by David Crane, consultant on information technology
Energy analysis is a technique
for looking at physical activity
within an economy. The main
principles were developed in
the 1970s following the 1974
oil crisis and a sudden awareness
of the importance of fossil
fuels in nearly every aspect of
our lives (or, at least, our
lifestyles). Similar issues look
to be coming up again, with the
recent debates in the US about
whether to open up new oil
reserves in environmentally-sensitive
areas, and even a
reconsideration of nuclear
power, long out of favour, as a
viable alternative.
The ECCO model uses energy
analysis theory as one of its
main tools, and many of the
variables in the model are
expressed in energy terms.
This article lays out the fundamental
concepts of energy
analysis.
In discussing energy analysis,
it is important first of all to
define energy. Energy is an
abstraction, designed to
account for the outstanding
difference between the initial
and final state of a system to
which some change has
occurred. We call this difference
the energy content of the
system. Energy exists in several
different forms, and, when
effecting change to a physical
system, will generally shift
between these forms. Kinetic
energy is energy as applied in
moving physical objects.
Electromagnetic energy is
applied to the vibrating modes
of sub-atomic particles, and
can be experienced as radio
waves, visible light, x-rays,
electric current, etc. Potential
energy refers to energy stored
in some form, capable of being
released. A nickel-cadmium
battery possesses chemical
potential energy, capable of
being released as electricity.
Finally, heat is a form of energy,
the form to which all other
types of energy eventually
degrade. Energy is governed
by a set of physical laws,
expressed last century in the
discipline of thermodynamics.
These are discussed briefly
below.
THE FIRST LAW OF
THERMODYNAMICS
The First Law of
Thermodynamics states that
energy can neither be created
nor destroyed, within a closed
system (defined as a system in
which no energy or mass may
enter or leave). Energy cannot
be thrown away. In applying
this law to an economic analysis,
we must determine the
extent to which the system of
study is closed.
For example, the global economy
is far from a closed system.
There is a significant exchange
of both matter and energy
between it and the natural
world. Even if we treat the
economy and environment as a
single system, there is a sizeable
exchange of energy, mainly
influx of solar radiation and
re-emission of heat to space.
Meteorites represent a small,
arguably insignificant, transfer
of matter between this system
and its environment.
At a national level, the system
is even more open. That is, the
size of the matter and energy
transfers is greater, relative to
the overall system size.
Nonetheless, the First Law
contains important consequences
for economic systems,
providing an absolute physical
limit on the availability of
energy to a system, and the
assimilation of "waste" energy
and products. Of course, other
more pressing limits, whether
physical or social in origin,
may impinge more directly on
the system, meaning that those
imposed by the First Law may
not be reached.
THE SECOND LAW OF
THERMODYNAMICS
The Second Law of
Thermodynamics is more
directly concerned with the
process of transformation,
rather than the natures of the
initial and final states. As such,
the consequences that it has
upon an economic system are
more pressing than those of the
First Law.
The Second Law raises the
question of energy quality.
Energy cannot be created or
destroyed, but it can be made
more, or less, useful. That is,
the work (in a rigorous physical
sense) that can be done by
that energy is more than simply
a function of the energy content.
In order to be able to discuss
this, a second abstraction,
called entropy, was developed.
Entropy is a measure of the
degree of disorder in a system.
For example, salt, with its
highly regular lattice arrangement
of atoms, has much less
entropy than the same salt dissolved
in water. A house has
less entropy before the roof
falls in than after. A marching
band has less entropy when all
dressed in uniform and marching
in time than when relaxing
in their homes afterwards. As a
system's entropy increases, its
degree of order, or information
content, will decrease. This
will not necessarily alter the
energy content of the system,
and hence a closed system may
undergo changes in entropy
content.
The Second Law states that, in
effecting any change to a system,
the overall level of
entropy in the system will
always increase. It is only possible
to reduce the entropy of
any part of a system by effecting
a greater increase in the
entropy elsewhere. For example,
a rotting house may spontaneously
collapse, but a reversal
of the process (i.e. rebuilding
the house) requires an
external input of an energy
resource, the entropy content
of which is increased.
Some of the forms of energy
discussed above are more
entropic than others (that is,
they are less ordered). Of
these, heat has the highest
entropy, and it is for this reason
that all other forms of energy
eventually disperse as heat. No
transfer of energy is totally
efficient, and the "lost" energy
is usually dispersed as heat.
Labelling the energy as "lost"
is simply a value judgement.
The energy is not destroyed,
but is transformed into a form
where it either cannot be, or
simply is not, used by the
economy. Of course, this distinction
is essential in an economic
analysis.
Examples of energy "loss"
include the heating of machine
parts through friction as they
rub together, the heating up of
electrical transmission wires,
or the heat generated by a
human, or animal, during physical
exertion.
ENERGY QUALITY
It has been calculated that the
energy required to heat a bathtub
of water from room temperature
to 60 Centigrade is
equivalent to the work exerted
by a lumberjack working for
approximately 19.5 hours
(Slesser 1978). This comparison
is made here in order to
highlight the notion of energy
quality. The hot bathtub consists
of high entropy energy,
the lumberjack's work of low
entropy energy. Although the
lumberjack and bathtub have
equivalent energy contents, the
lumberjack may use his/her
energy to effect a larger
amount of work.
Energy quality is reflected in
the perceived economic value
of the energy. In rugged pioneer
country, offering to pay a
lumberjack for a long day's
work with a bathtub full of hot
water would be poorly appreciated.
To look at the situation
the other way around, though,
if one desired a hot bath, one
would hardly go about it by
hiring a lumberjack to stir the
water for 19.5 hours. High
quality energy is not necessarily
more valuable than low
quality energy in the economic
context, but, in general, low
quality energy is suited to a
smaller number of uses.
In all modern economies, the
energy exerted by the human
workforce is negligible
(Slesser 1978). The work
equivalent of a lumberjack
working for a full day can be
purchased in the very high
quality form of electricity for
about 6 pence. The human
workforce, even in "manual"
labour, is employed primarily
to make decisions rather than
for the physical work it actually
does.
The bulk of energy utilised by
the global economy at present
is in the form of three fossil
fuels, namely oil, coal and natural
gas. The energy qualities
(thermodynamic availability)
of these three are all very similar.
Hence, substitution
between them can be calculated
accurately with reference
only to the energy content. In
ECCO this is the "reference
energy quality", by which all
other energies like electricity
(higher quality) or biomass
(lower quality) are measured.
For these reasons, a number of
practical decisions have been
made in the construction of the
Irish ECCO model (and other
ECCO models). Firstly, fossil
fuels are measured solely in
terms of energy content, and
are assumed to be substitutable
(unless explicitly stated otherwise
in the model structure).
Where we look at substituting
fossil fuels and electricity, as in
the heat pump or vehicular fuel
cell technologies, explicit coefficients
for commensurating
the two are developed, generally
from first principles or the
engineering literature.
Secondly, electrical energy is
measured separately, and any
assumptions made about the
substitution between thermal
and electrical energy are based
on empirical observations, not
an equivalence between energy
contents. Thirdly, other energy
sources, such as nuclear fuels
and renewable sources, are
treated in terms of fossil fuel
equivalents. As these sources
are currently used only to generate
electricity, that measure
is made by equivalencing the
inputs required per unit electrical
output. These inputs are
based on empirical data, i.e.
current technological practice.
All forms of electricity, generated
from whatever source, are,
of course, fully substitutable
once entered onto the national
grid.
These simplifying assumptions
present no problem when
examining the current technology
of energy supply and
demand. However, were radical
energy policies, involving
different qualities of energy
carrier, to be explored by the
model, the question of energy
quality would have to be compiled
in terms of the chosen
reference qualities mentioned
above.
ENERGY VERSUS MONEY
AS A NUMERAIRE
Having provided a definition
of energy, it is necessary to
establish the reasons for adopting
it as the numeraire for the
ECCO model. After all, most
economic statistics use money,
and the adoption of an alternative
involves a lot of extra work
and inconvenience to the
model builder.
Money, like energy, is a human
invention, an abstraction
designed to represent transactions
in the messy real world in
a neat, symbolic way. Money is
an opinion. Or rather two opinions,
that of the seller, and that
of the buyer. The price of the
good is arrived at by a process
that "evenly distributes the disappointment",
in the language
of traditional economics.
Being an opinion, money has
two disadvantages. Firstly, it is
subject to change over time as
a result of different perceptions
of the world, which may or
may not be grounded in reality.
If they are not, then prediction
of these perceptions is very difficult,
if only because the cultural
world is capable of
changing much more rapidly
than the physical world, and is
harder to quantify.
The second disadvantage of
money, as an opinion, is that it
has no international standard.
Each nation sets up its own
currency, and the coefficients
relating these (the exchange
rates) vary considerably, and
quickly. Further, money is
applied somewhat arbitrarily to
work in most modern
economies. In an economic
model using money as a
numeraire, there is no method
for accounting for voluntary or
unpaid work, such as childraising
and housework, or for
work paid in kind (ie work
paid for by other work).
Energy is also an abstraction,
but one grounded in a more
rigorous school of thought.
Certainly, more than one unit
for energy has enjoyed passing
fashion; the calorie has been
superseded by the joule over
the last twenty or so years. The
important distinction, though,
is that there are international
standards for energy units, due
to the precise first-principles
methods by which they are
defined. Anywhere, at any
time, one joule is capable of
moving a weight of one
Newton by a distance of one
metre.
So, the "cost" of goods can be
measured by considering the
energy that went into their
making. Note that this is not a
valuation of the good, in that it
does not consider the utility of
that good to the system. It is
simply a measure of the inconvenience
that was undergone
in the past to create that good,
or, more generally, the inconvenience
involved in replacing
it.
This distinction is perhaps best
clarified by illustration. To
build an ocean liner would
require an energy input of
approximately 1.2 PetaJoules
using current shipbuilding
technologies. In other words,
the embodied energy content
of the liner would be 1.2 PJ. As
a simplifying assumption, let
us assume that shipbuilding
technology has not altered
greatly in the last thirty years,
and the estimate of embodied
energy is valid over that period.
During the last thirty years,
however, air transport has
increased in volume, and partially
replaced sea transport.
Hence, the demand for ocean
liners has dropped, and the
money-value of the liner has
probably dropped too. This
decline has not resulted directly
from changes in shipbuilding
technology, but from wider
interactions within the transport
sector and in social behaviour.
Hence, the money-value of a
good is subject to a wide number
of influences. Further,
some of these are extremely
difficult to quantify. The
embodied energy numeraire, in
contrast, is relatively unchanging.
Thus, for the purposes of
the ECCO study, the money
numeraire is too unpredictable.
For other types of economic
analysis, however, this compaction
of multiple unknowns
into a single value, even
through an imperfect market
mechanism, may be highly
attractive.
Energy, then, is not subject to
the wild fluctuations that
money experiences. Then
again, neither is mass. Why not
set up an accounting system
based on the mass of goods?
The answer lies with the second
law of thermodynamics,
and a concept known as substitutability.
Only through energy
can one material be substituted
for another. From the second
law of thermodynamics it can
be seen that as energy is used
in the manufacturing process,
in other words making something
with a lesser degree of
entropy than its constituent
parts, the entropy of the energy
used increases. Thus it cannot
be used again: it is non-renewable.
This is not to say that energy is
scarce - the solar flux impinging
on the Earth's surface currently
provides ten thousand
times the energy used by all
human activities. Were sufficient
suitable human-made
capital present to exploit this
energy, then it would be capable
of supplying human needs
(or wants) practically indefinitely.
However, because energy use
is irreversible, it places a real
physical limit on the growth of
economic systems, and in
using energy as a numeraire
we are explicitly facing this. In
money-based economics, there
is no such limit applied;
money can be created by any
government capable of operating
a printing press. Thus
money-based economics fails
us in not recognising important,
insurmountable limits to
economic growth, and energy-based
economics does not.
The other important property
of energy is that it is unsubstitutable,
meaning that no other
physical resource is capable of
performing the functions currently
effected by energy. In
this it is unique. Metals can be
substituted by plastics or
wood, ceramics by glass, etc.
And, provided that sufficient
energy is available, no other
natural resource is ever depleted,
it simply increases in
entropy. The factors limiting
the accessibility of highentropy
resources lie with the
ability of the economy to provide
the capital and energy
supplies needed to access
them, not with an insuperable
physical limit deriving directly
from thermodynamic principles.
In other words, the problem
lies with distribution of
finite capital and energy supply
capacity within the economy.
In concluding this section,
then, the ECCO methodology
is concerned with addressing a
particular economic issue,
namely how a national or
large-scale economy's growth
rate is constrained by the physical
limitations of its production
processes, and how these
physical processes underlie
much of what we would normally
classify as 'economic'
factors. The methodology can
be usefully applied in a wide
variety of contexts, and works
best when a narrow sectoral
analysis is subsequently broadened
out to incorporate linkages
with other sectors, as in
the case of the renewable
energy study presented in
this paper. In performing an
analysis of these underlying
processes, the choice
of numeraire is important,
as energy-based accounting
provides an absolute yardstick
that monetary numeraires cannot.
Two numeraires, money and
embodied energy, have been
examined here, in terms of
their ability to express the
nature of this problem. The
money numeraire is discarded,
because of its sensitivity to too
many unquantifiable parameters,
and its non-conservative
nature. Embodied energy, in
contrast, is shown to be well
suited to this task, given the
caveat that energy quality may
need to be explicitly introduced
in some unusual circumstances.
MODELLING DEPLETABLE
RESOURCES
It might be useful to illustrate
the application of energy
analysis principles to the
extraction of depletable energy
resources namely oil, gas
and coal. The ECCO model
uses the same approach to all
three. Firstly, it is assumed that
a variety of grades of any particular
resource exists and that
the distribution of grades is
log-normal, tailing off at the
lower end towards the background
level found in the
Earth's crust. (With a log-normal
distribution, if the cumulative
amount of the resource
already extracted is plotted on
the x-axis of a graph using a
linear scale, and the energy
input required to extract one
unit of the resource is plotted
on the y-axis, using a logarithmic
scale, a straight line
results. This assumes that
extraction takes place with the
easiest resource first, progressing
to the more difficult. Real
life isn't always quite so logical,
of course, but on the large
scale the pattern has been
shown to hold up quite well.)
The important characteristic of
a natural resource reserve, in
terms of the ECCO methodology,
is the amount of energy,
direct and indirect, that must
be expended in extracting the
resource from the ground. This
aggregate value covers fuel and
electricity demands, non-energy
resource demands, and
fixed capital consumption. In
the case of an energy resource,
this is known as the Energy
Requirement for Energy, or
ERE for short. It is expressed
in units of energy input per unit
energy extracted.
Obviously, the ERE of a
resource reserve will depend
upon the grade of the resource,
in addition to other geological
features, such as depth and
hardness of covering rock.
Because the grade of the
reserve is variable, the ERE
will also vary. This holds at any
scale, from a single oil well to
an entire set of fields, to global
reserves of a resource. The
exact relationship between
resource grade and ERE is discussed
more fully in Chapman
(1983) but, as a simple
assumption, we can assume an
inverse relationship of some
sort. In other words, as
resource grade declines, the
ERE will rise.
The final assumption made
about the process of resource
depletion is that the reserve is
depleted in strict order of
decreasing grade, i.e. highest
grade first. This assumes perfect
knowledge of the entire
resource reserve before depletion
commences, which is
obviously fallacious. However,
any individual discovery of a
new high-grade pocket of
resources will simply create a
kink in the smooth log-normal
decrease in grade observed
under a "perfect" model, and
will not upset the underlying
behaviour of the model. The
work of Peckham & Klitz
(1978 & 1979) does show that
the long-term trends described
here operate in reality at a
national level.
Because the resource grade
declines log-normally, we can
expect a log-normal increase in
the ERE of the reserve, in the
absence of technological
change. The ERE of reserves
can then be set as functions of
cumulative extraction, and so
will rise over time at a rate
dependent on the rate of
extraction from the reserve,
which will itself depend on the
economic policies being enacted.
Note that the above model does
not postulate a cut-off point, at
which the reserve runs out.
Given suitable energy supplies,
the reserve can be depleted
down to the grade of the base
rock. Of course, the economic
consequences of securing such
a large energy supply may well
provide a cut-off point based
on economic, rather than geological,
constraints.
The above model structure has
been compared to the model
for land prices postulated by
Ricardo, and, indeed, there is a
degree of structural similarity.
It is important to note the difference,
however: Ricardo's
increasing price with scarcity
of the commodity arose from
an increased valuation being
placed upon remaining
resources by the market,
whereas the driver in the
depletable resource model is
based on physical variations in
the Earth's crust.
Technological change, will, of
course, alter the ERE of a
given reserve, and, conversely,
rising ERE may often provide
a spur to developing new technologies.
An example of this
inter-relationship is the development
of sub-sea satellite
wells in the UK Continental
Shelf, which allow small, high-
ERE fields adjacent to large,
well-developed fields, to be
extracted with a significantly
reduced capital input. To state
things very broadly, technological
change will tend to have a
similar effect to the discovery
of a new reserve pocket; it will
create an anomaly in the
smooth rise of the ERE curve,
but will not alter the underlying
behaviour.
Finally, it is worth mentioning
the approach taken in the Irish
ECCO model to imports of
depletable reserves, such as
fossil fuels and metals. The
above model cannot be applied
to global reserves in a national
model, because the overall rate
of extraction is not calculated
at a global level. In this case,
time-series data from a global
ECCO model, GlobEcco, has
been imported into the Irish
ECCO model, using a business-
as-usual scenario. Hence,
it is assumed that domestic
activities have no direct effect
upon the world "energy price"
of depletable resources.
OILWELL EXAMPLE
Suppose that a large reserve of
oil is discovered under a house,
say 8634 barrels of crude oil.
At $20 a barrel, the gross
income anticipated is
$172,000. Having taken some
initial seismic readings, the
owners discover that their oil
reserve is perfectly cylindrical,
with one metre diameter, and is
located between 200 and 2200
metres below the ground.
There is no gas associated with
the oil, so it will be necessary
to pump it out of the ground
mechanically. This process
will require energy. In addition,
there will be the cost of
buying the pump in the first
place, and then the cost of
refining the crude output.
Pumping begins, and everything
goes well for a few days,
then the oil stops coming. As
oil is extracted, the level
remaining in the well drops,
until the remaining oil is too
low down for the pump to be
able to bring it to the surface.
This is remedied by buying a
larger, more powerful pump. A
side effect of this is that the
fuel bill increases; the larger
pump requires more energy to
bring each barrel of oil to the
surface. Say, the small pump
required one-fortieth of a barrel
of oil per barrel extracted,
the larger pump requires one
twentieth. It is realised that this
larger pump will fail in the
future, as the level of oil in the
well decreases further. To summarize,
there is an energy gain
in the form of extracted oil.
Energy is spent by the pumps
in terms of the fuel required to
power them, and the devices
for refining the oil.
Furthermore, new capital is
constantly required, in the
form of larger pumps, as the
reserves deplete. The manufacture
of these pumps required
energy; this is the embodied
energy content of the machinery.
Using the principles of
process analysis exact figures
can be calculated for the
embodied energy, and primary
energy (i.e. pump fuel) requirements
of the extraction, as a
function of the cumulative
removal of the oil. By comparing
this with the amount of
energy extracted, the ERE can
be calculated.
As demonstrated above, the
ERE of the oil rises as more is
extracted. Ultimately the ERE
will reach 100%, and the net
energy gain from the extraction
process will be negative. At
this point, the oil well will be
physically uneconomic.
In a market economy, of
course, the point at which the
process becomes uneconomic
may arrive earlier. With several
wells in operation, all of different
shapes, size and levels
of extraction, the ones with
lower ERE values will be at a
competitive advantage, being
able to produce their goods at
a cheaper energy price. Given
sufficient reliable data to calculate
the ERE values of different
oil-wells or fields it
would be possible to predict
the economic fates of oil producers
without having to discuss
(monetary) oil prices,
which are subject to considerable
fluctuations and uncertainties.
REFERENCES
Campbell C (2002) "Limits on Supplies of Conventional Oil" talk given at the Conference Ireland's Transition to
Renewable Energy, organised by FEASTA, October 2002
Chapman (1983) Energy Resources, London: Heinemann
Crane DC (1996) "Balancing Pollutant Emissions and Economic Growth in a Physically
Conservative World" Ecological Economics 16: 257-68
Crane DC & Foran B (2000) "Modelling the Transition to a Biofuel Economy in Australia"
Proceedings of second international workshop, Advances in Energy Studies: Exploring Supplies,
Constraints and Strategies, Porto Venere, May 23-27, 2000: pp.23-39
Forrester JW (1971) World Dynamics, Massachusetts: Wright Allen Press.
Forrester JW (1968) Principles of Systems, Massachusetts: Wright Allen Press.
IFIAS (1975) Energy Analysis, Report #6 of the International Federation of Institutes for Advanced Studies
Meadows DL & Meadows DH, eds. (1973) Toward Global Equilibrium: Collected Papers,
Massachusetts: Wright Allen Press.
Melman AG, Boot H & Gerritse G (1990) Energiebesparungspotentielen - 2015, TNO Eindrapport 90-258, 2nd. edition
April 1991, Institut voor Milieu- en Energietechnologie (IMET)TNO
Peckham, R. & Klitz, K.,(1978) Energy Requirement of Scottish Offshore Oil,
Research Paper EUR 6062 EN, EU Joint Research Centre, Ispra.
Prigogine N & Stengers I (1984) Order out of Chaos: Man's New Dialogue with Nature, London: Heinemann
Slesser, M. (1978) Energy in the economy, London: Macmillan.
Slesser M & King J (1993) "Can Solar Energy substitute for Oil? A natural capital accounting approach"
Opec Review XVII, 3: 377-98
Slesser M., King J. & Crane D.C. (1997) The Management of Greed: A Bio-Physical Appraisal of Environmental and
Economic Potential, Edinburgh: RUI Publishing
Slesser, M, King, J., Revie, C and Crane, D. (1994) Non-monetary indicators for managing sustainability. Contract report
to DG XII of the European Community, Centre for Human Ecology, University of Edinburgh, Scotland
WEB SITES & SIMULATION SOFTWARE
In addition to the conventional citations above, some resources used to develop the model, and pertaining
to the model, are located on the internet. These are listed separately below.
http://www.eirestat.cso.ie Central Statistics Office, Ireland website, from which a wide range of
economic data can be downloaded in spreadsheet-readable format
http://www.irl.gov.ie/tec/energy/statistics/ Dept. of Public Enterprise website, from which most of
the energy data used to calibrate the model was originated.
http://www.eccosim.org.uk ECCO model website, containing further essays and resources regarding
the ECCO model, and an experimental online simulator for a model of the UK. The simulation
software is in active development as part of the 'Uncle Unc' software project at
.http://uncleunc.sourceforge.net (The main purpose of Uncle Unc has relatively little to do with
simulation models, and the connection to the ECCO models might not be obvious at first glance.
Contact Dave Crane mailto:dave@cranefamily.f9.co.uk if clarification is required.)
ECCO model available
Those readers who would like to project Ireland's energy future on different assumptions to those
used here may purchase the complete software from the Feasta office, 159, Lower Rathmines
Road, Dublin 6. The price is 20 euros or £15 sterling. A user-group has been set up and purchasers
will be able to download improvements to the software from the internet.
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