Sunday, June 22, 2008

Renewable energy : Fossil fuels :: David : Goliath

Renewable energy annual growth scenarios (Click to enlarge)

US annual energy flow (Click to Enlarge)

I was reading the latest Economist (June 21st-27th) which talks about the next innovation boom for VCs to invest in: Energy. The scale of the Energy market ($6 trillion, about 10% of the global economy) is at least one magnitude higher than Internet and Computing (booms of the 80s and 90s) put together. No wonder that Energy is generating so much interest in the investor community and among researchers and entrepreneurs.

The driving force for innovation in alternative energy sources like wind energy, solar power, and bio-fuels is the steep increase in crude oil and natural gas futures (No I don't believe it is out of love for the environment). I wanted to understand how much time is needed make a significant hole in the fossil fuel demand by way of diverting the energy demand to alternative fuels. A beautiful figure from the 2006 Annual Energy Review released by the US Energy Information Administration is a nice starting point. The figure is US specific, and does not consider energy hungry China or India, but if the US energy juggernaut can be tamed with say, 50% alternative energy sources, then I am certain that China and India will happily adopt these viable alternative energy sources as well. (Plus I don't have the beautiful figures for the rest of the world so lets work with the US data!)

About 14% of the total US energy comes from renewable sources and nuclear power, in fact the figure also says that only 6% of the energy comes from renewable sources excluding nuclear energy. The rest comes from fossil fuels (including natural gas). So lets try to guesstimate, based on this data and varying rates of renewable energy growth in the coming years, the time until we derive as much energy from renewable energy as from do from fossil fuels today.

I have plotted 4 scenarios based on 5%, 10%, 15%, and 20% annual growth of renewable energy starting from their base 2006 value (from the Energy flow diagram). The plot indicates that it is going to take between a 10% to 15% annual growth of renewable energy in order to catch up with the present fossil fuel energy contribution by 2030. While there is no hard-written reason for the annual growth to not exceed 10-15%, I believe that there are significant inertial factors, like deployed fossil-fuel based equipment, lack of skilled engineers, innovation lag, legal issues, etc., which will keep renewable energy from growing at higher annual rates.

Basically, this simple back-of-the-envelope calculation indicates that we need sustained double digit growth in renewable energy over the next 2 decades to challenge the fossil fuel Goliath. The figures also seems indicate that in the short term (5-10 years) fossil fuels are going to be the primary energy source. Therefore the world is going to need either a huge increase in supply or an appreciable decrease in demand of fossil fuels notwithstanding any alternative sources of energy in the short term.

Supply will grow as better technology is used for oil and gas exploration. It has already become worthwhile to use high-sulfur crude instead of sweet light crude oil. But the fact remains that demand will have to abate to meet the short supply through higher prices and unfortunately, slower economies.

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