There are many proven alternatives to fossil fuels. The question now is which of these methods provide the greatest bang for our buck – the best return on our investment? Traditionally, investment decisions have been made in part through the use of the Return on Investment (ROI). This method computes and compares the ratio of dollars gained to dollars spent in generating that gain.
For energy, it’s not necessarily about the $ in and the $ out. We also care about the energy invested in producing energy. Why? Because if it costs more energy to produce than it produces, the dollar amounts are not really the point. Before we get to the Energy Return on Energy Investment (EROI), let’s get straight about the ROI.
ROI (Return on Investment) has been used as a way to compare different investment opportunities for years. ROI takes the return, also known as the net gain on investment, and divides it by the cost of achieving that return. For instance, even though both net a $3,000 return, an investment that generates $1,000,000 in gains but has a cost of $997,000 is not as attractive an investment as one that generates $100,000 in gains but has a cost of $97,000. We may sense that the second alternative is the better investment, but how do we know for sure? The ROI allows us to demonstrate this.
ROI = (Total Gain on Investment – Amount Invested)/Amount Invested
= Net Gain on Investment/Amount Invested
ROI = (1,000,000 – 997,000)/997,000
= 0.3% ROI
ROI = (100,000 – 97,000)/97,000
= 3.1% ROI
The $3,000 resulting from the smaller investment does have the higher ROI. It is the stronger investment.
That’s all fine when comparing investments against one another. How do we know if any of the investments is a good use of our funds?
That answer will include a few other factors along with the ROI. One will be the alternate uses for the funds. For instance, if Treasury instruments could generate a risk-free return of 6%, why risk any funds to reap a 3% return? If our cost of capital is 12.5% and we must borrow some or all of the money necessary to generate the net return, why would we make that investment?
The ROI makes it easy to rank and examine alternative investment strategies. The EROI does the same for us when deciding between alternative energy investments.