On Technologies vs. Commodities

A theory that has gained traction in the renewable energy space is that renewable energy sources like wind and solar are based on manufactured “technologies”, while fossil fuel energy sources like oil, coal, and natural gas are based on extracted “commodities”. Per this theory, technologies can take advantage of learning curves, and thus will continue to get cheaper as they’re deployed in larger and larger volumes; commodities, on the other hand, don’t have learning curves, and thus can’t be expected to get cheaper over time.

Here, for instance, is a report from the Rocky Mountain Institute advancing this theory:

There are two main perspectives on the energy transition: the old incumbent view of business-as-usual; and the new insurgent view of exponential change. At heart this is the longstanding battle of commodities versus technologies. Design and technologies beat commodities because they enjoy learning curves and are limitless. So costs fall over time, and growth is exponential. New energy comes from manufactured, modular, scalable, clean technologies; old energy is from centralized, heavy, dirty commodities.

This theory obviously favors increasing the rollout of renewable energy; the more renewables we build, the cheaper our energy will get, whereas if we stick with fossil fuels we can’t expect that to happen.

Folks referencing this theory seem to disagree as to the exact mechanisms that are driving the difference between price trends in technologies and commodities. The same Rocky Mountain Institute report suggests it’s because commodities have depletion dynamics and because cartels like OPEC can control the price:

Individual fossil fuel technologies of course do have learning curves; but because of depletion and cartels, fossil fuel prices have not shown structural decline over time.

Someone else suggested to me that what this distinction is really getting at is elasticity of supply — that it’s much more straightforward to scale up the production of technologies than it is for commodities.

This 2011 paper from McNerney et al. on the historical price of coal-fired electricity suggests the difference is more about commodities being easily tradable:

Coal prices have fluctuated and shown no overall trend up or down; they became the most important determinant of fuel costs when average thermal efficiencies ceased improving in the U.S. during the 1960s. This fluctuation and lack of trend are consistent with the fact that coal is a traded commodity, and therefore, it should not be possible to make easy arbitrage

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