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Neorenaissance: Pricing the New Energy Economy

We hear talk about how we need to transition to a green energy economy, but what exactly does that mean?  It's a huge topic but a little math and some energy insight can begin to paint a rough picture.

The National Academy of Sciences recently created a "Science Ambassador" program which I'm pleased to advise.  We recently chose Pittsburgh and a pilot city to explore the relationship between science and the public on the subject of energy, and the NAS created this interactive page to explain America's energy supply and use.

The waste is shocking

Let's start with understanding our use.  Of the roughly 100 quads - quadrillion BTUs - of energy we use each year, about 57% is lost to inefficiency - energy spent in transport, line loss, and inefficient combustion.  To calculate it you begin with chemical compounds which can be burned or nuclei which can be fissioned and calculate the maximum output of heat.  This is your "Input Energy." Then you measure the amount of energy which actually did what you had in mind - propelled your motorcycle down the road, raised the internal temperature of your coffee, became the electricity which caused photon emission from your light bulb, heated your house - and that is Output Energy. The rest is Loss.

So the first thing we try to do in the new energy economy is reduce the 57% Loss.  There are many inefficiencies, both in getting your hands on the energy carrier - be it natural gas, superheated steam, electricity, etc. - and in transporting it.  What is most efficient depends on your economic model, the design of the system which delivers the energy, and the available technology. For example, if in July in the Arizona desert you have spare solar electricity coming out of your ears and would like to use it to keep cozy during the Minnesota winter, are you better off: A) converting it into liquid hydrogen which you ship to Minnesota for burning later, B) sending the electricity at once to Minnesota where you turn it into low pressure hydrogen gas which you burn later, or C) sending the electricity to Minnesota where it is promptly used to run a heat pump that raises the homeowner’s gigantic thermal storage tank to near boiling?  Whatever model you choose, you need to find values that may depend upon government decisions that will be made based upon the world views of voters not yet born.  

What about natural gas?

T. Boone Pickens says we have plenty of natural gas - why don't we just transition?  It's a brilliant transition plan - but not a long-term solution, and Pickens himself has acknowledged.  Let's consider the Marcellus shale deposit.  It could add as much as 500 trillion standard cubit feet of reserves; that’s roughly 14◊109 m3. But America is using about 0.7◊109 m3/y–1. That means that even if we ignore the baleful side effects of fracking (reports of ground water pollution and health hazards) the Marcellus only delays running out of fossil carbon by a decade or so. 

Making the electric switch

NOAA scientist Dick Feely says we can transition off carbon for 2% of GDP. Others say 5%.  In actuality, no one knows how much it is going to cost, but we can make estimates. Assuming we don't go all nuclear or figure out how to do fusion, we'll likely need renewable energy: wind and solar for starters.  A forthcoming article by William Pickard [Proceedings of the IEEE, February 2012, in press.] shows that providing backup storage for the one terawatt of generating capacity we now have will require about a thousand one gigawatt battery houses to store intermittently generated wind and solar power. That means building roughly one a month for the rest of this century.  Pickard estimates that each battery house could cost about $5 billion, and perhaps as much as $7.5 billion.  Plus we need to budget for replacements.  So let’s budget $70 billion a year, or roughly 0.50% of GDP for storage and stabilization of renewable electricity supply. 

Each year, that renewable electricity needs to be generated.  Price figures for concentrated solar power generators rated a 25 kWe are hard to come by, as are realistic average outputs.  So for simplicity let's use wind.  Commercial-scale turbines are 2 mWe in size and cost roughly $3.5 million installed.  They produce, on average, about 27% of nameplate capacity, or roughly .55 mWe.  If we figure that each battery house is on average passing 0.5 GWe and that each wind generator is on average yielding .55 mWe, roughly 900 generators will be needed for each battery house.  If we assume a lifetime of twenty years for each generator, then in the steady state (1/20)◊(900) = 45 wind generators a year are needed for each of the 1,000 battery houses or a total of 45,000 wind generators a year. At about $3.5MM each, that’s a total of $158 billion a year or 1.12% of GDP once we are fully transitioned - less before.

Next the entire high voltage transmission infrastructure (about 500,000 km) probably needs to be rebuilt every forty years or so at an estimated cost of about 1 M$ km–1. This is about 0.08% of GDP.

Adding these up, capital expenditures just to stabilize and deliver America’s renewable electricity supply could easily take 1.7% of GDP.  Since cost overruns are common, and since America's energy use is expected to increase by 13% over the next 2 decades alone, this could end up becoming 2.5%.

Green Makes Green

That's electricity.  But let's consider the overall picture of America’s energy and do some quick and dirty math.  The US expenditure of about 100 quads of raw energy a year is roughly 16 billion barrels of oil equivalent. If oil is a paltry $70 a barrel (a little less than the 2010 average), that is $1.12 trillion dollars a year or roughly 7.9% of our current GDP of $14.12 trillion, most of which we are paying out to foreign countries.

How one converts from annual cost to what you can afford to pay annually to get that burden off your back is a matter of policy discussion; but generally a return is capitalized at 10-15 years in many hard asset classes.  Homeowners, however, generally are moved by returns of 5 years or shorter.  And carrying costs are associated with the capitalization and maintenance.  That would mean roughly $1 trillion times 5 years = $5 trillion in bonds with interest over 30 years = $8.2 trillion or $273 billion a year or about 1.8% of GDP, plus a replacement reserve of every 20 years = 1.9% of GDP.  

Of course this would never happen since we won't bond for it all at once, but over 20 or more transition years. But it makes the point that a 2% energy number is not out of reach.  To begin, we can probably budget $43 billion per year - or .33% of GDP - for an extremely aggressive program.  Additional amounts each year are quickly offset by increased energy production within the economy, so it's possible the net annual increased cost will never exceed this amount.

So looking at it either way we're at a very, very rough estimate of .33% to start and 1.7% to as high as 2.5% or 3% of GDP per year full in - compared to the 7.9% of GDP we paid in oil equivalents in 2010.

Compared to the stock market, that's an attractive investment - especially since much of the 1.7%-3% would be spent within the continental U.S. to drive our economy while a lot of the 7.9% will go overseas to drive someone else’s.  That means home infrastructure (industrial, commercial and residential), home energy price control and economic stability, home jobs, home clean power, home quality of life.  That also means US global leadership in renewable energy supply, the same way we lead in farming - our renewable food supply. 

At first this expenditure is in addition to our current spend, but each year as more home grown renewable energy comes online, it begins to chip away at our outlay for fossil fuel.  Existing domestic oil production can supply during that transition and afterward it can still return from selling into the pharmaceutical, solvents, and foreign markets, and when we are fully transitioned our energy costs could conceivably fall from 8% of GDP to 3-4% - a huge economic stumulus on top of the home jobs to produce it. 

How do we get there?  By exercising an even rarer commodity - leadership.

This blog was originally published on Shawn Otto's blog, Neorenaissance. Shawn's new book, Fool Me Twice, is available now.

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Comments (2)

This is an interesting article with, as far as I can tell, accurate math.
But when one of your factors is a myth, the results open to question. The largest "battery house" that I am aware of is the molten salt device being tested by Xcel Energy to back up wind farm in southern MN.
This kluge from Japan is the size of a couple 18 wheelers, cost $4 million or so, and has total storage capacity of about 7MWh. That's 20 seconds of output from Prairie Island nuclear. Our 30,000 MW+ of wind farms produce about 1 quad of the 100 that we use in the US annually. To back up that erratic output we need about 30 GW of NG peaker plants, or hydro in the Pacific northwest. The notion that wind power is going to provide a significant percent of our electric supply is essentially a joke.

In addition to the previous comment, I think the author also overlooked the fact that in order to get off fossil fuels we need to use more electricity - by some accounts doubling our domestic consumption to power our plug in vehicles. If 1GW battery plants run into the billions, it makes no sense to ignore nuclear, which are about the same price except that they produce constant power instead of just store it. It's not the best technology obviously, but with limited options we are foolish to ignore it as an option.