Visualizing the Grid

I’m a huge fan of NPR, and they just finished running a series on the U.S. electrical grid and how we can/might move forward.  The full story can be found here.

My favorite part, however, is the interactive map they put together on the grid.  You can see the current and potential future incarnations of the grid and sources of power.

A fun game you can play is “guess which senators are more likely to be against cap-and-trade.”  All you have to do is select the sources of power tab, select coal and see which states are darker.

Have fun!

Get smaht

KP’s Lynne Kiesling kicked off a 5 part post on smart grid technology, economics and policy yesterday. For those interested in this much talked about but largely misunderstood concept, you’d be hard pressed to find a better teacher than Lynne.

Wise(r) words on renewables and transmission

Last week the NYTimes ran a new story with a familiar punchline: despite noble ambitions, many states look poised to fall well short of their renewable portfolio standard (RPS) mandates. The piece quotes LBNL’s Ryan Wiser, who has written and research extensively on renewable electricity. While the article talked mainly about loopholes and small regulatory incentives to comply, Wiser concludes with this blunt statement:

“It comes down in a lot of ways to transmission, ultimately.”

Where have I heard that before? Actually in my previous post I forgot to link to the paper I mentioned, which I co-authored with Shalini Vajjhala, Karen Palmer, and Anthony Paul. In it we show that increasing interregional transmission capacity can increase renewable penetration in a baseline scenario (absent any national RPS), and decrease the cost of renewable energy credits if a national RPS is enacted.

Also, in response to the last post I got a useful email directing me to WIRES, a coalition of transmission interests working on public policy to alleviate congestion and promote renewables. For those interested, there’s lots of useful information on their website, including a new report done by CRA on integrating locationally constrained resources.

It’s the remix to transmission

Barack Obama has promised to make it rain on the energy industry.

He should start by investing in high-voltage electricity transmission.

Lots more below the jump.

Smart stimulus

I don’t know if Ryan Avent and Alex Tabarrok would find a lot to agree on politically if they sat down for a chat but they are singing the same tune in the blogosphere this morning.  I’d like to add my voice to the chorus.

First, Alex says some smart things this morning about infrastructure stimulus:

The first thing people think about when someone says “infrastructure” is roads and bridges.  That’s unfortunate because we already spend over $100 billion a year on transportation infrastructure and the truth is we don’t need that much more.  Peter Orzag, President-Elect Obama’s choice for OMB estimated – when Director of the CBO – that an additional $20 billion in spending, mostly to maintain current transportation infrastructure, would achieve 83% of the net benefits to be had from more transportation infrastructure spending.  Moreover, in many cases, congestion pricing would be both greener and more efficient than greater spending. …

Even more valuable than transportation infrastructure would be greater investment in  electricity infrastructure, a smart grid. … Overall, blackouts cost the U.S. on the order of $100 billion a year. [DH: Alex does not source this, but Mike Giberson suggests a source.]

The smart gird is a not one idea but many technologies such as real-time pricing (smart meters), superconductive smart cable, and plug-n-play architecture that combine to produce a grid that is decentralized, self-healing, robust, and smart for both producers and consumers.

Alex is right on here: we already spend a lot on roads but not much on the electric grid, and the marginal returns to more spending on the latter are likely higher than the former.  Further, we need smarter policies for managing both resources, particularly congestion and real-time pricing to efficiently allocate demand to high-value uses.

Meanwhile, Ryan talks about how to spend money on roads (recommended) and then adds:

let me draw your attention to the Center for American progress’ $350 billion stimulus proposal. It includes $18 billion in spending on roads and bridges, and a total of $19 billion for transit. The former is about 50% of average annual spending on highways, while the latter is about 200% of average annual spending on transit (and the money allocated for New Starts is about 300% the annual average for that line item). I think it’s safe to say that these kinds of numbers are probably getting a good look from (soon-to-be) administration officials.

Wow, $18 billion for roads, huh?  It is almost like someone out there* was listening when Peter Orszag suggested $20 billion was about the right number.

Finally, if you do actually check the details of that CAP stimulus proposal, guess what else you find?  You guessed it, stimulus money for upgrading the electric transmission grid, $10 billion in all.

All that should be music to the ears of economists — now if we could just convince folks to try out this congestion pricing plan….

*For anyone who has been totally ignoring the news recently, this is the ‘Center for American Progress’ as in the ‘heart and soul of Obama’s transition team’.

The most interesting post I’ve read in a long time

Mike Giberson on negative electricity prices and wind subsidies in Texas.

In the first half of 2008, prices were below zero nearly 20 percent of the time. During March, when negative prices were most frequent, prices were below zero about 33 percent of the time. After mostly taking the summer off, negative power prices were back to near 10 percent in October……..During these negative price periods, suppliers are paying ERCOT to take their power. Consumers (at least at the wholesale level) are getting paid for using power, and the more power consumers use the more they get paid. These prices are a big anti-conservation incentive. You could, as a correspondent put it to me, build a giant toaster in West Texas and be paid by generators to operate it.

As is usually the case on KP, the whole post is clear and well argued and provides great background information. Definitely read the whole thing yourself. Then rethink your position on the PTC.

Some links

1. EPRI has announced two new projects to evaluate adding solar thermal energy to existing coal and natural gas plants. These hybrid plants could prove to be the cheapest way to get large scale solar energy on the grid. Not only do these solar installations take advantage of existing capital and transmission, but subsidizing their installation at dirty sites might reduce political opposition from incumbents.

2. I’ve written about the potential water resource constraints on the electricity industry before. Power plants, especially nuclear plants, use a lot of water, and drought or increased temperatures could pose a big problem for utilities in many parts of the country. This weekend Green Inc. had a post on the possibility of using treated wastewater in power generation. The piece cites C’s adviser, Dr. Michael Webber of UT Austin, who has a great article on the relationship between energy and water in Scientific American.

3. Over on the World Bank’s Doing Business Blog, Simeon Djankov links to a new paper which concludes that the adoption of potatoes in the Old World explains 17% of the post-1700 increase in population growth and 37% of the increase in urbanization growth.

4. Finally, GCC reports that coal is still the fastest growing fuel in the world. Great.

Public goods

Paul Joskow will be giving the 6th Annual Hans Landsberg Memorial Lecture at 12:30 today at RFF. The topic is “Electricity Restructuring: What has gone right and what has gone wrong?” For those of you who can’t make it down to 16 & P, RFF will be streaming the event live here. Sorry for the late notice. Hope yall can check it out.

Infrastructure

There are two articles in today’s New York Times that you should read.  First, Matthew Wald discusses the limits of our current electric grid:

The dirty secret of clean energy is that while generating it is getting easier, moving it to market is not.

The grid today, according to experts, is a system conceived 100 years ago to let utilities prop each other up, reducing blackouts and sharing power in small regions. It resembles a network of streets, avenues and country roads.

“We need an interstate transmission superhighway system,” said Suedeen G. Kelly, a member of the Federal Energy Regulatory Commission.

While the United States today gets barely 1 percent of its electricity from wind turbines, many experts are starting to think that figure could hit 20 percent.

Achieving that would require moving large amounts of power over long distances, from the windy, lightly populated plains in the middle of the country to the coasts where many people live. Builders are also contemplating immense solar-power stations in the nation’s deserts that would pose the same transmission problems.

The grid’s limitations are putting a damper on such projects already. Gabriel Alonso, chief development officer of Horizon Wind Energy, the company that operates Maple Ridge, said that in parts of Wyoming, a turbine could make 50 percent more electricity than the identical model built in New York or Texas.

Jenny Anderson then surveys the trend towards privatizing infrastructure investment.  I won’t quote from the article (just go read it!) but the figure that pops out is the $1.6 trillion that the U.S. needs in infrastructure investment in the next 5 years.  The article is focused on infrastructure like roads, bridges, and airports, but it is easy to draw links to the need for investment in the electric grid.  Can we get private investment in the electric grid?  I think T. Boone Pickens has discussed building his own transmission lines to support his proposed wind farms in Texas, but I wonder whether he can solve the NIMBY issues.

Here is Felix Salmon arguing that private investment in infrastructure is a good thing and will be more efficient over the long run.

Update: Please read Mike Giberson’s comment below about how T. Boone is (was?) working the NIMBY angles.  Funny stuff.

More update: Ryan Avent has some very smart thoughts about the incentives for private investors in infrastructure.  I’ll add that the experience with BAA and London airports suggests that even when it appears that private investors have properly aligned incentives to invest in infrastructure the actual outcome can be suboptimal. Is this a moral hazard problem arising from implicit government backing of the arrangement? Competition from other firms whose infrastructure is subsidized? Strategic behavior to maximize revenue rather than welfare?

Assault the battery

There’s a fair amount of skepticism in the econoblogosphere about McCain’s proposed $300 million prize for an auto battery. Tim Haab wonders:

But, why does the government have to provide the incentive? Shouldn’t markets do that? What am I missing?

Well, one potential reason, and something we’ve mentioned here before, is that much economic research finds that the existence of knowledge spillovers means that the socially optimal level of R&D investment is (conservatively) two to four times the level of actual investment. In other words, we as society get more than we pay for when we fund R&D.

Other commenters argue that the prize is unnecessary on more practical grounds. Tom Lee says:

But if someone were to invent a better [battery] they’d already be poised to make a huge amount of money through its commercialization. Offering prizes for innovation isn’t always a terrible idea — for pharmaceuticals with a limited market of potential users it can make sense due to the huge costs associated with developing and testing a new drug. But everyone in the developed world needs better energy storage technology, and they need it right now. … So sweetening the pot is unnecessary. Anyone who has a good idea about how to build a better battery is already working on the problem.

I’ll admit this argument sounds pretty convincing. Given the price of oil there’s a strong existing incentive to develop better batteries. Still, the possibility of knowledge spillovers lurks in the background…

Which brings us to a comment from a Free Exchange blogger, who argues that the structure of a prize doesn’t fit the problem:

The question is, will the prize induce an increase in research activity? Where batteries are concerned, this seems highly unlikely. Prizes are better suited to areas where there is not yet a clear market application for a discovery…

I can think of one arena where better energy storage could be put to very good use, and yet simultaneously lacks a clear market signal: electricity. The grid is still essentially a regulated environment. Energy storage would greatly increase the attractiveness of many renewable generation technologies which are inherently intermittent, but the “market” for such an innovation is a fragmented patchwork of regulatory agencies.

I suspect that energy storage for the grid might be a socially desirable spillover from McCain’s auto battery prize. This means that his proposal is less bad than many seem to think — but also less good than either a direct prize for grid-based energy storage, or a reform of our transmission policies.

Is dynamic pricing green?

Lynne Kiesling thinks so. Writing in Gridwise she states the following,

The connection between a Smart Grid and dynamic pricing can also create environmental benefits. Dynamic pricing can also contribute to improving environmental quality by enabling customers to shift demand away from peak periods with high prices or by reducing their overall use. This economizing incentive is the source of the conservation benefits of market-based pricing. Conservation brought on by dynamic pricing reduces energy costs and increases energy efficiency. This conservation typically takes two forms — curtailing consumption (reducing overall use) and shifting use to non-peak hours. Environmental benefits result from using more efficient generators that operate closer to the conditions for which they were designed, and reduced transmission and distribution losses.

While I agree with just about everything she says here, it’s not obvious to me that the net effect is a reduction in emissions. That’s because coal generators, by far the dirtiest source of electricity, produce the bulk of our baseload electricity (The base simply refers to the level of usage that is more or less constant throughout the day). Coal generators are a pain to turn on and off, but cheap to operate once they’re up and running, making them ideal for this sort of constant demand. When demand surges during the middle of the day, more variable technologies, such as natural gas, come on line to satisfy the peaks.

As Lynne points out, dynamic pricing has the effect of flattening the load curve, as high peak prices encourage people to shift their consumption to other times of day. Even if this pricing scheme does reduce total consumption (which is probably true, but not necessarily the case), it could actually increase the level of baseload generation- ie the total area under the load curve would decrease, but the minimum level would increase. Given current incentives, this would make the grid even more coal heavy than it currently is.

None of this is to say that we shouldn’t invest in smart grid/ dynamic pricing technology. Actually, from an efficiency perspective, this is a no-brainer, and Lynne’s piece lays out all the reasons why. We waste an absurd amount of money, and endure and increasingly tenuous grid, as a result of our opaque, uniform pricing scheme. Nevertheless, absent new source performance standards or a strong carbon price, switching to dynamic pricing could have negative environmental implications, effectively encouraging investment in coal generation.

*******Update********** Mike Giberson, Lynne’s KounterPart,  adds to the discussion by pointing out some additional complexities. All are good points, and worth looking into. On hydro, however, my understanding is that we’re pretty maxed out as is right now. Thus, while some regions like the northwest might have fairly clean baseload generation now, incremental baseload hours would probably require fossil generation. I’m hoping to look at this question more formally using the RFF electricity market model later this summer, and I’ll keep yall posted.

Why carbon permit allocation matters more than you think

A lot has been written about cap-and-trade in the econoblogosphere during the past week. Everything I’ve read though (which, to be honest, hasn’t been everything) takes as a starting point the Coasean notion that ownership doesn’t effect equilibrium price. The point being that firms care about opportunity costs, which are set by the market’s marginal willingness to pay, not accounting costs. Thus the market price for carbon permits should be the same regardless of how the permits are initially distributed. I’ve actually made this point several times before.

Yet, in practice, this isn’t entirely true. That’s because in half the country the electricity sector, where most expect the bulk of CO2 reductions to come from, isn’t a competitive market. Utilities are publically owned and prices are set at cost of service, as opposed to marginal cost. This means that they don’t make any profit, and customers see a price that is equal to the average cost of producing the electricity they consumed.

In regulated regions, free allocation to utilities would work as follows: Utilities would still consider the opportunity cost of these permits, and would gladly sell them to the market if the price was higher than their own marginal cost. However, unlike in competitive regions, where this money is pocketed and distributed to shareholders, regulated utilities would take this revenue and distribute it to customers, effectively lowering the average cost of electricity.

Thus, giving away permits to the electricity sector in regulated regions would effectively soften the blow for customers in those regions. Price wouldn’t go up by as much as if all the permits were auctioned off. Which brings me to the rub: since price doesn’t increase as much, demand doesn’t decrease as much either. This means that for a given permit price, we get a smaller emission reduction under free allocation – i.e. the efficiency of the whole program goes down. Since the electricity sector in regulated regions does less work when permits are given away for free, other sectors have to pick up the slack, driving up the cost for the economy as a whole. Preliminary modeling results done here at RFF have confirmed this relationship, and my boss, Dallas Burtraw, actually testified before the House on this relationship earlier this year.

Finally, I should note that this is more than just an academic debate, as I think Lieberman-Warner had about 9% of permits going to load serving entities for free as of last week (I’m sure Daniel knows the correct figure). I should also note that, despite the efficiency costs, I’m not necessarily opposed to softening the blow for electricity consumers. Electricity consumption makes up a higher percentage of poor households’ carbon footprint than rich households’, which means that allocating to load could have some nice distributional effects. Again, preliminary results here at RFF appear to confirm this. We’re hoping to have a discussion paper out on this soon.

Feel good clean energy video of the day

You can read more at William’s blog.

Nuclear power

The CBO just issued a new study on nuclear power in America. Via the CBO Director’s blog here are a couple highlights:

Carbon dioxide charges of about $45 per metric ton would probably make nuclear generation competitive with conventional fossil fuel technologies as a source of new capacity and could lead utilities to build new nuclear plants that would eventually replace existing coal power plants. At charges below that threshold, conventional gas technology would probably be a more economic source of baseload capacity than coal technology. Below about $5 per metric ton, conventional coal technology would probably be the lowest cost source of new capacity.

A carbon price of $45 per ton of CO₂ is very likely higher than the U.S. could (politically) implement in the near future. Current emissions prices in the EU are around $35/ton right now.  If the U.S. passed a bill with similar stringency to Lieberman-Warner — a big political ‘if’ — then the EIA says the 2020 price would be around $30/ton, while the EPA analysis suggests higher, $40-50/ton.  If I was guessing I would say it is much more likely that any politically acceptable bill will result in prices of $10-30/ton in the near term.

But I think this is actually the most interesting point about nuclear power right now:

Uncertainties about future construction costs or natural gas prices could deter investment in nuclear power. In particular, if construction costs for new nuclear power plants proved to be as high as the average cost of nuclear plants built in the 1970s and 1980s (adjusted for inflation), or if natural gas prices fell back to the levels seen in the 1990s, then new nuclear capacity would not be competitive…

And this is very possibly the state of the world we are in.  Check this recent post from the EU Energy Policy blog.  Power plant construction costs have more than doubled since 2000, with much of the rise in the last two years and much of it very related to nuclear construction costs.  China particularly is consuming so much cement and steel that global prices for construction commodities are going through the roof.

A couple years ago I was relatively sanguine about the prospects for nuclear power but I am much more skeptical now.  I think the big problems are:

1. In the short run the price of global commodities and NIMBYism mean that it is both very expensive and very difficult to build new plants.

2. In the long run bad news about climate change could make nuclear look much more attractive but here proliferation worries me.  The long run is all about China and India and other not-so-stable parts of the world.  Fine, you can nuke up the U.S. or Europe completely (a la France) but this doesn’t make a huge difference because those places aren’t the future of the emissions anyway.  To really make a dent in the emissions trajectory you are talking about a huge number of plants in parts of the world where there are major religious and ethnic tensions (Jammu and Kashmir, western China) or where governments are authoritarian or (perhaps worse) incompetent.

Essentially I think the U.S. and Europe should be thinking now about which energy technologies they’d like to export 20 years down the road.  In this regard I’d rather us do a bunch of carbon capture and storage research than try to reinvigorate the nuclear industry.

Here is the MIT study on nuclear power, recommended.

Energy subsidies in the U.S.

Have I mentioned recently how absolutely amazing the Energy Information Administration (EIA) is? As much as researchers frequently run into problems getting exactly the data they need to do the analysis they want, it’s pretty remarkable to live in a time and place where such incredibly detailed information about energy in the U.S. is available at your fingertips.

The EIA’s latest feat is this new report on federal energy subsides. I’m pretty sure I’ll be revisiting this report frequently, but on first glance two things stood out.

1. What the heck is “refined coal”? Based on a cursory reading it sounds like coal used to produce synthetic fuels. It is getting a huge portion of federal energy subsidies (check out table ES1): around $2.4 billion of the $16.6 billion total. Part of my confusion though is that the EIA analysis classifies most of this subsidy under electricity generation (so is it a synfuel or coal?) and this makes refined coal the biggest subsidy recipient on a dollar-per-megawatthour ($/MWH) basis (see table ES5): it receives $29.81/MWH, versus $23.37/MWH for wind, $1.59/MWH for nuclear, and $0.44/MWH for (regular) coal. (These are the only electricity generating technologies which receive more than a $0.3B in federal support.)

2. Besides refined coal, who’s the other enormous hog at the trough? Three guesses, and the first two don’t count. That’s right, ethanol/biofuels chewed through $3.2 billion in 2007. The metric used to report subsidy payments here is dollars per million BTUs (table ES6), and ethanol is more than double the nearest competitor at $5.72/mBTU. It’s a little tricky comparing this subsidy level to the subsidies for electricity, since electricity is a more valuable form of energy than heat, but a simple back of the envelope calculation using standard conversion factors suggests that this is in the ballpark (slightly lower) than the dollar-per-output subsidies for wind I listed above.

So, to summarize, just with those two items, one-third of federal energy subsidies are going 1) to the most polluting fuel used today and 2) to a form of liquid food that is driving up world prices and at best is saving us a tiny bit of greenhouse gas emissions. Awesome.

Take it to the house

A couple of weeks ago I posted about the current state of the proposed Western energy corridors after the Wilderness Society filed suit against the DOE for disagreeing with “failing to consider” the group’s claims during the public comment period. Today, according to Greenwire, two subcommittees of the House Natural Resources Committee were slated to examine the proposed corridors. It is expected that the members will also examine the public comment review process, in addition to the corridor proposals. Ideally Congress would use this opportunity to clarify the intentions of the 2005 Energy Policy Act with respect to these corridors, so that future delays may be avoided; Odds are there will be a lot of posturing and not much else. Stay tuned.

In the meantime, Karen Palmer, Anthony Paul, Shalini Vajjhala and I have a new discussion paper (PDF) out on the interrelationship between grid expansion and renewables policy. Basically, the point of the paper is to highlight how decisions along one dimension can affect optimal outcomes along another. For example, our modeling finds that absent new corridor designations, a national RPS could result in 10 additional GW of biomass capacity in the Southeast by 2020. However, were the DOE to simultaneously expand transmission capacity in certain areas, 6 GW of this Southeastern biomass would instead be replaced by Midwestern wind capacity. The point of this paper is not necessarily to advocate one corridor designation or renewables policy policy over another, but simply to stress the need for policy coordination across these two fronts. If you have any comments on the paper feel free to email me at sweeney@rff.org.

Assorted links

1. Agricultural Subsidies: Still a Bad Idea. Felix Salmon explains why removing ag subsides and taxing carbon are similar, and why they both make sense. Free Exchange squares the circle with a discussion of biofuels.

2. Who Pays a Tax? Tim Haab’s two-part series is here and here.

3. 6 Cities That Were Caught Shortening Yellow Light Times For Profit. What happens when your city stands to make money off of lawbreaking? Yep, that’s right, they make it harder to avoid breaking the law.

4. Malaria and the politics of disease. Efforts to fight malaria seem to be ramping up quickly. But even if near-term success can be achieved, will many be left worse off in the long run?

5. Congestion pricing works. Evidence from California.

6. Location, location, location. The premium for urban living.

7. The cost of siting transmission lines.  This came up yesterday in the seminar on curbing electricity demand at RFF as one of the key uncertainties in the future of electricity, given the political or economic forces that will bring new types of resources onto the grid in the coming years.  (Video from the event should be up in the next few days.)

No country for energy corridors

I can think of very few issues more handicapped by NIMBYism than the siting of transmission lines. Unlike nuclear power or other issues susceptible to NIMBY, it seems that everyone thinks expanding the interregional transmission capacity is a good idea. Just as long as the wires don’t go through wildlife preserves. Or Indian lands. Or historical battlefields…….

Recognizing that some interest group would find a way to effectively block just about any proposed corridor location, Congress intervened. Section 216(a) of the Federal Power Act (created by section 1221(a) of the Energy Policy Act of 2005) directs DOE to identify transmission congestion and constraint problems. In addition, section 216(a) authorizes the Secretary, in his discretion, to designate geographic areas where transmission congestion or constraints adversely affect consumers as National Interest Electric Transmission Corridors (National Corridors). In English, Congress basically told the DOE to identify where it would like to expand transmission, ignoring all other federal constraints. My (limited) understanding is that state level claims may still holdup siting, but the DOE will be exempt from getting siting approval from any other federal agencies. Three years later, after an extensive public comment period, the DOE affirmed its NIETC corridor designations, and it looked like it was full speed ahead towards badly needed transmission expansion.

Enter the Wilderness Society. In a press release last week, the group announced that it had filed a lawsuit against the DOE for “failing properly consider public comment* or exclude areas in California that are designated wilderness, national monuments, national parks and roadless forest lands.” (The subheading also mentions “historic battlefields” which had me wondering why the hell we preserve those anyway). I’m no attorney, but it appears that the suit is challenging whether or not Congress really intended to preempt other federal claims when it passed the Federal Power Act. If this claim sticks, it could be back to square one for expanding transmission. Stay tuned.

*** Shalini Vajjhala, Karen Palmer, Anthony Paul and I also submitted a comment to the DOE, highlighting the important interrelationship between transmission siting and renewable energy expansion. We’re finishing up the discussion paper this month, and I’ll post a link on CT as soon as its done. Note that we’re not currently considering suing should the DOE ignore our comment

The water resource implications of PHEVs

Today’s NYTimes has a piece on an interesting new paper from Carey W. King and Michael E. Webber of UT Austin. The authors point out that converting our auto fleet from gasoline power to electric power would put substantial strain on our nation’s water resources. Water is used to both mine and process fuels and to cool power plants during the generation process. The study estimates that “For every mile driven by a gas-powered vehicle that is displaced by one driven by an electric vehicle, about three times as much water is consumed (that is, lost to evaporation) and about 17 times as much is withdrawn (used and returned to its source).” However, far from arguing against PHEVs, the authors lay out a series of steps that policymakers should begin taking now in order to prepare for the shift to plug-ins.

Though the paper doesn’t mention how climate change will affect things, it seems obvious to me that things could get even worse. Hotter temperatures mean more cooling for generators, and warmer water to cool with. Several nuclear plants were shut down during the droughts in the southeast last year. The NYTimes also had a long much talked about article on how climate change could affect water supplies.

Finally, the authors do point out that renewable resources like wind and solar use no water, which is yet another reason why we should encourage their development.

A Price Signal May Not Be Enough to Promote Energy Efficiency

As energy prices increase, consumers will reduce their demand through energy efficiency measures and behavioral changes, which in turn will lead to fewer GHG emissions, right? Not according to the latest Carbon Market News Release form Reuters. Despite a recent spike in domestic gas and electricity prices, demand for energy has barely moved. In fact, the more that 100% increase in oil prices in recent years may actually be leading to an increase in carbon emissions.

” ‘The paradox here is that what looks like an increase in energy prices is in fact feeding through to an increase in carbon emissions rather than a reduction,’ said Oxford University economist and government adviser Dieter Helm.

‘That is because the oil price is not a genuine carbon tax. Far from cutting demand for carbon, the high energy prices have prompted a rush for coal — the dirtiest fuel,’ he told Reuters.

While known reserves of oil are expected to last only to around mid-century, and gas is in relatively plentiful but still finite supply, coal reserves are estimated to last for several centuries more.

There are big increases in coal burn in China, India and the United States where even tar sands have started to look attractive to investors again.”

Why isn’t a price signal enough to kick start investment in energy efficiency, “the low hanging fruit”? Rich did call me out on CT almost two months ago to put in my two cents on this; better late than never. Here are a few thoughts-most of these issues work in tandem:

1. The incentives for energy savings are not always there

- The person making the capital investment decisions is not always the person benefiting from energy savings (principle-agent problem). For example, the owner/manager of a building may not be the one paying the utility bills.

- The benefits from energy efficiency often come from relatively small diffuse pieces, and private businesses are more likely to invest in one large deal.

- People can’t respond to prices because they don’t have real time pricing information

2. The costs of achieving energy efficiency are likely higher than some estimates suggest (they are sometimes reported as negative costs)

- Lack of substitutability/Hidden Costs- Rich’s example of the difference in the quality of light emitted from incandescent vs. CFL light bulbs (though they do come in soft white now)

- Transaction costs of raising awareness or implementing programs such as putting smart grid technology in everyone’s house.

3. How people actually behave does not always match theory

- With advances in behavioral economics, we are recognizing things such as the “status quo bias” where there seems to be some added cost to switching behavior. The investment that it takes to review the options to make a different decision may seem confusing and not worth it for uncertain benefits.

- Rich suggested (in the same post as above) that people may be using higher discount rates than those in many energy models. For example, if people deal with expenses on a monthly basis, a large upfront cost may seem more expensive than the meager per month savings felt over time. This could be the case even if the cost savings exceed the initial capital investment at market discount rate.

“Evidence shows that there are few visible behavioural changes as a result of high prices. Governments need to do more than just rely on the price mechanism,” said Jim Watson of the Sussex Energy Group. “You need demand side measures too.”

Getting these demand side measures right means getting the incentives right, and matching them to actual human behavior.