Monday, June 23, 2008

Transition Time

The cover of this week's issue of The Economist is devoted to the future of energy, and to the proposition that large-scale change is "closer than you think." The magazine includes a 14-page special report providing a useful overview of the major technology options for replacing conventional sources of energy. Its editors are correct that it is now possible to imagine a world that relies much less on oil and coal than today's, and that the present demand-driven spike in energy prices and a generation's progress on alternative energy technology make that prospect much more realistic now than similar aspirations during the previous energy crisis. Unfortunately, the report is essentially mute on the crucial question of timing, thus avoiding the apparent paradox that the energy transformation eagerly anticipated by so many might require a significant further contribution from fossil fuels, in order to bring it to fruition.

I see two visions competing for share of mind with regard to energy: one paints a future world in which clean energy is plentiful and cheap enough to support sustained global economic growth, while in the other the urgency of dealing with climate change forces us to kill off the hydrocarbon economy quickly and build a low-emissions energy future on its ashes. As convinced as I am that our energy plans must address climate change, I do not find the latter view very motivating or convincing. Nor do I think it would be terribly appealing to anyone who is dismayed by the relatively modest economic slowdown now playing out as a result of high energy prices and the fallout from the subprime crisis--a pale shadow of what a true oil crash would look like.

How close are alternatives to being able to replace fossil fuels? The progress that has been made in the last 30 years is certainly encouraging. For example, the cost of producing electricity from wind was once a large multiple of the cost of conventional power. That gap has shrunk so much that a 2 cent-per-kilowatt renewable electricity tax credit--which is still in jeopardy--appears to be the difference between profit and loss. But in order for renewables to make serious inroads into the market shares of power produced from coal and natural gas, wind and solar power must first reach a scale at which their annual capacity additions can cover the average annual growth of electricity demand. In the US, that figure has varied between 1-2%, which amounts to roughly an additional 60 billion kWh of net generation each year. That means that, at an average capacity factor of 30%, we would need to add 29,000 MW of wind, solar and other renewable electrical capacity per year. According to the American Wind Energy Association, installed US wind power capacity grew by 5,244 MW last year, and should grow by at least that much this year. Grid-connected solar is still much smaller, though growing somewhat faster than wind.

Turning to liquid fuels, although demand growth in the US has stalled for the time being, due to high prices and lower economic growth, covering 1% annual growth in liquid fuels also looks challenging. Although US corn ethanol volume increased by 1.7 billion gallons last year and was on a pace to add at least that much new output this year, prior to the Midwest flooding, after adjusting for its lower energy content this amounts to 0.8% of US gasoline demand and only 0.3% of our total petroleum demand. Covering the 1% annual growth that would be consistent with stronger economic growth and lower energy prices would require the energy equivalent of an incremental 5.5 billion gallons per year of ethanol each year, without accounting for the significant quantities of oil and natural gas consumed in producing this fuel.

Conservation and efficiency can and should help to decrease the height of these goalposts, and we see that in the apparent shrinkage of US gasoline demand, as consumers adjust to the reality of $4 fuel. But whether needed to cover normal historical growth in energy demand, or merely as an important milestone along the path toward actually eroding the market shares of oil and coal, it will take wind, solar and biofuels several more years of sustained high growth rates to attain that scale. And that will still be the case, even if changes in consumer preferences speed up the planned improvement in US new-car fuel economy and bring more plug-in and all-electric vehicles and efficient homes and appliances into the market. For a system this large, massive change cannot happen overnight.

All of this makes for an uncomfortable transition period, during which we will remain frustratingly reliant on sources of energy that we know emit unsustainable quantities of greenhouse gases into the atmosphere, while leaving us vulnerable to unstable foreign suppliers. Although I am optimistic about the potential of alternative energy sources and improved efficiency to alleviate both of these problems in the longer term, I remain pragmatic about how much can be done right now. However viscerally satisfying the prospect might seem to many people, we cannot yet turn our backs on the fossil fuels that supply 85% of our energy needs today. Doing so prematurely would align us with the path of perpetual energy scarcity, rather than long-term clean energy abundance, just as much as if we abandoned the alternative energy technologies that are only now starting to produce on a scale that really matters. It's a shame The Economist didn't tackle the subject of managing our expectations during the energy transition they described so ably.

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