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Banking energy vs. banking money: you can’t finance energy

I’ve been working on some analysis lately tying energy return on energy investment (EROI) to financial parameters such as project internal rate of return and levelized cost of energy. An interesting question arrives when you think of the energy costs of financing a project. This is a particularly relevant question today given the level of scrutiny and discussion that is ongoing regarding financial and banking regulation.

The conventional economic wisdom is that financial speculation, mostly in real estate combined with a decade of overspending and a lack of savings in general, led to a bubble in economic growth (e.g. GDP) that then popped resulting in a recession. We are now told that the recovery from the recession caused from this overspending is close to ending due to massive government spending. This logic certainly sounds backwards: that is to say, the way the government claims we will get out of a financial downturn, caused by spending over the rate of economic growth, is in fact to spend more money than we are making. Of course this reverse logic has not convinced many people. I now look at this logic by contrasting energy and money from the view of debt financing.

I’ll define debt financing as simply spending less money/energy at the beginning of a ‘project’ than is actually the total required cost of the project. Thus, if my solar panel is $2M and I use debt financing, I might give a bank $400,000 at the beginning of the project and pay the other $1.6M over 20 years. However, when manufacturing and installing the wind turbine, I can’t consume only 20% of the energy inputs at the beginning of the project, and consume the other 80% of the required energy inputs over the next 20 years. This is because approximately three quarters of the energy inputs for a wind turbine are consumed before turbine actually starts to operate. The other 25% of the energy inputs are nearly uniformly consumed for operations and maintenance while the turbine is generating electricity.

We know that the energy for manufacturing and construction has to occur at the beginning of the project, and we know it takes 2-4 years to payback this energy (when considering the consumption of the energy by employees of the wind farm) in the form of electricity generated by the turbine. Note that most life cycle analyses analyzing energy payback time for wind turbines counting only the fuel inputs to the wind turbine life cycle such that the energy payback is calculated at less than one year for modern turbines. Either way, 75% of the energy inputs (analogous to monetary capital costs) are required at the beginning to even make the wind turbine function in the first place. Twenty percent of a wind turbine produces no energy. With this point of initial energy consumption in mind, then how do we build turbines in the first place without “energy financing”? The answer is that nature inherently provided the “energy financing” for us over the last 100 million years, and we call the energy savings over that time “fossil fuels”.

Thus, the concept of financing is one lens by which to view the difference between energy and money. Because energy is a physical quantity that must obey physical laws, we cannot make up concepts, such as financing, and have them apply to energy. It is arguable that the level of debt financing allowed in a society has a strong correlation with EROI. That is to say, it takes energy consumption ‘now’ to make goods ‘now’, so all of the extra energy to make those goods is based upon the extra energy (EROI > 1) that is currently flowing from the energy sector to all others.

Because society’s high EROI for the last 200 years has been based upon a stock, or ‘storage’, of energy in the form of fossil fuels, it is likely that a similar EROI from a flow of renewable energy (mostly solar derived resources) will not yield as society with as much energetic/economic productivity or societal complexity. This lower potential for a complex society based upon renewables is because to create a stock of energy from renewable energy flows, we must build energy storage systems to work with the renewable technologies. With fossil fuels, nature built the storage systems in the ground for us. And those stored energy resources needed 10s of millions of years of sunlight – the reverse of financing and the definition of saving.

Thus, we are currently spending the energy savings that nature provided us a million times faster than that it took to build that fossil fuel ‘nest egg.’ What we do and learn while spending this nest egg will determine how complex of a society we can have without it. Time has an arrow, and if we consume the same amount of energy 200 years from now as we did 200 years ago, we will not necessarily have the same level of lifestyle. We can only speculate about how different 2200 will be from 1800, but our actions today will certainly dictate the outcome. I’m betting that by learning how to live without fossil fuels while we have them today, will give those in 2200 a better chance of living better than those in 1800.

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