Energy Return On Investment with the concept of EROI. Applications, criticism and implications

Table of contents

Abstract

Table of contents

Table of figures

1. Motivation
1.1. Energy as an essential factor of production
1.2. Energy surplus as a necessary criterion for survival

2. EROI and its implications
2.1. The concept of EROI
2.1.1. Definition of EROI
2.1.2. Consistent framework for EROI
2.1.3. Different versions of EROI
2.1.4. EROI trends for oil
2.2. The minimum EROI for society
2.2.1. Bottom-up approach: Energy value chain
2.2.2. Top-down approach: Economic cost of energy
2.3. Applications
2.3.1. Corn-based ethanol
2.3.2. Comparison of alternative energy sources
2.3.3. Ideal EROI
2.4. Criticism
2.4.1. Lack of standardization
2.4.2. Disregard of energy quality
2.4.3. Lack of objectivity
2.4.4. Insufficiency of the concept
2.5. Implications
2.5.1. EROI and economic growth
2.5.2. EROI and Monetary Return On Investment
2.5.3. The paradox of oil

3. Conclusion

Bibliography

Appendix 1

Appendix 2

Abstract

Energy has a significant impact on economic growth and is a key driver for the wellbeing of a society. The less a society has to spend on energy, the more remains for consumption and discretionary spending that is directly translated into economic growth. This impact can be assessed with the help of the net energy analysis that makes use of the concept of EROI. The Energy Return On Investment is the ratio of the quantity of energy delivered to the quantity of energy consumed in a given process. Thus, this metric serves to measure the accessibility of a resource, meaning that the higher the EROI, the greater the amount of net energy delivered to society in order to support economic growth. This goes hand in hand with the finding that there is a minimum level of EROI that has to be reached, otherwise economic growth cannot be possible. Depending on the studies conducted, the minimum EROI for society is between 7:1 and 15:1.

Current research shows that the EROI for fossil fuels is on the decline, simultaneously leading to higher energy prices and thus impacting economic growth in a negative way. As a consequence, if the corresponding EROI is under the tolerable minimum, it is no longer profitable (both from an energetic and financial point of view) to extract that energy regardless of the reserves that are available. In order to find alternatives which are sustainable not only from an ecological but also from an economic perspective, EROI can be used to both comparing energy production technologies and deciding whether an investment in a specific technology contributes or not to the economic growth, in other words whether the technology produces energy with a level above the minimum EROI. The findings show that currently most of renewable energy sources do not reach the minimum EROI. Nevertheless, according to the concept of the ideal EROI there is considerable potential for improvement and thus the possibility to further increase the EROI.

Given that net energy analysis is going to be one of the most fundamental concepts in academic and policy discussion in view of the future of the energy mix there is still a clear need for a standardized and independent framework to calculate EROI.

Table of figures

Fig. 1 - EROI for conventional and alternative energy systems, Cleveland 7

Fig. 2 - “Pyramid of Energetic Needs” representing the minimum EROI required forconventional, Lambert et al. 8

Fig. 3 - Mean EROI (and standard error) values for thermal fuels based on known published, Hall et al. 10

Fig. 4 - Mean EROI (and standard error) values for known published assessments of power, Hall et al. 10

Fig. 5 - EROIs of all energy techniques with economical ”threshold”, Weißberg et al. 11

1. Motivation

All forms of economic production and exchange require the transformation of materials, which in turn requires energy. The resulting role of energy and the significance of EROI relative to the global economy can be acknowledged both from a macroeconomic and microeconomic perspective.

1.1. Energy as an essential factor of production

Regarding the role of energy as a production factor, there is still debate among econ-omists. Given that the importance of land as a production factor has been greatly reduced since the industrial development, today, the standard economic theory mainly distinguishes between two major production factors: capital and labor. After the two oil shocks in the 1970s and 1980s, energy was recognized occasionally as a distinct production factor by economists, however its importance in contributing to the economic production was generally ignored because of the low cost share of production (less than 5%). 1

Georgescu-Roegen, Ayres and Kümmel were among the first and only ones who have under-stood energy as a production factor and called attention to the limits of growth with regards to the imminent scarcity of fossil fuels. In his work, Georgescu-Roegen 2 applied the second law of thermodynamics and, therefore, the concept of entropy for the analysis of economic systems, arguing that since all economic activities involve transformations of resources, they are inherently linked with inefficiencies and irreversible degradation 2.

In his model, Kümmel 1 also takes into account energy besides capital and labor. According to mainstream economics, output elasticity and cost share of the corresponding production factors have to be equal. Nevertheless, Kümmel shows that the output elasticity of a production factor, which measures the factor’s productive power does not correspond to the respective cost shares of the total production costs. For energy these are much greater than the respective cost portions, while the opposite is true for labor. The productive power of energy is primarily given by technological constraints such as capacity utilization and degree of automation that are translated into monetary terms by shadow prices 1. Thus it can be stated that energy accounts for a large part of the economic production which is ignored by mainstream economics and attributed to technological progress instead. Consequently, any changes into quantity or quality of energy have a significant impact on economic growth. One of the concepts to assess this impact is the EROI which serves as an indicator for energy prices and consequently, energy expenditure.

1.2. Energy surplus as a necessary criterion for survival

As emphasized a half century ago, every organism has to undertake activities that gain more energy than they actually cost in order to ensure their survival or evolution. This “energy surplus” (or also called net energy) is given by the difference of the returned energy and “cost” for obtaining that energy and is considered a necessary criterion in order to allow the survival and growth of many species, including humans, as well as human endeavors, that is to say the development of culture, science and civilization itself. 3

However, the question is not solely whether there is energy surplus, but also to what quantity, quality and what rate it is delivered which makes the difference from life-sustaining needs such as survival and maintenance towards additional functions being reproduction and evolution. Consequently, both biological systems and civilizations need to maintain a rather a substantial energy surplus than a bare one in order to ensure sustainable evolution. This is also true for contemporary industrial civilizations which are largely dependent on fossil fuels: These complex societies need a large quantity of energy resources with sufficiently high net energy (represented by a high EROI) in order to be able to be sustainable and to be wealthy from an economic, technological, cultural and educational perspective. As one can see, the EROI is not only an indicator for energy expenditure but also plays a major when it comes to determine whether a system is sustainable or not. 3

2. EROI and its implications

2.1. The concept of EROI

2.1.1. Definition of EROI

Energy return on investment is the ratio of energy delivered to energy costs 4, in other words the ratio of how much energy is gained from an energy production process compared to how much of that energy (or its equivalent from some other source) is required to extract, grow, etc., a new unit of the energy in question 5. EROI is strongly linked to net energy analysis which corresponds to the difference between energy input and output, and gives a statement on the energy surplus of a system. However, EROI is the more meaningful metric, because as a ratio it provides more information about the relationship of the input and output than a simple difference.

At the time of the introduction of the EROI concept, the core issue was rather whether the EROI of a technology was positive or negative and the main goal was to defend and defeat a particular technology instead of assessing and comparing various technologies in an objective manner. However, as stated above, for a system or a society to be able to sustain itself, it is important to have a minimum level of EROI and efforts have been made to introduce a standard framework in order to compare technologies in view of this condition.

The standard definition of EROI is given by 4:

The energy gained includes electricity, useable heat and power for useful work. The quantity of energy required to supply the energy gained includes drilling, refining, construction, installation, operations, maintenance, decommissioning, transportation, manufacturing of specialized equipment and chemicals required for extraction. The units are usually given in BTUs, kWhs or other units. As the nominator and the de-nominator are usually assessed in the same units, the EROI is dimensionless.

2.1.2. Consistent framework for EROI

One of the biggest issues with the EROI is that the methodology is not yet standardized which often leads to contradictory results. In order to achieve harmonization of EROI analysis a consistent framework has been introduced by Mulder and Hagens 6, which is given by two dimensions.

The first dimension corresponds to the depth of the analysis, i.e. whether and which factors need to be taken into account (direct and indirect inputs, externalities): The first order EROI, only dealing with direct inputs (energy and non-energy resources) and outputs, the second order EROI including indirect energy and non-energy inputs and also credits for coproducts (such as thermal content, mass, exergy) and the third order additionally gives account to the externalities linked to the technology which can be translated into additional costs and benefits. Externalities can be social, ecological and economic consequences for instance. Most commonly the lifecycle analysis (LCA) which is a method to calculate the impacts that are associated to the whole lifecycle of a technology is used to estimate the components of the EROI of a technology, especially second order EROI. The second dimension determines how to handle non-energy resources and externalities. Non-energy resources can include land, surface, ground water and time and often it is difficult for them to be translated into energy equivalents. Including these factors yields three possibilities: ignoring them, and hence resulting in the simple EROI, converting them into energy equivalents (called “total EROI”) or dealing with them by defining separate indicators as additional components in the frameworks of a multi-criteria EROI. Given that energy is not going to be the only factor of production to be limited it is reasonable to focus on the third form of EROI. A higher order EROI means that the assessment becomes more comprehensive in scope and therefore more accurate, but there is a decrease in precision. 6

2.1.3. Different versions of EROI

The narrowest definition is given by 4

Normally the EROI calculation is applied at the point at which the extraction or production plant is left. This corresponds to the concept of mine-mouth (also called well-head or farm-gate) and includes the energy to find and produce the fuel. This is the most commonly used form of the EROI assessment. However, it may ignore benefits or costs occurring after the point extraction.

The EROI can be calculated both for a specific technology but also for whole society in order to represent the importance of the EROI for an economic system: This version of EROI is called societal EROI and yields 3:

By applying the above mentioned framework by Mulder and Hagens the EROI analysis results in different versions of EROI: While would correspond to the first order measure, the which is taking into consideration the whole energy value chain including the energy to find, produce, refine and transport to the point of use corresponds to the second order definition. It is given by

The most complete version of the EROI is the extended EROI which in addition to the other versions also include the energy used that are necessary for the infrastructure and transportation etc. 3

2.1.4. EROI trends for oil

In the 1930s during the oil development in Texas, Oklahoma and Louisiana it took on average one barrel of oil to find, extract and process 100 barrels of oil, which means that the EROI for in the US was about 100:1, then during the 1970s it decreased to 30:1, and at around 2000 it was between 11 to 18 returned per one invested. Thus, as we can see the EROI of our most important fuel is declining. The trend is similar for gas. Globally, the EROI was about 35:1 in the late 1990s and declined to about 20:1 in the beginning of the 2000s. With these trends continuing in about 20 to 30 years the EROI of oil and eventually gas will be equal to or lower than 1:1 which means that it will take at least one barrel of fuel to find and produce one barrel of fuel. In Europe the trends are similar. 7

The following figure illustrates the trends of EROI for conventional and alternative energy systems 7:

2.2. The minimum EROI for society

Due to the fact that the EROIs of energy production technologies is continually declining, it is crucial to determine to what point the EROI can decrease for a society to be still sustainable (minimum EROI). There are two approaches in order to estimate this level.

2.2.1. Bottom-up approach: Energy value chain

One approach to give an estimation for the minimum EROI from the bottom-up perspective has been proposed by Hall 3 by taking into consideration the value chain of energy production to determine the energy benefits and costs: For the case of oil as a fuel for a truck, is currently estimated to 10:1 and the is about 40 % less than the (17% non fuel loss, plus 10% to run the refinery, plus 10% extraction, plus about 3% transport) indicating that at least for oil one needs an of roughly 1.4 to get that energy to the point of final use 3.

By taking into consideration the energy services that are being delivered to the costumer, the authors come to the conclusion that to provide the services of 1 unit of crude oil is roughly 3 units of crude oil is needed, similarly for other types of fuels. This means that the 10:1 is cut to about 3:1 for a gallon at final use, since about two thirds of the energy extracted is necessary to provide the energy service at the end of the value chain. Thus a minimum EROI of 3:1 is required. In other words, to deliver one barrel of fuel to the final consumer and to use it requires about three barrels to be extracted. As a matter of fact, the EROI of 3:1 is only a bare minimum for civilization as it would only allow for the energy to reach the point of use but would leave only little discretionary surplus for things that use energy but do not contribute directly to getting more energy or other resources (art, medicine, education etc.). According to the authors, in order to maintain a civilization, it is estimated that an EROI would have to be considerably higher. 3

The following figure illustrates the Society’s pyramid of “Energetic Needs” representing the minimum EROI for conventional oil at the well-head (or mine-mouth) in order to perform various energetic tasks for civilization, analog to Maslow’s Pyramid of Needs 8.

Abbildung in dieser Leseprobe nicht enthaltenAbbildung in dieser Leseprobe nicht enthalten

Abbildung in dieser Leseprobe nicht enthalten

Figure2- “Pyramid of Energetic Needs” representing the minimum EROI, Lambert et al. 8

2.2.2. Top-down approach: Economic cost of energy

Works on the relationship of energy expenditure and economic growth have shown that in periods of higher energy costs, the expenditure is allocated from discretionary investments and consumption (mainly contributing to the GDP) to energy expenditure and that there is a threshold of energy expenditure above which the economic growth is no longer possible. Energy expenditure or the economic cost of energy is the “ratio of the cost of energy compared to the benefits of using it to generate wealth” which corresponds to the GDP 8. To determine the above-mentioned threshold which is given by a percentage of the GDP, various studies have been conducted, one of the most recent and extensive one’s by Fizaine and Court 9. In their work they give an estimation of the maximum energy expenditure level above which economic growth would be impossible and transpose this result in order to find the maximum energy price and the minimum level of EROI that the energy sector must have in or-der to lead to a positive US economy’s growth. With the help of a multivariate linear regression model they come to the conclusion that for the US economy, only 11% of the GDP can be allocated to energy expenditure to still have positive growth which corresponds to a maximal energy price of 173 $2010 per barrel and a minimum EROI of 11:1. With regards to the energy price we are currently far from the threshold, however concerning the EROI the threshold is quite close. There are other approach-es as well, including the one of Weißbach et al. 11 proposing a minimum required EROI of 7:1 for the USA and Europe and the study by Lambert et al. 12, based on correlations between EROI and the Human Development Index (HDI), yielding a min-imum required societal EROI in the range 15:1 for contemporary societies.

2.3. Applications

2.3.1. Corn-based ethanol

One of the first major applications of EROI has been in the context of the corn-based ethanol debate. The primary goal was to make a statement about whether ethanol based on corn has a positive energy yield (EROI greater than 1), and whether the break-even point is reached making the use of this technology worthwhile. If the energy returned is greater than the energy that is invested, then this is an indication that the investment should be made. However, as seen previously, there is a mini-mum EROI which has to be reached in order for an alternative to be worthwhile and not being subsidized by fossil fuels. The results of various analyses 5 show that the EROI of corn-based ethanol is between 1.2 and 1.6, although some works still show that the net energy return is not reached. EROIs above the bare technical threshold of 3:1 are rarely reported.

[...]