When we are not careful, selective use of the abundance of data available to us can serve to obfuscate an obvious problem. This is what happened in Kepler Cheuvreux’s recently released analysis of the comparative energy returned on capital invested for solar, wind and oil respectively. We are led to believe that the transition from a fossil fuel based transportation network to one based on renewable energy will not just be necessary to avoid a climate catastrophe, but rather, it will prove to be a rational decision from an economic perspective.
The main point KC makes is that a single dollar invested in oil will deliver less final energy used in transportation than a single dollar invested in solar energy or wind energy. Although it is admitted that the gross energy returned on capital invested for oil is higher than for wind and solar energy, the argument is made that the net energy of wind and solar energy is significantly lower. The reason for this is because a combustion engine loses 75 to 80 percent of energy contained in oil in the form of heat. On the other hand, a battery loses an estimated 25 to 30 percent in the conversion process from electricity to chemical energy back to electricity.
The estimated capital cost provided is 3 billion dollar per gigawat. This is an estimate provided to us based on present market conditions. It compares roughly to the 3.6 billion dollar per gigawat cost of solar power projects in 2011.
One issue we have to consider is that solar panel manufacturers enter high debts in an effort to remain competitive. Both the American and the Chinese governments deliver high subsidies to their manufacturers in the form of cheap loans. Chinese subsidies are estimated at between 2.9 and 4.73 percent. This doesn’t however include the indirect subsidies that Chinese solar panels receive. The Chinese government indirectly subsidizes its solar panel production facilities, by paying half the cost of installation in remote places.
Despite all these subsidies, or arguably because of them, 180 solar panel producers will disappear by 2015. If solar panel producers go bankrupt, it’s an indication that solar panels are being sold at prices at which they can not be produced. What we’re interested in discovering is whether solar panels can compete with oil in a fair market. We already know that governments can make a particular decision financially viable that would otherwise be too costly, but such market distortions always have an inevitable cost that is intentionally obscured from us.
One other point important to note is that for solar panels and wind turbines energy return estimates are provided for 2020 and 2035 as well. It is claimed here that the production of solar panels and wind turbines will become less expensive, while the price of oil will simply continue to rise. Although Kepler Cheuvreux has it right on rising oil extraction costs, their analysis seems to completely ignore the reverberations of such rising oil costs on everything else we do. Solar panels from China are shipped to the United States, by ships that require oil. The production of solar panels is also an energy intensive process. If coal prices rise in China, this translates into higher energy costs, which translates into more expensive solar panels. That’s one of the main reasons China right now controls the solar panel business, it can produce the panels at much lower costs.
There are other aspects of the analysis we have to be skeptical of as well. The idea that solar and wind energy are cost-competitive depends on a life expectancy of twenty years. This requires the solar panels produced to be of very high quality. Intense competition between companies just to survive has led many companies to cut corners in the production process. Solar panel defect rates are gradually rising around the world, which can be expected to translate into shorter life expectancies as well.
A significant issue with the analysis is its simplistic estimate of the net energy produced by solar and wind power compared to oil. The net energy estimate for oil is put at 25 percent, while the net energy estimate for renewables is put at 70 percent. What these net energy estimates ignore is the cost we incur while producing the vehicles that utilize the energy in the first place. To produce a hybrid car today costs 7000 dollar more than to produce a regular car. By 2020 it is estimated this difference will still be 4000 dollar. These are more up front capital investments that are not incorporated into the analysis.
Another problem that has to be considered is the diminishing returns of wind power. Too many wind turbines in the same location leads to the wind shadow effect, in which wind turbines steal wind energy from other turbines. Thus in a small location, every additional wind turbine leads to a smaller increase in the total energy production. We are of course a very long way removed from global wind energy saturation, but for us to build and maintain wind turbines in remote locations will lead to increases in cost.
All of these issues above pale in comparison to the biggest issues however: The storage of electricity. It’s very expensive and difficult to store electricity, but it will be necessary. Oil on the other hand, stores its energy for us, without any significant effort needed on our part. To avoid blackouts from excessive electricity demand, electric cars will have to be charged during the night. Solar panels of course are unable to directly deliver their electricity in the night.
The issue we arrive at now requires us to consider the cost of storing electricity produced by wind turbines and solar panels. We can pump water up, build large batteries, but all of these solutions have proved themselves to be very expensive. These are massive expenses that were not incorporated into this analysis.
This problem can not be avoided. As solar and wind grow, they will have to start storing their electricity, as intermittent delivery has the effect of destabilizing the electricity grid. In addition, natural gas turbines lose efficiency when forced to start up and shut down regularly because there happen to be unpredictable surges in wind electricity.
The problem we face here in communicating this message is that it is relatively simple to come up with a simplified estimate of solar energy costs versus the costs of fossil fuels. To incorporate all the different interacting variables into a calculation on the other hand is a gargantuan task.