The Renewable Energy Treadmill

Burning Money Instead Of Gas

(this article is part 1 of a series on the future of energy systems; it will be followed by a presentation of what could be the ideal energy mix for the long term, as well as an outlook for oil over the incoming 5 and 10 years, and probably an article covering new nuclear technologies).

A strange phenomenon is happening in the power market in Europe. The region has been investing massively into green energy, especially solar and wind, and has never been more reliant on gas, coal, and even at times oil, to keep the lights on.

A lot of opinions are thrown around about why, and we should examine it, even if briefly. But I think something rarely discussed is the fundamental difference of ROIC (Returns On Invested Capital) for the first percentage of solar/wind power in the energy mix compared to the later stages of the green transition.

Competing Narratives

The discussion between pro and anti-renewable is driven a lot by ideology and narrative.

The pro camp will claim that:

• solar and wind are now cheaper than any other power source.

• fossil fuel subsidies and corruption are the last things still holding us from having a fully decarbonized electric grid.

• electrification of transportation and heating system will go smoothly.

The anti camp claim that:

• solar and wind are not cheaper as their production in the real world is much lower than the nominal capacity.

• Renewables production is unreliable, unpredictable, and happens at the wrong time of the day and during the wrong season.

• The power grid cannot handle electrification without trillions invested in more power lines and transformers.

In my opinion, overall, the anti-camp views are somewhat more correct. Mostly because the pro-camp narrative is actively misleading, using metrics like Levelized Cost of Energy, with is very abstract and does not reflect real costs. So just not lying gets you more correct here.

At the same time, most of the anti-camp arguments rely on the intermittency and seasonality of renewables. Would that be solved, their entire thesis would fall apart.

The storage of electricity is a difficult task, so let’s see how it could be done.

Power Storage

To store power, we want ideally to store it as quickly as mobilizing electricity, with little to no storage loss.

Batteries

So far most tentative at scale have been lithium-ion batteries.

If you want to look deeper into various energy costs, I highly recommend Lazard reports. It is very rich in easy-to-read graphics like the one below:

As you can see, as soon as you add storage, you increase the minimum price of renewable by an x2 factor.

Not a surprise to me, when I asked how much it would cost to have a battery for 1 day of my household consumption, it came at a price tag of EUR20,000. While my 12 KWh rooftop solar (including installation and inverter) was only EUR11,000.

So to store my solar production for one day would bring the whole project at roughly 3x time the price…

Overall, using lithium batteries for utility-scale storage is absurd, as lithium-ion batteries are optimized for price and power per kilo of battery. Good for EVs, and absurd for unmoving batteries sitting in a power station, without volume or weight constraints.

IF batteries turn out to be used massively, any other chemistry will be better. There are plenty and all have a lot larger potential for improvement than lithium-ion:

• Lithium Iron Phosphate (LFP)

• Flow/redox batteries

• Liquid/molten metal batteries

• Sodium Iom batteries

• Lithium Sulfur batteries

• Graphene batteries

• Solid state batteries

I personally suspect that some of these might even work in due time to cover the peak demand in the evening right when solar stops working.

Investing-wise, my bet here would be some exotic and really original solution like the molten metal, or improvement in tech using low-cost and abundant materials like sodium batteries.

For the first one you most likely need to be an accredited investor and be part of the right VC round.

For the second one, the leader of sodium battery and LFP + world leader in battery production (50% of the world battery capacity) is China’s CATL.

"Even even if we dug out all the lithium in the world, we couldn't build batteries big enough to accommodate all the fluctuation in renewable energy production."

Ylönen - Polar Night Energy CTO

Utility scale battery park - BBC

Other Electric Storage

Other options for electric generation are rather poor, because power losses are massive.

Hydrogen might give back barely 20% of the initial energy AND requires massive capex.

Pumped hydro power is around 70% efficient, but requires investment and is not doable everywhere or on a truly massive scale.

Compressed air is around 40-60% efficient.

Obviously, if you lose half of the power in storage, the final power costs double. More even, you also need to cover the capex and maintenance costs of the storage solution.

An x5 price increase before accounting for capex for hydrogen shows how idiotic a “hydrogen economy” would be.

Creative ideas

None of the solutions discussed can cover the volume needed for seasonal storage. Like storing the summer sun for winter heating in cold climates.

So at best we would be talking of a summer electric grid on renewable, and a winter one on gas/oil/coal/nuclear.

Some ideas are worth mentioning for they are truly ingenious.

One is the low-cost heat storage designed in Finland, using basic piping, sand, and an industrial silo, or “sand battery” developed by Polar Night Energy. The heat can be stored for months and used for local district heating utilities, a very common feature in German and Finnish cities (as well as the former Soviet Union).

The same concept but for 1000°C (1832°F) industrial heat is developed by the company Rondo.

Storage Conclusion

I went on this tangent about energy storage to show that the issue is complicated. It might be solved. But we do not even have the right technology available yet. So building it up at scale will NOT happen before at best 2040.

Hence, we need to judge what will happen with renewable by counting on no storage or expensive storage for the foreseeable future.

Scaling Pains

Here is what happened in the last 10 years when adding renewables to the grid (I am not counting hydro here, as this is usually already somewhat maxed out by geology and past development):

The first 1% of the total capacity

Production is a bit expensive because panels and wind turbines back then were, but this is a test project anyway.

The 1-5% of the total capacity

The grid can always accept only that much power, especially as it is very distributed. Better technology, and economy of scale on production, installation, operations, and maintenance make costs fall quickly.

Rabid enthusiasm follows. Soon it is cheaper than fossil fuel!

The 5-20% of the total capacity

Economies of scale progress slow down but keep happening.

The grid struggles a bit at peak production, like windy sunny days, but stopping the gas plants allows it to handle it well.

The 20-50% of the total capacity

(this is where both Germany and China are currently at)

Half of the renewable production is wasted, as it is made during the time when it is not needed. The grid barely has enough at peak demand times, requiring gas powered plants barely used a few days a year.

Winter is even worse, and we need to restart coal plants to avoid blackouts. Coal and gas shortages loom but are avoided at the last minute.

Billions in investments in batteries results in massive electric bills, while barely storing 10-20 MINUTES of demand.

The economy of scale totally stopped and any rise in material prices like silicon reversed past progress. Now, panels and wind turbine prices are getting correlated to global fossil fuel energy prices that dictate raw material prices and manufacturing costs.

>50% of the total capacity

(This is the stage countries like Germany are eagerly barreling toward)

Winter blackouts are a given, and half of the year, industries are asked to “voluntarily reduce consumption”.

Regulations are banning too high heating in buildings. EVs are banned from charging for some hours or even full days.

Electric bills keep rising despite equally rising capex spending in ever more capacity.

The Money-Incinerating Energy Treadmill

So why is this happening, that the more renewable you add the worse its economics get?

Each additional GW of renewable power is less and less usable. It gets produced when no one needs it, and is missing at peak hours.

In winter it is getting worse, as a chronic daily shortage builds up from low to no solar power. It usually gets borderline catastrophic when the wind stops blowing, sometimes for weeks.

So the reason is not only the intermittency issue. It is intermittency + seasonality.

Quick Maths

Let’s say your country has already invested $10B in solar+wind. It kind of works, even if it failed to reduce the power price, it did not rise it either. Your grid frequently reaches the “100% of power was from renewable“ congratulations mark.

Now you add another $1B of “investment”, but you reach the point where this extra 10% of production is also making 5% of the TOTAL wind and solar a surplus at un-needed time.

Because the saturation point >100% of consumption is reached a lot more often. And production in poor condition, like low wind and no sun are still close to zero.

The $11B investment is now worth 5% LESS. This is a $550M loss in the value of capital invested in renewable.

So you invested $1B, but got only $450M out of the deal, incinerating $550M. This also means that out of $1B, you got only $450M worth of productive assets.

It Gets Worse

By this point, the issues with intermittency are becoming obvious. Adding more production capacity will not solve anything.

So a consensus forms that storage capacity is needed. So your grid operator also invests $200M in batteries.

This reduces a bit the worst of the production spikes. So the batteries pay for themselves, reducing some of the $550M of now useless capital.

Problem solved!

Lets add another $5B in renewable and finish greening the grid!

Now, out of $16B in production capacity, 30% of it is useless. This represents a loss of $4.8B.

But of course, you need to keep up with batteries as well. So you spend another $2B to match.

So you have now spent another $7B, to achieve roughly the same results you had before and overall lose money. The ROIC of these $7B is negative.

The more capacity gets added, the more expensive it gets, and the more it hurts ALREADY installed production.

But at least, maybe, you can power yourself mostly through green energy all day with all those batteries.

Although the actually needed battery investment probably is more in the range of the same as the power generation itself, so ROIC is deeply negative. Nevermind the need for a lot more power lines, themselves costing in the billions.

And this is only in summer…

Wasting Other Capacities

All this still does not increase production in winter days. Almost at all.

So you still need the exact same number of gas and coal power plants. Except they are now not used much or at all in summer time. Meaning their capex cost is now half as efficient.

Their operating profit collapses, as you need to maintain them, pay employees, etc… while not producing anything for half of the year.

So the more renewables on the grid, the more expensive coal and gas gets.

Of course this makes green advocates scream out: “SEE! We told you fossil fuels are more expensive”.

So we add more renewable capacity now that clearly, fossil fuels are more expensive…

This is the treadmill, you keep spending billions, and you don’t make any more money, instead you start making less.

Past a certain point, every billion spent on more renewable production probably costs 2-3x more in “unexpected” depreciations, necessary batteries and new power lines.

The public keeps hearing of billions of “investments”, and still blackouts keep looming and the electric bills keep rising.

An Unavoidable Fate?

Climate alarmists will tell you this is the price to pay for reducing carbon emissions.

Actually no, they will deny it is true, and say it a worthy sacrifice anyway in the same breath, never mind the contradiction.

Considering the amount of narrative control and political influence such positions have, we can expect most of Western governments to keep running on this treadmill for a while.

This is part of the Green Leap Backward I warned about a while ago:

This means more “investing” in green energies, more burning of capital, with no more power production.

Investing takeaway

Any country deeply committed to the Green Leap Backward, and trapped on the energy treadmill should be avoided for investment purposes.

The incinerating of capital will only accelerate for ideological reasons, and at the end of the day, it is likely to be YOUR capital fueling this pyre.

Photo by Jp Valery on Unsplash

This also means that industrial activity in particular will suffer greatly.

For proof, look no further than Germany: A quarter of companies in Germany is planning on moving production abroad.

“Not a single German company that supplies the country's automobile industry plans to increase investments in Germany, but 27% plan to do so abroad.“

And its energy intensive industries (chemical, pharmaceutical, steel, etc…) keep contracting without end.

This is great if you own stock in their competitors. So I think I will look at industrial companies able to benefit from this suicide of the European industry.

The other big winner will be hydropower utilities.

It is “green”, so it stays safe from all the future carbon taxes. But it can produce on demand, so ultimately can choose to outcompete batteries. And it has the most production in winter, when power is most direly needed.

One last irony to this whole madness: making wind turbines and solar panels is very energy intensive, needed to make all of this steel and silicon and concrete. So the more stuck you are on the treadmill, the more expensive renewable gets, or the more you rely on them being produced abroad, in countries producing them using coal.

So the quicker the treadmill, the less efficient at reducing emission renewable gets…