At Last – A Max Energy Cost Target

You may remember that about 6 months ago I mentioned asking Gail1 about her alternative energy model. Her view is that energy that cannot be used and make a profit won’t be used – thus supply and demand mean that energy prices go down after the peak not up. This is her explanation for the continuing world slump (in real terms) and the relationship between QE/escalating debt and its relationship to the price and availability of oil. I find her ideas both compelling and seriously more explanatory than the cacophony of different explanations by economists.

I asked the obvious question – what are the maximum prices for the various sources of energy which allow profits to be made and civilization to survive.

I couldn’t work out how to come up with an answer, but on historical grounds suggested for oil south of $40 and for gas and electricity a bit less than they are now in real terms.

Gail has now worked out an answer on historical and theoretical grounds

  • Oil $20 barrel
  • Electricity 4c/kw hr

Essentially, historically when these limits are breached bad things happen.

She doesn’t give us a natural gas figure but I suggest $2/mm cu ft . That’s above the current US sale price, but way below the marginal cost for producers; around $6+.

Given that the marginal producers of oil cost north of $100 barrel, once the investor subsidized producers have gone out of business, we will be in an unaffordable oil post peak shortage. There’s plenty left but we cant afford the cost of extraction. On current projections mid-2017 is when that I think that arrives (investment has dropped dramatically but there are a variety of financial and technical inertias in the system) – but I’m famous for getting timing wrong!

She points out that, given that we can’t extract oil and that a sudden transition to e-cars would involve phenomenal investment and lots more cheap electricity, an alternative form of liquid fuel is required really quickly – i.e. in production timescales not research.

Oil can be made from biology (energy-expensive), natural gas (expensive at real natural gas costs), coal (expensive + bad CO2 effects) , or electricity + CO2 + water (currently expensive). The only sustainable answer is the latter, but because the energy is largely wasted when the oil is burnt, only about 25% overall efficient (from solar input). Politicians will probably pick coal as the technology is really old and well understood and a lot of big coal producers are currently in serious financial trouble. It is also a nice, easy to understand, quick fix when drivers are queuing up at pumps (as in South Africa during apartheid). They will probably offer a short term coal oilification answer with a longer term carbon capture retrofit (which will never happen). Any country that goes this way will rapidly raise its debt levels to unsustainable and the economy will sink.

I thus conclude that the current vehicle stock is essentially scrap metal after a short period of rapidly oscillating oil price shortages and panic measures to supplement supply and target supplies to essential services. (message – don’t replace your current banger!)

Much of the population could be moved by electric vehicles (or push bikes) – I’m thinking here of trams and trains not electric cars because its easier to see an emergency (debt fueled) program of trams being rolled out (pace Edinburgh which demonstrates just how hard you can make it if you try), to hit a large proportion of the city and large town population. My recent visit to Vienna showed how effective this can be – at least if you live near the hub or one of the spokes. I’m assuming here that the debt levels needed to quickly replace all petrol by electric cars is not possible without serious economic effects (assuming Gails model) although probably a slow replacement will still happen.

Electric efficiency (solar to wheels) is much better than petrol so this approach makes the available electricity go several times further i.e. its usage is cheaper.

So where is this addition and replacement cheap electricity going to come from in 2017 onwards? Whatever we do will involve stonking amounts of debt, and a mid term hit to GDP so we need to do it once and not look for “bridging technologies”.

Not nuclear – its too expensive, new UK is over 15c/kwh, and too late. We will eventually find out in 20-30 years whether the south korean/chinese systems are truly cheap or just very risky, but its a bad bet.

Coal can do it, but not if you want to reduce usage for climate reasons.

Natural gas appears to be able to do it, until you look at the real (unsubsidised) cost, i.e. European rather than US current figures. Costs are incredibly variable in Europe as it has been tied to oil prices. “Old gas” is cheap but in limited supply, new gas is expensive.

So we end up with the usual few answers…

  1. Easy geothermal – Right cost and quick to produce if you need to, but limited scale.
  2. Hard geothermal – Massive resource but extraction costs are not coming down fast enough to be relevant in the timescale.
  3. Onshore wind – Most analyses of costs seem to be at least a year or more old with lots of issues over currency conversion and discount rates. However, unless I’ve got it wrong, in 2014 some US utilities were being offered wind at 2.5c/kw hr which is well inside Gail’s requirement even after a utility markup and an intermittancy tax. Wind is quickly scale-able. Usually the limiting factor is grid connection, which is fixable with will!. Costs are still coming down at a few percent a year with larger blades.
  4. Offshore wind – More expensive than onshore but coming down in cost rapidly. It has some intermittancy advantages will reach Gail’s goal around 2025
  5. Solar – Once again analysis is complex. Home solar is more expensive per installation but doesn’t carry the 2X grid overhead. Utility solar is cheaper but does. Solar costs are heavily affected by the number of hours of sun per day and year (Obvious but surprisingly ignored by boosters). Most analysis compare costs with oil, coal or gas, all of which have very variable input costs depending on currencies and oscillating world demand. About all we can say at present is that at current prices, it’s cheaper in the right places than anything except onshore wind. It is also still on a steep learning curve which leads some to predict that it will be cheaper than wind in ten years. Conclusion, it probably crosses Gail’s cost threshold today in some places and will expand its cost efficient coverage rapidly for at least a decade.
  6. Storage – Cheap volume, quick to roll out storage technologies are not ready. Long distance HVDC is a cost effective solution but needs a panic to get it built quickly enough. Intermittent is going to be a problem.

The result of all this is that we have arrived at the start of the energy desert. We can finangle enough debt in the short term to invest massively in a few electricity creation systems and to move across to electricity for a lot of current oil uses while keeping within Gail’s cost limit. We don’t have anything to spare. Cheap forms of efficiency are going to be critical as well as an acceptance that electricity may not be always available when we want it.

I have not considered heating, which is basically gas these days. I can see Gail’s analysis being relevant to industry, who have quite a lot of alternative approaches, but home heating is quite a serious problem. It’s not clear at what point a reduction in heating would affect workers and health, i.e. the economy. Biogas produced as a product of disposal is a good supply augmentation but has limited scale.

However, it seems obvious that negative heating, i.e. insulation and high efficiency new homes, is a robust strategy as it would effectively allow the use of less gas at a higher cost to do the same job and thus create more supply for a while, while setting up for a conversion to electricity and solar heating. (Solar or wind electricity are a good match; good for heating. Coal or gas electricity is a bad match as most of the primary energy is lost in the conversion to electricity).

Overall it seems that Gail’s cost limits are achievable practically, but with huge one-off investment. This would logically be funded by stopping investment in coal, oil, petrol cars and gas. Logically.


Surprising solar projection by respectable organisation

See Current and Future Cost of Photovoltaics

Or Google “Fraunhofer solar future”.

This is a hefty report by a very German organization i.e. they spent a year convening groups of experts in every aspect of solar and hammering all the aspects of death.

Takeaways- though it’s pretty easy to read

  1. Solar power will soon be the cheapest form of electricity in many regions of the world. Even in conservative scenarios and assuming no major technological breakthroughs, an end to cost reduction is not in sight. Depending on annual sunshine, power cost of 4-6 CT/kWh are expected by 2025, reaching 2-4 CT/kWh by 2050 (conservative estimate). [Lignite (nasty coal) is about 4-5 today and generally getting more expensive. So, in 2025 crossover is to be expected. Note that this does not include any cost rise from carbon pricing. So, carbon pricing that doesn’t have a major effect by 2025 may be irrelevant!]
  2. Most scenarios fundamentally underestimate the role of solar power in future energy systems. Based on outdated cost estimates, most scenarios modeling future domestic, regional or global power systems foresee only a small contribution of solar power. The results of our analysis indicate that a fundamental review of cost-optimal power system pathways is necessary. [Note that utility wind and solar cost bands now overlap 2015 and solar is getting cheaper faster than wind. – Wikipedia] Various scenarios suggest 20-40% utility of solar by 2050.
  3. Solar photovoltaics were already today a low-cost renewable energy technology. Cost of power from large scale photovoltaic installations in Germany fell from over 40 CT/kWh in 2005 to 9CT/kWh in 2014. Even lower prices have been reported in sunnier regions of the world, since a major share of cost comptes is traded on global markets. [Dubai 5CT]
  4. Financial and regulatory environments will be a key to reduce costs in the future. Cost of hardware sourced from global markets will decrease, irrespective of local conditions. However, inadequate regulatory regimes may increase cost of power upto 50 percent through a higher cost of finance. This may even over compensate the effect of better local solar resources. [Southern Germany can be more profitable than Spain because of the low risk, stable nature of the German market and financing arrangements]

My additional comments:

This paper has taken great pains to err on the conservative side in all aspects of its work to maintain respectability. Even its optimistic scenario has a lot of conservatism baked in underneath.

They have not punted much on new solar technologies- they mention them, but don’t assume sudden breakthroughs because of the inertia effect, I suspect.

Despite this, solar cells of twice today’s average efficiency would effectively halve many of the cost factors and mean that many existing solar sites could be retrofitted profitably.

They also seem to assume fixed axis setting. Obviously, dual axis can have a major effect on work function and thus output but as a material and operational cost. There’s a lot of innovative stuff in this area which I don’t think was included as it’s a bit contentious.

So, this is a good solid report that despite being conservative is well based and should cause anyone thinking of investing in new nuclear or coal to stop!

Since, I am more interested in trying to find the center of the potential futures rather than a safe lower limit, have no reputation to defend, I would put the cost effectiveness and roll out as better, earlier and largely discount the most negative scenarios.

After all, if the IEA can publish future production based on “undiscovered” reserves, surely I can with more confidence punt on undiscovered technology in a very fast moving area!



A Sign of Things to Come in the Energy Market

[My friend Ian Page, who researches and writes extensively about energy has graciously allowed me to repost some of his emails here.]

by Ian Page, 2024.08.07

German Utilities Paid to Stabilize Grid Due to Increased Wind and Solar

Its well understood that as the proportion of renewables increase, both stabilisation and storage become more critical.

As Germany is furthest ahead in the proportion of renewables, its interesting to watch the H1 and H2 responses.

The German grid has created a standardized bidding market in 5 minute chunks, and the price that is achieved for switching power on or off at very short notice is high enough to create innovation.

The fossil utilities are losing money and asset value: “German wholesale next-year electricity prices have plunged 60 percent since 2008 as green power, which has priority access to the grid, cut into the running hours of gas, coal and nuclear plants”

Adaptable producers can make huge profits: Leading to H2 innovation. “In Germany’s daily and weekly balancing market auctions, winning bidders have been paid as much as 13,922 euros to set aside one megawatt depending on the time of day, grid data show. Participants stand ready to provide power or cut output in notice periods of 15 minutes, 5 minutes or 30 seconds, earning fees whether their services are needed or not.

There’s plenty of innovators out there “New participants are flooding into the market now, which means that prices are coming under pressure,” Pilgram said. “Whoever comes first, gets a slice of the cake, the others don’t because prices have slumped.”

With some really bad H2- ideas

“Jochen Schwill and Hendrik Saemisch, both 33, set up Next Kraftwerke GmbH in 2009 to sell power from emergency generators in hospitals to the power grid. Today, the former University of Cologne researchers employ about 80 people and have 1,000 megawatts from biomass plants to gas units at their disposal, or the equivalent capacity of a German nuclear plant.”

And an ambiguous H1 response:
“To adapt to volatile supply and demand, RWE invested as much as 700 million euros on technology for its lignite plants that allow the units to change output by 30 megawatts within a minute. The coal-fired generators were originally built to run 24 hours a day.

RWE’s lignite generators, which have a total capacity of 10,291 megawatts, are flexible enough to cut or increase output by 5,000 megawatts on a sunny day, when power from solar panels floods the grid or supply vanishes as skies turn cloudy, according to Ulrich Hartmann, an executive board member at RWE’s generation unit.”

But very profitable results “Hartmuth Fenn, the head of intraday, market access and dispatch at Vattenfall AB, Sweden’s biggest utility. “Today, we earn 10 percent of our plant profits in the balancing market” ”

Overall we can see that fossil plants in future may produce most of their profits as balancing plants not baseload- a nice switch. Of course this only works for stranded assets. It would be hard to make a case for building new fossils for this purpose, as the price for balancing is dropping with new innovative entrants.

Pumped storage anyone!