Electric power supply-demand is nuanced

This post over at Marginal Revolution is a great example of why industry-specific knowledge is important, and why extrapolating from general economic principles can be dangerous.

Can you discuss whether [energy efficiency via smarter thermostats] can possibly work? As I understand the power industry, such a high percentage of the costs are upfront (with nuclear plants in particular, but with carbon burning plants as well) and the marginal price of producing energy (up to plant capacity) is so low, that falling demand would mostly cause plants to cut prices until they were again operating at capacity.

So “saving” energy at the consumer level won’t really reduce total energy consumption or gas emission.

As people familiar with the electric power industry already know, baseload power (e.g. nuclear) has low marginal cost but is also not supplying marginal supply - that role is played in most regions by gas turbines (and in some places by older coal or oil), which sell pretty much at marginal cost. A quick way to check this is by multiplying the price of natural gas by the heat rate of the marginal gas plant, and comparing that to the price per MWh of electricity - they will usually be pretty close.

The best commenters do a good job of explaining this. Ignore the first half dozen or so, Alfred and valuethinker are strong.

For what it's worth, U.S. industrial and commercial load is still below 2007 levels; energy efficiency standards from EPAct and EISA may be one factor, although obviously very difficult to parse out the effect of energy efficiency from other drivers like, say, the economy.

It's all about messaging

Speaking of farmers and climate change, Chris Clayton highlights has an interesting story from a climate-skeptical Kansas town that's nevertheless reduced its energy use by 5% from baseline (which is a lot).

You don't make a case to do something in Kansas by saying Al Gore backs it, but you can reshape the message and get the same result.

Climate and Energy Project looked at what it would take to get Kansans to overcome their skepticism about climate change.

So the (Climate and Energy) project ran an experiment to see if by focusing on thrift, patriotism, spiritual conviction and economic prosperity, it could rally residents of six Kansas towns to take meaningful steps to conserve energy and consider renewable fuels.

The most resonant themes were thrift (i.e. efficiency), reducing dependency on foreign oil, green jobs and "creation care":

The obligation of Christians to act as stewards of the world that God gave them, even creating a sermon bank with talking points they could download.

This is probably even much more effective than arguing that rising temperatures from climate change will hammer yields.

Market won't drive clean energy transition

Geoff Styles blogs a recent Science article explaining why the transition to cleaner fuels will take a long time.

Here's a clear and concise explanation from the top science journal in the country on why the transition to alternative energy won't--and can't--be quick, cheap or easy...

That's a crucial point for anyone who sees this energy transition driven not just by concerns about energy security and greenhouse gas emissions, but by notions of clean energy as the next big wealth-creating global trend, akin to the computer revolution. A kilowatt-hour or BTU does the same work, regardless of its source, so unless it can be produced for significantly less than from conventional sources, greener energy offers no productivity gains of the kind that have fueled the global infotech transformation.

Density and intermittency are both large disadvantages that many renewable energy sources must overcome... and even without these disadvantages, the article explains, the transition to current fossil fuels took half a century.

Pursuing renewable energy is a worthwhile goal (neither Geoff nor the author disagree), as is chasing energy efficiency, which is perhaps our most attractive short-term option to balance energy demand and supply. But I also agree that it's prudent to disregard the optimistic claims of those who believe things along the lines of "replacing oil will be the greatest commercial opportunity of our generation." It won't.

Can't quit "dirty power" cold turkey

In response to an over-enthusiastic Earth Day petition, the always-thoughtful Geoff Styles thinks through the following:

What would it mean if every power plant burning coal, oil or natural gas shut down today and remained idle? The short answer is chaos and social collapse, but let's take a quick look at why.

Here are a few of his facts for the numerically inclined:

As it turns out, all renewable sources plus nuclear generated a bit over 1.2 trillion kilowatt-hours (kWh) last year... Unfortunately, it's also less power than the US has generated in any year since 1966.

If we adjust for energy:GDP, then 1979, with its net generation of 2.25 trillion kWh, looks like a more appropriate basis of comparison to the economic work that our current zero-emission power output could do. The problem is that the US population has grown by 84 million people since then, and our economy, expressed in constant dollars, is more than twice as big as in '79--even after last year's contraction.

The wind, solar and geothermal power sources we've focused intensely on expanding accounted for just 2% of the electricity we used last year. Double them, and then double them again (10 years?) and that's still only 8%, compared to the 69% we got from fossil-based generation last year.

The argument almost makes itself, but he makes it well. And rightly doesn't even bother with the triviality of a similar argument for fossil transportation fuels.

Good ideas, but truncated RSS

That's my initial take on the FT's Energy Source blog, which I subscribed to hoping it would fill the big shoes left vacant by the untimely demise of Environmental Capital.

For example, this is a pleasantly non-lazy line of thought:

One of our favourite counter-intuitive ideas on this blog is that China’s massive and growing appetite for fossil fuels might end up being a good thing for the environment, as it could drive big efforts on renewables, electric vehicles, and even energy efficiency.

The rationale is that China takes forward planning much more seriously than many large economies; so unlike other countries that are simply ambling towards some kind of climate/security/supply (choose your favourite) crisis, China will put significant effort into energy alternatives. Of course, the buying up of long-term fossil fuel supply deals with various countries around the world doesn’t necessarily support that.

And if the local press is anything to go on, anxiety over energy security is indeed pretty high in China at the moment.

On the negative side, Energy Source's RSS feeds are truncated. This is not only incredibly annoying for a reader, but as Felix Salmon has described many times, doesn't even make financial sense for the publication!

Update: Unsubscribed. Don't love the style and not worth it with the truncated feeds.

Negative abatement costs, explained

Ted Gayer, co-director of economic studies at the Brookings Institution, published a lazily-reasoned and lazily-researched article dwelling on the apparent impossibility of GHG emissions reduction opportunities with negative marginal costs:

But Krugman oversells the affordability claim by linking to a widely cited report by McKinsey & Company. The main point of the McKinsey study is provided in their Exhibit B, which illustrates a rather peculiar finding that there are a significant number of pollution abatement options that can be achieved at “negative cost.” This finding violates the basic principles of economics. If firms (or consumers) could reduce emissions at negative cost, then they would do so. To say otherwise is to say that they are willingly or ignorantly passing up profits...

Gayer's original post has already been picked apart by luminaries such as Avent, DeLong, and Krugman, but in the interest of documenting this information for myself, I'm going to write out the possibilities Gayer acknowledges, followed by the ones he doesn't.

Gayer can think of four reasons why the McKinsey study might find negative costs:

1. The cost estimates are wrong (i.e. incorrect assumptions)
   


2. The cost estimates are incomplete


3. The private discount rate is incorrectly estimated


4. Firms are behaving irrationally (which he goes on to say is not realistic)

Thankfully, the relevant McKinsey report is available online, and had Gayer bothered to skim it, he would have found starting on p24 this helpful list of potential explanations for negative marginal costs, without invoking irrational behavior:

1. Agency issues (e.g. landlord-tenant)


2. Ownership transfer issues


3. Pricing distortions (e.g. via electricity price regulation)


4. Higher hurdle rates (e.g. consumer's cost of capital could be higher than a corporation's)


5. Constrained access to capital


6. Adverse bundling (e.g. efficient washing machine has other "gold-plated" features unaffordable to non-premium customers)


7. Local product and service availability


8. Improper installation or use
   

Beyond these, it is not hard to believe that well-documented behavioral biases (risk aversion, lack of awareness, habit) play a role in some cases.

Krugman also helpfully points out the considerable existing economic literature on principal-agent problems in energy efficiency.

Gayer's response is also a textbook example of responding to weaker criticisms, and ignoring the stronger ones.

For what it's worth, Gayer seems to support a market-based mechanism (cap-and-trade or a carbon tax) and fear a centralized, command-and-control approach by the government, which are both eminently reasonable positions (which I share, for what it's worth). But arguing flimsily against the existence of negative-cost GHG abatement opportunities like he does is an ineffective way of making that case.

Does W-M promote energy efficiency?

My comment in response to Michael Roberts' concern that Waxman-Markey doesn't pass on higher electricity prices that would spur energy efficiency:

I like your "increasing marginal price" mechanism. Alternately, Waxman-Markey attempts to preserve the price signal by encouraging local distribution companies to rebate consumers through lump sums rather than lower prices. I'm not an authority on how it turned out - Stavins seemed to think it was going to be fine, whereas this Climate Progress post parses how "airtight" the language is (the answer seems to be "indicative, but not totally airtight.")

Update: Michael agrees in the comments. For those interested, here's the relevant passage in its entirety from Kerry-Boxer (passed by a friend - apparently it's on p664-665, but I don't have a link):

In general, an electricity local distribution company shall not use the value of emission allowances distributed under this subsection to provide to any ratepayer a rebate that is based solely on the quantity of electricity delivered to such ratepayer. To the extent an electricity local distribution company uses the value of emission allowances distributed under this subsection to provide rebates, it shall, to the maximum extent practicable, provide such rebates with regard to the fixed portion of ratepayers’ bills or as a fixed credit or rebate on electricity bills.

"Solely" and "to the maximum extent practicable" leave some wiggle room, but overall this looks pretty good.

Smart grid cuts electricity demand 20%

Smart grid has a lot of hype to live up to, and large-scale roll-out hit some early roadblocks, but here is a recent promising result.

A smart grid pilot project in Fayetteville, N.C., has resulted in an initial 20 percent decline in average electricity consumption, according Consert, a Raleigh, N.C. technology company.

Those numbers are based on the first month of the project, a joint effort between Consert and I.B.M. that installed energy management systems for 100 residential and business customers of the Fayetteville Public Works Commission, the local utility.

A brief news scan informed me that the Boulder smart grid project, which I had lost track of after it hit some early customer opposition, is apparently up and running. And obviously stimulus dollars are hard at work replicating this early success elsewhere.

P.S. In other obsolete news, Steve Chu makes his case for smart grid.

The difficulty of behavioral change

Via Robin Hanson, people can use sunlight to cheaply disinfect water, but in Bolivia they choose not to. Why?

The leader of the study, Daniel Mausezahl, suspects a big reason for this is that lining up water bottles on your roof shows your neighbors that you aren’t rich enough to have more expensive methods of disinfecting water.

This commenter posits some alternative explanations, but I don't find the "appearing poor" explanation implausible. Changing behavior is d*$! hard, as we know from other the difficulty of capturing other "low-hanging fruit" like energy efficiency. My latest favorite example is food waste - estimates vary widely, but the consensus appears to be in the neighborhood of 40% of all food is wasted globally. That means that to increase world food production by 10% (something we will definitely have to do in the next decade, with increasing affluence changing diets and demand for biofuels growing, on top of population growth), we could either farm another ~150m hectares (an area slightly smaller than Alaska, or Mongolia), or we could reduce food waste by 15%. The numbers look to so easy on paper, and yet the opportunity is so diffused that it is nearly impossible to act on it in an impactful way.

(Same goes, by the way, for those who propose the entire earth become vegetarian - how, exactly, are you going to convince people to do that?)

Update: Speaking of the difficulty of capturing energy efficiency gains, here's a good case example - the U.S. Department of Energy.

Update 2: It really is too easy to find examples of this - here is U.S. Food Policy on the challenge of encouraging kids to drink water instead of sugary drinks. Aliza rightly calls out the challenge of aligning this campaign with the campaign to move from bottled to tap water, because bottled water is bad.

Cash for carbon, refrigerators

Some folks are running the numbers on Cash for Clunkers - so far we have estimates of $75 and $175 per ton of CO2. At well above the proposed starting price cap of $28/ton, this means the program's worthiness must be as an economic stimulus, if any.

Nevertheless, the concept is increasingly popular, and not only with those taking advantage to trade in old cars. Imitation is the sincerest form of flattery.

Update: A more detailed calculation gives an implied carbon price between $237-365/ton, or an order of magnitude above the starting ceiling for carbon allowance, so let's hope the stimulus was worth it. Via Greed, Green, and Grains, who deserves a pat on the back for his quick answer that ended up being in about the right place.

Update 2: Another California academic estimates between $200-400/ton.

McKinsey report: Energy Efficiency is Big

McKinsey has just released a report on "Unlocking energy efficiency in the U.S. economy". The central conclusion:

Energy efficiency offers a vast, low-cost energy resource for the U.S. economy – but only if the nation can craft a comprehensive and innovative approach to unlock it. Significant and persistent barriers will need to be addressed at multiple levels to stimulate demand for energy efficiency and manage its delivery across more than 100 million buildings and literally billions of devices. If executed at scale, a holistic approach would yield gross energy savings worth more than $1.2 trillion, well above the $520 billion needed through 2020 for upfront investment in efficiency measures (not including program costs). Such a program is estimated to reduce end-use energy consumption in 2020 by 9.1 quadrillion BTUs, roughly 23 percent of projected demand, potentially abating up to 1.1 gigatons of greenhouse gases annually.

Meeting 2020 emissions targets at a net savings of $700 billion is pretty incredible - Joe Romm is understandably excited.

Of course, "significant and persistent barriers" are not to be overlooked - implementing energy efficiency opportunities invariably runs in to agency problems, market failures, and a host of other challenges - but overall this sounds like great news and a strong argument for pounding the drum on energy efficiency.

Update: Matthew Kahn at Environmental and Urban Economics is not convinced and doubts whether McKinsey would put its money where its mouth is. A few choice quotes:

So, my point is that if McKinsey is so confident about the rate of return they are predicting --- shouldn't they stop giving advice and actually open a business and start selling their product?

Talk is cheap, let's see some new innovative contracts from the smart guys at McKinsey!

Guises for a gas tax

Rebates are a key feature of good energy efficiency policy, to avoid the Jevons Paradox. Now two clever law professors have suggested using the same idea to make a gas tax palatable:

Here is how it would work: Suppose you are the average driver, driving 12,000 miles a year in a 15 miles-per-gallon car. A $2 per gallon tax would cost you $1,600 a year. You would be unhappy about that. Sure, you would drive less if taxed and next time you would buy a car with better petrol mileage. But you would be so annoyed at the tax that you would not forgive your congressman for voting for it. But if you got a $1,600 cheque or a visible rebate on your taxes, you would understand that you were even: you might even think that with a little life adjustment, you could beat the game and come out ahead.

Your rebate would not change if you used less petrol. So you would have an incentive to keep some of that $1,600 by driving a little less often in a more fuel-efficient car. The country would import that much less oil, produce less carbon dioxide and get that much more freedom to manoeuvre in the international arena.

I think that is quite clever. Jay Yarow thinks we should just tell the truth:

Why does everything have to be so complicated? Here's a much simpler solution. Tell the public that the roads are falling apart and public transit is screwed because the tax collected from gas is too low to cover those expenses. We can keep racking up debt to pay for these expenses, or we can raise the tax on gas to cover our costs.

I'm going to flat out assert there's no amount of straight talk that would make a straight gas tax politically feasible. I could see rebates doing the trick, although it won't be as simple as it sounds. Or, of course, we could make cap-and-trade a de facto gasoline tax by giving free allowances to power generators and forcing refiners to buy theirs on the market.