Managing the Peak Fossil Fuel Transition 

EROI and EIRR

by Tom Konrad, Ph.D.

Current renewable energy technologies must be adopted in conjunction with aggressive Smart Growth and Efficiency if we hope to continue our current standard of living and complex society with diminished reliance on fossil fuels. These strategies have the additional advantage that they can work without large technological breakthroughs. 

Energy Return on Investment

Energy keeps our economy running.  Energy is also what we use to obtain more energy.  The more energy we use to obtain more energy, the less we have for the rest of the economy.  

The concept of Energy Return on Investment (EROI), alternatively called Energy Return on Energy Invested (EROEI) has been widely used to quantify this concept.  The following chart, from a SciAm paper, shows the EROI of various sources of energy, with the tan section of the bar representing the range of EROIs depending on the source and the technology used.  I’ve seen many other estimates of EROI, and this one seems to be on the optimistic (high EROI) end for most renewable energy sources.

The general trend is clear: the energy of the future will have lower EROI than the energy of the past.  Low carbon fuels such as natural gas, nuclear, photovoltaics, wind, and biofuels have low EROI compared to high-carbon fuels such as coal and (formerly) oil.   

The graph also clearly shows the decline in the EROI over time for oil.  Other fossil fuels, such as coal and natural gas, also will have declining EROI over time.  This happens because we always exploit the easiest resources first.  The biggest coal deposits that are nearest to the surface and nearest to customers will be the first ones we mine. When those are depleted, we move on to the less easy to exploit deposits.  The decline will not be linear, and new technology can also bring temporary improvements in EROI, but new technology cannot change the fact that we’ve already exploited all the easiest to get deposits, and new sources and technologies for extracting fossil fuels often fail to live up to the hype.

While there is room for improvement in renewable energy technologies, the fact remains that fossil fuels allow us to exploit the energy of millions of years of stored sunlight at once.  All renewable energy (solar, wind, biomass, geothermal) involves extracting a current energy flux (sunlight, wind, plant growth, or heat from the earth) as it arrives.  In essence, fossil fuels are all biofuels, but biofuels from plants that grew and harvested sunlight over millions of years.  I don’t think that technological improvements can make up for the inherent EROI advantage of the many-millions-to-one time compression conveys to fossil fuels.

Hence, going forward, we are going to have to power our society with a combination of renewable energy and fossil fuels that have EROI no better than the approximately 30:1 potentially available from firewood and wind.  Since neither of these two fuels can come close to powering our entire society (firewood because of limited supply, and wind because of its inherent variability.) Also, storable fuels such as natural gas, oil, and biofuels all have either declining EROI below 20 or extremely low EROI to begin with (biofuels). Energy storage is needed to match electricity supply with variable demand, and to power transportation. 

Neither hydrogen nor batteries will replace the current storable fuels without a further penalty to EROI.  Whenever you store electricity, a certain percentage of the energy will be lost.  The percent that remains is called the round-trip efficiency of the technology, shown on the vertical axis of the graph below, taken from my earlier comparison of electricity storage technologies. (Click to enlarge.)

Storage Technology Comparison

Round trip efficiency (RTE) for energy storage technologies is equivalent to EROI for fuels: it is the ratio of the energy you put in to the energy you get out.  You can see from the chart, most battery technologies cluster around a 75% RTE.   Hence, if you store electricity from an EROI 20 source in a battery to drive your electric vehicle, the electricity that actually comes out of the battery will only have an EROI of 20 times the RTE of the battery, or 15.  Furthermore, since batteries decay over time, some of the energy used
to create the battery should also be included in the EROI calculation, leading to an overall EROI lower than 15.

The round trip efficiency of hydrogen, when made with electrolyzers and used in a fuel cell, is below 50%, meaning that, barring huge technological breakthroughs, any hoped-for hydrogen economy would have to run with an EROI from energy sources less than half of those shown.

Taking all of this together, I think it’s reasonable to assume that any future sustainable economy will run on energy sources with a combined EROI of less than 15, quite possibly much less. 

It’s Worse than That: The Renewables Hump

All investors know that it matters not just how much money you get back for your investment, but how soon.  A 2x return in a couple of months is something to brag about, a 2x return over 30 years is a low-yield bond investment, and probably hasn’t even kept up with inflation.

The same is true for EROI, and means that users of EROI who are trying to compare future sources of energy with historic ones are probably taking an overly-optimistic view.  For fossil fuels, the time we have to wait between when we invest the energy and when we get the energy back in a form useful to society is fairly short.  For instance, most of the energy that goes into mining coal comes in the digging process, perhaps removing
a mountaintop and dumping the fill
, followed by the actual digging of the coal and shipping it to a coal plant.  Massey Energy’s 2008 Annual Report [pdf] states that "In 2008… we were able to open 19 new mines, and ten new sections at existing underground mines."  This hectic rate of expansion leads me to believe that the time to open a new mine or mine section is at most 2 years, and the energy cycle will be even quicker at existing mines, when the full cycle between when the coal is mined and when it is burnt to produce electricity requires only the mining itself, transport to a coal plant, and perhaps a short period of storage
at the plant.  Most coal plants only keep a week or two supply of coal on hand.

In contrast, Nuclear and Renewable energy (with the exception of biofuels and biomass) present an entirely different picture.  A wind farm can take less than a year to construct, it will take the full farm life of 20 years to produce the 10 to 30 EROI shown in the graph.  Solar Photovoltaic’s apparent EROI of around 9 looks worse when you consider that a solar panel has a 30 year lifetime.  Only a little of the energy in for Nuclear power comes in the form of Nuclear fuel over the life of the plant: most is embodied in the plant itself.   

Jeff Vail has been exploring this concept on his blog and the Oil Drum.  He refers to the problem of the front-loading of energy investment for renewable energy as the Renewables Hump.  He’s also much more pessimistic than the above chart about the actual EROI of most renewables, and found this chart from The Economist which illustrates the up-front nature of the investment in Nuclear and Wind: 

In terms of EROI timing, those technologies for which the cost of generation includes more fuel have an advantage, because the energy used to produce the fuel does not have to be expended when the plant is built.

In a steady state of technological mix, EROI is the most important number, because you will always be making new investments in energy as old investments outlive their useful lives and are decommissioned.  However, in a period of transition, such as the one we are entering, we need a quick return on our energy investments in order to maintain our society.  Put another way, Jeff Vail’s "Renewables Hump" is analogous to a cash-flow problem.  We have to have energy to invest it; we can’t simply charge it to our energy credit
card and repay it later.  That means, if we’re going to keep the non-energy economy going while we make the transition, we can’t put too much energy today into the long-lived energy investments we’ll use tomorrow.

To give a clearer picture of how timing of energy flows interacts with EROI, I will borrow the concept of Internal
Rate of Return (IRR)
from finance.  This concept is covered in any introductory finance course, and is specifically designed to be used to provide a single value which can be used to compare two different investments with radically different cash flow timing by assigning each a rate of return which could produce those cash flows if the money invested were compounded continuously.

Except in special circumstances involving complex or radically different size cash flows, an investor will prefer an investment with a higher IRR.

Energy Internal Rate of Return (EIRR)

I first suggested that IRR be adapted to EROI analysis by substituting energy flows for investment flows in early 2007.  I called the concept Energy
Internal Rate of Return, or EIRR
.  Since no one else has picked up the concept in the meantime, I’ve decided to do some of the basic analysis myself.

To convert an EROI into an EIRR, we need to
know the lifetime of the installation, and what percentage of the energy cost is fuel compared to the percentage of the energy embodied in the plant.  The following chart shows my preliminary calculations for EIRR, along with the plant lifetimes I used, and the EROI shows as the size of each bubble.

 EIRR

The most valuable energy resources are those with large bubbles (High EROI) at the top of the chart (High EIRR.)  Because of the low EIRR of Photovoltaic, Nuclear, and Hydropower, emphasizing these technologies in the early stage of the transition away from fossil fuels is much more likely to lead to a Renewables Hump scenario in which we don’t have enough surplus energy to both make the transition without massive disruption to the rest of the economy.

How to Avoid a "Renewables Hump"

Note that the three fossil fuels (oil, gas, and coal) all have high EIRRs.  As we transition to lower carbon fuels, we will want to keep as many high EIRR fuels in our portfolio as possible. 

The chart shows two renewables with EIRRs comparable to those of fossil fuels: Wood cofiring, and Wind.  Wood cofiring, or modifying existing coal plants to burn up to 10% wood chips instead of coal was found to be one of the most economic ways of producing clean energy in the California RETI study. The scope for incorporating biomass cofiring is fairly limited, however, since it requires an existing coal plant (not all of which are suitable) as well as a local supply of wood chips.  Some coal plants may also be converted entirely to wood, but only in regions with plentiful supplies of wood and for relatively small plants.  The EIRR for this should fall somewhere between Wood cofiring and Wood Biomass, which is intended to represent the cost of new wood to electricity plants.

Natural Gas

To avoid a Renewables Hump, we will need to emphasize high-EIRR technologies during the transition period.  If domestic natural gas turns out to be as abundant as the industry claims (there are serious doubts about shale gas abundance,) then natural gas is an ideal transition fuel.  The high EIRR of natural gas fired generation arises mostly because,
as shown in the chart "it’s a gas" most of the cost (and, I assume energy investment) in natural gas generation is in the form of fuel.  Natural gas generation also has the advantage of being dispatchable with generally quick ramp-up times.  This makes it a natural complement to the variability of solar and wind.

However, I think it is unlikely that we’ll have enough domestic natural gas to both (1) rely much more heavily on it in electricity generation and (2) convert much of our transportation fleet to natural gas, as suggested by T Boone Pickens.  We’re going to need more high-EIRR technologies to manage the transition.  Fortunately, such technologies exist: the more
efficient use of energy.  

Energy Efficiency and Smart Growth

I have been unable to find studies of the EROI of various efficiency
technologies.  For instance, how much energy is embodied in insulation, and how does that compare to the energy saved?  We can save transportation fuel with Smart Growth strategies such as living in more densely populated areas that are closer to where we work, and investing in mass transit infrastructure. 
The embodied energy of mass transit can be quite high in the case of light rail, or it can be very low in the case of better scheduling and incentives for ride sharing.

Many efficiency and smart growth technologies and methods are likely to have much
higher EIRRs than fossil fuels.  We can see this because, while the
embodied energy has not been well studied, the financial returns have. 
Typical investments in energy efficiency in utility run DSM programs cost
between $0.01 and $0.03 cents per kWh saved, much less than the cost of new fossil-fired generation.  This implies a higher EIRR for energy efficiency, because part of the cost of any energy efficiency measure will be the cost of the embodied energy, while all of the savings are in the form or energy.   This relationship implies that higher IRR technologies will generally have higher EIRRs as well.  

Smart growth strategies also often show extremely high financial returns, because they reduce the need for expensive cars, roads, parking, and even accidents [pdf.]

Conclusion: Brian or Brawn

The Renewables Hump des not have to be the massive problem it seems when we only look at supply-side energy technologies.  By looking at demand side solutions, such as energy efficiency, conservation, smart growth, and transit solutions, we need not run into a situation where the energy we have to invest in transitioning from finite and dirty fossil fuels to limitless and clean renewable energy overwhelms our current supplies.  

Efficiency and Smart Growth are "Brain" technologies, as opposed to the "Brawn" of traditional and new energy sources.  As such, their application requires long-term planning and thought.  Cheap energy has led to a culture where we prefer to solve problems by simply applying more brawn.  As our fossil fuel brawn fades away, we will have to rely on our brains once again if we hope to maintain anything like our current level of economic activity.

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16 Comments

  1. [...] (IRR), which I used as the foundation for Energy Internal Rate of Return (EIRR) in my article Managing the Peak Fossil Fuel Transition, you can find a good discussion of IRR on [...]

  2. Your EIRR concept is very interesting. Thanks for posting it. One thing it doesn’t consider is the riskiness of the cashflows derived from a given generation approach.

    Financing a nuclear plant is a lot tougher and costlier than financing a wind plant these days and thus the wind plant could be a good bet even with a lower EIRR. If you consider power purchase agreements or the fact that the plant’s output is roughly inflation indexed), it seems like the project risk is the major cost-of-capital factor.

    I know it isn’t a direct mapping, but it seems like NPV might be a better match, since you could include a discount rate that accounts for the riskiness of a project’s cashflows. Not sure how you normalize it all though!

  3. Tom said

    GraniteViewpoint,
    NPV is generally a superior analysis tool compared to IRR (see:http://www.wikicfo.com/Wiki/Default.aspx?Page=NPV%20vs%20IRR&AspxAutoDetectCookieSupport=1) but IRR has the advantage that it’s easier grasp for the uninitiated, which is why I use EIRR here, rather than “ENPV.”

    However, if you want to add complexity, such as riskiness of *energy* flows, and project size, I agree that ENPV will be the way to go.

  4. Jamie Bull said

    Very interesting post, Tom. I am planning on using your idea of EIRR in a piece of work I’m engaged in at the moment as I think the bubble chart would make a very nice way of tracking changing EROEI / EIRR over time.

    One question though: are the data in the bubble chart just the SciAm data? The fossil fuel ones seem a long way off what I have found in the literature. Coal fired power stations seem to average at an EROEI of around 5.5 (1.5 with CCS) and an EIRR of 17% (8% with CCS).

  5. Tom Konrad said

    I’m not sure I recall where I got all my data, but if you’d like to modify the bubble chart to reflect your numbers for EROI, you can find the spreadsheet I used in my calculations here:
    http://tomkonrad.com/blog/EIRR.xls

    • Jamie Bull said

      Thanks. I’ll be sure and post a link once it’s in the public domain.

  6. Roger Brown said

    Without denying the economic relevance of energy consumed by the energy producing process, I am firmly convinced that EROEI should not be used as central concept in the economic analysis of energy production. At first glance EROEI has a seductive simplicty which is very attractive. If you and I each have X units of energy to ‘invest’ in energy production, it seems obvious that whichever of us comes back with the most excess energy relative to the original investment must have made the wisest investment choice. However, this ‘one resource in and one resource out’ metaphor derived by analogy from financial investing is false. The investment of money is really the investment of a variety of production resources, and the return is to total ensemble of economic goods and services which result from that investment. All resource inputs musts be considered in order to determine the profitability of the investment.

    The economics of energy investment follows the same rules. For example, in order to understand the economics of biofuel production one must consider the opportunity cost of all of the required inputs of finite resource such as farm land, irrigation water, labor, etc. Yes, the input of energy must also be considered, although this energy should be counted as detraction from profit rather than as a cost. Properly speaking the production of energy does not have an energy cost. If I manufacture some new kind of electronic toy, the production of this product has an energy cost because one of two energy related outcomes must occur:

    1. Some energy producer must produce extra energy in order to allow my manfacturing process to function.

    2. Some other economic producer must give up energy in order to allow my manufacturing process to function.

    However, if I use energy to produce energy and I have a postive energy balance, neither of above energy outcomes occurs. The energy I consume must be subtracted from my gross output in order to calculate my energy profit, but no energy cost to the larger economy in incurred. The real cost of producing my net output is cost of the non-energy resources consumed such as land, irrigation water, labor etc.

    Of course EROEI is qualitatively correlated to total resource costs. Energy producing processes with high EROEI tend to have low resource costs and energy producing processes low EROEI tend to have high resource costs. In fact in the limit that EROEI approaches 1 the resources cost approach infinity since larger and larger amounts of resources must be invested to produce 1 unit of useful (or net) energy.

    However, I believe that the resource cost intensity of net energy production is a more fundamental concept than EROEI. For example if one is used to thinking in terms of resource costs then it is immediately clear that higher EROEI water cooled CSP plants in the desert are going to lose out to lower EROEI air cooled ones because of the high opportunity costs of water consumption.

  7. [...] graphics based on the data. Firstly we adapted the bubble charts idea used by Tom Konrad, the Clean Energy Wonk. His idea is to calculate the energy internal rate of return (EIRR) for technologies. This is the [...]

  8. Jamie Bull said

    Some of the numbers you have in your chart are very much at odds with what I found in quite a long literature search. In particular the numbers for coal and gas are a long way from what I’d expect.

    Are these numbers just for getting coal/gas out of the ground? I find it hard to believe that after transport, flue scrubbing and other conversion inefficiency you’d still have anything like the EROEIs and EIRRs you’re showing for coal and gas once it’s been turned into electricity.

    On the other hand, I didn’t find a lot of data for coal- or gas-fired generation so I am willing to be corrected. If you or anyone else has sources for different figures, please post them in the comments here or at the oCo carbon blog.

  9. Tom said

    Jamie,
    You’re numbers are probably more accurate than mine… did not do any literature search, and just used the EROI numbers from the chart at teh start of the article. I then made the simplifying assumption that the energy costs of operating fossil fuel plants roughly matched the financial operating costs. That is, I assumed that the embodied energy of a coal plant accounted for approximately 50% of its energy cost, 25% for nat gas, and 95% for renewables in order to determine the timing of the energy inputs.

    My intent was that people like you would do exactly what you did: get better data and make more accurate calculations of EIRR for comparing energy technologies as a supplement to EROI.

  10. Jamie Bull said

    Then I’m glad to be of service! I’ll be posting more of the raw data soon (day job permitting), as well as some analysis of the EROEI (or life cycle efficiency) of energy storage and transmission.

    • Tom said

      Regarding the EROEI of storage and transmission, have you seen this post http://cleanenergywonk.com/2009/12/29/the-cost-of-transmission/ where I try to compare the two to each other?

      The underlying premise premise is that a transmission line across time zones can be seen as virtual storage… you “charge” by sending power to the other time zone/region, and discharge by bringing it from the other region.

      Figuring out just how long a wire you need to get somewhere that the power supply/demand balance is sufficiently different to enable this technique is a judgment call, but I figured 1000 miles (one time zone) was about right.

  11. [...] can play a part (edit: potentially a very large part as pointed out by Dave in the comments, Tom Konrad, and Mark Barret in the work linked to below) in reducing the peaks of demand when power is not [...]

  12. [...] Building ·Tagged Green Building, ICFS, PFB Corp, SIPS In previous articles, I’ve often claimed that the Energy Return on Energy Invested (ERoEI) for energy efficiency measures is much hi…. This was based on the logic that a high ERoEI is needed to sustain the high financial returns from [...]

  13. [...] graphics based on the data. Firstly we adapted the bubble charts idea used by Tom Konrad, the Clean Energy Wonk. His idea is to calculate the energy internal rate of return (EIRR) for technologies. This is the [...]

  14. [...] sources including the pioneering work by C.J. Cleveland, H.T. Odum, Nate Hagens, Dr Charles Hall, Tom Konrad and Gail Tverberg. The numbers are illustrative, recognising that EROEI figures vary from [...]

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