CHAPTER 1

GETTING OUR FIX

At lunchtime on 30 July 2012, three out of India’s five electricity grids crashed. The two-day blackout that followed upset the lives, to varying degrees, of an estimated700 million people. Hundreds of trains stopped without warning, many in the middle of nowhere. Failed traffic lights caused major traffi c jams, bringing cities to a standstill. Water supplies were interrupted, surgical operations and cremations were halted, and miners were stranded below ground. When demand for power outweighs a country’s ability to provide it, the lights go out. And they could start going out in more developed countries before long.

India has a slightly better excuse than the developed world for losing the electricity plot – it is an emerging economy whose rapid growth has outgrown its creaking old infrastructure. If the lights go out in the West, it will be because we became so infatuated with green energy that we let it distort our grip on reality. And the results could be extreme. Although previous power cuts have provoked the occasional riot, the discomfited Indians were fairly restrained in their response to the Great Blackout. And yet mayhem is never far from the surface. In the summer of 1977, a series of lightning strikes knocked out the electricity supply to most of New York City for more than 24 hours. In the almost total darkness that resulted, civilization appeared to evaporate. More than 1,600 shops were looted, more than 1,000 fires broke out, and an outburst of general violence and disorder prompted nearly 4,000 arrests. It was said that the city’s birth rate spiked nine months later. This turned out to be false, but people had no trouble believing it, because it made perfect intuitive sense. Without electricity, with no light or cooking facilities, no television or public transport, and with anarchy in the streets, our nocturnal options are reduced to those of our Neolithic ancestors.

The fact is that we are hopelessly addicted to energy. It is the thin glue that holds our ‘civilized’ world together and life without it would be unthinkable. We need it to provide the life-or-death necessities of food, clothing, and shelter, as well as the comforts we have come to regard as necessities – lighting, heat, phones, computers, televisions, and all those other gadgets. We require energy in one form or another to travel more than a few kilometres by land, air, or, for the most part, sea. This is an addiction for which there is no cure and, like most addicts, our habit demands bigger and bigger fixes. Unlike street junkies, however, we need to plan many years in advance exactly where those fixes will come from.

That would be challenging enough in itself, but we have an additional problem. Our drug, or at least the way we produce it, has unpleasant side effects. The emission of greenhouse gases and other pollutants associated with fossil fuels is clearly undesirable, and replacing them with cleaner, more sustainable fuels is a rational goal. Whether it is sensible or even possible to try to achieve that goal in a compressed time frame, and at any price, is a different matter. The idea of promoting green energy while cutting emissions has such broad and instant popular appeal that it has shot up the political agenda in most developed countries. This political Bubble, which has diverted large sums of public money into renewable energy, has in turn created a financial Bubble, as business snaps up the ‘free’ money on offer to launch otherwise unviable green energy projects. Both Bubbles are unsustainable and when they burst, as they must, they will not only create financial havoc but may also set back the green energy cause for many years.

The fundamental, urgent question is how do we keep the lights on in 2030, or 2040, or 2050 while reducing carbon emissions in a meaningful way? As taxpayers, we have a crucial part to play in determining the answer, since it is our money that politicians are spending on one specific vision of a green energy future. Politics drives energy policy as much, or even more, than economics, and the two do not always pull in the same direction. Dependent as we are on finite supplies of dirty fossil fuels, often under the control of foreign, and not always friendly, governments, we want our energy to be clean and sustainable. But we also want it to be there and our aspiration must be tempered by what is practical and possible. Politicians are inclined to court short-term popularity at the expense of the hard choices necessary for a long-term good such as energy security. Yet there is no perfect energy option. The best we can do is to make the least-worst choice. This book will argue that there are more effective ways of spending our money to achieve the least-worst outcome.

What do I know about it, and why should you pay any attention to what I think? I am an investment banker, specializing in mining, oil and gas, and alternative energy companies. A Dane, I now live and work in London. After a career with a number of leading financial companies, including Goldman Sachs in New York, I set up my own investment bank, Wimmer Financial, with a network of corporate clients, institutional investors, and business partners in other geographies. I have a separate asset management company, Wimmer Family Office, which runs investment strategies on behalf of high-net-worth individuals and families. Wimmer Space is the umbrella company for my three planned trips to space and other adventures, including the world’s first tandem skydive over Mount Everest (in October 2008). It also includes our charity activities, publishing and TV documentaries, as well as public and motivational speaking. Every day I work with energy and resources businesses of all kinds, helping them to raise finance and to plan their futures. So this is a milieu I know a little about, and it is my experience of it that has shaped the thoughts in this book. Before I get into the thrust of my argument, however, let me briefly paint a picture of the energy world that these companies, and ultimately all of us, inhabit.

Since the start of the Industrial Revolution, world energy consumption has increased exponentially – which is to say faster and faster. At one time, its growth was driven by the industrialization of the Western world.

In future, it will be driven more by rising populations and living standards in Asia and Africa. More disposable nappies are now sold in Nigeria each year than in the whole of the European Union, which illustrates how the balance of consumption – and, ultimately, energy use – is shifting. As more people in China buy cars and fridges or climb onto planes, so the world’s demand for energy will keep on growing.

If energy growth keeps accelerating, the rate at which we have been able to switch from one dominant source of fuel to another has been much, much slower. The Industrial Revolution, which began halfway through the 18th century, was powered mainly by coal. Even so, it was many years before coal overtook wood (or ‘biomass’, as scientists would say) as the leading energy source. That only happened more than a century later, about 1880, just as oil was starting to appear. Today, oil is our largest energy source, its growth driven by the spread of the automobile and the internal combustion engine. And yet oil’s share of the total did not overtake coal until 1960. As we need to understand when contemplating the future, sweeping shifts in fuel usage do not happen overnight, even if we want them to.

Some years ago, an American bioengineer named Hewitt Crane coined an unsettling new term that put our voracious consumption into perspective. Crane was an early IT pioneer who developed the world’s first all-magnetic computer and who subsequently worked on optical character and handwriting recognition. Late in his life, he turned to what he realized was a very serious problem: given the speed at which our energy needs are growing, how can we keep supplying them in the future? Surveying all the different fuel sources and their Babel-like units of measurement, he was struck by how difficult it was for non-specialists merely to grasp the scale of the problem – all those mind-numbing tons of coal, barrels of oil, and cubic feet of gas, producing joules, calories, and megawatt-hours, in their millions and billions and trillions. He decided that, if we were to make critical choices about our energy future – which is essentially the subject of this book – we needed common, understandable terms in which to discuss it.

So Crane distilled the bewildering confusion of the energy lexicon into one simple measurement – the ‘cubic mile of oil’ or CMO. This is exactly what it says, a cube of oil, one mile high, one mile long, and one mile wide. As a unit, it describes our consumption of the real oil that is pumped out of the ground. It also measures the consumption of other energy sources by expressing their thermal energy content in terms of their oil equivalent. So one CMO of coal is the amount of coal that, when burnt, releases the same amount of thermal energy as one CMO of oil. One cubic mile of oil is roughly four cubic kilometres of oil. Expressed in the huge numbers that Crane was trying to avoid, it is also (very) approximately 1 trillion gallons, 4 trillion litres, or 26 billion barrels.

Crane died in 2008, so did not live to see the 2010 publication of A Cubic Mile of Oil, the book he co-wrote with colleagues Edwin Kinderman and Ripudaman Malhotra. It examines the options for averting what it calls “the looming global energy crisis” and we shall return to it later. Right now, in their terms of measurement, the world consumes roughly three cubic miles of oil every year.¹ The bad news, according to Crane et al, is that within less than 40 years, by 2050, we will be consuming six cubic miles of oil, and then only if we succeed in our best efforts at energy conservation. If, as is quite possible, we do not, they estimate we will need nine cubic miles of oil. Where will it come from?

One cubic mile or one third of our current consumption is actual oil, with the remaining two thirds coming from other sources such as coal, gas, nuclear, and hydro (see table page 17). It is worth noting that in 2009 all the other ‘alternative’, ‘green’, or ‘renewable’ energy sources combined, such as solar, wind, geothermal, wave, and tide energy but excluding hydro and biomass, made up less than 1% of the total, according to the International Energy Agency (IEA).² In its central outlook scenario, the IEA predicts that, by 2035, this share will still not be much more than 4%.

Each of these energy sources has its own distinct character, its own pluses and minuses in terms of cost, energy content and efficiency, abundance and sustainability of supply, technological challenge, and social acceptability. One very important variable, which gets a lot of air time in debates about renewable energy, is ‘load factor’. This measures how much electricity a generator type actually produces as a percentage of its total capacity – which is what it would produce if it ran for 24 hours a day and 365 days a year. Whereas a nuclear plant can grind on day and night to achieve load factors of 90% or more, the intermittency of the wind means that onshore wind turbines typically produce electricity less than one third of the time. All of these features will influence the part each plays in our energy supply in years to come, even as our taxes are spent – as, in principle, they should be – in an attempt to mould the desired outcome. Since this is ultimately a political choice, we need to decide what that outcome should be, within the limits of what is technologically possible and what we can reasonably afford.

We have to start by assessing our options, and so the rest of this chapter reviews the fuels and technologies we rely on at present, weighing their advantages and disadvantages. In Chapter 2, we take a critical look at alternative, renewable energy sources for power generation, and Chapter 3 examines the technologies that aspire to replace liquid fossil fuels in the wider world of transport. Alternatives need subsidies, so Chapter 4 looks at how green energy businesses are assembled, at the people who run them, and at how the finances work. Free money usually attracts too many people, however, and already we can see a Bubble forming in the green energy business. Chapter 5 describes this phenomenon and drills deeper into some of the problems attached to renewable energy. Perhaps the greenest approach to energy is to use less of it, so Chapter 6 reports on progress in the energy efficiency market, including smart grids, and light emitting diodes (LEDs). Chapter 7 compares European and US energy strategies, and finds Europe wanting. Chapter 8 shows how the drive for more renewables is starting to go horribly wrong. In the final chapter, all of this evidence is reviewed and I recommend what I believe to be our least-worst option. Let us begin with our traditional energy sources.

COAL

Oil is the biggest single source of our world’s energy. But one third of our energy – one cubic mile of oil – is used to generate electricity, and the dominant fuel for electricity generation is coal. It has persuasive advantages, alongside some rather unpleasant disadvantages. Coal has been with us for thousands of years, with traces found in Bronze Age funeral pyres dating from the third millennium BC. It came into its own after James Watt modified the steam engine – the ‘external’ combustion engine – so that it could provide a rotary motion, as wind and water mills had done for millennia. That was in the latter half of the 18th century and it gave wings to the Industrial Revolution. Burning coal provided the heat that boiled the water to produce the steam. It still does that today, producing steam to turn turbines in coal-fired power stations, although the coal is now milled into powder so that it burns more quickly. ‘Supercritical’ plants operate at higher temperatures and pressures and produce more energy from less coal, with lower emissions. The latest ‘ultra-supercritical’ plants do the same but more so – they have only been made possible by new super alloys that can withstand these higher temperatures.

Coal has a thermal content more than twice that of wood, which it gradually replaced as the dominant source of energy. Like other fossil fuels, it is effectively frozen solar energy, absorbed by plants millions of years ago and then buried before it could be released through decay. There are ascending qualities of coal, depending on the nature of the original vegetation and on how long and at what depths it has been buried (longer and deeper means more energy content). Lignite or brown coal is at the low end of the quality spectrum, containing the least thermal energy, rising through sub-bituminous coal, thermal or steam coal, metallurgical coal (used to make iron and steel) to anthracite, which has the fewest impurities and highest calorific content, and is widely used as domestic fuel. The lower-quality coals from lignite to thermal coal are used in power generation, and account for 41% of the world’s electricity, followed by gas (21%), hydro (16%), nuclear (13%), and oil (5%) [IEA 2009].

Coal’s virtues are that it is plentiful, cheap, and easy to mine. It is found in at least 70 countries around the world, with the biggest reserves in the US, Russia, China, and India. China, which overtook the US as the world’s largest energy consumer in 2009, is now the world’s biggest producer and biggest consumer of coal. Nearly 80% of China’s power generation is coal-fired, and it has been building new coal-burning power stations at the extraordinary rate of about two a week, although an old plant must now be closed for every one that opens. India is expected to replace the US as the world’s second-largest coal consumer (and its largest seaborne coal importer) by 2017.³

Recently, the world ratio of coal reserves to coal production has been falling, making some wonder whether we are approaching the ‘peak coal’ moment, after which production will go into irreversible decline. As a fossil fuel, coal is a necessarily finite resource and when it has gone, it has gone. It seems unlikely, however, that supplies are anywhere near serious depletion. New discoveries continue to be made and new technologies are allowing previously inaccessible deposits to be mined. What is more, improvements in power station design and combustion technology are enabling more energy to be produced from less coal.

Apart from being a finite resource, coal’s greatest disadvantage is, of course, the fact that it is dirty. When burned it releases pollutants such as sulphur dioxide and nitrogen oxides, which cause acid rain, and carbon dioxide, a greenhouse gas. Newer ‘integrated gasification combined cycle’ (IGCC) plants, which gasify the coal before burning it, have significantly lower non-greenhouse gas emissions, although they can cost nearly twice as much to build. Another greenhouse gas, methane, is trapped underground in coal seams and gets released during the mining process. The deeper and older the coal seam, the more methane escapes. However, methane is the main component of natural gas, and to all intents and purposes it is natural gas. So if it can be recovered, it is a useful fuel. The process of extracting coal-bed methane, as it is called, involves a lot of water, which must be disposed of and may be contaminated, so some environmentalists refer to coal-bed methane (or ‘coal seam gas’) as “the evil twin of shale gas”.

Methane links in to another negative feature of coal and coal mining, which is that it is dangerous for those who have to mine it, particularly underground. Subterranean methane explosions kill many miners around the world every year, especially in China. More mining operations are now installing methane recovery systems, partly for safety reasons and partly to sell as a fuel. In the case of surface mines, dust, noise, and landscape disfigurement can be disagreeable for those who live nearby.

Cleaner ways of using coal are evolving, although these invariably add to its cost. Some treat the coal beforehand, whereas others gasify the coal and then clean the gas before firing it in a gas turbine. That is a stop on the road to full ‘carbon capture and storage’ (CCS), which is more talked about than acted upon. CCS is what it says – a process of separating and capturing carbon dioxide before, during, or after combustion of a fossil fuel such as coal.

The gas is then transported by pipeline, and pumped deep underground where it is stored in porous rocks. It can be pumped into oilfields where, by maintaining pressure, it helps the operators to extract more oil, in a process known as ‘enhanced oil recovery’. The general idea is that CCS should be fitted to new coal-fired power stations or retro-fitted to old ones, so that we can continue to benefit from coal’s virtues while not suffering from its defects. (Which is why some environmentalists deplore it – they say we should we getting rid of coal altogether.) The problem is that CCS is very expensive and reduces efficiency – the amount of energy extracted from the coal. The US Department of Energy reckons that CCS fitted to a new pulverized coal plant may increase the cost of the electricity by up to 80% while reducing efficiency (because it burns extra fuel) by 20% to 30%.⁴ There are a handful of commercial-scale CCS projects up and running, but none is attached to a power station. In most cases, they are used in gas fields to reduce the carbon dioxide content of the gas to commercially acceptable levels.

Coal gasification has other applications in transport and chemicals. Using Fischer-Tropsch technology developed in Germany during the 1920s, coal can be gasified and then turned into less-polluting liquid synthetic fuels, including low-sulphur diesel, as well as certain petrochemicals. Oil-from-coal producer Sasol has been doing this in coal-rich South Africa since 1950, although it has yet to catch on elsewhere. Coal-to-fuel could conceivably become more widely attractive if the price of oil continues to rise, as it almost certainly will. ‘Underground coal gasification’, still in its infancy, uses similar chemistry to gasify coal without removing it from its seam. In essence, it means setting fire to the coal underground, although the process actually heats the coal to the point where, instead of bursting into flame, it separates into syngas. Some of the carbon dioxide can then be extracted, producing a cleaner, cheaper alternative to natural gas. Perhaps not surprisingly, underground coal gasification freaks out environmentalists even more than shale gas and coal-bed methane.

Coal may be dominant, but there are good reasons why we use a mix of other fuels to supply power to the electricity grid, the network that links power generation to the end user. One is simply security in diversity – we do not want to be too dependent on any one fuel. Another is that different types of plant provide different levels of flexibility and cost. In the early days of electricity, standalone generators were built near the homes or factories that consumed their power. The grid, with its long-distance transmission lines, allows power generated anywhere to be tapped by consumers anywhere. Since there is no practical means of storing electricity on this scale, however, the grid must constantly balance supply and demand from all of these different sources, making electricity always available when needed but without too much costly and wasteful generation. Too much power coming into the grid can be as problematic as not enough power. Staying on the line between the two is a tricky feat to pull off and, if the grid operators get it wrong, blackout beckons.

Maintaining this balance economically calls for a mix of generator types. ‘Baseload’ generators pump out electricity, at or near full, capacity all the time, with only occasional shutdowns for maintenance. ‘Load following’ generators adjust their output as demand fluctuates during the 24-hour cycle. And ‘standby’ generation is only switched on when needed, in extreme peak periods of demand or when baseload or load following plants are unable to supply electricity for one reason or another. Because standby and, to some extent, load following require the plants to be fired up and shut down more often, they have higher running costs and shorter lives. In some countries, an additional plant is switched into the grid according to a ‘merit order’ – those with the lowest marginal cost of production come in first. Marginal costs are variable costs that, in this case, are essentially fuel costs. Since the costs of renewable energy fuel – the sunshine, the wind, the action of the sea – are zero, that puts them at the head of the queue, causing problems for other generators that we will touch on later.

Coal-fired power stations are expensive to build compared with gas-fired plants, although they have a longer technical lifetime, at about 40 years. Today, big plants routinely cost more than $1 billion to build. A proposed 740MW Chilean coal-fired plant now being contested in court has a budget of $1.4 billion⁵, for example. That is approximately $1,900 per kilowatt (kW) of capacity. The latest ultra-supercritical plants have a typical investment cost in Europe (lower in China, higher in the US and Japan) of about $2,100 per kW.⁶ Newer IGCC designs (that is the integrated gasification combined cycle technology which, as mentioned earlier, gasifies the coal), can cost $2,400 per kW.

Coal plants take about four years to build and can take days to fire up, but they are cheap to run, so older power stations were ideally suited for baseload operations. Newer ones are having to adapt to more load following, particularly as intermittent supplies from renewables such as solar and wind power become more of a permanent feature on the grid. Load factors for coal vary from country to country and plant to plant, but in general, at about 75% to 85%, are the highest of all fuels except nuclear. All in all, coal has historically been the cheapest way to produce bulk electricity. Today, however, the economics of coal are being stretched in some more developed countries by regulatory requirements to control emissions with costly flue cleaning or carbon capture and storage equipment, as well as the need to buy carbon permits equivalent to their emissions. These regulatory costs close the cost gap between coal and cleaner fuels, making the latter more competitive, which is precisely the point of them. Carbon permits are not working as well as they might, because they are so cheap to buy and therefore do not make burning coal as prohibitively expensive as their inventors might have hoped. We will touch on this, the so-called ‘price of carbon’, again in the next chapter.

Coal may have been cast as power generation’s villain, but do not expect to say goodbye to it any time soon. In spite of efforts to relegate it to its smoggy past, coal’s share of the global energy mix is actually still rising, and the IEA⁷ says that, by 2017, it will “come close to surpassing oil” as the world’s top energy source. Between now and then, we will burn another 1.2 billion more tonnes a year of coal, more than the current annual consumption of the US and Russia combined, the agency says. That is because of abundant supplies and the “insatiable” demand for power from emerging markets. “In the absence of a high carbon price, only fierce competition from low-priced gas can effectively reduce coal demand,” it concludes. Coal may seem like yesterday’s technology, but people need energy, and new coal-fired plants are opening up almost every day. In late 2012, the World Resources Institute identified 1,200 new coal power stations being planned in 59 countries.⁸

OIL AND GAS

Crude oil or petroleum (from the Greek ‘petra’ and ‘oleum’ for ‘rock’ and ‘oil’) was first used for lighting in the mid-18th century. By the 1880s, realizing that oil had twice the energy content of coal, Admiral of the Fleet Lord Fisher, the great Royal Navy reformer, began arguing for its adoption as fuel in British warships. Replacing coal with oil would increase their range, allow smaller boilers, and do away with the arduous work of loading and stoking coal, freeing up men for more productive tasks. Then, as now, oil packs a lot of punch in a small space. It was the 20th century before the Royal Navy took Fisher’s advice and by then oil, or its gasoline derivative, had found a growth market in the shape of the automobile. Even then there was a debate about whether it might be better to power the new vehicles with batteries.

Oil and coal are created in much the same way, except that while coal comes from dead plant matter, oil and gas are produced by millions of dead marine organisms that drifted to the floors of seas and lakes before being covered by sediment. There is no such thing as a subterranean lake of oil. Instead, the oil resides in tiny cavities within porous sedimentary rock, which makes it rather more difficult to extract. At high temperatures oil turns into natural gas, which may be found in the same place as oil or on its own. Major oil sites include the Middle East and North Africa, Siberia, the North Sea, the Gulf of Mexico, West Africa (most notably Nigeria but with regions such as Angola and Southern Sudan becoming more important), Indonesia, and the Caspian Sea. The great unexplored oil territory lies beneath the Arctic Ocean, abutted by Alaska, Canada, Greenland, Norway, and Russia and is now attracting a lot of attention from international oil companies, not to mention governments. The Arctic may hold 13% of the world’s estimated undiscovered oil reserves and a whopping 30% of its undiscovered natural gas, according to the US Geological Survey.⁹

‘Peak oil’ is a more pressing debate than ‘peak coal’, but the day when world oil production begins to head irreversibly downhill is a moving target, as new finds continue to be made. Looking for oil costs increasingly more per barrel discovered, because all the easy deposits have already been found. Oil companies must explore in ever more challenging places, usually at sea, and in ever deeper waters, where costs multiply. The countries that own the oil are taking a larger slice of the proceeds in taxes and royalties, boosting what they call their ‘retained economic interests’. Recent upheavals in the Middle East have raised concerns over future oil supplies, which has forced prices upward. So oil economics continue to grow more challenging, even as higher prices justify more costly exploration. Oil companies are still making sizeable finds, in places such as East Africa, offshore Brazil, and in the deep waters off French Guiana. Even in the North Sea, long regarded as in decline and originally supposed to have been sucked dry by 1990, Norway’s Statoil recently celebrated the biggest find since the 1980s. And regardless of what has already been found beneath the ocean floor, most of the world’s offshore territory has yet to be explored.

Another factor pushing back the date of peak oil is technology, which is allowing oil producers to squeeze more oil out of existing wells or new geologies. Since they often have to leave behind two barrels of oil for every one they extract, this leaves some scope for improvement. If they could increase recovery rates only to one barrel in two it would, self-evidently, double the world’s proven oil reserves. Some techniques use heat or injections of gas, chemicals, or water to force more oil to the surface. The latest embryonic idea for squeezing production involves nanotechnology – injecting millions of minute carbon clusters (‘nanoreporters’) into underground reservoirs, where changes in their chemistry will signal the presence of oil that has been left behind. ‘Horizontal’ drilling, although considerably more expensive than vertical drilling, can greatly increase production. Horizontal drilling combined with hydraulic fracturing or ‘fracking’ (explained later), has opened up vast new reserves of ‘tight oil’ – oil in relatively nonporous rock – in the US, Canada, and quite possibly elsewhere, such as China, Russia, and Argentina.

Unlike a lot of new green energy businesses, where making the sums work can be very sensitive to this subsidy or that interest rate, financing a new oil or gas project is reasonably straightforward. If it costs X to get it out of the ground and you can sell it for Y, and if Y is still bigger than X after all the outstretched hands have had their share, you have got a nice profitable business. Where the wells are situated can be more problematic. Under normal circumstances, you would not get too close to Nigeria, for example. It is very risky. If you want to do deals in Russia, it helps if the parties are politically well-connected.

It would be good if we were less dependent on liquid fuels such as gasoline and fuel oil, since they account for more than a third of all man-made carbon emissions.¹⁰ The bulk of this comes from the world’s motor vehicle fleet, which has doubled every 15 years since 1970 and which continues to grow. Meaningful contributions also come from airlines and the shipping industry, although aircraft engines continue to become more efficient and therefore ‘cleaner’. If the world’s shipping fleet were a country, it would be the sixth largest polluter on earth, according to United Nations statistics. Experimental sails on container ships, to complement rather than replace their engines, suggest that substantial reductions are possible from that quarter. Molten carbonate fuel cells, which make electricity from compressed air and hydrogen-rich syngas (produced from carbons), can already power a ship’s auxiliary electrical systems and may one day propel the ship. Cleaner fuel for cars seems a no-brainer, even if the green lobby has now turned its face against certain kinds of biofuels.

Yet, if we are addicted to energy in general, we are seriously hooked on oil and it will be very difficult to get unhooked. It is the most calorific of all the fossil fuels and, like the most pernicious drugs, gives a lot of bang for your buck. With electricity generation, it is possible over time to change fuel sources without undue disruption. The central distribution infrastructure – the electricity grid – remains relatively unaffected. But our transport infrastructure is much more inextricably wedded to petroleum-based fuel, with millions of gasoline-and diesel-powered vehicles and their attendant networks of refuelling and servicing points. We shall explore the possibilities for electric and hydrogen-powered vehicles more fully in Chapter 3, but there remain huge problems with battery technology in areas such as capacity vs. weight, how far you can drive before recharging, and the risks for any private sector initiatives to create a nationwide recharging infrastructure.

If the oil ran out, we would be forced to come up with an alternative. But do not hold your breath. Sheikh Yamani, Saudi oil minister for nearly a quarter of a century, made the point rather memorably. “The Stone Age didn’t end for lack of stone,” he said, “and the oil age will end long before the world runs out of oil.” The most powerful influence on oil usage in the medium term will not be the supply of oil but its price. The more expensive it gets, the more pressure this creates, even on the reluctant, to come up with viable alternatives. This is not presently the case with oil’s close cousin, natural gas, which is getting cheaper, at least in some parts of the world. If transport is oil’s natural metier, gas is used principally in electricity generation and heating. It is, essentially, oil-lite. Liquefied or under pressure, it has roughly 40% of oil’s energy content, although about two-thirds more than brown coal. Even though oil is cleaner than coal, gas is the cleanest of the fossil fuels, producing half as much carbon dioxide as coal and two-thirds that of oil when burnt. It produces dramatically less nitrogen oxide than either and no sulphur to speak of.

There will be no immediate shortage of natural gas supplies, with big new finds in places such as Tanzania and Mozambique. Qatar, which has the world’s third-largest gas reserves after Russia and Iran, keeps finding more. (The Qataris have been spending some of their new-found wealth in London where, among other trophy investments, they now own the famous Harrods department store, The Shard skyscraper, and the Grosvenor Square site of the soon-to-be former US embassy. We have dealings with their London-based head of property investment.) Then there is the emergence of fracking, which is unlocking huge quantities of ‘unconventional’ gas from shale rock and so-called ‘tight sands’ or sandstone. The technique, developed in the 1990s by Texas oilman George Mitchell, involves blasting these nonporous geological formations with water, sand, and various chemicals. It uses lots of energy and water, which its opponents do not like, and they dislike even more its potential for contaminating aquifers, releasing methane, or even causing earthquakes. Its backers say these risks can be managed, at a cost, which is worth paying since the potential is enormous. Fracking has become widespread in the US, producing large quantities of inexpensive gas and forcing down prices, to the point where US gas producers are finding it difficult to make any money. We are involved with US companies that are active in this new industry.

Cheap shale gas now represents nearly one quarter of all US gas production and, as it displaces more expensive coal in electricity generation, US carbon emissions have been falling.¹¹ That is ironic, since in Europe, which has tried so much harder to reduce emissions, they have risen. This is partly because European gas prices are contractually linked to the price of oil, unlike free-floating US prices, and are therefore very high. So the dirty old coal that is no longer being burned in the US is being exported to Europe, where it is displacing more expensive but not-so-dirty gas. That is global markets for you.

If the US has all the oil and gas it needs, the world could become a different place. The American Gas Association reckons that the US has nearly a century’s supply of gas, half of it in shale and other rock formations.¹² More strikingly, the IEA says that, with the help of shale gas and tight oil, the US will overtake Saudi Arabia and Russia to become the world’s largest global oil producer by 2017.¹³ Some predict that the US could now achieve the energy independence it has so desperately wanted by 2030, or even 2020. This would have all sorts of geopolitical consequences. The US would invade the Middle East less often, for one thing. But it could also have at least one negative side-effect, easing the pressure on the security-conscious Americans to develop more non-carbon technologies.

Other countries may soon start blasting their own shale geologies, including China and Australia, both believed to have large deposits. Europe has nearly as much shale gas as America, although exploitation may prove harder for geological, legal, and political reasons. The shale gas tends to lie deeper underground, and is therefore more difficult to recover. In the US, what lies under the land usually belongs to the landowner. In Europe, it usually belongs to the state, so landowners are less keen on the sight of oil and gas rigs. Test fracking near the UK seaside resort of Blackpool produced two earth tremors in 2011, resulting in a blaze of negative publicity. The British government eventually decided to allow the practice to continue, although with additional monitoring, but France, Bulgaria, and the Czech Republic wasted no time in banning fracking for shale gas.

Oil-fired power stations can generate electricity on a large scale and can theoretically be used for baseload or load following. Given the price of oil, however, this is expensive power. So whereas a few oil-rich countries such as Saudi Arabia use oil for a significant proportion of their generation, most others prefer to keep it on standby, particularly since it can be brought on stream relatively quickly when needed.

Gas, on the other hand, has been enjoying a golden age in generation and will probably continue to do so for some time. Gas turbine plants, which can be built rapidly and fairly cheaply, fall into two categories – open circuit, and closed circuit or ‘combined cycle gas turbine’ (CCGT). The first is capable of very quick start-up but is relatively inefficient, and so is generally used as a standby plant. The second recycles its exhaust heat, boosting efficiencies, but takes longer to fire up. In Europe, a CCGT plant costs about $900/kW to build and construction times are typically about two years.¹⁴ This makes them cheaper and quicker to build than coal-fired plants although, at about 30 years, they have a shorter technical life. The weaknesses of gas-fired generation include its sensitivity to changes in gas prices and, depending on where it is situated, vulnerability to any volatility in supply. That volatility can be as much political as logistical. Russia, which supplies a quarter of the EU’s gas supplies, has shown itself quite prepared to turn off the taps when it feels provoked. So no one in their right mind wants to be too dependent on Russia for keeping the lights on.

NUCLEAR

Compared with electricity from coal, oil, or gas, nuclear power is ‘clean’, although its opponents would contest that point. But before we get into that argument, let us sketch out the basics. The process involves splitting atoms of uranium-235 by bombarding them with neutrons. The chain reaction set off by this nuclear ‘fission’ releases large amounts of energy that can be used to heat water, produce steam, and drive a turbine in much the same way as fossil-fuel-powered generation.

Uranium is found just about everywhere in the Earth’s crust, and is present in most rocks, usually at very low levels. It has two isotopes, uranium-238 and uranium-235, the latter being by far the rarer and most radioactive of the two. Most natural uranium contains fewer than 1% uranium-235 and must be enriched to between 3% and 5% for use in power generation, or between 85% and 90% for nuclear weapons. Enrichment is generally carried out using highly sophisticated gas centrifuges. The only reason that many countries lack the ability to make nuclear weapons is building or acquiring arms-grade centrifuges is extremely difficult.

Today, the world consumes about 180 million pounds of uranium a year (excluding military consumption, which is unknown). The vast bulk of that comes from mining, and a small proportion is produced by reprocessing spent fuel rods. Some 13%¹⁵ comes from the US-Russian Highly Enriched Uranium Agreement – otherwise known as the Megatons to Megawatts Program – that turns old Soviet nuclear warhead uranium into low-enriched uranium for power plants. The largest uranium mine in the world is at McArthur River in northern Saskatchewan, Canada. McArthur River has abnormally high-grade deposits, containing up to 20% uranium-235. That is sufficiently radioactive for the mining to be carried out by remote-controlled robots. Australia has the world’s largest-known uranium deposits but Kazakhstan is the biggest mining producer, having overtaken Canada in 2010. Australia comes third in the production league, followed by Niger, Namibia, and Russia. There will be no shortage of uranium any time soon.

Radioactivity is, of course, uranium-235’s dark side. The prospect of radioactive fallout as a result of nuclear accident or catastrophe – as at Chernobyl or Fukushima, for example – is cause for public concern, although, as we shall see, it frightens people more than is really justified. Even so, exposure to radiation can cause increases in cancers and, after very high doses, radiation sickness and death. Then there is the problem of how to dispose of spent but still radioactive nuclear fuel safely.

Until now, there has been no practical substitute for uranium-235. In the future, however, a safer alternative may be thorium, which has certain very desirable advantages. It is even more abundant than uranium, does not require enrichment, and is much more difficult to use in weapons. Unlike present uranium reactors, which are giant pressure cookers, the molten salt reactor designs proposed for thorium operate at normal pressures. They can use nuclear waste from other reactors as fuel, helping to solve, rather than adding to, the waste problem. Perhaps most importantly, the fission process is much easier to shut down and most of what little waste they leave is safe within a decade. Various countries have been experimenting with thorium-based reactors, including India, which has extensive thorium deposits, and China. Thorium research still has some way to go, although some believe we will see working thorium reactors by 2028. We shall be taking a closer look at thorium later.

Nuclear plants are well-suited to baseload generation. They take a while to start up, but they can have very high load factors and are very cheap to run. Unlike oil and gas, where large and unexpected price rises can suddenly make a project uneconomic, ongoing fuel costs for nuclear plants are a small percentage of the whole. So even if the uranium price doubled, the economic effect would be relatively slight. The overwhelming cost burden of nuclear projects lies in the up-front capital expenditure – they are slow and very expensive to build. The IEA puts typical nuclear build costs in Europe at about $4,000/ kW¹⁶, and typical build times at five years. The financial estimates will have been inflated by the experience at Finland’s Olkiluoto 3 project. Western Europe’s first new nuclear power station for 15 years, this has run disastrously over time and budget and looks like taking 10 years to build. Most nuclear project budgets also have to take decommissioning costs into account, which can average $800/kW, and waste disposal. In Finland, however, the state assumes liability for nuclear waste, funded by a small levy on the price of nuclear electricity. Nuclear’s running costs are among the cheapest of all and, if and when added carbon costs begin to kick in for fossil fuels, the all-in cost playing field will be levelled more in nuclear’s favour.

As things stand now, the costs and risks associated with nuclear mean that new private-sector-funded plants are unlikely to be built without some form of public help. And even though public subsidies are permitted for ‘renewable’ energy projects within the European Union, nuclear is not classified as renewable. Opposition to nuclear has recently hardened among some member states, notably Germany, making the possibility of reclassification more remote. Although Olkiluoto has not done nuclear’s reputation any favours, it was the meltdown at Fukushima that delivered the latest threat to its prospects. The earthquake and tsunami that devastated the north east coast of Japan’s Honshu island in March 2011 knocked out the nuclear power plant’s cooling pumps, causing a number of reactors to overheat. The television pictures were harrowing, but the situation was eventually brought under control and there was no loss of life. Nonetheless, the disaster prompted reaction on an international scale. The most extreme knee-jerk response came from Germany, which immediately closed down all pre-1980 reactors and ordered utilities to shut down all the others by 2022. Japan shut down all its own reactors and is reviewing its nuclear policy. Switzerland and Italy have imposed nuclear moratoria and various other countries, such as Brazil, have delayed their nuclear plans. This is the kind of political risk that makes nuclear, without any guarantees or sweeteners, even less enticing to the private sector. China, on the other hand, is unsentimentally accelerating its development of nuclear power, alongside shale gas and – our next subject – hydroelectric energy.

HYDRO

We said that there was no perfect energy option, but hydroelectric energy comes close. The trouble is that only certain countries are lucky enough to have the topography and the water supply to make it happen. Although it is utterly ‘renewable’ and as ‘clean’ as it gets, hydro is included in this chapter rather than the next because it is such a tried and tested part of our existing energy mix.

Like fossil-fuel generation, hydro converts one form of energy into another by turning a turbine-mounted magnet inside a coil. The difference is that it uses the kinetic energy of falling or flowing water rather than the thermal energy of heat and steam. Although it is possible to generate on a small scale with ‘run of river’ plants, relying on river flow only with no reservoir, most hydro comes from dammed water. The amount of power that can be extracted depends on the ‘head’, the difference in height between the upstream water level and the outlet level – the higher the dam, the bigger the power capacity.

Unlike other renewables such as wind and solar, hydro can deliver power on a huge scale. And unlike them it is predictable and controllable and can be switched on and off whenever it is needed. This almost instantaneous availability makes it highly suited to standby generation or load following. Countries with abundant water resources are more likely to use it for baseload – such as Norway, which gets 99% of its electricity from hydro, Canada (57%), Switzerland (55%), and Sweden (44%). Another positive feature of hydro is the possibility of ‘pumped storage’, which can boost revenues for generators and help with load management. On the same principle as a storage heater, this uses low-priced electricity at times of low demand – late at night, perhaps – to pump water back up into smaller reservoirs. From there, the water can be released at peak demand periods to generate more power for sale when prices are highest.

Hydro is not entirely perfect, however, and it does have its downsides. Large schemes can displace thousands of people, who have to pack up and move as rising waters in the new dam cover their homes. They can cause problems for farmers downstream, by interfering with their water supply, and play havoc with fish populations. Downstream water quality may be affected and, if the dam fails, the results can be catastrophic. Hydro projects can take up to eight years to build and are very expensive, although the costs per kilowatt fall rapidly as the capacity rises, from $3,900/kW for a small European scheme to $2,230/kW for a large one.¹⁷ Depending on their situation, the electricity may have to be transmitted over long distances, adding to costs. Hydro installations can last 100 years, and the fuel is free, but they are dependent on the availability of water, and some warn that climate change could affect future hydro generation.

Even with those caveats, hydroelectricity does just about everything that environmentally-minded legislators want from power generation and it can do it on a large scale. Unfortunately, since it requires sufficient water supply and the right terrain in the right (ie underpopulated) place, the technology is not reproducible at will. For countries not blessed with those virtues, other clean – if less mature – technologies seem more accessible and we shall now examine some of their strengths and weaknesses.

In the following chapters, we shall look at the strengths and weaknesses of alternative energy sources, and review developments in the world of transport. We shall meet some of the people who are creating green energy projects and then we’ll examine how Bubbles start. Because energy saving is the most effective form of green energy, I have included a chapter on energy efficiency. Then I explain how European energy policy is effectively a very large bet on rising fossil-fuel prices, a bet that we may be destined to lose. I show how the green energy Bubble is already leaking air before concluding with my own prescription for what we need to do to keep the lights on.