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.

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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. 

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Future Energy – technology will save us

Summary: With a focus on “Greener, Cleaner and Cheaper” energy, we are overlooking the possible negative consequences of cheap energy. More expensive energy can be seen as a big negative as it will slow economic growth, but cheaper energy could accelerate degradation of planetary resources. Damned if you do, damned if you don’t?

About the publisher: Richard Norris is a leading business developer and advisor to energy investors, developers, bankers and the public sector.

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What “Peak Demand”​ really looks like

Summary: Even in a “rapid transition” scenario the world will use over seven hundred billion barrels of oil in the next twenty years. This is more than 50% of the total oil produced since the inception of the industry in 1870. Since we have found and used most/all the cheap oil, inevitably the next 700 billion barrels will be more expensive. Peak Demand may be ahead, but “Peak Cheap Oil” is certainly behind us.

About the publisher: Richard Norris is a leading business developer and advisor to energy investors, developers, bankers and the public sector.

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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.

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The real fossil fuel subsidy – its not what you think.

A “$5.2 trillion subsidy for fossil fuels” scream the headlines, followed rapidly by the conclusion that the subsidy-free “real” price to consumers should be much higher. The logic being that this artificially low price drives consumer demand of fossil fuels and thereby acts as a barrier to entry of renewables. The figures bandied about are eye-watering: US$5.2 trillion is 6.5% of global GDP… a very big number indeed. And this is a very emotive subject. So before getting onto the *real* fossil fuel subsidy, let’s take a moment to consider what is meant by “subsidy”.

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