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How to Protect your Wealth by Investing in AI Tech Stocks

Hard Times For Vanity Tech Energy

Commodities / Energy Resources Oct 06, 2012 - 02:34 PM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleSTRESSFUL STRESS TESTS
The accident risk stress tests on European nuclear reactors, like the economic, financial and environmental stress tests on European biodiesel fuel production are delivering bad news for defenders and promoters of high cost vanity tech "solutions" to Europe's mostly imaginary energy problems. Upstream, these new hits are another blow to Europe's now creaky climate-energy policy and program package of 2008 - underlining yet again that this package is now badly in need of total reform or simply shredding.

Nuclear stress test results leaked to French and German media this week conclude that the EU's 185 civil nuclear power plants with a generating capacity of 162 000 MW as of July 2012 need to be upgraded "considerably" to bring them up to the safety standards needed in the post-Fukushima world. The cost of this, its programming and execution are all as yet undefined, but the cost to power utility companies operating nuclear plant in Europe will be at least 25 billion euros. Including public and semi-public owned nuclear plant, if the same upgrades are applied across Europe, costs will be at least double or triple the upgrade costs that private-only operators of nuclear plant in Europe will have to pay. The final bill will of course go to all taxpayers and all users of electricity. 

This blowback to both European and global nuclear power has given another boost to the exit plans of the ever-declining number of nuclear consortiums which were bidding for UK "new build nuclear" contracts, at already fantastic guaranteed prices, from the UK government, for the power which would have been produced. Current and now almost certainly failed negotiations included power price guarantees often well above 140 GBP per 1000 kWh (22.5 US cents per kWh or $360 per barrel equivalent).

Delivering another hard blow to the supposed high-tech image of "low carbon nuclear", the news of yet higher and further costs for nuclear power is accompanied by a flurry of construction orders for coal-fired power plants. Sector analysts report that utilities in seven European countries will add 10 000 MW of new coal plants by 2016, compared to just 1 600 MW of new gas-fired power stations because European gas prices are so high - roughly 5 times the price of natural gas in the US.

The European biodiesel industry, which is small by world standards, and its own miniature small sister the European bioethanol industry are more threatened than ever. The now very long-running food versus fuel debate has thrown more cold water on the always-delayed, long-pending EU proposals to somehow produce biofuels, but also prevent the deforestation (both in Europe and in supplier countries producing fuels to export to Europe) and environmental degradation of land needed to produce the fuels. The by-line is CO2 impact, and elite fear that land displacement for crops grown for fuel will cause a net rise in CO2 emissions relative to emissions already produced for the same amount of fuel and road transport movement.

The much more real impact of raising EU biofuels consumption, wherever the stuff is produced, is higher food prices but this is only treated as a "subsidiary problem" by well-fed Eurocrats.

The EU's nominal of theoretical goal for biofuels utilisation dates from 2008: 10% renewable-based liquid fuels in EU road transport by 2020. This goal was supposedly adopted by all Member States in 2009 when they incorporated the 2008 climate-energy package goals into their national Renewable Energy Action Plans (REAPs). The CO2 impact reduction goal was already lower: reduce greenhouse gas emissions in EU road transport by 6% by 2020 on a 2010 emission basis.

The fudge zone was further raised by renaming the biofuels "plan" or goal the European Fuel Quality Directive, which has been revised several times since 2008-2009 and re-incorporated into the climate-energy package, which is interpreted with increasing difference by different Member States. The remaining ambition was however simple: produce and use biofuels, substituting traditional fossil fuels which "can only get more expensive", while awaiting the rather slow "onrush" of electric cars set for  sometime after 2020. Any discussion of using natural gas-fuelled cars is verboten in European think tanks and expert panel discussion.

The problems are however massive for these pie-in-the-sky goals and dreams. Producing more biofuels, in Europe or outside Europe, can only "displace" food production, and can only raise food prices. As we mentioned above, this is not an elite concern. The politically correct way of facing this real problem, and trying to talk around it is the debate on "indirect land-use change" (ILUC), meaning the deforestation and monocropping of land for and by crops grown for energy, leading to a net increase in CO2 emissions for the same amount of transport activity in Europe. Also completely absent from the highly censored "debate", is the issue of diesel fuel: a proven carcinogen according to the UN WHO, but with biodiesel being the "main chance for Europe" because its land resources simply do not permit the fantasy goal of producing bioethanol from food crops, Europe's carcinogenic diesel car and truck fleet must go on growing, without a single "Diesel Kills" health warning on fuel station pumps! Cigarette smokers are not so lucky, the UN WHO studies on this cause of cancer being highly useful to Eurocrats seeking further tax hits on tobacco.

The swath of scientific studies on ILUC has no effect. The vast surge in global gas discoveries and gas resources – making it certain that Europe's extreme gas prices will fall - has no look-in at all to the elite circus act of renewable biofuels for Kleen Motoring in Europe. By a supreme irony, many of the studies available show that when ILUC is taken into account, biodiesel can be even worse for the environment than normal diesel fuel.

The European Commission’s draft proposal on ILUC, leaked to the press in September, included a cap on biofuels from food crops, at 5% only substitution of 2010-level EU road fuels gasoline and diesel fuel consumption (about 2.22 billion barrels) by the year 2020. In simpler terms this new restrained and downsized target for "conventional biofuels" in Europe would be about 110 million barrels a year of these fuel by 2020. At current oil prices this has a net value of about 9 billion euros a year, which could be compared with  the 2010 annual turnover of Europe's troubled auto industry, of about 520 bn euros.

By an interesting coincidence, and likely not just as it happens, the present amount of biofuels used in Europe, about 25%-33% imported, covers around 4.5% of present transport fuel demand in Europe. The ILUC proposal therefore caps "conventional biofuels" production at today's levels and throws in the towel on the Big Target of 10% substitution. In a gesture to the real danger of biofuels - higher food prices - the Commission's report says "almost the entire biofuel production to 2020 (was) expected to come from crops grown on land that could be used to satisfy food and feed markets”.

Conventional biofuel production would be capped using new taxes all based on grams of CO2-equivalent emissions per megajoule for biofuels crops, and averaging about as much as taxes applied to achieve a 6% reduction in emissions for fossil-based fuels. Users of the biofuels, mostly upstream in the refining and fuel production industry would be forced to pay carbon taxes. Fuel producers and suppliers looking to meet their 6% emission reduction target will obviously and rapidly cease buying biodiesel, when the new ILUC tax is applied.

Showing an additional commitment to unreason, the European Commission's new proposals - for new taxes - are defended by claiming the new 5% cap on conventional biofuels from conventional food crops "will move the biofuels industry beyond food” to second generation non-food biofuels, for example based on algae, or any other non-food biomass. The problem with these biofuels, at present, is they need more complex and expensive processing relative to World War 2-style home-brewed sugar beet alcohol poured into the fuel tank. The Commission's "second generation biofuels" shopping list is large. What it calls advanced biofuels could or might come from municipal solid waste, farm wastes, aquatic plant materials, aquaculture, fish farming and forestry residues, and other possibilities as long as the "advanced fuels of non-biological origin (produce) four times their energy content,” and only these will be supported by the new post 2020 EU renewable energy policy framework.

The European Biodiesel Board (EBB), representing producers of about three-quarters of all EU biofuels today, says these proposals if implemented would “definitively cause the death of the whole EU biodiesel industrial sector.” This, according to the EBB has a turnover of about 10 bn euros a year and employs about 70 000 persons directly and 450 000 in total: about 0.19% of the European total workforce, or roughly 1.6% of Europe's present 27 million unemployeds. How this tiny industry could or might pay the R&D to develop "second generation" biofuels is absent from Eurocrat thinking.

The lobby group circus centred on Brussels and further afield is now mulling the coming changes to biofuels, amid one very simple lever of change: EU imports of vegetable oil, especially from Indonesia and Malaysia, and large draw on colza or rapeseed crop output in in Europe, driven by present biofuel mandates, is powerfully aiding the upsurge in world food prices. Europe is a very long way from immune to a serious and large rise in world food prices. After European biodiesel clean fuel dreams, therefore, what comes next?
The bioethanol fuels industry, although a very small sister to European biodiesel rejects the claim that ethanol production drives up food prices. It says that fuel alcohol can be produced, in large quantities, even in Europe. One immediate problem is that European gasoline demand is at best stagnant. Rampant dieselization of EU27 car fleets means that in some countries, for example France and Germany more than 65% of all cars are diesel engined. Even if the European biodiesel industry is dead, now, carcinogenic diesel power will live on: the UN WHO cancer research institute based in Lyon, France estimates that for its home country, France, about 43 000 cancer deaths per year are due to diesel fuel particles and diesel smog. But never mind, the show must go on.

European energy taxation presently gives a large advantage to diesel fuel, but the new European Commission policy line is that a radical new energy taxation directive must be issued to force member states to tax diesel fuel much more than gasoline - because of its higher energy content and therefore CO2 emissions - and of course bring in higher state energy tax revenues. Times are however tough, and consumers are not in a mood to accept higher taxes on diesel fuel - even if they accept higher taxes on equally carcinogenic tobacco products. Yet another problem is even simpler: producing bioethanol is at least as expensive, and as uneconomic as producing biodiesel; both have net energy yields or EROIs of close to or worse than 1, that is producing 1 fuel energy unit of the biofuel needs as much energy as the fuel energy unit of diesel fuel or gasoline that is substituted and replaced.

The new cap on food-based biofuels  is claimed by the European Commission to be a "clear signal" to the biofuels industry on the volumes of conventional and advanced biofuels it must produce by 2020, which is as unrealistic as imagining that Brazil will supply Europe with cheap fuel alcohol, and Indonesia will supply Europe with cheap palm oil for biodiesel, whatever the level of sugar and vegetable oil prices on the world market, if advanced or second-generation biofuels are not available by 2020. The comedy act of Hunting New Biofuels is therefore now going from strength to strength in Europe, as old-style jatropha berries (for biodiesel) give way to genetically tweaked poplars, algae and elephant grass for "possibly producing" advanced renewable fuels.

Tweaking the terms of reference, and seeking new ways to tax and tax (but spend less and less), Europe's comedy act of facing the Energy and Climate Crisis Future has in no way ignored either shale gas or oil sands: both must be taxed for their CO2 emissions, if for no other reason than ensuring fuel and energy costs go on rising. For crop-based biofuels however, the end of the road, in Europe, is now clearly signalled. At most, they will cover around 5% of European road transport fuel demand in 2020.

By Andrew McKillop


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

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 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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