Big Bump in the Renewable Energy Road

I have been of the opinion that wind and solar power sources were the solutions to secure our future to move away from fossil fuels. It turns out that may not be the case.

Leight Goehring and Adam Rozencwajg are the Managing Partners of Goehring & Rozencwajg which is a fundamental research firm focused exclusively on contrarian natural resource investments with a team and over 30 years of dedicated resource experience.

My friend and colleague during my employment years at Dalhousie, David Tindall, sent a link to a video clip posted by Goehring & Rozencwajg titled, The Most Important 2000 Years of Energy History shares convincing evidence that “not only do renewables fail to accomplish their stated goals, to reduce the CO2 emitted into the atmosphere, but factoring in their energy return verses their energy investment characteristics, we stated that the investments made in renewables will make little progress in solving the CO2 problem. In fact, given the terrible energies efficiencies we made the bold prediction that renewable could very well make things worse as we progress through this decade and what’s happening today involving the rapidly developing energy crisis is a prime example of what the future could very well hold.”

Meet the Experts

Leigh R. Goehring
Managing Partner

Mr. Goehring has 30 years of investment experience specializing in natural resource investments. From 2005 until the end of 2015, Mr. Goehring was the portfolio manager of Chilton Global Natural Resources Fund. This dedicated natural resources focused hedge-fund grew to over $5 billion of assets under management at its peak.

Prior to joining Chilton Investment Company, Mr. Goehring served as the manager of the Prudential-Jennision family of natural resources funds between 1991 and 2005. These funds accumulated over $3 billion of assets under management at their peak.

Mr. Goehring started working on Wall Street in 1982 in the Trust Department of the Bank of New York. He holds a Bachelor of Arts degree with a major in Economics and a minor in Mathematics from Hamilton University.
Adam A. Rozencwajg, CFA
Managing Partner

Mr. Rozencwajg has 15 years of investment experience. Between 2007 and 2015, Mr. Rozencwajg worked exclusively on the Global Natural Resources Fund at Chilton Investment Company with Mr. Goehring.

Prior to joining Chilton Investment Company, Mr. Rozencwajg worked in the Investment Banking department at Lehman Brothers between 2006 and 2007.

Mr. Rozencwajg holds a Bachelor of Arts degree with a major in Economics/Philosophy from Columbia University.

Mr. Rozencwajg is a CFA charter-holder.

In this article, I plan to share what I’ve learned about the viability of various energy sources and frame that in the context of Gross Domestic Product (GDP) per capita. Let me start by pointing out I am not an energy or economic expert but the research by Goehring & Rozencwajg seems obvious to me.

Your knee-jerk reaction might be that energy and GDP are not linked but as it turns out, the growth in GDP hinges on access to energy. There are other factors but I think as you read on you’ll understand why I think our efforts to reduce CO2 emissions by transitioning from our dependency on fossil fuels to wind and solar energy will not be a viable solution. That comes as new news to me so if you’re surprised, join the club.

Energy Return on Investment (EROI)

Energy Return on Investment (EROI) is a ratio that measures the amount of usable energy delivered from an energy source versus the amount of energy used to get that energy resource.(1) It is a pretty easy calculation. You just need to compare the cost of an energy source (ie. Nuclear, Hydro, Coal, Closed-Cycle Gas Turbine, Solar, Thermal, Wind Turbine, Biomass, or Photovoltaic) to the revenues gained from selling the energy produced. Obviously, the revenue must be greater than the cost of the plant or it is not financially viable.

In summary:

  • EROI ratio measures energy inputs compared to energy outputs.
  • Sources of energy are considered “energy sinks” if their EROI is less than one.
  • The break-even point for an EROI score is seven.

Goehring & Rozencwajg divide their argument into two sections: the first is the EROI from known energy sources with which we’re all familiar, and the second is the change in people once when their country’s Gross Domestic Product per capital improves as a result of the use of energy to grow the economy.

Most of today’s energy comes from steam turbines which use fossil fuels such as coal, oil, or gas. As shown in the table, the EROI is 28 to 30 which is considerably higher than solar or wind. Hydro is has a higher EROI and has the advantage of being a clean energy source but also tends to disrupt ecosystems.

Nuclear Energy still tops the list and even though has a bad reputation, it emerged at a time when we still thought asbestos was a good insulating material. We have learned a lot since that time and the science around creating safe nuclear plants is light years ahead of where it was 50 years ago. Goehring & Rozencwajg argue it is our best option for the future. I personally think their argument is sound.

By the numbers, nuclear certainly makes sense to power the electric vehicles of the future, homes, transportation, industry, etc. Here in Canada, we have a highly educated workforce and although the resistance to transition from fossil fuels to nuclear energy will be daunting, it is clearly achievable. Over and over, the David Suzuki Foundation reminds us that every job lost in fossil fuels is replaced by 42 new jobs in other industries.

As I think about this option, I see a minimum of one nuclear plant, built in a safe location in every province and territory, producing enough energy to meet the needs of the provincial jurisdiction with lots of surpluses to add back to the grid for export to our energy-hungry neighbor to the south and perhaps overseas. We could become a global leader and as we build expertise can help the rest of the world to have access to inexpensive energy with a high EROI and reduced environmental impact than what we are doing today.

As sound an argument that our best current energy option is nuclear, I think the more important discovery is how unlikely solar and wind are likely to be part of our future energy needs. My guess is they will continue as an option on a small scale such as powering individual homes where the owner funds the acquisition and installation and once that cost is amitorized over time, they will be powering their homes for pennies with perhaps a little surplus to sell back to the grid.

A question I wonder is why are we so committed to solar and wind power as the best option for the future? They are both tangible and easy to explain but if as Goehring & Rozencwajg argue, they have no chance of addressing future needs, it seems to me those in a position of governance are aware this is the case. I’d personally like to learn more about the state of nuclear power so I confident my advocacy for this as a power source is both a sound and ethically correct decision.

The second argument Goehring & Rozencwajg make is about the way that humanity deals with energy and their conclusions are based on history evidence. I found it interesting that up until 1700 AD, energy was really based on the back-breaking effort of mankind. There were not engines and devices to help man get the job done. I personally find this remarkable when I see manmade structures that date back decades. Those are unbelievable human achievements.

The industrial revolution started early in the 1700s with the invention of the steam engine. It was primitive and improved on within 60 years which enhanced it’s efficiency. The steam engine was behind advances in the textile industry, transportation, and the primary catalyst for the transition from human powered to machine power.

The nations which adopted modern inventions like the steam engine became more efficient with their capacity to create consumable goods and saw their GDP grow. Many of those nations continue to be the most economically influential today.

There are many additional milestones which influenced the growth of the GDP in advanced countries but I’m sure you get the idea. All the advances hinged on access to inexpensive energy to drive the “engines” of the day. The more interesting value is the GDP per capita. Those working in these lucrative industries found their individual fortunes improved and they were able to purchase goods more easily and live more comfortable lives.

Allowing for the conversion of money to the value as we see it today, historically there is a tipping point of $2,500 when below that value, people do not see much change in the quality of their lives. They are just earning enough to get by.

However, once they pass that point they become consumers and between the $2,500 and $20,000 GDP per capita, as wealth grows, consumption grows. At $20,000 the consumption tends to level off. To put this is context, the Canadian GDP per capita stands at $43,241 in 2020. This doesn’t mean everyone has access to this level of wealth but overall it is a measure which places Canada as one of the weather nations on the planet.

So what happens when the GDP per capital exceeds the tipping point of $2,500? The short answer is that individuals have disposable income for the first time and begin to spend of consumer goods to enhance their quality of life. That translates to better living conditions, improved diet, better personal transportation, better home heating and/or cooling depending on location, travel for leisure, and so on. The improved diet is interesting as people tend to become more meat eaters as their wealth improves.

To put these changes in context, all the ways in which afluent societies spend to improve their lives, increase their consumption of energy. There is direct consumption such as home electricity, fuel for vehicles, etc. and indirect consumption such as the energy it takes to create materials used in home construction, auto construction, etc. The point is that as economies grow, the need for more energy grows.

There is some irony in this human trend as all the conversations, resolutions, and plans to reduce CO2 in the atmosphere hinge around the global reduction in energy consumption, which historically is highly unlikely based on the ways that economies have grown in the past. There is simply no convincing argument to suggest humanity will make do with less. With that said, perhaps the global food chain consumes too much energy to continue?

What is the obvious conclusion? The only way we can deal with climate change is a move to efficient energy sources in the future. The only current energy source with a high EROI is nuclear power. Now is the time to invest in this form of energy. It is happening in Ontario so it can anywhere.

With the motivation of ensuing humanity survives, the odds are we’ll discover other efficient energy sources in the future but it is my opinion that we need to become serious now about maximizing what we already have within our grasp.

One Reply on “Big Bump in the Renewable Energy Road”

  1. Nuclear power is very ironic for me.

    Canada has vast reserves of fossil fuels, so we sell a lot of the stuff that is villainized lately.

    Canada also has “The Great Canadian Shield” which is possibly the least risky place to put nuclear plants.

    Nuclear can be a great design, but as we saw with Japan recently… you shouldn’t put nuclear plants in earthquake prone areas or tsunami prone areas.

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