Archdruids and Net Energy

This week's Archdruid Essay is an improvement on the ones I discussed last week, but although he's retreated a little onto higher and more defensible ground, I still think his position has some poorly defended salients that he should abandon.  In particular, I think he's still too hung up on energy concentration, and is still trying to argue that there's something physically difficult or impossible about transitioning to a renewable powered civilization.  In my view, there's nothing physically impossible about that (though I'm perfectly willing to concede that the total cultural inertia of western civilization is enormous and that worries me a lot).  The Archdruid makes two main arguments in his post, and in this post I'm going to take on the first of them (hopefully coming back to the other at some point in the future when time and interest allows).

That first argument is that solar power has been tried in the marketplace before, and didn't succeed, and therefore this is evidence that civilization as we know it cannot be powered by renewables:

Yet it’s at least as instructive to pay attention to what hasn’t worked. The approach central to today’s large-scale solar plants – mirrors focusing sunlight onto tubes full of fluid, which boils into vapor and runs an engine, which in turn powers a generator – was among the very first things tried by the 19th century pioneers of solar energy. As discussed in last week’s post, these engines work after a fashion; that is, you can get a very, very modest amount of electricity out of sunlight that way with a great deal of complicated and expensive equipment. That’s why, while solar water heaters spread across rooftops on three continents in the early 20th century, solar heat engines went nowhere; the return on investment – measured in money or energy – simply didn’t justify the expenditure.

He doesn't mention it, but of course it's a-fortiori true that wind-power had been used for many centuries before the nineteenth century and also largely disappeared from the economy at about the same time that the solar experiments he refers too were being tried and failing.

However, this doesn't prove the proposition "twentieth century renewables can't power civilization". It is strong evidence for the proposition that "nineteenth century renewables couldn't compete with nineteenth century fossil fuels".  But those two propositions are very far from being the same thing.  Let's take this apart.

Let us, as a first approximation, neglect the various forms of government intervention in the marketplace, and just consider two energy sources competing as commercial enterprises.  The key issue in business success is profit - the difference between revenues and expenses.  After paying for labor, materials, energy, and all the other inputs the business requires, the revenues from selling the product or service had better cover the costs and then some, in order to reward the investors and entrepreneurs that make the business happen.  Generally speaking, in most normal markets, competition will drive profits of successful firms down to somewhere in the range of 5-10% of revenues.

The general character that this gives to business beyond the startup stage will be familiar to many readers with commercial experience - small differences matter a lot.  Something that causes only a few percent difference in the revenues or expenses of a business causes a few tens of percent difference in the profits.  Needless to say, a business that is consistently significantly more profitable as another one in the same general line of work will be vastly more successful.  For example, if one business has twice as large profits as another, by providing twice as large a return on investment to investors, it will attract much more investment capital and be able to scale up much faster, etc.  This is why businesses expend a huge amount of effort trying to understand and control how they apply their costs to generate their revenue - they live and die by the efficiency of that process.

So, as a very simple hypothetical, let's consider the difference between a company, Renewable Co.,  introducing a renewable with an energy return on energy invested (EROEI) of 10 (for 1 unit of input energy, 10 units of energy are output), and another company, Fossil Inc,  introducing a fossil fuel energy with a EROEI of 100.  Let's suppose their labor and other costs are identical, their energy outputs are equally useful, and let's suppose after the initial phase, the market adjusts the price of energy such that the fossil fuel company is making a 10% net profit.

In this situation, we can calculate the net profit of the renewable company.  We know that the input energy cost of Fossil Inc must be 1% of their revenues (because they have EROEI of 100), and since Renewable Co has a EROEI of 10, it must require ten times as much input energy, so 10% of it's revenue will go on input energy.  So the costs of Renewable Co exceed those of Fossil Inc by 9% of revenues.  Therefore, the net profit of Renewable Co. will be 1%, while the net profit of Fossil Co. will be 10%.

Clearly, investors are going to massively prefer Fossil Inc. Renewable Co is barely profitable at all, and doesn't stand a chance.

However, this does not prove that, had Fossil Co. not existed, Renewable Co could not have succeeded.  All else being equal, if energy prices were just 10% higher, it could have made the same level of net profit that Fossil Co. ended up making and had the basis of a perfectly successful business.  It's hard to see how 10% higher energy costs would destroy civilization.

Of course, I concede this is a very simplified example, but I think it illustrates something important about the situation - renewables in the nineteenth century weren't an experiment in isolation, they were an experiment in competition with fossil fuels.  And of course, it's true to this day that fossil fuel EROEI's are as good or better than renewables, and renewables are just barely (wind) or not yet (solar) cost-competitive with fossil fuels, and hence have required government incentives to get them deployed.

Of course, those fossil fuel costs would probably look a bit different if the coal and oil companies were required to take out insurance against the risk of places like California and Spain turning into deserts.