The End of the Oil Age
It has been written, more than once, that the reason renewable energy technologies have had difficulty supplanting fossil ones is that fossil fuels are just so darn cheap. Indeed, Brent Crude closed Friday at $34.06/barrel (bbl), and less than a month ago was trading at $27.88/bbl. Natural gas on the Nymex closed Friday at $2.06 per million British thermal units (mmBtu), a significant one-day recovery from the $1.97/mmBtu it had hit the day before.
It is true that prices this low provide fossil fuels with a significant cost advantage over renewable energy. In power generation, the benchmark metric most people use when evaluating the cost of different production technologies is the Levelized Cost of Electricity (LCOE). I won’t bore you with the details (although they can be found here if you want to geek out), but essentially LCOE computes the cost of producing energy from an asset over its useful life. Even with natural gas costs twice the current costs, the LCOE for combined cycle natural gas turbines average $0.044/kWh. Utility-scale solar, by comparison generates electricity at $0.291/kWh, and on-shore wind comes in at $0.072/kWh. (All data can be found here). Those numbers certainly bolster the argument that renewable energy is struggling because it’s more expensive.
The problem with this argument, however, is that transitions from one material to another has never been driven by lower costs. We didn’t move from the Stone Age to the Bronze Age because bronze was suddenly less expensive than stone. We did it because bronze made much better weapons and tools. Similarly, we didn’t move from bronze to iron because iron was cheaper, but because iron offered the opportunity to mass produce metal objects.
While none of these transitions were driven by cost, they all occurred because the material we transitioned to was technologically superior to the one it supplanted. Metal is easier to form precisely and consistently than stone, and is therefore better for producing tools and other objects. Steel is a better building material than iron because of its higher strength and lower weight, even though it costs more. The lack of a compelling technology driver is the real reason renewable energy is not taking off.
One example is the most subsidized, legislated, and litigated renewable energy source of them all: ethanol. As I described in an earlier post, the Renewable Fuel Standard, or RFS, dictates that a certain amount of the fuel sold in the US must come from renewable sources. The most common renewable fuel used to satisfy this requirement is ethanol, which is blended into gasoline at ~10% by volume.
Ethanol does have some significant advantages. First, as an oxygenate (or a compound containing oxygen) it promotes more complete fuel combustion, leading to less pollution. Second, it has a much higher octane rating than gasoline. Octane is a confusing concept, but basically it’s a fuel’s ability to be compressed without igniting prematurely. The typical gasoline octane scale goes from 0 to 100, with premium US gasoline typically being about 95 octane. Ethanol, however, has an octane rating of 110. This means it can take greater compression, and the engine can generate more power, than in a standard gasoline engine. Arguably this characteristic will enable engines to meet the future higher mileage standards the federal government has mandated.
Given these advantages, it would seem like ethanol has a technological advantage over gasoline, so why is it not replacing gasoline completely? Ethanol has two pretty major drawbacks compared to gasoline. First is energy density. A gallon of ethanol only has about 67% as much energy as a gallon of gasoline. This means the fuel tank in an ethanol car would need to be about 50% larger than the one in a gasoline car to go the same distance. Second, ethanol likes water. I won’t get into all of the details, but basically it’s really hard to get an ethanol/water mixture beyond 95% ethanol. That’s why grain alcohol/Everclear is 190 proof: they basically can’t make it any stronger than that. While 95% ethanol may not be good for human consumption, 5% water is terrible for engine consumption. Water causes all kinds of issues with engine systems, from corrosion to ignition problems. And while it is possibly to get 100% pure ethanol, the instant is exposed to water, like say the humidity in the air when you’re filling your tank, it will tend to absorb that water until it gets back to that 5% mark. Designing an engine system to handle a fuel that behaves that way is complicated and expensive. Ethanol does not have a decisive technological advantage over gasoline, which is why its implementation has been so difficult.
Turning back to the power sector, the major issue with moving to high levels of renewable power generation is not the cost, but the fact that these sources are intermittent. Solar cells only provide energy while the sun is shining. Wind turbines only provide energy while the wind is blowing. Hydro power is more reliable, but by most accounts, we have already tapped the vast majority of the viable large-scale hydro power resources. This intermittency is already causing problems in some states, especially those with high levels of solar power production, like Hawaii. The big issue isn’t necessarily sun rise and sun set, as those are predictable and can be planned for. The issue is cloud cover and storm fronts, which can move in quickly and without much warning, and cause dramatic changes in power output in a matter of seconds. The electric grid was not built to respond to power swings like that, which can cause reliability issues.
Luckily, these intermittency issues are starting to be addressed. Many forms of energy storage are being developed, most notably batteries. However, even with energy storage, power generation from renewable resources is no more reliable or better than traditional fossil fuel power generation. While high cost will not prevent adoption of technologically superior alternatives, it will prevent adoption of technologically equivalent alternatives. In spite of all that, I do believe the end of the oil age is near. The reason is that in all of this discussion we have not touched on the major impact of greenhouse gas emissions. While we are moving in the right direction with the shift away from coal and toward natural gas, the massive natural gas leak in southern California shows that natural gas can still result in significant greenhouse gas emissions.
In the wake of the recent climate talks in Paris, it is becoming clear that carbon taxes are not just possible, but likely. Indeed, there is already some form of carbon pricing in place covering 36% of the world’s GDP, including the European Union, the Northeast US, California, and several cities within China. The Intergovernmental Panel on Climate Change (IPCC), a UN committee which reports on the impacts of climate change, estimates that one metric ton of carbon dioxide emissions has a social cost of $37. That means that one metric ton of carbon dioxide emissions causes $37 worth of damage in the form of increased health care cost, reduced crop yields, etc. Imposing this cost on natural gas power producers would increase the cost of natural gas power by almost 50% (to $0.064/kWh from $0.044/kWh). Given the rate of decline in the cost of producing electricity from renewable resources, it won’t be long before the cost of power from these sources will be below even natural gas power generation.
So while renewable energy does not provide a technological advantage over traditional fossil fuel resources, the long-term cost drivers favor renewable resources, even in the face of low oil prices. This is why I am bullish that the end of the oil age is near.
