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.

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