ASPO Ireland has invited Australian economics professor, Dr. Steve Keen, to Dublin to give a series of lectures as part of his global tour to support the recent publication of a revised edition of his book ‘Debunking Economics‘.

His visit is already generating debate over on the IrishEconomy website.

During his trip he will be presenting at several events:

TASC Economists (4:30pm Tuesday 15th)

ASPO Ireland/Feasta (7pm Tuesday 15th)

IIEA Economics group (open event) (11am Wednesday 16th)

A brief economic explanation of Peak Oil by Chris Skrebowski

Graph 3 Shows the development of oil prices and illustrates the $10/year trend (red line)

The conclusion appears to be that:

Unless and until adaptive responses are large and fast enough to constrain the upward trend of oil prices, the primary adaptive response will be periodic economic crashes of a magnitude that depresses oil consumption and oil prices. These have the effect of shifting consumption from incumbent consumers—the advanced economies—to the new consumers in the developing economies.

This is exactly what happened in the last recession when between the start of the recession in January 2007 and its effective end in 1Q 2011 demand rose by 4.3 million b/d in the non-OECD area and fell by 4 million b/d in the OECD area.

Weak World GDP Growth & “Peak Oil” by Bob Hirsch

As we previously forecast, the decline in world oil production is likely to occur in the next 1-4 years…

Beginning in 2004, world oil production (total liquids) has been on a fluctuating plateau, as shown below.

Hirsch’s warning that we’ve got at best 4 years before terminal decline is particularly disconcerting. It leaves us with barely time to brace for impact, let alone attempt to get out of the way. The Initial Thoughts article published yesterday took a high level look at Ireland’s oil consumption and looked at an illustrative scenario to halve consumption by 2020, effectively rolling us back to where we were in 1990. It was not possible without a drastic (2/3) reduction in private car use. The chart below extends the data back to 1970.

We can clearly see the impact of the second oil crisis on our consumption, although it doesn’t appear to have had much impact on GDP (worth further investigation to understand why). The steepest future demand scenarios reflect the reverse side of the steep rise in the 90′s. Between 1990 and 2000 we doubled our oil consumption and GDP. The charts below show a strong correlation, the direction of causality being the subject of much debate, with Ayres-Warr arguing that there is a positive feedback between the two, but energy being the critical enabler:

If this relationship holds on the way down, as it did on the way up, we should expect the economy to shrink back according to oil availability. Whether and to what extent this relationship works in reverse should be the focus of much considered attention. One important factor will be the cause of the reduction. If it’s because of high price imposed by market factors, then that could have a very different impact than if we implement policies ourselves to force us down the curve.

SEAI’s 2009 Transport Statistics report is a great resource, some highlights worth mentioning in this context include the chart below showing a strong link between personal consumption and private car travel.

What’s interesting about the average distance data is how it demonstrates that our cars spend most of their time stationary. At an average speed of 30 kmph, it takes just over 500 hours to hit the average distance travelled by an Irish petrol car. Assuming normal driving hours are between 7am and 9pm (14 hours/day x 365 days = ~5,000 hours), the car spends 90% of its time going nowhere.

The vast majority of private cars are less than 10 years old, the average life of a car in Ireland is almost 7 years. Even if we get back to the heady days of 100k new cars each year, and assuming petrol cars were outlawed, forcing everyone to buy electric, it would take 10 years to replace half the nearly 2 million private cars in Ireland (in the scenario being considered here, the remaining half needing oil will be recycled for parts).

The chart below, extracted from a report by the CSO, presents a vivid image of those most vulnerable from a transport perspective to oil price volatility or availability.

Finally, for the jet-set among us, it’s worthwhile to understand where most of our airline travel is destined. The link with the UK and EU clearly evident. I don’t know if the data is available, but it would be useful to see a breakdown of this data into purpose of travel, business versus tourism. The government’s strategy of reinvigorating the economy through tourism may be misplaced.

If there is a non-negligible risk of future oil scarcity in the near term, then it would be negligent not to manage the associated risks.

Dr Kumhof presented a wealth of very useful information, and more importantly, an approach to understanding our economy’s dependence on energy and oil in particular, that needs to be repeated for Ireland. Below are some initial thoughts using headline data from the IMF and SEAI.

The chart above shows total oil consumption in Ireland on energy related activities (95% of all oil used) [source]. Clearly, the lions share goes into Transport, although Residential use is also substantial.

A closer look at the Transport sector demonstrates that private cars are the single largest consumers. Consumption by rail and public passenger services is paltry. ‘Unspecified’ and ‘Fuel Tourism’  are remarkably significant and will be looked into further in future research.

Let us next take a look at historic consumption and future projections, which were prepared by SEAI [source]:

Included in the chart of oil consumption is GDP data from the IMF’s WEO database [source]. The scenarios shown include SEAI’s Baseline scenario, which used the 2009 growth forecasts from the IMF (since reduced in 2010). It also includes the impact of two action plans (AP) focused on energy efficiency (NEEAP) and renewable energy (NREAP). The IMF’s April WEO considers the scenario of a 2% decline in oil availability, which is also included here from a demand perspective. To halve our oil demand by 2020 required an annual 6% reduction. Given the strong historic correlation between oil consumption and GDP, one worries about our ability to produce the growth anticipated by the IMF while reducing oil demand, at least without a very clear plan for achieving it.

The argument for pushing the Nation down the curve ahead of a shortage is to build some resilience into our economy and reduce the risk of our current high degree of exposure. There is obviously a cost associated with such an insurance policy, just as there is a cost if we’re caught unprepared. It’s a political call as to what’s an appropriate balance of cost, benefit, and risk. The present concern is the general ignorance surrounding the nature and potential cost of the risk we’re taking by doing little or nothing to prepare.

To see what an aggressive reduction in oil consumption for Ireland might look like, I set some headline targets for 2020 to see what it would take to achieve based on current patterns of usage. I started by assuming Industrial and Agricultural usage would remain flat, although I averaged agriculture over the last 10 years on the assumption that there would be an increase in activity, while industrial use could be expected to become more efficient, allowing greater output with the same input, sensible but arbitrary assumptions. I then assumed a doubling in demand for rail and public transport. I assumed road freight transport would double in efficiency. I assumed residential and commercial/public services would make large gains by reducing to 45% of current usage. I assumed aviation demand would halve, again arbitrarily. I then made the very dramatic assumption of a 2/3 cut in demand from private cars. It’s not possible without a collapse in the economy, but I wanted to look at what it would take to halve current consumption in transport overall.

Here’s what the scenario looks like:

Based on what we know from Hirsch, Ayres/Warr, and the IMF, such a dramatic reduction in demand over a relatively short period would only be observed in a situation where the economy effectively collapsed. However, if we don’t make a plan now to figure out how to reduce our dependence while we’re trying to resurrect the economy, we’re going to end up in a very vulnerable place. This is an opportunity, we can’t afford to miss it.

Assessing the Risks

Energy Security and the Global Economy

Dr. Roger Bentley [slides]

Prof. Robert Ayres [slides]

Dr. Michael Kumhof [slides]

Following up on our June seminar Energy Security and Competitiveness in a Rapidly Changing World, our next seminar expands on the recent warning from the IMF, published in their April 2011 World Economic Outlook, on the risks of oil scarcity to the global economy.

Access to affordable, reliable, and sustainable energy is a matter of national security, particularly so for a state such as Ireland, heavily dependent on increasingly expensive imported fossil fuels. Since the last seminar we have seen the unprecedented release by the International Energy Agency of their strategic oil reserve in an attempt to ease pressure on rising prices, further oil price volatility, and continuing economic stagnation in Europe and the US.

Dr. Michael Kumhof, a Deputy Chief at the International Monetary Fund will present his latest research on energy augmented macroeconomic models which formed the basis of Chapter 3 of the IMF’s April World Economic Outlook, entitled ‘Oil Scarcity, Growth, and Global Imbalances’. This work is a noteworthy departure from classical economic growth modeling methodologies. He will be joined by Dr. Robert Ayres (INSEAD) and Dr. Roger Bentley (UK ERC), whose respective work on the role of energy in economic growth and oil production forecasts, were referenced in the IMF study.

This seminar will highlight how

• traditional models of economic growth exclude energy as a factor of production
• present a new model incorporating energy as a factor of production (Ayres)
• present an overview of a comprehensive study of future oil production forecasts and their attendant risks (Bentley)
• an updated IMF model for economic growth incorporating oil and considering different future availability scenarios (Kumhof)

	Dr. Michael Kumhof Deputy Chief, Modeling Unit, Research Department, International Monetary Fund	Dr. Kumhof prepared the economic model and ran the oil supply scenarios published in Chapter 3 of the IMF’s April 2011 World Economic Outlook.He will present his latest work on the impact of different future oil availability scenarios on economic growth.
	Dr. Robert U. AyresProfessor Emeritus, INSEAD	Prof. Ayres is a co-author of The Economic Growth Engine: How Energy and Work Drive Material Prosperity and Crossing the Energy Divide: Moving from Fossil Fuel Dependence to a Clean-Energy Future. He has published ground-breaking research into the role of energy in determining economic growth, raising fundamental questions about our conventional models for economic prosperity.
	Dr. Roger BentleyUniversity of Reading	Dr. Bentley is a leading expert in energy and oil production forecasts. He co-authored Global Oil Depletion (2009), a report commissioned by the UK Energy Research Council. He has studied the often controversial debate on oil production forecasts since the oil crises of the 1970’s and attended the IEA’s meeting in 1997 on oil reserves which formed the warning in their 1998 World Energy Outlook, a warning repeated in their 2008 WEO.

ASPO Ireland has teamed up with SEAI, who will host the event.

To see what is in front of one’s nose requires a constant struggle – Orwell

ASPO Ireland was invited to return this year (last year) to Cultivate‘s Rethink Tank at Global Green, a part of the Electric Picnic festival, to participate in a panel discussion on How green is Ireland? The panel was chaired by Davie Philip of Cultivate, and participants, along with yours truly, were Gavin Harte, Taja Naidoo, and Eamon Ryan.

Gavin kicked off proceedings with a ‘lively’ talk, so lively in fact he had the audience squating up and down for 5 minutes to let them ‘feel’ what 40W of power was like (think of a light bulb). He then told them that to power Ireland requires about 20GW  - imagine the entire population of Europe squating – ALL THE TIME – to power just the Irish economy. I put the graph below together to give you a sense of the scale of our dependence on mostly imported fossil fuels. We shouldn’t expect to be able to replace all of that with wind (that blip at the bottom of the graph), wave, biomass, etc. in any meaningful timeframe, so our challenge is as great to reduce demand to a level that supply can meet. If we have ambitions to continue to enjoy something approaching the relatively high standard of living we currently enjoy, then that will require a complete re-engineering of Irish society to operate on a much lower energy demand basis.

To this end, Eamon Ryan, former energy minister and now leader of the Green Party, warned that the way to engage the general public in this transformation was not to scare them with dire warnings about Peak Oil and Climate Change and called for a massive investment in the Smart Grid. I suspect trying to resurrect your political career on the back of a spent political force in Ireland is a daunting task. And no politician has ever been elected for promising bad news. The economic risk posed by peak oil is not being managed by anyone at a government level, and the NAMA project, a 50 billion euro bet on going back to a paradigm that peak oil makes impossible, is what we’ve got instead of a Smart Grid. Admittedly, his analysis is correct, but it’s a lot easier to shout from the sidelines than get it done at the cabinet table.

And so to another fool wasting his sweetness on the desert air… and the general trust of my comments on the day, namely paradigms are funny things. I opened by describing the challenge Copernicus faced trying to convince us that maybe we were the ones going around the sun, rather than the other way around. Copernicus only saw a pre-publication draft of his work on his death-bed, waiting 20 years to release to the world the results of his study of the motion of the planets. His acolyte, Galileo, was threatened with excommunication for teaching his students Copernicus’ work. It’s often hard to appreciate how much of what we believe to know is simply socialised knowledge, what everyone believes without question, a paradigm. And to question it is to question the legitimacy of a whole network of beliefs that build up around it. The happy belief that we are at the centre of our universe ties in quite conveniently with our creation myth as recorded in the Book of Genesis. To challenge that story means taking on the whole of society in a pervasive belief network that is stable for all the reasons that society is generally stable.

So too Darwin, who sat on his theory of evolution for 20 years before being forced to publish it to beat a competitor to the printing press. He was acutely aware that he was taking on the Church and everyone who believed in it when he suggested man had descended from the apes rather than, per the Book of Genesis (again), had life breathed into him by God on the 6th day.

Similarly, it is now a generation since Dr. Colin Campbell, founder of ASPO, published his first study of oil depletion, The Golden Century of Oil. In that generation, in which he forewarned that global oil production could peak as soon as the year 2000, consistent with M. King Hubbert, leaving industrialised society with, at worst, just a decade to take appropriate steps to prepare, all his warnings were wilfully ignored. Much worse, he was denounced as a heretic by his colleagues in the oil industry and the economics profession, who pointed out that higher prices will induce us to find new and alternative sources of energy.

Now, 20 years later, we have casual announcements by the International Energy Agency (IEA), that conventional oil peaked in 2006 and that governments would have been well to have started preparing ten years ago. The challenge that Dr. Campbell faced in proposing his peak oil theory is the threat it posed to the unquestioned faith in the paradigm of economic growth. There is no energy source that we’re currently aware of that can replace the one third of the global economy’s energy supply that comes from liquid petroleum: not wind, not nuclear (fission). 84 million barrels per day (mbpd) equates to 5,600  GWs of wind power or 17,000 GWs of turbines (we installed 40GW last year globally to bring the total to 200GW). Very soon (“there is a significant risk of a peak before 2020″, UK ERC), global oil supply is going to start declining, ASPO’s best estimate is 3% per annum, equivalent to 2.5 mbpd (500 GW of turbines). The green establishment rhetoric is calling for an orderly transition to non-fossil fuels. Given the numbers above, the transition is unlikely to be anything but orderly. And the biggest transition to be made is in our belief systems, in our very paradigm of living.

So to the panel’s question – How green is Ireland? For many tourists who visit our shores each year, very! Yet our new Fine Gael/Labour government are probably sympathetically described as ‘struggling’ with the green political agenda, less clear is whether they’re struggling to dismantle it completely. Not only that, there is an agenda being pushed by certain quarters to eschew the virtues of wind energy and continue the dash for gas, or as we heard recently from the IOOA, the opportunity to develop the massive but untapped oil/gas potential off the West coast of Ireland. The desperate claims of a society in need of its energy fix. Just like digging up the tar sands and defining the borders under the arctic ice so that we can exploit the expected natural resources underneath once the ice melts. The behaviour of a rational and well informed society acting with a social conscience or the nihilism of a heroin addict in need of their next fix?

In an era when the green agenda is largely disenfranchised, it’s easy and convenient to attack the straw men that are our new Minister’s for Energy and Environment. However, to do so is to forget that they were elected by the majority to sweep away those previously filling our Dail and get our economy ‘back to growth’. The legal contract between mortgage holders and their bank managers is that they will repay their loan, the social contract between parents and their children is that they will enjoy, at the very least, the same standard of living as their parents. And so the general public’s demand for a return to economic prosperity (and therefore growth from our current dire predicament) is premised on a return to something that no longer exists in our future, cheap energy. To understand why that is so, is to understand the peak oil argument. Encouragingly, the upcoming ASPO/SEAI event (Oct 10th) with the IMF on their recent study of the impact of oil scarcity on the global economy offers fresh insight from a very credible source into this enormous challenge, and more importantly, a challenge that fundamentally undermines our socially constructed understanding of the world we live in and our expectations for the future, much as Copernicus and Darwin did in their time.

We should learn from them and better appreciate how societies can be blind to the reality staring them in the face. We should also be mindful that, while Copernicus and Darwin’s theories undermined the faith of entire societies, whether one believes that the sun goes around us or vice versa would have little material impact on the day-to-day life of the average medieval citizen. To suggest that the remarkable standard of living that the fortunate among this planet’s 7 billion and growing homosapiens enjoy, only made possible by our exploitation of Nature’s stored reserve of ancient sunlight, a reserve we’re extinguishing in but the blink of an eye, is threatened by a decline in that energy supply, is to shake the very roots of our secular beliefs in as profound a way as Darwin threatened our religious beliefs in a different time.

Modern society is as fraught with conflicts of secular dogma as was medieval society with religious dogma. To acquire a new world view, a change of paradigm, is comparable to a religious experience. (Cotgrove, 1982)

In which case, don’t be surprised if mainstream society doesn’t want to hear your story about Peak Oil or Climate Change. Do what you can to build a safety net. Do what you can to keep yourself sane while you exist in a paradigm that most of the people around you simply cannot see or comprehend. Much like the rebels in The Matrix awakening people from their machine induced dream, try to find open minds and help release them, but understand that others will see you as a threat to the legal and social contract they have with their bank manager and children, and their hopes and expectations for the future.

How Green is Ireland? Very. Now get on with the job at hand.

On June 13th 2011, the Sustainable Energy Authority of Ireland (SEAI) is hosting a seminar on “Energy Security and Competitiveness in a Rapidly Changing World” to be opened by the Minister for Communications, Energy and Natural Resources, Mr. Pat Rabbitte T.D.

Energy security is becoming a more pressing issue globally, with its potential economic and social implications being raised recently by bodies such as the International Monetary Fund and the International Energy Agency. There is growing concern about the risks of disruption related to oil in particular, with prices high and demand likely to considerably outstrip supply growth in the coming years. Ireland’s large renewable energy resource, coupled with a greater immediate emphasis on efficient use of all energy, represents a path out of our dependence that also offers opportunities for enterprise and export growth. Energy security is now an important national strategic issue for Ireland.

Attendees will hear from leading energy professionals on the changing international context, the impact of energy security on our competitiveness and our opportunities for change and mitigation.

The speakers are:

· Mr Pat Rabbitte T.D., Minister for Communications, Energy and Natural Resources,

· Richard O’Rourke, Association for the Study of Peak Oil and Gas (ASPO)

· Katrina Polaski, Head, Low Carbon Technologies, SEAI

· Fergus Cahill, Irish Offshore Operator’s Association

· Peter Clinch, Jean Monnet Professor (Economic Integration/Environmental Policy) at University College Dublin (UCD)

Watching Barack Obama walk off Airforce One this morning in Dublin airport into a very blustery day, it inspired me to take a look at the Eirgrid website to see what kind of power our wind turbine fleet is generating.

I then thought I’d take a look at what our overall energy consumption looks like.

We’ve a long way to go to fill the gap currently occupied by fossil fuels, oil in particular.

The potential for good news is in the generation report published by Eirgrid, summarised in the chart below. It shows that if all the renewable generation (RES-E) resources are built out then, we go a long way towards bridging the gap.

However, while the nameplate generation gets us past the 20GW mark, when it’s adjusted for average power output (capacity factor), it drops below 10GW, and below fossil capacity. Theoretically, an all-electric car fleet would halve our oil consumption, reducing demand by about 5GW.

Bottom-line: it’s do-able, but it will be a squeeze.

[NOTE: power figures are calculated by converting the annul figure in ktoe from the SEAI's report 'Energy Forecasts for Ireland to 2020' into an annual average in MW]

The latest International Monetary Fund (IMF) World Economic Outlook (WEO) published last month (April 2011) makes for very interesting reading, Chapter 3 specifically: “Oil Scarcity, Growth, and Global Imbalances”.

Considering the findings of the report, it’s remarkable the relatively little press the report has received, and I can find none in the Irish media. All the more remarkable considering their role in our bail-out.

Chapter 3 considers four future oil production scenarios, one of which being a ‘Peak Oil’ scenario (Scenario 2):

• Benchmark scenario
• world oil production increases by only 0.8% versus business as usual (BAU) 1.8%
• Scenario 1: Greater substitution away from oil
• assumes a more optimistic long-term elasticity of 0.3, almost five times as high as that used in the benchmark scenario
• Scenario 2: greater declines in oil production
• -2% per annum (-3.8% vs. BAU)
• 4% real increase in extraction costs per year (vs 2% in benchmark scenario)
• Scenario 3: greater economic role for oil
• the contribution of oil to output (either directly or as an enabler of technology) amounts to 25 percent in the tradables sector and 20 percent in the nontradables sector (rather than 5 percent and 2 percent).

Oil production assumptions in the IMF model

The chart above demonstrates the oil production scenarios used in the model.

For this study, the researchers took the IMF’s ‘standard’ economic model, GIMF (Global Integrated Monetary and Fiscal Model), which is a multiregion dynamic general equilibrium model, and made some rather ground-breaking modifications – at least if you’re a neoclassical economist.

The main difference between this application and the standard version of the GIMF is that oil is a third factor in an economy’s production, in addition to capital and labor, and a second factor in final consumption, in addition to goods and services. The price and availability of oil therefore influence production as well as consumption possibilities.

This is a very substantial break from the conventional Solow-Swan model (for which Solow won the Nobel Prize in 1987). This thinking reflects that described by Ayres & Warr (referenced in this IMF report) in their recently published book ‘The Economic Growth Engine‘ (2009). They develop a metabolic model of economic activity based on exergy and efficiency as the primary determinants of economic growth in industrial society. This allows them to drop the critical assumption of ‘technological progress’, while still explaining GDP growth. Ayres & Warr critically deconstruct neoclassical economics and highlight, yet again, its shortcomings as a model to explain and forecast economic performance. As such they represent yet another paradigm shift away from the old school. That the IMF would see fit to adopt it for this report demonstrates how the paradigm of the old school is starting to be replaced because of the failures of the old.

The authors then model oil demand using a function based on consumption elasticities. Long- and short-term elasticities are determined  using a regression model of per capita oil consumption and real per capita GDP. The results bear out the belief in the special nature of oil:

• very low short-term price elasticity, about –0.02. This implies that a 10% increase in oil prices leads to a reduction in oil demand of only 0.2%
• long-term price elasticity is 4 times larger, implying a 10% permanent increase in oil prices reduces oil demand by about 0.7% after 20 years.
• short-term income elasticity is about 0.68, implying that a 1% increase in income is associated with an increase in oil demand of 0.68%

The authors’ paradigm shift is only partial, they’re still principally using a general equilibrium model. Yet, even in this regard, they explicitly acknowledge the limitations of their model:

In each of the GIMF scenarios, the transition to a new equilibrium is, by assumption, a smooth process:
- consumers in oil-exporting economies easily absorb large surpluses in goods exports from oil importers,
- financial markets efficiently absorb and intermediate a flood of savings from oil exporters,
- businesses respond flexibly to higher oil prices by reallocating resources, and
- workers readily accept lower real wages.
Some of these assumptions, however, may be too optimistic.

Indeed.

The results of the simulation are summarised below:

The report observes, that based on its simulations, the benchmark scenario is relatively benign. Scenario 1, an admittedly optimistic scenario, given the assumption made, of a gradual move to a reduced dependence on oil, is moderately better. From there on the scenario results become rather unsettling. Scenario 2 (the ASPO scenario), results in an immediate tripling of oil prices, going to 800% increase at the end of the simulation period, 20 years hence. Of more interest to our politicians (and paymasters) is the impact on economic growth and Europe’s current account. The results from scenario 3 (pseudo Ayres-Warr) are to double the negative impact of the benchmark scenario, putting it between the worst case scenario (ASPO) and the benckmark scenario in terms of impact on GDP.

However, the study fails to consider the very obvious possibility of a combination of Scenarios 2 and 3, i.e. both ASPO and Ayres-Warr being correct. If the Ayres-Warr scenario doubled the impact of the benchmark scenario, then we might reasonably assume that it will do the same to the ASPO scenario, making the worst-case twice as bad.

The report summarises the scenarios, pointing out:

But if the reductions in oil output were in line with the more pessimistic studies of peak oil proponents or if the contribution of oil to output proved much larger than its cost share, the eff ects could be dramatic, suggesting a need for urgent policy action.

From the references, the authors studied the Hirsch Report (2005) and the work of the UK ERC’s Global Oil Depletion Report (2009). Undoubtedly the most significant finding from the ERC report is:

A peak in conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020. Given the lead times required to both develop substitute fuels and improve energy efficiency, this risk needs to be given serious consideration

What does the IMF consider are the policy implications?

Fundamentally, there are two broad areas for action:
First, given the potential for unexpected increases in the scarcity of oil and other resources, policymakers should review whether current policy frameworks facilitate adjustment to unexpected changes in oil scarcity.
Second, consideration should be given to policies aimed at lowering the risk of oil scarcity, including through the development of sustainable alternative sources of energy.

Given the impact of the banking crisis on Ireland’s economy, probably the most salutary warning in the report, in light of what’s gone above, is regarding the threat Peak Oil poses to our already fragile banking system:

The adverse effects of large-scale bankruptcies in such industries [car manufacturing, airlines, trucking, long-distance trade, and tourism] could spread to the rest of the economy, either through corporate balance sheets (intercompany credit, interdependence of industries such as construction and tourism) or through bank balance sheets (lack of credit after loan losses)

The challenge we face, from a policy perspective, is getting the mix of short-term and long term policies right such that we can get through the near-term disruptive risks on the long road to decarbonising our society.

The area of appropriate policy responses will be explored in a future post.

Contents:

Tensions from the Two-Speed Recovery: Unemployment, Commodities, and Capital Flows

Chapter 3. Oil Scarcity, Growth, and Global Imbalances
1.What Are the Main Findings?
2.Has Oil Become a Scarce Resource?What is oil scarcity?

• How do we measure scarcity?
• What lies behind the apparent increase in oil scarcity?
• What are the prospects for overall energy consumption?
• What are the prospects for oil demand?
• What are the prospects for oil supply?
• What are the implications for oil scarcity?

3.Oil Scarcity and the Global Economy

• What is the model and how is it calibrated?
• How will lower oil supply trends affect the global economy?
• Alternative scenarios?
• Scenario 1: greater substitution away from oil
• Scenario 2: greater declines in oil production
• Scenario 3: greater economic role for oil
• Summary of the simulations
• Additional considerations

4.Implications for the Outlook and Policies

Appendix 3.1. Low-Frequency Filtering for Extracting Business Cycle Trends
Appendix 3.2. The Energy and Oil Empirical Models
References

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).

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).

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).

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).

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.

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…)

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.

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 typically 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.

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:

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.

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.

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).

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).

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.

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.

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.

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)

References

Acaravci, A. & Ozturk, I., 2010. On the relationship between energy consumption, CO2 emissions and economic growth in Europe. Energy, 35(12), pp.5412-5420.

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