Smart money in alternative energy?Part 4: avoiding the duds using EROEI

April 12th, 2007

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Continuing from yesterday?s article, Smart money in alternative energy?Part 3: centralised or distributed power?, today we will look at a very simple but very important concept for evaluating alternative energy businesses?Energy Return On Energy Investment (EROEI). Understanding of this idea is certainly helpful to prevent you from wasting your time by even considering outright bad investments.

According to the Wikipedia, EROEI is the

… ratio between the amount of energy expended to obtain a resource, compared with the amount of energy obtained from that resource.

Simply put, if in order to produce one unit of energy, more than one unit of it is expended, then this process is an energy sink. That is, that process is unviable as an energy source.

A very good way to illustrate this concept is via an example of a real life alternative energy business. There is a company in Australia that is in the business of producing electricity through the burning of garbage as fuel. Is this a viable energy business? Well, consider this: in order to burn garbage as fuel, you need to assemble vast quantities of garbage from all around town and transport them to the power plant. This means garbage trucks are required to drive to each household to collect the garbage. What does garbage truck run on? Petrol. Thus, by the time all the garbage is put together at the power plant, a lot of energy is already consumed in the form of petrol consumption by the garbage trucks. Obviously, the energy produced through the burning of the garbage is less than the energy that had been previously consumed. In this case, the EROEI tells us that this process is an energy sink and is unviable as an alternative energy business in the long run!

So, watch the EROEI!

  • Wonderchild

    The publication’s name should be changed to Investor MIS-Information. To correctly calculate EROEI, one should only utilize expenses that are NEW & essential to a project. Thus the fuel utilized by garbage trucks picking up the garbage/fuel from homes & delivering it to a site likely closer than the site currently used for dumping the garbage is not a valid expense. Any return in the form of energy, etc. is a PLUS because you are currently paying all of the petrol expenses anyways. Grade 3 mathematics is not that difficult except apparently to writers employed by Investor MIS-Information.

  • Wonderchild

    The publication’s name should be changed to Investor MIS-Information. To correctly calculate EROEI, one should only utilize expenses that are NEW & essential to a project. Thus the fuel utilized by garbage trucks picking up the garbage/fuel from homes & delivering it to a site likely closer than the site currently used for dumping the garbage is not a valid expense. Any return in the form of energy, etc. is a PLUS because you are currently paying all of the petrol expenses anyways. Grade 3 mathematics is not that difficult except apparently to writers employed by Investor MIS-Information.

  • …one should only utilize expenses that are NEW & essential to a project

    Wrong! The whole point of EROEI is not about expense. It is about energy usage. If we use your logic, then your EROEI will be far greater than 1, possibly even higher than oil! The point is that burning garbage for energy fails to closed loop test: if the energy produced is then feed back into the energy for the garbage truck to collect the garbage, will there still be any left over? Or will it result in a shortage which will require more energy produced from externally?

  • …one should only utilize expenses that are NEW & essential to a project

    Wrong! The whole point of EROEI is not about expense. It is about energy usage. If we use your logic, then your EROEI will be far greater than 1, possibly even higher than oil! The point is that burning garbage for energy fails to closed loop test: if the energy produced is then feed back into the energy for the garbage truck to collect the garbage, will there still be any left over? Or will it result in a shortage which will require more energy produced from externally?

  • Tax Lawyer

    This makes no sense to me. All that matters is whether dumping the trash which must be collected by municipalities anyway, will generate more energy from burning rather than dumping?

    Rather than a sinkhole for energy, burning the trash is the equivalent of the accounting equivalent of “scrap” Scrap Value

  • Tax Lawyer

    This makes no sense to me. All that matters is whether dumping the trash which must be collected by municipalities anyway, will generate more energy from burning rather than dumping?

    Rather than a sinkhole for energy, burning the trash is the equivalent of the accounting equivalent of “scrap” Scrap Value

  • Hi Tax Lawyer!

    Rather than a sinkhole for energy, burning the trash is the equivalent of the accounting equivalent of ?scrap? Scrap Value

    Ask yourself this question: can the world’s energy be solved by burning trash? It’s true that electricity is a by-product of burning trash, but this is not the point. The whole process itself is consuming more energy than it produces.

  • Hi Tax Lawyer!

    Rather than a sinkhole for energy, burning the trash is the equivalent of the accounting equivalent of ?scrap? Scrap Value

    Ask yourself this question: can the world’s energy be solved by burning trash? It’s true that electricity is a by-product of burning trash, but this is not the point. The whole process itself is consuming more energy than it produces.