The Automatic Earth

In recent years, there has been more and more talk of a transition to renewable energy on the grounds of climate change, and an increasing range of public policies designed to move in this direction. Not only do advocates envisage, and suggest to custodians of the public purse, a future of 100% renewable energy, but they suggest that this can be achieved very rapidly, in perhaps a decade or two, if sufficient political will can be summoned. See for instance this 2009 Plan to Power 100 Percent of the Planet with Renewables:

A year ago former vice president Al Gore threw down a gauntlet: to repower America with 100 percent carbon-free electricity within 10 years. As the two of us started to evaluate the feasibility of such a change, we took on an even larger challenge: to determine how 100 percent of the world’s energy, for all purposes, could be supplied by wind, water and solar resources, by as early as 2030.

See also, as an example, the Zero Carbon Australia Stationary Energy Plan proposed by Beyond Zero Emissions:

The world stands on the precipice of significant change. Climate scientists predict severe impacts from even the lowest estimates of global warming. Atmospheric CO2 already exceeds safe levels. A rational response to the problem demands a rapid shift to a zero-fossil-fuel, zero-emissions future. The Zero Carbon Australia 2020 Stationary Energy Plan (the ZCA 2020 Plan) outlines a technically feasible and economically attractive way for Australia to transition to a 100% renewable energy within ten years. Social and political leadership are now required in order for the transition to begin.

 

The Vision and a Dose of Reality

These plans amount to a complete fantasy. For a start, the timescale for such a monumental shift is utterly unrealistic:

Perhaps the most misunderstood aspect of energy transitions is their speed. Substituting one form of energy for another takes a long time….The comparison to a giant oil tanker, uncomfortable as it is, fits perfectly: Turning it around takes lots of time.

And turning around the world’s fossil-fuel-based energy system is a truly gargantuan task. That system now has an annual throughput of more than 7 billion metric tons of hard coal and lignite, about 4 billion metric tons of crude oil, and more than 3 trillion cubic meters of natural gas. And its infrastructure—coal mines, oil and gas fields, refineries, pipelines, trains, trucks, tankers, filling stations, power plants, transformers, transmission and distribution lines, and hundreds of millions of gasoline, kerosene, diesel, and fuel oil engines—constitutes the costliest and most extensive set of installations, networks, and machines that the world has ever built, one that has taken generations and tens of trillions of dollars to put in place.

It is impossible to displace this supersystem in a decade or two—or five, for that matter. Replacing it with an equally extensive and reliable alternative based on renewable energy flows is a task that will require decades of expensive commitment. It is the work of generations of engineers.

Even if we were not facing a long period of financial crisis and economic contraction, it would not be possible to engineer such a rapid change. In a contractionary context, it is simply inconceivable. The necessary funds will not be available, and in the coming period of deleveraging, deflation and economic depression, much-reduced demand will not justify investment. Demand is not what we want, but what we can pay for, and under such circumstances, that amount will be much less than we can currently afford. With very little money in circulation, it will be difficult enough for us to maintain the infrastructure we already have, and keep future supply from collapsing for lack of investment.

Timescale and lack of funds are by no means the only possible critique of current renewable energy plans, however. It is not just a matter of taking longer, or waiting for more auspicious financial circumstances. It will never be possible to deliver what we consider business as usual, or anything remotely resembling it, on renewable energy alone. We can, of course, live in a world of renewable energy only, as we have done through out most of history, but it is not going to resemble the True Believers’ techno-utopia. Living on an energy income, as opposed to an energy inheritance, will mean living within our energy means, and this is something we have not done since the industrial revolution.

Technologically harnessable renewable energy is largely a myth. While the sun will continue to shine and the wind will continue to blow, the components of the infrastructure necessary for converting these forms of energy into usable electricity, and distributing that electricity to where it is needed, are not renewable. Affordable fossil fuels are required to extract the raw materials, produce the components, and to build and maintain the infrastructure. In other words, renewables do not replace fossil fuels, nor remove the need for them. They may not even reduce that need by much, and they create additional dependencies on rare materials.

Renewable energy sounds so much more natural and believable than a perpetual-motion machine, but there’s one big problem: Unless you’re planning to live without electricity and motorized transportation, you need more than just wind, water, sunlight, and plants for energy. You need raw materials, real estate, and other things that will run out one day. You need stuff that has to be mined, drilled, transported, and bulldozed — not simply harvested or farmed. You need non-renewable resources:

• Solar power. While sunlight is renewable — for at least another four billion years — photovoltaic panels are not. Nor is desert groundwater, used in steam turbines at some solar-thermal installations. Even after being redesigned to use air-cooled condensers that will reduce its water consumption by 90 percent, California’s Blythe Solar Power Project, which will be the world’s largest when it opens in 2013, will require an estimated 600 acre-feet of groundwater annually for washing mirrors, replenishing feedwater, and cooling auxiliary equipment.

• Geothermal power. These projects also depend on groundwater — replenished by rain, yes, but not as quickly as it boils off in turbines. At the world’s largest geothermal power plant, the Geysers in California, for example, production peaked in the late 1980s and then the project literally began running out of steam.

• Wind power. According to the American Wind Energy Association, the 5,700 turbines installed in the United States in 2009 required approximately 36,000 miles of steel rebar and 1.7 million cubic yards of concrete (enough to pave a four-foot-wide, 7,630-mile-long sidewalk). The gearbox of a two-megawatt wind turbine contains about 800 pounds of neodymium and 130 pounds of dysprosium — rare earth metals that are rare because they’re found in scattered deposits, rather than in concentrated ores, and are difficult to extract.

• Biomass. In developed countries, biomass is envisioned as a win-win way to produce energy while thinning wildfire-prone forests or anchoring soil with perennial switchgrass plantings. But expanding energy crops will mean less land for food production, recreation, and wildlife habitat. In many parts of the world where biomass is already used extensively to heat homes and cook meals, this renewable energy is responsible for severe deforestation and air pollution.

• Hydropower. Using currents, waves, and tidal energy to produce electricity is still experimental, but hydroelectric power from dams is a proved technology. It already supplies about 16 percent of the world’s electricity, far more than all other renewable sources combined….The amount of concrete and steel in a wind-tower foundation is nothing compared with Grand Coulee or Three Gorges, and dams have an unfortunate habit of hoarding sediment and making fish, well, non-renewable.

All of these technologies also require electricity transmission from rural areas to population centers…. And while proponents would have you believe that a renewable energy project churns out free electricity forever, the life expectancy of a solar panel or wind turbine is actually shorter than that of a conventional power plant. Even dams are typically designed to last only about 50 years. So what, exactly, makes renewable energy different from coal, oil, natural gas, and nuclear power?

Renewable technologies are often less damaging to the climate and create fewer toxic wastes than conventional energy sources. But meeting the world’s total energy demands in 2030 with renewable energy alone would take an estimated 3.8 million wind turbines (each with twice the capacity of today’s largest machines), 720,000 wave devices, 5,350 geothermal plants, 900 hydroelectric plants, 490,000 tidal turbines, 1.7 billion rooftop photovoltaic systems, 40,000 solar photovoltaic plants, and 49,000 concentrated solar power systems. That’s a heckuva lot of neodymium.

In addition, renewables generally have a much lower energy returned on energy invested (EROEI), or energy profit ratio, than we have become accustomed to in the hydrocarbon era. Since the achievable, and maintainable, level of socioeconomic complexity is very closely tied to available energy supply, moving from high EROEI energy source to much lower ones will have significant implications for the level of complexity we can sustain. Exploiting low EROEI energy sources (whether renewables or the unconventional fossil fuels left to us on the downslope of Hubbert’s curve) is often a highly complex, energy-intensive activity.

As we have pointed out before at TAE, it is highly doubtful whether low EROEI energy sources can sustain the level of socioeconomic complexity required to produce them. What allows us to maintain that complexity is high EROEI conventional fossil fuels – our energy inheritance.

Power systems are one of the most complex manifestations of our complex society, and therefore likely to be among the most vulnerable aspects in a future which will be contractionary, initially in economic terms, and later in terms of energy supply. As we leave behind the era of cheap and readily available fossil fuels with a high energy profit ratio, and far more of the energy we produce must be reinvested in energy production, the surplus remaining to serve all society’s other purposes will be greatly reduced. Preserving power systems in their current form for very much longer will be a very difficult task.

It is ironic then, that much of the vision for exploiting renewable energy relies on expanding power systems. In fact it involves greatly increasing their interconnectedness and complexity in the process, for instance through the use of ‘smart grid’ technologies, in order to compensate for the problems of intermittency and non-dispatchability. These difficulties are frequently dismissed as inconsequential in the envisioned future context of super grids and smart grids.

 

The goal of modern power systems is to balance supply and demand in real time over a whole AC grid, which is effectively a single enormous machine operating in synchrony. North America, for instance, is served by only four grids – the east, the west, Texas and Quebec. System operators, who have little or no control over demand, rely on being able to control sources of supply in order to achieve the necessary balance and maintain the stability of the system.

Power systems have been designed on a central station model, with large-scale generation in relatively few places and large flows of power carried over long distances to where demand is located, via transmission and distribution networks. Generation must come on and off at the instruction of system operators. Plants that run continuously provide baseload, while other plants run only when demand is higher, and some run only at relatively rare demand peaks. There must always be excess capacity available to come on at a moment’s notice to cover eventualities. Flexibility varies between forms of generation, with inflexible plants (like nuclear) better suited to baseload and more flexible ones (like open-cycle gas plants) to load-following.

The temptation when attempting to fit renewables into the central station model is to develop them on a scale as similar as possible to that of traditional generating stations, connecting relatively few large installations, in particularly well-endowed locations, with distant demand via high voltage transmission. Renewables are ideally smaller-scale and distributed – not a good match for a central station model designed for one-way power flow from a few producers to many consumers. Grid-connected distributed generation involves effectively running power ‘backwards’ along low-voltage lines, in a way which often maximizes power losses (because low voltage means high current, and losses are proportional to the square of the current).

This is really an abuse of the true potential of renewable power, which is to provide small-scale, distributed supply directly adjacent to demand, as negative load. Minimizing the infrastructure requirement maximizes the EROEI, which is extremely important for low EROEI energy sources. It would also minimize the grid-management headache renewable energy wheeled around the grid can give power system operators. Nevertheless, most plans for renewable build-out are very infrastructure-heavy, and therefore energy and capital intensive to create.

Both wind and solar are only available intermittently, and when that will be is only probabilistically predictable. They are not dispatchable by system operators. Neither matches the existing load profile in most places particularly well. Other generation, or energy storage, must compensate for intermittency and non-dispatchability with the flexibility necessary to balance supply and demand. Hence, for a renewables-heavy power system to meet demand peaks, either expensive excess capacity (which may stand idle for much of the time) or expensive energy storage would generally be required. To some extent, extensive reliance on power wheeling, in order to allow one region to compensate for another, can help, but this is a substantial grid management challenge.

Little storage currently exists in most places, although in locations where hydro is plentiful, it can easily serve the purpose. Where there is little storage potential, relatively inflexible existing plants may be required to load-follow, which would involve cycling them up and down with the vagaries of intermittent generation. This would greatly reduce their efficiency, and that of the system as a whole, reducing, or even eliminating, the energy saving providable by the intermittent renewables.

Not all renewables are intermittent of course. Biomass and biogas can be dispatchable, and can play a very useful role at an appropriate scale. EROEI will be relatively low given the added complexity and energy input requirement of transporting and/or processing fuel, and also installing, maintaining and replacing equipment such as engines.

Biogas is best viewed as a means to prevent high energy through-put by reclaiming energy from high-energy waste streams, rather than as a primary energy source. This will be useful for as long as high energy waste streams continue to exist, but as these are characteristic of our energy-wasteful fossil fuel society, they cannot be expected to be plentiful in an energy-constrained future. The alternative – feeding anaerobic digesters with energy crops – is heavily dependent on very energy intensive industrial agriculture, which translates into a very low EROEI, and will not be possible in an energy-limited future scenario.

Smart grid technology, large and small scale energy storage, smart metering with time-of-day pricing for load-shifting, metering feedback for consumption control (active instead of passive consumption), demand-based techniques such as interruptible supply, and demand management programmes with incentives to change consumption behaviour could all facilitate the power system supply/demand balancing act. This would be much more complicated than traditional grid management as it would involve many more simultaneously variable quantities of all scales, on both the supply and demand sides, only some of which are controllable. It would require time and money, both in large quantities, and also a change of mindset towards the acceptability of interruptible power supply. The latter is likely to be required in any case.

Greater complexity implies greater risk of outages, and potentially more substantial impact of outages as well, as one would expect structural dependency on power to increase enormously under a smart-grid scenario. If many more of society’s functions were to be subsumed into the electrical system – transport (like electric cars) for instance – as the techno-utopian model presumes, then dependency could not help but be far more deeply entrenched. In this direction lie even larger technology traps than we have already created.

In Europe, where indigenous fossil fuel sources are largely depleted, there has been a concerted move into renewables in a number of countries, notably Germany and Spain, since the 1990s. The justification is generally climate change, but security of supply plays a significant role. Avoiding energy dependence on Russia, and other potentially unstable or unreliable suppliers, by developing whatever domestic energy resources may exist, is an attractive prospect. Public policy has directed large subsidies into the renewable energy sector in the intervening years.

Feed-in tariffs, offering premium prices for renewable power put on to the grid, were introduced, with different tariffs offered for different technologies and different project sizes, in order to incentivize construction and grid connection of all sources and sizes of renewable power. In addition, in a number of jurisdictions, grid access processes have been streamlined for renewables, and renewable power has preferential access to the grid when the intermittent energy source is available. Other power sources can be constrained off if insufficient grid capacity is available.

The European Dash for Off-Shore Wind – Germany

 

Middelgrunden wind farm – Kim Hansen, Wikimedia
Recently emphasis has been placed on developing large-scale off-shore wind resources in countries, such as Germany and the UK, where these are available. The advantages are that it is a stronger and more consistent resource than on-shore wind, and that planning hurdles can be avoided. Germany, which has decided to phase out nuclear power by 2022, has been particularly interested in taking this route, and plans to build 10GW of off-shore wind installations by 2020 and 26GW by 2030. It has been more challenging than expected, however, particularly in relation to the exceptionally expensive grid connections and extensions required to bring power from a different direction than the grid had been designed for:

Germany’s power-transmission companies have tabled plans to build four electricity Autobahns to link wind turbines off the north coast with manufacturing centres in the south … Tennet, Amprion, 50 Hertz and Transnet BW said that building 3,800km high-voltage electricity lines – at a cost of around €20-billion – over the next decade was possible if politicians and public rallied behind the so-called energy transformation…

…In a first blueprint for the government, the companies proposed 2,100km of direct-current power lines – similar to those used for undersea links like that between the U.K. to the European continent – to connect the North Sea and the Baltic coasts to the south. On top of that, 1,700km of traditional alternating-current lines would have to be built, they said. These would complement 1,400km of this type of line already planned or being built – at a cost of €7-billion – under the government’s decade-old network plan.

Since Ms. Merkel closed eight of the country’s 17 nuclear reactors last summer and brought forward the phase-out of the energy source to 2022 from 2036, her biggest headache has proved the stability of the electricity network, which was designed to pipe nuclear electricity from south to north, not renewable electricity from the coast.

The cost and financial risk associated with building off-shore grid connections is so high that power companies are struggling to fund them. They are liable to wind farm developers if the latter are unable to sell their electricity for want of a grid connection. Significant connection delays are occurring, described by the German wind industry as “dramatically problematic”. Delays could potentially leave completed wind installations unable to deliver power to the mainland, and worse, requiring fossil fuel to run them in the meantime:

The generation of electricity from wind is usually a completely odorless affair. After all, the avoidance of emissions is one of the unique charms of this particular energy source. But when work is completed on the Nordsee Ost wind farm, some 30 kilometers (19 miles) north of the island of Helgoland in the North Sea, the sea air will be filled with a strong smell of fumes: diesel fumes.

The reason is as simple as it is surprising. The wind farm operator, German utility RWE, has to keep the sensitive equipment — the drives, hubs and rotor blades — in constant motion, and for now that requires diesel-powered generators. Because although the wind farm will soon be ready to generate electricity, it won’t be able to start doing so because of a lack of infrastructure to transport the electricity to the mainland and feed it into the grid. The necessary connections and cabling won’t be ready on time and the delay could last up to a year.

In other words, before Germany can launch itself into the renewable energy era Environment Minister Norbert Röttgen so frequently hails, the country must first burn massive amounts of fossil fuels out in the middle of the North Sea — a paradox as the country embarks on its energy revolution.

The situation has since worsened since:

What started out as a bit of a joke – last December Der Spiegel noted how RWE’s Nordsee Ost wind farm, far from delivering clean energy, was burning diesel to keep its turbines in working order – has rapidly turned serious. Siemens, the contractor for Germany’s offshore transformer stations, has booked almost €500 million in charges, according to Dow Jones. RWE is set to lose more than €100 million at Nordsee Ost. And E.ON’s head of Climate and Renewables, Mike Winkel, is on record as saying that no one, at E.ON or anywhere else, will be investing if the network connection is uncertain.

Investment in wind farms is drying up on growing risk and uncertainty:

Sales of offshore wind turbines collapsed in the first half, a sign the power industry and its financiers are struggling to meet the ambitions of leaders from Angela Merkel in Germany to Britain’s David Cameron. One unconditional order was made, for 216 megawatts, 75 percent less than in the same period of 2011 and the worst start for a year since at least 2009, according to preliminary data from MAKE Consulting, a Danish wind-energy adviser…

…”The industry in Germany has been frozen for a few months because of grid issues,” said Jerome Guillet, the Paris-based managing director of Green Giraffe Energy Bankers, which advises on offshore wind projects…

…Grid operators and their suppliers in Germany underestimated the challenges of connecting projects, Hermann Albers, head of the BWE wind-energy lobby, said in an interview earlier this year. Albers expects Germany won’t reach its 10- gigawatt goal by 2020, installing not more than 6 gigawatts by then.

Shares of Vestas, the world’s biggest wind turbine maker, have fallen 80 percent in the past year, underperforming the 56 percent decline in the Bloomberg Industries Wind Turbine Pure- Play Index (BIWINDP) tracking 14 companies in the industry. Siemens, which with Vestas dominates the offshore business, dropped 27 percent over the same period.

In order to mitigate the risk and prevent the wind programme from stalling, German power consumers are to be on the hook to compensate wind farm owners for the cost of grid connection delays:

The draft bill endorsed by Chancellor Angela Merkel’s Cabinet of Ministers would make power consumers pay as much as 0.25 euro cents a kilowatt-hour if wind farm owners can’t sell their electricity because of delays in connecting turbines to the grid. The plan is aimed at raising investments after utilities threatened to halt projects and grid operators struggled to raise financing and complete projects on time.

The cost of consumer surcharges to maintain the ‘Energiewende’ (the shift to renewable energy) appears set to become an election issue in Germany:

Germany’s status as a global leader in clean energy technology has often been attributed to the population’s willingness to pay a surcharge on power bills. But now that surcharge for renewable energy is to rise to 5.5 cents per kilowatt hour (kWh) in 2013 from 3.6 in 2012. For an average three-person household using 3,500 kWh a year, the 47 percent increase amounts to an extra €185 on the annual electricity bill.

“For many households, the increased surcharge is affordable,” energy expert Claudia Kemfert from the German Institute for Economic Research told AFP. “But the costs should not be carried solely by private households.” Experts have pointed out that with many energy-intensive major industries either exempt from the tax or paying a reduced rate, the costs of the energy revolution are unfairly distributed.

Meanwhile, the German Federal Association of Renewable Energies (BEE) maintains that not even half the surcharge goes into subsidies for green energy. “The rest is plowed into industry, compensating for falling prices on the stock markets and low revenue from the surcharge this year,” BEE President Dietmar Schütz told the influential weekly newspaper Die Zeit.

Grid instability is of increasing concern in Germany as a result of the rapid shift in the type and location of power generated. The closure of nuclear plants in the south combined with the addition of wind power in the north has aggravated north-south transmission constraints, which are only marginally mitigated by photovoltaic installations in Bavaria.

With a steep growth of power generation from photovoltaic (PV) and wind power and with 8 GW base load capacity suddenly taken out of service the situation in Germany has developed into a nightmare for system operators. The peak demand in Germany is about 80 GW. The variations of wind and PV generation create situations which require long distance transport of huge amounts of power. The grid capacity is far from sufficient for these transports.

As the German grid is effectively the backbone of the European grid, and faults can propagate very quickly, instability is not merely a German problem. Instability can result from a combination of factors, including electricity imports and exports and the availability of fuel for conventional generation. Germany narrowly avoided, causing an international problem in February 2012 due to power flows between Germany and France and a shortage of fuel for gas-fired generation in southern Germany.

Many new coal and gas-fired plants are to be built in the south in order to address the problem. Old coal plants are likely to have their lives extended and emission limits loosened in order to maintain needed generation capacity. Thermal plants are being effectively forced to operate uneconomically, as they must ramp up and down in order to make way for the renewable power that has priority access to the grid. Operating in this manner consumes additional fuel and produces accelerated wear and tear on equipment. Price volatility is increased, making management decision much more difficult.

On days when there is a lot of wind, the sun is shining and consumption is low, market prices on the power exchange can sometimes drop to zero. There is even such a thing as negative costs, when, for example, Austrian pumped-storage hydroelectric plants are paid to take the excess electricity from Germany….

….Germany unfortunately doesn’t have enough storage capacity to offset the fluctuation. And, ironically, the energy turnaround has made it very difficult to operate storage plants at a profit — a predicament similar to that faced by conventional power plants. In the past, storage plant operators used electricity purchased at low nighttime rates to pump water into their reservoirs. At noon, when the price of electricity was high, they released the water to run their turbine. It was a profitable business.

But now prices are sometimes high at night and low at noon, which makes running the plants is no longer profitable. The Swedish utility giant Vattenfall has announced plans to shut down its pumped-storage hydroelectric power station in Niederwartha, in the eastern state of Saxony, in three years. A much-needed renovation would be too expensive. But what is the alternative?

German industry is already taking precautionary measures as the risk of power interruptions is rising rapidly. Even momentary outages due to minor imbalances can result in equipment damage and high costs, and it is unclear who should shoulder the losses:

It was 3 a.m. on a Wednesday when the machines suddenly ground to a halt at Hydro Aluminium in Hamburg. The rolling mill’s highly sensitive monitor stopped production so abruptly that the aluminum belts snagged. They hit the machines and destroyed a piece of the mill. The reason: The voltage off the electricity grid weakened for just a millisecond.

Workers had to free half-finished aluminum rolls from the machines, and several hours passed before they could be restarted. The damage to the machines cost some €10,000 ($12,300). In the following three weeks, the voltage weakened at the Hamburg factory two more times, each time for a fraction of second. Since the machines were on a production break both times, there was no damage. Still, the company invested €150,000 to set up its own emergency power supply, using batteries, to protect itself from future damages….

….A survey of members of the Association of German Industrial Energy Companies (VIK) revealed that the number of short interruptions to the German electricity grid has grown by 29 percent in the past three years. Over the same time period, the number of service failures has grown 31 percent, and almost half of those failures have led to production stoppages. Damages have ranged between €10,000 and hundreds of thousands of euros, according to company information.

Producers of batteries and other emergency energy sources are benefiting most from the disruptions. “Our sales are already 13 percent above where they were last year,” said Manfred Rieks, the head of Jovyatlas, which specializes in industrial energy systems. Sales at APC, one of the world’s leading makers of emergency power technologies, have grown 10 percent a year over the last three years. “Every company — from small businesses to companies listed on the DAX — are buying one from us,” said Michael Schumacher, APC’s lead systems engineer, referring to Germany’s blue chip stock index….

….Although the moves being made by companies are helpful, they don’t solve all the problems. It’s still unclear who is liable when emergency measures fail. So far, grid operators have only been required to shoulder up to €5,000 of related company losses. Hydro Aluminum is demanding that its grid operator pay for incidents in excess of that amount. “The damages have already reached such a magnitude that we won’t be able to bear them in the long term,” the company says.

Given the circumstances, Hydro Aluminum is asking the Federal Network Agency, whose responsibilities include regulating the electricity market, to set up a clearing house to mediate conflicts between companies and grid operators. Like a court, it would decide whether the company or the grid operator is financially liable for material damages and production losses.

For companies like Hydro Aluminium, though, that process will probably take too long. It would just be too expensive for the company to build stand-alone emergency power supplies for all of its nine production sites in Germany, and its losses will be immense if a solution to the liability question cannot be found soon. “In the long run, if we can’t guarantee a stable grid, companies will leave (Germany),” says Pfeiffer, the CDU energy expert. “As a center of industry, we can’t afford that.”

The expectation of uninterruptible power, and the extreme dependency it creates, is the problem. Consumers do not feel they should be required to provide resilience with expensive back up options, yet this is increasingly likely in many, if not most, jurisdictions in the coming years. In emerging markets, it is common for power supply to be intermittent, and for fall-back arrangements to be necessary. We recently covered this situation in detail at The Automatic Earth, using India as a case study.

The European Dash for Off-Shore Wind – The United Kingdom

 

North Hoyle Offshore Wind Park
The UK’s Renewable Energy Roadmap has plans on a similar scale to Germany, proposing 18GW of wind capacity by 2020 (or some 30,000 turbines). Scotland is particularly keen to emulate, and surpass, Denmark, which generates 30% of its power from wind. Denmark is able to do this because it does not operate in isolation. It is effectively twinned with with Scandinavian hydro power, which provides the energy storage component, albeit at a price. On windy days, Denmark can export its surplus power to its neighbours, which have large enough grids to absorb power surges, but it does so at a low price. When the wind is not blowing, Denmark imports power at a high price. Ownership of the storage component makes a significant difference to the economics.

Unfortunately for Scotland, it currently has no access to a comparable hydro resource, either within it own borders or in the English market where it would be selling surplus power. As things stand, if wind power were developed at the proposed scale, it would have to be twinned with gas plants, but North Sea gas is already in sharp decline. For this reason, Britain and Scandinavia are planning to build NorthConnect, which would join Britain and Norway in the world’s longest subsea interconnector (900km) at an estimated cost of £1 billion (€1.3 billion), supposedly by 2020. This would follow on from the BritNed interconnector linking Britain and the Netherlands as of 2011 – a 260km line developed at a cost of £500 million (US $807.9 million).

“Using state-of-the-art technology, the interconnector will give the UK the fast response we will need to help support the management of intermittent wind energy with clean hydro power from Norway,” Steven Holliday of the National Grid says. “It would also enable us to export renewable energy when we are in surplus. At this very moment a seabed survey is underway in the North Sea, looking at the best way to design and install the cable, which would run through very deep water.”

If the project were completed as projected, it would allow the British, like the Danes, to subsidize the Norwegian power system, as the economic advantage lies with the owner of the storage capacity. The odds of completing such an ambitious project on time, however, and within budget, have to be regarded as low even if we were not facing financial crisis. Given that we are, those odds fall precipitously. The likelihood of having to twin whatever off shore wind is actually built with gas therefore increases. UK gas production is falling and storage is limited.

The shale gas reserves touted to provide affordable gas in the future amount to a mirage, thanks to the very low EROEI and high capital requirement. The UK is facing a future as a gas importer at the wrong end of a long pipeline from Russia. This is not a secure position to be in, especially given the UK’s gas dependence following the 1990s dash for gas. Developing wind power will make little difference if there is no flexible generating plant to provide back up.

The cost of building the turbines, their grid connections, back up gas plants and additional gas storage would be over ten times the amount required to build a fossil fuel alternative. According to a recent report to Britain’s Department of Energy and Climate Change, the cost of the grid connection alone would be greater than the entire cost of the alternative option.

The cost would have to be borne upfront, while the payback would come over a long period of time. This has significant implications for the net present value, and ‘effective EROEI’, of wind energy, especially in a scenario where the applicable discount rate is likely to skyrocket due to growing instability:

When introducing a discount rate of 5%, which can be considered very low both in non-financial and in financial realms, and represents societies with high expectations for long-term stability (such as most OECD countries), the EROI of 19.2 of this particular temporal shape of future inputs and outputs is reduced to and ‘effective’ EROI of 12.4 after discounting.

But discount rates are not the same in all situations and societal circumstances. Investing into the same wind power plant in a relatively unstable environment, for example in an emerging economy, where discount rates of 15% are more likely, total EROI for this technology is reduced to a very low value of 6.4, nearly 1/3 of the original non-discounted value.

Currently stable states are far more likely to resemble developing countries in a future of upheaval.

The investment choice is having to be made at a time when financial crisis is beginning to bite, thanks to Britain’s disastrous financial position as the ponzi fraud capital of the world. While wind is currently the preferred option, it is very likely the decision will be revised over the next few years, with relatively few turbines ever having been built, and perhaps even fewer actually connected to the grid. Neither the turbines nor the gas alternative, if there turns out to be sufficient capital to build either one, would last more than perhaps thirty years, so both represent medium term solutions only.

The CEO of the National Grid, in an interview last year with the Today Programme on BBC Radio 4, informed listeners that they would have to get used to intermittent power supply. No one seemed to be paying attention. It is interesting to note that under the old nationalized and vertically integrated CEGB in Britain, there was a responsibility to keep the lights on. When the CEGB was broken up, the National Grid inherited only the responsibility to balance supply and demand.

The UK power regulator, Ofgem, has also issued stark warnings of blackouts:

Millions of households are at risk of power black-outs within three years because coal stations are being replaced with wind farms, the energy watchdog has said. In its strongest ever warning, Ofgem said there may have to be “controlled disconnections” of homes and businesses in the middle of this decade because Britain has not done enough to make sure it has enough electricity. The regulator’s new analysis reveals the risk of power-cuts is almost 50 per cent in 2015 if a very cold winter causes high demand for electricity. Ofgem believes the lack of spare power generation “could lead to higher bills”, which are already at record high of £1,300 per year.

Whitehall sources said there is very little the Government can now do to avoid the risk of black-outs in the middle of the decade. It will take around three or four years to build any new gas plants and it would be very difficult to build more coal plants under European rules.

Alistair Buchanan, chief executive of Ofgem, said Britain’s energy system is struggling under the pressure of the “unprecedented challenges” of a global financial crisis, tough environmental targets and the closure of ageing power stations. Currently, Britain has 14 per cent more power plant capacity than is strictly necessary to keep the lights on. However, this crucial buffer will fall to just four per cent by the middle of the decade. Its report shows the risk of power-cuts begins to increase sharply from next year onwards.

Given the time scale for changes in generation and in infrastructure, preparations based on joined-up thinking have to be made well in advance of any looming crunch points. We are essentially experimenting with changes in a sporadic and haphazard fashion, and finding we are running risks we had not anticipated due to our failure to understand infrastructure requirements and dependencies. The risks are building rapidly, and it may already be too late to avoid unpleasant consequences.

Essentially, what appears to be happening across Europe is that nations are falling in love with offshore wind, permitting grand projects far out to sea – and then belatedly realizing that it is not so easy to get the energy back to shore. It is a bit like building hotels in the desert and forgetting to put the roads in. How come some of the world’s most advanced and industrialized countries are committing such a colossal oversight?

The problem is one of mindset. Ever since the first days of electricity, there has really only been one model for energy distribution. You build a generating center, more or less wherever you want it, and then create outbound distribution links to whoever needs power. This hub-and-spoke model is deeply ingrained in every aspect of energy distribution, from how utilities and grid operators work to the way regulators and policy makers think. But for renewable energy, it does not work.

You cannot just put a wind farm wherever you want. In fact, in the case of offshore wind, the locations you have could hardly be more inconvenient from an energy transport point of view. That means grid connections almost need to come first in the thinking about offshore wind. How expensive will they be? How feasible? How can the costs and installation timeframes be reduced?

These questions are fairly obvious, and are nothing new. One renewable energy veteran remembers speaking to an oil and gas representative a few years ago, who said that if we were really serious about renewables then the first thing we would have to change is the grid. Needless to say, that has not happened. If the issue is not addressed soon then every offshore market runs the risk of having an experience like Germany’s.

A European Supergrid?

 

Image: Airtricity
A European supergrid, with many cross-border transmission lines, has long been a European goal. The idea is to share power as widely as possible, evening out disparities in supply and demand across Europe. It is intended to be particularly applicable in terms of evening out the effects of intermittent renewable energy, notably off-shore wind, which could be linked with distant storage capacity. The vision even includes integrating Icelandic geothermal power.

Initial steps are already being contemplated with regard to integrating off-shore wind in north west Europe:

The North Sea Grid Initiative consists of Germany, Denmark, Norway, Sweden, Belgium, France, Luxembourg, and the United Kingdom. These countries signed a memorandum of understanding back in 2011 to help spur offshore wind development and tap into the ideal types of renewable energy in different parts of Europe within the next decade. More than 100 gigawatts (GW) of offshore wind are in the development or planning phases throughout Europe.

Pooling grid connection costs between countries by linking wind farms is projected to bring costs down substantially. Interconnectors are extremely expensive, hence the incentive to reduce costs wherever possible.

To make offshore wind work in northwest Europe, policymakers may have to adopt even more ambitious plans for the technology, gathering individual projects into hubs further offshore to capture more wind and pool connection costs, in a potentially high risk strategy.

The approach could shave 17 percent off an estimated 83 billion euros to connect 126,000 MW of offshore wind by 2030, according to a report produced last year by renewable energy lobby groups, consultancies and university research departments, “OffshoreGrid: Offshore Electricity Infrastructure in Europe”.

Groups such as Friends of the Supergrid envisage an exceptionally ambitious scaling up of power system integration, with a view to transitioning to an electrified economy by 2050:

“Supergrid” is the future electricity system that will enable Europe to undertake a once-off transition to sustainability. The concept of Supergrid was first launched a decade ago and it is defined as “a pan-European transmission network facilitating the integration of large-scale renewable energy and the balancing and transportation of electricity, with the aim of improving the European market”.

Supergrid is not an extension of existing or planned point to point HVDC interconnectors between particular EU states. Even the aggregation of these schemes will not provide the network that will be needed to carry marine renewable power generated in our Northern seas to the load centres of central Europe. Supergrid is a new idea. Unlike point to point connections, Supergrid will involve the creation of “Supernodes” to collect, integrate and route the renewable energy to the best available markets. Supergrid is a trading tool which will enhance the security of supply of all the countries of the EU.

The stated goal is to a achieve a transition to sustainability, while providing for a low-carbon, high-growth scenario. This is an obvious contradiction, given that high growth not sustainable by definition. The plan appears to be the pinnacle of techno-utopia, and a clear example of fashionable energy fantasy. Unfortunately unrealistic dreams can be sold as safe long term investments:

Despite these uncertainties, others believe the supergrid is a smart investment. ‘There are pension funds and many investors looking for safe returns,’ Julian Scola, spokesman for the European Wind Energy Association in Brussels, said to the New York Times. ‘Electricity infrastructure, which is a regulated business with regulated returns, ought to and does provide very safe and very attractive investment.’

Pension funds, while they still exist in their current form, could be lured into backing something too good to be true, as happened so extensively during the initial phase of the credit crunch. Such investments are highly unlikely to pay off.

The Broader European Energy Context

 

In addition to the problems with off shore wind and grids, knock on effects are anticipated in other energy markets with greater reliance on wind power:

There will be an increase in gas-price volatility across Europe as markets with more wind capacity, such as the U.K., Spain, France, Germany and the Netherlands, are linked to those with less, James Cox and Martin Winter, consultants at Poyry in Oxford, England, said in a research report published today. Wind will be the main source of irregular supply, as output can still fall to zero no matter how much capacity is installed, while solar continues to produce even under cloud cover.

“If it’s cold and still, it’s much more extreme for the gas network because you get the heating demand response to the cold weather and the power response to the still weather,” Cox.

The European Union has reached 100 gigawatts of installed wind-energy capacity, equivalent to the output of 62 coal-fired power stations, the European Wind Energy Association said Sept. 27. In the EU, about 5 percent of electricity came from wind last year.

The winners in this scenario will be owners of so-called fast-cycling gas storage, which can respond rapidly to falling wind generation, and traders who can take advantage of diverging prices at Europe’s trading hubs as weather patterns vary by geography, Cox said.

Once again, ownership of key energy storage components is critical. In our financialized world, it is also small wonder that traders playing an arbitrage game would be expected to enjoy great opportunities for gain. This dynamic has already threatened power supplies and is likely to do so repeatedly:

Germany’s electricity grid came to the brink of blackout last week – not because of the cold, but because traders illegally manipulated the system. They tapped emergency supplies, saving money but putting the system at risk of collapse.

Normal supply is maintained by the dealers acting as go-betweens for the industrial and domestic electricity consumers and the generators so that the latter know how much to supply. The Berliner Zeitung said the dealers were legally obliged to continually order enough electricity to cover what their customers need. But this was not done earlier this month, according to the regulator’s letter. Instead dealers sent estimates which were far too low, meaning the normal supply was almost completely exhausted. Several industry insiders told the Frankfurter Rundschau daily the tactic was deliberately adopted to maximise profits.

The dealers systematically reduced the amount they ordered for their customers, avoiding the expensive supply and forcing the system to open up its emergency supply – the price for which is fixed at €100 a Megawatt hour. This is generally considered very expensive – but compared to what else was on offer at the time, it represented huge savings – yet put the entire electricity supply system on emergency footing for no reason.

The Global Clean Tech Bubble

 

Those who advocate for a complete shift to renewables often state that it would be possible if only the political will to fund the transition were available. In fact, funding programmes have been introduced in many jurisdictions, often on a very large scale. Capital grants and long term Feed-In Tariff (FIT) contracts have been introduced in many European countries and in other regions. Feed-In Tariffs, which typically offer a twenty year guaranteed income stream in order to overcome the investment risk, have often been the economic tool of choice. Some of these have been very generous, and the subsidy regimes have driven large investments in renewables for many years. The costs have been in the hundreds of billions of dollars, with projections for many times that much in the future, both for generation capacity and for the necessary infrastructure to service it:

In 2005, VC investment in clean tech measured in the hundreds of millions of dollars. The following year, it ballooned to $1.75 billion, according to the National Venture Capital Association. By 2008….it had leaped to $4.1 billion. And the [US] federal government followed. Through a mix of loans, subsidies, and tax breaks, it directed roughly $44.5 billion into the sector between late 2009 and late 2011. Avarice, altruism, and policy had aligned to fuel a spectacular boom….

I….Investors were drawn to clean tech by the same factors that had led them to the web, says Ricardo Reyes, vice president of communications at Tesla Motors. “You look at all disruptive technology in general, and there are some things that are common across the board,” Reyes says. “A new technology is introduced in a staid industry where things are being done in a sort of cookie-cutter way.” Just as the Internet transformed the media landscape and iTunes killed the record store, Silicon Valley electric car factories and solar companies were going to remake the energy sector. That was the theory, anyway.

With the much of the risk safely lodged elsewhere, at least apparently, a sense that one could not lose became increasingly entrenched. This is dangerous, because this is the psychological underpinning of a speculative mania. When investors begin to throw money at something regardless of cost, believing that the investment can only go up, a self-reinforcing spiral leading into an epidemic of poor decision making tends to be the result. The sector over-reaches itself and the boom ends in bust, trashing the economic reputation of the sector for many years.

Productive capacity that had been built out in order to service the artificially-stimulated demand is then abandoned, often without having recovered its costs. Demand suffers an undershoot as the stimulus is withdrawn, typically for long enough that productive capacity has degraded to unusability before demand can recover. In this way, bubbles encourage the conversion of capital to waste.

Bubbles are inherently self-limiting and do not require a trigger to burst. They simply reach the maximum expansion, run out funds to tap to keep the expansion going, and implode. In the case of cleantech, the day of reckoning has been aggravated by lack of infrastructure, specifically grid capacity, as we have see above. Projects in some jurisdictions were facing years or more of delay for want of the physical ability to move the power from where it was proposed to be generated to where it could possibly be used.

For instance, the available grid capacity in Ontario (Canada) was oversubscribed in the launch period the the FIT programme. Ambitious grid expansion plans are planned, but over a period of decades. Even if we were not facing financial crisis, the financing for specific projects would have long since disappeared before the projects could expect to receive at FIT contract. Similarly in Europe, the grid connections necessary to build out off-shore wind on a large scale simply do not exist, and cannot be brought into existence in less than several decades time. Time is a major factor for high tech investors used to a rapid, or even explosive pace of development:

There was an additional factor at work: impatience. Venture capitalists tend to work on three- to five-year horizons. As they were quickly finding out, energy companies don’t operate on those timelines. Consider a recent analysis by Matthew Nordan, a venture capitalist who specializes in energy and environmental technology. Of all the energy startups that received their first VC funds between 1995 and 2007, only 1.8 percent achieved what he calls “unambiguous success,” meaning an initial public offering on a major exchange. The average time from founding to IPO was 8.3 years. “If you’re signing up to build a clean-tech winner,” Nordan wrote in a blog post, “reserve a decade of your life.”

The truth is that starting a company on the supply side of the energy business requires an investment in heavy industry that the VC firms didn’t fully reckon with. The only way to find out if a new idea in this sector will work at scale is to build a factory and see what happens. Ethan Zindler, head of policy analysis for Bloomberg New Energy Finance, says the VC community simply assumed that the formula for success in the Internet world would translate to the clean-tech arena. “What a lot of them didn’t bargain for, and, frankly, didn’t really understand,” he says, “is that it’s almost never going to be five guys in a garage. You need a heck of a lot of money to prove that you can do your technology at scale.”

The bubble is now bursting, especially for solar, which had benefited from the largest subsidies, but increasingly for wind as well. Investments in renewable energy companies, formerly seen as a no-lose bet, have often been failing to live up to expectations, to put it mildly. Early entrants did very well, but late comers are the empty bag holders, as with any structure grounded in ponzi dynamics:

Renewable energy is the future, say environmentalists. But for green and ethical investors it has turned into a nightmare, with makers of wind and solar power systems among the worst-performing stocks in recent years. Take Vestas, the Danish wind turbine maker. Early investors enjoyed sparkling returns, with shares leaping from 34 Danish kroner in 2003 to 698 in 2008 – a 20-fold rise. But since then, beset by the loss of government subsidies, cost overruns, production delays and competition from China, the price has collapsed. Today it is trading at 35 kroner – so someone investing in 2008 will have lost nearly 95% of their money. In August Vestas revealed it had slumped into losses and shed another 1,400 jobs, bringing total redundancies for the year to more than 3,700. It had planned to construct a plant at Sheerness docks in Kent to supply turbines for expected deep-water North Sea wind farms, but this was axed in June.

Solar panel manufacturers have also burnt a hole in investors’ pockets. Look at SunTech, the world’s biggest maker of PV (photovoltaic) panels, based in Wuxi, China. Its private equity backers (notably Goldman Sachs) made a fortune when it listed on the New York Stock Exchange in 2005, making well over 10 times their original investment. So did the people who bought at the initial share launch, with the shares shooting from $20 to $79 in late 2007. And today? They are changing hands at just 92 cents. First Solar, another one-time darling of Nasdaq, collapsed from $308 in April 2008 to $23 last week. Solar is an industry awash with overcapacity in China, falling prices and declining government subsidies.

Solar is particularly expensive in comparison with currently available alternatives. Grid parity – cost competitiveness with other sources – is a distant dream, hence the requirement for disproportionately large subsidies:

“Today, you’d need to charge $375 per megawatt hour to justify investment in new solar equipment—nearly four times the average US retail price of electricity,” writes Catherine Wood of AllianceBernstein….And these calculations don’t include the cost of backup power or energy storage to supply power when the sun isn’t shining. A backup power system or battery would add roughly 25% to the electricity price required to justify new investment in solar power.

“Finally, these calculations ignore the cost of the real estate upon which a solar panel sits, because most smaller scale installations are on a rooftop that would otherwise go unused. For utility-scale installations, however, ignoring real estate costs is not fair. The cost basis for what will be the largest utility-scale solar power installation in Japan more than doubles if you take into account the value of the real estate that the solar panels will occupy.

 

China has made a very large investment in renewables and energy storage technologies, and their productive capacity has expanded so quickly that companies in other countries have struggled to compete, particularly in photovoltaics. The sharp fall in panel prices has been very hard on non-Chinese solar manufacturer, dropping capacity significantly. The Chinese developmental state has been building out infrastructure of all kinds for many years, hence this determined move is no exception. Subsidies at the national level were vastly larger than those given by western states, and a national feed-in tariff was introduced. Additional support was given at the provincial and local levels in the form of tax incentives and access to real estate at subsidized cost.

Even in China, however, huge losses are now being incurred:

China in recent years established global dominance in renewable energy, its solar panel and wind turbine factories forcing many foreign rivals out of business and its policy makers hailed by environmentalists around the world as visionaries.

But now China’s strategy is in disarray. Though worldwide demand for solar panels and wind turbines has grown rapidly over the last five years, China’s manufacturing capacity has soared even faster, creating enormous oversupply and a ferocious price war. The result is a looming financial disaster, not only for manufacturers but for state-owned banks that financed factories with approximately $18 billion in low-rate loans and for municipal and provincial governments that provided loan guarantees and sold manufacturers valuable land at deeply discounted prices.

China’s biggest solar panel makers are suffering losses of up to $1 for every $3 of sales this year, as panel prices have fallen by three-fourths since 2008. Even though the cost of solar power has fallen, it still remains triple the price of coal-generated power in China, requiring substantial subsidies through a tax imposed on industrial users of electricity to cover the higher cost of renewable energy. The outcome has left even the architects of China’s renewable energy strategy feeling frustrated and eager to see many businesses shut down, so the most efficient companies may be salvageable financially.

Even as costs fall on a bursting bubble, renewables have not achieved grid parity. That quest has been greatly aggravated, particularly in North America, by the shale gas mirage, which promises so much gas for the foreseeable future that it has crashed the price of gas in the meantime:

The price of natural gas peaked at nearly $13 per thousand cubic feet in 2008. It now stands at around $3. A decade ago, shale gas accounted for less than 2 percent of America’s natural gas supply; it is now approaching one-third, and industry officials predict that the total reserves will last a century. Because 24 percent of electricity comes from power plants that run on natural gas, that has helped keep costs down to just 10 cents per kilowatt-hour—and from a source that creates only half the CO2 pollution of coal. Put all that together and you’ve undone some of the financial models that say it makes sense to shift to wind and solar. And in a time of economic uncertainty, the relatively modest carbon footprint of natural gas gets close enough on the environmental front for a lot of people to feel just fine turning up the air-conditioning.

Unconventional fossil fuels (shale gas, coal bed methane, tight formation gas, shale oil and oil-shale etc) are well entrenched in their own bubble, as we have repeatedly documented at TAE (see for instance Shale Gas reality Begins to Dawn and Unconventional Oil is NOT a Game-Changer).

People are currently believing the hype, and perception is what moves prices. The current perception is of glut, when in fact the unconventional fossil fuel boom is likely to be short-lived thanks to very low EROEI, a high capital requirement and huge amounts of leverage. The artificially low price of natural gas is on the verge of putting over-leveraged gas producers out of business en masse, at which point the North America will be set up for a supply crunch and price spike. By the time that scenario plays out, there will no longer be the time or the money to shift back to investment in renewables.

Fracking is getting underway in many other jurisdictions as well, and will very likely be similarly disappointing. In Europe, the mirage offers the hope of gas independence from Russia, but this potential is likely to be illusory. Ironically from an environmental point of view, given that gas is perceived to be acceptable from a carbon emission perspective, gas produced by fracking is very much more carbon intensive than conventional production – likely worse than coal.

The boom and bust dynamic is, for the time being, alive and well in the energy sector. Any part of the real economy which has become heavily financialized will be subject to the rapid speculative swings of finance. Such swings can devastate vital economic sectors. The bust which is coming courtesy of the bursting the largest financial bubble in human history will be one for the record books.

Austerity and the Future of Renewable Energy Subsidies

 

The feed-In tariffs that stimulated so much investment in renewable energy for sale to the grid have been suffering cutbacks in many, if not most, jurisdictions that introduced them. Solar tariffs in particular have been deemed too generous, especially in an era of increasing austerity. We covered this dynamic at TAE back in early 2011 in The Receding Horizons of Renewable Energy.

The financial benefit of a feed-in tariff accrues to a few relatively wealthy renewable energy entrepreneurs, while the cost of the subsidy is borne by electricity consumers. It will become increasingly difficult to justify high levels of private payments as times get harder and electricity bills become less affordable for the masses. The costs, for tariff payments, for back up generation capacity, and for infrastructure build out, have escalated rapidly on increasing installed capacity in early adopter countries. Cutting feed-in tariffs, or whole programmes, is likely to become a means of scoring easy political points once we move from general support for green initiatives towards a greater focus on a shrinking economy. Environmental concern peaks with the economy, in that people who do not have immediate worries of scarcity place more importance on wider issues with a longer timeframe. Once an economy is in contraction, however, societal discount rates skyrocket and the focus on broader issues rapidly disappears. Considering what the future holds economically, a loss of concern for the environment is sadly highly likely.

Ironically, installing renewable generation under a feed-in tariff often does little or nothing in terms of energy security for the person installing it. All power is typically loaded on to the grid and paid for, and all power consumed is purchased from the grid. Separate storage systems are often explicitly disallowed, meaning the the owner of the renewable energy system is as vulnerable to blackouts as anyone else. Generation installed in this way is effectively a money generating system from the point of view of the installer, rather than an energy generating system.

One group of countries aggressively cutting renewable energy subsidies is the European periphery. Both Greece and Spain, for instance, championed renewable energy regardless of cost, but are now being forced to retreat from the sector. In both countries, subsidy uptake exceeded expectations, hence the future costs are projected to be far larger than had been anticipated.

In Greece, a lack of funding and a substantial regulatory burden has delayed much of the mass of applications to the point where they are unlikely ever to be built, but substantial investments, mostly in wind power, have already been made and the projects commissioned.

Since George Papandreou came to power in the October 2009 elections in Greece, a central policy priority has been the promotion of “green energy.” As part of this policy, between EUR 10-15 billion in renewable energy (RE) projects have been licensed. These include large, industrial-scale wind and photovoltaic projects, as well as smaller installations of up to 1-5 MW…

….Unfortunately, there has been no prior control over either the number or location of the applications permitted, nor has there been a cap on the energy generation capacity licensed. As a result, investors have responded in far greater numbers than imagined.

The process has not been without its political clientilism. In an effort to appease farmers, for instance, the Ministry of Agriculture made extraordinary efforts to get farmers to apply for RE production licenses, with many public assurances that their applications would be approved. As a result, thousands of farmers responded, with the result that the number of applications is at least double the original forecast. These farmers already benefit excessively from EU Common Agricultural Policy subsidies, and will soon increase their reliance on the state through renewable energy generation.

Reliance on payments from the state is not a good position to be in, in a country where the economy is seizing up, as it currently is in Greece. Greece is experiencing a liquidity crunch, and we covered what that really means several months ago at TAE in Crashing the Operating System – Liquidity Crunch In Practice. The power system is no exception. Back in June, in the run-up to the general election, the financial crisis became acute:

Greece’s debt crisis threatened to turn into an energy crunch on Friday, with the power regulator calling an emergency meeting next week to avert a collapse of the country’s electricity and natural gas system. Regulator RAE called the emergency meeting after receiving a letter from Greece’s natural gas company DEPA, dated May 31 and seen by Reuters, threatening to cut supplies to electricity producers if they failed to settle their arrears with the company….

….According to an energy industry source who declined to be named, DEPA has no cash to settle gas supply bills worth a total 120-million euros (US$148.4-million) with Italian gas firm Eni , Turkey’s Botas and Russia’s Gazprom, which fall due this month. DEPA CEO Haris Sahinis declined to comment on the company’s cash position but told Reuters: “DEPA is taking every action to avoid owing anything to its suppliers.”

If DEPA cuts off supplies, Greece’s independent power producers such as Elpedison, Mytilineos, Heron and Corinth Power — which cover about 30 percent of the country’s power demand — would be forced to stop operations. Greece’s grid operator ADMIE would then have to proceed to rotating power cuts to avoid a general blackout, just as the country’s summer tourism season, a rare foreign exchange earner for the country’s uncompetitive economy, goes into full swing.

These producers use natural gas, much of it supplied by DEPA, to produce about 70% of their electricity output. Greece’s dominant electricity company PPC uses natural gas to a much lesser extent than the other producers, but PPC’s coal and hydro units would not be able to cover the shortfall. Power companies have failed to pay their bills to DEPA because they, in turn, have not been reimbursed by LAGHE, a state-run clearing account for the nation’s energy transactions.

In recent months RAE has repeatedly urged the government to shore up the accounts of LAGHE, which is sitting on a deficit of more than 300-million euros. The account went into deficit because its receipts have not matched the generous subsidies it pays out to renewable energy producers, particularly for solar panels. LAGHE’s deficit deteriorated earlier this year when two electricity retailers, PPC’s biggest rivals, went bust without honoring their obligations to the account, leaving authorities scrambling to find cash….

….Greece could also boost the LAGHE account by using about 100-million euros sitting in the accounts of the two power retailers that went bust earlier this year, Zervos said. But energy authorities have no access to that money because it has been frozen as part of a criminal investigation into the bust. “It’s absolutely crazy. This is money that power consumers paid into the energy system,” the source said.

In a highly interconnected system, the potential for knock-on effects is very significant. The system is only as strong as its weakest link, and when there is little money to go around to settle accounts, there are many weak links are exposed. The risk is cascading system failure.

By September, Greece was responding to the threat by, among other factors, axing the feed-in tariff programme and targeting previously favoured renewable energy producers:

Greece, aiming to stave off a fresh energy crisis, plans to support its main electricity market operator through a temporary tax on renewable power producers and by extending an emergency loan, a senior official said on Friday. Deputy energy minister Asimakis Papageorgiou told Reuters that Greece’s international lenders had dropped their opposition to the loan plan [previously seen as illegal state aid] in view of the country’s critical energy situation.

The electricity system came close to collapse in June when market operator LAGHE was overwhelmed by subsidies it pays to green power producers as part of efforts to bolster solar energy. LAGHE was already suffering in Greece’s debt crisis as bills were left unpaid by consumers protesting against the collection of an unpopular property tax via the bills of PPC, the country’s sole electricity retailer.

Papageorgiou also said that Greece would unveil by the end of 2012 plans for a market-based retail electricity network. He said PPC, due to be privatized under a massive government sell-off plan to ease Greece’s budget crisis, will probably spin off some power stations and distribution lines to create one or two rival companies. PPC itself would find a strategic partner.

The state-run Loans and Consignments Fund, a key lifeline for the country’s energy system, will give LAGHE a one-year loan of 140 million euros ($180 million), Papageorgiou said. “The troika (EU, IMF and ECB) approved it because they realized that these actions are necessary for the market to survive and return to a normal state,” he said.

Earlier this year the fund extended 100 million euros to state-owned natural gas supplier DEPA and another 110 million to dominant state-controlled utility PPC (DEHr.AT).

The temporary charge on renewable energy producers was a further measure to plug LAGHE’s deficit of more than 300 million euros. “I’d call it a solidarity levy,” Papageorgiou said. “It will be in force over a very specific period… and set at such a level that will allow them to operate normally with satisfactory returns.”

Greece has slashed the guaranteed feed-in prices it pays to some solar operators and is no longer approving permits for their installation.

Greek consumers, who can ill-afford to pay more for anything as unemployment skyrockets, are being asked to cover a 19% hike in electricity prices. The power system framework is a byzantine mess, and the last few years of attempted transition have added enormously to the complexity of the predicament. It is unclear in what form the system may ultimately survive, but in the meantime, the population is very likely to have to get used to interruptible supply at best.

When feed-in payments are cut, and windfall taxes imposed instead, those who took on loans to build projects will not be able to service the debts they incurred. Their eventual default will add to the illiquidity of the system. Further investments in renewables will dry up on risk of so many kinds at once. A twenty year guaranteed payment, meant to overcome that risk and stimulate investment, is a promise too good to be true. When governments make reckless promises they cannot keep they will simply repudiate the contracts unilaterally. There are no risk free investments, but many people have acted as if there were and have structured their investments, or even their lives, around promises destined to be broken:

The Spanish and Germans are doing it. So are the French. The British might have to do it. Austerity-whacked Europe is rolling back subsidies for renewable energy as economic sanity makes a tentative comeback. Green energy is becoming unaffordable and may cost as many jobs as it creates. But the real victims are the investors who bought into the dream of endless, clean energy financed by the taxpayer. They forgot that governments often change their minds….

….The austerity programs have piled on additional difficulties in the form of subsidy reductions. No government would announce “temporary” subsidies, for fear of scaring off investment in renewable energy. Still, that’s exactly what the subsidies are turning out to be. Investors everywhere are going to get slaughtered as debt-swamped governments trim or eliminate the freebies.

The renewable energy bubble was inflated by government subsidies. Those same governments are now deflating them. Turns out the subsidies were too good to be true.

In Spain, renewable subsidies were generous and achieved a huge increase in installed capacity, at a consumer cost of 6 billion euros a year by 2009 (compared to 5.6 billion in Germany where the economy is four times the size). Approximately half the subsidies went to solar, which produced 2% of the power. However, when financial crisis began to bite, cuts were inevitable. Initially, tariffs on new projects were reduced 45%, and later a new decree retroactively limited the number of production hours qualifying for subsidies for existing projects with feed-in tariff contracts:

Spain’s solar industry lobby group, the Asociacion Empresarial Fotovoltaica, estimated that the second decree would effectively reduce tariffs received by PV plants by 30 per cent, forcing many of the PV companies to default on their debt. Infrastructure Investor magazine called the second decree “the Christmas Eve massacre.”

Investment began to dry up almost immediately on greatly increased regulatory risk, and companies were left with no domestic market for their products:

Spanish renewable-energy companies that once got Europe’s biggest subsidies are deserting the nation after the government shut off aid, pushing project developers and equipment-makers to work abroad or perish. From wind-turbine maker Gamesa Corp. Tecnologica SA (GAM) to solar park developer T-Solar Global SA, companies are locked out of their home market for new business. These are the same suppliers that spearheaded more than $69 billion of wind and solar projects since 2004 that today supply more than 50 percent of Spain’s power demand on the most breezy and sunny days….

….”They destroyed the Spanish market overnight with the moratorium,” European Wind Energy Association Chief Executive Officer Christian Kjaer said in an interview. “The wider implication of this is that if Spanish politicians can do that, probably most European politicians can do that.”….

Industry Minister Jose Manuel Soria, who is preparing a wholesale redesign of the pricing for Spain’s regulated energy industry, described the January move as a “first step.” The nation’s energy regulator in March suggested scaling back incentives for solar thermal plants. The government also may impose temporary taxes or caps on renewable plants, Standard & Poor’s said in February….

….T-Solar, which became the world’s biggest solar-farm operator by leveraging its Spanish business, currently has more than 40 running in Spain, Italy and India. While it still makes solar panels in Orense, Spain, they’re bound for Peru. “We have an important pipeline of projects, and it’s 100 percent outside Spain right now,” T-Solar Managing Director Juan Laso, who also heads the country’s photovoltaic power association, said in a telephone interview. “If you take such a brutal measure, what you do is oblige the industry to move out,” he said of the January moratorium.

For the time being, there are still other markets to be served, but as financial crisis spreads, that will be less and less the case. Many other jurisdictions are cutting, or contemplating cutting, subsidies. The remaining market is set to shrink relentlessly, squeezing overcapacity of supply.

A Decentralized Renewable Reality?

Renewable energy is never going to be a strategy for continuing on our present expansionist path. It is not a good fit for the central station model of modern power systems, and threatens to destabilize them, limiting rather than extending our ability to sustain business as usual. The current plans attempt to develop it in the most technologically complex, capital and infrastructure dependent manner, mostly dependent on government largesse that is about to disappear. It is being deployed in a way that minimizes a low energy profit ratio, when that ratio is already likely too low to sustain a society complex enough to produce energy in this fashion.

Renewable electricity is not truly renewable, thanks to non-renewable integral components. It can be deployed for a period of time in such a way as to cushion the inevitable transition to a lower energy society. To do this, it makes sense to capitalize on renewable energy’s inherent advantages while minimizing its disadvantages. Minimizing the infrastructure requirement, by producing power adjacent to demand, and therefore moving power as little distance as possible, will make the most of the energy profit ratio. The simplest strategy is generally the most robust, but all the big plans for renewables have gone in the opposite direction. In moving towards hugely complex mechanisms for wheeling gargantuan quantities of power over long distances, we create a system that is highly brittle and prone to cascading system failure.

In a period of sharp economic contraction, we will not be able to afford expensive complexity. Having set up a very vulnerable system, we are going to have to accept that the the lights are not necessarily going to come on every time we flick a switch. Our demand will be much lower for a while, as economic depression deepens, and that may buy the system some time by lowering some of the stresses upon it. The lack of investment will take its toll over time however.

While a grid can function at some level even under very challenging conditions – witness India – it is living on borrowed time. We would do well to learn from the actions, and daily frustrations, of those who live under grid-challenged conditions, and do what we can to build resilience at a community level. Governments and large institutions will not be able to do this at a large scale, so we must act locally.

As with many aspects of society navigating a crunch period, decentralization can be the most appropriate response. The difficulty is that there will be little time or money to build micro-grids based on local generation. It may work in a few places blessed with resources such as a local hydro station, but likely not elsewhere in the time available. The next best solution will be minimizing demand in advance, and obtaining back up generators and local storage capacity, as they use in India and many other places with unstable grids. These are relatively affordable and currently readily available solutions, but do require some thought, such as fuel storage or determining which are essential loads that should be connected to batteries and inverters with a limited capacity. Later on, such solutions are much less likely to be available, so acting quickly is important.

Minimizing demand in a planned manner greatly reduces dependency, so that limited supply can serve the most essential purposes. It is much better than reducing demand haphazardly through deprivation in the depths of a crisis. Providing a storage component can cover grid downtime, so that one no longer has to worry so much when the power will be available, so long as it is there for some time each day. Given that even degraded systems starved of investment for years can deliver something, storage can provide a degree of peace of mind. It is typically safer than storing generator fuel.

Some will be able to install renewable generation, but it will not make sense to do this with debt on the promise of a feed-in tariff contract that stands to be repudiated. Those who can afford it will be those who can do it with no debt and no income stream, in other words those who do it for the energy security rather than for the money, and do not over-stretch themselves in the process. Sadly this will be very few people. Pooling resources in order to act at a community scale can increase the possibilities, although it may be difficult to convince enough people to participate.

It is difficult to say what power grids might look like following an economic depression, or what it will be possible to restore in the years to come. The answers are likely to vary widely with location and local circumstances. Depression years are very hard on vital economic sectors such as energy supply. Falling demand undercuts price support, and prices fall more quickly than the cost of production, so that margins are brutally squeezed. Even as prices fall, purchasing power falls faster, so that affordability gets worse. Consumers are squeezed, leading to further demand destruction in a positive feedback loop.

Under these circumstances, the energy sector is likely to be starved of investment for many years. When the economy tries to recover, it is likely to find itself hitting a hard ceiling at a much lower level of energy supply. With less energy available, society will not be able to climb the heights of complexity again, and therefore many former energy sources dependent on complex means of production will not longer be available to simpler future societies. Widespread electrification may well be a casualty of the complexity crash.

We are likely to realize at that point just how unusual the era of high energy profit ratio fossil fuels really was, and what incredible benefits we had in our hands. Sadly we squandered much of this inheritance before realizing its unique and irreplaceable value. The future will look very different.

 

Continue reading »

George Monbiot recently made a major about-face on his peak oil stance, on the grounds that unconventional oil represents a new reality. The basis of his u-turn is a recent report on unconventional oil by Leonardo Maugeri, (former) oil executive at Italy's Eni, published at Harvard University, where Maugeri's a Senior Fellow at the John Kennedy School, Belfer Center, which we discussed here at TAE in Unconventional Oil is NOT a Game Changer.

George Monbiot:

We were wrong on peak oil. There's enough to fry us all

Peak oil hasn't happened, and it's unlikely to happen for a very long time.

A report by the oil executive Leonardo Maugeri, published by Harvard University, provides compelling evidence that a new oil boom has begun. The constraints on oil supply over the past 10 years appear to have had more to do with money than geology. The low prices before 2003 had discouraged investors from developing difficult fields. The high prices of the past few years have changed that.

Maugeri's analysis of projects in 23 countries suggests that global oil supplies are likely to rise by a net 17m barrels per day (to 110m) by 2020. This, he says, is "the largest potential addition to the world's oil supply capacity since the 1980s". The investments required to make this boom happen depend on a long-term price of $70 a barrel – the current cost of Brent crude is $95. Money is now flooding into new oil: a trillion dollars has been spent in the past two years; a record $600bn is lined up for 2012.

I sent George a short response to his article, by way of opening a dialogue:

What we are facing is a demand and price collapse that will render unconventional supplies uneconomic. Natural gas is leading the way over the next few years. The high cost and low EROEI are fatal flaws.

And received this reply:

If there's a collapse in demand, peak oil is not an issue, right? If there's a resurgence of demand, unconventionals become economic again. As for EROEI being a constraint, try telling that to the tar sands producers in Alberta.

With best wishes,

George

The debate continues. Here is my next installment:

 

A demand collapse will certainly put peak oil on the backburner for a number of years. The next few years will be remembered for financial crisis as we move into what will be at least as bad as the Great Depression (and very likely worse, since the bubble was much larger this time). Peak oil will not have gone away, however.

We have used the cheap and accessible oil (and other fossil fuels) and what remains will be exceptionally, and increasingly, expensive in both financial and energy terms. Predictable consequences will follow from this, but in a complex interaction with many other factors, notably the context of the huge credit bubble bursting. This amounts to crashing the operating system. For a while, resource constraints will be relieved due to economic seizure (i.e. the collapse of both the money supply and the velocity of money).

During the period of financial crisis, deflation and deleveraging, weak demand will buy us some time, but at the cost of setting us up for a supply crunch later. The period of sharply falling prices will kill investment in the energy sector, because the cost of production will fall less quickly than prices, meaning margins will be squeezed. Both physical and financial risks will be much higher. A lack of economic visibility will be anathema to what are inherently long term projects.

In addition, trade collapses during periods of economic depression, as for instance letters of credit become impossible to obtain, and the lack of funds for maintenance compromises the integrity of distribution infrastructure. Infrastructure may also be deliberately targeted during the inevitable upheaval. All of these factors act to reduce supply, and would be difficult, or impossible, to reverse quickly if demand were to rise.

When supply and demand become tight, what transpires is not a simple price spike, but an exaggerated boom and bust dynamic. This has been underway since 2005/06. The first full cycle unfolded from 2005/06 to 2008. The second began in 2008/09 and will probably end with a price bottom relatively early in this depression with a resurgence of military demand, given that oil is liquid hegemonic power.

That should feed into the third cycle, which should send prices sharply higher in real terms, if not to a new high in nominal terms. This price volatility, against a backdrop of severe economic contraction, upheaval and fear is leading towards a profound societal change, most likely a significant period of involuntary loss of socioeconomic complexity.

You mention the tar sands, and they are indeed an interesting case – an arbitrage between cheap natural gas and expensive syncrude that can continue while the price disparity is maintained. They are able to make money, even though they are not producing much net energy. Unfortunately for the tar sands producers, the price disparity is set to reverse.

The hype surrounding shale gas has crashed the price to the point where it is on the verge of putting producers out of business. Natural gas in North America appears to have bottomed, while the perception of glut in unconventional oil, combined with weak demand and a lack of appropriate infrastructure for internal North American sources, is set to undermine oil prices considerably.

Tar sands projects will be under acute threat under those circumstances – not imminently, but over the next five years or so. Once one cannot make money from some combination of artificial input/output price disparity, public subsidy and the ability to socialize externalities, then EROEI becomes the defining factor, and the EROEI for tar sands is pathetic.

While I agree that oil men do not base decisions on EROEI, ultimately EROEI will determine their ability to make money, and that is their driving motivation. Finance can only temporarily allow people to ignore thermodynamics.

EROEI effectively determines what is and is not an energy source for a given society (ie to maintain a given level of socioeconomic complexity). Unconventional fossil fuels are caught in a paradox – that their EROEI is too low for them to sustain a society complex enough to produced them.

They can only be produced for the relatively short period of time that the complex society built on conventional sources continues to maintain its current capacities, but as the conventional sources disappear, and that society can no longer support itself, the ability to undertake all the activities required for unconventional production will be lost. The hype has no foundation.

We have been living in a major departure from reality in many ways, as always occurs during bubble times, but those times are coming to an end. Instead of overshoot, we are headed for undershoot, and we are not going to like it.

Note the critical paradox of unconventional supplies. That is where the cornucopian view of energy, where Monbiot now seems to have landed, breaks down.

The same argument applies to renewable power as it is currently practiced. Without affordable conventional fossil fuels, the increasingly complex alternatives cannot be developed and exploited.

We find ourselves in a world of receding horizons.

Unconventional supplies are always priced at conventional energy plus a premium, thanks to their crucial dependency on conventional supplies.

What high Energy Return On Energy Investment makes possible, low EROEI will eventually take away, following a brief boom that constitutes the last gasp of our modern energy bubble era.

Image: Raúl Ilargi Meijer: Data source: David Murphy