Wednesday, May 28, 2014

Energy and the Bubble Economy

On 20th May the Yorkshire Chapter of CASSE, Centre for the Advancement of the Steady-State Economy, presented this event at Leeds University Business School. I expected one session but there were two separate presentations.

Tiago Domingos of the University of Lisbon took the first module: “Can energy use and economic growth be decoupled?” Green growth is possible by reducing the energy/GDP ratio, and to do that we need to decarbonise the energy system. This proved to be a technical talk; knowledge of thermodynamics a distinct advantage. Apparently energy cannot be destroyed and in any energy transfer there are always losses. This is demonstrated by our present electricity generation process, where around 60% of primary energy is wasted in generation and transmission and only 20% of what’s left (Final Energy) is Useful Energy. The rest is dissipated as heat in the appliance. He claimed that an output of 0.02kWh needs an input of 25kWh, which seems to be overstating the case a bit, but even a loss of 90% is bad enough. We pay for final energy - and all the primary energy that goes into it - and waste most of it in inefficient appliances.

We now moved on to the thermodynamics bit and started talking about exergy. I hadn’t heard of it before, but this is what Wikipedia says:   

“In thermodynamics, the exergy of a system is the maximum useful work possible during a process that brings the system into equilibrium with a heat reservoir.[1] When the surroundings are the reservoir, exergy is the potential of a system to cause a change as it achieves equilibrium with its environment. Exergy is the energy that is available to be used. After the system and surroundings reach equilibrium, the exergy is zero.”

The professor then went on to propose that we should study exergy rather than energy, and gave examples of sources of exergy: electricity, coal, gas, biomass, oil, food. (Note that electricity is a source of exergy, but of course not of energy.) He stated that the important ratio is not energy/GDP but Useful Energy/GDP. There followed an analysis of energy statistics for Portugal since 1850 when the economy was agricultural, through industrialisation from 1920 and onwards. The Final Energy/GDP ratio dropped sharply and plateau’d from 1960. Useful Work/GDP was at the same level as 1850, although primary energy consumption went up.

Domingos quoted the economist, Nicholas Kaldor, who said that in the long term the wages/interest, interest/capital, capital/GDP and Useful Work/GDP ratios were constant in most economies. There are also thermodynamic limits to the efficiencies of transforming primary to final energy and final to useful energy. The whole thing seems to lead me to the conclusion that there is very little scope for decoupling energy from economic growth. What hope for growth? Having said that, surely it all comes down to efficiencies. And while electricity generation from coal, gas, nuclear and even biomass can have losses of as much as 70%, the losses in generation from renewables are less than 1%.
The Bubble Economy

Our second speaker was Robert Ayres (from INSEAD in France) who will shortly publish "The Bubble Economy: Is There a Sustainable Way Forward?”. 

This was a very different presentation, and referred to Tulip Mania, the South Sea Bubble, the Trust Bust, the Dot-com Crash and the Sub-prime Disaster, among many others which litter history. Apparently there is a plausible story and investors start to pile in. Rumour builds on rumour, possibly helped along, until every man in the street sees a golden opportunity and mortgages his house to buy in. Canny investors get out at the top, confidence evaporates, prices crash and small investors lose their houses. Ayres predicts another bubble, this time involving fracking. Presumably that will happen in the US. After this week’s report from the UK Geological Survey few people in this country will surely invest!

Since 2008 we have seen pressures in the economy from climate change and the end of cheap oil, leading to inequalities and a slow recovery. In 2008 the banking system was under such extreme stress that governments had no choice but to rescue it. Household net worth collapsed and the middle classes have still not yet recovered. Oil price rises are inevitable because the rate of new discovery of oil is not keeping up with production. Saudi Arabia continues to be a major global oil producer, but its recoverable reserves remain, and have remained constant since 1988. (This is apparently justified by improving extraction techniques.) The oil price affects the global economy, but Ayres claims that it is only recently that the IMF has included the price of energy in its models. We need to decarbonise our energy and this is becoming more achievable as the average cost of onshore wind has been falling annually by 14%. The price of solar PV is falling faster; not yet to grid parity, but arguably coal generation benefits from hidden subsidies in that it does not pay the true cost of pollution. The costs of renewables and hydrocarbons are reaching a crossover point as new technologies, experience and economies of scale drive down renewable costs. Could we create a renewables bubble? Ayres told us that there are substantial reserves held by US corporates in overseas banks and doing nothing. Let’s not have a bubble, but let’s have some solid investment.

The future growth paradigm will be based on energy efficiency, not demand.

Questions came thick and fast and this a summary of what I picked up. 

Why will energy costs rise? asked a former Shell executive. Because Saudi is running out and the projected reserves in the US have been overstated and we are using it faster than we’re finding new reserves. Well, when he was at Shell they tried predicting the oil price and got it totally wrong….

Can we really substitute electricity for oil? Yes, but it is difficult and time-consuming which is why the price of oil matters…Is 30% the maximum share of energy that the UK can source from renewables? I would have thought that was pessimistic, myself.

If the future is efficiency, what about user behaviour? The rebound effect means consumers can spend the same and use more. Prices must be controlled by governments to prevent this. A green levy could keep expenditure at constant levels and raise a fund for green research and investment.

Will lower-quality reserves demand more energy? Energy in for energy out is a problem with fracking...Timescales for decarbonising the economy are a concern. There are big opportunities for improving efficiency - notably transport and home heating (cars are still very inefficient) - but if we are serious about our 2050 targets we have a serious problem. Current policies - and politicians - do not recognise the extent of the challenge.

Education is lacking in high places.

And my conclusion? As always, spread the word. Make people aware that business as usual is not an option. Make them aware that big business has generally taken all this on board, but small business and the consumer need to follow on. It’s not about a lower standard of living, it’s about doing things differently and more efficiently. It’s about not sacrificing the long term for the sake of the short term. 

Please tell any politicians you meet.