#25. Britain and EROEI risk

Application of the SEEDS model to the United Kingdom shows that an escalating real cost of energy poses a major threat to the economy. What are we going to do about it? And do we even know what we are facing?

What with the European elections and other interesting events, it’s been a while since I wrote about my core thesis, surplus energy economics. For anyone not familiar with this – and allow me to recommend my book Life After Growth! – SEE is a discipline which argues that the entire economy is, and always has been, an energy equation and not, as so many people assume, a monetary construct. Society and the economy began when farming gave us the first energy surplus, enabling a small minority of the population to turn to non-subsistence tasks, and the discovery of the heat engine applied dramatic leverage to that surplus, creating the complex societies that we take for granted today.

Of course, energy isn’t ‘free’. In accessing energy, some energy is consumed, be it in drilling oil wells, sinking mine shafts, constructing pipelines and refineries, or fabricating solar panels, wind turbines or nuclear reactors. Where prosperity is concerned, what matters is the difference between the gross amount of energy accessed and the energy consumed in doing so. Obviously, if we used up 100 units of energy to access 100 units, the exercise would be pointless, because there would be no energy left over for us to use.

This cost ratio is measured as EROEI, or the ‘Energy Return On Energy Invested’. If 50 units of energy are accessed and 1 unit is consumed in the process, the EROEI is 49:1. Put another way, the cost of accessing the energy is 1 divided by 49, or 2%, a number which I call the ‘Energy Cost of Energy’, or ECOE.

As we go about our economic activities, the system imposes this ECOE cost on us. With our specimen EROEI of 49:1, we’d hardly notice a 2% levy on our activities, not least because the ways in which we measure economic output (such as GDP, or Gross Domestic Product) are far from perfect. Thus a modest energy ‘levy’ isn’t generally noticeable, especially if it is pretty static over time.

Increase that levy from, say, 3.6% to 5.6%, however, and we begin to notice its effects. For those who persist in regarding the economy as nothing more than a monetary system, the noteworthy features would be an undershoot against growth expectations combined with a big real-terms increase in the cost of the energy that we use.

Those who are familiar with SEE, on the other hand, regard such trends as indicative of a rising ECOE, or in other words a falling EROEI. Looking around the energy scene, they would observe that huge, cost-effective sources of energy are in decline, and that the industry is turning its attention to resources which are far costlier to access.

Despite the sterling efforts of the EROEI community, we do not have an overall calibration of global, national or by-fuel EROEIs and ECOEs. I must stress that my SEEDS (surplus energy economics data system) model cannot possibly be definitive, and neither is it intended to be. Its purpose is to provide, in the absence of anything better, a general outline of where I think ECOE has been, and where it is going.

Alarm bells – the British situation

The application of SEEDS to the United Kingdom shows a worrying deterioration in EROEIs and, consequently, a sharp uptrend in the ECOE (energy cost of energy) as it affects economic performance.

Eleven years ago, in 2003, Britain was continuing to benefit from its North Sea windfall. Our production of energy, at 237 million tonnes of oil equivalent (mmtoe) remained greater than consumption (226 mmtoe), though the surplus had narrowed to 11 mmtoe in 2003 from 50 mmtoe in 1998.

Since then, oil and gas production have both dropped by about 65%, whilst coal output has halved from an already low level. Despite progress with renewables, overall UK energy production has declined from 237 mmtoe in 2003 to about 102 mmtoe today, and seems certain to go on falling.

This has happened at the same time as global ECOEs have been rising sharply. SEEDS shows this global average rising from 3.6% in 1998 to 5.6% in 2008, thus playing a major (though often overlooked) role in the 2008 economic slump. Since then, my estimate of global ECOE has climbed further, to 7%, which helps to explain why oil prices remain well ahead of 2007 levels despite a sharp intervening slump in economic activity.

For Britain, this trend has been far worse, because we have swung from a net exporter to a net importer of oil and gas. Even where EROEIs are the same, by the way, a net exporter gains versus a net importer of energy because costs (and taxes) stay at home. Reflecting this, my estimate of Britain’s overall ECOE has soared from 2.8% in 1998 (when the global average was 3.6%) to 13% today, getting on for twice the global average. Both factors – rising global ECOEs, and a deteriorating energy trade position – are set to continue.

It would be futile, though instructive, for us to lament British energy decisions of the past. Our net export revenues, which we might have saved (like Norway) or invested in the modernisation of our industrial base, were spent instead on tax cuts and the cost of unemployment. Exporting part of our always-modest gas resource, and using more of it to switch to gas-fired electricity production in pursuit of a quick buck, surely needs no comment from me.

What matters now is coping with the future outlook. Basically, high and rising ECOEs are going to undermine our economic performance. What we need to do is to be aware of this, to minimise it where we can, and to manage the broader consequences.

(And, by the way, don’t pin your hopes on a shale bonanza which isn’t going to happen here, and is likely to be over within three or four years in the US).

A troubling outlook

The chart below is designed to give you an outline of where this might lead. The blue line shows real GDP growing at an assumed annual rate of 2% into the future. Of course, our horrendous current account deficit, and our equally horrendous levels of debt, might make this assumption untenable, but let’s stick with it for now as a base-line.

The dark red line adjusts this for ECOE, showing real GDP less the cost of energy. This cost has always been there, of course, but the combination of global trends and our worsening energy trade position are transforming this cost from a barely-noticed irritant to a very serious drag.

The bright red line shows a further adjustment for our current account balance, already very bad but capable of becoming much worse if our net trade in energy (which includes both direct energy and energy-incorporating products such as food) deteriorates as our energy production continues to erode.

Of course, how we counter this is a matter for government. Going ahead with nuclear, after Labour’s long hiatus, is clearly necessary, even if our choice of new reactors seems a strange one. We also need to press ahead with renewables, ultimately making a choice between economic costs on the one hand and NIMBYism on the other.

However you look at it, this is a major challenge. At the very least, ensuring energy continuity is going to be hugely expensive, impairing what we have left to spend on other things.

UK 2%m

* Assumes growth of 2% annually from 2014



13 thoughts on “#25. Britain and EROEI risk

  1. Whilst agreeing that the outlook is bleak, and that shale is not an enduring answer, I’m less convinced that renewables are yet a solution. The problem with renewables is their intermittency and poor load factors, meaning that they are not replacements for fossil fuel assets, merely a means of expensively eking out those fossil fuels. From an economic point of view, renewables are too capital intensive to be justified by their outputs, and to make the outputs more useful you need storage, which further inflates the capital requirements. It is already technically feasible to collect wind and solar energy, use the power to dissociate water into hydrogen and oxygen, and store the power, or to store it as compressed air, recovering the energy kinetically – I work for a company that is already doing all of this on large scale operational prototypes. But the problem is that the combined system costs are incredibly high, and the net output low, because although inter-stage efficiencies are impressive, the losses at each conversion stage are cumulative.

    My belief is that we are abandoning fossil fuels too fast, before we have adequate alternatives. Put simply, we should be keeping coal plants operational, looking for industrial scale solutions for power generation and storage, rather than subsidising expensive small scale solar and wind whilst hoping that something will turn up. Whilst shale gas won’t get us out of the energy hole, coal is plentiful from varied sources, and novel techniques (such as underground gasification) could give us access to trillions of tonnes of coal under the North Sea, although I suspect that importing open cast coal will be vastly cheaper for decades.

    Nuclear may be the ultimate answer here. Costs are currently too high and the flat output means that plant utilisation would be low if you build much above your system baseload making the cost problem worse, but there’s where we need to put the effort – build Hinkley Point C (poor value, but better to get on with it than continue wringing our hands and doing nothing), but whilst building it, cost engineer the product and the process (including the nuclear safety and planning processes) in the hope that we can build further near-identical schemes for a fraction of the cost. In parallel work with KEPCO to see if their designs being built at Shin Kori would be a cheaper off-the-shelf alternative. And again in parallel, start looking at energy storage from nuclear plant to see which is better, using off peak power to dissociate water for energy storage (using the gas for CCGT to meet peak demand), or simply over-provisioning of nuclear capacity (which did work for France when they built their nuclear fleet in the 1960s and 70s). If we can make industrial scale power-to-gas storage work, then the existing renewables investment may yet turn out to be just a poor investment. If we can’t store power, then the circa £30bn that by 2020 will have been spent on wind turbines and solar PV will have been a colossal misallocation of capital that will be an albatross round the neck of UK energy consumers for the next two decades. I’ve said it before in a previous post, but Shin Kori 5 & 6 have been approved at a cost of $7bn for 2.8 GW of plant. Our £30bn could have bought about 18 GW of nuclear capacity at that price, which along with 11 GW of current capacity and 3 GW of Hinkley Point C, and all without despoiling all of the UK’s uplands and coasts. Unfortunately what’s done is done, and £20bn of this money has already been wasted – but to continue to throw a further £10bn at ineffectual renewables is madness when they simply can’t keep the lights on in the long north European winters.

    • Thank you. You are very obviously an expert at this, and your input is extremely enlightening.

      For starters, and unless there are safety issues that I’m not aware of, I have absolutely no idea why the UK is buying the French plant rather than Shin Kori version. I note, though, that the French are effectively financing as well as building it, getting their pay-back in very high electricity prices.

      Could the simple answer be that the UK is so skint that it can’t afford to buy its own plant, but must accept one financed by the builder? After all, our current account deficit is 5.5% of GDP. Robert Peston says that this is sustainable for only five years, even if we can get it down to 4%, which I doubt we can. This plant is going to take a lot more than five years to build, so it is a case of “beggars can’t be choosers”?

      On renewables, again the logic may be economic. Though it costs far more to do it this way, the money is spent here. (It’s like the 1930s argument over battleships. Though the price-tag for a battleship was £10m, the real net cost was barely £1m after income taxes, profit taxes and savings on unemployment costs all flowed back, leveraged by the multiplier effect).

      One other point here. Renewables (or nukes) are not going to get us back to the sunny uplands of a high EROEI and a low ECOE. But then, nothing is going to get us back there anyway. So, we’re going to be poorer. What we’re really short of is ready capital, right now. Renewables are very costly, but this money is spent at home, and is spent in manageable instalments, unlike a big capital project which would call for up-front investment that Britain simply cannot afford?

      In other words, might there be no good choices, only bad ones that we can’t afford or worse ones that, by piling the bills onto posterity, we can (sort of) afford?

    • On the subject of nuclear and beggars not being choosers and surrounding issues, is there much difference (in the longer term) when financing long life assets between a current or capital account deficit? In both cases we have to repay (or service the debt), and the timing of the investment is the same? My personal view is that the choice of EDF was motivated purely by the fact that EDF are currently an active player in the UK market, and this was an easier option. The government deliberately overlooked the fact that EDF would play to French interests and go for the Areva EPR, because they (government) simply don’t care about energy prices, not withstanding all the cant about energy prices the inept crooks of Westminster spout. I would suggest that the much lower prices of a Doosan-led Korean reactor could have been readily financed by a range of SWF investors, or even (with some government guarantees) by UK pension investors looking to park the increased funds from mandatory employee enrolment.

      Addressing the point that renewables boost the local economy, I’m worried you’re going all Keynesian on me! And it is only partially true. The vast majority (I guess about 90%) of the renewable technology has been foreign (in design, manufacture and incorporation of suppliers). As the technology is about half of the installed cost, renewables have contributed about £15bn to our trade deficits over recent years. I’d agree that most of the balance is spent locally, but that’s largely on low added value construction and installation elements, and the jobs are relatively short term – it doesn’t take very long to erect a wind turbine. The government routinely trot out nonsense about thousands of “green jobs”, but the reality is that despite their expense renewables do not generate many enduring jobs. How many people are required to man a wind turbine? And despite the vast amounts of wind turbines despoiling the Welsh landscape, I think you’d agree that there’s no evidence of a vibrant economy suddenly appearing in mid Wales?

      There have certainly been bad choices (almost all driven by the fact that the EU has excessive control, and its poor quality politicians are besotted with the whole climate change agenda), but those are done. In terms of where we go from here, there is the opportunity to make better decisions. Wresting control back from Europe would be a start, but only if the UK government can wean itself off the teat of climate change as it’s central belief system and primary raison d’etre, and I see no signs of that amongst the charlatans of Westminster and Whitehall.

      If then, government remain committed to low carbon, we (in Northern Europe) need nuclear ASAP, in volume, and at much lower cost. If the world goes for nuclear power then it may be appropriate to consider developing thorium reactors to increase the fuel supply, but that’s for the future. I come back to the point that Korea is managing to build nuclear reactors far more cheaply and far more quickly than the UK, and that the continued nonsense of renewables pushes costs up, prevents investment in better alternatives, and solves few problems.

      Sadly the government are doing none of that, and are (for example) committed to a quadrupling of the amount of small scale solar PV by 2020, despite the high costs, low load factor, and output that occurs both daily and seasonally when it of least value. DECC are currently looking for ways to better utilise renewable output through “demand side response measures”. An example of this is an idea gaining traction that solar PV could be linked to an electric immersion heater in the householder’s hot water tank. It is utter madness to install economically inefficient small scale solar PV panels, to do so with big fat subsidies, and then to use the electrical output to heat water on site – in most cases this is competing with highly efficient condensing gas boilers, and the idea is simply a stupid and expensive solution to a problem creates by a stupid and expensive policy. It won’t decrease our winter dependence on foreign gas, it won’t reduce the fixed costs of the gas grid, and it increases the cost associated with the government’s mad subsidy programmes. I’ve seen well informed figures that show that by 2020 over 40% of UK electricity bills will be consumed by the costs of government mandated schemes and subsidies – the renewable obligation, renewable heat incentive, feed in tariffs, CfDs, energy company obligations, capacity payments.

  2. I saw this study and wanted to know how you would evaluate the results from this study?
    They did a lifetime energy assessment of 2 MW windmills in the US north west. They found it would take about 1/2 year to 1 year for the windmill to cover the cost of making and maintaining the windmill. And the lifetime of the windmill was set at 20 years. So would that mean payback of 19 to 1 to about 39 to 1. Or would you calculate that in a different way?

    • In principle, this seems OK. It’s consistent with inside figures that I’m aware of. With EROEI calculations, though, the first question has to be “how far back down the chain do you go?”. I’m sure they included the energy incorporated in the steel used to build the turbines – but what about the energy used to construct the steelworks in the first place? If you exclude the latter, this is a derivative technology, whose EROEI is enhanced by our high-EROEI (fossil fuel) legacy.

      The second question is the downstream one. There are always severe conversion and storage losses. Wind cannot meet peak demand reliably, and doesn’t produce the high-density liquid fuels required for transport. Then there’s the question of scaling – can wind (or solar) ever be scaled to meet the magnitude of our energy demand?

      Don’t get me wrong – wind (and solar) are vital, but their acreage demands worry me in a world with 7 billion mouths to feed. So does their lack of concentration (or power-to-weight and peak appolication characteristics).They cannot help us mine and transport minerals, or phosphate rock. I doubt if they can power desalination. The depreciation perriod of 20 years sounds a bit optimistic. Even if it’s accurate, this EROEI is better than where we’re headed with fossil fuels, but it doesn’t take us back to the EREOEIs of, say, 20 years ago.

    • Thanks for the reply.
      As far as the question of how far back the chain do you go? I am in favor of looking of at tighter (shorter) boundaries and demanding higher EROEI to cover the rest of the system. So these windmills in the North West of the US are decent, but corn ethanol or sugar cane ethanol are not nearly good enough.

      As far as scaling up to meet world demand, wind power alone can’t do it. As far as i know the only renewable energy source that can is solar. (but you folks in the UK have crappy solar energy input.)

      As far a transportation, planes and ships are very tough to do with batteries or wires. But bikes, cars and trains are not a problem. ( and solar powered Air ships should be doable and would be totally awesome .)

      Why do you think that mining could not be electrified?
      And I kind of hate to point this out but the sun provides the energy to evaporate all the water that turns into rain (a solar powered desalination system that costs nothing 😉

      Keep up the good work, the energetic analysis of the economy is vital to understanding what is happening.

  3. Badger:

    Once again, great thought-provoking stuff (let me know if you’d like to do a guest blog here).

    On thorium, my understanding is that we’re nowhere near energy breakeven with this, and even the demonstrator plant at Cadarache is going to cost Eur. 15 bn. No-one in government seems to think beyond the near-term, especially when there’s the comforting shale delusion ready at hand to be thrown at critics.

    • “Once again, great thought-provoking stuff (let me know if you’d like to do a guest blog here).”

      I’d certainly be interested. I’ll try and drop you a line privately that’ll explain more about my background, what I do and don’t know, and see where we might go with this.

      Coming back to thorium, I acknowledge that it isn’t viable yet, but if nuclear becomes mankind’s number one fuel option, then we’re talking about needing vast volumes worldwide (hundreds of times current levels of demand), and in that case using thorium to bulk out uranium is probably a very good idea, and one that broadens the supply chain, which helps further reduce dependence upon less desirable regimes, and enables countries with few indigenous energy resources (eg Turkey, India) to join the party?

  4. re the comment that “ships are very tough to do with batteries or wires”. In fact, marine diesel engines can run on a version of coal – Coal Water Slurry – quite effectively.

    “CWF can be used in several different applications. In the largest particle form it is a viable substitute for heavy grade fuel oils used to produce steam in boilers such as Diesel #6, Bunker C and Bunker D residual oil fuels. Additionally when the particle size is 80 micrometres or less the CWF can be used as a cofuel or substitute fuel in diesel engines. Low speed marine or modular powerplant diesels can operate on pure CWF.”



  5. Good morning. I read with greatest attention and interest The Perfect Storm, issued when T.M. was at Tullett Prebon, and now I read this post and related comments. I strongly agree with the energy=wealth equation and the concept of EROEI (or EROI as formulated by Prof. Charles Hall few decades ago). However, I noticed in most of Tim’s writings (at least those that I read) and comments to his posts that there is one important point always missing, what R&D can do or will do for changing this seemingly inexorable way towards decreasing EROEI and increasing ECOE. Of course, you can simply argue that no breaking technology has appeared at the horizon and basic research will need decades to be finalised to an industrial deployment. However, there is one technology that is in a development stage since 10-15 years, and is really promising even though for some reasons that I ignore it is not known outside a very restricted number of people involved in it all around the world.
    In one of the comments I read that solar energy can be more than enough for human needs (actually, is several order of magnitude greater) in principle, but in practice a) its surface density is too low, b) at present, is too expensive (means low EROEI), and c) is intermittent then of low quality for general use. This is true and it’s also true that wind energy, as collected by wind turbines, is not enough to cover the entire human need and also suffers of drawbacks a) and c) above, and partially of drawback b), too.
    However, if you consider that wind is present in the whole atmosphere and most of its energy is carried by so-called tropospheric wind, namely at an altitude greater than 500-600 m above ground level, you may understand that a technology capable to catch the energy carried by these winds might be enough as a viable medium/long term substitute for fossil fuels. Furthermore, AWE (Airborne Wind Energy) installations could be very light and not too expensive (point b. above). They might have a large energy/surface ratio (point a.) because they recover energy from a 3-dimensional, being able to vary the altitude in contrast to the wind turbines that work at fixed height. Finally, the wind at high altitude (above 600 m agl) flows for more than 6000 hours/year in most regions of the world, solving the issue under point c.
    There are about 60 players worldwide involved in AWE, some 10 of them having already demonstrated complete functionality in small scale (prototypes producing energy at 50-100 kW power). At least one of them has a full-scale industrial machine (3 MW nominal power) in a final industrial development, to be operative by 2015.
    I believe that information about this technology should be acquired by energy analyst/economist like you, T.M., and the energy expert, who commented your post (badger), because the estimated EROEI of this technology, at least in its best implementation, could reach values higher than 100 (ECOE less than 1%), and hopefully change the dark scenario of poverty, otherwise foreseen.
    Best wishes.

    • Thanks, G.A., very interesting points.

      I think there’s a lot of mystique around technology.

      For instance, the electronics of warship weapons systems get smaller and smaller, but radar scanners keep getting bigger – that’s because we can’t miniaturise the laws of physics, which determine the size of scanners (and the height of masts carrying them). I use this example to draw a distinction between the possibilities of technology and the laws of physics.

      The laws of physics (in the energy instance, thermodynamics) set the context – technology can make things more efficient within this envelope, but cannot take us outside the envelope itself.

      Let me give you an example – mining copper. At present, we have to mine and process 500 tonnes of rock to get 1 tonne of copper, and we need to use a certain (very large) amount of concentrated energy (diesel, in vast trucks) to do this. Now technology can make this more efficient, I’m sure, but it cannot change the basic equation of concentration (of ore), mass and energy involved.

      In my book, I say that, if you locked up the brightest researchers in a vault with huge computing power and vast amounts of money, they could not create a humble ham sandwich. So I’m always doubtful about claims made for technology – which cannot change the physical parameters.

      Battery technology is a case in point. This has improved enormously, but there are limits to how efficient it can become. No amount of technology will get a quart out of a pint pot, bend the laws of energy and mass, or turn base metal into gold.

      I’m sure I don’t need to tell you any of this; but you’d be amazed how many otherwise clever people don’t realise that technology operates within the parameters of physics!

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