EROEI: energy return on energy invested?

Energy return on energy invested

Net energy return on energy invested (EROEI) is the best metric for comparing end-to-end energy efficiencies. Wind and solar currently have EROEIs that are lower and ‘slower’ than today’s global energy mix; stoking upside to energy demand and capex. But future wind and solar EROEIs could improve 2-6x. This will be a make-or-break factor determining the ultimate share of renewables?

This 13-page report quantifies net EROEIs, draws five conclusions for the energy transition, and explores how much wind and solar EROEIs could improve over time?

Energy efficiency matters because it determines how much primary energy needs to be supplied, in order to meet the ultimate energy demands of human civilization. If energy efficiency surprises to the upside, then the demand for coal, oil and gas will surprise to the downside. Or vice versa. We are worried that over-optimistic assumptions about future energy efficiency gains will culminate in energy shortages (here, here and here) (page 2).

So what is the ‘efficiency’ of wind or solar? Maybe 80-90%? The question is more complicated than it sounds. For a heat engine, efficiency is easily calculated by dividing electrical energy outputs by fuel energy inputs. But for a wind or solar asset, there is no fuel input. We are harnessing something that would otherwise have dissipated (page 3).

Net energy return on energy invested is the best way to compare total life cycle efficiencies of different energy sources, apples-to-apples. For example, it takes 100kWh of energy inputs to mine 1 ton of coal, which contains 6,500 kWh of thermal energy (65x gross EROEI), and then yields 4,000 kWh of useful heat and power (40x net EROEI) (page 4).

Renewables today. Our best estimates are that the net EROEI for wind today is around 23x and the net EROEI for solar today is around 12x. It has taken us about four years to build up these numbers, across dozens of different economic models. Of course, the numbers vary case by case, especially based on where these renewables are deployed (page 5).

There are five key conclusions from net EROEI. Renewables have net energy returns on energy investment that are ‘lower and slower’ than today’s blended average global energy, especially coal and gas (page 6), which is not the end of the world (page 7), but does mean the scale-up of wind and solar produces some questionable reversals of 300-year mega-trends (page 8), global energy demand is likely to surprise to the upside (page 9) and global energy capex must treble to $4trn per year (page 10).

The most interesting prospect for renewables to take greater share of the future energy mix, and overcome some of the issues above, is to improve their net EROEIs. Could solar ultimately surpass the net EROEI of coal and gas by over 2x? There is historical precedent for fundamentally new energy technologies to improve over time, looking back at the development of steam cycles, early electrical generators, gas turbines (chart below). Improving net EROEIs may determine the ultimate share of renewables in the future energy system? (pages 11-13).

CCS challenges: by any amines necessary?

CCS challenges

Post-combustion CCS has more practical challenges than we had previously assumed, as are explored in this 13-page report. Today’s established amines require extensive pre- and post-treatment of gases; to prevent degradation, plant corrosion and toxic emissions. This might double real-world CCS costs. But it also creates more opportunity for novel CCS processes, which are rapidly emerging.

CCS denotes any energy technology that prevents CO2 from combustion (or calcining) being released into the atmosphere. Our latest roadmap to net zero assumes 6 GTpa of CCS by 2050, of which one half, or 3 GTpa is conventional CCS. Data are given for the costs and energy penalties of conventional CCS — spanning across amine plants, CO2 pipelines, CO2 trucks, CO2 shipping and CO2 disposal — on page 2.

What now? Conventional CCS is likely to accelerate, due to reforms to the 45Q, in the US Inflation Reduction Act of 2022. Forecasts for the market’s evolution (in MTpa) are summarized on page 3.

As a result, practical and logistical issues are moving into view. Chief among them is whether conventional CCS actually works well in practice? How does it work? And are there hidden CCS challenges, which have not been tackled by 40MTpa of historical CCS projects? (pages 4-5).

Amine degradation lies at the root of these CCS challenges. Make-up rates for amines can be quantified from technical papers (data here). But these studies also show wide variability, and offer up useful data that will matter for real world installations.

CCS challenges. Seven challenges for commercial scale deployment of conventional CCS are presented on pages 7-10. We think lab studies under-estimate degradation rates, amine make-up processes will dent utilization, other operational parameters degrade alongside the amines, degraded amines corrode amine plants and equipment, they can result in toxic air emissions (nitrosamines are a possible show-stopper), especially where CCS plants are run intermittently, and all of the issues above can be highly sensitive to the impurities in the feed gases (SOx, NOx, particulates, etc, data here).

It is important to quantify and to understand these various CCS challenges, in order to risk CCS deployments appropriately. Or, conversely, to de-risk them.

Next-generation amines are being developed to overcome these challenges. The most mature example to cross our screen is profiled on page 11 (listed company), and seven further examples are profiled on page 12 (mainly private/venture companies).

Other abatement options. We had previously hoped that simple CCS would accelerate rapidly from 2023 onwards. However, there is a risk that today’s technically ready amine plants face more CCS challenges than anticipated, while many next-gen amines that overcome these challenges are not fully technically ready. This also makes us wonder whether there is more upside for other abatement options in the world’s roadmap to net zero (page 13).

Growing economies: reforest and reinvest?

clean economic development

CO2 removal credits could add 6-60% to the GDP of 47 emerging countries as they reforest 1.5bn acres and create a 7.5GTpa CO2 sink, while the resultant cash flows could double these countries’ investment rates. Reinvesting in wind, solar, electrification avoids higher carbon fuels and deforestation for firewood. Reinvesting in timber value chains maximizes CO2 permanence and value. This 13-page note explores ‘reforest and reinvest’ as a promising framework for clean economic development in the energy transition.

An important objective in the energy transition is to accommodate clean economic development for 4bn people on Planet Earth, with incomes around $2k pp pa, who currently use 90% less energy per capita than the ‘top 1bn’ in the developed world (page 2).

However clean economic development requires investment, especially for clean infrastructure. Without financing this infrastructure, there are risks that development will be slower and more skewed to particularly high-carbon energy sources; such as cheap coal and even worse, firewood from deforestation (page 3).

But what if emerging countries could reforest half of the areas that have historically been deforested, selling the resultant CO2 credits at $50/ton, and reinvesting a large portion of the income? (page 4).

We think there are 47 countries where this model could uplift GDP by 6-60% and ‘double’ potential annual investment rates in the country. Examples, numbers and case studies are presented on pages 5-7.

Where to reinvest the cash flows from selling nature-based CO2 removals? We think that 2-10x multipliers can be achieved. In other words, if the sales proceeds from 1 ton of CO2 removals are reinvested in emerging world countries, they can abate 2-10 tons of future CO2, while promoting clean economic development, and progressively increasing the ‘quality’ of nature based CO2 removals (pages 8-9).

Integration into timber value chains is explored as a method to maximize value and ensure that sustainably harvested timber sees its carbon locked up for the long-term in higher-value construction materials, which are 20-60x more valuable than raw stumpage (pages 10-11).

Wind, solar and electrification can also be financed to lower countries’ reliance upon coal and deforestation wood. This option has a strong multiplier effect (numbers in the note) and also enhances the quality of reforestation in the country (page 12).

Implications for the energy transition? Emerging world reforestation may increasingly gather momentum as a clean economic development model. We think this presents opportunities for companies that align themselves with the ‘reforest and reinvest’ model, while it will contribute to pushing high cost options off of the CO2 abatement cost curve.

Energy efficiency: a riddle, in a mystery, in an enigma?

Energy efficiency gains

Projections of future global energy demand depend on energy efficiency gains, which are hoped to step up from <1% per year since 1970, to above 3% per year to 2050 by some forecasters. But there is a problem. Energy efficiency is vague. This 17-page note explores three definitions. We are worried that global energy demand will surprise to the upside as energy efficiency gains disappoint optimistic forecasts.

Forecasts of future energy demand hinge on energy efficiency. When energy efficiency increases, then less primary energy needs to be supplied to meet the ultimate energy demands of civilization. But definitions matter, as some forecasters are now assuming enormous accelerations of efficiency gains in the energy transition (page 2).

Definition #1. Energy intensity of GDP? The primary energy intensity of global GDP has declined at 1.0% per year since 1970. We can also measure this metric by sector. But there are two great controversies with this measure of energy efficiency (pages 3-4).

Definition #2. Primary energy efficiency is the percent of the thermal energy in fuels that is converted into useful energy for machines. The definition has its roots in the power sector. We have charted 20 examples of energy efficiency factors, which can also be aggregated by fuel, over time, and for the entire global energy system. So we think primary efficiency of the global energy system is around 45% today, has been improving at 0.8% per year, and the gains will accelerate to 1.1% per year through 2050. But this definition only gives a partial picture. See pages 5-9.

Definition #3. Secondary energy efficiency is the percent of useful energy supplied to machinery and appliances that is actually used for its intended thermodynamic purposes. This is the most challenging concept of energy efficiency. It can be almost impossible to define and measure. See pages 10-12.

Efficiency paradox #1. On our best attempts to parse the data, we think secondary energy efficiency has most likely declined on a global average basis over the past half-century. We are not sure whether there is a historical precedent for secondary efficiency to improve on a global average basis (sometimes called Jevons Paradox). Our roadmap to net zero requires an inflection in secondary efficiency from -0.3% per year to +0.2% per year. Others’ roadmaps require an inflection to 2-3% per year. There are very important controversies here. Energy demand could surprise strongly to the upside (page 13).

Efficiency paradox #2. Primary energy efficiency is seen improving from 45% in 2019 to above 60% in 2050 in our roadmap to net zero. However, many transition technologies, especially hydrogen value chains, have round-trip efficiencies well below the global average. How can you increase total global primary efficiency by deploying technologies with lower-than-average primary efficiency?! (page 14).

Efficiency paradox #3. Industrial history has seen primary efficiency of heat engines improve by a factor of 3-5x each century since 1650. This is amazing. But it cannot continue, as primary efficiency is capped at 100%. Although we do think primary efficiency gains enjoy a final 2-3x surge upwards through the deployment of more renewables and electrification, as a mega-trend for the 21st century (page 15).

Our conclusions, bluntly stated, are that some forecasts for declining global energy demand through 2050 may be based on vague, aspirational, and historically unprecedented efficiency assumptions. This matters. Persistent under-supply in global energy markets could de-rail the energy transition (fantasies then crises) and culminate in cruel energy shortages (page 16).

Our favorite opportunities to drive energy efficiency through the global energy system — reducing both primary demand and useful demand — are spelled out on page 17.

Flaring reduction: fire extinguishers?

Oil industry flaring

Controversies over oil industry flaring are re-accelerating, especially due to the methane slip from flares, now feared as high as 8% globally. The skew entails that more CO2e could be emitted in producing low quality barrels (Scope 1) than in consuming high quality barrels (Scope 3). Insane environmental impacts are entirely preventable. This 10-page note explores how, across producers, energy services and new technologies.

145 bcm of gas is flared globally, as 1.5 mcf/bbl bubbles out of the global average oil barrel, of which 0.2 mcf/bbl gets flared. Country-by-country dynamics are summarized on page 2.

Methane slip is a growing controversy. Methane causes 25-120x more warming than CO2. New technologies to mitigate methane leaks are evolving rapidly. But one of the biggest sources of leaks is incomplete combustion in flares, also known as methane slip. Numbers and controversies are presented on pages 3-4.

Insane implications. After exploring these numbers, we strongly believe there are barrels of oil in the market where the Scope 1 CO2 from low-quality flaring is higher than the Scope 3 CO2 from combustion. Or in other words, there can be less CO2 emitted from burning high quality barrels than from producing low quality barrels. The maths are on page 5.

The biggest challenge is to mitigate flaring outside of the US, Canada and Europe, which themselves account for 8% of global flaring, and <5% of the global CO2e from flaring. Clearly and categorically, the best way to do this is to develop gas value chains. Case studies prove this point and are outlined on page 6.

Preventing flaring requires investment, estimated at $70bn upstream, and $50bn in LNG liquefaction facilities, and pulling on an extremely broad array of sub-industries, from compressors to pipelines to new technologies. We have screened examples of companies and technologies that will help to reduce flaring on page 7.

Case studies of flaring reduction and leading companies involved? Approximately half of the challenge is in gathering and monetizing gas that is more than 20km from any existing infrastructure (page 8) and the other half of the challenge is in capturing small and hard-to-capture gas streams (page 9).

There are hundreds of reasons why oil industry flaring occurs; hundreds of solutions to improve the quantity and quality of associated gas handling; but likely you do not want to read hundreds of pages cataloguing all of these examples. Our solution is to end by summarizing some of the companies that stood out most from our work, and which may be interesting for decision-makers to explore further (page 10).

Energy transition: the fantasy of the perfect?

Energy transition fantasy crisis

This 14-page note explores an alternative framework for energy transition: what if the fantasy of perfect energy consistently de-rails good pragmatic progress; then the world back-slides to high-carbon energy amidst crises? We need to explore this scenario, as it yields very different outcomes, winners and losers compared with our roadmap to net zero.

Energy transition fantasy crisis. New energies are amazing. But their future ramp-up creates uncertainties that will naturally deter investment. If future technologies are going to be close to perfect – low-cost, clean, abundant, practical – then why invest in anything less than perfect? The paradox is that under-investment in energy amplifies the risks of crises. And during a crisis, priorities shift. The goal is simply to end the crisis. Quickly. Even if it means backsliding towards higher-carbon energy. This is what we call a ‘fantasy crisis cycle’. The logic of this framework is explained on pages 2-3.

Pragmatism unravelled? Real world projects and technologies are almost always less than perfect. Thus they will tend to get overlooked when perfection is the standard. And they take a long time to construct, which means that they cannot help resolve crises. Thus we think that energy transition fantasy crisis cycles are going to lead to lower deployment of most of the pragmatic investments needed in our roadmap to net zero. Seven main categories and examples are noted on pages 4-5.

How to avoid energy transition fantasies? The thing about perfection is that it is easy to imagine and difficult to deliver. We suggest some criteria to identify fantasy thinking, and risk future technologies appropriately, on pages 6-7.

Any port in a storm? If we do not invest enough in energy and materials, then we will have shortages of energy and materials, and the most likely result is a series of crises. Crises and their implications are discussed on pages 8-9.

Fantasy crisis cycles. Case studies are presented of prior fantasy crisis cycles in energy industry history, going back to the 1950s, and running through to the present day, on pages 10-11.

Winners and losers? Nobody fares well in a crisis, in absolute terms. But some industries fare materially better in relative terms, especially relative to expectations during the fantasy phase, and relative to our usual roadmap to net zero. The outlook for large companies, large incumbents, especially coal producers, gets discussed on pages 12-14.

CO2 compression: stranger things?

CO2 compression

CO2 is a strange gas. This matters as energy transition will require over 120 GW of compressors for 6GTpa of CCUS. This 13-page note explains CO2 compression and CO2’s strange properties. This helps to fine-tune appropriate risking factors for vanilla CCS, blue hydrogen, CO2-EOR, CO2 shipping and super-critical CO2 power cycles. There is a wide moat around leading turbomachinery companies.

The objective of the energy transition is to meet the energy needs of human civilization, somewhere in the range of 120,000 TWH pa in 2050, while simultaneously eliminating net CO2 emissions, which could otherwise reach 80GTpa.

After four years of research, our roadmap to net zero includes 6GTpa of CCUS, a broad category that includes vanilla CCS, blue (and turquoise) hydrogen, novel power cycles like oxy-combustion, CO2-EOR and CO2-to-materials.

CO2 compression is required for almost all of these examples. Atmospheric pressure is 1-bar. The typical pressures involved in different CCUS applications above are explained on page 2.

The energy needed for CO2 compression is a function of input variables, such as mass, temperature, compressibility, heat capacity ratio and efficiency. This is captured in our compression models and explained on page 3.

But CO2 is strange. A CO2 molecule is not a billiard ball. This linear molecule has regions of negative and positive charge, and different acentricity versus other atmospheric gases (page 4).

Liquid CO2 needs to be pressurized beyond 5.2-bar. This actually makes CO2 liquefaction for CO2 shipping or CO2 trucking up to 80% easier than for other gases (page 5).

Densities are 2-10x higher than other gases, especially around/above pressures of 75-bar. This means turbomachinery, vessels and pipes for high-pressure CO2 can be smaller but likely also need to be more rugged versus other gases (page 6).

Wild fluctuations in Cp, Gamma and Compressibility occur. This makes the calculations for compressors and heat exchangers truly complex, which is worth understanding, in order to help with risking factors for novel CO2 technologies (pages 7-9).

The energy requirements for CO2 compression follow from the discussion on pages 3-9. I.e., what compression power (in MW) is required to take 1MTpa of CO2 and increase it to 5 – 200 bar of pressure? (page 10).

These complexities matter because they suggest a strong moat for leading companies in turbomachinery, and some other CO2 specialists. Three public companies stand out from technical papers and past projects, while others at the cutting edge are also discussed (pages 12-13).

Energy transition: the very hungry caterpillar?

energy transition stocks

The universe of energy transition stocks seems small at first. 50 clean tech companies have $1trn in combined value, less than 1% of all global equities. But decarbonizing the world is insatiable. Consuming ever more sectors. In our attempt to map out all of the moving pieces, we are now following over $15trn of market cap across new energies, (clean) conventional energy, utilities, capital goods, mining, materials, energy services, semiconductors.

In one of the all time great works of literature, a tiny and very hungry caterpillar hatches into the world. Then over a period of several days, the caterpillar gobbles up substantively everything that it encounters: an apple on Monday, two pears on Tuesday, three plums on Wednesday, four strawberries on Thursday. No matter how much the insatiable little creature eats, it is still hungry. Although one day, it does eventually morph into a beautiful butterfly. And everyone lives happily ever after.

The energy transition is like the hungry caterpillar. At first it seems small. Confined to a few niche companies. But over time, it feels like the theme is also liable to gobble up whatever it encounters. We think the world will achieve an energy transition. The thermodynamics of renewables-electrification are simply astounding. And helping decision makers to find economic opportunities in the energy transition is the focus of TSE’s research.

But after four years, our definitions of ‘energy transition stocks’ seem to be getting ever broader. Consuming ever more sectors.

Five themes still dominate in the minds of many investors. 60% of the market cap in these themes is concentrated in 50 clean tech companies. But are there growing risks of crowding in some of these ‘obvious’ energy transition stocks? (pages 2-3).

Consuming the electric sector. We count c$4trn of addressable market cap in sectors linked to electrification, across utilities, power electronics and semi-conductors. Some of the names that have stood out in our research are noted on pages 4-5.

Consuming the metals and materials sector. We count $2trn of addressable market cap in sectors linked to raw materials, across metals, mining, mining equipment. Some of the names and themes that have stood out in our research are noted on pages 6-7.

Consuming the commodity chemicals sector. “If you want to make an apple pie from scratch, first you must invent the universe”. There is no modern wind, solar, batteries without carbon fiber, ethylene vinyl acetate, fluorinated polymers; and in turn, these are some of the most sophisticated and complex value chains in human history. Commodity chemicals companies that have stood out in our research are noted on pages 8-9.

Consuming the energy sector. Building out new energies is a boot-strapping process, pulling on today’s traditional energies, while cleaner fuels such as natural gas double in volumes in our overall roadmap to net zero (page 10).

Consuming other sectors too? We explore the read across from energy transition to financial services, bio-sciences, aerospace and defence, consumer goods and healthcare, along with some broader conclusions about energy transition stocks, on pages 11-12.

Solar surface: silver thrifting?

silver use in solar

Ramping new energies is creating bottlenecks in materials. But how much can material use be thrifted away? This 13-page note is a case study of silver use in solar. Silver intensity halved in the past decade, and could halve again? Conclusions matter for solar companies, silver markets, other bottlenecks.

An important goal for curing energy shortages and accelerating the energy transition is to accelerate solar capacity additions. Our solar forecasts are discussed here, modelled here and re-capped on page 2.

Solar bottlenecks. There are seven separate materials where our solar ramp-up is likely to consume well over 20% of today’s total global market balances. However, this is assuming materials intensity remains constant (in grams/kW or kg/kW) (page 3).

A silver case study. Silver intensity of the average installed solar module has recently halved. So can it halve again? Important uses of silver are in the front contact fingers, busbars and solder of modern solar cells. This is explained on pages 4-6.

What determines the amount of silver use in solar? To answer this question, we have modeled the losses on the surface of a solar cell, due to resistance in the emitter layer, resistance in the contact layer and due to shading. The engineering equations are strangely beautiful (pages 7-8).

Can you thrift silver from a solar cell? The answer is yes. Especially if silver prices explode. It is easy if you don’t mind sacrificing electrical efficiency. Trade-offs and quantities are explored on page 9.

Can you reduce silver use in solar, while also increasing efficiency? Intriguingly, the answer here is also yes. To an extent. Especially with improved printing technologies (pages 10-11).

Silver markets. Our conclusions for silver markets are updated (in kTpa terms). We still see solar tightening silver markets, after balancing volume growth, changing cell designs (e.g., TOPCons) and thrifting. But continued thrifting partly mutes the upside (page 12).

Company implications. Leading solar manufacturers that optimize silver loadings can easily derive 0.3 – 1.0% benefits in operating margins. We think silver is a soft bottleneck for solar’s ascent and not a hard bottleneck (distinction here). Improved contact printing technologies may also be pulled into the money (page 13).

Silicon carbide: faster switching?

Silicon carbide power electronics

Silicon carbide power electronics will jolt the energy transition forwards, displacing silicon, and improving the efficiency of most new energies by 1-10 pp. Hence we wonder if this disruptor will surprise to the upside, quintupling by 2027. This 12-page note reviews the technology, advantages, challenges, and who benefits?

Transistors, such as IGBTs and MOSFETs, are the building blocks for solar inverters, wind converters, battery chargers and EV drive trains. We argue that their crucial role in new energies is analogous to the $100bn pa valve sector in conventional energy (pages 2-4).

The incumbent semi-conductor used in 99.9% of electronics and 95% of power electronics is silicon. However, a new entrant is gaining ground. Silicon carbide (SiC) is a fundamentally better semi-conductor for power-electronic applications, yielding 1-10% efficiency improvements (page 5).

Why is SiC “better”? The answer stems from material properties, including 100x lower on-resistance, 10x lower switching losses and 3x better thermal performance. An explanation of these variables, and why they matter, is covered on pages 6-7.

Challenges for SiC power electronics? There are three challenges for SiC, around cost, reliability and scaling. These stem from the production process and can be quantified. Interestingly, we think this set of challenges shapes who is likely to dominate this fast-growing market (pages 8-9).

How large is the silicon carbide power electronics market in $bn? We think the SiC market may surprise to the upside. Different commentators’ SiC market sizing assessments and forecasts are summarized on page 10.

Companies producing SiC power electronics and materials? Our screen of SiC companies, covers 10 public and 2 private companies. There is one stand-out pure-play. Other names with exposure to the theme are mid-large cap companies listed in the US, Europe and Japan (pages 11-12).

Copyright: Thunder Said Energy, 2019-2023.