gas turbine, 455 nuclear power, 250 hydroelectric power, and 12 geothermal, solar, and wind. This is not a diverse resource base. Such heavy reliance on fossil fuels leaves the electric utility industry vulnerable to price increases and overestimated demand. Given the uncertainty of energy prices, prudence dictates strategies to reduce financial risk, so that trade-offs need be made between the criterion of minimum price and the criterion of risk reduction. As long as a decade ago, these three alternative energy sources were attractive, given a balance between prices based upon private costs and the financial risk of a system of supply sources ( Hall and Thomas 1984a).
Alternative energy sources include solar electricity and heat, wind electricity, and geothermal electricity. Without accounting for national security, environmental, and human health costs, these alternatives are now economically competitive in limited amounts for some regions of the United States, using the sole criterion of minimum price. Moreover, solar power is now being sold by a private firm to California utilities, and the price of solar power is less than nuclear power. These three alternative energy sources have no national security subsidies and, relative to conventional sources (coal, oil, natural gas, nuclear), have minimal environmental and human health effects. Those environmental effects are regulated so that, in some sense, the environmental costs are already internalized.
Conventional energy sources pose economic risk. Continued selection of conventional energy sources based upon the sole criterion of minimum cost is economically inefficient. The energy source that has the minimum price changes every five years. Uncertainty in prices and demand calls for the strategies of diversity and flexibility to reduce economic risk. Solar and wind have less risk because they do not rely on fuel with uncertain future costs. Solar and wind can be rapidly built and reduce the demand-side risk of overcapacity.
Conventional energy sources, notably oil, coal, and nuclear power, have substantial unregulated externalities and national security risks of a magnitude equal to their prices. The market would not continue to select such a high proportion of these conventional sources if the prices reflected the externalities and national security risks.