Wednesday, July 2, 2008

Alternative Energy Investment

Alternative energy. Dreams of clean, cheap, limitless energy. Yeah, right. Clean, cheap, limitless. Pick one of the first two, third one is impossible (just plain physics). This article looks at different sources of alternative energy from investment point of view. It only includes currently available technologies.

Energy Requirements In The Modern World

There are three areas of modern life which require different approaches to energy.
1. Electricity: cheap (relatively) to produce, easy to use, easy to distribute to static locations, impossible (so far) to store, impossible (so far) to distribute to moving locations.
2. Transport: in most cases, can't use electricity, because requires source of energy which can be stored and moved.
3. Heating. Can use electricity, but in most cases direct heating is cheaper. Includes heating of buildings and heating of water.

Some Physics

There are couple of physical laws relevant to discussion:

The law of conservation of energy: energy is never created or destroyed, it just getting converted from one form to another. Modern physics extends it to law of conservation of energy/mass: energy and mass can be converted to each other, according to Einstein equation: E = mc2, but the total remains the same.

Second law of thermodynamics. The essence of it is that thermal energy is a universal energy sink, all kinds of energy are eventually converted to heat. The most important for this discussion consequence of this law is Carnot equation: Emax = (Tmax - Tmin)/Tmax: maximum efficiency of thermal engine equals difference of absolute (Kelvin) temperatures divided by maximum absolute temperature.

Units of measurements. We'll use scientific units: Joule for energy and Watt for power. You need one watt of power for one second to product one joule. One kilowatt-hour (kWh) is equal 3600000 joules. One HP equals 736 watts.

Power Conversion

What is usually called power production is really power conversion (see law of conservation of energy). Mechanical energy is easily converted into electricity and used directly for transport. Any energy is easily converted into heat. Most often we need to convert heat energy into mechanical. There are several types of engines which can do it, listed here in order of efficiency:

Diesel. Max efficiency around 50%, unit power can be low to medium, power per mass is medium.
Gas turbine. Max efficiency around 40%, unit power medium to high, power per mass is high.
Steam turbine. Max efficiency around 35%, unit power is high, power per mass is low.
Gasoline engine. Max efficiency around 30%, unit power is low, power per mass is high.

Impact on Environment

Every kind of energy production impacts environment. It can be air, water or ground pollution, contribution to global warming, heat pollution, ground footprint, water and air flow changes etc.


Electricity is produced by converting chemical energy of fossil fuels, potential energy of water on high ground or nuclear energy. Biggest problem of electricity: it can't be stored in more or less significant quantities. Consumption varies depending on time of day, which means that significant part of production has to be quickly available on demand for peak consumption and quickly switched off when not needed. You need different plants to cover constant, or base consumption (load) and peak load.

Fossil fuel plants. Mostly coal fired, some use natural gas and crude oil. All convert chemical energy to heat first, then to mechanical and electricity.

Coal plants are efficient, produce relatively cheap energy (around 2.5 cents per kWh in US). Units are huge, usually 100000 kW or more, require a lot of time to start up. Good for base load, can't be used for peak production. Thermal efficiency is around 35% (steam turbine), hard to improve. Impact on environment: heat pollution, greenhouse gas (CO2) production, ground and water pollution (ash), air pollution (acid rain, mostly solved in US, still problem in many countries).

Natural gas plants. Energy produced is expensive, 7-11 cents per kWh, probably more with current price of natural gas. Units are small to medium (1000 kW to 25000 kW). Use either gas turbine or combined cycle (gas turbine + steam turbine). Gas turbine units are easily started and stopped, used mostly for peak power. Combined cycle units are very efficient (55% or more), but not as fast to start. Impact on environment: heat pollution, greenhouse gas (CO2) production, much less than coal, because most of natural gas energy comes from hydrogen.

Crude oil fired plants. Mostly extinct.

Nuclear plants. Currently (surprise!) they produce the cheapest energy. Granted, in US many of them went through bankruptcy, wiping out amortization costs. But, anyway, average nuclear power cost in US is 1.3 cent per kWh. Current plants are good for base load only. Thermal efficiency is about 30%. Impact on environment: heat pollution. Chernobyl was caused by idiotic design, nobody builds such plants anymore. There are big political problems though, including spent fuel reprocessing/storage. New technologies might come up (pebble bed), improving safety and thermal efficiency and possibly making nukes suitable for peak load.

Hydro plants. Very efficient and relatively cheap. No need for thermal cycle, so efficiency is almost 100%. Impact on environment: significant. To build plant you need to create an artificial lake, completely changing ecology in the area.

Alternative energy plants: wind turbines, solar panels, solar-to-heat plants, geothermal plants. There was a talk several years ago about so-called low temperature plants, but probably before spending money people took a look at Carnot formula (efficiency of thermal plant working on 10 degrees Celsius difference is about 3%).

Wind turbines. Efficient (mechanical energy). Low unit power, biggest turbine is 6000 kW. Power cost is about 8 cents per kWh after government incentives. Without them, probably around 15 cents if not more. Weather dependent. Impact on environment: turbine towers need to occupy a lot of land, changing landscape and air flows in area, noise pollution, birds killed, and possible infrasound effects. The latest might be a big liability problem near population centers.

Solar panels. Very inefficient. Cheap panels, made from silicon or tallium have efficiency around 10%. Panels made of exotic materials (gallium, for example) have efficiency of about 20%, but very expensive. Energy cost is usually prohibitive: between 30 and 70 cents per kWh. Weather dependent. Impact on environment: heat pollution, made worse by low efficiency, landscape changes: panels need to occupy a lot of land to produce significant amount of energy. Production of panels creates a lot of toxic waste.

Solar-to-heat plants. Efficiency about 25% now, can be raised to more than 50%. Require expensive movable mirrors, need direct solar light (weather dependent). Not enough information to estimate costs. Mirror cleaning is problem not yet resolved. Impact on environment: some heat pollution, big land footprint.

Geothermal plants. Usually build in areas with high underground temperatures. Use steam produced underground to drive steam turbines. Efficiency is under 20%. There are not many places in the world suitable. There is not enough information to estimate cost. Impact on environment: open cycle (when spent water is dumped) produces dump water which is not acceptable without cleaning, because it contains a lot of minerals, including heavy metals. Closed cycle requires intermediate cleaning of water. There is one investment candidate here: Ormat (ORA). It depends mostly on government subsidies, but governments in question probably can afford them for a long time: Iceland, New Zealand, Israel.

Conclusion: in electricity production, alternative energy is not profitable without government subsidies in foreseeable future. Because such incentives can't continue indefinitely, long term investment in this area is not possible. Short term speculative investment possible in times of energy panic (like now), should be restricted to the best companies. Short note on T. Boone Pickens new idea: getting richer at taxpayers expense.


Transport, with some exceptions, need to carry energy source and power plant. Hence transport energy requirements: power units should have high power to mass ratio, energy source with high energy density, easily transportable. Here come oil products: diesel fuel, energy density of 39 megajoules/liter and gasoline, 35 megajoules/liter. Fuel tank of a small car (50 liters or 13 gallons) contains 1750 megajoules of energy, or 486 KWh.

Sea and river transport. Transport units are big, can use more efficient heavier power units. Most use diesel power. Oil tankers use steam turbine, which allows use of crude oil as a power source. Cheapest transport available. Alternative energy: none. Can use nuclear power, but power units are much more expensive than diesel so far, and nukes as ship power units are politically not acceptable for now.

Rail transport. Can use electricity. Electrified railroads are much more expensive, but have better capacity, because locomotives can pack much more power per unit. Especially good in mountains. Where electrified roads are not economically feasible, railroads use diesel power. Alternative energy: none.

Aviation. Almost all aviation uses gas turbine power, either in jet (turbofan) engines or turboprops. There are still some gas powered piston engines in use, but they are marginal. Alternative energy: there are some attempts to use biofuels, natural gas and hydrogen. Neither can compete with jet fuel (kerosene produced from oil). Best replacement for oil might be kerosene produced from natural gas or coal. There is only one company in the world right now with marginally profitable technology: Sasol ltd (SSL). Might be an investment opportunity if oil price holds above $100 for significant time. Not sure if this is alternative energy, but there is nothing else for now.

Automobile transport. Currently uses diesel or gasoline engines. All attempts to create viable electric vehicle, from 1890s to 1990s (it's nothing new!), hit the same wall: energy density. We know that fuel tank of a small car contains about 486 Kwh. Efficiency of car gasoline engine is about 20%, electric car has about 90%. Electric car needs battery capacity of about 100 KWh. Such chemical batteries are plain impossible. Add here charging problem: you can fuel a car in about 5 minutes, you need several hours to charge an electric car, and conclusion: electric car is only good for short daily trips. Forget family vacations in such car! Or fishing trips upstate. Or lots of other things people do. Biofuels: only sugar cane ethanol might be economically feasible if oil keeps above $100 per barrel. Brazil is the biggest producer, but I couldn't find public companies with US ADRs. Corn ethanol is a waste of taxpayers money, corrupting farmers and killing people in Africa. Soy diesel fuel isn't any better. Impact on environment of either is huge: tropical rainforests are cleared now to plant more corn and soy. Maybe somebody can genetically engineer some bacteria which directly produces gas or diesel fuel. Will not be profitable for the nearest 20 years.

Conclusion: for transport use, acceptable alternative fuels are: synfuel from coal for aviation and automobiles (not exactly what greens would endorse), and sugar cane ethanol. Invest in Sasol for synfuel. Let me know if there is an opportunity to invest in Brasil ethanol. Electric cars are not in the picture.


There are two major heating applications: heating of houses and heating of water. This is where we really have viable alternative energy solutions.

Geotermal energy. Lousy electricity producer, because it's hard to get high enough temperature into steam turbine (remember Carnot equation?). But great for house and water heating. The only problem: there are not many places on Earth where it's feasible. I haven't found any public companies so far, any help is appreciated.

Solar energy. Again, lousy electricity producer, but good for water heating. For obvious reasons, restricted to places where weather cooperates: temperature is always above freezing. But there are a lot such places on Earth. I personally saw a lot of solar water heaters on Greek islands, in Israel and Cyprus. I think it can be used successfully in California, New Mexico and Florida. Again, I haven't found any public companies.

Conclusion: there is a great opportunity for geotermal and solar energy in house and water heating. Unfortunately, there are no public companies to invest in.

Not included

Short note on things not included in this article:

1. Hydrogen energetics. Misleading term, because hydrogen is not a source of energy but a method of storing and transporting it. Not very good at that: hydrogen is a gas, with molecules so small it leaks through steel pipes. I don't think it will be feasible. Ever.

2. Fuel cells. Can be part of hydrogen energetics or used with hydrocarbon fuels. For the last 10 years, fuel cells were about 3 years to mass production.

3. Thermonuclear energy. 10 years in future for the last 50 years. This one will be used sometimes, but we don't know when.

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