Alternative Energy : End of the Oil Age?

Alternative Energy : End of the Oil Age?

As the possibility of high oil prices looms large there is some urgency to look for alternate energy.

- Dr. Bhamy V Shenoy
Senior Advisor, Georgian National
Oil Company and Convener,
Mysore Consumer Council.

World crude oil prices have been steadily increasing since 2002. They reached a historic high of $75 per barrel (not in terms of real dollars) in the first quarter of 2006. Within this backdrop of higher oil prices, another race of Alternate Energy Sources (AES) and New Energy Technologies (NET) to win the grand prize of larger share of the world energy market has started. The world energy market had seen such a race soon after the first oil shock of 1973 which was further reinforced by the second oil shock that followed in 1979-80. These oil shocks were caused first by the Yom Kippur war, and then the Iranian revolution and Iran-Iraq war.

However, unlike the first race which was induced by major oil supply disruption, the current one is the consequence of a combination of several smaller events. The first run up in crude oil saw prices zooming from about $11/bbl in 1972 to $80/bbl (in terms of 2004 $) in 1980. Then the prices fell to an average band of $25/bbl by 1986. This lasted till 2002. As prices started coming down, the race for alternate energy sources also slowed down. Oil lost its share while other energy sources gained. But AES did not succeed in securing any significant market share. The question that now arises is, how will the current AES race develop? How will it be influenced by the oil prices in future? Exhibit 1 shows two pricing scenarios.

For a number of reasons, this time the race of AES and NET will gain momentum instead of slowing down as happened during the first race. As the possibility of high oil prices looms large there is some urgency to look for alternate energy. This is also important as environmental concern of greenhouse gases produced by burning increasing amount of fossil fuels is gradually rising. There is a greater likelihood of oil prices remaining high and even crossing the proverbial $100/bbl level rather than falling to lower levels of $30 or $40/bbl as forecast by many energy analysts.

What are renewable energy sources?

Before we start discussing the role of AES in meeting the future energy demand, it may be useful to take a look at its classification. At present, we have commercial energy sources consisting of oil, gas, coal, hydro and nuclear power and non-commercial sources of energy like firewood (though in many places, this is not free), agricultural wastes, etc. While fossil fuels are non-renewable sources of energy biomass can be considered renewable. IEA defines modern renewable as bio fuels, wind, solar, mini hydro power, marine and geothermal energy. Exhibit 2 is based on IEA classification shows different kinds of modern renewables and their uses.

Because of high oil prices and the possible impact on the environment due to increasing use of fossil fuels, a growing need to replace fossil fuels is being felt. Also, for many countries energy security is a big problem because of uncertainty in securing the required amount of oil and gas at reasonable prices. Thus, there is not only a need to find new renewable energy sources but also to use fossil fuels in the most efficient way by developing new and improved technologies like hybrid cars, improved technology to produce oil shale, tar sands, etc.

Exhibit 2: Alternative Energy – A Snapshot
Technology	Energy Product
Biomass Energy
Combustion (Domestic scale)	Heat (cooking, space heating)
Combustion (Industrial scale)	Process heat, steam, electricity
Gasification/power production	Electricity/heat
Gasification/fuel production	Hydrocarbons, methanol, H2
Hydrolysis and fermentation	Ethanol
Pyrolysis/production of liquids	Bio-oils
Pyrolysis/production of solids	Charcoal
Extraction	Bio diesel
Digestion	Biogas
Wind Energy
Water pumping and battery charging	Movement and power
Onshore wind turbines	Electricity
Offshore wind turbines	Electricity
Solar Energy
Photovoltaic solar energy conversion	Electricity
Solar thermal electricity	Heat, steam, electricity
Low temperature solar energy use	Heat (water and space heating, cooking and drying), and cold
Passive solar energy use	Heat, cold, light and ventilation
Artificial photosynthesis	H2 or hydrogen rich fuels
Hydro power	Electricity
Geothermal energy	Electricity
Ocean Energy Systems
Tidal barrage, wave energy, tidal currents,
OTEC (Ocean Thermal Energy Conversion)	Electricity
Hydrogen	Electricity and power
Source: IEA

Participants in the energy market share race

Of the several renewable energy sources, wind power shows the greatest potential today. The cost to generate electricity through wind power is comparable to fossil alternatives, particularly when environmental costs are also taken into consideration. Photovoltaics have dropped by 30 to 20% of their cost in 1980. Still they are uneconomical. Modern renewables like small wind turbines, Photovoltaic cells, small scale or micro hydels are economical for distant villages where grid power can be very expensive.

Solar thermal technologies have been providing heat and hot water for residential and industrial end-users for several years. They are competitive even without any subsidies. Marine energy sources like tidal forces, ocean currents, wave power, and thermal gradients have yet to be developed. Fuel cell technology using hydrogen is found to be economical for some specific conditions. However, the basic problem in the extensive use of hydrogen cells is its cost and also the source for generating hydrogen. If fossil fuels are used to generate hydrogen, we have not solved the fundamental problem of reducing fossil fuel dependency besides the inherent high cost.

Economics of bio fuels

We have achieved much progress in developing and using bio fuels like ethanol, and bio diesel. But their economics is still questionable. In the US, variable costs for bio diesel is $2.85 per gallon (while wholesale diesel costs about $2.00 per gallon today) from soybean oil and $1.55 from yellow grease. Even then their maximum potential is about 0.03 MMBD. In the case of ethanol, economics is slightly better. Variable cost to produce ethanol from corn is about $1.20 per gallon and $1.00 per gallon from cellulose. Total maximum potential is about 1.8 MMBD which is not insignificant in relation to 9 MMBD of gasoline demand in the US. Brazil has been the leader in the use of ethanol to replace gasoline for powering their transportation. At high oil prices, ethanol appears to be a viable alternative to fossil fuels even in the absence of subsidies.

Exhibit 3: AES – Project Cost
Source	Capital Cost (cr of Rs/MW)	Estimated Cost of Generation (Rs/kwh)
Small Hydro Power	5.00 - 6.00	1.50 - 2.50
Wind power	4.00 - 5.00	2.00 - 3.00
Biomass power	4.00	2.50 - 3.50
Bagasse Cogeneration	3.50	2.50 - 3.00
Biomass Gasifier	1.94	2.50 - 3.50
Solar Photovoltaic	26.50	15.00 - 20.00
Energy from waste	2.50 - 10.00	2.50 - 7.50
Source: Ministry of Non-conventional Energy Sources (MNES)

In case of India, where demand for sugar is finely balanced, land is limited, food production needs to be increased and water is always scarce, economics of ethanol is unlikely to be attractive. According to Nimbkar Agricultural Research Institute (NARI), there is a need to develop technology to convert residues left after harvest (consisting of cellulose and hemi cellulose) into ethanol. This will help in producing food and fuel from the same piece of land. NARI claims the cost of producing ethanol from sweet stalk sorghum to be just Rs. 10 to 14 per liter ($0.90 to 1.26 per liter).

Unlike the US and Brazil which have the luxury of diverting resources to produce ethanol instead of feeding the people, India may not have that alternative. However, it is not so in case of bio diesel. In his speech on alternate fuels on April 18, 2006, President APJ Abdul Kalam recently stated that India has about 60 million hectares of wasteland and 30 millions of that can be used to grow Jatropha or such energy plantation, to produce bio diesel. Each hectare can produce about 2 tons of bio diesel at a cost of Rs. 20 per liter ($1.80 per gallon). At present, when oil prices are skyrocketing this is certainly economical.

There are other differing estimates which are less economically attractive. Some experts estimate that each hectare can produce three tons of seeds which will yield just one ton of diesel and the cost to produce diesel after taking into consideration a subsidy of Rs. 6,000 per hectare of investment will be Rs. 30 per liter ($2.70 per gallon). Potential of 30 to 60 million tons of bio diesel in comparison to the current diesel demand of about 42 million tons is quite huge. This will also create huge employment and an enormous amount of wasteland will be put to use. This is an alternative which should be followed by India in a mission mode as suggested by the president.

In addition to the above AES, in case of developing countries like India, alternate technology like smokeless chulas, modern wood stoves, etc. can increase the efficiency of using firewood. Despite the high potential of this low technology, and enormous budget allocation over the years, penetration of this technology has been slow.

India has been a leader in developing and refining biogas technology using cow dung, human and animal waste, vegetable waste, etc. This renewable technology is also economical even without subsidy. However, the adoption of this technology is hindered despite the enormous efforts undertaken by the government. This is because of the populist pricing policy adopted by the government in selling petroleum products like kerosene and LPG as well as electricity. When electricity is sold practically free, which villager will invest in biogas plants to produce methane? When kerosene is sold below market price, what incentive will be there to use biogas for cooking or lighting purposes?

Role of ministry of non-conventional energy sources

Annual budget allocation of Ministry of Non-conventional Energy Sources (MNES) for 2006-07 is Rs. 580 cr which is a fraction of ONGC's budget of Rs. 14,400 cr. MNES estimates total potential power from renewables to be around 172,000 MW by 2032. This consists of 52,000 MW from biomass, 45,000 from wind power, 15,000 mini hydro projects, 5,000 from bagasse and 5,000 from Municipal Solid Waste (MSW). As on the end of 2005, there was 7,160 MW of AES (wind turbine 4,434 MW, cogeneration 867 MW, mini hydro project 1,748 MW, 3.8 million biogas plants and improved chulas 35.2 millions) contributing to India's energy needs.

As planning commission has pointed out in its report, development of modern renewables have been driven more by subsidy considerations and achieving paper targets rather than real economics or real objective of reducing fossil fuel substitutions. Exhibit 3 shows the reasonable attractiveness for some of the renewables in India.

Changing market shares of world energy sources

As could be seen from the market shares of traditional commercial energy sources that are depicted in Exhibit 4, between 1973 and 2003, oil's share in the world energy market declined from 49 to 38% and is forecast to remain at that level till 2025. While the share of gas, coal and nuclear energy sources have increased between 1973 and 2003, those changes are marginal but for the nuclear energy which has gone up from 1 to 6%. The latest report by ExxonMobil titled "The Outlook for Energy" released in April 2006 also forecasts similar market shares for traditional energy sources. Renewables like wind and solar energy are forecast to contribute not more than 3 million BD (MMBD) of equivalent oil energy in 2030. In comparison to the oil consumption of 115 MMBD, this is very small.

Two significant assumptions affecting these two forecasts by EIA and ExxonMobil are sufficient oil reserves (proven and yet to be discovered) and oil prices around $30/bbl. ExxonMobil's forecast is not explicit about the underlying crude oil assumption. Both these forecasts assume that the world oil will not peak any time soon. They refute the argument of some of the experts who have forecasted that world oil will peak soon based on Hubert's principle. It is true that Hubert's prediction was accurate with respect to the US. But there are several experts who do not think Hubert's principle will hold good for the rest of the world. They also disagree with the argument advanced by Houston oil economist Mathew Simmons in his often quoted book Twilight in the desert where he has challenged the huge proven reserves of Saudi Arabia and also their capability to increase substantially above the current production of 10 to 12 MMBD.

Changing market shares of India's energy sources

While developed world uses mostly commercial energy sources, India's dependence on non-commercial resources (mostly biomass) like firewood, agricultural wastes, etc. may be as much as 35% amounting to about 114 million tons of oil equivalent (MTOE) in 2003. Based on the data of Ministry of Non-conventional Energy Sources, modern renewables might have contributed about 4 MTOE. It is assumed that contribution from non-commercial sources at best will remain at the same level of 114 million tons and contribution of modern renewables will be about 60 million tons.

If India's energy market develops along the scenario given by the planning commission in their draft Integrated Energy Plan, then oil share will decline marginally from 27 to 24% in 2031 (See Exhibit 5). Gas share will increase from 7 to 11%, coal from 37 to 42%, nuclear energy from 1 to 8% while share of biomass will go down from 26 to 7% and share of renewables will go up from 1 to 5%. As standard of living goes up in villages, it is to be expected that use of non-commercial energy resources in rural areas will go down and commercial energy whether from renewables or non-renewables will bound to go up.

In one sense this is a brave forecast. During the last 60 years, India's achievement to improve the living standards of rural population has not been all that impressive. Continuing dependence of rural people on non-commercial sources of energy like destruction of forests for firewood has been unreasonably high.

Conclusion

To promote renewables, there should be a greater appreciation of India's energy security needs since we are facing a grave energy crisis. This is not on the national agenda of the country or any of the political parties. We have seen how subsidies are misused especially in energy sector. The government needs to streamline energy pricing policy both in electricity and petroleum sector if it wants to promote the use of renewable energy sources. Mere sloganeering or setting mission statements as we have done in the past is not likely to make much difference.

Just like our petroleum navaratnas are able to supply petroleum products with reasonable level of professional expertise despite usual bureaucratic problems, the government needs to promote private sector companies in renewables. This needs to be supported by appropriate legal and regulatory framework with sufficient fiscal and government support. It is only then that India will be able to achieve the full benefit of the expertise it has in modern renewables. Even if the rest of the world is not planning for the beginning of the end of oil era, India should do so to take advantage of its technical expertise, taking into consideration geopolitical reasons, and limited oil and gas reserves.

The views expressed herein are the personal opinion of the author but not of the organization he represents.