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!