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A Review of Green Energy Growth Prospects

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Energy is the primary resource of ecological and economic growing systems (Robert U. Ayres & B. Warr 2005). Conventional economic theory does not recognise this simple obvious truth to its full extent; preferring to convolute and substitute. Well it appears this works no more…

There is growing global concern that inefficient energy consumption in the west is reaching physical limits (D. H. Meadows et al. 2004). In this global context of climate change and energy security fears of declining conventional energy resources are gaining increasing attention (Colin J. Campbell & Laharre 1998), (Hirsh et al. 2005), (Hirsch 2006), (Sorrell et al. 2009) (United States Joint Forces Command 2010) (Fatih Birol 2010) (International Monetary Fund 2011). There is uncertainty of future conventional energy production figures or reserve stock (C. J. Campbell 2004), (Jakobsson et al. 2009), (Aleklett et al. 2010) (R. G. Miller 2011). The UK parliament are currently considering future energy rationing systems (Flemming & Chamberlin 2011). North African and Middle Eastern unrest can be attributed to food prices soaring as a result of energy commoditiy prices effects upon farming, fertilisers & transport. Food nor fuel can no longer be subsidized due to declining export revenue of energy resources, resulting in in-operability of the proportionally higher percentage for food budgeted by citizens of developing nations. (See Illustration 1).

Illustration 1: Brent Crude Oil and UN Food and Agriculture Organisation Price Indices

Equally, there is uncertainty of the sustainability of the renewable energy industry with many technologies untested and industries quoting hot air rather than verifiable data (MacKay 2008) (Holmes 2009). There is little doubt that we need to reduce our anthropogenic carbon emissions and renewable energy technology are seen as the panacea of both our energy security problems and climate change (International Energy Agency 2010). This post will explore how energy and our economy interrelate in production and assess the the reality of this question in an Irish context, as to what levels  of contribution can renewable energy technologies play in Ireland’s energy future.

There are many arguments with regard to cultural and natural heritage issues with  appropriate planning and placement of technology in the landscape. There are economic issues with regard to the equality of incentivisation of nascent technologies through government subsidy and R&D funding (Huber et al. 2007). There are equal arguments that the market should control the price of energy and efficient allocation of new technologies will automatically come on-stream as the prices increases (Anthoff & Hahn 2010). It can be argued that alternative energy requirements (AER) and feed in tariffs (REFIT) have increased energy prices in Ireland in comparison to European counterparts, but it remains to be evaluated, does diversification of energy supply increase resilience and economic value to our energy systems; thus with a net social benefit. Ireland has large natural energy resources in comparison to current consumption. However, economic and technical feasibility is critical in assessing what level of energy generation can renewable energy sources provide for Ireland in the future. (ESB international 2008)  (G. Dalton & B. P. Ó Gallachóir 2010) (G. J. Dalton et al. 2010) (Gordon Dalton et al. 2009) (Falcão 2010). Many policy driven documents have set targets without considering technical feasibility, assuming sufficient technological process will occur without taking into account appropriate learning curves.

Net energy, also called energy balance, or energy return on energy invested is a critical  measure of energy systems feasibility and sustainability of both energy output and quality. This physical valuation method is an appropriate concept to underlay valuation of energy systems, which are be reviewed in the Irish context in assessing the future sustainability of Irish renewable energy systems.
Irish Energy Background

Ireland is a small island open economy with little conventional energy resources. We import 91% of our energy supply (Dr Neil Walker 2009). 96% of Irelands Energy consumption is fossil fuel based, and 62% of final energy demand currently is provided by crude Oil derived products. Ireland holds little sway over global energy markets pricing mechanism. The marginal cost of producing a barrel of Oil has risen exponentially in the past 5 years, but is currently being speculatively traded between $100/barrel – $124.5/barrel exacerbating production-pricing effects. Further price volatility is dependent on the origin of the oil and the daily news on the unrest in the middle east. The cost-price discrepancy and high production inelasticity to pricing shows the supply and demand relationship and thus addictive requirement for oil globally. Oil is by far and large the highest density transportable energy source currently at technical maturity, however, it’s price does not reflects its versatility. In a financial sense oil inputs to any industrialised economy only cost 4%-5% of GDP on average, however in physical terms of its work input in most value adding processes hydrocarbon energy accounts for considerably larger proportions of the actual physical energy required to carry out a process. This is explored later. Oil accounts for 52% of total primary energy requirements in to Ireland’s economic engine, but accounts for 62% of final demand due to its conversion efficiency in use of adding value and service creation (Clancy et al. 2010). It is the global exogenous price of hydrocarbon energy that any Irish renewable energy system must compete with and replace, to be deemed profitable or to have net social benefits.

The energy market and its physical infrastructure are in a period of volatility induced change as a result of climate change and peak conventional oil. The era of cheap oil is over and its parting signal is manifested itself in quintupling of prices in the last 10 years with unprecedented price volatility and quite probably the trigger of the bursting of the financial bubble. A systems approach on the principles of strong sustainability should be applied in exploring what role renewable energy technologies have in Ireland’s energy future under current policy scenarios and expected future energy scenario (Pezzey & Toman 2002).

There is considerable variation in the views with regard to the technical viability, economic feasibility and long term sustainability of renewable energy technologies, such as wind, wave, tidal, biomass and solar thermal. Current models of their economic viability are based primarily on two variables, the price of a barrel of oil and the price per tonne of carbon dioxide equivalent (tCO2e) of abatement. As already introduced, the price of hydrocarbon energy is increasingly volatile; thus unpredictable by traditional means and there is not an operational market for carbon trading and thus appropriate pricing. There are completely opposing views being published from equally respected economic and engineering consultancies both for and against increased renewable energy penetration on the Irish electricity grid.

There is considerable room for improvement in evaluation of renewable energy technology and conventional hydrocarbon energy systems in internalising externalities, both caused by systems giving erroneous pricing indicators to the single electricity market (SEM) and marginal cost of abatement curves. Both technologies groups have vested interests and little incentive for full evaluation. True evaluation and policy design seems difficult. Renewable energy technologies need to properly internalise embodied energy, embodied carbon, technical feasibility, learning curves and storage costs in their pricing; while, conventional supplies need to internalise carbon costs, environmental damage and more realistic future fuel prices (See Illustration 2).

Illustration 2: OECD IEA WEO 2010 Oil Price Projections

We have entered a new era in energy in the past 3 years; the IEA have been consistently wrong in their fuel price forecasts for the past 5 years while considerably reducing expected 2030 production over the past 10 years from 135million barrels per day (mb/day) in 1998 to 96mb/day in 2010 (International Energy Agency 2008) (International Energy Agency 2009) (Fatih Birol 2010) (International Energy Agency.;Organisation for Economic Co-operation and Development. 1998). Current crude oil production has been essentially flat fluctuating about 85 mb/day since 2004 (See Illustration 3). The US Energy Information Administration recently revised upward their production figures by between 400-700kb/day backdated 11 months, while the definition of what constitutes oil is being changed to maintain the appearance of energy resource growth with non-conventional oil; Tar sands from Canadian Alberta or Heavy Oils from Venezuela or converting natural gas to liquids for example. This trend is driving oil production into increasingly difficult locations with increased production effort, increased marginal costs and thus less energy return on energy invested per barrel of oil produced. Increased marginal effort is analogous to lower energy return on energy invested (EROI) (See Illustration 4, Illustration 6). On a societal level, this means we are moving ever closer to productivity ratios of 1:10-1:7 for our total energy requirement, while 50 years ago, oil, coal and gas were produced with an EROI of between 90:1 and 50:1. This was  as a result of the fact that the resource was so simple to produce comparatively (Cleveland 2005), (Hall et al. 2009). Energy prices are increasing, and we are using more energy in producing energy, and thus there is less net energy left to export to market domestic or international to power society as a whole; further increasing prices in a cyclical feedback loop. There is a highly non linear pricing effect between production and supply as a result of narrowing margins on energy return on energy invested; while production levels may appear stable, due to increased energy consumption in the process, less energy reaches the market for societal consumption; thus driving the price up (See Illustration 5).

Illustration 3: Current Global Crude Oil Production – US Gov Energy Information Administration
Illustration 4: Energy Return on Energy Invested – Net Energy Cliff
Illustration 5: Energy Return on Energy Invested in Global Oil Production
Illustration 6: Carbon Intensity Vs Energy Return on Energy Invested

It is becoming increasingly obvious that economic theory of classical production functions based on weak sustainability constructs of substitutable capital are unable to effectively predict growth, much less production while including environmental limits. Oil price volatility and production scarcity has publicly exploded into the mainstream economic consciousness in the past 3 weeks,  (International Monetary Fund 2011).  The total productivity factor (TPF),  essentially a fudge factor, is exogenous, unmeasurable and described as technological advancement without quantification. In fact, a more suitable replacement for the Solow residual (TPF), is simply exergy; the useful physical work contributed by energy inputs given a systems time dependent efficiency (See Equation 1 & Equation 2). In the classical paradigm energy costs accounts for about 4%-5% of production costs and are thus typically not thought to be significant. However, in this physical paradigm, energy accounts for approximately 10 times the classical view point. In this paradigm, exergy is shown econometrically to account for approximately 40% – 50% of growth in developed economies and is a direct endogenous independent variable of the macroeconomic production function (B. Warr & R. Ayres 2006) (B. Warr & Robert U Ayres 2011).

Illustration 7: Components of Economic Growth – United States Historical Example
Solow Production Function  (Solow 1956)

In this light it is apparent that, to maintain economic sustainability our economies must grow, requiring increased exergy at constant efficiency and reduced cost, while conversely climate change demands that we reduce our carbon emissions and thus reduced our exergy input at constant efficiency. Thus, to prevent our economy from repeatedly crashing against energy supply limits, augmented by carbon taxes, we must use large portions of the energy our economy demands, to supply change in our energy infrastructure to carbon neutral renewable energy systems. This must be done while concurrently increasing overall efficiency so the net work (useful exergy) into the economy is increasing; enabling its growth. This is a mammoth task for 3 reasons.

1. The dominant economic paradigm, indicates that energy production is a secondary product of of the economy and not a primary driver of the economy. This flies in the face of science and dangerously underplays the energy requirement for economic growth and leaving pricing mechanisms to the market rather than policy (R. U Ayres et al. 2007) (Kümmel et al. 2010) (B. S. Warr & R.U. Ayres 2010).
2. We are have peaked globally in conventional oil supplies in 2006. That is, we have used approximately half of ultimate recoverable reserves of oil and the rate of production is at a maxima. Oil is used in the provision or manufacture of most other energy sources, and is vastly undervalued (Fatih Birol 2010) (Cullen & Allwood 2010) (See Illustration 8).
3. Conventional and Renewable Energy systems valuation is complex and currently without understanding of embedded energy, energy return on energy invested and the net social costs implicated (Cleveland 2005) (Hall et al. 2009).

Illustration 8: Global Oil & Gas Production and ASPO estimate forecast

Given that cheap, clean, predictable, transportable, and reliable energy sources are a prerequisite for economic stability; how will the economic-energy system cope with significantly increased levels of renewable energy. We need increased levels of energy to grow our economy; we need our economy to grow to increase capital; we need capital to grow our energy output/input (See Illustration 9 & Illustration 10). We may be at a circular feedback constrained by physical energy production limits. Efficiency being the variable we are left to control. Current Irish targets are to have 40% renewable electricity by 2020, with 20% efficiency measures by the same year (Department of Communications, Marine and Natural Resources 2007) (Department of Communications, Marine and Natural Resources 2009). This is one of the largest targets for renewable energy globally, from one of the smallest least interconnected electricity grids. Ireland has also experienced the largest increase in external debt as a percentage of GDP of any other country in this  world, in the last 3 years. Our ability to invest capital expenditure in infrastructural projects to maintain our energy consumption levels and quality of life has been critically undermined by the property bubble & resulting banking crisis. Both energy production and Ireland’s potential green economy energy sources are investigated below.

Illustration 9: Irish Economic Growth and Energy Consumption Growth
Illustration 10: Irish Economic Growth, Energy Consumption and bubble creation with non energy correlated (non real) economic growth; i.e. credit creation, bubble expansion & bust

It is quite clear in day to day life that energy plays a primary role. Our the global economy can be viewed as a materials processing engine, rather than an accumulation of substitutable  capital (See Illustration 12). Primary energy resources are converted to useful fuels through a first stage process with a given efficiency. A secondary conversion takes place creating useful goods and services again with a secondary conversion efficiency. The whole processes in thermodynamic terms can be seen as an engine converting high grade energy, to low grade energy with increasing entropy throughout the process in keeping consistent with the first and second laws of thermodynamics. That is that energy is neither created nor destroyed but only changes form; secondly that entropy is a uni-directional flow of order, meaning that energy only flows from high grade to low grade. i.e. high temperature to low temperature, high pressure to low pressure, high density carbon in fuels, to low carbon density in the atmosphere post combustion. (conversely under BAU wealth begets more wealth…)

Illustration 12: Energy Conversion to Final Services (Cullen & Allwood 2010)

This process of energy conversion is most clearly seen in population production (See Illustration 13). Prior to the industrial revolution in 1750s, the primary energy resources were embodied solar energy, through the burning of biomass, or the eating of it to produce labour. Population was relatively stable observing a low population growth rate, with doubling times greater than 150 years. However, since the industrial revolution, the invention of the steam engine to pump water out of coal mines, and the haber-bosch process of converting natural gas into ammonia, population growth rate, i.e. growth rate ~ production rate, has increased 5 fold, reducing doubling times to less than 30 years. The current increase in population above and beyond the 2 billion living in this world in 1925, are directly produced  by ancient solar energy, embodied through photosynthesis in compressed biomass, stored in the form of hydrocarbon energy.  This process of energy conversion and embodiment in all natural and man made capital is limited and physically measurable by its energy content within its production process. Energy is probably a better valuation currency than Euro or Dollars, as it is backed physically not by gold but by the laws of physics and reality, it is fixed and measurable; it has intrinsic value. This accounting of embodied energy is complex, so to this end, rather than a bottom up approach, an econometric production function is utilised to illustrate this point.

Illustration 13: Population growth as a result of energy fossil fuel embodied in the green revolution in agriculture

There have been many attempts to include energy within production functions previously, however this post focuses on a specific pair of models derived by Ayres & Warrs and Kummel (B. Warr & R. Ayres 2006) (Kummel et al. 1985). The critical difference being that it is not the gross energy input that is commonly used in biophysical production functions, but the useful proportion of that energy input, i.e. the useful work, that is actually used in economic production. This is key to the successful understanding of the role efficient energy has to play in production and economic growth. It provides some interesting insights.

The orthodox method is that energy and other natural-resource based products should be regarded as economic produce of labour and capital as they are produced by industrial activity. The alternative more scientific, biophysical view would be the contrary, namely that energy is the fundamental non-substitutable input, whereas human labour and (produced) capital are both really intermediates. (B. Warr & Robert U Ayres 2011). The role that energy plays in production is generally hidden in the total productivity factor (TPF) (A(t)) which accounts for the majority of growth in classical Solow production functions. The Solow residual A(t) is exogenous to the production function and cannot be measured, and thus renders classical production functions useless in forecasting, as the residual accounts for the majority of growth. These rules have historically held as we have increased our energy supply globally year on year since the mid 1860s (Until 2009 that is). It is argued that the main driver of economic growth is interaction between technology and energy efficiency in increasing productivity, reducing costs and enabling increased demand and thus growth. Production and consumption are seen as abstractions of embodied energy valued in monetary terms, with a significant externality in all production as a result of the disproportionate value attributed to hydrocarbon energy in production.

Standard equilibrium conditions state that output elasticity of a factor of production should be equal to its share of total factors costs. This however is seen to not be the case. A simple example of this is the following; 1 litre of crude oil costs approximately 77 cents at market prices, and contains approximately 10.1kWh of energy. The energy equivalent of this in labour terms is approximately 100 man hours of labour. Effectively hydrocarbon energy subsidizes all production, as what man would work for 100 hours for 77 cents. It is seen below (See Illustration 14) that for the United States, hydrocarbon energy consumption typically costs in the range of 3- 4% of GDP over the past 20 years; GDP growth displaying an inverse sensitivity to this cost. Further as seen in 2008 energy prices spiked during the summer, double from 4% to 8% of GDP and the embedded energy costs through US consumers budgets, creates the situation where they are unable to pay tight sub prime mortgage repayments, bursting the credit bubble of the new millennium.

Illustration 14: US Expenditure on Hydrocarbon energy consumption.

It is suggested that a model is required that can be expressed in variables that are measurable and within a framework the disregards the growth in equilibrium assumption. Ayres and Warrs Suggest the following method (Robert U. Ayres et al. 2003), (B. Warr et al. 2008), (Robert U. Ayres et al. 2007).
The energy augmented Cobb-Douglas model behind this thinking takes the form of:

Equation 2: Ayres-Warr Production Function

The results of the modelling exercise are outlined below in Illustration 15 & Illustration 16. There is seen to be a reasonable correlation to historical data. It should be highlighted that this is completed entirely as a function of efficient energy, capital and labour. Efficient use of energy (U) accounts for over 40% of growth in both the UK and US case, much more than the 4% conventional valuation would have us believe.

Illustration 15: US Energy Augmented Cobb Douglas Production Function
Illustration 16: UK Model – Energy Augmented Cobb Douglas Production Function

Peak Oil & Gas Scenario

The model results were further extrapolated for investigation of peak oil and gas scenarios where from 2012 onward a decline in primary energy of 2% per annum occurs. Over 64 oil and gas producing countries in the world have peaked in their production rates, as have the US and UK even  with periods of extreme price increase (See Illustration 17). It is observed that geological field pressure governed by the navier-stokes equations is the primary driver of the flow of a crude oil, and unfortunately the price signals of supply and demand are nearly irrelevant as are unsustainable prices after 55% of a field or well reserve is produced. Given this scenario, holding labour and capital constant; It is interesting to note the significant requirements in energy efficiency to offset declining energy resources, and maintain economic growth. While is should be observed that current western economies are only between 11%-15% life cycle efficient, current annual increases in energy efficiency are in the order of 0.2%, rather than the required 2% to maintain a steady state economy.

This is of course is an abstraction and simply a numerical experiment. Capital and Labour depreciate in a recession and unemployment rise so this is a conservative scenario where only exergy to work efficiency is considered for declining energy resources. To illustrate this point a scenario of a market price realisation event where capital depreciates at 15% per annum is also outlined and its effect on economic growth is stark.
Energy share of production is considerably larger than its cost. This has implications for production valuation and economic growth valuation as a whole, as it represents a significant positive externality on all production incentivising cheap production, automation, globalisation and transport without fully internalising the proportionate cost of energy to production.
In the light of decreasing conventional energy supplies, Irelands energy resources and green renewable energy technology are reviewed below.

Illustration 17: US and UK Peak Oil Production even with significant incentive price hikes
Illustration 18: Peak Oil & Gas Projected US GDP Growth Scenarios for Varying Exergy – Work Efficiency increases in productivity

Irish Energy Resources

In a global sense, over 99% of all energy is solar energy in one form or another (Hubbert 1971). Contextually, this is important to note in the sense of energy accounting and sustainable rates of energy consumption, or maximum sustainable yield from a given energy source. Solar energy is direct solar electro-magnetic radiation and can be captured by solar photovoltaic silicon panels, however, they need direct sunlight. Clouded Irish skys are not particularly useful. Solar thermal energy is another direct solar form of energy and is useful in generation of renewable heat (RES-H) as the technology only requires indirect sources of sunlight diffused through clouds. All forms of biomass are indirect solar radiation, stored through photosynthesis and mineral conversion into biomass growth for use in solid fuel boilers for heat and electricity generation (RES-E). Biomass can be converted into bio-gas and bio-fuels for transport (RES-T). Wind energy is again indirect solar radiation set up as a result of thermal currents in the atmosphere, constantly seeking thermal and pressure equilibrium, and this is the wind blowing. Equally wave energy is indirect solar energy, as waves are created as a result of the aerodynamic friction of wind blowing along large fetches of ocean, transferring wind energy to wave creation. Ocean waves are one of the most efficient forms of energy transfer, as can be seen in the distances tsunamis can travel without losing significant energy or wave size. Tidal energy and nuclear energy are the only significant sources of energy that are not solely indirect solar energy. Tidal energy is caused as a result of the gravitational pull of the moon (and partially the sun) on our oceans as it orbits the earth, and thus even though it is diurnally varying, it is the most predictable of renewable energy sources. Nuclear energy is thought to be the remnants of the radioactive decay of materials remaining in the earth’s crust from the earth’s creation, and is thus a non renewable resource. Finally oil, coal and natural gas, are also indirect solar radiation, as they are the remains of biomass and organic material pressurized and cooked over geological time approximately 92million years ago. The process is very slow and non continuous. Globally we are currently consuming 4 barrels of oil for every one we find, the equivalent Oil reserve of the North sea has been seen disappear on aggregate global production in the past 15 months; to maintain current IEA projections, we need to find the equivalent reserves of 4 new Saudi Arabia’s by 2030 (Muriel Boselli 2008).

Illustration 19: Irelands Effective Energy Resource Map

Ireland is however endowed with large renewable energy resources. Ocean and Wind Energy are the two main policy directions with significant targets for  renewable energy generation. Ireland also has significant potential for biomass and bio-fuels given to her excellent growing climate and low population density.  Observing  Ireland’s property rights between Ireland and Rockall and thus huge territorial waters (See Illustration 19), it is probable that Ireland’s property rights over solar, wind, wave and tidal energy resources are far greater than actual  indigenous energy requirements. However, misinterpretation of data and resources is rife in policy and media documents. The magnitude of the energy resources are almost irrelevant. It is the technically accessible resource, economically feasible, the maximum sustainable yield, with a net positive energy return on investment and net social benefit from any given kinetic or biological renewable energy resource that counts.

To put this in perspective, Ireland’s electricity demand is approximately 30% of our total primary energy consumption. In 2009 Irish Electricity demand was 27TWh. Our Wind Energy resource is estimated at 22 times electricity demand at 613TWh. Our technical feasible resource is 344 TWh (González 2004). 2009 indigenous use was 2.8TWh. Ireland’s Wave Energy Resource is estimated at 525 TWh/year while 21TWh is estimated to be technically feasible (Holmes 2009). Ireland’s technical tidal energy resource is not significant at 0.915 TWh/year. There are no currently commercially operational wave energy devices globally, and tidal energy is still in very early stages of development (Falcão 2010). The original Irish targets for wave energy were to have 75 MW by 2015 and 500MW by 2020, the 2015 targets has been suspiciously quite of late (Department of Communications, Marine and Natural Resources 2007).

It is clear to see given technically feasible resources and technology maturity that wind energy is the likely significant contributor to future Irish renewable energy generation. This has been the trend to date, and would likely continue all things remaining equal (See Illustration 24). The marginal cost of a energy system, ignoring the valuation of carbon and backup externalities, is simply the fuel costs. In the case of renewable energy systems, the marginal cost (MC) is commonly deemed close to nil. However the capital costs of renewable energy systems is a different matter entirely. 80% of the project cost for a wind farm is the capital cost spent upfront in project construction (Krohn et al. 2009). Thus the project feasibility or net benefit is highly sensitive to material costs. 76% of wind turbine costs are as a result of the steel requirement. Steel prices track oil prices and there was a 20% increase in the price of wind turbines over the period of 2005-2008 (Blanco 2008). Many Wind energy advocates advertise the dropping price of wind energy over the past 2 years, however, this is simple as a result of the turbines cost structure and reliance on embedded hydrocarbon energy (See Illustration 20). Causality aside, the global economic crisis and concurrent crash in demand and price for oil and steel are the main reasons for the aberration in prices between 2008-2009. Last year, once oil prices recovered as a result of Indian and Asian energy demand, prices for wind turbines has increased. This volatility has caused concerns of the lack of investment in wind energy systems in Ireland (Walsh 2011).

Illustration 20: Crude Oil Price correlation with Primary metals and other primary fuels

Wave and tidal energy and similarly vulnerable to capital expenditure costs of steel and copper; shown by a feasibility study of the Pelamis wave energy device given a power matrix generated in Portugal, at a site with a similar quality wave resource as Ireland. The paper found that at 2004 price of material inputs that the cost of electricity (COE) was between €0.16/kWh- €0.64/kWh, while at 2008 price of capital COE was €0.40/kWh – €1.60/kWh (G. J. Dalton et al. 2010). Given current electricity prices are between €0.079/kWh – €0.16/kWh including industry and domestic supply, future economic feasibility of wave energy in Ireland seems unlikely given market trends in commodity prices. Ireland’s Current incentive (REFIT) feed in tariff for wave energy is €0.22/kWh, it is estimated that it is required to be minimum €0.30/kWh to encourage the required R&D and industry growth to attain the 500MW target by 2020(G. Dalton & B. P. Ó Gallachóir 2010). Further, Dalton does not evaluate the requirements for energy backup of energy storage upon the cost of wave energy. Either energy storage or grid interconnection is required for high penetration of renewable energy systems, but typically these externalities are not included in the cost valuation of renewable energy generation, thus leading to inconsistent policy.

The last two months has seen three different reports evaluating the effect of wind energy on the Irish electricity market. The Irish Wind Energy Association report that investment in wind energy has dropped by 58% in comparison to last year, the Irish Academy of Engineers calculate that the presence of wind energy on the grid has increased the wholesale cost of electricity by €157million this year, while the Sustainable Energy Authority of Ireland calculate that wind energy has reduced the wholesale price to the single electricity market by €75million. (Grant et al. 2011) (Clifford & Clancy 2011) (Sullivan 2011).

Eirgrid, the Irish transmission service operator (TSO) express concerns as to the instability and capacity factors achieved thus far by existing wind energy installed capacity and that €11billion investment in electricity grid upgrades is required to enable high renewable energy penetration while electricity demand is dropping (Hare 2010). The All Island Grid Study found that 40% is the maximum level of renewable energy electricity given the common Weibull and Rayleigh distributions of wind speed characteristics that the current Irish Grid can accommodate (ESB international 2008). There is now increased grid interconnected capacity allowing electricity to be sold to the UK electricity markets which will aid in stabilising the electricity grid, while on the other hand wind energy is has been found to be commonly achieving less than specified rated capacity factors1 (See Illustration 21). It is important to note, that 40% renewable electricity is one of the few energy targets that has is goals decided as a result of technical feasibility limits rather than political aspiration.

Illustration 21: Weekly Peak Electricity Demand % Percentage met by Wind Generation in Ireland

As stated above, the critical variables in valuation of renewables are carbon and the price of oil. Oil is expected to maintain a majority role in the Irish Energy mix to 2030 under baseline (See Illustration 22) and under the national renewable energy action plan (NREAP) and National Energy Efficiency plan (NEEP) (See Illustration 23). The market is increasingly picking up on the likely hood of extremely high oil prices in comparison to tradition. Globally we are heading into a period of energy price volatility, geopolitical and geological insecurity of supply. While these are the governing factors for energy valuation, most Cost-Benefit Analyses consistently underestimate the cost curves for oil futures on the back of IEA production estimates and undervalue the true social cost of carbon; estimates range from €18/tCO2e – >€200/tCO2e for true internalisation of the environmental damages of hydrocarbon energy supply. Under these circumstances true evaluation of renewable energy technologies is difficult.

Illustration 22: Irish Historical and Forecast Total Primary Energy Requirement by Source (Clancy et al. 2010)
Illustration 23: Sankey Diagram of Forecast Total Primary Energy Requirement for 2020 under the National Energy Efficiency Action Plan and Renewable Energy Action Plan
Illustration 24: Renewable Energy Contribution to Ireland’s Total Energy Requirement (Dennehy et al. 2010)

Energy Valuation & Economic feasibility

An exemplar Energy supply and demand curve is illustrated below (Illustration 25) highlighting the steep demand curve in relation to supply, showing a demand price in-elasticity. Renewable energy advocates state that the marginal costs (or system marginal price – SMP) of increasing supply are essentially zero once the energy system is operational, as there are no fuel costs or spin up costs (See Illustration 26). This perspective lends itself to the merit order method of ranking and choosing which energy systems should come online first, in rank order of marginal cost. This then should reduce the price of electricity on grid as SMP should represent the most efficient generation system economically. Thus renewable energy systems such as wind should be first to come online generating electricity. It should be noted that due to energy conservation laws of thermodynamics, the massive amounts of energy transmitted by the electricity grid and its configuration, there is little energy storage on the grid. Therefore the electricity that is used currently can be deemed to have been instantaneously generated from a multitude of varying types and sizes of generating plant. As one can imagine, effective planning is critical for this systems stability. This is the crux of the issue with variability of renewable energy systems. While current valuation maintains an effective zero marginal cost for renewables, this method ignores the externality imposed on conventional hydrocarbon generation facilities. Renewables effectively are renting conventional supplies standby condition for the inevitable eventuality of the wind energy dropping, and an alternative to be turned on (spun up). Without evaluation of this rent, the true net benefit of renewables is difficult to quantify.

On top of the variability of renewable energy systems, the marginal abatement cost of CO2e must also be considered which varies with the efficiency of energy generation plant (See Illustration 27). This cost is of course a dynamic feedback related to the first issue of variability. Needless to say it is a complex issue, which is difficult to model internalising all effects appropriately.

The final layer of complexity in evaluating energy generation variability comes in the form of the Single Electricity Market (SEM) for the Island of Ireland. Essentially each generator bid into a centralised market on half hourly intervals and the transmission operators (TSO – Eirgrid) purchase at the price set by the most expensive generator in the market. Therefore most generators cover their short term costs of producing that half hour of electrical energy. Both SMP and capacity payments make up the total cost of electricity generated to ensure investment in future generation capacity. While there is a generation schedule, the TSO may deviate demand depending on requirement, and depending on the instantaneous status of the energy grid. The market price reflects this demand change in 30 minute intervals resolution. There is also the alternative energy requirement cost on all generators to produce (or purchase) a certain percentage of their electricity from renewable sources (Alternative Energy Requirement – AER) (Clifford & Clancy 2011). The levelised energy cost (LEC) is the price a generator must get to break even on the SEM, including all operational costs over its lifetime. Due to the effective zero SMP for renewable they can underbid conventional energy generators. While this increases competition, as already stated it also inflicts an externality in the conventional generating providers.

A final technical externality, that is as of yet not typically well understood and is currently being researched are the damage costs to conventional plant of time varying spin up costs. On the supply demand curve, prices in the SEM can jump from wind to gas turbines because Combined Heat and Power (CHP) or condensing plant cannot spin up fast enough to take account for variability of renewable energy resources if there is a significant change between market bids. That is the economic merit order does not take into account the technical feasibility of operational constraints of generation plant. Most generation plant have start up times ranging from 1 to 6 hours and thus must be efficiently planned. Combined Cycle Gas Turbines (CCGT) are the only base-load capable plant that can be ramped up to full generation capacity in 15 minutes. (CCGT is essentially a jet engine bolted to the floor of the power plant). However, this variation of turning on and off the CCGT have resulting costs not typically included in their CBA or their operational costs. Costs of maintenance increase and the operational lifespan and terminal value of the turbines is reduced due to thermal fatigue stress cracks and damage to the plant turbine blades as a result of the variability of the renewable energy resources when used as back up. This cost is not appropriately valued in supply demand curves and results in an negative and positive externalities in the costs of both conventional and renewable energy generation prices.

Illustration 25: Indicative Supply & Demand Cost structure for Energy Showing demand~Price in-elasticity (Weigt 2009)
Illustration 26: Effect of Wind Energy Supply on Demand including typical Electricity Generation Plant (Krohn et al. 2009)
Illustration 27: Irish Cost of Carbon Abatement in Power Sector (Motherway & Walker 2009)

Energy Security, Climate Change & Growth

To wrap this all together; Increasingly cheap energy supplies over the past 150 years are deemed to have been a main driver of economic growth. Wealth, capital and labour are all simply forms of embodied energy; which depreciate or decay with exergy loss, while energy flows from dense capital and labour forms, to their environment increasing overall entropy; again in line with the first and second laws of thermodynamics.

Can renewable energy technologies play a significant role in Ireland’s energy future?

There are two views to take on this question. Firstly in an independent perspective solely focused on the energy technology isolated system. A second integrated systems approach looking at the interdependent energy systems connected to the grid and economy as a whole and questioning whether the energy crisis and economic crisis are dependent.

Both answers are suspected to be opposing, but are not currently properly transparently valued, and so the answer, as it is today boils down to perspective and faith in the green economy rather than effective techno-economic analysis.

Ideology is the solvent of reason.

It is widely accepted that we need renewable or a carbon free energy system to prevent runaway climate change (International Energy Agency 2010). While there have been estimates (Nordhaus 2007), the marginal effects of climate change or a increase in temperature are not scientifically understood in enough detail to effectively calculate the costs of this system. There is significant uncertainty in the viability of the green economy or green technology to lead the way.
There are however net social benefits in behavioural change in efficiencies measures which do not solely lie in new energy production (See Illustration 30). On average a western economy is 15% efficient at converting raw energy input to services output (B. Warr et al. 2010) (Robert U. Ayres et al. 2003). There is much room for improvement with significant net social benefits with negative costs. This is important in Ireland while capital investors seem few and far between.

The CEO of the Sustainable Energy Authority of Ireland, Prof. Owen Lewis, is often heard saying we should  fix the holes in the leaky bucket before we start more pouring more water into it. So, should we be investing in increasing electricity supply with renewable energy technology while demand is dropping (See Illustration 21) or increase the dropping demand with increased efficiency measures, at net negative social cost?

It has already been postulated that production of economic growth is highly correlated to efficient energy input. Observing  the US department of Energy’s, Energy Information Agency data in Illustration 3 showing oil production flat between 2004 and 2008, long before the global economic crisis, it is not difficult to extrapolate the trend to Illustration 8; the logistic curve of oil and gas production, similar to that of any non renewable resource. Over the concurrent period, 2004-2008, price increased to destroy demand, while global expenditure on fossil energy rose from 3.4% GDP to 7.8% in 2008. Ultimately it destroyed economic growth. Over 64 Oil producing nations have peaked in their rate of production along their logistic production curves and are on average decline at the rate of 3% per annum (Sorrell et al. 2009).

Ireland needs cheap clean energy to power the economy. The delusion of the the economy return to growth under economic business as usual is simply ludicrous. Maintaining this mantra will be Irelands ultimate downfall, remaining debts slaves indefinitely. Energy efficiency through behavioural change for promotion of net social benefits is where the potential lies initially in reducing costs, while under the burden to reduce our national deficit. There will be a need to be a proportional shift away from hydrocarbon energy sources toward electrification as hydrocarbon resources continue their slowly accelerating terminal decline. While Ireland’s total energy requirement will need to be reduced as a whole, our electricity consumption is likely to increase as a percentage of our total primary energy requirement. In this paradigm, there is cost effective potential for wind energy to provide electricity up to 40% of the grid capacity. Where the other 60% is to come from remains to be seen. This is not said lightly, as it poses significant energy security and thus economic stability risks. Currently it seems unlikely that wave or tidal energy as any role to play in Ireland’s future green energy revolution, based on technical feasibility, economic constraints, the embedded energy costs of hydrocarbon energy in the fabrication and mining of required metals. They need significantly more research and development funding to solve device control and material problems. The probability that wind energy will have maximised the capacity for renewable energy penetration on the grid before wave energy reaches technological and economic maturity, makes this case even more probable. The case where pumped storage (Deane et al. 2010) or high levels of interconnection to European grid may alleviate this situation.

In all, the effect of energy and efficiency on economic production is underplayed. Neoclassical production and new valuation methods under environmental ecological economic principles need to be applied to account for multiple significant externalities in the energy market, and their influence on the global market and society as a whole.

Ireland will need all the net energy positive renewable energy it can install in the following years while investment capital is available and while the embedded energy costs of new capital expenditure projects are not exorbitant. Installing increased levels thereafter maybe be prohibitively expensive and technically infeasible if BAU continues without significant mobilisation on energy efficiency programmes taking in industry, business and households, and significant energy storage systems are constructed.

The window of opportunity is closing rapidly, if this change does not happen a long and protracted economic depression is envisaged for the foreseeable future; with all the human, social & civil upheaval that entails.

Illustration 28: Concurrent Energy Expenditure Spikes & Recession Historically for the US

Illustration 29: OECD IEA – Energy Technology Perspective – Projections for required Carbon Abatement to maintain a stable climate below estimate runaway climate chaos tipping points

Illustration 30: Carbon Abatement Cost Curve for BASELINE $60/barrel of Oil Case (Motherway & Walker 2009)

Illustration 31: Costs per tonne of Carbon Dioxide equivalent Abatement for “High” Oil Price (Motherway & Walker 2009)

ASPO Ireland



2 Comments on "A Review of Green Energy Growth Prospects"

  1. Kenz300 on Tue, 10th May 2011 12:29 am 

    Quote– “Globally we are currently consuming 4 barrels of oil for every one we find, the equivalent Oil reserve of the North sea has been seen disappear on aggregate global production in the past 15 months; to maintain current IEA projections, we need to find the equivalent reserves of 4 new Saudi Arabia’s by 2030 (Muriel Boselli 2008).”
    ————————–

    That says it all.

    We need alternatives to oil and soon. Second generation biofuels made from algae, cellulose and waste may not be the total solution but they may reduce the pain. The world produces a lot of trash every day. The conversion of waste to fuel should make a contribution.

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