ECON FINAL
"proven reserves":
fossil fuels that are technically and economically recoverable at current prices
Three components of electricity industry
generation (burning or harnessing) transmission (high voltage high capacity lines) distribution (lower voltage)
nuclear costs
-Varies between countries Uncertain/disputed
Could addressing these challenges conflict with the goal of climate change mitigation?
... i mean, can't replace ff with renewables...
Nuclear investments turned out to be much more costly than expected - motivation for restructuring
Accidents Unforeseen construction costs Increased safety regulations Higher than expected upkeep and waste disposal costs Under the regulatory agreement between the state and the utilities the consumers still had to pay for these investment
Problems with Competition in Electricity Industry
All these factors are a recipe for market power (even for a small producer) Think about a hot humid summer afternoon where the entire region is blasting their ACs and generation reserves are maxed out. A small generator get away with asking for huge amounts. Would this happen if some producers were able to store electricity? * NO Would this happen if the price was reflecting the changing wholesale prices in real time?* NO Would the wholesale market prices still be volatile even if everybody was playing nicely and no one was exercising market power? YES? In practice the wholesale price had to be capped in order to prevent market power. (i.e. replacing the old regulation with new one).
Learning-by-doing spillovers
Argument: The renewable energy costs would come down due to learning-by-doing and this benefit would inevitably spillover to the industry. Classic public good being underprovided situation. Therefore, we should subsidize green energy. Push back: It is true that the cost of solar came down dramatically in the recent decades. But to a large extent we owe that to the crystalline silicone technology developed within the US space program and private semi-conductors industry as well as the economies of scale. Learning by doing played a relatively small role.
Economists are concerned about whether the energy efficiency decisions are economically efficient
Are the decision makers choosing the energy efficiency level such that overall economic benefits are maximized?
Productive inefficiency-
Attempt to reclassify old as new by drilling new well to an already established reservoir (i.e. additional welfare loss)
How to mitigate CO2 emissions?
Capture the CO2 from the atmosphere •Expand the size of forests (won't be enough) •Carbon Capture Storage (expensive) Reduce fossil fuel consumption •Supply side•Demand side
Other Policy Concerns and Future Research
Carbon credits Economics of energy storage Improving forecasting tools to mitigate intermittency Possibility of giving up control
will we ever stop using fff
Demand side has two major components(two major fossil fuel consuming sectors) -Electricity generation (coal, natural gas)•Replace coal and natural gas with solar, wind, nuclear? -Transportation (oil)•Can we reduce oil usage in transportation?
During the Great Depression - No regulation
Excess supply in Southwest Shortage in North No enough pipelines Northern states were pushing for regulation
1938 Natural Gas Act
Federal Power Commission was given the control of natural gas transmission and prices Different rates for new and old gas Price ceiling started to create significant shortages by late 1960s.
1989 Natural Gas Wellhead Decontrol Act
Full deregulation (no more ceilings)
1978 Natural Gas Policy Act
Gradual price liberation on new gas by 1985 Continue to control the old gas price Price control was extended to intrastate market From FPC to Federal Energy Regulatory Commission
Beyond the direct effects, there are indirect macroeconomic impacts to inc oil production domestically
Hard to quantify -Past experiences may not be representative
Environmental Kuznets Curve
Industrialization and env degradation, highest industrial, dec again in post industrial
Environment and Energy Issues in the Developing Countries
In the developing world environment quality is poor Air Quality Water Pollution Child mortality due to poor air quality Child mortality due to poor water quality
Challenges in greening electricity
LCOE geographical variation intermittency Duck curve
Another big issue is poverty. Connecting people to the grid does not necessarily solve the poverty problem.
Like most things reliability problem is unequally distributed. Poorer households are affected more. Even if they had the perfectly reliable electricity, these people are very poor in the first place so they are are unlikely to be able to afford the appliances that use electricity. So connecting them to the grid may not be of much use to them Having access to consistent food, running water, sanitation, health care, education may be bigger issues for them.
Greening the Transportation
Mainly via battery powered electric vehicles (EV) The main trend is transitioning to EV Not easy! Battery costs vs oil limtied range charging time oil prices will respond and become compeitive
Expanding oil production in US (though no effect on the world price) would create wealth in US.
Oil company profits (it's complicated!, who owns them?, how is it the profit distributed?) Tax payments to federal and state governments and (hopefully reduce other taxes) Royalty payments to land owners
FERC Order 451
Old gas prices were deregulated From 15 different prices (depending on vintage of the well) to single price ceiling (above market clearing price)
Most certain portion is operating cost
Operation &Maintenance (O&M): $25/MWH •This high number is mostly driven by large number of people employed in a nuclear plant (~500 people per gigawatt capacity as opposed to ~50 people /gigawatt natural gas capacity)-Fuel: $5/MWH-Waste disposal: $5/MWH
Will We Ever Stop Using Fossil Fuels?
Reduction will have to come from either the supply side or demand side Supply Side: The reserves are not increasing (despite we once feared the would) New reserves are being found New technology enables different variety of resources to be economically viable
California Energy Crisis (2000-2001)
Starting June 2000 wholesale price started to skyrocket While retail price was capped at 6 cents/kwh Utilities in California were losing $50 million a day and were no longer able to pay the power producers. Rolling blackouts ensued
Electricity and transportation are the largest fossil fuel consuming sectors.
Therefore the demand side will hinge on two questions: Can we replace coal and natural gas with solar, wind, nuclear? Can we reduce oil usage in transportation?
Hotelling rule
Under these assumptions Hotelling says the price of an exhaustible natural resource should increase at the interest rate.
1978 PURPA: Public Utility Regulatory Policy Act - motivated for restructuring
Utilities required to buy power from independent power producers at a price equal to avoided cost of utility. Many states set these avoided costs much higher than the marginal cost of generation Result: Many utilities ended up signing LONG TERM purchase contracts with these independent power producers at these high prices. In retrospect, these prices were especially high given the natural gas price fell in 1980s and 90s.
Forecasting is important for investments as well as thinking about global climate change.
What will fuel this energy transition? It is coal for a lot of countries.
duck curve
challenge for greening el becasue resource sin a given area are correlated, large sclae penetration reduces marginal value of capacity Risk of over generation during the day, negative prices Need for quicker ramp up
price ceiling
dead weight loss
Energy efficiency:
energy services per unit of energy input.
Rebound effect
increase in energy use as a result of declines in marginal cost of energy services caused by increase in energy efficiency
IN US all three functions have been
historically bundled together/vertically integrated within an investor owned utility IOU or owned by local municipality
Large differential between the U.S. vs Europe and Asia
interest in construction of LNG export terminals don't have infrastructure yet
Hotellings rule doesn't always work bc
lot of assumptions don't hold STILL Price has a rationing role in the markets and it should reflect the degree of scarcity.
Restructuring bc
nuclear expensive PURPA created discrepency
natural gas prices
price depends on location cost of pipeline is bulk of cost---> natural monopoly long term purchase commitment still competitive forces are in effect bc oil and coal are close enough substitutes
Energy conservation:
reduction in the total amount of energy consumed.
Energy conservation
reduction in the total amount of energy consumed. So energy efficiency may or may not imply conservation
Hotelling's rule assumptions
-A private owner to the entire stock of the resource -Total amount of stock is fully known and fixed -Once withdrawn, the resource is fully used up -The stock will not regenerate itself (unlike fish) -The cost of withdrawing a unit of the resource is always the same -No substitutes to the resource
Note that these increases in demand corresponds to significant welfare increases for these masses.
-A refrigerator can mean people will have better nutrition, women will spend less time cooking and perhaps they can go to work. -Switching from burning wood to electric stoves will improve indoor air quality, reduce deforestation, and will be safer for those women who would otherwise be collecting the burning wood outside.
The cost of solar PV came down dramatically in the recent decades But it is mostly due to
-Crystalline silicone technology (developed in US space program as well as private semiconductor industry) -Economies of scale earning-by-doing played a relatively small share So subsidies are not well justified on public good grounds.
Second oil shock came during 1978-1981
-Oil worker strike in Iran in 1978 -Shortly after that Shah was overthrown in 1979 and US hostage crisis -Iran-Iraq war
Even if we built the grid and connected people to the grid there are still issues remaining to be solved
-Reliability of electricity -There is still underlying poverty
Seven Sisters :
-Standard Oil of New Jersey (now Exxon); -Standard Oil of New York (now Exxon); -Standard Oil of California (now Chevron); -Texas Company (Chevron); -Royal Dutch Shell; -Anglo Persian Oil Co (BP); -Gulf Oil (Chevron and BP)
Rebound effect: Suppose there is a standard that increases mpg of cars
-This will make a mile of transportation cleaner. -But it will also make the per mile driving cost lower .-Therefore people will consume more miles (intensive margin) Per mile of travel will also be cheaper → more miles driven -Furthermore, what do they do with the money they saved? Do they consume more energy intensive products? Money may be saved (or not) →spend it on more (or less) energy intensive products? (income effect) -In other words do they change behavior in a way that will make them end up using more or less energy? -Also do some people who don't own cars can end up buying cars and start using gas. May (or may not) encourage car purchases by people who were otherwise did not own a car(extensive margin.) The short run effect is a lot more straightforward to study.
Why is reliability a problem?
-Unreliable electricity will affect businesses, hospitals, and the effectiveness of infrastructure. -It will also impede investment requiring many of businesses to get a back up generator -Back up generators are really dirty. They burn diesel and pollute the air.
What is up with the forecasts constantly underestimating the energy demand in the developing world?
-Worlds poor and near-poor will likely drive the demand growth in energy consumption .-Why? As the worlds economy grows masses of people will (hopefully) be lifted out of poverty. -These people will start (in fact they already have started) buying energy consuming appliances. -Therefore the increase will be along the extensive margin (think jumps in growth).
True or False?: Proven reserves are fixed.
...FALSE
Question: Is the market for information perfect?
...No, we don't always have access
Question: Is it optimal to be perfectly informed?
...No. Costs you more to be knowledgable about everything, dimishing marginal return
Is it possible for the US oil market to be "independent" of the rest of the world? (Hint: Think about energy independence vs. energy security)
...No. P dtmd by world market, could think about E security which is different
Subsidizing green instead of taxing pollution is economically inefficient for 3 main reasons
1) artificially pull price of all electricity down and will lead to overconsumption of energy ---> discourages conservation ---not that green is overpriced but that pollution is underpriced ---any level of emission reduction, cost is minimized if mcofAb is equalized across polluters, subsidizing doesn't come anywhere near that but taxing does 2) subsidizing gives same amount of credit to every single rw kwh. but not all kwh are generated equally ---Depending on the time and location they are generated they displace different amount of emissions --- and rltnp between green power and em reduction isnot uniform. 3) Benefit leakage - diplace dirty energy in another jurisdiction
Electricity in the Developing World
1.1 billion people in the world don't have access to electricity Entire Sub-Saharan Africa, (+960 million people), currently only consumes about as much power as New York City. Important pressing question is as these masses come out of poverty how should/will their energy transition look like Contrary to what some people might think, building decentralized technologies solar micro-grids (often referred to as "energy leapfrogging") are not likely to be the solution.
Ethanol
95% of transportation fuel is oil based remaining from corn ethanol Converting corn to ethanol is energy intensive so the reduction is limited to 20% If you include the life cycle of raising corn the GHG may in fact potentially increase due to corn Also ethanol is more corrosive and prone to absorbing water Huge tax credits, protected from imports via large tariffs
NG overview
A large portion of natural gas in the US comes from wells that also produce oil Similar to electricity 3 portions -Production transmission distribution.
Natural gas windfall
A lot has changed since the full deregulation in the production transmission side in 1989 Starting early 2000s new technology enabled horizontal drilling and hydraulic fracturing (fracking) + 25% to the proven natural gas reserves from 2007 to 2013. Barnette Shale and Marcellus SHale most famous reservoirs
Hydrogen
A storage method, not an energy source! (Currently) not a solution to any of our problems (Currently) most effective way to store hydrogen requires burning fossil Without MASSIVE amounts of storage it is nearly impossible for the uninterrupted free market to address global climate change by either reducing supply of demand.
Sources of inefficiency due to price ceiling
Allocative inefficiency Productive inefficiency Reduced incentives for exploration
NEM
An arrangement between the power utility and customers -Customer buys or leases onsite generation equipment for own consumption -Any excess generation is exported into the grid ------Customers get credited for their exports at the retail rate. small scale decentralized = Distributed Generation (DG) In December 2015 PUCN Changed the NEM rate and existing customers were NOT grandfathered.•September 2016 PUCN (with 2 new commissioners) to grandfather•June 2017 Nevada State legislation passed AB405 set the net metering compensation rate for new customers 95% of the retail rate. For every 80 megawatts of capacity decline by 7% to a floor of 75% of the retail rate.
US Strategic Petroleum Reserve (SPR)
An emergency fuel storage of petroleum maintained underground in Louisiana and Texas by the United States Department of Energy (DOE). he largest emergency supply in the world, with the capacity to hold up to 727 million barrels Started the petroleum reserve in 1975 after oil supplies were interrupted during the 1973-1974 oil embargo, to mitigate future supply disruptions.
Green Jobs
Argument: By subsidizing renewable energy we are not only helping the environment, we are also creating jobs and stimulating the economy. Push back: Not only subsidizing renewable is NOT the best (most economically efficient) way to help the environment (see previous lecture), but also it is not clear whether subsidizing renewable industry (as opposed to hundreds of other industries) would be the best way to stimulate the economy. It may (or may not) create more jobs but it is not clear whether green subsidies would be overall welfare improving given that it takes more resources to generate 1kwh of electricity from renewable sources. Take home message: Environmental benefits are the only valid reason to be partial towards renewable energy. Other arguments don't really hold much water.
Energy security
Argument: US should be producing a bigger share of the energy that it is consuming. Subsidizing renewables is the way to do that. Push back: US is self sufficient in coal and natural gas which fuels US electricity. Imported energy is mostly oil that is used mostly in transportation. The evolution in the transportation will occur via switching to EV. So if we will fuel our cars with electricity instead of gasoline (an oil product) natural gas and coal are perfectly fine for energy security purposes. Also, they are cheaper!
Why did this happen?
Because all that could go wrong did go wrong! Significant increases in natural gas prices Significant increases in Nox permits Large unanticipated increases in demand in late 1990s Drought → reduced hydro generation Market power!!
Summary
Challenges associated with energy and environment in the developing world have multiple layers. Unlike the developed world informational issues make up a large source of the market failures that lead to the environmental degradation. And they are paying for it with their lives. One major problem is how to ensure reliable energy access to large impoverished populations in the world without breaking the bank AND cooking the planet. While it is fun to fantasize about romantic solutions like soccer balls and solar micro grids, the electricity will eventually have to come from a reliable grid. Also we need to keep in mind the other pressing priorities including hunger, lack of water, disease, tyranny etc.
Allocative inefficiency-
Consumers substituted away to still expensive yet inefficient energy sources like oil and coal Inefficient rationing
China
Consumes ~25% of worlds energy by itself. -Still a lot less per capita energy consumption compared to US -Fast growth. See the the forecasts from various issues of the international energy outlook.
Africa and INdia
E consumption predicted to increase a lot, US expected to decline
Economic efficiency vs. energy efficiency?
Economic efficiency may or may not imply maximizing energy efficiency. Economists are concerned about whether the energy efficiency decisions are economically efficient
Information labels
Energy efficiency ex Information failure: If people are unable to make the right choice because they don't have enough information then giving them that information will bring them closer to their private optimum The benefit will depend on the kind of good. (Search good vs. Experience good vs. Credence good) also how big the loss would be in case of an error Information intervention is more useful for experience goods and credence goods. Externality But very unlikely to address economic externalities. Private action may incorporate some externalities, but too little.-They may do some but they will never fully address the externality solely on information then providing people with information will do very little, if at all, to correct the failure. Most people already know they are contributing to pollution by driving cars yet this doesn't stop them. Magnitude of error without the information matters-Milk vs. refrigerator
Fundamental economic argument: Get the prices of energy (or any other commodity) right! Price the externalities and you are done. You don't have to worry about other interventions. Problems?
Even if you get the prices right, often times people are not well informed enough to make the right decisions. In other words they deviate from the textbook definition of "rational decision maker". We are never going to get the prices right. It is almost impossible politically.
effect of an increase in oil price?
Eventually all the cost must be paid by consumers But it is not entirely clear for whom. Foreign companies drill in US and US oil companies drill abroad. Without knowing how much the increased company profits is recycled back into the US economy this is a very hard thing to measure.-This will also create tax revenue for state and federal governments which is a good thing IF it translates into reduced sales or income tax or better government services.- This will also create royalty payments for the land owners of the drilled area. NOTE: Oil is bought and sold in a worldwide market -Therefore the prices are set based on worldwide demand and worldwide supply ---SO Increasing oil production in US has the same effect on price (i.e. consumer expenditure) as increasing oil production in some place else. The effect of any increase in supply on price must be considered in comparison to the world oil market.
NG environmental benefits
Global: Still debated. Uncertainties include -Methane leaks (debated, very heterogeneous) -Its own combustion as fuel (debated, did lower prices end up more energy being used?) -Coal displaced (debated, how much?) Local: Still debated. -Toxic fluids are used in the process. Does it contaminate ground water? -Does it waste too much water depleting local water resources? Does the process itself pollute the air? (drilling, establishing compressor stations, transport equipment) -Coal displacement will improve the air quality. -Does it cause earthquakes? Other local effects Classic boomtown changes-Noise-Crime-Traffic-Local job creation jury's still out
Net metering in nevada
started in early 80s in US, modest growth for long time, sudden growth in recent years PV costs way down started in NV 1997, diversify the economy, econ incentives solarcity began marketing and accepting applications in may 2015 renewablegenerations program to meet RPS quota had to be shifted up in 2015 summer PUCN ordered economic investigations bc of unfair cost shifting
Other arguments in support of green subsidies: Learning-by-doing spillovers
theory by which productivity is achieved through practice, self-perfection and minor innovations This is mainly about public-good nature of the improvements in renewable energy technology The idea is that even if the intellectual property laws are strong, the inventor gets relatively small share of the value that is created from his/her invention so the government should subsidize the research For renewable energy the common argument is subsidies will lead to learning-by-doing which will drive down the costs but these benefits are not fully captured by the individual firm i.e. the learning will spillover to the resto of the industry The subsidy, then, would be justified if learning-by-doing is a big source of cost savings
energy efficiency
energy services per unit of energy input. This is viewed as investment. You trade off higher initial capital costs with uncertain reductions in future energy (operating) costs. The focus of energy efficiency economics studies is to what extend can the policy interventions improve the outcomes that are otherwise not optimal due to market and behavioral failures. This requires understanding-The extent of these failures-Identifying policy interventions that would provide a welfare improvement (i.e. a policy that costs less than its benefits).
cost shifting bc
utility gets a regulated monopoly status and in exchange they provide : universal access, generation trans and dist, reliability, rate cases, and compliance with other regulations Recovery of the FIXED costs occurs mostly in a variable manner consume less energy, it's not proportionate to the reduction in total costs as a result, the utility would have to increase the rate for everyone else to recover the stranded costs utility can't refuse to buy
What about proliferation of nuclear weapons?
he connection between nuclear power and nuclear weapons is unclear. It is not zero but it is highly uncertain. : To make nuclear weapon you need highly enriched uranium that is over 80% U-235 or Plutonium-239 The uranium in the nuclear power plants is only lightly enriched (2-4% U-235) It is not possible to steal P-239 from within a nuclear power reactor because it is surrounded with highly radioactive fission products When fed into the reactor, lightly enriched uranium creates plutonium and other highly radioactive materials. One could potentially try to remove that plutonium but the process requires a large industrial facility that would be difficult to hide.
challenges in greening el: Solar and wind are intermittent
I.e. they require (fossil fueled) back up generation the cost of which are typically excluded from the LCOE calculation Estimates suggest the costs vary between $3 to $39/MHW cost for intermittency. Cost will vary with location
Principle-agent problem
If the landlord is deciding the energy efficiency level of a home via insulation and appliances but he is not paying the power bill, he may not have enough incentives to make the house more energy efficient IF he thinks that he won't be able to recover his investment cost via higher rents. Because the renters are not perfectly informed about the energy efficiency level they won't pay high enough rents for an efficient home.
NG welfare impacts
Increase in consumer surplus due to quantity expansion and price decline from 2007 to 2013: $74b Annual residential gas bill decline attributable to the supply boom from 2007 to 2013: $13b Producer surplus is estimated to have fallen by $26 billion/year between 2007 and 2013
recap
Increasing domestic production does not help more than increasing production any place else, because it is a single global market-The effect of any increase in supply on price must be considered in comparison to the world oil market not the size of the US market Increase in oil price or increase in domestic consumption will create wealth-But it is not entirely clear for whom. Foreign companies drill in US and US oil companies drill abroad. Without knowing how much the increased company profits is recycled back into the US economy this is a very hard thing to measure.-This will also create tax revenue for state and federal governments which is a good thing IF it translates into reduced sales or income tax or better government services.- This will also create royalty payments for the land owners of the drilled area.
NG regulation retail side
Initially (until 1960) rates were determined on a case by case basis In 1960 FPC divided US into 23 areas within which the gas price would be uniform It took many years to approve and decide what the rates should be freezing the rates until 1973
natural gas regulation
Interstate prices were set too low while intrastate prices were left unregulated This caused the intrastate price to shoot up by 650% from 1969 to 1975. The assumption was that industry supply was perfectly inelastic while in fact it was not
NG is difficult to transport, unlike oil
It's a gas, bulky -compressed natural gas (CNG) in pipelines, took off as a major energy source after -liquid natural gas (LNG) -by first freezing then shipping in tankers then re-gasified, how most export is done Both are expensive makes it a natural monopoly, so it has a history of regulation
As a result, some states found themselves paying much higher for electricity than others
Large amount of variation in retail electricity rates across the states created political pressure
Nuclear Energy
Nuclear is a fundamentally new source of energy for humanity As a CO2 free energy source it has some advantages over wind and solar -Dispatchable -Has a relatively small land footprint and scalable Therefore it may end up playing an important role in transitioning the energy system for a future that is climate constrained. 11% of world energy consumption, very unequally distributed
More recent Oil history
OPEC was formed in 1960 in Baghdad. 5 initial members: Saudi Arabia, Kuwait, Iran, Iraq, and Venezuela nitially not much power because the 7 sisters were running the show also more importantly US had the world dominance in production Eventually spare US capacity dwindled and agreements with the 7 sisters started to break starting 1970s. On October 6th 1973 Israel invaded Egypt and Syria.US supported Israel
International wealth transfers due to oil trade has significant geopolitical impacts
Oil price $30/barrel →$130/barrel means Iran will make ↑$65B more annually But this has nothing to do with the geographic of the source of the oil that US imports An increase in oil price will benefit ALL oil exporters Where the oil comes from is irrelevant. Only how much oil (Why?)
Energy Efficiency Gap: Policy Implications
Once again if the main source of the failure is the externality then address the externality as directly as possible (tax /cap-and-trade) [First Best] If the main source of the failure is informational inefficiency (OR first best policies are not politically available) ----Providing information can help IF people are able to process it and incorporate it into their decision ---Standards or subsidizing energy efficient durable goods may provide benefits If it there are both informational failure and externalities: combine the first best with standards/investment subsidies.
Potential for gains of electricity restructuring
Operational efficiency-Not significant. If anything, it has decreased (need to create a wholesale market, and losses of complementarities between generation and transmission). Better investment decisions-If the rate of return is not guaranteed they will make wiser investment decisions Demand side-Normally demand side does not respond to changes in costs-A deregulated utility will have more incentives to tap into this huge potential for efficiency.
NEM flaws
Pricely -Large scale costs less per Watt installed capacity Intermittency -Has not been a much of an issue in Nevada -Likely to get better with smart grid and home batteries -The intermittency is the big problem in solar and wind-Requires building back up generation (read fossil) Residential solar gets extra RPS credit PUCN Changed the NEM Rate Existing customers were NOT grandfathered. Difficult to design a single rate to accurately capture all the costs and benefits for everybody The costs and benefits are highly location and time specific
BUT note that simply building the grid is not going to be sufficient. You also need to be able to connect the people to the grid.
Recent study done in Kenya showed that despite the billions of dollars of international aid money spend on building Kenya's grid the electrification rate is still 30% -The price of connections is high for most people -Financing options are not available for rural families -Not enough skilled workers to oversee the design, construction and electrical wiring -Even for those who paid their connection fee in full it took about 7 months on average for them to be able to use the electricity at home.
regulation recap
Regulation started with high prices in the North Then political pressure led to (complicated) price ceilings Price ceilings led to shortages and other inefficiencies (allocative and productive)
Challenges with meeting the climate goals
Remember that climate challenge is not an engineering problem. It is an economic problem. We do have the tools and technology today to solve it but they are expensive. So the solution has to be affordable by masses and requires global collaboration Fossil fuel reduction will require fundamental changes in two industries. -Electricity will have to switch from coal and gas to solar, wind, and nuclear -Transportation sector will have to switch to EVs
challenges in greening el: Duck Curve
Resources in a given area are correlated → Large scale penetration will reduce the marginal value of capacity.
Starting 1980s, the generation component was no longer really a natural monopoly, because due to technology:
Smaller scale generation became more efficient Transmission losses were reduced (so competing with another plant hundreds of miles away became more feasible)
Sometimes providing information may not help
Suppose you need some meds for your medical condition. How practical is it for you to study all the medical studies and reports and figure out which drug is the best? Would information help?
The process of deregulation was largely motivated by the desire to get rid of this discrepancy
The idea was that competition in the production would cut the costs But the difference in prices reflects the historical (i.e. sunk) cost caused by PURPA contracts and nuclear investments that are done under the assumption that natural gas prices would be a lot higher by 2000s than they actually turned out.
Oil background
Until 1859 most people obtained light by burning animal fats Oil from the ground was used since 4000 BC August 27 1859 successful oil drilling in Pennsylvania he major goal was to obtain kerosene which was used in lamps Byproducts were either too light or volatile or too dense and smoky. So they were not safe for lamp (now aka gasoline and diesel) Name of gasoline comes from its tendency to vaporize really fast and become gas First internal combustion gasoline engine is developed in 1867 by August Otto, a German engineer First diesel engine was invented in 1892 by Rudolph Diesel, another German engineer ntil the early 20th century (when mass produced automobiles started) gasoline and diesel were pretty much seen as useless byproducts Pennsylvania oil rush 1860s → Overproduction → Price crash + Careless depletion of oil reserves Eventually the industry started to consolidated and monopolized by John D. Rockefeller (Standard Oil Company) Later on in 1911 Standard Oil was split (into 34 companies including Chevron, Texaco, Conoco) due to antitrust act Until WWI oil was of economic importance to be used in lighting. But when Winston Churchill announced that the military ships which were powered by coal at the time will be replaced with oil powered ships oil also gained a strategic dimension. Around WWII kerosene started to be used as jet fuel because gasoline and diesel was of high demand by the military machines and and no body used kerosene for lighting anymore because they had electric light bulbs. Plastics and other petrochemicals arrived in 1930s, made out of bitumen a very heavy cheap oil byproduct.
Standards
Useful if information is too costly/ineffective -Eliminates consumer/producer choice -How strong is this argument? "Standards focus the market on producing the high-quality products this will create economies of scale in producing high quality product" Addressing externalities -Ban products that would not often be sold if external costs were internalized -Inefficient if some consumers would purchase at the full social cost including externality• What if you don't use the product often enough to justify the more efficient product? -Standards are often based on current technology so they may lock in the technology and undermine innovation.
Recap
WWI: Winston Churchill announced that the military ships switch to oil WWII: Kerosene as jet fuel 1930s: Plastics and other petrochemicals 1930s-1970s: Domination of "Seven Sisters" 1970s: OPECOctober 1973: Arab oil embargo (First Major Oil Shock) 1979-1981: Situation with Iran and Iraq (Second Major Oil Shock) 1983: Preference for transparency in the price (NYMEX and ICE)-Refinery margin netback pricing 1990: Invasion of Kuwait by Iraq-Price doubled in 3 days-Fell shortly after due to oil release from SPR and war ending quickly
Arguments in support of green subsidies: Energy Security
argument is that US should be producing a bigger share of it's energy because a price shock would effect the entire US economy Therefore supporting renewable energy would help with that Despite US imports a lot of oil (mostly used in transportation), it is self sufficient in coal and gas (mostly used in electricity). So the energy security argument could potentially support moving towards EV. But in that case generating electricity from coal and gas is equally "energy secure" as generating electricity from wind and solar, let alone it is cheaper! The main contribution of renewable energy vs. coal and natural gas is not that it improves security but it is cleaner!
market based policies
cap and trade and tax, minimize cost of achieving a given mitigation target not politically feasible, instead we see more of green subsidies which are oftne said to be equivalent to market based policies subsidizing green instead is economically inefficient
1973 Arab OPEC Embargo
decided to stop supplying oil to US and the Netherlands. (Arab Oil Embargo) World supply fell 10% overnight, price quadrupled within 4 months. This realization of power further accelerated the nationalization of oil.
Potential Public Benefits of NEM
Avoided transmission losses (limited) -50 percent of NEM gen is exported Avoided gen + trans + distribution capacity (limited) -NEM generation does not really coincide with the peak load Spatial diversification. (not factored in) Reduced need for cooling in the buildings (not factored in) Easier on the ecosystem (compared to large scale solar) (not factored in) Warm glow (feel good about it_ Conspicuous consumption (like to show off that you're green) Freedom from the "evil" utility
Bottom line
Both supply side and the demand side is not looking very good for being able to reduce fossil fuel use when left uninterrupted. This means that we will have to have effective government policies that intervene in the market Most economists (including the conservatives) agree that the market based policies (carbon tax or cap-and-trade) is the way the go These policies are not very politically palatable in the US. So we tend to see more of "green subsidies" instead of pollution tax, the argument being "it is the same thing".
NEM recap
Cost shifting Large portion of utility's costs are fixed (remember that's why a electricity business is a natural monopoly in the first place).-For this reason, a customer installing solar PV panels and generating their own electricity will end up paying less than the utility has planned and invested for them. In other words, since the utility bill will go down NEM customers' contribution towards paying off all those fixed costs will go down.-The utility needs to cover all the costs via the bills. So if one group of customers are not paying their fair share towards the fixed costs the rest of the rate payers would end up having to pick up the tab.-What makes this extra annoying is that solar NEM customers tend to be richer than an average Nevadan. So effectively NEM shifts costs from richer folks to rest of the rate payers. Increased costs Compensating the exports at the retail rate increases the costs for everybody. Same kwh could be bought from the wholesale market at a much lower price. If a NEM customer is just another electricity generator why should they get a higher price than the rest of the electricity generators? Residential solar PV is less cost effective than large scale solar -Per unit of capacity utility scale solar installations generate more (green) kwhs than rooftop solar installations. -Installing large scale solar is cheaper than installing rooftop solar A house with a solar PV adds a lot of intermittency to the grid and it is the utility's job to make sure all is under control. Supporters of NEM argue that having distributed generation capacity will provide some extra benefits that utility scale solar does not-Avoided generation + transmission + distribution capacity (limited)-Avoided transmission losses (limited)-Spatial diversification (not factored in)-Reduced need for cooling in the buildings (not factored in)-Easier on the ecosystem compared to large scale solar. (not factored in) Bottom line: Due to political pressure, NEM is here to stay. Similar fights are going on in other states as well. NEM is not the best way to tackle with our environmental challenges simply because it is too expensive and causes unfair cost shifting. However, there is no reason for an average electricity consumer to be able to appreciate what is going on: that he/she is paying for his/her neighbors' solar panels. This is a classic textbook example of information problem .
Capital cost
Highly disputed $2000-$8000/kW capacity-So if let's say it's $4000/kW this translates into a cost of $70/MWH bringing the total to $100/MWH together with the operating costs. The costs in US were closer to $2000/kW mark until the Three Mile Island accident in March 28 1979 After that the costs went up to $8000/kW. This differs from the experiences in other countries. More recently shale revolution made it harder for nuclear to compete with these cost figures forcing some of the nuclear plants out of business. inc capacity but stable since 90
challenges in greening el: Tremendous geographical variation in sunlight and wind speed.
Long-run marginal cost would be upward sloping (i.e. scaling up is expensive or perhaps even infeasible)
Energy efficiency contd
Market failures such as externalities, imperfect information can cause inefficiencies Behavioral failures": deviation from utility maximizing behavior. he focus of energy efficiency economics studies is that to what extend can the policy interventions will improve the outcomes that are otherwise not optimal due to market and behavioral failures. This requires understanding ----The extent of these failures -----Identifying policy interventions that would provide a welfare improvement (i.e. a policy that costs less than its benefits).
The unstable prices induced the trade to move to a more transparent platforms
New York Mercantile Exchange (NYMEX) -Intercontinental Exchange (ICE) 1999 Canadian energy authorities began to recognize tar sands (viscous mixture of heavy oil, sand and clay) as legitimate reserves. Oil from shale-Increasing US oil reserves by ~ 60%
Energy Efficiency Gap
McKinsey Curve Discrepancy between the observed energy efficiency levels and the socially optimal energy efficiency level. Why don't people invest in energy efficiency even if it would save them money? Possible explanations -The analysts do not observe all the costs. Perhaps there are search costs. Costs associated with hiring key personnel to operate the new equipment. Suspected risk of maintenance problems with the new equipment -The analysts do not estimate the savings properly. They often ignore the rebound effect. -Energy efficiency investments are irreversible -The analysts do not really observe the true expectations on prices. -Some consumers are credit constrained -There are major information issues People may be unaware of potential energy efficiency investments -People don't know how much they will use/save/ Principle agent problem They mostly use "engineering estimates" which often overstate the savings The analysts do not really observe the true expectations on prices as well as the preferences. Empirical estimates suggest that information failures account for a relatively small portion of the problem. Subsidies for energy efficiency investments could potentially go to those consumers who would invest anyways (i.e. tax payer money wasted)
methane Sources
Natural sources of methane -Swamps (larger) -Termites (smaller) Human sources -Rice farming (similar to swamps) -Livestock -Fossil fuels Climate feedback sources -Permafrost soils preserving the methane melting with global warming -Hydrates (trapped CH4 ice sediments in ocean floor, slow)
Standards and choice
Standards eliminate choice. Effectively it makes it illegal to sell certain products. Will create inefficiency for some. How? Eliminates some choices (hopefully the ones that would not be chosen if the prices were reflecting all the costs and people were able to make fully informed decisions) It is true that we don't like to eliminate choice but it's not like we are unwilling to EVER eliminate choice. It is true that when we set standards some transactions (by well informed consumers) that would have occurred and would have improved welfare are not going to happen. The trade off is there may be lot of transactions that would have happened that would not have been in the best interest of the consumers. The problem is not that it is never ok to eliminate choice, But whether benefits by eliminating choice is worth the costs of eliminating choice
Key characteristics of electricity industry that makes exercising market power possible even for a generator firm with a relatively small market share
Storage is not economical Supply needs to meet the demand at all times (shortfall will mean much more than unmet demand) The price that is paid by the consumers often do not reflect the minute by minute changes in marginal cost. Short run supply is inelastic demand is also inelastic
Other arguments in support of green subsidies: Green Jobs
Supporting renewable energy to promote jobs was popular in 2008 within the "stimulus package" In the short run the effectiveness of subsidizing renewable energy (as opposed to some other industry) depends on how quickly growth can be actualized as a result of a subsidy within that industry (again relative to some other industry). In the long run the job creation will depend on the labor intensiveness of the renewable energy industry Renewable energy takes more resources to generate, i.e. practically we sink more resources into generating a kwh of renewable energy compared to conventional source. So yes you may be creating more jobs but you are also spending more One potentially palatable argument might be that the people for whom the jobs are created would otherwise go and work in worse jobs with lower pay (empirical studies needed to verify) Dynamic view: By subsidizing renewable energy, a government will change the course of evolution of the overall economic outlook ----The benefits will spill over but stay within the country. But what if some international firm comes and swipes a large portion of the benefits?
Hotelling rule example
Suppose -You have 200 barrels of oil in the ground at $10/barrel. -Interest rate is 5% If you extract the whole reserve and sell and invest it into an interest account you'll have 2100 after one year Can the price of the resource increase faster than interest rate?
biggest challenge of oil
The biggest challenge is the climate change simply because of the sheer amount of collaboration it requires across the world. The economic and geopolitical need to keep the oil price down conflicts with the goal to mitigate CO2 emissions.
LCOE
The estimates depend of numerous engineering and economic factors that vary with the technology Different assumptions on the economic variables create large discrepancies --Inflation rates, interest rates, how much the generator will be used, future costs of fuel and other inputs, possible regulations that might affect the outcomes etc. Generation plants differ in their location, architecture so this will create a heterogeneity in levelized costs across plants (even if they have the same technology) Studies are based on average outcomes in existing plants. But the future may hold-Technological progress-Learning by doing-Economies of scale-Increased scarcity of prime generation locations take the LCOE estimates with a grain of salt The LCOE for solar came down dramatically which is good news Even if we knew these economic variables with full certainty LCOE varies a lot across the generators even if they have the same technology due to variations is location and architecture.
Why is the environmental quality so poor?
The willingness to pay is measured to be low. But if the environment quality so poor why is the willingness to pay for it so low? High marginal utility of consumption relative to marginal utility of environmental quality. ---When people are very poor the money that they have mostly goes towards their basic needs and not much is left for environmental quality. High marginal cost of providing environmental quality ---Not necessarily abatement cost only but the local capacity for policy design and implementation-Low capacity to raise revenue for environmental goals -Infrastructure can create some sort of economies of scale in the monitoring process. So lack of it will likely increase costs Political economy and rent seeking ----Social planner's own utility maximization can get in the way of overall welfare maximization. -Examples include corruption in pollution monitoring, illegal deforestation, bypassing smog checks with bribes. Measured willingness to pay for environment quality may not be the actual willingness to pay for environmental quality. -----Do the individuals really know the payoffs from investments given the information barriers exist in the developing countries? •Studies suggest that providing information can increase willingness to pay for things like water filters or switching to cleaner water sources. -Credit market failures -Poorly defined property rights
Vintage differentiated regulation
This is a concern relating to energy efficiency standards can impede adoption of energy efficiency if it causes people to hold onto their old product. -E.g. if a mileage standard raises the cost of new cars people will use their old inefficient cars for longer.
leapfrogging naive argument
This view is likely to turn out to be naïve for a couple of reasons -Distributed solar generation capacity is a much bigger investment than a cell phone for a household .-There is still a centralized infrastructure supporting the cell phones (i.e. cell towers). A centralized system offers massive economies of scale advantage (i.e. if there are 100 users we don't have to build 100 units of capacity because not everybody is using it at the same time). -Service quality is better for cell phone than landline, which is not the case for distributed solar
lecture 19
US consumes about 20 million barrels a day Imports 10 million barrels a day Exports 6 million barrels a day Strategic petroleum reserve: 727 million barrels
Leapfrogging
We often hear people saying there will be some kind of an energy revolution similar to cell phone revolution. That is with the advent of cell phones many people with no land line access "leap frogged" into having a cell phones
Main issue with nuclear energy : Waste
he moment it is removed from a reactor it is extremely dangerous BUT the radioactivity declines over time. 1000 years after the discharge, the waste is 1000 times less radioactive. You may think that 1000 years of toxicity is not a good thing to pass on to the next generations. But if you put it in perspective with all energy options your opinion may change. Think about emitting CO2. Even if we suddenly stopped emitting all CO2 today, 1000 years from now the contribution of CO2 that exists today in the atmosphere will only be 50% less bad. CO2 has very high "future footprint" The probability of reactor accidents is a lot lower with the new generation nuclear plants. Long term geological storage In US: the focus single site. Yucca Mountain NV.•Disposal in mine shafts in a relatively shallow dry formation•One problem is that we don't know if the formation will stay dry with climate change. Focus in Canada and many other countries: deep boreholes that are many miles into the earth inside billion-year-old granite formations But right now none of the waste from world's civilian nuclear power plants is in secure long term geological storage - operational in the nuclear plant or temproary dry cask somewhere near it Although nuclear waste does have a much higher acute toxicity, in narrow technical terms risk of nuclear waste per unit of energy produced is relatively small compared to say risk of oil spills or risk of hydro dam failure. Yucca Mountain controversy in Nevada is exacerbated by the fact that Nevada was also the site for nuclear weapon testing.
Question: Is there an information failure in light bulbs?
how many hours are you going to use it? Buy without that full info
Natural Gas: Chemistry
hydrocarbon, mostly methane: CH4 In terms of the oxidation spectrum CH4 is the most reduced form of carbon (gives more energy to oxidize), more energy than coal per carbon But CH4 itself is 30 more potent as green house gas than CO2 Once released to the atmosphere it has a lifetime of a decade before it reacts to make CO2 and loses the greenhouse power
Rebound effect
increase in energy use as a result of declines in marginal cost of energy services caused by increase in energy efficiency. This is one of the biggest complaints associated with energy efficiency standards. Standards do not internalize the externality. Almost universally intensity standards energy use or pollution per usage. The problem is that if you use more the energy intensity gain can be offset by the increased use.