TOD: EROI and EIRR

[GliderGuider]

Here's an interesting analysis of the transition to renewables that takes the time line of the energy returns into account.

Managing the Peak Fossil Fuel Transition: EROI and EIRR

All investors know that it matters not just how much money you get back for your investment, but how soon. A 2x return in a couple of months is something to brag about, a 2x return over 30 years is a low-yield bond investment, and probably hasn't even kept up with inflation.

The same is true for EROI, and means that users of EROI who are trying to compare future sources of energy with historic ones are probably taking an overly-optimistic view. For fossil fuels, the time we have to wait between when we invest the energy and when we get the energy back in a form useful to society is fairly short. For instance, most of the energy that goes into mining coal comes in the digging process, perhaps removing a mountaintop and dumping the fill, followed by the actual digging of the coal and shipping it to a coal plant. Massey Energy's 2008 Annual Report states that "In 2008... we were able to open 19 new mines, and ten new sections at existing underground mines." This hectic rate of expansion leads me to believe that the time to open a new mine or mine section is at most 2 years, and the energy cycle will be even quicker at existing mines, when the full cycle between when the coal is mined and when it is burnt to produce electricity requires only the mining itself, transport to a coal plant, and perhaps a short period of storage at the plant. Most coal plants only keep a week or two supply of coal on hand.

In contrast, Nuclear and Renewable energy (with the exception of biofuels and biomass) present an entirely different picture. A wind farm can take less than a year to construct, it will take the full farm life of 20 years to produce the 10 to 30 EROI shown in the graph. Solar Photovoltaic's apparent EROI of around 9 looks worse when you consider that a solar panel has a 30 year lifetime. Only a little of the energy in for Nuclear power comes in the form of Nuclear fuel over the life of the plant: most is embodied in the plant itself.

Jeff Vail has been exploring this concept on his blog and the Oil Drum. He refers to the problem of the front-loading of energy investment for renewable energy as the Renewables Hump. He's also much more pessimistic than the above chart about the actual EROI of most renewables, and found this chart from The Economist which illustrates the up-front nature of the investment in Nuclear and Wind:



To give a clearer picture of how timing of energy flows interacts with EROI, I will borrow the concept of Internal Rate of Return (IRR) from finance. This concept is covered in any introductory finance course, and is specifically designed to be used to provide a single value which can be used to compare two different investments with radically different cash flow timing by assigning each a rate of return which could produce those cash flows if the money invested were compounded continuously.

Energy Internal Rate of Return (EIRR)

I first suggested that IRR be adapted to EROI analysis by substituting energy flows for investment flows in early 2007. I called the concept Energy Internal Rate of Return, or EIRR. Since no one else has picked up the concept in the meantime, I've decided to do some of the basic analysis myself.

To convert an EROI into an EIRR, we need to know the lifetime of the installation, and what percentage of the energy cost is fuel compared to the percentage of the energy embodied in the plant. The following chart shows my preliminary calculations for EIRR, along with the plant lifetimes I used, and the EROI shows as the size of each bubble.



The most valuable energy resources are those with large bubbles (High EROI) at the top of the chart (High EIRR.) Because of the low EIRR of Photovoltaic, Nuclear, and Hydropower, emphasizing these technologies in the early stage of the transition away from fossil fuels is much more likely to lead to a Renewables Hump scenario in which we don't have enough surplus energy to both make the transition without massive disruption to the rest of the economy.

More at the link.

[Laura902]

1. At the rate were going..

I see oil availability running very low before we do anything about renewable sources. We'll wait until it is too late and the EROI on oil will be reach zero so that no oil company would waste money drilling anyway.