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> The same example can be made with monetary ROI, too. You can have an exclusive small business that has excellent ROI, however, cannot scale. How do you compar

> The same example can be made with monetary ROI, too. You can have an exclusive small business that has excellent ROI, however, cannot scale. How do you compare that to a large business/market with ROI close to one? Sorry, I do not see the similarity. In your example you are limiting how much you can invest to one opportunity. And (risk adjusted) ROI is perfectly valid way to compare both of your companies, I just invest as much as I can to the higher yielding asset. > You cannot use any accounting tricks (such as subsidies) to fake it. It may be more difficult to fake, but it does not answer the question what use the measure has. (Note that ROI may be fakeable in the short term, but in the long term that is much more difficult. Either you get your money back or you do not.)

js8 10y ago
> Sorry, I do not see the similarity. OK, let me try to explain better. In your example, the only thing that prevents me to invest in the source A (with the ridiculously high EROEI) is how much other resources than energy I currently have. For example, say source A requires diamonds, which are expensive, and I can only afford a handful. But source A is much better investment than the source B, and I absolutely want to invest into A first (at the very least, I can sell the energy with much higher profit margin). In my example, the only thing that prevents me to invest into higher-yielding asset (and we agree it's a good idea) is some additional limitation of reality (availability of resources), for example the size of the market. So in both examples, there has to be an additional resource constraint, which prevents putting all investment into the higher-yielding enterprise. In the first example this limiting resource is money, in the 2nd example it cannot be money, but it can be something else. So if ROI is a good way to compare investment opportunities, EROEI is a good way to compare energy sources. > It may be more difficult to fake, but it does not answer the question what use the measure has. An well-known example where ROI was faked is subsidies for ethanol as energy source. EROEI is less than 1, but because of the subsidies, ROI became larger than 1. The EROEI would be an ultimate measure of where to put your effort (energy) if you were alone in the world and there were no other people. Then you wouldn't need money and could price everything in energy required to obtain it. Or equivalently, the world where people would collectively want to minimize the amount of effort they want to spend. Which is not quite the real world with money (the wealthy people for example can afford less effort than others), but it's useful as an approximation of it (and if you assume free market, then they are very close).
- beefield 10y ago
  > But source A is much better investment than the source B You misunderstood me. Quote: "investment costs are one million dollars per watt generated." It will cost you a million dollars to get one watt of output It is much worse investment than B. > The EROEI would be an ultimate measure of where to put your effort (energy) if you were alone in the world and there were no other people. There are other factors of production than energy. Land use and time would be completely ignored even in the single person autarky model.
  - js8 10y ago
    > You misunderstood me. I think you are in contradiction, then. What is the cost of energy in your example world? > It will cost you a million dollars to get one watt of output It is much worse investment than B. I don't think you can reconcile this claim with the EROEIs you used in your example. > There are other factors of production than energy. Land use and time would be completely ignored even in the single person autarky model. Yes, other factors that are possibly scarce are missing from that model. But that is the same deal for ROI calculations, too, as I already explained. The point is, just like money you have is the most important factor limiting investment, (thermodynamic free) energy is the most important factor limiting production.
    - js8 10y ago
      > I think you are in contradiction, then. Let me explain a bit better where is the contradiction. The high cost of source A from your example indicates that this source requires some expensive fuel. If there is an unlimited (in practice) amount of this fuel, in other words, it's not scarce, then this high price indicates that it's very hard to obtain (takes a lot of effort). This contradicts to the claim that source A has high EROEI, because if it has high EROEI, then it means that the fuel for it can be obtained very easily (with very little energy investment). (You could see the contradiction the best if you were to actually set the cost of energy in your world.) The only way out of this contradiction is to assume that this "expensive fuel" is a very scarce (finite) resource, which cannot be readily produced from other things. For example, say it's platinum, and we would like to keep platinum to make other things out of it rather than burn it to make energy (and that's why it's expensive - people want to keep it). So that was my original interpretation of your example. In that case, source A is a better way to make energy than B, it's just you don't have enough fuel you would like to use for it, and so you can only use it in small volume. Just like with ROI - there can be excellent investments with very limited volume, and just ROI will not tell you anything about the volume. As a side note - I really recommend to stop thinking about economics in terms of money and start thinking in terms of means of production (which is where EROEI comes in). And only then, when you see the full economic picture on the process level (how things get transformed in the economy), introduce the actual monetary accounting. This way, you can avoid some pitfalls (such as simultaneously claiming that price of energy is both very low and very high).

js8 10y ago

> Sorry, I do not see the similarity. OK, let me try to explain better. In your example, the only thing that prevents me to invest in the source A (with the ridiculously high EROEI) is how much other resources than energy I currently have. For example, say source A requires diamonds, which are expensive, and I can only afford a handful. But source A is much better investment than the source B, and I absolutely want to invest into A first (at the very least, I can sell the energy with much higher profit margin). In my example, the only thing that prevents me to invest into higher-yielding asset (and we agree it's a good idea) is some additional limitation of reality (availability of resources), for example the size of the market. So in both examples, there has to be an additional resource constraint, which prevents putting all investment into the higher-yielding enterprise. In the first example this limiting resource is money, in the 2nd example it cannot be money, but it can be something else. So if ROI is a good way to compare investment opportunities, EROEI is a good way to compare energy sources. > It may be more difficult to fake, but it does not answer the question what use the measure has. An well-known example where ROI was faked is subsidies for ethanol as energy source. EROEI is less than 1, but because of the subsidies, ROI became larger than 1. The EROEI would be an ultimate measure of where to put your effort (energy) if you were alone in the world and there were no other people. Then you wouldn't need money and could price everything in energy required to obtain it. Or equivalently, the world where people would collectively want to minimize the amount of effort they want to spend. Which is not quite the real world with money (the wealthy people for example can afford less effort than others), but it's useful as an approximation of it (and if you assume free market, then they are very close).

beefield 10y ago
> But source A is much better investment than the source B You misunderstood me. Quote: "investment costs are one million dollars per watt generated." It will cost you a million dollars to get one watt of output It is much worse investment than B. > The EROEI would be an ultimate measure of where to put your effort (energy) if you were alone in the world and there were no other people. There are other factors of production than energy. Land use and time would be completely ignored even in the single person autarky model.
- js8 10y ago
  > You misunderstood me. I think you are in contradiction, then. What is the cost of energy in your example world? > It will cost you a million dollars to get one watt of output It is much worse investment than B. I don't think you can reconcile this claim with the EROEIs you used in your example. > There are other factors of production than energy. Land use and time would be completely ignored even in the single person autarky model. Yes, other factors that are possibly scarce are missing from that model. But that is the same deal for ROI calculations, too, as I already explained. The point is, just like money you have is the most important factor limiting investment, (thermodynamic free) energy is the most important factor limiting production.
  - js8 10y ago
    > I think you are in contradiction, then. Let me explain a bit better where is the contradiction. The high cost of source A from your example indicates that this source requires some expensive fuel. If there is an unlimited (in practice) amount of this fuel, in other words, it's not scarce, then this high price indicates that it's very hard to obtain (takes a lot of effort). This contradicts to the claim that source A has high EROEI, because if it has high EROEI, then it means that the fuel for it can be obtained very easily (with very little energy investment). (You could see the contradiction the best if you were to actually set the cost of energy in your world.) The only way out of this contradiction is to assume that this "expensive fuel" is a very scarce (finite) resource, which cannot be readily produced from other things. For example, say it's platinum, and we would like to keep platinum to make other things out of it rather than burn it to make energy (and that's why it's expensive - people want to keep it). So that was my original interpretation of your example. In that case, source A is a better way to make energy than B, it's just you don't have enough fuel you would like to use for it, and so you can only use it in small volume. Just like with ROI - there can be excellent investments with very limited volume, and just ROI will not tell you anything about the volume. As a side note - I really recommend to stop thinking about economics in terms of money and start thinking in terms of means of production (which is where EROEI comes in). And only then, when you see the full economic picture on the process level (how things get transformed in the economy), introduce the actual monetary accounting. This way, you can avoid some pitfalls (such as simultaneously claiming that price of energy is both very low and very high).