By Carey King
With the talk in the United States all abuzz about the presidential election this year, President Obama (and advisors) and Mitt Romney (and advisors) have to act as
though they know the solution to lowering unemployment and raising economic growth rates. It is hard for anyone running for an election to admit that they might be powerless to affect some energy and economic realities. In this post, I discuss the trend in the figure below: US monthly personal-consumption expenditures (PCE) for food and energy goods and services as a percentage of total household expenditures.I think it is completely possible that the stop in the declining trend of PCE for food and energy that stopped in the early 2000s is indicative of the new reality facing the United States energy and overall economic (and debt) situation.
By Carey King
Earlier this year I discussed (The EROI of Algae) some research at the University of Texas on an experimental algae to fuels experiment. A couple of new papers have now been published on the energy return on investment (EROI) of algae-based bioenergy when coupled to a wastewater treatment plant (Energy Return on Investment for Algal Biofuel Production Coupled with Wastewater Treatment: http://www.ingentaconnect.com/content/wef/wer/2012/00000084/00000009/art00002). The reason why it is energetically beneficial to couple a wastewater treatment plant to an algal growth facility is because algae, like terrestrial crops such as corn and soybeans, require nutrients as inputs. Wastewater has a high quantity of nutrients that actually must be removed before discharging the water into the environment…in some cases to prevent algae blooms! Oh the irony.
By Carey King
There is a new special issue of the online open-access journal Sustainability on the
topic of net energy: New Studies in EROI (Energy Return on Investment). This has been organized over the last year by Charles Hall of the State University of New York. This special journal edition has many papers on new and updated assessments of EROI for oil and gas in the US, Canada and Norway. Additionally there are new papers discussing how to relate EROI to energy prices and costs as well as how different constructs for EROI measures (e.g. for a technology or a business) are useful for different decision making contexts.
I encourage all researchers and interested persons to view the papers in the special issue, as it is certainly a great contribution to the literature at a time when distinguishing among the most viable energy resources has never been more important.
In an earlier blog post (“The Algebra of Algae…to Biodiesel”) I discussed if the US was to reduce its CO2 emissions to 17% of those in 2005 (mimicking the ‘popular’ climate legislation from two years ago in 2009), then the US could produce 50 billion gallons of biodiesel from an algae feedstock. Aside from later being told that titling the blog “Algaebra” would have been much better (what I agreed with at the time), I have now discovered that the web is littered with discussions of brassieres made of algae. I’m glad I used my previous title!
But I digress, the caveat for my previous blog on algae biodiesel was is that to meet the CO2 emissions limits there could be no other source of CO2 emissions other than the power plants that would be capturing CO2 and piping that CO2 to the algae farms. There is also the possibility of using CO2 directly from the atmosphere to grow algae, but most algae-facility designs assume a source of concentrated CO2 to grow the algae feedstock. Clearly we need to understand the limitations of using ambient air, and the inherent CO2 in the air, versus supplemental CO2 from anthropogenic sources.
Over the last year a student (Colin Beal) at the University of Texas, Austin, has been characterizing the experimental set-up at the Center for Electromechanics for testing an algae to bio-oil process. The process stops short of converting the bio-oil into biodiesel, and he presented the results at a recent conference: Beal, Colin M., Hebner, Robert E., Webber, Michael E., Ruoff, Rodney S., and Seibert, A. Frank. THE ENERGY RETURN ON INVESTMENT FOR ALGAL BIOCRUDE: RESULTS FOR A RESEARCH PRODUCTION FACILITY, Proceedings of the ASME 2010 International Mechanical Engineering Congress & Exposition IMECE2010 November 12–18, 2010, Vancouver, British Columbia, Canada, IMECE2010-38244.
Colin counted the direct (electricity primarily) and indirect energy (nutrients, water, CO2, etc) inputs into the process along with the energy content of two outputs: the biomass of the algae itself and the bio-oil extracted from the algae. He did not count the energy embodied in any capital infrastructure. What he found for this experimental, and very batch process was that the EROI of the experimental process was approximately 0.001.
This experimental EROI value for energy from algae must be kept in perspective of the stage of development of the entire technology and process of inventing new energy sources and pathways. It is important that we understand how to interpret findings “from the lab” into real-world or industrial-scale processes. To anticipate the future EROI of an algae to biofuel process, Colin performed two extra analyses to anticipate what might be possible if anticipated advances in technology and processing occur: a Reduced Case and Literature Model calculation.
The Reduced Case presents speculated energy consumption values for the operation of a similar production pathway at commercial scale. Many energy inputs are simply not needed or would be much smaller in a continuous flow process. The Literature Model provides an estimate for the EROI of algal biocrude based on data that has been reported in the literature. In this way the Reduced Case is grounded on one side by the sub-optimal experimental data and on the other side by the Literature Model, which is largely comprised of theoretical data (particularly for biomass and lipids production from optimal algae).
What Colin discovered was that the EROI of the Reduced Case and Literature Model were 0.13 and 0.57, respectively. This shows that we have much to learn for the potential of making viable liquid fuels. Additionally, Colin’s calculations for the experimental set-up (and Reduced Case analysis) show that 97% of the energy output resides in the biomass, not the bio-oil. For his idealized Literature Model, 82% of the energy output was in the biomass.
While these results seem discouraging, we do not have much ability to put these results into context of the rate of development of other alternative technologies and biofuels. How long did it take to get photovoltaic panels with EROI > 1 from the first working prototype in a lab? We have somewhat of an idea that it took one or two decades for the Brazilians to get reasonable EROI > 1 from using sugar cane for biomass and biofuel production (Brazilian sugar cane grown and processed in Sao Paulo is estimated near EROI = 8).
I believe we need to strive to quantify EROI for new technologies even they are still in the laboratory stage. Perhaps some very early technologies and processes are even too early for estimating or measuring EROI, but algae biofuels are clearly in the mainstream of research given the $500 m investment by Exxon-Mobil into genomics firms searching for the ideal strains of algae. These ideal strains of algae might simply excrete hydrogen, ethanol or lipids such that all of the capital infrastructure and direct energy requirements assumed for collecting algae and extracting the lipids even in Colin’s Literature Model can be largely unnecessary. Let’s hope others join in in trying to assess the EROI of their experimental and anticipated commercial processes for alternative energy technologies.
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.
There is much discussion today in the US regarding how much the government should spend, and go further into debt, to help get the economy growing and increase employment such that we can later pay back this debt when economic growth is good (i.e. positive) again. For those who do not believe in the general capitalism arrangement that assumes economic growth (as we define it today) can and must continue indefinitely, the logic of spending more so we can pay it back later can seem like putting off the inevitable final economic bust.
Persons such as Robert Reich, former Labor Secretary under the President Bill Clinton, are calling for more stimulus spending (see http://robertreich.blogspot.com, and for an entry on his normal calling for more stimulus spending, visit http://robertreich.blogspot.com/2009/11/great-disconnect-between-stocks-and.html). Reich correctly says that the latest increase in US GDP growth, of a reported 3.6% in the 3rd quarter of this year, is mostly related to a shift in capital assets at the expense of labor. This is supported by research by Robert Ayres and Benjamin Warr indicating that investments in providing “useful work” and capital are responsible for roughly 50% of US economic growth whereas additional labor investments are only responsible for some amount of less than a few percent. Useful work is roughly equivalent to primary energy consumption divided by efficiency of conversion into mechanical motion – but think of essentially as how energy impacts our economy. In 1900 their research shows that investments in labor were the most influential factor (55%) in US economic growth with useful work responsible for nearly 40%.
What all of this means is that over the last 100 years our industrialized economy has replaced physical labor (working in factories and farms) with machinery run on fossil fuels. Therefore as long as cheap energy is available to operate this machinery and make more of it, human labor is simply not necessary. We pay people to think of ways to not need as may people to make a product, and then we act surprised when we succeed. We now pay people to think, not use their muscles, and we translate this to a need for better education. We also translate this to other areas of life, such as health care, where investments in capital (knowledge and machinery) have enabled incredible tools and techniques to cure disease and injuries.
What all of these advancements depend upon is excess energy such that people CAN be paid to spend time and think of new inventions. This excess energy is a function of the resource (renewable or fossil) and our ability to exploit it. This ability can be measured as energy return on investment (EROI). If US oil had an approximate EROI of 100 in the first decade of the century and today has an EROI of 10–20, then each barrel of oil in 1900 had approximately six times more capability of growing the economy than today. This estimate is calculated as follows:
˜ ((EROI-1)“useful work” productivity factor in 1900) / ((EROI-1)“useful work” productivity factor in 2000)
˜ ((100-1)40%) / ((15-1)50%)
˜ 40/7 = 5.6
So when we look to the past and assume we can invest in various economic stimulus packages with the thought that we have always had the ability to repay the debt in the future, I believe understanding this tie energy (EROI, useful work) and economic growth is important. So we can say:
1. The US has a large national debt load (the highest ever) and now the annual budget deficit is reaching the highest levels ever reached. Thus, we seem not to be paying back the debt over time, except interestingly the US did that during the time Robert Reich was serving in the 1990s under the Clinton administration; and
2. The total system-wide conversion of energy resources into useful work is becoming less productive over time yet more influential on the economy.
The conclusion is that we are increasing our debt load at the same time we are having less ability to pay it back. This basic conundrum will define this current century.
The discussion continues in the US about economic recovery (it was somehow reported this past week at 3.5% for the last quarter). People keep asking typical and often meaningless questions. “Is this growth sustainable?” “But employment is still rising, when will unemployment go down?” To many in the research community that study society from a “whole systems” mentality, the answers to these questions are obvious in the long run even if few short term solutions exist to alleviate any real or perceived economic pain or loss of lifestyle. Oh, and the answers to the two questions are “no”, and “when we (the US) accept lower lifestyles”.
This weekend, Timothy Geithner, the US Treasury Secretary appeared on the popular Sunday talk show Meet the Press. Geithner was asked when employment (unemployment is US is measured at 9.8%) would start to rise, and when the budget deficit and national debt would stop growing. His answer was the mainstream view. This view is essentially that the economic stimulus funds are providing the base investments for growth in the future, and they will “take a while.” Another way of looking at this statement is, that because private businesses spent years, if not the past couple of decades, making the wrong types of investments and/or expecting the wrongly high returns, the government is now making the right kind of investments that will make those same high returns. Oh, and create jobs.
Unfortunately, the research on energy and economics is showing us that the trends are not indicating that these future expectations will come to fruition. I present two areas of research to think about together.
(1) Work on economic production functions by Robert Ayres of INSEAD indicates that investments in increased labor no longer produce economic gains for the US. Work by Ayres and his colleagues (often Ben Warr) on how energy, or rather “energy services” (which they term more precisely “exergy services” or “useful work”) relate to economic growth shows that investments in energy services and capital are practically the only drivers of economic growth at this stage of development in the US. If we consider, as many economic production functions do, that the “factors of production” are of three main categories, (i) capital, (ii) labor, and (iii) energy (or energy services), then Ayres’ work shows that every dollar invested in capital or energy is each responsible for half of economic growth, and investments in labor are responsible for well less than 5% of economic growth.
See: an interview and/or journal paper from Ayres and Warr
Journal paper: Ayres, RU, Sustainability economics: Where do we stand? Ecological Economics 2008 67(2) 281–310.
(2) Research on the trends in energy return on energy invested (EROI) for fossil fuels undergoing the inevitable decline. This does not necessarily have anything to do with whether or not there are large fossil resources, but can have something to do with describing fossil reserves (those that are economically recoverable). What this declining EROI means is that even though we have continually produced and consumed more energy (worldwide) and have large coal and natural gas resources, they will still not provide for the economic growth of the past.
One example of conceptualizing pionts (1) and (2) above is natural gas. The natural gas (NG) inudstry is now on a public relations campaign to explain the resource base increased by technologies to extract natural gas from shale rocks. So yes, we now have a greatly (2–3X) expanded resource base of NG, but at what EROI? These resources cannot be economically produced at the $2/MMBtu of the year 2000, and need closer to $6/MMBtu for a price. Thus, the EROI of unconventional NG could be 3X less than conventional NG. So the conculsion is, we may have 100 years of domestic NG in the US based upon current consumption, and these resources are valueable, just not as valuable as past resources.
What all this means is that economic growth, as defined since the industrial revolution, cannot happen as fast as the past. The conversion of energy resources, including both renewables (dependent upon current solar income) and fossils (benefitting from hundreds of millions of years of solar income) for productive uses simply requires more energy and resources than in the past. Thus, there is less excess available for other economic sectors, and most economists, businesses, and governments have not accepted this position. There is little incentive for them to do so, except for energy companies themselves since their livelihood is dependent upon making proper judgments of how EROI relates to their monetary return.
Furthermore, investments in energy technologies, capital, and resources that increase labor in the energy sector relative to past investments, inherently go against the trends of the last 100 years. This is not a result of bad public policy, bad tax incentives, overtaxation or even bad business practices. This is a result of increasing complexity of our society such that investments just no longer provide the larger marginal return as they used to, and perhaps they are no longer providing a marginal return at all anymore (think bank bailouts, two wars: Afghanistan and Iraq, health care reform).
We think more energy equals more capabilities, but that equation is incorrect. EROI is a necessary and important factor to understand. When EROI is high, there is a large margin for error and a high degree of discretion when making investment decisions. As EROI decreases, there is less margin for error, and each error can become more influential for a system that has been built upon higher EROI and still expects it. The pay of investment bankers and automaker executives together with health care technologies are results enabled by high EROI that enabled their existence to begin with. They are only causes of budget deficits and debt when we refuse to adjust. This point of adjustment, or lack thereof, is where we reside today.
As we have reached the one-year anniversary of Lehman Brothers bank collapsing, many are still wondering what happened to the US and world financial system. Many in the government are calling for better regulation of the financial and banking industry, but perhaps there is one regulation that towers above all others: banking reserve ratio.
The reserve ratio, or reserve requirement, identifies the amount of customer bank deposits that must be held within the bank. The bank is allowed to lend out the rest of the money. Currently the US reserve requirement is 10%. Thus, for every 100 dollars deposited, 90 dollars can be lent to borrowers.
The reason that the reserve ratio is important, is that it parallels conceptually to another ratio of concern in the area of energy: energy return on energy invested (EROI). To some, the question remains whether or not this parallel is also a correlation caused by the physics and thermodynamics describing energy, rather than “laws” of economics and financial practice. But to me, there is no debate. To think that we can have an industrialized society without much excess energy, or high EROI, is not feasible. Also, because net energy and economic growth are so highly coupled, there likely cannot be a continuing industrialized society without a relatively low banking reserve ratio.
Economists model the macroeconomic output (GDP) as a function of three basic factors (that are not necessarily independent): labor, energy (energy services), and capital. Research since the 1970s by a group of dedicated ecological economists has unequivocally shown that the modern US economy grows significantly with more energy (energy services) and capital. Over the last 100 years in the US the labor factor has become insignificant. That is to say, and increase in the labor force will cause practically no economic growth (see Robert Ayres (2008) Ecological Economics). The reason is that in the US, labor has been almost 100% replaced by primary energy sources including fossil fuels, nuclear energy, and renewables. Consider that economic capital includes the intellectual capital and education of the workforce, and we see that physical human labor is valued quite poorly.
Before you say this doesn’t make any sense, then keep in mind that people expect a “jobless recovery” yet again after we apparently had such an economic recovery (in the US) after the dot-com bust. I say apparently because it is probable that the US fiscal policies fighting off recession during the early 2000s just kicked the can down the road until the current economic recession.
While there are no systematic analyses of how EROI should relate to banking reserve ratio, I think this is a fruitful area for study. Lending money and expecting a return on investment is analogous and reliant on lending energy to invest for future energy return. It is likely that the inverse of the reserve ratio (that is amount of money lent out to that held in deposit in the bank) cannot be larger than EROI. As the EROI of fossil fuels to energy services seems to be only slightly above 10 (where the inverse of US reserve ratio is 9), or in the 10–20 range at the “mine mouth”, and even less for finished products such as gasoline and electricity, we might very well already be operating society on an energy services EROI <10. Can our society operate as it exists if we lend more money than we our lending ourselves energy? I hope we can learn the answer to this soon.
An article in the July 7th edition of the Wall Street Journal (WSJ) describes how the use of wood pellets is on the rise as a fuel for electricity in the EU. They are the “new Tulip” now being traded as a commodity on the Amsterdam energy exchange. In just looking up the price for industrial wood pellets, the price is hovering in the range of 130-140 â‚¬/MT (metric ton). With an energy content near 7,500 Btu/lb, this is similar to low rank (brown or lignite) coal.
With the well-written WSJ article referenced above, I won’t discuss the issue further here, other than to marvel that the use of wood is competing for the generation of electricity and heat with fossil and other modern renewable. Granted, the wood pellet stoves are much more controlled and efficient than your great-great-great-great-great-great-great-great (i.e. great8 to great10) grandfather’s wood burning stove. But this story is still a good example of technology struggling to overcome the limits of resources and moving back to a previous fuel. Unfortunately, we know that there are limits to the quantity of wood that can be replaced sustainably, but this is also an important feedback.
Over the last 300 years industrialized society has moved away from wood because the fossil energy resources had much higher energy density and concentration in mines and fields with oil and gas. Now industrialized society is moving somewhat (albeit on a very small scale) back to biomass in the form of these wood pellets for heat and electricity (often thrown into boilers with coal), but also including biomass for biofuels. This represents the struggle of “technology” to solve problems that society wishes to solve (in this case less greenhouse gas emissions) and the lack of focus of businesses to create substitutes for the services that primary energy resources (i.e. oil, gas, nuclear materials, biomass, sun, etc.) provide and that people want.
Unfortunately we have traditionally waited for the retrospective economic effects to tell us to return to a focus upon the value that energy resources and services provide to civilization. Data from the last 40 years shows us that people and the government focus upon energy costs when they become approximately 9-10% (at least half is for oil) of the gross domestic product of the US (for example see data at the EIA and chart in this paper by Charles Hall). Full data are not out for the last two years, but it appears as though we passed this threshold in 2007 and were likely well above 10% in 2008.
But this focus upon energy services has become, will become further, and should be center to discussions of economics. What percentage of GDP should we be spending upon energy? If this percentage gets too low, consumers and industry are not focused upon energy conservation and long term impacts. If this percentage gets too high (or too high too quickly) then general economic slowdowns tend to occur, mostly driven by oil prices in the last 40 years. Another question: How much we are in control of what this “energy/GDP” is or can be? The amount of energy obtained compared to searching and obtaining primary energy resources, or energy return on energy invested (EROI), is highly influential. If we get 50 barrels of oil when using the energy equivalent of 1 barrel of oil (e.g. EROI = 50) to find and extract that oil, then we have 49 barrels of oil to power the rest of the economy. If the EROI is 20, then this is significantly different. Less energy for health care. Less energy for education. Less energy for agriculture and food production. Etc.
We must understand to associate EROI with GDP much better than we currently understand. Otherwise, we won’t be able to foresee the longer term and very important implications of our energy policy and technology decisions. EROI must be used and understood as a measure of technical innovation.