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Eye on the Market | November 21, 2011 J.P Morgan Topic: The quixotic search for energy solutions sea fields recently discovered off the coast of Brazil. We have discussed these projects before (EoTM September 2009). The sub-salt fields in Brazil lay 7 kilometers below the surface of the ocean, beneath a thick salt canopy in the Lower Tertiary region. Oil extraction can be quite complicated due to the low permeability and porosity of the salt canopy, and tar pockets. Our investments in this region are linked to providing services, rather than owning exploration and production assets themselves. Overall, our experience in conventional energy investments has generally been positive. Renewable energy investments. Our experience with renewable energy investing has much more mixed, for many of the reasons outlined in this paper. Some wind projects have worked well, while others (in the UK and in upstate New York) have not, mostly a function of less windy conditions than project managers anticipated. As with conventional energy, some of the better wind projects are related to providing services (constructing offshore wind farms, development for purposes of sale), rather than taking ongoing operating risk. Weather played a negative role as well: higher than expected precipitation in Brazil negatively affected our investments in sugar cane ethanol. Solar projects are on track (utility-scale projects in the US and Europe, and a company providing distributed solar solutions to small business), although both are highly dependent on continued subsidies. Natural gas discoveries have effectively raised the efficiency hurdle rate for renewable projects, and fiscal problems in the West may reduce the subsidies that underpin many renewable projects and valuations. Michael Cembalest Chief Investment Officer Notes Vaclav Smil is a Distinguished Professor in the Faculty of Environment at the University of Manitoba in Winnipeg and a Fellow of the Royal Society of Canada. His interdisciplinary research has included the studies of energy systems (resources, conversions, and impacts), environmental change (particularly global biogeochemical cycles), and the history of technical advances and interactions among energy, environment, food, economy, and population. He is the author of thirty books and more than three hundred papers on these subjects and has lectured widely in North America, Europe, and Asia. He is also noted by Foreign Policy magazine as #49 on its list of the 100 most influential thinkers in the world. Citations “Energy Myths and Realities”, Vaclav Smil, AEI Press, 2010. “Year in Review — EROI or energy return on energy invested”, Charles Hall and David Murphy, Annals of the New York Academy of Sciences, January 2010. “National Electric Transmission Congestion Study”, US Department of Energy, December 2009. “Annual Energy Outlook 2011 Reference Case”’, Richard Newell, US Energy Information Administration, December 16, 2010. “Energy and the Wealth of Nations: Understanding the Biophysical Economy”, Charles Hall of SUNY ESF (who was kind enough to review this Eye on the Market) and Kent Klitgaard, Springer NY, 2011. For more information on Eos and zinc-air battery storage, see www.eosenergystorage.com Acronyms Conversions used in examples 1-6 CAFE Corporate average fuel economy 1 megawatt = 1,000,000 watts ERCOT Electricity Reliability Council of Texas 1 terawatt = 1,000,000 megawatts EPRI Electric Power Research Institute 1 petawatt = 1,000 teiesvalls HVDC High voltage direct current (emegewalt - ee) miles NIMBY Not in my backyard! epee ene _ =ie0D inoegaleules ; 1 gigajoule = 1,000 megajoules EROI Energy return on energy invested 1 liter gasoline = 35 megajoules IPCC Intergovernmental Panel on Climate Change 1 mile = 1.609 kilometers CCS Carbon capture and storage 1 gallon = 3.785 liters CO, Carbon dioxide 1 unit of carbon = 3.7 units of CO, EIA Energy Information Agency 1 metric tonne = 2,200 pounds IEA International Energy Agency 1 pound = 0.4536 kg IAEA International Atomic Energy Agency 1 barrel = 42 gallons of gasoline PV Photovoltaic solar 1 btu = 1,055 joules CSP Concentrated solar power (the parabola version) DoE Department of Energy SUNY ESF State of New York, College of Environmental Science and Forestry HVAC Heating, ventilation and air conditioning 8 HOUSE_OVERSIGHT_030821