In this revision presentation I take students through a suggested for an answer to a past paper question on the economics of renewable energy. There are four key skills - knowledge, application, analysis and evaluation and my presentation displays these as we progress through the question.

1. AS Micro: Data Response Question on
Renewable Energy / Government
Intervention (EdExcel) May 2014

4. Knowledge Application
Analysis Evaluation

5. Explain two likely reasons why the UK government has a target of ‘generating 20%
of the nation’s energy from renewable sources by 2020’ (Extract 1, line 10). (6)
Renewable resources are commodities such as solar energy, oxygen, biomass,
fish stocks or forestry
1. Increasing the supply of energy from renewable sources is motivated by the
macroeconomic aim of achieving more environmentally sustainable growth,
Extract 1 mentions that tidal power would be carbon neutral in comparison to
the use of fossil fuels that create carbon emissions and market failure.
2. Another long term aim of increasing output from renewable sources is to
diversify energy supply and make the UK less reliant in imported oil, coal and
gas. If the renewable sector can grow sufficiently large, it will be able to
exploit economies of scale and therefore bring down the unit cost of energy
for consumers. This will help to achieve another government aim, namely a
more equitable distribution of income and wealth.
Knowledge Application
Analysis Evaluation

6. Explain how ‘funding the huge £34 billion cost of the scheme’ could proceed
without a UK government subsidy (Extract 1, lines 4 and 5). (4)
A subsidy is a government payment that provides a financial incentive for
producers to invest and supply in a particular industry.
The Severn Barrage scheme – according to the extract – will not require a subsidy.
This is because the UK government is hoping to attract inward investment from
overseas via capital spending from foreign energy companies. This inward FDI,
together with higher retail prices for energy paid directly by customers is designed
to provide the necessary revenue over the lifetime of the project.
Knowledge Application
Analysis Evaluation

7. Examine the possible impact on the production possibility frontier for the UK
economy if the Severn Estuary tidal barrage is constructed. Illustrate your answer
with an appropriate diagram (10)
A PPF shows the output combinations of two goods or services attainable when
all factor resources are fully and efficiently employed.
If the tidal barrage is constructed, extract 1 tells us that the project will create
over 30,000 new local jobs together with new road and rail links and new
factories to build the turbines. This investment is an increase in the supply of
factor inputs available to the renewable energy industry and will increase the
productive capacity of the sector, leading to an outward shift of the production
possibility frontier. My analysis diagram shows an outward shift of the PPF for
renewables but with no change in the supply potential of non-renewable
supplies. This analysis assumes that factor inputs are occupationally mobile
between the two industries. In reality, there may be a loss of efficiency from
switching them because some of the labour and capital may not be equally
productive between renewables and non-renewables.
Knowledge Application
Analysis Evaluation

8. Examine the possible impact on the production possibility frontier for the UK
economy if the Severn Estuary tidal barrage is constructed. Illustrate your answer
with an appropriate diagram (10)
Output Energy
from Non-
Renewables
Output of Renewable Energy
NR1
NR2
R1
A
B
C
R2 R3

9. Examine the possible impact on the production possibility frontier for the UK
economy if the Severn Estuary tidal barrage is constructed. Illustrate your answer
with an appropriate diagram (10)
My analysis assumes that the new jobs and other factor resources used in building
and running the Severn Tidal Barrage are additional inputs. This may not be the
case, for example if the majority of new jobs are for local people who are
unemployed and available to work, the project might simply lead to a decrease in
the amount of spare capacity in the UK energy industry and this would be shown by
a movement from within the PPF towards the boundary.
The effect on the PPF for the UK also depends on the scale of the project and the
productivity of the tidal barrage once it is up and running. Extract 1 says that the
turbines might be run on reduced speed to reduce the risk for wildlife, this could
lead to a loss of efficiency as a trade off for protecting natural habitat. However, the
tidal barrage is expected to reduce the risk of severe flooding which could be a long
term factor helping to avoid £billions of damage to industries further down the
Severn Estuary. Flooding can cause an inward shift of a region or a country’s
production possibility frontier.
Knowledge Application
Analysis Evaluation

10. Discuss factors which might influence the supply of labour for constructing the
tidal barrage scheme. (14)
The labour supply is the number of hours people are willing and able to supply at
a given wage rate. The labour supply curve will be upward sloping because as
wages rise, workers are attracted by the incentive of higher incomes. The extent to
which a rise in the wage rate leads to an expansion in the supply of labour
depends on the elasticity of labour supply. It is likely that many of the jobs used in
constructing the tidal barrage are highly skilled which means that the elasticity of
labour supply will be low in the short term because of occupational immobility.
However factors such as free movement of labour within the European Union
increase the potential labour supply. For example construction workers from
Eastern Europe might be attracted to work on the Severn Estuary project because
of higher relative earnings. If net inward migration causes the the supply of labour
available shifts outwards, then the costs of building the barrage might be lower
than forecast. I have shown an increase in labour supply in my diagram.
Knowledge Application
Analysis Evaluation

11. Discuss factors which might influence the supply of labour for constructing the
tidal barrage scheme. (14)
Knowledge Application
Analysis Evaluation
Wage
Rate
Employment
LS1
W1
W2
E1 E2
LD1
LD2
An outward shift of labour demand
for construction jobs
Wage
Rate
Employment
LS1
W1
E1 E3
LD1
LD2
Immigration of skilled workers causes
labour supply to shift outwards
LS2

12. Discuss factors which might influence the supply of labour for constructing the
tidal barrage scheme. (14)
Although wages are important, labour supply might also be affected by non-
monetary characteristics of jobs – e.g. the risks involved, general working
conditions and the quality of employer-provided training.
Figure 1 shows that the proposed barrage is close to the major cities of Cardiff
and Bristol. This should provide a ready supply of labour for the project
although this depends on the current rate of unemployment in these cities
and also on the cost of transport to and from the construction site. Unreliable
and costly transport links (for example the road toad charged for travelling
over the existing Severn Bridge) would impede the geographical mobility of
labour and could create labour shortages.
The tidal barrage would take several years to complete and therefore house
prices / housing rents for workers moving into the region might be the most
important factor affecting the available supply of labour.
Knowledge Application
Analysis Evaluation

13. Evaluate two measures, other than supporting the Severn Estuary tidal barrage,
by which the Government could promote the generation of renewable energy.
(14)
If one regards renewable energy as a merit good providing positive externalities,
one strategy is to increase subsidies available for power from wind, solar and
hydro-electric sources. For example the government recently offered a subsidy
to consumers who installed solar panels on their roofs and fed back their surplus
energy into the national grid. The result was a huge rise in the number of panels
and an increase in renewable energy supply. Subsidies will increase demand
most when the PED in the market is high. But the “feed-in-tariff” subsidy was
generous and caused a substantial opportunity cost. Another problem was that
solar subsidies benefitted richer households who could afford them and the
majority of panels were imported from China (which worsened the UK balance
of trade). The miss-selling of solar panels especially to vulnerable households
was an example of information failure. The solar panel subsidy policy could be
regarded as an example of government failure.
Knowledge Application
Analysis Evaluation

14. Evaluate two measures, other than supporting the Severn Estuary tidal barrage, by which
the Government could promote the generation of renewable energy. (14)
Price of
renewable
energy
Quantity / output
Market Supply
pre subsidy
P1
Q1
Total spending on the renewable subsidy is equal to the subsidy per unit
multiplied by the level of output – shown by the shaded area
Market
Demand
Market Supply
post subsidy
P2
Q2
P3
Producer
receives this
price
Consumer
pays this
price

15. Evaluate two measures, other than supporting the Severn Estuary tidal barrage,
by which the Government could promote the generation of renewable energy.
(14)
Instead of subsidizing renewable energy, an alternative policy is for the government to
increase taxes on fossil fuels. For example the UK is part of the EU carbon emissions
trading scheme in which polluting businesses must purchase sufficient CO2 permits to
cover their annual emissions. If the carbon price is high, power generators might decide
to shift some investment towards renewable projects since this will have a lower carbon
impact. And smaller businesses might also switch to small-scale wind and solar schemes
to reduce the expenses of buying carbon permits in the market. The main problem with
the EU carbon trading scheme is that the price per tonne of CO2 has been volatile and, in
recent years, extremely low at less than Euro 5 per tonne. This means that the incentives
to use renewable energy are weak and some power companies have gone back to
burning imported coal. A better long term solution might be to have a compulsory and
fixed carbon tax so that energy suppliers have a stronger profit incentive to make the long
term investment decisions in sources of renewable energy such as wind turbines that
Extract 1 says may only last 25 years. A carbon tax would be my preferred measure.
Knowledge Application
Analysis Evaluation

16. AS Micro: Data Response Question on
Renewable Energy / Government
Intervention (EdExcel) May 2014