The Rapid Response Institute

Tag: total cost of ownership

  • Crippling Green

    Crippling Green

    “Yes, hope is a strange thing.  Peace at last.  But at what price?”
    — Khaled Hosseini

    Great Societies have been lost in the past–a number of times.  There is no reason to believe our current crop is immune!

    Ariel Durant, the co-author of the 11 volume tome, The Story of Civilization is credited with, “A great civilization is not conquered from without until it has destroyed itself from within.”

    The United States is currently engaged in a great climate civil war.  One one side there are those who advocate for expensive and expansive economic and social investment in so-called Climate Change.  Climate Change Skeptics, often derided by the aforementioned group as Climate Deniers are those who question the Scientific Consensus and the cost and return on the investment to become Net Carbon Zero.  By the way, science is never settled.

    From the observer’s perspective, there is a long term effort to shut down debate, as is typical in today’s society largely by name calling, shaming and even threats.  Dissenters seemingly risked their professional reputation, loss of grants, even safety, and more.

    And Now Questions

    Funny thing happened on the road to Net Zero.  Questions began to be raised about the efficacy of renewables, and their Total Lifecycle Cost.  Moreover, the heavy metal cost of ecological damages of mining were raised and are now under scrutiny.

    The Let Them Eat Cake Strategy

    Transitions, especially Transformations are painful.  Based on Joseph Schumpeter’s Creative Destruction, “The incessant product and process innovation mechanism by which new production units replace outdated ones,” transformation is a linchpin of Capitalism.  Now, some believe socialism is the future, history does not prove their point.  Are any to turn in the Smart Phones for the old black dial model tethered to a wall?

    However, when this natural process is driven by the ‘heavy hand’ of non-economic actors, perturbations in the process can cause warps in the economic space time continuum.  Some examples of overreach include:

    Agriculture

    Some argue that, “Agriculture accounts for 16 to 27% of human-caused climate-warming emissions.”  Nitrous oxide (N2O) is the named culprit (according to the Intergovernmental Panel on Climate Change this chemical accounts for 6% of greenhouse emissions).

    It is reported that in the Netherlands agricultural sector system manure is high in nitrous oxide.  Emotions are apparently running high between Dutch farmers who see a targeted 30% reduction in livestock heads and the government whose position seems to be this is an “unavoidable transition.”  Jobs are at risk!

    Gasoline

    It seems the President of the United States is celebrating high gasoline prices as part of “an incredible transition” to move away from fossil fuels.  As with the Dutch case, this seems to place the biggest burden on the so-called ‘little guy.”

    Truckers

    We all remember the trucker protests in Canada and the United States in early 2022, mostly regarding Covid-19 restrictions.  Around the world there was a strong level of solidarity.

    This sector is also not immune to Climate Change driven initiatives.  From one source there are two key considerations:

      • The proposed 2027 new emissions regulations for diesel-powered trucks, and
      • The 2030 goals from some states and their aggressive objectives for zero-emissions vehicle sales.

    One might project similar (Covid-19 driven) responses to these new mandates.  This might be another major negative impact to supply chains for all sectors.

    Electric Vehicles

    The US Secretary of Transportation has suggested that everyone would benefit from an EV.  At the time of his statement (October 2021), the average cost of an EV was $55,676 while a compact car was $25,240 and and SUV was $34,122.

    By this pundits calculation (at $4 a gallon), break even for the SUV is 5,389 gallons of gasoline at 20 miles per gallon.  As mathematicians will say, it follows that break even is almost 108,000 miles of driving.  Years of driving for most of us and what shape will the battery be in at that point.  While some argue the maintenance costs are less for EV, most consumers are driven by out-of-pocket buying decisions.  Then there the disposal costs of EVs at end of life (see Other Blogs below for details).

    Fracing

    Perhaps one of the more emotional fossil fuel development process is Fracing (not Fracking by the way).  Some believe the damage to the environment from fracing is the greatest of any human endeavors.

    On the other hand, the value from fracing includes:

      • The shale revolution mad the United States self-sufficient in oil and gas for the first time since 1947
      • In 2022, the US is the largest exporter of LNG (liquified natural gas)

    Given the current geopolitical situation, easy access to low-cost traditional energy sources is at least near time high value.

    There are many other areas of controversy regarding this issue.  More than likely both sides will continue to make their points and emotions will continue to play a major role.  There will be Winners and Losers over the next few years as this debate plays out.  Honest scientific debate can mitigate the emotional and political agenda at play.

    Are Green Initiatives Making the Problem Worse?

    Per the NBC piece aired on September 20, 2022, illegal gold mining in Peru not only releases mercury into the ecosystem but adds to environmental carbon when the soil is disturbed.  This makes this pundit wonder if all the heavy metal strip mining to fuel EVs will do the same in addition to its other environmental problems (see Heavy Metal Rocks below)?

    Moreover, this issue about strip mining and carbon release has been known for a long time.  In 1977 the peer reviewed scholarly article, Soil fungal populations and soil respiration in habitats variously influenced by coal strip-mining addressed this issue.

    Likewise, NBC reported on illegal gold mining in Peru in 2019.   Point being, this information is not new nor is The Science newly discovered.

    Unintended Consequences run amok?  Are lithium batteries destroying the planet?

    And the Winner Is?

    No one!  If we do nothing, we are told the oceans will rise and temperatures will become unbearable causing all manner of weather driven catastrophes as well as increased intensity and frequency of forest fires.  On the other hand, spending the multiple trillions of dollar will enrich the (very) few at the cost of economic collapse for the many.

    Lose–Lose Deal.  Either way our world ends or our economies end.  Is there a difference?

    According to Merriam-Webster, “A pyrrhic victory is a victory that comes at a great cost, perhaps making the ordeal to win not worth it.  It relates to Pyrrhus, a king of Epirus who defeated the Romans in 279 BCE but lost many of his troops.”

    Decisions–Decisions

    So Global Society is faced with two choices.  The earth is in physical peril unless we spend malevolent amounts of money as fast as possible.  Or, as a result of economic destruction on a global scale if this level of spending adds little if any value.  Then we will all live in poverty or worse.  Either way, Human Extinction is one end game proclaimed by many.  The very definition of a Dilemma.

    According to Merriam Webster, one definition of Hobson’s Choice is, “The necessity of accepting one of two or more equally objectionable alternatives.”  Not a great place to find oneself.

    The ancient Romans apparently made poor decisions as a mature and wealthy society.  It cost them dearly.  Are we now?

    How are You and Your Organization Assessing the Risk of Investing in Climate Change (Conventional Wisdom) Scenarios or Alternative Approaches?

    Other Recent Relevant Blogs

    These blogs in this series address this particular issue in greater detailed.  Together, they form a more complete picture of the author’s position on relevant components discussed here as well aligned subjects.  In reverse chronological order:

    For More Information

    Please note, RRI does not endorse or advocate the links to any third-party materials herein.  They are provided for education and entertainment only.

    The author’s credentials in this field are available on his LinkedIn page.

    Disclaimer, the author has no personal or business relationship with Bjorn Lomborg or his publications other than reading and commenting on his latest book, False Alarm: How Climate Change Panic Costs Us Trillions, Hurts the Poor, and Fails to Fix the Planet.

    Second Disclaimer, Ali Daneshy was interviewed for the referenced Forbes article on Fracing.  This author knows Mr. Daneshy and worked with him for many years at Halliburton.

    For those start-up firms addressing energy challenges, the author is a member of Global Energy Mentors which provide no-cost mentoring services from energy experts.  If interested, check it out and give us a shout.

    For more information on Cross Cultural Engagement, check out our Cross Cultural Serious Game.  You can contact this author as well.

  • A Windy Position

    A Windy Position

    In a recent online discussion, this pundit put forth the thought that fiberglass wind turbine blades can pose an environmental problem when decommissioned.  This position was quickly challenged with the rebuttal that burning coal ‘kills’ kids so it did not matter if discarded blades litter the countryside as it is worth it.

    According to research quoted by the European Wind Energy Association, “With wind turbine blades likely to account for some 50,000 tons of waste annually by 2020, growing 4 times by 2034 the landfill is not a viable long-term solution.”  Moreover, “Findings from the University of Strathclyde indicate a global increase of wind turbine blade waste from around 400,000 tons per annum in 2030 to around two million tons by 2050.”

    My rebuttal to the kills kids argument–what will this do to global population health?  Keep in mind, this is only one source of industrial (and consumer, i.e., EV automobiles) decommissioned assets.

    Disposal/Recycling

    “Glass-reinforced polymer composites (GRP), used in wind turbine blades around the world, is recognized as a hard-to-break-down source of pollution.”  Research is underway to address this problem and mostly likely progress will continue going forward.

    “Currently only a few recycling techniques are available to treat such an enormous quantity.  So most have been landfilled and many continue to be buried today.”  Other current options include:

    • Grinding–turning fiberglass into powder.  A labor intensive process that provides filler for other purposes
    • Incineration–the ash is usually disposed of in a landfill

    • Pyrolysis–decomposes into three recoverable substances: pyro-gas, pyro-oil, and solid byproduct— all of which can be recycled

    “While the overall life of the wind turbine does cause less pollution than coal-fired power plants do, the initial solution of just burying the fiberglass doesn’t seem in line with the goal to cause less pollution.” (Ibid)

    Really?  How is this saving the planet?

    Clearly, these alternative disposal processes have a financial cost greater than simply burying the blades.  If not, they would be used more frequently.

    Future generations will have to address this issue much like the current one continues to deal with asbestos from the past.  The KIDS will end up dealing with and paying for the folly of their parents and grandparents.

    A Contrarian Posture

    As noted, there is a romanticism about renewable energy sources, most commonly wind and solar.  However, we believe in the ‘no free lunch’ model.  There are risks and cost associated with every form of energy.

    In two recent editions, Heavy Metal Rocks and Going Green? Or NOT! we took an initial look at the financial cost over the renewable lifecycle as well the environmental impact that will need to be addressed.  The edition is a continuation of the premise that, “Technology Romance must be met with Fiscal Realities.”

    Society will eventually recognize the environmental damage done by solar and wind energy systems can be very high.  By then, the harm may have been done.

    As an example, many oil and gas assets are approaching end of life.  The decommission costs are very high and increasingly regulations are changing to hold asset owners accountable for these costs.  Generally, accountants refer to these as Reserves.

    Shouldn’t renewable asset holders be required to set aside reserves to cover the disposal of assets as well?

    Lifecycle Cost Structure

    For capital assets with significant planning, development, manufacture, deployment, operations & maintenance and finally decommissioning costs there is another dimension.  The Asset Maturity Model was developed to assist management understand how to best maximize asset performance over decades, in some cases.  This model is integrated into an economic value model which we be discussed herein.  There are also a number of tools and standards available to assist management, such as ISO 55001–Asset Management.

    In April 2022, Bloomberg published a piece, “Wind Power’s ‘Colossal Market Failure Threatens Climate Fight.”  The Global Wind Energy Council deemed the current wind energy situation a ‘Colossal Market Failure.’

    Blaming a mismatch (alignment) between governments policies and current markets, the risk is not only that net zero targets will not be met but the supply chain is contracting.  Moreover, one study suggests that for the US net-zero policies will cost more than 12% of our Gross Domestic Product (GDP) in 2050.  To put this in perspective, today Social Security cost 5% of GDP and Medicare/Medicaid 6.4 percent–11.4% combined.

    The ‘lack of alignment‘ is a major determent to successful organizations.  In our recent blog, ESG Explained we discussed the role organization and its ecosystem governance at length.  Building on our 2011  monograph, Asset/Equipment Integrity Governance: Operations–Enterprise Alignment; A Case for Board Oversight (AEIG) we developed the case for Operational Excellence as part of ESG.  Energy and supply chain management are key components of this enterprise approach.

    Total Cost of Ownership (TCO)

    TCO is a function of the acquisition cost, including all engineering, design, deployment, installation etc. as well as ALL costs associated with its lifecycle OPEX, including decommissioning, abandonment, and environment remediation.  It is all encompassing.  It is the long-standing metric that all projects must understand and model accordingly before a Capital Expenditure (CAPEX) is authorized.

    The following list are documented per citation links.  These are taken from a recent article challenging the Return on Investment (ROI) of current green initiatives.

    Readers will note that some are social costs, i.e., transition costs to new energy sources currently provide minuscule contributions to the Energy Basket.  These costs will grow dramatically going forward.

    •  “Making a transition from fossil fuels to green energy is costly.  Solar and wind can only deliver electricity, which accounts for less than a fifth of total energy consumption.
    • When the sun doesn’t shine or the wind doesn’t blow, prices rise quickly and we have to revert to fossil fuels for backup.
    • Batteries are inadequate and expensive, easily quadrupling solar electricity costs and failing to provide much power.
    • In 2021, Europe only had battery capacity to backup less than 1 ½ minutes of its average electricity usage.  By 2030, with 10 times the stock of batteries, and somewhat more usage needed, they’ll have enough for 12 minutes.
    • The Bank of America has found that achieving net-zero will cost $150 trillion over 30 years, almost twice the combined annual GDP of every country on Earth.
    • The annual cost of $5 trillion is more than all the world’s governments and households spend every year on education.
    • In a new study, McKinsey finds most of the poorest nations in Africa would have to pay more than 10 percent of their total national incomes every year toward climate policy.  This is more than these nations combined spend on education and health.
    • Reducing emissions just 80% will cost the United States more than $2.1 trillion every year from 2050, or more than $5,000 per person, per year.
    • The annual US cost of World War II is estimated at $1 trillion in today’s money.  Every year by 2050, climate policy could cost Americans more than twice what they paid during the Second World War.
    • Surveys show few people are willing to spend more than a few hundred dollars a year on climate policies.  Asking people to spend tens or hundreds times more is a recipe for failure.”

    These are significant tangible and intangible costs.  In this writer’s opinion, the business case has not been made for these and other total cost line items.  A more extensive study should be considered by readers who want to do a deep dive on these economics.

    Keep in mind, that these broader issues do not take into consideration regarding daily operations and maintenance.  These must be factored in as well.

    Finally, while these are ‘opinions’ from reputable sources, why are they not considered the economic models used today?  Seems like Data Bias, doesn’t it.

    EVPM

    Beginning in 2004, recognizing many of the TCO components as well as the economic value potential from a CAPEX, we developed what came to be known as our Economic Value Proposition Matrix model (EVPM).  This model is now mature, robust as well as integrating a Risk Matrix.

    It is an excellent tool for assessing both Tangible and Intangible components of value and cost.  Additionally, a free version is available and it is fully supported with training as well as other materials (including a video).

    Importantly, EVPM “Translates technology into the Language of Business” which make it an excellent tool for preparing to meet with the Chief Financial Officer (CFO) and/or Budget Committee.  Management makes decisions as a function of the risk associated economic value brought to the organization.  While technology has a level of romance to it, financial issues are the major decision making driver.

    The Energy Basket

    It is useful to look past the hype to see what the US energy basket actually looks like.   Slightly over three percent comes from wind and only 1.3 % is solar.  Fossil fuels (petroleum natural gas and coal) represent 79% of our current energy consumption.  In the opinion of this writer these disparities have been basically the same for decades.

    China and India burn 14 million tons of coal per day!  By all accounts, coal will play a major role in power production in these economies for some time to come.  As a function of the global percentage of coal used; China over 50%, India over 11% and the United States at approximately 8.5%.  Moreover, an assessment of its use by 130 countries is available to interested readers.

    The debate about ‘Clean Coal‘ continues.  None-the-Less, most likely coal will continue to be used for decades.  Keep in mind that 2050 is less than 28 year away.

    While regulation plays a role in the energy mix, economics are the fundamental driver.  Until the economics of non fossil fuels change, the basket will most likely not.

    The Lone Ranger is Missing

    Listening to some, it seems that all we have to do is focus on the Energy Transformation and in only a few short years magic will happen.  Hate to tell everyone, there is no Silver Bullet.  Transformation will take decades and should be led by those driven by market forces.

    One example, on April 29, 2022 the Texas Department of Transportation (TxDot) announced the two year closure of a major highway artery in the Houston metropolitan area to replace a concrete ramp.  Point being, road construction is well understood and a major proven technology and process.  Still, it will take a significant amount of time to perform this upgrade.

    How can we assume a major Energy Transformation using new technologies will unfold as optimistic parties suggest?  History suggests this is not likely.

    Closing Points

    This long time energy careerist believes that various energy sources from the basket should be used as economically appropriate.  While we all have an interest in a low pollution environment, if the economics as shown in this piece are close to correct, the resulting economic damage may be greater than a somewhat warmer planet.

    The data presented herein are documented.  The sources and quality of the data can be challenged but it should not be ignored.

    Finally, this piece has focused primarily on wind energy.  A similar analysis needs to be taken for every energy source including fossil fuels of all kinds.

    The demand for energy will continue to grow and even exponentially.  Clean fossil fuels are available and without strong energy balanced policies the future is bleak for many and not just because of climate change by the significantly higher cost of living and loss of opportunities due to energy starvation.

    The energy challenges are complex and dynamic.  This blog is not a comprehensive review, but simply a focus on a narrow aspect.  For example, we did not delve into issues such as Carbon Capture & Sequestration.  A calm, rational, economics discussion is in order.

    What does Energy Transition mean to you and how will you help the Less Fortunate be better off?

    For More Information

    Please note, RRI does not endorse or advocate the links to any third-party materials.  They are provided for education and entertainment only.

    For more information on Cross Cultural Engagement, check out our Cross Cultural Serious Game.  You can contact this author as well.

  • Heavy Metal Rocks

    Heavy Metal Rocks

    Not the rock bands of the 1960s–1980s, but the mining required to extract the heavy metals necessary for electric vehicles and other renewable energy solutions.  So, what is a heavy metal and why do we care?

    Typically, “In science, a heavy metal is a metallic element which is toxic and has a high density, specific gravity or atomic weight. However, the term means something slightly different in common usage, referring to any metal capable of causing health problems or environmental damage.”  Often these toxic elements are carcinogenic.

    For most readers this will not come as a surprise.  The heavy metals in batteries can be recycled, thus minimizing their negative impact on the environment and subsequently, humans and other life forms, i.e., the food chain.  However, smaller batteries are typically tossed into the trash.  Larger ones such as lead acid automotive batteries are usually reclaimed (for a fee to the consumer).

    From this pundit’s perspective, it is too early in the technology maturity to fully understand how millions of EV (electric vehicle) will be recycled effectively and economically.  Managing the lifecycle of these ‘elements’ from mining, use, recycling and reuse is a significant component of these renewables.  There is a cost associated with this process, both monetary and socially.

    Total Carbon Ownership

    In the business, the term TCO usually referees to the Total Cost of Ownership.  Updated, this Lifecycle metric may better reflect the Total Carbon impact of a product/solution, i.e., large scale batteries, solar panel, fossil fuels, etc.

    TCO = Carbon as a function of two major lifecycle elements; Operations and Decommissioning.

    For this purpose we define Operations (aka Use) as the lifecycle process from mineral extraction, manufacturing, deployment and maintenance.

    Decommissioning is the process of taking out of service, removal and appropriate disposal of components, including recycling.

    Follow on from our blog of November 2, 2021, where Milton Friedman detailed the complex supply chain required to manufacture a simple yellow graphite pencil, one can only imagine how complex the requirements are for a wind turbine.  Carbon neutral is not a simple problem to solve.

    Enter Structural Dynamics

    Many readers understand that Machine Learning Algorithms use the statistical multivariable method, Multiple Linear Regression–defined as, where “one variable is estimated by the use of more than one other variable.”  While this tool can be useful when assessing the impact and relationships of several independent variables, it does not necessarily help organizations to understand their TCO.

    Theoretically, every economic actor in the supply chain or the decommissioning process can calculate their carbon footprint for each​ product/step they control.  In the real world, such intangibles, i.e., safety are open to interpretation, ‘fudging’ or worse.  Moreover, we can expect large gaps or errors (inadvertent or otherwise) in carbon models that must be addressed if we are to realistically address the carbon problem.

    In the 1990s as a result of watching a number of systemic enterprise failures and/or poor performance, and wondering how this happened with such regularity the questions was raised–why?  This led this author coin the term with the subsequent book, Structural Dynamics: Foundation of Next Generation Management Science.

    Most do not understand the processes and structural changes at work on a daily basis.  Focused on near term performance metrics, they lose sight of the forest while concentrating on the trees.  The subsequent disruption caused is often rapid and economically cataclysmic.

    Structural Dynamics uses tools such as Structural Equation Modeling (SEM) to seek to identify the underlying process and structural movements.  It appears to be a useful tool to address the Total Carbon Ownership that organizations will have to address in the very near future.

    Dealing With Residuals

    Whether heavy metals or carbon, organizations must also assure ESG (Environmental, Social, and Governance) criteria are met throughout the energy lifecycle.  However, there is a cost associated with these and other organizational structures from the deployment and/or use of energy of all types.

    TCO is a decades long cost that can transcend actual corporate life, i.e., acquisition, bankruptcy, etc.  Currently, the oil and gas industry is littered with assets no one claims ownership.  Two cases follow:

    • Stranded assets are, “those investments which are made but which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to generate an economic return, as a result of changes in the market and regulatory environment.”  These resources are no longer worth continued investment.
    • Abandoned assets have reached the end of life.  By one source, it is estimated that there are approximately 53,000 Gulf of Mexico offshore oil and gas well in this category.  Remediation costs range from $500k to $10 million per well–min $26.5 billion.

    It is reasonable to expect that all sources in the ‘energy basket’ will have similar end of life futures.  Green is therefore, not unique.

    “Forewarned is Forearmed”

    A Serious Assessment

    This pundit believes that scant attention has been paid to the lifecycle (economic and social) price of renewables and that the Total Carbon Ownership cost has never been calculated–certainly not published.  However, there are tools that will shed light on this going forward.

    TCO is a function of a detailed and long lifecycle, not unlike oil and gas assets that in some cases are over half a century old.  Any subsequent model of this process is by default complex, detailed and full of unknowns, or unmeasured latent variables.

    The approached this writer has developed using Structural Equation Modeling driven by Structural Dynamics seems well fitted to address this longitudinal and futuristic problem.

    For many, the so-called ‘green energy’ seems without consequences.  The history of energy suggests otherwise.  A full assessment using Structural Dynamics can reveal gaps, misunderstandings, errors and omissions.

    This model will advise management and even regulators what the true cost of an energy source is.  The approach is worthy of a serious discussion.  By the way, this model works for all sources of energy including coal and other fossil fuels as well as renewables.

    What is Your Firm’s TCO and How Can It be Lowered?

    For More Information

    Please note, RRI does not endorse or advocate the links to any third-party materials.  They are provided for education and entertainment only.

    Interested in Cross Cultural Engagement or DEI, check out our Cross Cultural Serious Game

    We presented, Should Cross Cultural Serious Games Be Included in Your Diversity Program: Best Practices and Lessons Learned at the Online Conference, New Diversity Summit 2020 the week of September 14, 2020.

    Contact the author for information on these and others subjects covered in the Critical Mass series.