Tuesday, August 5, 2008

Part I: The Economics of Alternative Energy (Updated)


Alternative energy forms are coming closer to being economically viable, but all still have a ways to go and some, such as wind power, have unique problems that make large scale reliance on that energy form problematic. Indeed, none of the alternative energy forms are at the point where they can substitute cost effectively and without unintended consequences for oil and gas.
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This is Part I of what is planned to be a series of four posts on our energy alternatives.

Part II - Oil & The Hostile Domestic Regulatory Environment

Part III - Why Exploit Our Domestic Oil Resources

This from Rebecca Smith writing in the WSJ in February, 2007 provides an excellent overview of the status of alternative energy forms at that time. There have been advances and, in some cases, observation of unintended consequences that I address at the end of her article:

. . . For years, the big criticism of alternative energy was cost: It was too expensive compared with energy based on traditional fuels like coal and natural gas.

Even though the fuel was often free -- such as wind or the sun's rays -- alternative-energy producers had to plow lots of money into finding the best way to capture that energy and convert it into electricity.

. . . Alternative energy still can't compete with fossil fuels on price. But the margins are narrowing, particularly since oil and gas prices have been rising. . . .

Alternative energy still faces obstacles to mainstream success. Many projects need government or utility subsidies and incentives to be viable. Generating costs have risen recently for some types of renewable resources, pushed by higher materials prices, labor costs and demand. Supply chains are prone to hiccups, and wind and solar-energy resources need backup sources of power to compensate on windless or cloudy days.

For all its promise, relatively little electricity currently comes from renewable sources, other than hydropower. According to the Energy Information Administration, renewable resources produced 2.3% of the U.S. electricity supply in 2005. Bio-mass was responsible for 1.5%, wind for 0.44%, geothermal for 0.36% and solar power for a scant 0.01%.

In contrast, coal-fired generation produced 49.7% of U.S. electricity supplies in 2005, followed by nuclear power at 19.3%, natural gas at 19.1%, hydropower at 6.5% and oil-fired generation at 3%.

. . . Here's a look at the economics of the various alternative-energy sources -- how much they cost now and what developments could make them more competitive.

WIND

Wind power stands out as one of the splashiest success stories in renewable energy. Over the past 10 years, as wind farms sprouted around the world, the cost of generating electricity from wind has fallen dramatically.

In 1980, wind-power electricity cost 80 cents per kilowatt hour; by 1991 it cost 10 cents, according to the International Energy Agency.

Today, production costs at the best on-shore sites have dropped as low as 3 cents to 4 cents per kilowatt hour, but are more typically 6 cents to 9 cents, not counting subsidies -- getting closer to the cost of generating electricity from burning coal. In fact, costs are approaching the point where wind power may be able to prosper without subsidies -- currently 1.9 cents a kilowatt hour in the U.S. -- particularly if natural-gas prices stay high.

The Department of Energy's Energy Information Administration has concluded that there isn't much difference between the cost of new power plants using wind and other traditional fuels, such as nuclear, coal and natural gas, if you take into account a broad array of expenses. A plant entering service in 2015, the administration said in a 2006 report, could make electricity from wind for 5.58 cents a kilowatt hour -- versus 5.25 cents for natural gas, 5.31 cents for coal and 5.93 cents for nuclear. The report didn't quantify the differing environmental impacts.

A host of factors have brought down the cost of wind power. The materials used in wind turbines have improved, and the turbines are now much larger and more efficient: 125 meters in rotor diameter, compared with 10 meters in the 1970s. The cost of financing wind farms also has dropped as financial markets become more comfortable with the risks involved.

Governments have also given wind power a boost. In Germany, the largest wind-power producer, the government has been giving grants to builders of wind farms since the late 1980s, and requires utilities to buy electricity generated from renewable sources at premium rates. The extra cost is passed on to consumers.

In the U.S., the extension of the federal Production Tax Credit -- which gives tax credits to alternative-energy companies -- has spurred record development over the past two years, as have state renewable-procurement targets. The nation's wind-power generating capacity increased by 27% in 2006 to 11,603 megawatts, according to the American Wind Energy Association. Only gas-fired generators added more megawatts of capacity in the U.S. . . .

. . . By the end of 2005, there were about 59,000 megawatts of total installed capacity of wind power world-wide, enough for the needs of roughly 20 million homes. Two-thirds of that capacity is in Europe; Germany, Spain, the U.S., India and Denmark are the top five producers of wind power.

Wind power faces hurdles. Factors like location, wind speeds and capital costs have a big impact on the cost of generating wind power. The price of 3 cents to 4 cents per kilowatt hour only holds at sites with the best wind conditions. In some places with less wind, costs can still be as high as 20 cents per kilowatt hour. Meanwhile, a shortage of turbines the past couple of years has pushed up construction costs in the U.S., as has a weak dollar. . . .

SOLAR

For decades, solar power has endured cycles of booms and busts as investors made big bets only to watch the technology fail to achieve its promise. Solar power still accounts for less than 1% of the world's power generation, with 5,400 megawatts of capacity on line, enough for the daytime needs of 2 million to 3 million homes. (Solar power doesn't generate electricity at night, meaning backup energy sources are needed.)

One reason there's relatively little solar electricity is that traditional solar panels aren't very efficient at converting sunlight to electricity. So most solar electricity is made and consumed at a single site -- and in many cases isn't even enough to meet the needs of a single house. A recent study by the New Jersey Board of Public Utilities found that it cost about $77,500 to install a 10 kilowatt-capacity system on a house. Without subsidies, it would take 50 years to pay for itself. With subsidies, it dropped to 9.6 years.

In all, the cost of generating electricity with solar panels is 35 cents to 45 cents per kilowatt hour, according to the International Energy Agency. In the U.S., costs are typically less -- 26 cents to 35 cents -- because there's better sun, says the U.S. Solar Energy Industry Association.

Now, however, a new generation of solar plants is on the cusp of being able to produce electricity on an industrial scale at competitive rates. The new plants use a technology called concentrating solar power, or CSP, which is much more powerful than the classic photovoltaic panels, which use semiconductor chips to convert sunlight into electricity. CSP plants use huge arrays of mirrors or solar dishes to track the sun and collect its heat to make electricity. The plants can generate hundreds of megawatts of power, closer to what fossil-fueled plants make.

The major hurdle remains bringing generating costs in line with those of conventional power plants. It costs 9 cents to 12 cents to generate one kilowatt hour of electricity by CSP -- not counting any subsidies -- compared with about 3 cents to 5 cents to generate the same amount of electricity by burning coal.

Tom Mancini, CSP program manager at the Energy Department's Sandia National Laboratories, says three factors make CSP plants more expensive than a traditional coal plant even though the raw material -- the sun's rays -- is free. Because the technology is so new, the equipment is pricey in itself and costs more to operate and maintain. And financing such projects is costly because of the perceived risk. CSP is a young technology: Only 6% of solar energy is generated by CSP technology, with the lion's share still coming from traditional solar panels that typically are heavily subsidized by homeowners.

For now, CSP still needs government support to be viable, either in the form of tax breaks to builders of plants or subsidies to buyers of electricity. The industry scored a major coup in 2006 with the creation of a U.S. tax credit that equals 30% of a solar project's cost. A growing system of state-sponsored renewable-energy credits also gives developers a valuable revenue stream. The credits are bought and sold by businesses and utilities trying to meet greenhouse-gas reduction goals.

. . . Energy experts argue that as more CSP plants go into operation, the technology will improve and costs will come down. But with current costs high, few companies are willing to take the risk of building without significant government incentives. "It's a chicken-and-egg situation," says Mr. Mancini.

BIOMASS

Although it doesn't get much public attention, biomass is the biggest source of renewable electricity in the U.S. today -- producing more electricity than wind, solar and geothermal sources combined.

Biomass refers to the conversion of plant matter into a transportation fuel (biofuel) or electricity (biopower), usually by incinerating waste material or creating combustible gas through chemical processes. A significant amount of electricity also is made by gathering and burning landfill gas.

It's a growing area of interest because methane, created by decaying organic material, is a more potent greenhouse gas than carbon dioxide -- so people are anxious to put it to use and keep it out of the atmosphere. Many cities also burn solid waste to cut down the volume destined for landfill sites, and they're eager to convert the garbage to something useful.

The biggest biomass power generators in the U.S. aren't utilities. They're forest-products companies with big sawmill and pulp operations, like International Paper Co., Weyerhaeuser Co. and Koch Industries' Georgia-Pacific Corp. Weyerhaeuser, for example, makes electricity by reusing waste heat and by burning hog fuel, or wood waste, and black liquor, a pulp-mill byproduct. It sells the power it produces -- equivalent to the annual energy needs of 140,000 homes -- to local utilities.

Because biomass plants typically are small -- usually less than 50 megwatts in capacity, or one-tenth the size of a conventional fossil-fuel power plant -- equipment costs are high relative to the amount of power produced. That, in turn, makes generating costs somewhat high -- currently, about 5 cents to 10 cents a kilowatt hour without subsidies.

Power costs are also related to the cost of fuel and the amount of heat embedded in it. As many homeowners know, there's more energy locked in an oak log than a pine log. The same holds true for biomass power generation -- some fuels make more heat and, thus, electricity. Better numbers can also be achieved by mixing plant matter with fossil fuels, like coal, and burning them together at large plants to capture the greater efficiencies.

Costs are expected to come down as technology improves and as more waste material gets redirected to electricity production, providing a cheap fuel stream. Many experts believe biomass will expand dramatically in coming years as more industries look for ways to make electricity out of their waste, diverting more material away from landfill sites.

A recent study by the California Biomass Collaborative, a government and industry group, concluded there are 80 million tons of plant material produced in California each year that could be diverted to biomass use. About 30 million tons are practically available. The study said those 30 million tons could be converted into 2,500 megawatts of electricity, equivalent to five large gas-fired plants, and 1.3 billion gallons of transportation fuel at competitive prices.

Biomass has gotten a jolt from renewable-portfolio standards embraced by nearly half the states, which require utilities to get electricity from renewable resources. In California, for instance, the state's energy agencies have set a rough goal of having biomass sources generate 4% of the state's power by 2010.

GEOTHERMAL

Geothermal energy -- tapping heat deep in the Earth to generate power -- may have more potential, at less impact to society, than any of the other alternative resources. A new study on geothermal energy, produced by an interdisciplinary team at the Massachusetts Institute of Technology, found that geothermal energy could produce 10% of the nation's electricity by 2050 at prices that would be competitive with fossil fuels.

Geothermal heat is turned into electricity through a number of methods. In general, producers drill into the ground to release steam and water that have been naturally heated and, until then, trapped. These are used to power a turbine and generator, making electricity. Liquids are reinjected into the ground to keep the process running.

Currently, geothermal energy costs about 6 cents to 10 cents a kilowatt hour, without subsidies. The main expense is actually drilling the holes and building power plants on top of them. And expertise is needed to properly manage a site to make sure the right amount of liquid is cycled through the geothermal source to extract the heat.

The amount of electricity produced depends on many things, including the size of the geothermal field, water pressure and temperature and how quickly the field can heat and release water.

Geothermal energy is especially valuable because it makes electricity around the clock, unlike solar or wind power that require backup sources of generation. Also, unlike wind and solar installations, geothermal plants have a small footprint -- smaller, even, than many fossil-fuel power plants. Advancements in equipment are making it possible to generate electricity with lower-temperature geothermal resources, and new drilling techniques let producers plumb greater depths.

Today, there's about 8,000 megawatts of installed geothermal capacity globally, with 3,000 megawatts in the U.S., the top producer. Mostly, it has been developed where heat is easily accessed and is accompanied by water and porous rock. The biggest developed field in the U.S. lies 72 miles north of San Francisco at The Geysers. Nineteen of the 21 plants at the site are owned by Calpine Corp., which makes 725 megawatts of electricity there, equivalent to one and a half large conventional power plants.

The MIT study found that far more geothermal electricity could be generated if companies -- especially oil companies -- leveraged their knowledge of drilling techniques, geology and hydrology to tackle the problem. An investment of $800 million to $1 billion in research and development would be required, equivalent to the expense of a single coal-fired plant.

The initial units would make electricity for 10 cents or so a kilowatt hour but later plants would see costs fall to 5 cents a kilowatt hour, probably within a decade, as processes became more refined. That would make geothermal operations competitive with modern gas-fired plants. But backers say that for geothermal energy to thrive, supportive policies are needed, including loan guarantees, depletion allowances, tax credits and accelerated depreciation -- things oil, gas and minerals-extraction companies get.

Still, geothermal energy does come with a caveat: Heat sources can be depleted if not carefully managed. At The Geysers, for instance, operators have had to retire at least half a dozen generating units, even though the field was developed largely only in the 1970s and 1980s.

BIOFUELS

Interest in alternative transportation fuels -- mostly ethanol -- soared following President Bush's declaration a year ago that the U.S. is "addicted to oil." Many potential fuels are being discussed, from biodiesel to hydrogen. Most of the buzz is around what's already by far the biggest alternative transportation fuel in the U.S.: ethanol made from corn.

There's lots of talk about the possibility of using ethanol as a standalone fuel to power cars. But virtually all the ethanol consumed in the U.S. today is used in a less-sexy way: It's blended into normal gasoline.

That's done mostly in parts of the country with bad air-pollution problems, because adding ethanol to gasoline reduces smog-causing emissions from the cars that burn the fuel. Ethanol also is used as a gasoline "extender."

The cost of producing ethanol depends largely on the cost of corn, ethanol's main feedstock. It also depends on the cost of the energy -- typically natural gas -- used to power the process that turns the corn into ethanol. Keith Collins, chief economist at the U.S. Department of Agriculture, estimates that today it costs about $1.60 to produce a gallon of ethanol.

Ethanol producers sell their brew on a wholesale market -- sometimes to gasoline refiners and sometimes to middlemen who sell to those refiners. The price of ethanol typically rises and falls with that of gasoline, which itself is a function of the global oil price. Ethanol typically has sold for up to 51 cents per gallon more than gasoline, because the federal government gives ethanol blenders a 51-cent-per-gallon tax break to encourage production of the supplemental fuel.

. . . Ethanol's per-gallon price premium over gasoline widened to more than $1. Margins for ethanol producers ballooned. Yet by late last year, the ethanol boom was cooling. The sudden profitability of the ethanol business, combined with increasing federal requirements for the production of alternative fuels, sparked a rush of investment in new ethanol plants.

Meanwhile, gasoline prices, and thus ethanol prices, were falling from their mid-2006 highs. The production costs for ethanol were also rising, largely because the rush to produce more ethanol had driven up the price of the fuel's main feedstock, corn.

On Friday, the price of ethanol for March delivery closed at $2.06 a gallon on the Chicago Board of Trade, and the price of gasoline for March delivery closed at $1.61 a gallon on the New York Mercantile Exchange.

Where ethanol prices will go from here is a matter of debate. President Bush, in his State of the Union speech last month, laid out an ambitious target for the U.S. to consume about 35 billion gallons of ethanol and other alternative transportation fuels by 2017. (The U.S. currently consumes about 5.2 billion gallons of ethanol per year.)

Reaching the numbers outlined by President Bush won't be easy. It probably would require significantly increasing the concentration of ethanol that's blended into gasoline. That, paradoxically, is a move that scientists say raises potential air-pollution problems of its own. Studies show that while ethanol added to gasoline in low concentrations helps reduce certain emissions, such as carbon monoxide, it tends to increase some other emissions.

Another option to meet the government mandate would be to increase the use of ethanol as a standalone fuel. That would require the installation of ethanol pumps at gas stations -- a move that could cost the oil industry billions of dollars.

Read the entire article.

Here are some updates to the information above:

Wind:

This is the centerpiece of T. Boone Pickens plan. He wants to see 20% or more of the countries electical generation capacity coming from wind power. As he writes:

Studies from around the world show that the Great Plains States are home to the greatest wind energy potential in the world — by far.

The Department of Energy reports that 20% of America's electricity can come from wind. North Dakota alone has the potential to provide power for more than a quarter of the country.

Today's wind turbines stand up to 410 feet tall, with blades that stretch 148 feet in length. The blades collect the wind's kinetic energy. In one year, a 3-megawatt wind turbine produces as much energy as 12,000 barrels of imported oil.

Wind power currently accounts for 48 billion kWh of electricity a year in the United States — enough to serve more than 4.5 million households. That is still only about 1% of current demand, but the potential of wind is much greater.

A 2005 Stanford University study found that there is enough wind power worldwide to satisfy global demand 7 times over — even if only 20% of wind power could be captured.

Building wind facilities in the corridor that stretches from the Texas panhandle to North Dakota could produce 20% of the electricity for the United States at a cost of $1 trillion. It would take another $200 billion to build the capacity to transmit that energy to cities and towns.

That's a lot of money, but it's a one-time cost. And compared to the $700 billion we spend on foreign oil every year, it's a bargain.

I have not seen any major criticisms of this plan yet to be able to start to judge its viability. I do know that wind generated power has proven problematic elsewhere when tried at large scale. For example, this is the criticism by Christopher Booker, a columnist for the Telegraph, of an equally ambitious plan in the UK and Europe:

. . . [B]ecause wind power is so unpredictable and needs other sources available at a moment's notice, it is generally accepted that any contribution above 10 per cent made by wind to a grid dangerously destabilises it.

Two years ago, much of western Europe blacked out after a rush of German windpower into the continental grid forced other power stations to close down. The head of Austria's grid warned that the system was becoming so unbalanced by the "excessive" building of wind turbines that Europe would soon be "confronted with massive connector problems". Yet Mr Hutton's turbines would require a system capable of withstanding power swings of up to 33GW, when the only outside backup on which our island grid can depend is a 2GW connector to France (which derives 80 per cent of its electricity from nuclear power).

Nothing better illustrates the fatuity of windpower than the fact that Denmark, with the highest concentration of turbines in the world, must export more than 80 per cent of its wind-generated electricity to Norway, to prevent its grid being swamped when the wind is blowing, while remaining heavily reliant the rest of the time on power from Sweden and Germany.

The Danes, who decided in 2002 to build no more turbines, have learnt their lesson. . . .

UPDATE: No Oil For Pacifists blogs on a National Review article that analyzes the Pickens plan and finds it wanting for much the same reasons as Chris Booker articulates. Here is a part of the post:

. . . Electricity must be consumed the moment it is generated; there are no methods for storage on an industrial scale. This means that supply and demand must constantly match within about 5 percent. Otherwise there will be power “dips” or “surges,” which can cause brownouts, ruin electrical equipment, or even bring the whole system crashing down.

Traditionally, maintaining voltage balance has involved two things: (1) matching supply with demand through the normal daytime/nighttime fluctuations, with demand usually peaking around mid-afternoon, and (2) maintaining a “spinning reserve” against sudden losses of power, in case an overloaded transmission line brushes against a tree and shorts out, or a generator unexpectedly shuts down. Utilities generally build “peaking plants” to handle high daytime demand, then carry a “spinning reserve” of 20 percent of output to guard against shutdowns.

Now imagine introducing a power source that is constantly fluctuating. The output of a windmill varies with the cube of wind speed, so it can change greatly from minute to minute. Putting windmills on the grid is a little like the Flying Wallendas’ hiring a new crew member to shake the wire while they are doing their balancing act. Engineers who work on electrical grids have been quietly complaining for years, and over the last decade, grid operators in Denmark, Japan, and Ireland have all refused to accept more wind energy. In fact, Denmark — the world leader in wind generation — stopped building windmills altogether in 2007. After long discussions at numerous symposiums and in professional energy journals, a consensus has emerged that, even with very accurate weather forecasts and other improvements, a grid can at best tolerate a maximum of 20 percent wind energy. Above that, the fluctuations become too difficult to mask. That’s why DOE chose the 20 percent–by–2030 goal. . .

Oh, there’s one more rub. Bringing windmills online will require building a whole new cross-country transmission system. While wind energy is concentrated in the Midwest, consumer demand is mostly on the East and West Coasts. Normal transmission lines — of 138 kilovolts (kV) and 345 kV — lose about 10 to 15 percent of their wattage every 1,000 miles, which is not a problem when the power is generated close to the consumer. But transmitting electricity halfway across the country will require a completely new infrastructure of 765 kV lines that cover long distances without losing power. This could be an enormous problem, because utility executives now say the only thing more difficult than siting a power plant is building new transmission lines, since every property owner and municipal jurisdiction in the path gets to have a say. Ranchers who are as just as picky as Pickens about what they permit on their land could pose huge obstacles.

Solar:

There is good news on the solar energy front regarding CSP technology and other challenges. This from the blog Next Big Future:

EETimes reports that MIT has a new catalyst that makes electrolysis nearly 100% efficient in a cost effective way. This would make storage of intermittent power from solar and wind more cost effective.

CNET also has coverageMIT had recently developed special glass panels that concentrate light 40 times standard sunlight before delivery directly to the cell. They expect this technology to be commercialized in three years.

The system is so simple to manufacturer that the inventors expect it to be deployed within 3 years at little cost over standard window costs.



In other solar power news, from the New Scientist magazine, a new material could harness both visible and infrared photons, so it has a theoretical maximum efficiency of 63%, it creators say, and should give significantly better real-world performance.
Current solar cells absorb visible light and have a maximum efficiency of about 40%. They add titanium and vanadium atoms into a conventional semiconductor, altering its electronic properties to create the intermediate energy level. It may prove challenging to insert enough titanium or vanadium to form a properly functioning intermediate energy level in the semiconductor.

The hard part of getting water to split is not the hydrogen -- platinum as a catalyst works fine for the hydrogen. But platinum works very poorly for oxygen, making you use much more energy," said MIT chemistry professor Daniel Nocera. "What we have done is made a catalyst work for the oxygen part without any extra energy. In fact, with our catalyst almost 100 percent of the current used for electrolysis goes into making oxygen and hydrogen."

MIT's patented formulation of cobalt phosphate was dissolved in water. When the electrical current is passed through it to initiate electrolysis, the catalyst attached itself to the oxygen electrode to increase its efficiency. When the electrical current was turned off, the cobalt phosphate dissolved back into water.

Nickel oxide catalysts are currently used to boost the efficiency of electrolyzers, and they worked equally well in MIT's formulation, Nocera acknowledged. He added that the toxicity of nickel oxide forces the use of expensive, hermetically-sealed water containers. MIT's patented catalyst formulation is "green," Nocera said, and can be used in inexpensive open containers.

Biomass:

The embrace of first generation bio-fuels has been an utter disaster in terms of food prices and environmental damage. Second generation biofuels, such as switch grass, still present the problem of using arable land for something other than food crops. There is some promising work being done, however, with bug dung and sea weed that would not require any arable land or fresh water resources.

Nuclear:

The problems with nuclear power plants are storage of the nuclear waste and construction costs. The latter are rising so fast that nuclear plants may no longer be economically viable in the U.S. according to the WSJ.


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Anonymous said...

In your example of solar power (PV) you said the payback without subsidy was 50 years. That is incorrect because it assumes a no interest loan. If you purchase a PV system either with a loan or using money you would otherwise invest then PV never has a payback and in fact the cumulative interest costs keep increasing the total loan much like an unpaid student loan. PV is not and likely will never be practical. As for the subsidized PV costs well, that begs the question. Obviously it is subsidized exactly because it is incapable of paying for itself. And clearly shifting that extra cost to the taxpayer does nothing to make PV more practical.
As for Ethanol from corn I have to point out that the government economist was incorrect in his wild ass guess on the cost per gallon. Ethanol from corn uses more energy into the process then it gives in the form of ethanol. More oil, NG and coal is used to make the ethanol then it is worth. The ONLY reason we still have ethanol from corn is because of the lobbyist and farm state congressmen who keep subsidizing it. But it gets worse: Making fuel from food results in the obvious, i.e. more expensive food. Using enormous amounts of groundwater to make ethanol results in a faster depletion of critical water for agriculture (which will sooner or later compound all our problems). And last but not least it has been proven that ethanol actually pollutes more then gasoline does. Go figure; a government economist was wildly wrong! Who would have guessed?

The bottom line is there are no viable alternatives. There are a number of small things we can do mostly in conservation and elimination of wasteful practices. But there is no free energy and when fossil fuels are gone the free ride is over and a lot of people will die.