Welcome back to the last lesson of the energy accounting and the characterization of the exosomatic metabolism. We are closing this lesson with a critical appraisal of a popular indicator of coal energy return on investment that is often as been proposed as an indicator to check the quality of primary energy sources. We will do this using simple examples (the dynamic budget of the household) and to criticize not the basic idea net energy analysis of coal because this is obviously one very useful concept to analyze the energetics of self-organizing systems, but to criticize the fact that a simple ratio of two numbers cannot be used to assess the quality of primary resources. This is a complex concept that requires putting in relation, contextualizing a set of different numbers. Let's start, first of all, with the definition of EROI. EROI can be framed in this way. Looking at an external view you have a primary energy source, and you have an internal view, a process of exploitation of these primary energy source. The external constraints, tells you how much energy is available, and of course, this is not addressed by the EROI because in EROI we are assuming that you get more output than input. And this is something not possible in energy transformation because of the first law of thermodynamics and even worse because of the second law of thermodynamics. You cannot have a transformation of energy in which you have more output than input. So if you have more output coming out than an input you put in, obviously there is a third type of energy that you are not accounting which is paying for the difference. So, in this type of arrangements, the energy return on investment would be the ratio between the output of energy that you get in relation to the energy that you're putting in. But both of these flows are under human control, so this is about the internal view of the process. We will analyze the problems in implementing or using this simple indicator by using an economic example. Why an economic example? For two reasons: one, because the energy return on the investment is based on the logic of the return of the economic investment that you use in economic analysis, and second, because I don't know why people understand much better examples of complex relations when done in money, rather than in energy. So that if you can do whatever complex economic analysis everyone understands very well, whatever very simple and stupid analysis done in joule people get totally lost. So let's get into these examples. The primary energy source or the primary source of income for the family would be a "job". So we are doing the return on investment of a job, the output is the money that the person is or the family obtain because of the job. The input is the money that is spent because of the job. And the EROI, of course, is the money gained because of the job and money spent because of the job. Let's get into this example. We have a family of four people: there is a housekeeper, two children and breadwinner. The breadwinner is exploiting a job in order to get an income. There are four persons consuming $20 a day for seven days. So they require a net surplus of $560 per week. The breadwinner is spending $40 dollars a week; $3 a day for commuting and $5 a day for a meal, is working a five work day. On the left we have information about the flow. He has a contract for one year, so he will get altogether $31,200. And the base level is the wage is $120 per day. So, in this case, this is the external view, the characteristic of the source, this is the final end use using the net surplus and this is the characteristic of the hyper cycle that is consuming money but is getting a larger fraction of money. If we are afraid of this way, the return on investment here is $15 to $1. There are $40 spent and $600 gained. Of course, one obvious observation here that is not just an issue of dollars spent here because the worker is also working; it's not just putting dollars in it. But let's go through this and see that by looking at the EROI in this way we are just looking at the internal view, but we are not looking at the productivity of production factors. So we are not looking at what is the wage, how much labor is required to obtain the income and what are the labor conditions. In fact, let's imagine that we are changing a little bit the situation here and we imagine that we are now asking the guy to work six days rather than five at a lower wage. Let's imagine that he has to go longer period of working to save on bus and having worse meals to save on the money spent. Basically, he will have a lower wage, he will have a cheaper meal and worse commuting and he will be working more. Still he will get the same return on the investment. Let's go now on the external view. The given value of EROI of $15 to $1 does not say anything about the characteristic of the source. Let's imagine that rather than 52 weeks, he has just a temporary job for two weeks. Of course, the decision whether they get the job or not can be affected heavily by the fact that this is a contractor, you have a tenure position for life or for one year or for two weeks. And of course, if we're looking at 52 one, you don't know it. This is just the same return on investment. But another important part on the internal view that is overlooked by the energy return investment or EROI: what we are feeling with EROI. A family of four people, a single or a family of five people, this will change dramatically the quality of the job. So let's imagine if you have the original family that we were looking at the beginning: four persons consuming $20 a day for seven days are breaking even. So the ROI $15 to $1 makes possible for one worker to keep the family alive in a sense. They cannot save anything but at least they can pay what they spend. Let's imagine that with the same ROI now we are having the job and just a single person that is consuming $15 for seven days. Of course, this ROI will generate a surplus of $420 per week. So this will be a fantastic job for the single, same ROI as before. Let's imagine now that this is a family of six that is requiring $630 dollars per week. And then of course with this type of expenditure they will have a shortage of $70 per week, same ROI. Again, this return on the investment, if it is not contextualized in relation to what is using the surplus generated by the hyper cycle per se does not have much usefulness. And that is another important problem with the return on the investment. Being a ratio of two single numbers, we are putting all the inputs together. Input of energy could be electricity or could be fuels; the two things are different. We saw in one of the previous sessions. Let's imagine that the same analysis that we are doing, is done with wage are paid in black without taxes or with wage on which one has to pay taxes. So, they $40 to $600 will be the same $15 to $1. And if you get black money this is a net cash inflow. If you don't get black money but an official payroll then you will have to pay taxes on it. So this will be a gross income, so gross income is different from a net cash flow. Again, this is the difference: if there is here some of the return which is electricity or some is thermal, there is a big difference how useful is this money for the final users. So the EROI is the same but the usefulness for the household is not. Conclusion; the basic rationale of the net energy analysis (from which the concept of EROI has derived) is certainly sound. We saw a lot of examples of it. Of course, what matters is the net you can get not the gross. This has been developed in the field of energetic and has been used extensively and proved to be good in theoretical ecology. The problem with EROI is excessive simplification: a simple ratio output/input, cannot undo the task of assessing the quality of an energy source that is used to generate the supply of energy carriers for a given metabolic body pattern of a given society. If you want to do this, you have to address three points. One, when studying the production of energy carriers, you have to look at two non-equivalent energy forms - the primary energy sources and the energy carrier. So, at this point you have to have information about the primary energy sources, for instance the duration of contract, and the assessment of output/input depends on, as well as how is the duration of the contract. Number two, when dealing with the conversion of exosomatic energy; we are not just to look at the input (the quantity energy carriers) but also other things. For instance, if the energy carriers are of different nature, it is better to keep separated the accounting of electricity if you will process it. You have to account as well the requirement of labor; this is another expenditure. You have to account as well the requirement of power capacity. When dealing with exosomatic energy, you have to have different types of energy carrier input, an input of labor for control and an input for power capacity. This is what has to be included in the assessment. So going to the example of the other family, are the revenues and the costs expressed in the same type of dollars? How many days of labor are required to get $600 for a week? What inputs are required for a day of job? (Commute and meals) So, all this type of information is lost if we are using just the ratio of two numbers. And finally, the quality of primary energy sources can only be assessed in relation to the characteristics of the matrix of end use. This was, if you are a single, you can live on a job and be perfectly happy with that. If you have a family of six and also sustain other relatives far away, the same job is no longer good. So you have to have a relation, what we said before or we will see later on, between what is the strength of exosomatic hyper cycle, how much surplus of energy a given exploitation can give, and what is the bio-economic pressure that is, how much surplus is required by the society in order to keep its metabolism. This is what would be the bio-economic pressure: the amount of money, the average standard of living, how much they are spending per day and what is the relative size between the dependent population (those they are the dissipative part) and the part that is consuming. We will see this later on in more detail. This is just the metaphor of the dynamic budget of the house.