Thought Leadership The New Energy ROI - Part II

By Jeff Suderman, Senior Strategist, IBTS and Dustin Knutson, Director, Energy Services

In our previous Energy ROI thought leadership piece, we reviewed an energy acronym called ROI which proposed that Resiliency, Optionality and Efficiency are the key strategies for an effective energy future. This article will address the traditional definition of energy ROI – the actual return on investment for energy production. The purpose of this article is to outline what energy ROI is, examine two foundational energy challenges and propose solutions to these challenges.

What is Energy ROI?

The Energy ROI FormulaIn business, the acronym ROI stands for Return on Investment. The term Energy ROI (EROI) refers to how much return you get when you invest in energy creation. Since it takes energy to create energy, the EROI formula assesses how much more energy is produced than is spent generating it. This calculation of net energy is derived by assessing “the amount of energy delivered into the mainstream of economic activity less the amount which is required to bring it there”.[1] Figure 1 provides the basic formula used to calculate net energy ROI. When less energy is spent on energy creation there is more energy is available for public consumption.

Average Energy ROI'sEnergy ROI is important because it tells us how many times an investment in energy production will pay itself back. A higher return on investments is beneficial for producers and consumers. The average energy return on investment ranges between 7 times and 30 times the initial cost to create energy. Figure 2 provides a summary of historic energy ROI’s based on energy type.[2] Therefore, economic growth is aided by having high energy return on investments.

Challenge #1: Decreasing Energy ROI’s

As a local government official, you may not have given much consideration to energy ROI. Since energy is produced and sold by state or private firms, energy ROI is something we typically let others worry about. So why is this a concept that you need to be aware of?

Research conducted by The Global Climate and Energy Project at Stanford University shows that traditional conventional energy is more difficult to produce than it has been in the past (e.g. – shale gas and oil sands). Historically, the energy sector has required a low energy investment to produce energy and this meant high Energy ROI’s. Until 1960, approximately 5% of energy produced went back into the cost of production. Over the past 50-70 years this investment has risen to about 10% and this is decreasing overall EROI rates.[3] Furthermore, their research predicts that energy ROI’s will continue to diminish in the future.

Therefore, the cost of energy creation is increasing which results in less overall energy available for consumption. This decrease in Energy ROI will increasingly affect public energy supply.

Challenge #2: Our Insatiable Appetite for Energy

Energy is directly linked to economic growth.[4],[5] Senator Lisa Murkowski recently called energy “the bumper sticker of the 21st century” because it enables nearly every component of modern life.[6] When we have accessible and surplus energy, it stimulates innovation resulting in growth in both economic and societal complexity. However, as development occurs, “societies must produce even more energy to pay for this increased complexity”.[7] This creates a productive but cyclic model of energy creation and consumption, somewhat like the fable of the snake eating its own tail.  

Furthermore, history shows that when more energy becomes available it is always used.  “Contrary to what is often suggested in debates about energy, climate, and our future, it is usually not possible for a society to reduce its consumption of resources voluntarily over the long term.” [8] If the ROI of the energy production sector decrease, there will be less energy available for society. This may slow economic growth (recession) or at worst, cause depression.[9]

As a result of increasing societal complexity and energy dependency our mindset about energy is changing. Historically, energy was a commodity that we consumed. Increasingly, energy is being treated more like a currency because it affects regional economic and societal health. Therefore, as local government officials, you need to be aware of the key drivers which affect the value, access and price of this valuable currency.

Future Energy Scenarios

As we consider how these two problems will affect us in the future, it is useful to develop future scenarios. The challenges outlined above reveal that economic prosperity has two key energy related drivers: a growing supply of energy and an affordable energy creation system. By evaluating both positive and negative extremes of these drivers we create four scenarios which outline potential energy futures. Each of these futures has been given a title to describe the overall theme that this future could present. 

Future Energy ScenariosIn Scenario 1 (upper right quadrant) we have an energy future influenced by high energy supply and a low cost of energy production. This Let the Good Times Roll future is the optimal scenario for economic prosperity as noted by the orange circle. Scenario 2, Build it and They Will Come, assumes a low cost of energy combined with low supply of energy producers. In this outlook the opportunity for economic growth is limited unless investment in energy supply occurs. Scenario 3, Energy Hunger Games, assumes the worst – low energy supply and a high cost of energy production. In this scenario the fittest will survive as we compete for limited and expensive energy. Finally, in Scenario 4, Show Me the Money presents a picture of abundant but expensive energy. This means that only those who can afford high energy costs will thrive.

The purpose of developing scenarios is to help us understand our current reality with more clarity. This future picture reveals that many of our economic plans are built on scenario 1 (the orange circle). Furthermore, the two challenges we discussed above show that this scenario is diminishing in feasibility. Increasingly energy is moving into scenarios 3 and 4 (the blue circle). These high cost scenarios transpiring because of the two challenges of decreasing ROI and our energy consumption appetite. Therefore, future success will require that we do business differently.

Energy Solutions

As local government leaders, you understand the critical link between economic development and energy. While we are in an era of energy challenge, effective leaders look for creative solutions. Dr. Carey King, professor at the University of Texas at Austin, suggest that we must address these challenges with a two-pronged strategy.

Solution 1: Conservation

Currently, there is significant emphasis on energy conservation. This involves using smart technology such as programmable thermostats or energy efficient lighting. However, while this is a good way to decrease individual energy usage, it will not be successful as our sole strategy because history shows that we always use what we have. Therefore, we must continue doing this but pair it with a second strategy in order to truly decrease overall consumption.

Solution 2: Innovation

The second component of the solution is to actually create less energy. This will require innovation. We must meet these current energy needs with less resources thereby increasing our energy ROI. This is different than an abundance mentality of ‘just create more energy’. Instead, by fostering innovation, we must look for ways to use existing resources more effectively. Dr.  King suggests we should set goals of cutting production levels by 10% while maintaining the same amount of energy output. A California desert city recently did this with a related resource, water usage. Historically, the city depleted annual aquifer levels each year. In 2012, they introduced innovative policy and infrastructure which reversed that trend and created a net surplus in the aquifer without creating economic hardship.[10] Similarly, we must learn to generate the same output with less resources in the future. Doing so will reverse the trend of our decreasing Energy ROI.


We are in the midst of a seismic energy shift. Historically, energy has been treated as a commodity. In the future, we must treat it as a valuable currency.[11] Understanding Energy ROI helps local government leaders understand that your energy future has two important drivers; supply and cost. You must develop strategies to help you decrease the factors which driver down supply and drive up cost. This means you must not assume business-as-usual. It also requires you to become active in creating initiatives which foster both energy conservation as well as innovation.


Read Part 1  |  Continue to Part 3


[1] Peet (1986). Energy Analysis - a Review of Theory and Applications, New Zealand Energy Research and

Development Committee.

[2] Dale, M. (July 18, 2013). The cost of energy increases. The World Future Society Annual Conference. Chicago, IL: Presentation.

[3] Dale, M. (July 18, 2013). The cost of energy increases. The World Future Society Annual Conference. Chicago, IL: Presentation.

[4] Dale, M. (July 18, 2013). The cost of energy increases. The World Future Society Annual Conference. Chicago, IL: Presentation.

[5] Harf, J. E., & Lombardi, M. (2010). Taking sides (7th ed.). Guilford, Conn.: McGraw-Hill/Dushkin. P. 97

[6] Murkowski, L. (April, 2013). The Bloomberg Energy Summit. New York. Speech.

[7] Tainter and Patzek (2012), Drilling down: The Gulf Oil Debacle and Our Energy Dilemma

[8] Tainter and Patzek (2012), Drilling down: The Gulf Oil Debacle and Our Energy Dilemma. P. 83

[9] Dale, M. (July 18, 2013). The cost of energy increases. The World Future Society Annual Conference. Chicago, IL: Speech.

[10] Coachella Valley Water District (2013). 2012-2013 Annual Review. Making every drop count.

[11] Dale, M. (July 18, 2013). The cost of energy increases. The World Future Society Annual Conference. Chicago, IL: Speech. 

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