Energy Revolutions Hidden In Plain Sight: Part 3 of 3 -- Policy

Energy Revolutions Hidden In Plain Sight: Part 3 of 3 -- Policy
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A note about this three-part series:

Policymakers, tech plutocrats, and a cacophony of pundits serially talk about revolutions in energy and technology. “Revolution” is a powerful word but is so overused in these domains that it’s lost meaning. But real revolutions, by definition “radical and pervasive changes,” do matter. They create pivots in history. Using the proper meaning of the word, this series explores the realities of the only three energy revolutions that have happened in modern history.

In Parts 1 and 2 of this series we saw that technology was the primary cause of the only revolution in energy supply and the only revolution in energy demand in modern times. In both cases, the animating technologies came out of left field. So in this last part of the series, we turn to the third question: Has there been a revolution in energy policy?

Since government programs were not responsible for either the supply or demand revolutions, we look instead to spending as the metric for a “radical and pervasive change.”  In that regard, the only policy revolution since WWII was the passage of the 1975 Energy Policy and Conservation Act (EPAC). Not only was the EPAC Act a radical policy formulation—forged in the aftermath of the 1973-74 oil embargo that shocked the nation, tripling oil prices overnight—but it also established the framework followed by essentially all energy policies since.

The EPAC Act mission came down to this: avoid, conserve or replace hydrocarbons. It is, of course, beyond obvious that the driving force in energy policy today has morphed from strategic security to concerns about global warming, specifically whether we should use hydrocarbons at all. But that is a distinction without a difference. The policy locus remains the pursuit of alternatives to hydrocarbons.

 

The passage of the EPAC Act spawned 40 years of policies resulting in well over a half a trillion dollars of cumulative government spending on energy programs to avoid hydrocarbons.1 This is a policy revolution. The money could have funded a half dozen more Apollo programs or several missions to Mars.

After all that, consider the state of affairs: Today, the nation still gets over 80% of all energy from hydrocarbons. And the vast majority of the rest comes from old nukes and hydro dams. Given that the mission of all the policies and subsidies has been to drive down costs of alternatives, it is notable that wind and solar remain astonishingly expensive compared to hydrocarbons. Stripped of hyperbole, the ‘naked’ engineering costs are revealing.

At today’s capital costs, $1 million worth of a modern wind turbine will produce, over 30 years of operation, about 100,000 barrels of oil equivalent (BOE) of energy. And $1 million worth of today’s rooftop solar panels will produce, again over the same 30 years, less than 50,000 BOE. Compare this to what $1 million worth of a shale rig produces over 30 years of operation: at least 400,000 barrels of actual petroleum, or 400,000 BOE of natural gas.

Energy Produced Per $1 Million Of Hardware 30-Year Output: Barrels of Oil Equivalent (BOE)

Data sources: NREL, AWEA, RBN Energy

Yet, despite big subsidies to stimulate rapid growth in solar and wind, neither has yet moved the meter. Last year solar panels supplied 0.3% of America’s energy; wind turbines supplied 2%. But given decades of media adulation and policy promotion, it’s not surprising that surveys show most people think those sources make a 10-fold greater contribution.

Biofuel, an early but now largely abandoned darling of alternative energy darling has not moved the meter either. The Bush administration gave us today’s massive biofuels subsidies, an idea pioneered by the Clinton administration. Set aside the fact that burning corn-ethanol actually increases emissions of climate-implicated gases, and consider that biofuel mania alone has cost consumers at least $80 billion, as my Manhattan Institute colleague Robert Bryce has documented.

For all that money—and despite the fact that 40% of America’s corn harvest is now turned into fuel—ethanol today displaces less than 4% of U.S. transportation fuel. Do the math. Even using 100% of the nation’s crop would have de minimis relevance. This is a far cry from those heady days of alternative energy enthusiasm a decade ago when Silicon Valley legend Vinod Khosla gushed: "I have no doubt that 100% of our gasoline use can be displaced [by biofuels] in the next 25 years … I expect to see a major disruption in the oil business."

None of this has deterred post-hydrocarbon enthusiasts from urging further expansion of government alternative energy programs. All that’s needed, the argument goes, is a final push, an energy version of the Manhattan Project or the Apollo Program.

But powering an entire economy is not like putting a few men on the moon. It’s like putting everybody on earth on the moon—permanently. One might imagine spending a fortune to subsidize millions of moonshots, but that money wouldn’t lead to new physics that could obviate the staggering cost of escaping earth’s gravity. There is no new physics in energy either—at least not since 1939 (first fission reaction), and 1954 (the first photovoltaic cell).

The cost trends of the past four decades clearly show that the radical cost improvements in solar and wind are over. From 1980 to 2005 or so, wind and solar tech saw gains in underlying efficiencies that rapidly drove costs down some 10-fold. But the data show those gains have been far slower in the past decade. And every expert forecast sees even smaller incremental gains for the foreseeable future.

Reductions In Solar & Wind Costs: Historic & Forecast: Normalized to 1980 = 100

Data sources: IEA 2016 Wind Task Force, DOE SunShot Photovoltaic Pricing Trends

Solar and wind technologies are now on the curve of diminishing returns. (Biofuels long ago crossed that Rubicon. And, for the record, batteries are on the same diminishing cost curve too.) The fact is, going forward, every incremental policy dollar will yield less progress than in the past.

This is an entirely normal phenomenon. Throughout history, engineers achieve big gains in the early years of a technology’s development, whether wind turbines, aircraft engines, steam ships, photovoltaic cells or computer processors. With time, the engineering starts to approach physics’ limits. Bragging rights for gains in efficiency (or speed or any other equivalent metric) shrink from double-digit percentages to fractional changes. These days aircraft turbine manufacturers eagerly tout single-digit percentage gains in fuel efficiency because those machines are now near the thermodynamic limits of how much heat can be converted to thrust.

The physics of the universe we inhabit means we can never capture 100% of the potential energy contained in any source, whether photons arriving from the sun, or the kinetic energy of moving air. The boundary for a wind turbine, called the Betz Limit, permits capturing almost 60% of air’s kinetic energy. Modern turbines already exceed 40%. That leaves some gains to be made, but nothing revolutionary. And there aren’t any game-changing economies of scale left for the underlying components either—concrete, steel, fiberglass—which are already in mass production.  

Similarly, engineers rapidly drove photovoltaic cells down the declining cost curve in the early days. Now cells are bumping up against limits. The Shockley-Queisser Limit defines how much of the energy in photons photovoltaic cells can convert into electricity: 33%. The most recent announcement of a 26.3% efficient silicon cell is perilously close to that boundary. As with wind, there are precious few cost reductions available in the associated materials (silicon, wires, glass) already being mass-produced. To be sure, scientists are finding new non-silicon options—e.g., the exotic-sounding perovskites—that offer yet further incremental cost reductions. But all options have similar physics boundaries. Even the most exotic and expensive laboratory cells can’t beat a roughly 50% boundary. There are no 10-fold gains left.

Meanwhile, the technologies that unlocked shale oil and gas are still in early days with 10-fold gains still available before seeing physics limits. Several years ago the Energy Information Administration initiated monthly tracking of the rapid progress of drilling productivity (energy output per rig) in what amounts to the nation’s newest energy industry. (For more on that, see Part 1 in this series.)

Shale productivity has been improving by an average of at least 20% a year over the past half-dozen years. In other words, output per rig is doubling every three years. Last year rig productivity jumped from 26% to 41% across the various shale plays. Contrast this with the latest announced solar cell productivity gain that advanced the old record by 3%.

As a recent Federal Reserve study showed that the “conundrum” that the small drop in the amount of shale energy produced last year—less than 10% despite over 60% fewer rigs in operation—can only be explained by big gains in technology. Of course there are physics limits for shale too.

Though it’s a far less studied subject compared to solar and wind, the underlying geophysics points to a roughly 500% gap between what today’s rigs can extract compared to what nature ultimately permits. Engineers are on track to close that gap as Shale 2.0 emerges with the application of digital tools and software. Eventually shale tech will reach the diminishing returns curve. But that day is likely at least a decade away. That means the spread between conventional and alternative costs is widening, not shrinking.

These physics and engineering realities are precisely what led Google engineers to abandon a major project to develop renewable tech cheaper than coal. Writing about what they learned, those engineers observed: “Incremental improvements to existing [alternative energy] technologies aren’t enough; we need something truly disruptive ... We don’t have the answers. Those technologies haven’t been invented yet.” Bill Gates, who has devoted much of his post-Microsoft life to thinking about and investing in energy tech has, in numerous interviews, said much the same. To find energy revolutions we will need to make new discoveries in the underlying physical sciences. That can only emerge from basic research, not from subsidizing more of yesterdays’ technologies.

Put another way: The Internet didn’t emerge by subsidizing the dial-up phone; nor was the transistor inspired by subsidizing vacuum tubes, nor the automobile inspired by railroad subsidies. There’s a long list of such analogies.

But just as there are immutable laws of physics, so too are there immutable laws in politics. Subsidies along with their economic inverse, taxes, are universal across all forms of government throughout history as a means to influence businesses, technologies, or behaviors. America subsidizes trains, farms, exports, housing, fishing, shipping, roads, etc. and etc. 

However, sensing that the scale of recent energy subsidies may have exhausted political tolerances, some policymakers on both sides of the aisle have turned to the idea of a carbon tax. Even some noted economists have embraced the idea. And, as noted above, the motivation—worries about climate change—alters nothing about the underlying physics and economics of what is possible with energy. 

Stripped to the two core conceits of the carbon tax we find the same goals that were framed in the decades-old EPAC Act: reduce society’s use of traditional fuels, and give money to “innovators” to come up with magical alternatives. What exactly is it that the carbon tax supporters have not learned from history?

Whether the handouts come from taxes or subsidies, the physics of today’s technologies remains unchanged. As for suppressing hydrocarbon demand, we have good data on how big a tax must be to make a difference. When petroleum was north of $100 a barrel, global demand softened a modest few percent. No sane politician is proposing a tax that would double today’s price. And a politically tolerable carbon tax that moves prices up only slightly won’t change demand a scintilla.

Policymakers are left with an inconvenient set of facts. The world’s nearly 8 billion people and $80 trillion economy depend on hydrocarbons to supply 85% of global energy; oil itself fuels 98% of transportation. Only radically new science has any prospect for meaningfully changing those realities. Fortunately for taxpayers, policymakers could pay for a lot of research in the coming decades for a tiny fraction of the massive subsidies already squandered on hardware.

1 Doubt that number? Google search the Department of Energy’s budgets, and the myriad of analyses of serial federal and state energy subsidies, grants, and programs.

Mark P. Mills is a Manhattan Institute senior fellow.

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