How to explain Embodied Energy: introducing the “WACE”: Weighted Average Cost of Energy

By conventional logic, low oil and gas prices suppress demand for low-carbon alternatives, and conversely high oil and gas prices spur substitution.  There is some debate that the current low oil prices will slow the transition to low carbon energies.  I argue below that we should not be worried about low fossil-fuel prices undermining the energy-transition, but rather the complete opposite.  High fossil-fuel prices will be a bigger problem.

In corporate finance the concept of the Weighted Average
Cost of Capital  (“WACC”) is well known.  This is the total cost of how the company funds
itself through equity and debt.  Simply
put, the cost of funding a corporate entity is the percentage of equity times
by the cost of equity and the percentage of debt times by the cost of that debt,
thus:

  • WACC = (%E*costE) + (%D*costD)      where %E+%D=100%.

When thinking about the concept of embodied or embedded
energy I have adopted and adapted the idea of the WACC to better explain the
issues.  In this new model I call the
Weighted Average Cost or Energy – I am trying to capture, albeit very
simplistically, the idea that making wind-farms and solar panels requires a
large energy input, and the cost of that energy input(“cRE”) is today dictated
by the cost of fossil-fuel power (“cFF”). 
This statement is true given that roughly 85% of the world’s primary
energy comes from fossil fuels – so it stands to reason that this will underpin
the cost base. Thus, the WACE can be expressed:

  • WACE
    = (85% * cFF) + (15% * cRE)

If you are constructing a renewable energy project today,
the WACE for your project will be dominated by the 85%, that is by the cost of
fossil-fuels.  This has important
implications for the Energy Transition: if the cost of fossil fuels increase,
the cost of renewable energy increases also.

Continue reading “How to explain Embodied Energy: introducing the “WACE”: Weighted Average Cost of Energy”

Snowflakes in Winter

I guess it is not unusual to find snowflakes in winter.

* Students demand declaration of climate emergency and divestment from fossil fuel companies;

* College suggests turning off heating as a direct measure to help.

* Students reply: “This is an inappropriate and flippant response by the bursar to what we were hoping would be a mature discussion. *It’s January and it would be borderline dangerous to switch off the central heating*”

* Me: LMAO Surely that is exactly the point (on a global scale)…. and yet the irony of the reply appears to be lost on even the brightest and best….

https://www.thetimes.co.uk/article/professor-at-st-johns-college-oxford-turns-oil-row-into-a-heated-debate-0zr2wpmb5

tag#oxford hashtag#energy hashtag#climate hashtag#energytransition hashtag#divestment hashtag#oil hashtag#oilandgas

Brilliant Minds, Sub-Optimal Outcomes in Investing: Ignore Oil and Gas at Everyone’s Peril

“Old” energy sucks as an asset class, yet not investing in it will undermine the driver of growth (cheap energy) that allows other sectors to soar. No individual investor is incentivized to support the common good.

In game theory, the Nash Equilibrium, named after the mathematician John F Nash Jr. (of “A Brilliant Mind” film fame), is a proposed solution of a non-cooperative game involving two or more players in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy. source 

To this we can add that the observation that such an equilibrium is often sub-optimal for all players, but as noted in the description, no player has any incentive to change. Players are “locked in” to a sub-optimal outcome. 

Continue reading “Brilliant Minds, Sub-Optimal Outcomes in Investing: Ignore Oil and Gas at Everyone’s Peril”

The Cold Night of Forgetting*

Cold, dull, wind-less autumn days should make us think about the reality of energy security in a world celebrating high levels of renewable electricity supply

On a frigid autumn day let’s cast our minds back to the blissful dog-days of summer and the rampant headlines about how coal was now not needed and more than 50% of the UK’s power (meaning electricity) was provided by renewables. There has been a remarkable growth in renewable energy in the UK and whilst not blessed with much sun, wind is more abundant. Good news indeed.

Continue reading “The Cold Night of Forgetting*”