Tuesday, May 6, 2014

Fossil Fuel Liberation

One of the arguments against rapid deployment of renewable energy is cost.

Renewable technologies over time become cheaper as R&D improves; fossil fuels on the other hand become more expensive as they deplete. Eventually we will reach a point when fossil fuels will become too expensive and at that point, so the argument goes, the market will fix the problem. The difficulty with that argument is that the longer we wait, the more installed infrastructure there is to replace.

What we have seen with oil is that, aside from times when there have been short-term price shocks, the inflation-corrected price of oil up to 2006 remained around $30 per barrel. Then in 2007, the price rapidly took off and headed to about $150, before a worldwide economic crisis slowed the world economy. Even so, the price has persistently stayed at 3-4 times the long-term level.

Why? Because conventional oil output was heading to a peak, meaning we were increasingly relying on more expensive resources that previously were not viable.

What that illustrates is that when supply becomes constrained, price can rapidly exceed the levels where alternatives become viable, meaning the price signal favouring alternatives kicks in a lot faster than those alternatives can be rolled out. Had the financial sector not collapsed in 2007, the rapid increase in oil prices would have triggered a downturn.

Take a look at these three scenarios in which energy use increases by 2.5% per year (close to the long-term average), doubling roughly every 30 years.

In the first scenario, we have only fossil fuels contributing to that doubling. That means after 30 years, we have twice as much fossil fuel infrastructure to replace as we had at the start. If prices of fossil fuels only increase rapidly once supply fails to keep up with demand, we have an enormous amount of infrastructure to replace very quickly. The red arrow illustrates the amount of energy production that must be replaced.

What if we have a cautious approach and aim to increase renewables by 1.5% of total energy demand per year, i.e., not as much as demand increases? Then we have the second scenario (bottom left panel). In this scenario, when we have to replace fossil fuel infrastructure, the total amount is still large – about 70% of the amount in the no renewables scenario.

If we try harder and aim to increase renewables by 3% of total energy use every year, i.e., more than the increase in demand, we get the final scenario. In this version, after 30 years, the red arrow represents less than 40% of the infrastructure that would have to be replaced in the first scenario.

How soon do we need to worry about this? Don’t we have 200 years worth of fossil fuel reserves?

Leave aside the issue of climate change that says we shouldn’t actually burn all this stuff.

At a rate of increase of 2.5% per year, 200 years of use results in a little over 70 years before it’s all gone. And in practice, long before we get there, the high quality resources will be depleted.

If we do not want a real monster of an economic crash when all cheap fossil fuel reserves run out and we don’t have time to replace all that outdated infrastructure, we should aim for a faster deployment scenario in which new clean energy increases faster than total demand. As I illustrate here, that faster increase need not be dramatic if we start early enough. Wait too long, and we start running into scenarios where we have to replace a lot of infrastructure at once – and that can only be expensive.