Sunday, March 27, 2011

Germany's Electricity Follies

Why is Germany supporting feed-in tariffs for solar PV? Why is a country in northern Europe spending billions of dollars to buy solar cells just so that they can pay technicians to install these cells on home that hardly see any solar radiation? There are parts of southern Europe that can see over twice the amount of average solar radiation as in Germany. Note that the manufacturing of these cells produces significant amounts of greenhouse gases. Home-installation of solar PV panels in Germany is one of the silliest things I've heard of, and we've got some silly programs here in the US (such as corn ethanol production.) [And by silly, I mean it has a negative, unsubsidized rate of return on investment and also causes an increase in the amount of greenhouse house gases than if the policy had not been followed.]

Given the recent election losses for the center-right party in Germany over the last half a year, I foresee even higher electricity prices in Germany and even more problems as the left-leaning, feed-in-tariff-friendly parties gain more political power. How does Germany expect to be generating its electricity in twenty years? Below are three problem areas that could cause Germany to lose its relative standing in the EU (compared to France) and in the world (compared to China, India). By the way, France is the only country in the EU will a decent 'energy' (i.e. 'exergy') policy. If France can continue to stick with 80% electricity generation from nuclear power and move consumers to electric powered vehicles, I expect to see France emerge as a relative power-house in Europe. (Note that the UK is still following similar feed-in tariff follies. UK feedin tariffs )

Problem#1:   $0.50/kWh feed-in tariff for solar PV
Currently, the building and installing of solar panels costs more than the solar panels could generate in electricity sales over their lifetime in an unsubsidized market. So right now, the only way to make them economically viable is to have large state and federal subsidies. But just because there are subsidies, doesn't mean that building these panels isn't an overall drain on their economy. The taxes that must be paid to support the feed-in tariff (or the increase in the overall price of electricity) means that this policy is a net drain on Germany's economy. A much wiser policy would have been to invest more money in solar PV R&D before subsidizing the mass-scale production of a technology that currently consumes more electricity in the production of the PV cells than the PV cells can generate over their lifetime. Since a significant portion of the electricity used to manufacture these solar cells can come from fossil fuel combustion, it's possible that this feed-in tariff policy is both wasting of money and causing an increase in greenhouse gas emissions.

Saturday, March 19, 2011

Intro to Economics for Physicists: Part 1

“For meaningless is exactly what you have to flirt with when you are in between social, and in particular linguistic practices—unwilling to take part in an old one but not yet having succeeded in creating a new one.” R. Rorty, Philosophy and the Mirror of Nature

In this post, I'd like to give a general overview of economics and how it relates to physics. At first, it might seem that there is no connection between economics and physics, but both are part of the same underlying study of how the universe operates. By "economics," I mean the study of how humans make decisions related to food, shelter, clothing, entertainment, etc. By "physics," I mean the movement of particles, atoms, or molecules according to the fundamental forces of nature. Generally, we don't use the term "physics" to describe the evolution of biological species or the evolution of human financial markets because we lack the fundamental understanding of how the laws of physics can be used to describe, let alone, predict the evolution of species or financial markets.

While we lack a full understanding of systems far-from-equilibrium, we can at least recognize that biological species and their financial markets are both part of an overall system that is far-from-equilibrium, and that system is the Earth. Not only are they initially far-from-equilibrium, but they manage to stay far-from-equilibrium via the continuous input of exergy. (The definition of exergy is the capability to do work.) Sources of exergy include sunlight, fossil fuels, nuclear potential energy, wind motion, and underground thermal reservoirs with temperatures above room temperature. (Some forms of energy have no exergy, such as thermal energy at the same temperature as the environment.)

What I'd like to cover here is the difference between "economics" in the sense of "how humans make decisions related to food, shelter, clothing, entertainment, etc." and "economics" in the sense of "neo-classical equilibrium theory" or  "free-market capitalism."

Here are some definitions that will be useful for any physicist hoping to communicate with economists:

Saturday, March 12, 2011

The Problems with Calculating the Levelized Cost of Electricity and Using it to Compare between Competing Technologies

There are major problems today with how academia & governments compare between different types of electricity generating power plants. For example, the way that the US Energy Information Administration (EIA) presents data comparing various electricity generating power plants is highly biased towards intermittent technology (like wind) and highly biased against peak-following technology (like hydro or natural gas). There is a fairly good article on this subject by Paul Joskow of MIT, which highlights the problem of comparing base-load electricity technologies (like coal, or nuclear) with intermittent technologies (like wind) or with peak-following technologies (like natural gas or hydro-electric.) However, while Joskow does a good job of points out the problem, he doesn't discuss what is the correct figure of merit that we should be using to compare technologies that generate different types of electricity.

The typical means of choosing between competing electricity power plant configurations is to compare the value of the levelized cost of electricity (LCOE). This post will highlight the problem in calculating LCOE and the problem in comparing technologies using the LCOE. And then this post will discuss how most of these problems can be solved by calculating the internal rate of return on investment.

First, I'll summarize the major problems with LCOE, and then I'll discuss each one in more detail.

Problem#1:  Electricity does not sell for the same price; it depends on what type of electricity (base-load, peak following, intermittent, etc...)

Problem#2: LCOE is incapable of handling power plants that co-produce fuels & chemicals 

Problem#3: The choice of the discount rate is often not explicitly stated

Problem#4: The units of LCOE are problematic

Problem#5:  The calculation of LCOE hides underlying self-reference

Favorite Quote of the Day & How to Train Physicists to be Energy Engineers/Economists

A quote in the newspaper today (WSJ) got me thinking.
 "Some members of this administration apparently live in a world unconnected to energy reality." Erik Milito, American Petroleum Institute.

I do not want to open up Pandora's Box by turning this into a blog with a political slant. (For example, I will work with and work for people of either political slant.)

With that having been said, I am posting this quote because I feel that a certain official in the Department of Energy is giving physicists a bad name when it comes to making energy policy. I feel that this certain official is partially divorced from energy reality. I've seen quite a few of his presentations, and I haven't seen a single graph comparing the economic viability of the technologies he supports. And I've never seen him cite the estimated economic damage from change climate. How does he decide which technologies the Dept of Energy should invest in if he doesn't know the economic damage per ton of emitted CO2? Likewise, I do not think that he has ever presented results on the rate of return on investment or even the return on investment of various technologies. Instead, he ends most of his talks with vague comments on "Protecting the environment for our grandchildren." Well, you can't protect the environment unless you do your homework and calculate the rate of return on investment of various technologies. If you don't do this, you can end up doing silly things like subsidizing corn ethanol (or other renewable technologies) because it promotes job growth (until taxpayers have to pay back the money we borrowed to subsidize corn ethanol.)

As a former physicist (current engineer in the field of generating electricity and transport fuels), what turned me off about many of my ex-colleagues in the physics community was that I felt they were "living in a world unconnected to energy reality." (I too was rather naive, and it took a few years for me to lose my nativity. And I still have some distance to go compared to experts in the field.)

I fully support physicists who are out there studying how the world is, but the ability to ask fundamental questions about how the world is does not necessarily make a person an expert in the field of energy policy or energy technology.

One of the underlying goals in this blog has been to try to rephrase the field of economics so that physicists (who may become under-employed due to upcoming state & federal budget cuts) have as smooth a transition as possible to the field of energy engineering and economics. It has taken me over four years to transition, and I hope that a physicist reading this blog could effectively transition in less than a year.

One reason that I support an electricity-backed currency is that I think that it will encourage more physicists to become energy engineers/economists. I think that some physicists are turned off from economics because it uses units that aren't fundamentally grounded in any of the units that we were taught in school.  [Length, time, mass, charge, etc...]

If we use a currency with units of energy (kiloWatt hours, for example), then this solves the problem of not having to introduce a non-physical unit into the field of economics. And I think that this will encourage more physicists to enter the field of energy engineering/economics.

Ultimately, physics and economics are one and the same, just as physics and chemistry and biology are one in the same. What we need to do is to make economics more "physics-friendly" because what happens during a economic-downturn is that luxuries (like physics) get cut out of budgets because the cost of drilling, driving, & generating electricity is increasing. The economy is demanding more energy engineers and less luxury. We need the really smart physicists out there to focus their effort on solving problems in the field of energy engineering/economics so that the economy starts growing again, at which point we can afford to increase funding for basic physics research. (Same goes with luxuries like space exploration.)

Some physicists may not like this (and they probably are the ones who never took courses in economics in college.) But I think that we can make the transition easier for most physicists by making economics more "physics-friendly."  Imagine if some of the brightest minds out there (who are currently imagining new String Theories) started working on developing theories that ground economics in basic, fundamental physics. There are certainty plenty of people starting to bridge this gap (many of which are associated with Santa Fe Institute), but what if there were ten times as many researchers actively working towards bridging the gap between physics and economics? We could be solving energy problems a lot faster.

As a sign of how important it is to bridge this gap, one of my upcoming posts will be titled "Intro to Economics for Physicists"  Hopefully, it will be of use to practicing energy engineers as well.

Sunday, March 6, 2011

How do Bacteria calculate a rate of return on investment

How do bacteria go about calculating a rate of return on investment?

I think that this is one of the most fundamental questions we can ask about life and how it began. If a bacteria is a structure for increasing the entropy of the universe, then how does this structure figure out the best way of increasing the entropy of the universe? It appears that the best way of increasing the entropy of the universe is to maximize the rate of return on work invested, but this can't be proven.
Do bacteria have any means of calculating the rate of return on investment of a certain action? (such actions include moving, consuming food, and self-replicating.)
How does it decide when to move (i.e. expend work), when to consume food (which also initially consumes work), or when to self-replicate (and again this also consumes work)?
Do bacteria have a set rules for when to move, eat & replicate? And if so, what are those rules?
If there aren't set rules, can a bacteria do calculations of the rate of return on investment of its actions?
Either way, where did the rules come from or where did the ability to calculate rate of returns on investment come from?

As I've been discussing in previous posts (Source of Exergy in Early Universe & Meaning of Life), it is likely (but in no way proven yet) that within the equations of far-from-equilibrium thermodynamics is the capability for structures to self-replicate. Right now, we can predict when structures (like Bernard cells) will form in non-equilibrium processes, but we don't have the ability to predict when self-replicating structures (like bacteria) will form in non-equilibrium processes. I had suggested previously that the capability for structures to self-replicate may be due to or related to the ability of the underlying symmetries of the differential equations to be self-referential.
Either way, there should be way of predicting from a set of differential equations (that describe the motions of the large but finite number of chemical species) the likelihood of forming self-replicating structures (like bacteria.)

So, while it's known that bacteria can reproduce at rates as fast as once every 20 minutes, the question remains: how do bacteria attempt to maximize their rate of return on investment? How does a bacteria decide when to self-replicate? And most importantly, how can the self-replication of structures (bacteria) be described using the law of non-equilibrium thermodynamics? (i.e. without adding any non-physical equations)

We need to understand how the simplest bacteria self-replicate. We need to calculate the rate of return on work invested for a bacterial colony. We need to be able to understand whether maximizing the rate of return on work invested is 'programmed' into the DNA-protein synthesis. Do bacteria have the software in their DNA for calculating the return on investment of an action? Do more advanced species have better calculators? If bacteria can multiple so quickly, why aren't they covering every square inch of the planet? Do humans have a better calculator for determining the rate of return on investment than bacteria?

So, let's get back to why I'm ultimately interested in how bacteria operate.  As I've mentioned previously, I want to go back to the basics. I want to get back to basics because many of us in our society are so far removed from the underlying driving force of life that we don't know how the world works. Some of us live in a world of such abundance that we don't know the underlying cause of the abundance...and some of us are so far removed from the source of the abundance that we mistakenly advocate for policies that will ultimately destroy the abundance. In particular, I'm thinking about people who advocate for building electricity generation technologies that have negative rates of return on investment (such as solar PV today.) And I'm not talking about advocating for R&D for these technologies, I'm talking about advocating for the building of commercial scale plants that end up consuming more work (such as electricity) than they generate over the lifetime of the power plant (such as solar PV today.)

The other reason that I'm trying to get back to basics is that I'm getting really tired of hearing the same old arguments from economic classicists (mostly Republicans) and economic Keynesians (mostly Democrats). I think that both classicists and Keynesians have gotten so far removed from the underlying driving force of an economy that they end up talking right past each other. Most undergrad economic textbooks fail to even discuss the economics of electricity generation and vehicle transportation. Both groups of economists also seem to hide the self-referential nature of an economy, and the fact that economies (like the weather) are impossible to predict. When Ben Bernanke tells you that he is 100% confident that his policies will work, don't believe him!  There's no way to be 100% confident in which way the economy will go. A bacteria might be able to calculate an average rate of return on investment by spending work to move to a new location (which might have more food), but there's no way to be 100% sure. The equations of far-from-equilibrium thermodynamics can not be solved deterministically. And the calculation of the average rate of return on investment is approximate because it's self-referential. You have to truncate the calculation and make approximations because the value of the rate of return depends on the amount of work consumed in calculating the rate of return. This vicious cycle can not be re-normalized. There is no way to avoid uncertainty in estimates of future rate of returns on investment.

But with that having been said, I believe that there is no better way to increase the entropy production rate of the universe other than choosing those actions which have a sufficient large value of the average rate of return on investment. In power plant design, I think that this value has to be greater than 5% per year to sustain our current way of life. Many technologies out there (such as solar PV) can not currently achieve an unsubsidized annual rate of return on investment of at least 5%. A value of 7% to 10% is more realistic of what we need to grow our society.

While bacteria can individually reproduce at rates much faster than 5% per year (more like doubly rate on the order of hours), the overall rate of return from bacteria appears to have maxed out millions of years ago. Bacteria do not appear capable of capturing more sunlight and converting it into higher entropy infrared radiation, and they certainly are not launching themselves into outer space in order to colonize other planets (without our assistance.)

So, why I'm personally interested in understanding how far-from-equilibrium thermodynamics can describe the actions of bacteria, I'm mostly interested in learning from the bacteria in how to design self-replicating solar robots that we could use to generate electricity and populate other planets. We have to learn from how bacteria operate in order to create the self-replicating solar robots of the future.

Comparison between the electricity prices ($/MW-hr) and hard drive prices ($/MB) over time

As you already know, the price of hard drive space has been dropping exponentially over the last thirty years.
From the data at the following website, I calculated a 33% annual geometric (i.e. exponential)  decrease in the price of hard drive space per MB in inflation-adjusted US dollars.

Interestingly, when I did the calculation of the price of commercial electricity in the US between 1980 and 2009. There was essentially no change in the price in inflation-adjusted dollars. While there were increases and decreases in the price of electricity, there's been no real secular trend in the price of electricity as there has been for the price of hard drive space. (Note that the the trends for the residential or industrial price of electricity are similar to the trends for the commercial price of electricity.)

So, while the price of hard drive space has been drastically dropping, there has been no secular (i.e. overall) trend in the real price of electricity. You'd think that with all of the innovation that we've had over the last 30 years, that we would have figured out how to decrease the price of electricity in inflation-adjusted dollars. Instead, what this suggests is that the innovations in the field of electricity production have just offset the difficulty in finding new energy sources and the attempts to make electricity production less environmentally damaging.

In previous posts, such as Electricity Backed Currency, I have argued that there might be some positive benefits of moving to an electricity-backed currency. The largest benefit is that we are guaranteed that the money in our 0% interest banking accounts won't lose value, i.e. the Federal Reserve can't print money when the economy isn't growing, causing the value of the money in our accounts to drop. (As is happening right now as I type with Quantative Easing 2.0) Another benefit of an electricity-backed currency is that calculating the economic feasibility of a process is a lot easier if there is no inflation. You don't have to constantly redo prior cost estimates because of inflation. This means that more work can be spent on creating things of value rather than spent in the calculation of the rate of return on investment. It feels as if very little is being built in the US right now because we're spending all of our time redo-ing past economic calculations, then we have to redo the calculations because we are borrowing money to do all these calculations, and printing money to cover some of the borrowing, and then we have to redo the calculations using more borrowed money because printing money is inflationary, if all other things are constant. The inflation is even worse when the price of energy is also increasing. In an electricity-backed currency, there is no inflation and so more time can be spent building power plants rather than re-calculating the cost in current year dollars.

Another benefit of an electricity-backed currency is that it removes a lot of the fear in the financial markets. If the US dollar is backed by something of actual value, like electricity, then we can all calm down, knowing that money is something of value that can't be manipulated by bankers on Wall Street and the Federal Reserve.  In essence, an electricity-backed currency decreases the role and power of the Federal Reserve. (Check out this future post How to Implement Electricity Backed Currency  )

The connections between non-equilibrium thermodynamics and economics has been and will continue to be a theme of future posts on this blog.

My goal in these posts is to educate (as best as I know) anybody who is interested in learning about the connection between energy/electricity generation and macro/microeconomics. This is an important topic because the generation of work (such as electricity) is the goal of a society, and it's easy to listen to present-day economists (both classicists and Keynesians) and get really confused. It's easy to listen to a series of arguments from one side and agree with them, and then listen to arguments from the other side and agree with them too! This is due to the fact that, in my opinion, both classical and Keynesian economists are misguided, and are good a hiding the self-referential nature of economics.

My goal in these posts is to start with the basics, and then work our way up to more complicated principals in economics. The starting point is the generation of work (such as electricity). If you have to eventually tie everything back to work (in units of kW-hr, let's say), then it's really difficult to over-leverage the economy. Arguments about the multiplier effect of government stimulus go away since the only way that the government can generate a multiplier effect is if it invests in processes that have a positive "average rate of return on investment."

In other words, an electricity-backed currency is one way of removing as much fuzzy math as possible, and making economics more tangible for people without degrees in the subject. Over the next few posts, I'll be going over some the problems in our current theories of economics and how they can be improved with inclusion of the following two items:
1) Non-equilibrium thermodynamics  (i.e. how to generate work from a system far-from-equilibrium)

2) Electricity-backed currency (i.e. maintaining the price of electricity within a certain narrow range, and backing the currency up with a known amount of electricity) See Energy Backed Money for more information.

Let me know what you think.