The Biden Administration is touting electric vehicles (EV) and clean electricity technologies (e.g., solar and wind power) as the salve for today’s high oil and natural gas prices. Like modern-day Marie Antoinettes, their advice is distressingly oblivious to the reality facing most Americans.
EV technologies have improved greatly over the past several years, and many models are exciting to drive and own. There have also been advancements in solar and wind technologies that are also impressive. Still, none of these technologies are the answer to alleviate today’s high energy costs for most families.
Let’s start with EVs. These are luxury vehicles with an average price of $62,876 as of January 2022. According to the latest U.S. Census data, the median household income in the U.S. is $67,521. Obeying the “golden rule of car buying” that the car’s price should not exceed 35 percent of your gross annual income, then the median family can afford to pay $24,000 for a car or about one-third the price of a new EV. At current prices, EVs are only affordable for households earning nearly $180,000 a year. Clearly, these vehicles are not an option for most families.
Alternative energy sources like wind and solar are just as problematic. Installing solar panels onto the family home requires large upfront costs that are currently between $15,000 and $25,000, on average. Even if these costs were financed, it would be the equivalent of asking a middle-income family to finance an additional car payment, something the average family can ill-afford.
Even if most families could afford a brand-new EV or to install solar panels on their homes, these technologies are still not an answer to the problem of rising energy costs. The rising demand for the rare earth elements necessary to power EVs, solar panels, and other alternative energy technologies has far outpaced the current supplies. Additionally, the same short-term commodity price pressures impacting oil and gas are also impacting the prices for irreplaceable raw materials such as nickel and lithium. Consequently, the prices for lithium and nickel are also skyrocketing.
The rising input prices are inevitably leading to rising prices for these alternative energy technologies. In the case of EVs, Morgan Stanley analysts estimate that EV prices would increase by $1,000 just due to the recent rise of nickel prices to above $100,000 a metric ton. As of March 15th, Elon Musk announced that Tesla is raising the prices for their EVs between 5 percent and 10 percent.
A similar problem exists for utility scale wind and solar resources. These energy sources require additional costly upfront capital expenditures. Then, there is the problem of dispatchability, or the reality that alternative energy sources only generate electricity when the wind blows or the sun shines, not necessarily when the energy is needed. Consequently, ensuring that there is sufficient electricity generation requires the utilities to build expensive infrastructure duplication. Adding to the costs, greater use of the alternative energy sources decreases the efficiency of the electricity grid, which imposes additional price pressures and further raises the cost of electricity.
The high and rising prices for EVs and other alternative energy sources demonstrate that these technologies will not solve the energy budget squeeze for families in the near-term. The best way to lessen the budget squeeze families are facing is to establish sensible policies that account for current physical and financial realities.
With respect to energy policies this means reversing the policies obstructing the development and transmission of oil and natural gas in the U.S. Policies should also reduce the unnecessary regulations thwarting the construction of new nuclear facilities that can generate low-cost zero-emission electricity. Energy costs would also benefit from better monetary policies that would help arrest the broader inflationary trends harming the U.S. economy.
Alternative energy sources are costly, less reliable technologies that are facing the same rising cost pressures as oil and natural gas. Policymakers will not help mitigate rising energy costs by ignoring this physical reality, let alone families’ financial constraints.
Wayne Winegarden, Ph.D. is a Sr. Fellow in Business and Economics and Director of the Center for Medical Economics and Innovation at the Pacific Research Institute.