The competitive struggle between technology and resource depletion

The study of EROI may be of little more than academic interest except for two factors. Energy extraction has conformed to Ricardo’s ‘best first’ principle, meaning that the easiest resources to extract tend to be the first. But at the same time, human ingenuity continually pushes the technological frontier forward. Hence, there is a competitive and ongoing struggle between resource depletion and technology. The US shale revolution typifies this tension, and for a time at least, seemed to signal the triumph of technology. But the extraordinary ramp up of production beginning 2009, and that was supposed to run for decades and lead to US ‘oil independence’, has already fallen 600,000 barrels per day below its April 2015 peak (EIA).

On the other hand, wind and particularly solar PV, have driven even further down the cost curve, with further declines in the pipeline. At the same time, the shift to ICT-enabled service economies was supposed to decouple energy from economic growth. While learning curves often seem intuitive and obvious, ex-post, their use ex-ante can be fraught. Furthermore, while relative decoupling has been a feature of the advanced economies for several decades, absolute decoupling is still mostly an aspiration.

It’s useful to be reminded that the future is not at the end of a trend line. Seven years ago, concentrated solar was being projected by some as the new ‘low cost baseload’ power source of the future, but installed global capacity is still barely a blip at around 5 GW. A sober assessment could similarly be made of optimistic forecasts for nuclear, ocean, tidal and geothermal. The problem for wind and PV is whether the issue of intermittency is merely a ‘surmountable challenge’ or a fundamental constraint at high penetration. This is still an open question. In Europe, there is a strong correlation between installed variable renewable energy and electricity prices.

installed wind and solar per capita
Residential electricity price for EU countries 2014, including taxes, versus installed wind and solar. Sources: Eurostat, BP, IEA

On the other hand, the effects of energy supply constraints are real and daunting. The loss of oil from Cuba’s economy as a consequence of dissolution of the Soviet Union in 1989 provides a classic case study in oil dependence. The Cuban socialised model of agriculture had been sustained by the highly generous terms of trade of Cuban sugar for Soviet oil (Sinclair 2001) Although the drop in oil consumption was more moderate than originally feared – 20% over 2 years – the impacts were enormous and debilitating. The Cubans did eventually learn to live with less oil, and adapted to the loss of oil through decentralisation, urban gardening, and a range of market based reforms. The defining economic feature of the 1970s was the stagflation driven by the 1973 oil crises. King has shown that US expenditures on oil that exceed 4% of GDP is likely to be recessionary.

My perspective is that EROI provides a framework to understand these competing narratives – which I call the techno-optimist, encompassing the Silicon Valley mindset, versus the limits to growth narrative. Note that many in the degrowth movement, such as Alexander and Trainer argue that a future with less resources actually offers an opportunity for civilisational renewal.

technology versus depletion

Electricity networks and disruption

Clayton Christensen’s theory of disruption was originally based on his observations about disc drives. He saw that the manufacturers of 14” drives for mainframes had been driven out of business by manufacturers of 8” drives for mini-computers, and then the companies that made the 8” drives were subsequently driven out of business by manufacturers of 5.25-inch drives for PCs. So why hadn’t the 14” drive producers simply started producing 8” drives? And why did consumers want the inferior 5.25-inch drives?

In low-end disruption, inferior products compete in a smaller market with lower profit margins, but are ‘good enough’ for some consumers at a cheaper price. While established producers are focused on improving their products and profit margins, low-end producers capture economies of scale, and some products eventually gain a foothold by offering enough of what consumers want at a budget price. By the time the established producers realise that they’ve lost market share, a new market segment has been established and it is too late.

Discussions around solar and batteries are frequently discussed as ‘disruptive’, but is this really a good description of the changes happening in electrical systems?

Distributed power is to conventional generation what electric vehicles are to internal combustion vehicles. Both disrupt the incumbent products (generation assets or internal combustion engines respectively), except that EV’s are better described as high-end disruption. Furthermore, distribution networks are to electricity what roads are to transport. In both, the maintenance of the distribution assets is essential.

But when discussing EV’s, nobody talks about the ‘disruption’ of the road network, or the massive infrastructure and regulation that overlays passenger transport. All of the bridges, traffic lights, emergency and medical care, road law enforcement, traffic engineering, council maintenance and parking control. Roads are the arteries of transport. EV’s or internal combustion, the systems and infrastructure is the same.

On the other hand, the problem for electricity distribution networks is that the tariff structures employed in Australia, and around the world, rely mostly on energy-based tariffs rather than demand-based tariffs. Since owners of distributed energy assets consume less energy from the grid, their share of network costs is reduced by more than the avoided costs of installing the distributed generation. In other words, solar owners still rely on the grid at times of peak demand although they draw less energy from the grid over a billing period.

 

transformers

So will physical assets of the distribution networks be disrupted? The short answer is no. Indeed, much of the discussion around solar and batteries is around integrating virtual networks, aggregators, using blockchain to facilitate electricity trading among small users, network optimisation with smart grids, etc. The maintenance, modernisation, and upgrade of networks is absolutely essential to integrating a higher share of renewables. In virtually all high-penetration renewable scenarios, geographic diversity of wind and solar is a primary mechanism for smoothing intermittency. This requires an expansion of transmission infrastructure, not a contraction.

So what about disruption of the tariff model? Earlier tariffs were based on the social contract that those that used the most energy paid the most, regardless of the marginal cost of an individual consumer. Some consumer classes are implicitly protected as a matter of social justice. For example, pensioners that operate air conditioners on hot weekdays are cross-subsidised by other consumer classes, such as full-time workers not at home until the evening. Do we really want pensioners to avoid using their cooling on the hottest days? Large-scale grid defection would be a disaster for those least able to afford distributed energy, such as the elderly reliant on pensions, renters, the unemployed, and single income families.

So is disruption a useful theory for distributed power? It’s clear that distribution network providers in Australia are concerned about being left with a stranded business model. They want to be part of any prospective developments, regardless of whichever way it turns. I think the concept of low-end disruption applies to distributed power, but strictly only to the business model and not the physical assets. Regardless of the business models and tariff reforms that emerge, the physical infrastructure of networks needs to be maintained.

A few thoughts on the electricity ‘death spiral’

One of Germany’s exports has been the idea of ‘energy democratisation’ – the Energiewende is not just a transition to renewable energy but a switch to energy democracy. But was does energy democracy really mean and is it a useful model for thinking about future energy supply?

The thing that makes the democracy idea interesting in Australian is that there is little precedent for it in relation to the provision of public goods. Australians usually express a preference for socialised public services – indeed, Australia’s national health care system (Medicare) is so valued that even minor tweaks are strongly contested – think of the Abbott Government’s disastrous $7 plan for a co-payment in 2014.

We expect socialised education and urban transit. Even corporatised and privatised entities are expected to be firmly constrained by government regulation. It’s easier for a household to ‘democratise’ their water supply and go ‘off-grid’, yet nobody campaigns for ‘the suburban democratisation of water’ – water rates have gone up a lot in Australia as well. What about an exodus from schools in favour of home schooling? Environmental NGOs usually campaign for socialised services – better to invest in trains and urban transit rather than support ‘democratised transit’ (i.e. private cars).

Furthermore, the strong trend is towards outsourcing of home services – think lawn mowing, home cleaning, meal preparation (i.e. restaurants), painting, organised sport and play for children, car repair, etc. In the 1980s, I wouldn’t have dreamed of sending my car to a workshop for repair – who does their own workshop repairs nowadays? Yet futurists talk of bringing our energy production in-house – is this really a one-way trend?

dial_face_meter_example_2

Technology is shifting and it’s easily possible to go off-grid. But what about inverter, panel and battery failures that might take a week to repair? And battery replacement after 8 to 10 years. If the house is sold will the new owners want the responsibility of off-grid, and realise they’re going to need new batteries next year? Will it become the new normal to buy a generator from Bunnings for back up? What about strata title?

My sense is that there is a demographic that loves tinkering and the idea of off-grid. It’s a great idea for those of us who like doing things for ourselves and expect a little inconvenience sometimes. But I’m not convinced that most people will take the leap once they realise that it’s a one-way journey – once the capital is invested, it’s an expensive exercise if you change your mind. What if you want a reverse cycle heater but the system’s not big enough? Go back to the installer – ‘oh sorry, we supplied what you asked for.’

The so-called ‘death spiral’ of electricity utilities is predicated on the idea that the economics of disconnecting will drive an exodus from the grid. I would argue that a stronger incentive will be the reverse – it’s worth paying more to stay on-grid to avoid the hassles of managing your own power supply. What’s the equilibrium value of on-grid versus off-grid? I wish I knew. We live in interesting times.