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Bill Konrad 1930-2011

May father died on December 7th, and I just published his obituary on Forbes: http://onforb.es/BillKonrad. As a life-long investor and IT CEO, I think it would have pleased him to have it published there.

Interviewing his friends and family in the process of writing it was a great help in coming to terms with losing him, as was this shorter poem I read at his memorial ceremony:

Dad could be a little prickly and hard to know at times,
just like the cacti you see around you here,
at his favorite spot,
overlooking the Pacific ocean.

I believe he loved them because he saw a parallel between them and himself.
That parallel was not the unexpected beauty of their blooms,
a trait he never would have admitted to in himself…
But I think that was just his needles talking.

Instead, I think he valued their ability to thrive in adverse conditions.
Above all, he loved to watch them grow,
To see what unique forms they would take on.

Just recently he told me that, when he was young, he was somewhat sickly.
Against the odds, he did thrive.

Dad was a risk-taker, but not a gambler.
He did everything he could to stack the odds in his favor.
With his health, he exercised religiously, and kept careful track of everything he could,
from his pulse rate to the most recent medical research.

In the stock market, he would place big bets on individual companies,
but only when he knew everything he could about those companies.
He made his first million before he was thirty because he saw the emergence of of a new electronics industry long before most other investors.

His diligence continued to pay off even when he was 70,
When he won his age division in the Big Sur marathon.

Dad was a great role model.
He set goals for himself, and he succeeded at them.
One of his goals and successes was to be a great father.

I love you, Dad.

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A Greener Way to Shorten

I’ve been using bit.ly as a url shortened for a couple years now, and never stopped to wonder which country is “.ly”. It turns out it’s Libya. As in a Libyan firm whose chairman is Col. al-Qaddafi’s eldest son, Mohammed al-Qaddafi, not the rebels.

Sure I could just switch to one of several even shorter url shorteners, like r.im… except tha one seems to be down. Maybe goo.gl… at least they can keep a website up.

The same people who brought you JouleBug (of which I’m a fan, although I still don’t have a FaceBook account; I already spend too much time online as it is) have another option: gree.nr. I like a shortener that’s targeted at greens. And, since not many people are using it yet (they just launched), I now have a few short versions that make sense for my own websites:

http://gree.nr/AES
http://gree.nr/CEW
http://gree.nr/FGS
http://gree.nr/TK

I guess I’m a gree.nr cybersquatter.

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My Microwave, GE, and a Failure of EcoMagination

I’ve long been a fan of General Electric’s (GE) Ecomagination initiative.  I believe that CEO Jeff Immelt believe that more efficient and renewable energy products will be strong growth industries for years to come.  I quoted him in early 2007, “Renewable energy, energy efficiency, environmental technology – we’re going to own it."

But being green goes much deeper than selling Renewable Energy and Energy Efficiency products.  It’s also about product lifecycle.  A truly green company makes sure that the lifecycle of their products will have low impact on a Cradle to Cradle basis.

That’s where my microwave comes in.  I bought it a year and a half ago, and it started losing power at the oddest moments, and then coming back on unpredictably.  It seems to me the most likely problem is loose power connection, which should be simple to repair.  GE provides only a 1 year warranty, but I hate to recycle something so new that it looks like I just got it off the shelf of the store, so I looked for a place I could drop it off to get it repaired.

GE doesn’t do drop offs after the warranty date.  Instead, they want to send a service technician out, at a cost of $70 for the house call, plus parts and labor.  In other words, I’m practically guaranteed to have to spend more than the microwave cost new to get it repaired.  

If it had been during the warranty period (1 year), I could have dropped it off where I bought it.  Why can’t I do that after the warranty period, if I pay for the repair?

In sum, I see some easy improvements that GE could make to become greener with their appliances, not just their wind turbines and locomotives:

  1. Stop building appliances so cheaply that they fall apart so quickly.  This is the subject of an excellent book I finished recently, Cheap: The High Cost of Discount Culture, which is worth a read.
  2. Extend the warranty to a reasonable length (say 5 years) and advertise it heavily.  After all, if the appliance were built right, warranty service would not be expensive to implement.  Am I the only one who hates to have to recycle (or worse, throw away) an appliance after 18 months?  I doubt it.
  3. Better yet, institute cradle to cradle practices, taking the appliance back at the end of its life.

In April, GE announced that they had started an initiative for lifecycle assessment of their products.  It’s awfully nice that they’re doing a study, but I really don’t need a study to tell me that not giving me the option to drop off my microwave for repair when it’s 18 months new is not helping its lifecycle environmental impact.

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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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The Green 50

Inc. Magazine  just did a series of profiles of businesses working to solve our environmental problems.  There’s not much here for investors… almost all of the companies profiled are private.  (Interface, Inc. being one notable exception), but it always give me hope to see all the people out there working to solve the immense problems we face… it’s nice to remind ourselves that we are not alone; we’re all doing out part in our own way.

 Thanks to Nancy LaPlaca for sending me this.

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Want to be Rich? Grow up First.

  Here’s a great article in the New York Times about people who got rich and then managed to lose it all.  It includes parts of an interview with George Foreman, who came very close to losing it all, but managed to rescue himself from the brink of financial disaster.  He says:

“A lot of people just don’t grow up,” he says. “I mean, 65-year-old men. They just don’t grow up. They don’t understand that money does not grow on a tree and that you’ve got to respect every dollar. Like Rip Van Winkle — the guy who slept — they party, party, party, then they wake up. ‘Oh my God!’ And they do something desperate trying to recapture what they had. And it doesn’t work like that. You must stay awake.”

What does this have to do with the readers of this blog, few of whom are ever going to make millions of dollars in their jobs?  The same rules apply to the rest of us: if we don’t treat money with respect, if we approach the stock market, or life in general, like a gigantic virtual slot machine, we’ll lose everything we have.  Money does not have the power to rescue us from ourselves. 

It is possible to make money in the stock market at random, by the luck of the draw.  The problem with this is we’re not good at acknowledging that it was just dumb luck.  When we think back on our luck, we’re much more likely to think that hunch we had was our brilliant intuition or a message from a higher power. 

If there is a higher power out there giving stock tips, She has a mean sense of humor, because I don’t know of any religous figures who are making out in the market.

So we get lucky in the market, and it goes to our heads.  We look at the $10,000 we managed to turn into $20,000 with a couple lucky picks, and we start thinking that if can just have a couple repeat performances, we’ll be able to pay off our mortgage.  So we follow a few more hunches, and pretty soon we’ve got $5,000.  Easy come, easier go.

 As the stories in the article suggest, it may be even easier to lose money by simply spending it than it is to lose it in the market… and at least you had some fun along the way.  Either way, you end up broke, and, worse, you lose you confidence in yourself.

What’s my point?  If you have dreams of ever being rich, now is the best time to get ready, and learn self discipline.  Michael Jackson is a prime example of the fact that there is no amount of money an overgrown child can’t spend his way through. 

Learn self-discipline and respect for your money now, before there are millions riding on the line, and you’ll be able to keep those millions when you get there.  Self discipline is also a great help in getting there.

Don’t know where to start?  Try Suse Orman’s The Laws of Money.  In my mind, each of her five laws boils down to acting like an adult around money; respecting it, but not letting the idea of money have power over who you really are.   And she’s a lot better at persuading people than I am.

Yes, I keep recommending the same books.  If that bothers you, you can do one of three things: 1) Stop reading my blog, 2) Complain, or 3) Read them. 

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There’s Ethanol and then there’s Ethanol

In the renewable energy community, Ethanol has a bad rap, due to some often-quoted, seldom checked studies on energy payback.

It’s received wisdom that ethanol from corn has an energy return on energy invested (EROEI) of somewhere between 0.8 and 1.0; i.e. you get less out than you put in.  The persistence of this idea is possibly due to some great cartoons.  I’m probably going to undermine my whole argument here, by including this one…

Then again, I expect that my audience is highly intelligent, and not easily distracted.  If you weren’t, you probably wouldn’t still be reading my extremely dense and often-tortured prose.  You deserve a good cartoon every now and then…

Back in the world of ethanol, times have changed.

Even though cellulosic ethanol is still very much in its technological infancy, a lot of companies and people are doing a lot of interesting things with corn ethanol to make the process more efficient, and, get those energy inputs in the form of “free” waste heat from some other process, or from renewable sources such as cow manure or landfill gas.

I’ve been educating myself a lot about this reading C. Scott Miller’s Bioconversion blog.  I admit I’m having to do a lot of catch up on this, because I was one of those people who believed ethanol was a total government subsidized boondoggle until recently.

All that said, even at an EROEI of 1.25 to 1.8, ethanol is not much of an energy “source.”  Sure, we’re getting a little energy out of the process, but one way to think about EROEI is how much effort it takes to get our energy. 

As a rough illustration, at an EREOI of 2, there has to be one person working to get energy for every person doing something else.  So if civilization were to exist one out of every 2 people would have to be employed in the energy sector… the other 50% would then have the energy they needed to do other useful things, like be doctors, politicians, soldiers, engineers, builders, investment advisers, bloggers, artists, manufacturers, scientists, psychologists, food farmers (as opposed to energy farmers), talk show hosts, etc.

 You might argue that some of those professions aren’t very useful (investment advisors and politicians perhaps), but even if we eliminate all those “useless” professions, I think the more useful professions like talk show hosts and artists might start finding themselves a little squeezed.

There is a reason that the human race was 95%+ farmers or hunter gatherers for most of of our history: the energy sources we were using were not powerful enough, with too low EROEI to sustain higher forms of civilization, such as talk show hosts.

If you don’t believe me, read this great article on “Peak Wood,” the cause of the iron age.

Back to ethanol: it’s not going to solve our world energy problem.  It’s a useful way to turn non-liquid fuels (manure, biogas, or coal) into something you can put in your car, but if we in the U.S. are  looking for a domestic source of energy that will wean us off the Middle Eastern oil teat, we can do it, only if we want to be a nation of farmers, witha much smaller population and lower standard of living than we have now.

Ethanol is big business these days, and it will make a tiny dent in our oil addiction, so all the investment is probably doing some good.  I predict that the biggest beneficiaries will be the farmers, and considering how hard farming is, that’s not a bad thing.  It’s probably better than out-and-out farming subsidies.

Basically, I’m no longer worked up about ethanol subsidies and mandates.  There are a ton of better ways we could be spending the money, but it’s hardly the stupidest thing our government does with our money.   I’d even be happy about it if they’d simply replace the money spent on all farm subsidies with subsidies for farm based energy.

I just don’t want it to distract from the important work we have to do to deal with the twin probems of peak oil and global warming:

  1. Improve energy efficiency (especially of our vehicle fleet.)
  2. Develop high ERoEI energy technologies: Wind, Solar concentrating, Geothermal.  PV will probably make it on this list as the technology improves.
  3. Displace some of that oil in transport with renewable electricity, via plug-in hybrids.  (Economic fuel cells are still too far away to make hydrogen a viable transportation fuel in the next 20 years)

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