Why Did Apple Pay so Much for 130 MW of Solar? Is Google Part of the Answer?

Sometimes, we write blog posts that pose rhetorical questions in the title. This time, I have real questions. I lay out several possible answers below and would love input from blog readers.

Here’s a little background. Several weeks ago, to great fanfare, Apple and First Solar announced that Apple was paying $848 million for 25 years of the output of a 130 MW block of First Solar’s California Flats project in SE Monterey County. (The other portion of the project is under contract to PG&E.) First Solar’s press release heralded this as the “industry’s largest commercial solar deal” and Tim Cook noted that the solar electricity would offset a lot of Apple’s California consumption.

My husband, who also works in the energy industry, and I took this up at the dinner table, much to our kids’ chagrin. My husband did some quick math, and then grabbed a calculator to do the math again. He wanted to make sure he hadn’t screwed up. His calculations suggested that Apple had paid a significantly higher price compared to other recently announced power purchase agreements for solar.

He took the reported amount Apple was paying and divided by an estimate of how much electricity they would be buying. He guessed that the plant would have a capacity factor of 30% and hence produce 342,000 MWh/year (.3 x 130 MW x 8,760 hours/year), or approximately 8.5 million MWh over the life of the contract. Assuming that the reported contract value reflects the undiscounted sum of the payments under the contract, this yields an average price of approximately $100/MWh ($848 million / 8.5 million MWh).

My husband was surprised because prices for other recent solar deals have hovered around $60/MWh. The industry collectively cooed over a recent 25-year deal signed by Austin Energy to buy solar for $50/MWh.

A reporter for Forbes did a similar calculation. He used a higher capacity factor – 33% – and still seems surprised that Apple paid so much. He concludes, however, that it’s not a horrible move by Apple given that future prices for utility-supplied power may go up.

My guess is that Apple did not overpay. They are, after all, Apple.

An artist's rendering of Apple's planned campus in Cupertino (Source: sfgate.com)

An artist’s rendering of Apple’s planned campus in Cupertino (Source: sfgate.com)

Here are a couple conjectures:

  1. Apple is receiving the tax equity in addition to the electricity.

What does this mean? Through the end of 2016, a business that invests in a solar project is allowed to take 30 percent of the project cost as a tax credit. As I understand it (see here for a great explanation), this means that if a project costs $100 million, it will generate $30 million in potential tax savings through the Federal Investment Tax Credit (ITC). The problem is that First Solar is unlikely to have enough profits to take advantage of all the tax credits its projects generate. Historically, solar companies have sold the tax credits to banks or others in the financial sector, but, according to some reports, demand for what’s known as “tax equity” is drying up.

So, one possibility is that at least a share of what Apple bought was the tax equity on its 130 MWs. Accounting for this could make the price they paid much more reasonable. For instance, if they bought all the tax equity on the 130 MWs then we should think of the price they’re paying for electricity as just 70% of the total $850 million, since they’ll be able to use 30% of the $850 million to offset future tax liabilities.

Apple also may be able to obtain tax benefits from a share of the accelerated depreciation for which solar projects are eligible.

This is where Google comes in. Late last week, Google announced that it was investing $300 million in a fund created by Solar City. Some of the press on this deal said it was structured to allow Google to get the tax equity, which makes me more likely to believe that Apple got a similar deal with First Solar.

If this is what’s really happening, the headlines citing Apple’s $848 million purchase of solar-powered electricity are a bit misleading, at least as I see it. Sure, Apple is paying $848 million to First Solar, and part of what it’s getting is electricity, but it’s also getting the ability to avoid paying taxes in the future. To me, this is like saying I paid $10 for a sandwich, and neglecting to mention that I also got $3 back in change. Counter to First Solar’s press release, this would not just be a solar deal, but a solar and tax deal.

I can understand why companies like Apple might not boast about buying the right to pay lower taxes. It’s not in any way nefarious – and could help solar companies by keeping the market for the tax equity competitive – but it doesn’t burnish their green image in the same way that buying solar electricity to power their data centers does.

  1. Something else is missing. Apple is getting something else out of the deal?
  1. Apple did screw up. We all make mistakes, even big, smart companies.

Personally, I put my money on something along the lines of 1., but I am very curious to learn what, you, loyal and informed readers, are hearing.

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One university’s attempt to reduce energy waste at work

If you work outside your home, chances are you don’t pay (directly) for the energy you use at work. At my place of work, the UC Berkeley campus, most employees never see – let alone pay – their energy bills.

Of course, there are plenty of pro-social reasons to be conscientious about my energy consumption at work (climate change and tight university budgets, to name a few). But these “split incentives” (i.e., the fact that I bear none of the costs when I increase campus energy use) beg the question: How much less energy would we use at work if we were all responsible for paying our own energy bills?

windows Source: http://www.theatlantic.com/business/archive/2014/04/our-cubicles-ourselves-how-the-modern-office-shapes-american-life/360613/

This seems like an important question when you consider the quantity of energy consumed each year by commercial buildings (which include office buildings, retail space, restaurants, hotels, hospitals, schools, and universities). The commercial sector now accounts for over 18 percent of total U.S. energy and close to 40 percent of U.S. electricity use.


Source: http://www.energymanagertoday.com/industry-accounts-for-33-of-us-primary-energy-use-099763/

Do split incentives cause energy waste at work?

A recent paper by Matt Kahn, Nils Kok, and the late John Quigley sheds some light on this question. These authors track the electricity consumption of a large sample of commercial buildings in the Western U.S. In particular, they examine the association between lease incentive terms, occupant characteristics, and electricity consumption in commercial buildings.

They find that commercial tenants whose utilities are bundled into the rent consume significantly more electricity than tenants who pay their own bills. They also find an increase in occupancy by government (versus private sector) tenants is associated with a significant increase in the energy consumption. The authors suggest this correlation could possibly be explained by the fact that government tenants face relatively soft budget constraints.

We can’t be sure that these correlations indicate a causal relationship. But if split incentives in the commercial building sector are associated with higher energy consumption, could an un-splitting of these incentives lead to cost-effective efficiency gains? An amazingly dedicated team of energy efficiency enthusiasts here on campus set to find out.

Un-splitting incentives on the UC Berkeley campus

Back in 2012, energy costs were rising and there was a general sense that energy was being used inefficiently across campus. Campus electricity bills – on the order of $20 million annually – are managed by central campus. How can you motivate individual employees to focus on energy efficiency when they have no direct financial incentive to do so?

The Energy Incentive Program (EIP) was introduced in April 2012 to provide individual departments and units with the information – and the financial incentive – to make cost effective changes to their energy consumption. Each operating unit was assigned a baseline for each building based on electricity use in academic year 2010-2011. Units are rewarded (or charged) 10 cents per kWh for consuming below (or above) their baseline. Importantly, this financial incentive is (approximately) equal to the price the university currently pays for electricity. Units were also provided with real time feedback and improved support for building managers.

The figure below plots electricity consumption on the Berkeley central campus (in blue). The figure shows a notable drop in campus electricity consumption in the first two years of the program (FY 2012-2013). To put these trends into some sort of context, the red line plots student enrollment over the same time period. Electricity consumption has dropped below 2007 levels while student enrollment has increased. Building square footage has also increased since 2011.


(Huge thanks to Kevin Ng and Lisa McNeilly for providing UC Berkeley central campus electricity consumption data.)

This simple graph does not prove that the Energy Incentive Program caused the coincident drop in energy consumption. To credibly estimate a causal impact of the program, we would need to take much more care in constructing an estimate of what UC Berkeley electricity consumption would have looked like absent the program.

A comprehensive program evaluation is well beyond the scope of this blog, but I can offer some anecdata. Although many faculty and staff are oblivious to the incentive change, the program is on the radar screen of the people who manage department budgets and buildings. Every manager I spoke with could point to multiple projects – ranging from email reminders about phantom loads to major lighting retrofits – implemented to keep energy consumption below baseline. Office managers who had been uninterested in building maintenance before the program now closely monitor their daily energy consumption and alert facilities managers when something looks amiss. Much of the $1,869,200 paid out in incentives to date has been re-invested in energy or water efficiency improvements.

Funding for the Energy Incentive Program is scheduled to decrease this year. I hope the incentive/charge per kWh does not. The program budget could instead be balanced by reducing energy consumption baselines in a way that does not disproportionately penalize departments that have made major efficiency investments. Given tight university budgets and ambitious environmental goals,  it is as important as ever to get campus energy prices right.

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The Job Creation Shuffle

Renewable energy proponents and advocates of the Keystone pipeline finally agree on something: that the right way to count “job creation” is to focus narrowly on the jobs in the industry they want to boost and ignore the overall impact on employment.  Unfortunately, researchers who actually study employment are not on board.

The “green jobs” movement is currently having a break out moment in California, just as the fight over Keystone is headed towards a final showdown, with proponents bellowing more about the thousands of workers who will briefly be employed building the pipeline than the dozens who will operate it.


Photo Credit: Forbes.com

The “job creation” justification for government energy policies isn’t new, but its support among economists remains in the range of, well, zero.[1]  In the last couple weeks I’ve pinged leading macro, labor and environmental economists – many of whom have worked in the Obama administration – and got the same results that I got when I did this a few years ago: zero support for making energy policy based on job creation.[2]

Appearing and Disappearing Jobs All Over the Economy

The problem is that when it comes to creating or destroying jobs, counting the direct industry impact misses a big part of the picture.  In non-recession economic times – like today – most of the people who take a newly “created” job are leaving an existing job.  Or would have found another job.  So, the direct industry impact is smaller than claimed.

Then there are people who are displaced by the new jobs created – the coal miners who worked for the mine that is shut down; the workers at the incandescent light bulb plant; the fracking oil drillers in North Dakota laid off when cheaper crude from the tar sands is carried to market by the Keystone XL; or the workers who would have carried that same oil by rail if the Keystone weren’t built.  Of course, many of these people too will find other jobs, but some will become unemployed.

But the fundamental fallacy of counting jobs is that any government policy alters demand, supply, prices and wages throughout the entire economy.  Higher energy prices cause some energy-using industries to contract, reducing employment.   Higher taxes that pay for subsidizing an energy source make some companies less inclined to expand.   Reports of “green job creation” or the “jobs that will be created by Keystone” are just data cherry picking, not real analysis.

MonthlyUnemp1995-2014U.S. Monthly Unemployment Rate.  Source: Bureau of Labor Statistics

Most importantly, when energy policies change the economics of energy use, wages adjust – upward if there is now excess demand for labor in one sector, downward if there is weak demand in another. In the end, government energy policy is not going to noticeably change the long-run rate of unemployment.  Jobs are constantly created and destroyed throughout the economy.  It’s not about jobs but about good jobs at good wages.

Economists long ago agreed (yes agreed! It does happen) that what drives good jobs at good wages is education and training of workers, workplace policies like minimum wage, maximum work hours, and safety, and — and this is critical — companies that put workers in a position to create a lot of economic value.  That is, companies that have the capital and collective intellectual insight to create higher value products using fewer resources.

That’s why, outside of a recession, government should pursue energy policy to maximize the economic value energy creates (including the value consumers get from more affordable energy prices), while minimizing environmental impact and energy security risks.  Not to “create jobs.”

Job Creation During a Recession

During the last recession and years of high unemployment, there was an appropriate focus on short-run stimulus. (There is, in retrospect, less universal agreement among economists on how appropriate this was, though I have a hard time remembering many opponents during the darkest days at the end of 2008.)  There was disagreement in energy, and in all other sectors, about exactly which investments would create jobs most quickly.  But it was all about getting stimulus money out quickly and creating jobs in the plummeting economy.   Practically all economists saw those as extraordinary times that called for extraordinary response.

When the economy is no longer in a state of severe underutilized capacity, the stimulus justification fades.  We may not be back to full employment, but long before we get there, government policies to create jobs end up mostly crowding out other jobs that create as much or more economic value.

Jobs in the Long-Term

If you are talking about a program that would take years to roll out and longer to deliver any real impact, recession-based policies are irrelevant.  You can’t forecast the next recession and most of the time, the economy is growing.  So, let’s consider the long-term job creation arguments for energy policy.

First, there is the simplistic view that some forms of energy are more labor intensive and therefore create more jobs.  That would be great if they weren’t also more expensive.

But higher costs signal that more of society’s resources go into each unit of energy, which is destroying economic value.  Those higher costs ripple through all the energy-using industries, destroying jobs.  That ripple effect is much harder to measure than the direct count of jobs in the industry (and would not give the desired answer), so many advocates simply ignore them.

There is also a more dynamic argument, often made for renewable energy, that one state or country can gain a long-run economic advantage by investing in the next breakthrough technology.  Sometimes the proponent argues that clean energy is obviously a growth industry and if our city/state/country gets out ahead of others – and of private investors – we’ll be in great shape when the boom arrives.

But it’s tough to see how government policy makers will have a better shot generally at identifying emerging business opportunities than the private sector.  And the opportunity is ever present for using such investments to reward political supporters, or enrich one’s self, or just pursue an energy agenda the politician is confident is right in spite of all the contrary evidence.

Creating Virtuous Networks?

The more thoughtful version of the argument is that up-front investments will create agglomeration economies (also known as “network externalities”) that will lock in a location as the hub of the industry, the “next Silicon Valley” argument.  While this story makes a bit more economic sense in theory, it fails in practice.

In his excellent 2012 book, The New Geography of Jobs, my Berkeley colleague Enrico Moretti spells out the theory and evidence for agglomeration economies.  And then in considering locales that strategically decide to become the next technology or manufacturing hub he says “..[T]he track record on industrial public subsidies in the United States and Europe is not great.  It is simply too difficult for policymakers, even the brightest and best-intentioned ones, to identify winning industries before they become winners.” Indeed. And how about the not-so-bright and not-so-well-intentioned ones.  In an idealized setting, this could work, but in the real world it is much more likely to destroy economic value than to create it.

We Still Need A Strong Energy Policy

None of this suggests that government energy policy is unnecessary.  Serious negative environmental effects point to a significant role for regulation and pricing the externalities.  The need for new technologies calls for aggressively supporting R&D, where subsidizing the creation of knowledge spillovers is likely to create net benefits.  But job creation shouldn’t be on the list of considerations when policymakers debate energy policy – whether it’s building the Keystone XL or subsidizing renewable electricity.[3][4]


[1] Yes you can find an economist who supports long-term policies to create energy jobs, green or brown.  You can also find a scientist who thinks there is no human impact on the climate, or a doctor who doesn’t think children should be vaccinated.  But that’s not where 95%+ of the people in these professions come out.

[2] The editors of MIT Technology Review chimed in with the same message in an open letter to President Obama two years ago.

[3] A nice quote frequently retold in policy discussions on this subject is due to Rob Stavins in a 2009 New Yorker article, “Let’s say I want to have a dinner party. It’s important that I cook dinner, and I’d also like to take a shower before the guests arrive. You might think, well, it would be really efficient for me to cook dinner in the shower. But it turns out that if I try that I’m not going to get very clean and it’s not going to be a very good dinner. And that is an illustration of the fact that it is not always best to try to address two challenges with what in the policy world we call a single-policy instrument.”

[4] There is a wonkier discussion of energy jobs creation in my 2012 Journal of Economic Perspectives paper, “The Private and Public Economics of Renewable Electricity Generation,” which the American Economics Association makes available free here.

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How (and who) will pay for our energy infrastructure?

You may have heard that the Federal highway trust fund is running out of money because, darn it, people aren’t using enough gasoline. The transformation of our energy system is rapidly accelerating the need to confront a long-standing problem with how we pay for our transportation and utility infrastructure. For the most part we have paid for this infrastructure through taxes or surcharges on the fuels associated with them. Highway construction and maintenance is supported primarily by a tax on gasoline. Natural gas and Electricity distribution infrastructure is funded through volumetric charges on energy usage.

While at first blush this may seem like a logical, even efficient, approach the problem is that the costs of this infrastructure do not scale with the consumption of these fuels.   A BMW 7 series may tear up the same pavement as a Tesla S class, but only the Beamer is going to be chipping in for the repairs.   What was once a tolerable and subtle cross-subsidy has turned into a serious funding problem.   The somewhat paradoxical problem is that, as our energy consumption gets more efficient, we contribute less to these infrastructure costs. Since the costs don’t go down, we’re left with a funding shortfall.

On the electricity side, the infrastructure is funded through rates that are linked to the volume of kilo-watt hours (KWh) consumed. Its an even more extreme version of the gas-tax problem. Imagine a world where your fourth tank fill-up in a month costs 3 times as much as your first fill-up. That’s a typical electric rate in California. Slide1

This figure illustrates the rate structure for PG&E in my area. The more you consume the higher the per-kWh price gets. On the fourth step (tier) prices rise to over 32 cents/kWh. The problem is that the kWh I consume cost PG&E around 10 cents/kWh (Even that 10 cents includes a bunch of fixed costs like wholesale grid charges, and the costs of funding the CAISO and the CPUC).   The rest pays for transmission, distribution, and other “system” costs – including bond payments for the electricity crisis – that don’t go down when I reduce my consumption. PG&E recovers these fixed costs through a usage-based, per kWh fee.

While this can be a powerful incentive for conservation (and for installing solar panels), it creates a direct conflict between the goals of promoting efficiency and keeping our infrastructure funded. The less gas or electricity I consume, the more those costs need to be recovered through higher taxes or electricity rates.  You could argue that these “mark-ups” of energy costs help to offset another market failure, the environmental cost of energy consumption, but in California we are already pricing the CO2 – at least somewhat.  You could make the case that gasoline should still cost more, but on the electricity side, its pretty tough to justify a 32 cent/kWh price based on environmental damages alone.

These funding systems can also create a situation where individual consumers make choices driven by opportunities to shift costs onto others.   The guy who came to my house last week – yes we have door-to-door solar salesman in Davis – offered to install solar panels for a contract starting around 17 cents a kWh (by the way, sales guy, if you’re reading this call me).   If I take this offer, I’m swapping out power that costs 17 cents for power that cost 10 cents – a losing proposition, right? Except that I’m paying 32 cents for that power and take that other 22 cents or so on the last tier of my electric rate and shift those costs over to other PG&E customers. So I’m saving 15 cents a kWh (again, call me…) but total costs, thanks to the contributions of other PG&E customers,  have gone up by 7 cents.

On a small scale, we’ve lived with this for many years, but we are rapidly reaching the point where raising rates on those without solar to recover these infrastructure costs won’t be viable any longer.   That leaves us with three choices

  1. Stick utility shareholders with the costs.
  2. Reduce the money we spend on infrastructure – perhaps dramatically.
  3. Disconnect the recovery of these costs from the usage of fuel.

Many jurisdictions have been searching, sometimes clumsily, for ways to implement option C. We have the infamous “prius tax” in South Carolina and the solar tax in Arizona. Here in California, we have a proposed road user fee that would start to recover some highway costs on a per-car, rather than per gallon of gas, basis.

In utility regulation the phrase “revenue decoupling” has been around for a long-time. The concept was originally pursued as a means to stop utilities from trying to expand the volumes of product that they sell, and to help incentivize them to embrace energy efficiency.   At its core, revenue decoupling means finding a way to allow utilities to recover their prudent fixed costs in a way that’s not linked to consumption. Some kind of user fee that’s not based on volume is the definition of revenue decoupling.  Distributed generation and improved efficiency aren’t likely to reduce infrastructure costs dramatically anytime soon, so I see more user fees in our future.

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Football – the Ultimate Demand Side Management Program?

On this blog we are supposed to write insightful things about energy markets, but I’ve got football on the brain. While the Pats beat the Seahawks in a game everyone watched, my family and I spent the day on an empty beach in San Francisco. This made me contemplate the behavioral responses of individuals to major sporting events and what this means for utilities across the globe.

The news focused on the fact that for the first time, this crown jewel of sporting events that exactly one country watches, was played under LED lights. This is exciting news! The stadium installed 44,928 LED lamps, which need only 310,000 Watts of power compared to the old metal halide bulbs, which used 1.24 million Watts. This capital investment not only reduced energy consumption by a whopping 75% but provided more even light (fewer shadows) which both players and high definition video cameras like. Further, LED lamps are on immediately while the old sort takes 20 minutes to ramp up to full brightness. This is the last year the NFL will use roman numerals for the super bowl (because the next one will be number 50 and super bowl L just doesn’t sound manly enough) and the first year we use current technology lights. Out with old, in with the new.

But how much energy did we save? If those lights are on for 8 hours, we have saved 7.44 MWh. That is not chump change. To put this into general terms, this is the equivalent amount of energy 686 US homes use in a whole year. And those lights will be used at other events for a long time, so the savings are not trivial. Are these really all of the energy savings we get from major sporting events? The answer is no.

I am German and in my version of football, if you touch the ball with your hands, you get a penalty. Every four years, the greatest tournament in the world of sports followed in pretty much every country on the globe (yes here too!) is carried out – the Fifa World Cup. For us soccer fanatics, when our country plays, we call in sick, paint our faces, throw on our jerseys and head to a big screen. All of those screens running must mean that load rises drastically – right? Nothing could be further from the truth. TVs, even the big ones, use relatively little electricity. But while watching you fail to engage in activities that do take a lot of power, like doing your laundry or working. Am I making this up? Let me introduce you to the Brasilian soccer powered duck graph:

brasilgraphOn the 28th of June of 2010 Brasil (one of the greatest teams in the game) played Chile. I don’t need to tell you what time the game took place and when half time happened. The typical day load is about 60 GW and during the game this dropped by 15GW. During half time, there was a brief spike of 3.3 GW (microwaves presumably) and then load dropped again to 45 GW. It is noteworthy that the ramp slopes in this graph are similar to those of some renewable technologies. Other utilities see bunching during sporting events. In the US we see spikes in water use during unimportant portions of the big game (sorry Katy Perry – people need to use the restroom at some point) and in Canada something similar was reported during the Olympic game for the gold medal in hockey.

The policy prescription here is a simple one – schedule sporting events of regional significance during periods of anticipated high peak loads! The NFL could become a major player in Demand Response! All kidding aside, what these simple graphs show is that seemingly trivial things like watching a major soccer game can have massive impacts on a national or regional market. Small changes in behavior matter – if enough people engage in it.

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Can Mammograms Teach Us Something Useful about Energy Efficiency?

At first blush, mammograms and energy efficiency investments appear to have nothing in common – one’s a personal, preventative health tool and the other helps you save money and energy. But I suspect they raise similar time-management issues. Let me explain.

This starts with an energy-efficiency experience that I had recently. As I blogged about in late December, my family and I spent a couple days at the beach over the holidays. It was really cold in Berkeley while we were gone, so we relished checking our new Nest (a Hanukkah gift from my in-laws) to see how cold it was in our house – bottoming out at 53 degrees. On the way home, we turned the heat up from the airport, definitely appreciating that feature of the Nest.nest-mobile-app

An hour later, when we were actually in our house, our feelings for the Nest took a nosedive. It was still 53 degrees inside. It got up to 55 degrees by the time we went to bed and was only 58 degrees when my husband woke up the next morning and called the Nest customer hotline – this had never happened before, so we thought the Nest was somehow slowing down our furnace. The extremely helpful rep talked to my husband for almost an hour (5-stars for Nest on customer service) and gradually deduced that it was likely an issue with our furnace filters.

My husband went to the basement and took out the filters – score! They looked like they had 3 inches of fur. After he vacuumed them, our furnace kicked into gear. We had basically been asking an asthmatic to run a marathon, and it was getting tired. With clean lungs, our furnace got our house to 68 in an hour.Dirty-Filter

So, the energy efficiency lesson is this: remember to clean your filters. According to the web research I’ve done, this can help you save 10-20% on your heating bill.

What does this have to do with mammograms? If you’re like me, both “get the furnace filters cleaned” and “get a mammogram” (or “get a prostate screen,” for men) are annoying tasks that you know you should do, but, as life happens, get short shrift.

I think of myself as basically conscientious, maybe not 95th percentile, but at least above the median. I do get approximately annual checkups with my doctor, and every year I walk out with a requisition for a mammogram and every intention of getting one, but then don’t get around to it.

to do list

Last week, I got a call from a local number that I didn’t recognize. I tend to answer those as my thoughts go pretty readily to an EMT checking one of my kids’ phones and finding “Mom.”

Luckily, it wasn’t an EMT, but a friendly yet firm woman who told me she was calling to schedule a mammogram for me. I agreed, eyeing dates in February on my calendar, but she wanted to talk about an appointment in 25 hours. It was brilliant—as it turned out, I didn’t have anything pressing at 5PM on a Friday, so I went in and got the test. If she’d gotten me to schedule something for February, there’s probably a 50/50 chance that something more pressing would have come up for that time slot in the meantime, and I would have canceled, telling myself I’d do it later.

I suspect that both the mammogram and filter cleaning fall victim to what behavioral economists call, “rational inattention” (as Meredith mentioned 2 weeks ago). I have some vague sense that I should be doing them, but actually getting them done involves looking up phone numbers, finding the referral from my doctor (or neighbor in the case of furnace filter cleaners), which is a pain, so I don’t do them. There’s probably an element of less rational procrastination, too.

If others are similar to me and put off filter cleaning, perhaps something like the proactive mammogram scheduling could work. If a filter cleaner had gotten in touch with either me or my husband over the past year encouraging us to sign up for a cleaning tomorrow, we probably would have done it. Not only would we have saved a bunch of energy, but we would have also avoided 18 hours in a frigid house at the end of our vacation (plus cleaner air for our family over the past couple years, no doubt).

Even better would be if Nest could use our personalized data, figure out when our furnace is huffing and puffing too much, and suggest a furnace filter cleaning. Wasn’t personalized data one of the reasons Google was so interested in paying lots of money for Nest?

Behavioral programs and nudges for energy efficiency have received a lot of attention. Opower, the founding father in this domain, recently raised $120 million through its IPO. My general impression is that Opower-type results are pretty intriguing – garnering 2% savings from a simple home energy report. But, 2% savings won’t be the silver bullet for climate change. Maybe nudges targeted at specific actions will be the next important step for behavioral energy efficiency.

Also a good behavioral marketer?

Also a good behavioral marketer?

Ultra-rational economists would argue that if people like me will be super responsive to proactive scheduling calls, furnace-filter cleaners would be doing them already. But small business owners have a lot on their minds, too, like keeping up with the tax code, health insurance laws, etc., so they also may be rationally inattentive to the latest behavioral research.

Then again, mammograms and furnace filter cleaning are not unique. Firms that offer closet cleaning, physical training and time-management consultations might also figure out that they should call people with offers to schedule an appointment tomorrow. I, for one, would very quickly learn not to answer phone calls from local numbers while I was at work. So, they’d have to come up with another way to penetrate my inattention.

Energy efficiency is a core component of most major carbon mitigation plans. And, it’s something that 91 US Senators recently voted in favor of! Figuring out how to help people make good decisions about energy efficiency is a fundamental challenge. But, people make perplexing decisions in many parts of their lives, so, hopefully, we can continue to learn from lots of domains.

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Oil price crash shows the challenge of breaking addiction

The price of crude oil has fallen more than 50% since summer and drivers are responding exactly as economists would predict.  Americans are driving more, the market for SUVs is roaring again and the average fuel economy of new cars sold is declining after years of increases.


Many oil analysts predict that oil prices won’t stay this low, and the futures markets agree.  The price for oil delivered in March 2019 is 40% higher than the price for oil delivered in March 2015.  Regardless of whether oil prices regain some of their 2014 losses in the next few years, the latest petro-roller coaster illustrates the monumental challenge that still lies ahead for attempts to reduce greenhouse gas emissions by switching to EVs or biofuels.

To see why, start by recognizing that the oil crash of 2014 resulted from a collection of unforeseen changes to supply and demand.  Economies in Europe and Asia saw slower demand growth than was forecast.  The U.S. supply expansion (mainly from fracking in North Dakota and Texas) continued at a more robust pace than anticipated, while U.S. demand is dampened by years of improving fuel economy. Libya’s oil production rebounded as warring factions reached enough accord to get oil onto tankers.  And OPEC did not offset these surprises as it has done in the past (mostly just Saudi Arabia) by taking a few million barrels per day off the market.


But the piece of this story that has gotten very little attention is how small the supply and demand surprises have been as a share of the 92 million barrel per day market.  Given past trends, the news in the last year didn’t plausibly change the supply/demand balance by more than 5 million barrels per day, and it was probably a lot less.  Yet, that was enough to drop the spot price of oil by more than 50% and push down long-run oil price expectations by more than 30%.

The reason for this outsized reaction is the simple economics of competitive markets: the price is set by the marginal cost of the last, or highest cost, barrel sold.  The marginal barrel is less costly to produce these days than 6 months ago, but most of the crude oil supplied is even less expensive.  The recent oil price drop shows that a small increase in crude supply and/or a small drop in demand brings a much cheaper barrel of oil to the margin, and that sets the price.

The 2014 crash gave us a small glimpse of what reducing world crude demand would do to oil markets.  There is a lot of conventional crude oil that is unpumped and an enormous supply of oil from shale and tar sands that is becoming cheaper to produce each year.  The annual energy forecasts from the U.S. Energy Information Administration, International Energy Agency, BP, Exxon and others see consumption of liquid hydrocarbons increasing or flat for many decades.

CrudeDemandOutlookBPSource: BP Energy Outlook, 2014

If switching to alternative fuels took even 20% out of world oil demand – less than a third of the oil used for transportation — the price would surely crash further and for much longer than we have seen in the last year.

What would oil prices would look like if world demand fell to 70 million barrels a day by 2025?  Anything above $40/barrel doesn’t seem very plausible, and below $30/barrel seems much more likely, possibly well below.  Even at $30/barrel, the oil-cost component of gasoline is about $0.75/gallon.  With transportation, refining, and retailing costs plus taxes (at today’s level), the U.S. price of gas would barely clear $1.50.

Alternative transportation technologies are indeed making real progress.  Energy storage is improving and making electric vehicles credible, if still very expensive.  Biofuels are improving and I read stories that some can compete at $3/gallon, though scalability is still an unresolved question.  I hear frequently from some of my former students who are deeply involved in these exciting ventures.

An alternative fuel vehicle that is cost competitive (including amortized capital costs over the life of the vehicle) with $3/gallon gasoline has a shot at being a successful small or medium scale business.  But to get to a technology that drives oil out of the transportation market for 21st century, that drastically reduces carbon emissions from vehicles, and that does it worldwide without imposing much higher gas taxes – which even relatively-wealthy Americans resist strongly — $3/gallon is still way too high.  The cost of alternative fuel transportation would have to get to half of that or less.

I’m thrilled by the rapid advances we’ve seen recently in alternative energy.  But when it comes to powering transportation, I don’t agree with the advocates who say the mission is nearly accomplished.

Scaling up alternative energy will greatly disrupt the conventional energy markets.  That disruption will cause oil prices to plummet and ratchet up the challenge to alternative transportation. The economics of oil markets mean that the two major roles for government in the fight against climate change – pricing greenhouse gases and supporting research on alternatives – will remain critical for decades to come.

I’m still tweeting energy news articles and new research papers @BorensteinS 

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