Improvements in Efficiency and Usefulness of the Product

Energy equipment can also exhibit qualitative changes over time that lead to higher efficiency of conversion without increasing unit cost in propor­tion. For example, bigger wind energy converters do not usually cost more in proportion as they grow larger, but their specific (marginal) cost per megawatt of capacity decreases. In addition, the efficiency of fuel use typically increases with changes in quality and size of the generator, so that the specific cost of the energy service goes down even more.

Efficiency changes can be taken into account in experience curves, but only if the delivered energy service (e. g., the kilowatt-hours of electricity) are the measure of experience as well as the unit for which costs are considered. Just like in the case of diseconomies of scale, equipment might evolve into an application suited for specific niche markets and, as a result of these qualitative changes, specific costs might be higher in later stages of technology diffusion.

1.6 Diffusion and Standardization

A fourth reason for the reduction of cost with increasing maturity of a technology is the standardi­zation that a successful technology will undergo during its diffusion from niche markets into general markets. Standardization drives down overhead and compatibility costs. A logistic rather than exponen­tial curve seems to be the appropriate representation of this phenomenon.

1.7 Market Conditions

All phenomena discussed so far might not have any effect on unit cost of production or on prices of the technology if the market structure is not sufficiently competitive. Not only might monopolists and oligo­polists be able to charge prices that are far higher than the costs of developing, producing, and distributing a product or technology, but a noncompetitive market structure also relieves market participants from the pressure to improve products and production pro­cesses. Thus, learning and efficiency gains might be realized more slowly than in competitive situations. Other market conditions, such as the maturity of the market on the demand side and the opportunity of spillover effects, might affect the speed of learning and improvements of the industry standard in economic or technological terms and, thereby, have indirect effects on the cost reduction over time.

In addition, the market situation in input factor markets (e. g., labor, materials) can play an important role in both improving and reducing cost reduction and experience effects. However, in an abstract and very general model of cost reduction with increased experience, it is very hard to account for these effects.

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