A ratio that measures the amount of usable energy delivered from an energy source versus the amount of energy used to get that energy resource
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
Energy return on investment (EROI) is a ratio that measures the amount of usable energy delivered from an energy source versus the amount of energy used to get that energy resource.
In other words, the EROI function compares the cost of an energy plant to the revenues gained from selling said energy. The revenue earned must surpass the cost of the plant.
EROI ratio measures energy inputs compared to energy outputs.
Sources of energy are considered “energy sinks” if their EROI is less than one.
The break-even point for an EROI score is seven.
The energy return on investment (EROI) formula differs in terms used. Shown below are some of the formulas used – all of which essentially mean the same thing.
EROI = Energy Output / Energy Input
EROI = Energy Gathered / Energy Invested
EROI = Energy Delivered / Energy Used to Deliver that Energy
If the sum of the EROI formula is equal to or less than one, it is considered an “energy sink.” It means that the energy described in the formula should no longer be used as the main energy source. Instead, it can be put to better use through energy storage (batteries).
An EROI sum of at least seven is required to be considered a viable and profitable energy source, while an EROI score of seven represents a break-even point.
Energy Inputs and Outputs
The EROI function measures relative inputs and outputs used to produce energy. Described below are the inputs and outputs that are gathered to calculate EROI.
On-site Energy Consumption (Input) – On-site inputs that consume energy include labor energy costs, health and safety energy costs, and transportation.
Energy Embedded in Materials Used (Input) – It includes the materials consumed at the construction, decommissioning, and operational stages.
Energy used in Labor (Input) – Transportation and energy used for a laborer’s full workday are included in the input calculation.
Heat, Motion, and Electricity (Output) – The desired outcome of any energy production is either heat, motion, or electricity.
Environmental Factors (Output) – Energy producing plants and/or technologies can be directly affected by the environment. For example, an earthquake can dislodge a wind turbine or destroy a power plant.
Energy Sources and their EROI’s
Here are the top energy sources and their respective energy return on investment score:
To be viable, the EROI score must be above seven. As the list below shows, it is typically not cost-effective to invest in wind turbines, biomass, and photovoltaic solar panels as major sources of energy. The graph below alludes to that as well:
Technological Applications of EROI
Photovoltaic is a form of solar energy that is clean and renewable. With the use of solar radiation, solar panels are able to produce electricity. When it comes to EROI, photovoltaic ranges are very low. Photovoltaic is sometimes considered an energy sink.
2. Wind Turbines
Wind turbines produce electricity by using the wind. It is done with the use of a generator that creates electricity when the turbine is spinning. With regard to EROI, wind turbines generally range from 5 to 20. Although the range is smaller, it is still partially above the break-even point and can be cost-effective.
3. Shale Oil
The EROI of shale oil is typically between 1.4 and 1.5. It is because of the heat input requirements to produce the oil. From a business perspective, shale oil is not a desirable energy source.
4. Oil Sands
The EROI of oil sands differs due to the methods of calculation. It can either be calculated using external energy inputs or all energy inputs. They approximately range from 1 to 5.
Economic Implications of EROI
Here are the economic implications and effects of EROI:
Price – As EROI decreases, price increases. It can be shown in photovoltaic solar panels.
Economic Downturn – Some experts state that a decrease in net energy and an increase in capital intensity contribute to an economic downturn.
Elasticity – When the EROI is above 10, the relationship between the price and EROI is relatively stable and linear. If the EROI falls below 10, prices drastically fluctuate.
Profitability – The EROI score suggests both price limits and profitability.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!
Building confidence in your accounting skills is easy with CFI courses! Enroll now for FREE to start advancing your career!
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Already have a Self-Study or Full-Immersion membership? Log in
Access Exclusive Templates
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.