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Green Energy Vanity

Commodities / Renewable Energy Mar 27, 2010 - 02:19 PM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticlePRESTIGE AND SCALE
Since about 2005, as oil prices maintained their relentless march upwards to hit USD 147 a barrel in 2008, then collapsed to less than a quarter of this, before rising again, the call for ever bigger and more prestigious Green Energy projects became deafening. In the run-up to the failed Copenhagen climate summit at end 2009, some OECD leaders, including Obama, Merkel, Sarkozy and Brown made ever more impassioned and exaggerated claims for how much, and how quickly "brown energy" must be phased out - and replaced by low carbon, high prestige vanity projects.


Speaking on March 11, 2010, Chinese vice minister for Industry and IT, Miao Wei, described massive wind farms in China as essentially "vanity projects". Reasons he gave were that wind electricity costs more than coal or nuclear, windfarms have large land needs, the better locations have already been utilised, and siting wind mega projects on cheap land in China's dusty deserts would likely accelerate wear and tear of the mills, cutting their useful lifetimes to 20 years or less.

On a much shorter timeframe, spanning the 6 months from September 2009 to March 2010, European political leadership support to carbon taxes grew to a peak then collapsed. Between times, Climategate and Copenhagen had cast a deep shadow on the confused mass of of climate change apocalypse stories backed by flimsy junk science claims of supposedly expert climate scientists, that government-friendly media rushed to uncritically publicize. On March 23, 2010 the French PM Fillon announced there would be no carbon tax in France. This was the exact opposite of what he announced on Sept 10, 2009, despite President Sarkozy many times saying this confused, politicised and small tax able to garner about 3 or 4 billion Euro (to compare with the French national budget deficit for 2010 of around 155 billion Euro) was the way "to save the planet". Since end December, Sarkozy like other OECD leaders carefully avoids talk about the urgent and lifesaving green energy solution to higher oil prices.

FEED IN, FUEL UP AND MOVE ON

For green business promoters the context is a lot simpler. As in any boom-bust the urge is to profit from investor naivety and rack up earnings right now, in a new and fragile sector where the previous and apparent cast-iron political and public opinion support is showing dangerous signs of reality fatigue. The race to always beat the competitors and grab the biggest slice of the action is now faced with a "best by" date, as political, corporate and technical credibility slumps for saving the world with green energy through demanding massive handouts of public funds for green energy and carbon finance promoters. Reinforcing the sudden loss of credibility for green energy salvation delivered by the Copenhagen climate summit farce, the costs, time needed, and technical or resource limits on "switching" to green energy is becoming a little better known.

Political leaderships in the OECD countries are starting to understand the credibility loss they have suffered on this issue. The timing is bad, since it comes hard on the heels of their bungled, expedient and massively expensive bailouts of failed finance sector gamblers and both we, and they can be sure low carbon vanity projects will do less than nothing to trim rising oil prices. Losing the climate issue after losing the finance issue makes it clear to everyone outside the charmed circle of government "expert panels", and increasingly to the friendliest of governmentfriendly media, that the future for prestigious green energy vanity projects is uncertain if not cancelled.

LOW CARBON HIGH COST

The heroic pressure to force feed growth of green or low carbon energy, like all national prestige and vanity projects was fed by a mixture of fear and arrogance, like any other politicized rush to beat other nations with unsure but innovative technology. The bottom line of how much these ever bigger vanity projects cost, and how sustainable they are, always comes a lot further down the list of questions polite people dont ask and politicians coyly sidestep.

Like other never-completed, failed and abandoned heroic technology projects, comparable with the 'Titanic' ship or 'Concord' airplane, which were in theory to be followed by vast fleets of the same items, technological weakness, in-built obsolescence, and imaginary performance of the new and sexy tech gimmick were underestimated, overestimated, unknown or ignored. This did not save the day, and the bottom line reasons was always the same: cost.

To be sure, making comparisons of low carbon non-fossil energy, and today's real world energy system about 85% fossil based, is difficult, but outline figures can be given. Some are even sketched out with seeming precision by energy agencies like the IEA and EIA, by OECD studies, by national economic agencies, from the UN's IPCC (itself fast losing credibility through its bungled attempts to exaggerate global warming), and from reports to the Davos Forum, think tanks, university research centers and other sources, including corporate study groups across the world.

Most of these studies take a hypothetical low growth scenario for world total energy demand to around 2030 or 2040, and forecast what part of that future demand could or might be met by low carbon "cleaned up" fossil energy, energy saving, and non-fossil alternatives. Targets for "penetration" of alternate energy are often in the range 20% to 33% of total needed by about 2035. Costs are set by using usually low forecasts for the capital cost per unit energy. Energy technologies covered sometimes include nuclear power and large-scale hydropower, and sometimes do not. Energy saving forecasts vary widely, as do forecasts for the rate of cutting the energy intensity of economic output. This leads to an extreme high range of figures, scenarios and guesstimates ripe for cherry-picking of the most favourable, optimistic and unlikely.

However, from these data sources, we can give a range of around US$ 15 to 30 trillion in current dollars being needed, to 2030 or 2040, that is from a minimum of close to US$ 1 trillion a year, starting now, and sustained for 25 years. This could likely "decarbonize" up to 25% of world commercial energy demand, on a low growing demand basis, by around 2035. Whenever the nonfossil energy sources take a high role, more than 25% or more in some scenarios (compared with about 1.5% today from non-hydro renewables), the costs spiral even further.

This concerns perhaps 25% of future energy supplies - capital raising and investing for the other 75% also has to be estimated and costed. This could or should, but rarely is compared with current majority-fossil energy capital expenditure, heavily trimmed by the recession from 2007 highs, but standing at about US $650 billion in 2009 for world total commercial energy spending. This ranges from oil and gas through coal and uranium to electric power. IEA forecasts are that world oil and gas capital expenditure, alone, could hit US$ 1 trillion a year by 2016, mainly due to fighting depletion and paying for high cost LNG infrastructures. Adding the two strands of brown energy and green energy investment needs, we are confronted by far-out annual numbers reminiscent of OECD government bailouts to the finance sector in its hour of fear and crisis, in 2008-2009.

UNLIKELY AND UNCERTAIN

One thing is sure, the chance of a quantum leap in energy sector spending was already low before the global financial crisis and the Copenhagen climate summit wipe-out. Today it is even less likely. This returns us to the present, and cumulative growth of "present generation vanity project" spending in low carbon energy. This is usually exaggerated through including turnover on the gaming tables of carbon finance tradable instruments, including recycled Clean Development Mechanism credits, emissions credits futures and derivatives, and related paper. Actual physical investment in non-hydro renewable energy equipment and infrastructures is likely running at about US$ 75 billion a year in late 2009. Accumulated world spending in the 6 years since 2003 could be placed at no more than US$ 350 billion, about a quarter of the US national budget deficit for 2010 as announced by Obama, earlier this year.

What we can be sure about is that "present generation" green energy will surely and certainly deliver high priced energy and electricity for users. Feed-in tariffs for solar electricity in the countries which have specially favoured this vanity tech, like Germany, which is now tending to cut back these subsidies, are often in the range of 15 US cents per kWh, and higher. This reality byte is always absent from the fact-free euphoria surrounding corporate low carbon mega projects that are flashed in the media. To be sure, doubling or tripling electricity prices to consumers would work magic on the ROI for low carbon vanity projects but the same applies also to oil. Doubling the price from the current barrel price around US$ 80 a barrel, to US$ 160 a barrel, would surely favour "ecological" small-engined cars and even save presently floundering fuel ethanol and biodiesel projects.

The need for "favourable financing" to save the world with high-priced energy underpins the unlimited potential for corporate appetite, and ensures continued growth of the predictable calls for bigger government hand-outs, cheaper loans and higher prices for sustainable power, called "feed in tariffs". These government favours will save us all from Biblical Flood "before the end of the century", and higher oil prices before the end of 2010.

FIGHTING DESPOTS WITH GREEN ENERGY: ENERGY SECURITY

Right behind the strident claims of Apocalypse Now that star speakers on the climate change talk circuit, headed by Al Gore are paid big money to thunder at the microphone, comes the notion of energy security. This is national security flowing from the biofuel barrel and spinning windmill rotor. Fighting the kiss of death they received at the Copenhagen farce of Dec 2009, global warming hysterics now add energy security as yet another key benefit from their vanity projects.

Along with low carbon energy, we would get a cut in oil import bills, saving us from the cruel and despotic oil exporter states of the OPEC group, from friendly democratic Russia, and from environment conscious Canada. Cheap, or at least secure and home-brewed green energy would generate balanced trade with the rest of the world, improve national finances in other ways, and perhaps also strengthen the national currency. Along with the green jobs, and prevention of Arctic ice melt, the consumer public would be yet more enthralled by the energy security they will have for a few trillion dollars, a year.

The strategic shift to oil security, instead of saving polar bears (whose numbers are, curiously, rising as their ice-free territory expands) as the rationale for big spending is typically fact free and distorted. The difference between net and gross oil imports, and the value of for example crude oil imports against refined product exports, is usually and carefully avoided. Al Gore likes to quote gross oil import costs to the USA as totalling "hundreds of billions of dollars a year", and for at least 2 of them he was right for the USA's most-recent record year (2007), for the gross deficit on its oil trade.

Current total net oil imports of all 27 importer OECD countries were around 24.5 million barrels/day in November 2009. If we assumed a year average barrel price of US$100 the annual net oil import cost would be about US$882 billion. At current net oil import rates of about 9.1 million b/d and current barrel prices around US$ 80, the US oil trade deficit is about US$15 billion a month, or US$180 billion a year.

Total spending by OECD governments to bailout failed gamblers in the finance sector, provide incentives and subsidies to car buyers, aid other economic sectors, and finance national budget deficits is likely running at over US$ 2.25 trillion for 2008-2009. This comfortably covers several years total oil import costs at record-high average barrel prices. Another somber fact emerging from this US$ 0.88 trillion a year OECD total oil import bill, with a year average 100-dollar barrel, is that as noted above IEA published forecasts claim that world oil and gas investment spending must rise to US$ 1 trillion a year by 2016. Average barrel prices and average natural gas prices needed to finance this can be guessed.

SUSTAINABLE ENERGY AND THE GROWTH ECONOMY

The drive to imagine a sustainable energy future itself depends on imagining, or hoping the global growth economy is sustainable. This is very far from sure. When or China and India were able to repeat the OECD sustained high-growth economy of the 'Trente Glorieuse' period through 1950- 1975, their oil demand would rise so high no possible investment amounts in world oil and gas could satisfy this new demand. If OECD oil demand shrank by 60% or 75% from current rates this could buy time would be far from sustainable.

From a much lower peak than today for global energy demand in 1929, some countries experienced over 10 straight years of falling energy needs in a recession-type sustainable economy. Economic recovery from the 2008-2009 recession is simple to identify: shrinking rates of energy demand contraction, then rising rates of energy consumption. These are, to be sure tracked and anticipated by oil and coal traders, if not yet by uranium and natural gas traders.

Some OECD countries through 2008-2009 recorded short-term falls in oil demand close to 7.5% or above, electricity demand in some countries has shown falls far above 10%, coal demand also contracted far and fast, showing that depending on the type and severity of recession commercial energy demand can fall much more than GDP output. This underlines that the energy economy is itself variable. Growing demand is only sure if the growth economy survives.

This adds another challenge to the drive for low carbon energy: Are we sure it will be needed? Now that the junk science threat of Biblical Flood from runaway and catastrophic climate change has been de-credibilized, and oil import dependence wheeled on stage as the worst threat to economic and political security we are only one step away from the real question: How long does the growth economy survive? Government funding to "a green energy future" is tending to fall back, as signalled by the French abandon of carbon tax and steadily falling support from other governments to low carbon vanity projects. This can now give way to discussing the real issue of what the sustainable economy means.

ENERGY TRANSITION AND ECONOMIC ROUT

Falling credibility of climate change hysteria from extremists like Al Gore and Rajendra Pachauri, and lower-rank members of the climate change circus, such as "Gaia philosophy" writer James Lovelock, James Hansen, and Club of Rome intellectuals is now pacing the fall in "Stimulus Spending" by OECD governments. Cheap public loans and free bailouts for failed or unlucky gamblers in the financial community will decrease as handouts to corporate green energy vanity projects decrease, making clear the next stage is approaching. For the energy sector this will include a slimmed and downsized climate change circus, which has now talked itself off stage, also cutting off this useful if small source of public support to private corporate incompetence.

Before the Copenhagen rout, announced goals of energy transition in the OECD countries had attained extreme and impossible highs, for example 80% reductions in CO2 emissions and implied cuts of 80% in the dependence on, or replacement of fossil energy by 2040, as announced with a winning smile by Obama, and the leaders of Germany, France and UK before the climate summit. This article has suggested how much this fantasy would likely cost, if it was technically and industrially feasible.

Anything above 25% of total commercial energy coming from non-hydro renewable energy in 2035 can be costed at a need for world capex in alternate energy being raised to US$1 trillion a

By Andrew McKillop

gsoassociates.com

Project Director, GSO Consulting Associates

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

© 2010 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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