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.

 

Can deregulated electricity markets provide reliability?

A new edition of Resources, the quarterly magazine from Resources for the Future, is now out. In it RFF Senior Fellow Tim Brennan has an article about the electricity market. Part of Brennan’s discussion deals with electricity reliability and whether deregulated electricity markets are going to be more effective at offering reliability than centrally controlled and vertically-integrated electricity markets.

He starts with the neoclassical argument that competitive markets should enhance reliability (referred to as “security” in this excerpt), or at least help ensure it for those who are willing to pay:

When it comes to security, markets should help, not hurt. Opening markets to new competitors and, over time, to new entrepreneurs and innovators should result in redundancy. And a region or nation should be less vulnerable to disruptions if it is not depending on the facilities and services of a single monopoly provider.

…

More directly, markets can actually help to provide security. Security of service, like any other product feature is one of the attributes that suppliers will offer in an open market, as long as the consumer’s willingness to pay exceeds the cost of furnishing it.

He goes on to acknowledge, however, that some of the particular features of the electricity grid may mean that there are insufficient incentives for electricity companies to ensure reliability:

[Electricity] reliability is, in economic terms, a critical “collective good.” Failures of my car, furnace, or computer to start may be serious problems, but they are ones largely between me and the firms I choose to supply and repair those items. If my electricity supplier fails to meet my demand, it is not just my problem; everyone on the grid is blacked out as well.

Although he doesn’t offer a straightforward answer to whether he thinks this is a major problem for deregulating electricity markets, he does include a nice analogy that helps frame the question at hand:

The nature of reliability as a collective good implies some degree of central control. …the key question is the degree to which such centralized control is consistent with the decentralized decision processes essential to entrepreneurial competition. At one extreme,we might need no more central planning than air-traffic controllers exercise in the airline industry. Air space can be policed to avoid collisions without precluding competition among carriers to transport passengers and freight. At the other extreme, a central controller may need to control dispatch of generators in the short run and investment in generation over the long run to ensure reliability as well as efficiency.

My guess is that newer technologies are going to be able to provide some of this differentiated service, e.g. real-time meters and pricing, smart appliances, programmable thermostats, etc. This will allow some consumers to pay a lower electricity rate in exchange for bearing some reliability risk, while allowing other customers who truly value reliability to pay a premium to always have the lights on. But do read the article, it’s a thought-provoking look at the electricity markets, and then drop back by to leave your thoughts on whether deregulated electricity markets can work.

Daylight saving time increases energy use

I posted previously about research that showed that at the margin, extending daylight saving time (DST) doesn’t save energy, suggesting that the U.S. isn’t going to get any energy benefit from it’s recent extension of DST. (DST begins March 9 this year in the U.S. Prior to 2007 it would have started 3 weeks later.) I noted in that post, however, that “this doesn’t mean DST does not save energy for the parts of the year where it is already used, merely that it likely cannot be extended at the margin for increased energy savings.”

A new research paper now speaks to the larger question of whether DST as a whole saves energy, and suggests rather that the institution increases energy use. Matthew Kotchen and Laura Grant exploit a natural experiment in Indiana and report:

Our main finding is that—contrary to the policy’s intent—DST increases residential electricity demand. Estimates of the overall increase range from 1 to 4 percent, but we find that the effect is not constant throughout the DST period. There is some evidence of electricity savings during the spring, but the effect lessens, changes sign, and appears to cause the greatest increase in consumption near the end of the DST period in the fall. These findings are consistent with simulation results that point to a tradeoff between reducing demand for lighting and increasing demand for heating and cooling. Based on the dates of DST practice before the 2007 extensions, we estimate a cost of increased electricity bills to Indiana households of $8.6 million per year. We also estimate social costs of increased pollution emissions that range from $1.6 to $5.3 million per year.

It looks like the upshot is that while DST saves energy on lighting, it uses extra energy for heating and cooling, particularly for AC use in late summer and early fall. (People are going home from work and running their ACs longer and harder because of the extra daylight.) Yesterday’s WSJ had a great write up of the results. The Indianapolis Star ran a story today. As pointed out by the WSJ, there are other reason for DST beyond energy use:

There may also be social benefits to daylight-saving time that weren’t covered in the research. When the extension of daylight-saving time was proposed by Mr. Markey, he cited studies that noted “less crime, fewer traffic fatalities, more recreation time and increased economic activity” with the extra sunlight in the evening.

The $8.6 million that DST is costing Indiana households on their electricity bills works out to $3.19 per household per year, so it may be a price worth paying.

Matt was one of my favorite professors in grad school at UC Santa Barbara. He’s an engaging and thoughtful guy, and really smart about designing interesting research questions. Here is Matt suggesting that we should drill for oil in ANWR. Here he is on household participation in green electricity programs.

If you’re in DC in early April (the 10th) and want to hear Matt talk about these results, come by RFF for an academic seminar. Please come!

H/T: Tyler Cowen.

Good point

Rich has posted previously on the debate over point of regulation for a cap and trade program in California, pointing out all the administrative advantages that regulating upsteam — near the point of generation — would have.

It looks like someone was listening!* The California Public Utility Commission (CPUC) and the California Energy Commission have now released for public comment their draft set of recommendations to the California Air Resources Board (CARB). (Thanks to loyal CT reader Jeff for the pointer.) They’ve recommended that CARB set up a cap-and-trade program that includes the electricity sector and makes “deliverers” of power responsible for compliance, where “deliverers” essentially means “generators” for in-state electricity and “importers” for out-of-state. (And covering imported electricity is quite important to the environmental integrity of the program: California imports 20% of its electricity, and this electricity accounts for more than 50% (!) of the electricity-sector GHG emissions from the state.)

This is good news, for a couple key reasons: First, it will be far easier to administrate a program where generators and importers are responsible for reporting the source of power and associated emissions than it would be if utilities were asked to do so. (The other main option — a “load-based” point of regulation — would require utilities to perform a mind-bogglingly complicated accounting act to calculate the emissions associated with the power after it had been scrambled onto the grid.) Second, this deliverer-based approach can be turned quite easily into a pure sourced-based (generator) approach if the western U.S. adopts a regional cap-and-trade program similar to RGGI in the northeast U.S.

The decision could be even better, however. First, the proposal from CPUC and the Energy Commission also includes recommendations for the natural gas sector, and here they do not recommend including natural gas in a cap-and-trade program. They do at least acknowledge it should be considered for future inclusion, but for now, while they acknowledge the advantages of incentive-based regulation for the electricity market, for some reason they don’t think it would be appropriate for natural gas. That recommendation is perplexing and disappointing.

Part of the reason that it’s perplexing and disappointing is that the movement in the discussion at the federal level is towards making the point of regulation even further upstream, at the level of the fuel.** For example, the Lieberman-Warner bill has shifted from regulating natural gas emissions at the electricity generator to regulating the processors and importers of natural gas. Shifting the point of regulation to fuel provides broader coverage — since natural gas is used in many places in the economy besides electricity generation — and reduces the number of regulated entities, and hence administrative burden. California could get a more effective and efficient program, as well as one that would be more likely to be inter-operable with a future federal program, if it would move to making point of regulation the fuel producers/processors/importers.***

For further info on point of regulation in a federal program, see this paper for an estimate of the number of emission sources that would likely have to be regulated depending on where you set the point of regulation, and this paper for an analysis of why upstream is best the relative merits of various approaches.

*Admittedly, they probably were listening less to us and more to the Market Advisory Committee and its members, including RFF scholar Dallas Burtraw.

**This works because you can calculate the exact volume of CO₂ emissions from burning a given quantity of fuel beforehand. For example, burning a gallon of gasoline always releases 19.6 pounds of CO₂ into the atmosphere.

***In reality I don’t get the sense that this has ever been much a part of the conversation in California — they seem intent on getting a cap-and-trade program set up that includes primarily the electricity sector, and then they’ll see how things go and move from there.

Electricity as female empowerment

This paper investigates the employment effects of a mass roll-out of household electrification in rural South Africa. … My findings show that cooking with wood falls sharply in treated areas over a five-year period, and lighting and cooking with electricity increase substantially. IV employment results indicate asymmetric responses by gender: female employment rates increase by 13.5 percentage points in treated areas, while there are no significant male effects. Middle-poor communities respond most to the new option to use electricity, and employment effects are large for women in their thirties and forties who are less constrained by child-care responsibilities.

That is Taryn Dinkelman, graduating from Michigan, in her job market paper. The basic story is that when you spend a few hours per day tied up in home production — collecting wood and cooking — the provision of electricity can free up significant time for other opportunities. Note that the poorest households don’t benefit as much, probably because while connections were completely subsidized in South Africa, the poorest households remain less able to afford the appliances that use electricity. Also note that this is a very large employment effect on the extensive margin: the female employment rate is 7% in her study area.

Sunshine on my double-glazed low-E windows makes me happy

Economist.com’s Tech.view columnist has a great article up today about his research into putting solar cells on his own home. The article provides an accessible overview of photovoltaic technology as the author goes through the calculations of home installation. His conclusion? Even living in sunny southern California, he estimates that going solar would cost him “$600 a month for ten years, even after setting the interest charges against tax. And all that just to feel good about saving $75 of electricity a month.”

Although the article doesn’t state it explicitly, it sounds as if the downfall of solar technology is not only the expense — around $65,000 at his home, before any subsidies or rebates — but that there are easier ways to go green. We get a clue here, as he talks about the electricity needs of his home:

It’s not even as though the place gobbles electricity. When the house was being rebuilt five years ago, the new roof came with over a foot of thermal insulation. The floor-to-ceiling windows along two sides of the structure were replaced with double-glazed “low-E” glass (the sort that blocks infra-red radiation), and thermal linings were included in all the exterior walls. Even during the summer, the air conditioner usually stays off.

Admittedly, the architect went overboard on lighting. Fully illuminated, the house demanded seven kilowatts of raw lighting-power before fluorescent lights replaced thirsty tungsten filaments. Overall electricity consumption is now a reasonable 8,300 kilowatt-hours (kWh) a year.

Based on this description it sounds like his home is already pretty efficient. And those efficiency improvements were probably undertaken primarily because they made financial sense — the installation cost was less than the expected savings on energy. But given the author’s interest in going solar and his exactitude in calculating the cost, it’s also likely that he’s much more environmentally aware and economically savvy than your average homeowner. There’s a lot of research suggesting that many other — less savvy — property owners are leaving money on the table by failing to increase the efficiency of their buildings.

From the viewpoint of both the homeowner and the electricity company, efficiency improvements and solar technology look very similar: they reduce a home’s demand for electricity from the grid. Given the large subsidies regulators seem ready to give out to solar panels — perhaps $14,000 in this author’s case — it’s easy to think that regulators could be getting a much better deal if they figured out how to buy some energy efficiency with those dollars.

Solar statistic of the day

Average number of solar hours per day in sunny southern California: 5.5

That is from John Supp, of California’s Solar Initiative. What this means is that even in southern California, a PV panel produces at its optimum output only 22% of the time. In northern California this figure drops to 18% (4.5 hours).

While there have been a lot of exciting developments on the PV front in recent months, the practical realities remain discouraging. Unless we figure out how to store this energy (or how to make the sun shine longer), its going to be a long time before PV makes a significant dent in our coal/ natural gas consumption.

More to come on the economics of PV later today (I hope).

Could South Africa’s electricity woes threaten the 2010 World Cup?

Last week’s Economist has an article about South Africa’s severely stressed electricity market. Despite having some of the world’s largest coal resources, severe planning errors on the part of publicly owned utilities have turned surplus into shortage. The government is now warning that “occasional blackouts, euphemistically known as “load shedding”, will be a fact of life for at least another five years.” In addition to the substantial threat this poses to South Africa’s business-as-usual economy, I’m particularly concerned that electricity shortages could hinder the World Cup, which South Africa will host in 2010. This will be the first time that an African nation has hosted the tournament, and many have openly expressed doubt about the nation’s ability to handle the security and logistics involved with hosting such a massive event. If SA’s electricity grid is stressed now, imagine what will happen when millions of people from around the world descend on the country for a month of partying.

I still plan on going, but I’ll probably bring a suitcase full of batteries.

Trends in energy efficiency

Data taken from the BEA and EIA websites.

***Update: Apparently this was unclear to some. One very crude measure of energy efficiency is the amount of stuff you can make with a given amount of electricity. By this metric, you could say energy efficiency has been increasing over the past 16 years, albeit at a rate slower than overall economic growth.

Decoupling + Energy Efficiency Programs = Corporate Welfare?

N-dot’s assertion that “Cap-and-trade = Carbon tax + Corporate welfare” seems to have resonated with policymakers in DC . It’s been mentioned at just about every cap-and-trade talk I’ve attended in the past few months. While I sense that the tide is turning towards a full (or at least close to full) auctioning of permits, listening to people talk about what we should do with all this revenue raises some new concerns about corporate welfare. In particular, as the title indicates, I’m a little concerned that we may overcompensate utilities in our quest for energy conservation.