Energy Economics

ME 413: Lecture 5

Md. Ashiqur Rahman, Ph.D.

BUET, Dhaka, Bangladesh 1
 LEARNING OBJECTIVES

 Human Development Index (HDI)

 Energy Return on Energy Invested (EROI)
 Cost of Energy
 Levelized Cost of Energy (LCOE)

ME 413: Energy and Environment 2

 Human Development Index
 The basic level of energy to sustain a given human population is very
difficult to specify.
 United Nations proposed a measure of standard of living, termed the
Human Development Index (HDI).

 The United States and Iceland have the highest

energy consumption per capita, but their
human satisfaction level is not much different
from other developed countries such as France
or Germany, which provide their populations
with a good standard of living at much lower
energy consumption per capita.

ME 413: Energy and Environment 3

Human Development Index

ME 413: Energy and Environment 4

Energy Return on Energy Invested (EROI)
 Energy transformation systems take natural resources from the environment
and produce fuels and electricity.
 They initially require an investment in money, materials, and energy for
manufacture and installation.
 Once installed, the energy production system will use natural resources and fuel
to generate electricity. During the lifetime of the energy transformation plant,
there will also be maintenance and replacement costs.
 If we put all of these inputs and outputs in terms of energy, we can compare
the consumer energy produced for the market to the energy required either
from the economy or parasitic internal use.
 This analysis is known as EROI.

ME 413: Energy and Environment 5

 Energy Return on Energy Invested (EROI)

 EROI is important for achieving sustainability because it is a measure

of “low-hanging fruit”.

 The rate of return is very good at first, but as

the workers have to climb up in the trees and
use ladders, the investment in the harvest
goes up and the harvest rate goes down.

 EROI is a quantitative means to understand

the past, present, and future net flows of
energy to the economy for different energy
transformation technologies.

ME 413: Energy and Environment 6

Energy Return on Energy Invested (EROI)
 EROI makes sure that energy investments that have a very low return
(usually under EROI = 8) are carefully scrutinized.
 The decision-makers are informed of the risk to long-term sustainability
of the energy flow to the economy from such investments.
 For conventional electricity generation (i.e., coal, oil, nuclear power), the EROI
is very different depending on whether the energy input from the fuel is
considered as a free resource from the environment or a consumer fuel taken
from the economy.
 A coal-fired power plant that has its own dedicated mining operation are
much different from a plant that must purchase coal in the market.

ME 413: Energy and Environment 7

 Energy Return on Energy Invested (EROI)
o EROI for renewable electricity generation:
o One effective way to look at the EROI for renewable electricity is to
construct a timeline of the energy inputs and outputs using a spreadsheet
and then divide the cumulative production by the cumulative inputs.

o The construction begins at time

0, energy generation at time 1,
energy input equals energy
produced at time 2, and lifetime
of the system ceases at time 3.
o For this hypothetical system, the
delivered energy is 5 units and
the energy input is 1 unit giving
an EROI is 5/1 = 5.
8
Energy Return on Energy Invested (EROI)

o Example: Thin-film PV modules

o NREL (National Renewable Energy Lab) reports that it takes 120 kWh/m2 to
make silicon PV modules. Another 120 kWh/m2 is needed for the frame and
support structure for a rooftop-mounted, grid-connected system. Assume 6%
conversion efficiency and 1700 kWh/m2 per year of available sunlight energy.
o What is the energy payback period and EROI (assuming a lifetime of 15
years, 30 years)?

o Electricity production per year = 1700 x 0.06 = 102 kWh/m2

o The energy payback is ~ 3 years
o EROI = 6.4 for 15 year life, EROI = 13.8 if the lifetime is 30 years (assuming
no maintenance and replacement cost)

ME 413: Energy and Environment 9

Energy Return on Energy Invested (EROI)
o The EROI for coal fuel is by far the highest (about 50) of any energy resource.
o The EROI for oil has declined in the last century to 15–25.
o This drop is a result of oil reservoirs being depleted and energy investment
costs increasing as exploration and development are shifted to lower-grade
crude or offshore reservoirs

ME 413: Energy and Environment 10

Energy Return on Energy Invested (EROI)

ME 413: Energy and Environment 11

Cost of Energy
o The capital cost per kW capacity is a way to compare the cost of building an
energy production system to the market value of the energy produced.
o The investment costs include the capital cost, which is the cost of
engineering and building the plant, plus maintenance and cost of fuel.
o There are other costs associated with power plants, such as insurance,
potential liability, safety, and security.

ME 413: Energy and Environment 12

Cost of Energy
o Certain Alternative Energy generation technologies are cost-competitive with
conventional generation technologies under some scenarios.
− such observation does not take into account potential social and
environmental externalities (e.g., environmental consequences of
conventional technologies), reliability or intermittency-related
considerations (e.g., transmission and back-up generation costs
associated with certain Alternative Energy technologies)
− As a result, there are large uncertainties in what the real costs of
energy in the future will be.

o Lazard’s Levelized Cost of Energy Analysis (2017):

o the estimates are based on current generation technologies for the
conventional systems, which are considered mature.
ME 413: Energy and Environment 13
 Cost of Energy
Unsubsidized Levelized Cost of Energy (LCOE) Comparison

o The cost estimates for nuclear

power do not include a facility
for disposal of radioactive waste
and the safe disposal of the plant
after decommissioning.

ME 413: Energy and Environment 14

 Cost of Energy
Subsidized and Unsubsidized LCOE Comparison: for U.S. federal tax subsidies

ME 413: Energy and Environment 15

Cost of Energy

Circle size indicates

construction time in months

ME 413: Energy and Environment 16

 Cost of Energy
o Other costs:
o Land has a value and a potential
productivity for producing food,
fibers, and wood.
o Fossil fuel sources have a great
energy density, while all of the
renewable sources are very diffuse
and therefore require large areas to
deliver power needed in an
industrial society.

ME 413: Energy and Environment 17

 Cost of Energy
o Other costs: Example Problem
o In Arizona, USA, a law has been passed that requires that by the year 2025, 15% of all the
electric energy generation be from renewable sources. Given that the projected electricity
demand is 50,000 GWh/year in 2025 and the annual average solar radiation impinging on a flat
plate is about 2 × 103 kWh/m2/year. Assume a PV efficiency of 12%.
o Calculate the collector area required and the land area for this target to be met by solar PV.

o Solution:
o The amount of electric power delivered per year is = 2 × 103 X 0.12 = 240 kWh/m2
o The collector area =

= 31 km2

ME 413: Energy and Environment 18