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Economics and Energy

To appreciate the economics of energy conversion, some basic principles of physics need to be understood. To make this as easy as humanly possible, let’s compare economics with physics, as economics is a subject that you are already very familiar with.

I hope…

If not, please invest $2.99 and read my book!

So, take a deep breath, open your mind and away we go…

Both Economic Wealth and Energy can be Stored

Anything that has monetary value (i.e., a price greater than zero as established by a free market), stores economic wealth. A house, a stock certificate and a bitcoin are all storing economic wealth.

Whereas energy can be stored in batteries, hydrocarbon molecules, hydrogen molecules, hydro dams, etc.

Both Economic Wealth and Energy can be Transferred

Economic wealth is easily transferred whether by the physical exchange of paper currency, the usage of Venmo, or the transfer of bitcoin.

Energy is transferred in all sorts of ways, including the sunlight reaching the Earth, ocean waves, the physical relocation of fuel or batteries, or the usage of an electrical grid or a natural gas pipeline.

Both Economic Wealth and Energy can be Converted

When goods or services are bought and sold, economic wealth is often converted into currency form as an intermediate holder of the wealth, and often converted again into a purchased good or asset.

Energy is often converted from one form to another, one example being a solar panel that converts sunlight to electricity.

Economic Wealth Can Be Created and Consumed, Energy Cannot

Economic wealth is created by the application of productive work to an economic resource, and can be consumed in many ways, examples being the consumption of food or the advancement of science.

In contrast, energy is never created or consumed. Per the First Law of Thermodynamics, “The total energy in a system remains constant, although it may be converted from one form to another."

Economic Wealth is Subjective, Energy is Objective.

Economic wealth cannot be directly or scientifically observed as it is a concept, something we collectively believe in. It is imprecisely measured in units of currency, another concept, that represents a usually decreasing amount of wealth. While this notion of wealth nicely explains our behavior at times, its opaqueness makes it difficult to comprehend, let alone logically analyze.

In contrast, energy is observable and exists throughout the universe. Humans measure energy in units of joules, where a joule is a fixed and precisely defined amount of energy. A joule of energy on Mother Earth will represent the same amount of energy as one joule on Alpha Centauri.

Maybe physics is not so bad after all…

The Many Forms of Energy

Energy exists in many forms, as detailed here.

Quick summary:

Potential Energy; stored or related to position. Examples being chemical (batteries, hydrocarbons), mechanical (a compressed string), nuclear (nuclear bonds), and gravitational (higher elevation objects such as water stored in a hydro-dam).

Kinetic Energy; related to motion. Examples being radiant (electromagnetic waves), thermal (heat, which is molecular vibration), motion (moving objects, wind), sound (traveling waves), electrical (movement of electrons).

Energy is constantly being converted from one form to another, that is the nature of the universe. Mostly a natural process, such as the center of a star converting nuclear energy into radiant and thermal energy. But can also be an artificial process thanks to science-based invented devices such as turbines and solar panels.

Using such invented devices humans harvest, convert, store and transfer energy, eventually converting it one last time to do some useful, such as heating a house, making a car move, or using your cell phone. This final useful conversion step is often referred to as “energy consumption”, (even though the energy is not really being consumed.) In 2020, this last step “consumption” of energy represented $1 trillion of spending, about 4.8% of our GDP.

What is Energy? How is it Measured?

Assume that you slowly push a chair across a level, slightly sticky floor. You push with just enough constant force such that the chair slowly moves. At the one-meter mark you remove the force, and the chair stops.

Such an applied force is measured in units of “newtons (N)”, named after Sir Isaac Newton, and I kid you not, one newton is about equal to the weight, a downward force, of an apple held in your hand.

The definition of a joule in this mechanical example is:

1 joule (J) = 1 newton-meter (N-M)

In other words, this application of exactly one newton of force to move an object one meter, by definition, implies that one joule of potential energy (chemical, stored in your muscles) was initially transferred by converting it into kinetic energy (the moving chair), and eventually into thermal energy (friction induced heat).

Which gives you a rough idea of how much one joule of energy represents. Whether or not floors are pushed across sticky floors in other galaxies is yet to be determined.

What is Power?

It will require a finite amount of time, whether quickly or slowly, for this chair to move one meter, which brings us to the concept of power, which is the rate of energy conversion. Power is measured in units of watts(W), and the definition of power in this example is:

1 watt = 1 joule per second (of energy conversion)

If it took five seconds to move the chair one meter, the rate of energy conversion would be 0.2 joules per second, or a power of 0.2 Watts.

If it only took one second to move it, the power would be 1 Watt.

The key point is that while the amount of energy converted is constant, the power depends on how fast the energy is being converted.

A Real World Example

While pushing chairs across sticky floors is terrible interesting, let’s instead talk about electricity, which can conveniently and usefully assume the form of either potential energy (for storage) or kinetic energy (for transfer).

Every second an incandescent 60-watt light bulb converts 60 joules of kinetic electrical energy to mostly thermal energy (heat), and some radiant energy (light). If this bulb is replaced with a much more efficient 10W LED light bulb, it will now convert just 10 joules per second of electrical energy, most of it into radiant energy.

Here is another example. Electrical potential energy can be stored in batteries, and a common fully charged lithium-ion cell has an energy storage capacity of 15 watt-hours. Assume that this battery is discharging (i.e., converting) energy at the rate of 5 joules per second, or 5 watts. Three hours later, the total amount of energy converted is equal to 5 watts x 3 hours = 15 watt-hours, which means that the battery is now dead.

Let’s Think Bigger.

A typical house requires anywhere between 10,000 – 20,000 watts of electrical power to heat it, run the air-conditioners, etc.

20,000 watts is a big number, so will conveniently convert this to 20 kilowatts. If this were the average energy transfer rate over a 24-hour period, then the net daily energy transferred to the average house would be 20 x 24 = 480 kilowatt-hours (kWh).

Look at your last utility bill, and sure enough, you were billed according to the kilowatt-hours of electrical energy transferred to your house for about the last 30 days.

Moving up the Energy Chain.

Let’s assume that 400,000 people live in a city, that on average there are 4 people per house, implying that there are 100,000 homes. Math tells us that all the homes in this city will need to convert 480 kWh x 100,000 = 48,000,000 kWh of electrical energy per day, which is the same as 48 gigawatt-hours (gWh) per day.

Where will this energy come from?

Traditionally this is what power plants are for. A 2gW power plant (a reasonable size), operating non-stop will convert 48 gWh of harvested energy per day into electrical energy, to be transferred over the electrical grid to homes and businesses.

The Boom and the Challenge

The devices that harvest, transfer, and convert energy all consume economic wealth, whether it be to invent, produce or to operate them. This being the most important intersection of economics and energy.

For over the last century fossil fuels have supplied the world with low-cost energy, creating unprecedented economic wealth which advanced science, technology, and medicine, improving the standard of living for many.

Corresponding well with the “Spinning Economic Wheel of Wealth Creation” model.

That was the boom, when the percentage of GDP spent on energy was relatively low.

The challenge we now face is that:

- Low-cost energy (that a free market will naturally favor) tends not to be the cleanest source of energy.

- The global energy market has not implemented a consistent carbon tax.

- Developing countries are increasingly demanding the lowest cost source of energy to improve their standard of living.

These are opposing goals without a common solution, meaning that emissions of carbon may easily continue to increase.

What is the path to a common solution, an emission free, low-cost energy solution for all? Solar? Wind? Nuclear? Natural Gas? A combination of all?

I don’t have the answer, but what we do know is that if that the percentage of our GDP spent on energy increases, there will be less wealth for everything else, including the critically required research to develop new, clean sources of energy, and the infrastructure required to convert and transport it.

There might be some tough decisions ahead.

Which is why I have chosen to educate myself on this matter, and perhaps you should too.


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