They could have true subsidies on solar, rather than the phony ones we have now. We could simply make it legal for people to invent and market products that would allow people to use solar in a way that competes with current utilities. We could stop subsidizing coal with the billions in depletion allowances, billions in subsidies on trains (coal is the huge majority of rail freight and over half of rail capacity goes to haul coal), exemptions from pollution requirements for natural gas fracking (it is totally legal for natural gas drillers to destroy entire public aquifers by “fracking” or cracking the rocks that hold water and gas separate, so the gas will leach out through the aquifer and the gas companies can collect it), or any of the thousands of other subsidies on destructive industries that current governments provide. If a tiny fraction of the money that went to subsidize destructive options in current systems went to build automated solar photoelectric roofing tile factories like the ones I will be describing in Chapter Eight, solar photoelectric roofing substrates would cost little more than our current roofing materials. The electricity is already there. All we have to do is collect it.

 

Individuals can build solar. But they can not sell it. If you check solar inverters you will see they all conform to a standard called UL-1741. Inverters made to this standard are unable to produce electricity unless connected to a complying electrical grid. They have electronic mechanisms that are designed to detect signals that the utilities send out. Without these signals, the inverter immediately shuts down and stops producing electricity. My system is UL-1741 compliant. (All systems must be. This is the only thing the utility checks for.) This means I can’t produce electricity unless I am hooked up to the grid and the power is on. If we have a power outage, my power goes off, even though the system is capable of providing all my electricity. I have tried and not been able to find a way to override the system, so I can’t produce electricity unless I am connected.

In the United States, all utilities are regulated monopolies. It is illegal to compete with them. If my system could produce electricity without a connection to the grid, it would be able to compete with them. To prevent competition, the power companies created this standard. The United States and every other country I have checked requires it. In these systems, it is not legal for people to produce electricity privately and sell it in competition with utilities.

 

 

Why do governments subsidize destruction and not subsidize non-destructive alternatives?

The answer is simple: we live in societies that depend on jobs and “activity” to function. Unemployment destroys these societies. These societies need jobs. Destruction provides work. If we use destructive energy systems, we have to employ millions of people worldwide to dig up and transport an endless stream of fuels to the furnaces to provide our energy over time. We need to employ millions more to make the equipment to move the fuels, millions more still to make the steel for this equipment, millions more to extract additional coal to make the additional steel we need for the additional equipment to mine the additional coal. The endless use of destructive processes creates ever more jobs as people have to work more and harder each year to find and exploit the increasingly scarce resources. More work means more incomes, more spending, more demand, more production, more profits, more investment returns, more tax returns, and a better-functioning society.

We could get all our energy for free from the sun with no destruction at all. But the non-destructive system doesn’t create the things these societies need more than almost anything else: jobs. No one has to extract sunlight from underground mines, so if we used solar we would lose almost all of our current mining jobs. No one has to run trains to haul sunlight to our roofs where it can generate electricity, so if we used solar we would lose roughly half of all transport jobs in the world today (more than half of all train traffic is coal; add in oil and gas transport, which has facilities that only transport these items, and roughly half of everything transported is fossil fuels). Photoelectric systems don’t have any moving parts to lubricate or wear so they don’t need armies of people working full time to keep them in repair, as gas-fired and coal-fired plants do. Solar photoelectric panels work on a sub-atomic level that doesn’t wear in use, so if we used this system we wouldn’t have to build and rebuild, over and over again, to keep producing energy. Build the panels once (in factories that are almost totally automated and require virtually no labor). Set them in the sun. That’s it.

Imagine the catastrophic effects on our systems if we were to start using this free energy. At this time, more than 100 million people worldwide have jobs directly related to fossil fuel use. If we used solar, these people would lose their jobs and incomes. More than a billion people have jobs indirectly related to fossil fuel use. They would lose their incomes also. They would stop spending and “demand” (the amount they can afford, not the amount they need to stay alive) collapses. Businesses that sell other things can’t sell anymore and lay off nearly everyone. Now nearly everyone has no jobs and nothing to spend. We can produce energy for almost nothing. But no one has anything to spend so it really doesn’t matter that it doesn’t cost anything to produce energy anymore. Our systems won’t be able to function.

The people in governments know this. They don’t want to appear to favor destruction, but they know we need the jobs. So they say they want solar and other non-destructive technologies in their public speeches, but spend their time in back rooms encouraging the destructive options. Then they use tricks to try to convince us that they aren’t doing this. They call programs that provide massive subsidies for coal, and thus increase the amount of pollution in the skies, the “Clear Skies Initiative.” Programs that pay people to destroy forests have names like the “Forest Preservation Act.”

During the campaigns, they tell us how much they care. We really want to believe them and delude ourselves that this time things will be different. But once in office they have to take care of business. They need to keep society functioning. The society they run needs destruction to function. Once in power they will work hard to give this society what it needs. It needs jobs. It needs destruction. They will make sure it gets it.

Later I will be talking about systems without the flows of value that induce destruction. In these societies, solar is literally free. Nothing can compete with free. No one would even consider coal. In current societies, solar does generate returns. They are often close to what people need to justify them. But they could be a lot closer. In fact, in many applications, solar would be cheaper than coal even with the fantastic artificial costs discussed above, if our governments just encouraged it. But as long as our societies work in ways that depend on jobs to function, we can’t expect them to really do anything like this. Republics need jobs. Republics have massive capital costs that make solar uneconomic. As long as we have republics, our governments will do everything in their power to prevent solar or any non-destructive option from gaining any traction.

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