Breaking News! California Electricity Prices are High

In case you missed it, a recent investigative piece in the LA Times unearthed the shocking fact that California retail electricity prices are high,  about 50% higher than the national average. The article’s main focus is on the fact that California has a lot more installed nameplate generation capacity then has historically been the norm. There are several causes identified in the piece.  Deregulation of the market in the late 1990’s is pointed to as a culprit. Somewhat inconsistently, the construction of regulated, rate-based plants also takes much of the blame. One factor that was barely mentioned, however,  was California’s renewable electricity policy.

The story of how California’s electric system got to its current state is indeed a long and gory one going back at least to the 1980’s. The system still suffers from some of the after effects of the 2000 era crisis.  The Long Term Procurement Process (LTPP) put in place in the wake of the crisis, and overseen by the CPUC, has been criticized from many sides.

However, since the power crisis of the early 2000’s settled down, the dominant policy driver in the electricity sector has unquestionably been a focus on developing renewable sources of electricity generation. As is well known (outside of the LA Times apparently), California has one of the country’s most aggressive renewable portfolio standards (RPS).  The RPS requires each firm that sells electricity to end-users to procure an increasing fraction (33% by 2020, 50% by 2030) of the energy they sell from renewable sources.

Desert Solar Array
The Times article’s focus on generation capacity does (a bit unwittingly) provide a nice starting point for a discussion about the cost and implications of this renewable energy policy. The policy, while undoubtedly effective at reducing the carbon intensity of the power sector, has also been quite disruptive to the economics of the sector.  It is forcing a rapid (and early) replacement of conventional sources with renewable, but variable, generation sources such as solar and wind. Since 2010, about 80% of new capacity has come from renewable sources and it’s likely that much of that capacity would not have been built if not for the RPS.  (Much of the remaining 20% has been coming online to replace the retired SONGS nuclear plant or capacity slated for retirement due to environmental issues with their water cooling  processes.)

newcap2010

New Capacity in California ISO by fuel type

Proponents of strong renewable standards have pointed to the fact that new contracts for renewable energy carry price tags that are (at worst) only modestly above those for a new conventional natural gas power plant. However comparing the cost of a brand-new solar plant to that of a brand-new gas plant overlooks two important facts.  First, renewable, variable output sources offer very different operational capabilities than conventional sources.  Second, right now we don’t really need new capacity of any kind, and are in fact struggling to find ways to compensate the generators that are already here.

The renewable portfolio standard provides an interesting contrast to the federal mileage standards on vehicles. Both require the replacement of older legacy, high-carbon sources with newer,  lower-carbon ones. However automobile standards work by requiring people to buy more fuel-efficient cars when they decide to buy a new car. Renewable portfolio standards require utilities to buy low-carbon energy by a certain deadline rather than when they are deciding to “trade-in” their old power plants. In California at least, the result has been a much more rapid turnover of legacy sources to the newer, cleaner ones. Another implication, however is the fact that the system now has a large amount of what can appear to be excess capacity. This is because renewable policies are rapidly forcing new “green” capacity into a market that was more or less fully resourced before the mandates really started taking effect.

I don’t mean to imply that the “replace it now” approach is definitively worse.  Research has shown that standards applied only to new purchases can inefficiently extend the lifetimes of older technology, from cars to power plants.  This can significantly dilute the environmental benefits of a technology mandate.  In contrast, instead of extending the lifetimes of old plants, the RPS is in effect forcing the early mothballing of legacy capacity. This improves the environmental impact, but also increases costs, sometimes in subtle ways. The effect grows larger with stricter mandates. At higher percentages, the RPS starts to displace increasingly newer (and cleaner) sources of generation.  The economic effects can be mitigated by allowing for renewable energy generated elsewhere in the country to count toward RPS compliance, but California has largely rejected such policies.

Largely due to the RPS, we have a surge of new, low marginal cost energy, flooding into a wholesale market that already had enough generic energy, thereby driving down wholesale prices. Since wholesale prices cannot support the cost of this much generation (new and old), increasingly the gap must be  made up through rising margins between wholesale and retail prices.  Utilities and other retailers have to pay  high market prices for new renewables instead of being able to “buy low” on the wholesale market.  Because all retailers face the same regulation, they pass these costs on to end users. And this doesn’t even consider the costs of new transmission, most of which is being added to boost the power system’s ability to access and absorb large amounts of renewable energy. Transmission costs, which are also charged through to electricity end users as part of the retail prices cited in the Times article, will continue to grow in coming years. The Tehachapi transmission project alone is projected to cost over $2 Billion.

The result is the seemingly perverse situation where customer rates are rising while (conventional) generation sources are simultaneously struggling for revenue and threatening to retire. Such conditions are a recurring theme on this blog and are often drivers of significant change. Unfortunately, despite the glut of electrical energy, we will likely still need the conventional capacity to handle the ramping and back-up needs created by the increased reliance on variable sources (wind and solar).

One of the debates lurking in the background is who should be responsible for the cost of these disruptions. Richard Schmalensee has observed that deregulation may make it easier for State policy makers and regulators to ignore wholesale market effects. This is because the assets being stranded today are largely owned by non-utility generation companies in contrast to the late 1990’s when the stranded assets were a joint problem of regulated utilities and their rate payers.

California led the way with developing renewable energy in the 1980’s,  with the deregulation of the power sector in the 1990’s and 2000’s, and now with high-volume renewable mandates since 2010. We are learning a lot about how to physically manage and finance a cleaner energy system. We also need be realistic about the costs of such policies.  When you combine the cost of policies of the past with the aggressive goals for the future, you get retail electricity prices that, yes, continue to be pretty darn high.

 

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Learning to Frack

Technological advances and learning-by-doing have made U.S. shale oil profitable even at $55/barrel.

Just ten years ago shale oil was expensive. Global oil prices spiked to $135/barrel in 2008 but shale oil didn’t and couldn’t respond. Now, at only $55/barrel, U.S. oil producers are going all in, announcing billions of dollars of increased investment, particularly in Texas and North Dakota, and energy experts like Daniel Yergin are expecting U.S. production to increase this year by more than 500,000 barrels per day or about 6%.

This remarkable transformation is a perfect example of learning-by-doing.  Cost reductions in solar, wind, and batteries get a lot of attention.  But fossil fuel producers also learn from experience, and the pace of learning in U.S. shale oil over the last couple of years has been impressive. Recent research by Thom Covert and others help us make sense of what happened, and identify several key lessons for other industries.

Shale Oil Ramps Up, Even at Lower Prices

U.S. oil production in 2015 reached its highest level in decades, driven large increases in production from shale oil.  With shale oil and other forms of “tight oil”, producers drill horizontally and then use hydraulic fracturing to reach oil trapped in low-permeability rock like shale, sandstone, and limestone.  Over the last decade, these technologies have provided access to vast areas of oil reserves that were previously out of reach.  The growth has been particularly dramatic in the Eagle Ford, Permian, and Bakken, but other areas have grown rapidly as well, and shale oil now represents almost half of all U.S. production.

shaleoilNote: After slowing down in 2016, U.S. shale oil is expected to ramp up again in 2017, continuing a decade-long surge. Constructed by Lucas Davis (UC Berkeley) using EIA data.

Production slowed in 2016 as oil prices briefly dipped below $30/barrel.  Companies made severe budget cuts, reduced drilling activities, and U.S. oil production fell 12% between July 2015 and September 2016.  Remarkably though, even at $30/barrel, production still continued at a solid pace.  Despite historically low oil prices, the U.S. still produced almost 9 million barrels per day during 2016.

Now with oil prices at $55/barrel, U.S. producers are pushing their chips to the center of the table.  Hess, one of the biggest producers in North Dakota, just announced a $2.25 billion investment budget for 2017, up 18% from last year.  Noble Energy has said they will spend up to $2.5 billion for 2017, up 67% from last year.   Companies believe these investments will be profitable because U.S. production has become so much more efficient.

Practice Makes Perfect

Economists have long studied learning-by-doing. As a company makes more of a good, it tends to become more efficient at production.  That is, the company learns to make output using fewer resources; or, equivalently, the company learns how to make more output for a given set of inputs.  Leaning-by-doing has been shown to happen in virtually all industries, with some of the best-known studies in economics coming from aircraft, semiconductors, and shipbuilding.

These industries may at first seem quite different from hydraulic fracturing, but there is a key similarity.  In all of these industries, companies are performing a repetitive production process.  Boeing builds hundreds of airplanes.  Chesapeake Energy drills hundreds of wells.  Key to learning is repetition, so industries like this are best suited to learning-by-doing.

rigNote: Oil production in North Dakota’s Bakken shale.  Photo from here.

Tens of thousands of oil wells have been drilled in the United States since 2010.  This repetition has allowed producers to experiment with innovative new approaches to drilling and finishing wells; new combinations of drilling fluids, well depths, and other factors. This trial-and-error over thousands of wells has facilitated learning, pushing new techniques forward and reducing the cost per well.

Not all markets look like this. For example look at building nuclear power plants.  Nukes are such massive projects, undertaken so infrequently, that there is less scope for learning.  Not surprisingly, studies have found only limited learning-by-doing for nuclear power plants.  See here, here, and here.  This is exactly the rationale for small modular reactors – proponents argue that in building much larger numbers of smaller reactors they can benefit from learning-by-doing and decrease costs.

Evidence from the Bakken

In the most comprehensive study to date, University of Chicago economist Thom Covert documents rapid learning-by-doing by shale oil producers in North Dakota’s Bakken Shale.  Covert gathered detailed data from all oil wells drilled in the Bakken over an eight year period, including total oil production as well as information about the sand, water, and other “inputs”.  Covert shows that over just a small number of years, producers learned to make much more profitable choices, squeezing up to three times as much profit out of a given well.

One of the interesting patterns is that over time, producers have learned to be much more aggressive, extending the horizontal section of wells much farther and then using much more water and sand. By the end of the period, producers were using five times (!) as much water and three times as much sand per foot of horizontal length.  This “super-size’’ approach has been adopted successfully with natural gas production as well.  Super-size wells cost more upfront, but yield much larger amounts of oil and gas.

bakken.pngNote: Reproduced with permission from http://home.uchicago.edu/~tcovert/, this map shows the expected returns from using additional water and sand.  The black dots are the locations of actual wells.

It is complicated, however.  Covert shows that the optimal set of inputs varies dramatically across locations. The heat map above shows that some locations are much more suited to super-sizing than others.  Using more water and sand increases production in some places (the red areas), while decreasing production in others (the blue areas).

Global Technology Spillovers

Learning-by-doing in U.S. shale oil is important not only for the United States, but also because of the prospects for global technology spillovers.  The United States is not the only country with shale oil formations, and it would be naive to think these techniques will not quickly spread around the world.

That said, there is an important feature of the U.S. oil and gas market that makes it particularly well-suited for learning. Unlike most other countries, in the United States there is a wealth of publicly-available information.  Regulators and third-parties collect and disseminate detailed data on each and every well drilled in the United States.  Other countries hoping to grow their oil production would do well to adopt similar practices for information disclosure.

Moreover, the United States has private mineral rights.  This makes it possible for many firms, including smaller firms, to enter the market and try new drilling approaches.  In contrast, where mineral rights are government controlled, it can be harder for companies to enter the market and we might expect there to be less experimentation. U.S. oil and gas production has long been characterized by ingenuity, innovation, and risk-taking – all typical of competitive markets.

Still, it seems inevitable that these techniques will quickly spread around the world.  Globally there are already an estimated 400+ billion barrels of tight oil reserves, so there are a lot of places where these techniques could be profitably employed. This means the global supply curve for crude oil will continue to shift outward, applying continued downward pressure on global crude oil prices.

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Have We Peaked?

The heat is on, and climate change will put significant strain on the US power grid – unless we do something about it.

In the absence of any concrete new policy proposals coming out of the not-so-green White House, we figured we would write about something we know even more about – research! Patrick Baylis, Catie Hausman and I have a new paper out today in the Proceedings of the National Academies of Sciences (PNAS), which is of utmost relevance to this blog. It combines Max’s three favorite topics: climate change, electricity and lots of data.

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Humans do not like heat. There is ample evidence that when it’s hot outside, more people die, we are unhappier, air quality decreases, we become more aggressive and violent, less productive and our cognitive ability decreases. In order to offset these effects, we seek cool environments. Lakes, shade and, over the past century, the air conditioned indoor space. Movie theatres these days are so cold, you can just bring a bucket of sugary cream and you’ll have ice cream by the time the trailers are done. Supermarket, shopping malls, server farms, packing plants, and most homes are air conditioned.

In most of the U.S., electricity usage spikes in the summer when it’s really hot outside. Alan Barreca and coauthors have shown that the rollout of air conditioning has led to massive decreases in heat related mortality over the past century.  While we use some electricity to run our heating systems in the winter, in most of the country, air conditioning uses more electricity. And so it’s no surprise that rising temperatures from climate change are expected to lead to increased electricity demand.

The question that arises is just how much. Lucas has a nice paper on residences in Mexico and finds that we expect massive increases there. In the US, the literature has been relatively sparse. There are few papers on the commercial and industrial sectors.

And importantly, producing electricity at peak times is much more expensive than at non-peak times. If we need to expand generating capacity enough to allow for one more large window unit air conditioner to run at the system peak demand, the upfront cost of that additional power plant (or share thereof) in California is roughly $900. That number nearly knocked my air conditioned socks off.

In the PNAS paper released today we impose end of century climate on today’s economy and grid. We highlight that climate change would cause electricity demand to increase disproportionately at times when the grid is already stressed. A lot of the previous research has focused on the impact of climate change on the *typical* day in a year, finding moderate increases in demand over the next 100 years. We show that it’s also important to factor in the impact on the highest-usage days — when we show that electricity demand will increase even more.

Under business-as-usual (= somewhat frightening) RCP8.5 scenario from the climate change literature, we estimate that *average* demand will increase 7.9%. But the increase is substantially larger — 17.6% — on the highest demand (meaning sweltering hot) days of the year (specifically, we look at the 95th percentile of usage). That makes sense, since a bigger percentage of demand is coming from air conditioning on those high-usage days.

The reason this matters is that cost-effective electricity storage is not yet widely available. So we build the grid to meet the highest usage “peak” hour of the year. Over the next 100 years, that grid capacity will need to increase substantially to accommodate climate-change driven demand growth.

What this means is that adaptation to climate change will be costlier than existing models estimating these costs globally estimate. There are a number of adaptation routes — building hundreds more peaker power plants; developing more storage; developing more efficient cooling technologies, or getting customers to change their behavior. But the existing cost calculations for adaptation don’t factor in the need to do these things.

Another implication is that actions to *prevent* climate change are more valuable than what existing models say. If you can lessen climate change, you can avoid some of these adaptation costs. So let’s get to solving this climate change problem, which is neither perpetuated by the Chinese (their plans to solve climate change are more ambitious than what I fear we will do) nor a hoax. It’s real. Let’s get to it.

This blog post was coauthored with Catherine Hausman (Michigan) and Patrick Baylis (Stanford/UBC Vancouver).

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If Trump Is Waging a War on Facts, What Should I Do?

In a single, very personal way, I benefited from Trump’s election victory. It led to an amazing mother-daughter bonding experience last weekend when I took my 14-year-old daughter to the Women’s March on Washington.

My own crowd shot

My own crowd shot from the Women’s March on Washington

It may not surprise blog readers that I voted against Trump in the election. After all, I’m a Californian who thinks deeply about climate change and environmental policy, values facts, cares about social justice, free speech… the list goes on. After the election, I felt an intense maternal instinct to show my daughter that many people were vehemently opposed to the racism, homophobia, Islamophobia, sexism, etc. articulated – if that’s the right verb to describe policymaking by tweet – by our President. And, I was fortunate to have enough frequent flier miles to fund our trip.

In any case, the march, subsequent debates about liberal alliances, and discussions with my colleagues about what the next four years might bring for energy and the environment have led me to do a lot of soul searching about how I spend my days and how much I’m contributing to the common good.

In particular, I’ve written blog posts that highlight problems with existing clean energy or environmental policies. I’ve expressed skepticism of off-grid solar in Africa, some energy efficiency programs, and the benefits of rooftop solar.

I’m wondering, though, if I should hold back in the coming years? In the era of fake news and “alternative facts”, is a reasoned critique of some part of an environmental policy more likely to be used by opponents to kill it entirely?

I’ve contemplated an answer to this question on several levels:

Practical there will be many fewer environmental and clean energy policies to critique in the coming years, so it doesn’t matter what I say.

But, this isn’t a satisfying answer. While it’s very likely true at the federal level, California already seems to be stepping up its game around climate change. And, as a local, it’s in many ways easier for me to engage here.

la-me-pc-jerry-brown-climate-change-republican-president-20150805

So, if California is going to move into even more of a leadership role on climate change and other environmental policies, that’s all the more reason to get it right.

PrincipledI’m an academic and I uncover facts. Facts speak for themselves so I shouldn’t be swayed by politics.

I’m all for this, but it oversimplifies. I have the latitude to pick which projects I spend time on, and I try to prioritize policy-relevant topics. But, the election has changed what’s policy-relevant and the range of potential policy levers. With many treasured energy and environmental policies now on the chopping block, I need to recognize that my research and blogs could be received differently in this new political environment.

Metaphysical – critiques are an inevitable part of life as an energy economist.

24-221s15Almost every economist – from labor to macro – has what I would describe as “cancer research envy.” A number of us have been in situations where we’re vying for attention, say at an event with big campus donors, with a medical researcher who seems to be making progress on something that could help in the fight against cancer. It’s hard to get the crowd riled up about tax policy or a subtle critique of cap-and-trade next to that.

But, at some level, what we are doing is even more basic research than the molecular chemist behind the cancer discoveries. That’s because economists do research that helps all of us understand and ultimately decide how much money goes to cancer researchers instead of diabetes and to medical research instead of more virtual reality video games. What government allocations, philanthropic decisions or tax policies cause cancer researchers to get more or fewer resources? And, why did the creative and driven scientist decide to go into medical research and not investment banking? At the most basic level, economics is about how societies allocate scarce resources.

Economists have a lot in common with my paternal grandmother who was a teenager during the Great Depression. We absolutely hate waste. (My grandmother kept a refrigerator shelf full of the free ketchups from McDonalds.) Rooftop solar may do some good for the environment, but if it’s not the best way to reduce climate change and local pollution, I’m going to write blogs that criticize it.

After all, if we’re spending too much money fighting climate change, that’s money that we could be spending on lots of other things that society values, like cancer research.

images-2So, I think I need to keep uncovering new facts and writing blogs to help fine-tune the policies and decisions on energy and the pic-make-america-great-again_millsenvironment. Just remember, a dollar saved on energy policy is a dollar we can use somewhere else, whether it’s buying yarn to knit a pink pussy hat or buying a “Make America Great Again” hat – whatever suits your fancy.

 

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Will Trump Negotiate a Better Coal Deal for Taxpayers?

It’s here. The first week of the Trump administration. And it promises to be a busy one.

On the energy front, Trump has an ambitious agenda for his first days in office. Some policy changes will take time to execute. Others can happen with the stroke of his pen (and a tweet).

Ending the moratorium on leasing federal land for coal mining – put in place last year by the Obama administration – is one change we can expect very soon. When it happens, it will mark a return to business as usual in the federal coal program.

trumpcoal

Trump Digs Coal: Source

Here’s the problem. Business as usual is broken. The federal coal program is supposed to manage vast federally owned coal reserves, which account for more than 40 percent of U.S. coal production, “for the benefit of current and future generations.” But the program has, for a long time, been criticized for selling taxpayers short. For this and other reasons, new federal leases were put on hold last year until a comprehensive review of the program could be completed.

A follow-up scoping report released earlier this month from the Department of the Interior lays out a blueprint for major reforms that would help taxpayers receive fair compensation and better account for the environmental impacts from coal mining. The outgoing secretary of the interior has argued that “the only responsible next step is to undertake further review and implement these commonsense measures.”

It’s now up to the Trump administration to decide what to do next. Sticking with the status quo will cost taxpayers. It could also have big implications for the environment.

What’s the problem (and how can we fix it)?

If you are an American taxpayer, you are a part owner (in a manner of speaking) of vast coal reserves. In addition to the coal covered by existing leases, which can support production at current levels for 20 years, there’s much more coal in federally owned ground.

 Source: US Geological Survey; Bureau of Land Management; Energy Information Administration

When the government (or, more precisely, the Department of the Interior) auctions leasing rights and collects royalties from the sale of “your” coal, it is supposed to make sure it receives fair compensation on your behalf. But the government is falling short. Critics have convincingly argued that leasing auctions are fundamentally noncompetitive and undervalue the rights to mine federal lands.

Problems with the royalties that mining companies actually pay are well-documented as well. Overall, it’s been estimated that undervaluation of coal could have cost taxpayers as much as US$30 billion in lost revenue over the past 30 years.

For the majority of Americans who are worried about global warming, uncompensated environmental damages should present a much bigger concern. In a recent study, my coauthors and I calculated the climate change-related damages from burning Powder River Basin coal (which accounts for most of federal coal production). We use the monetized climate damages of $44 per ton of CO2 based on the median U.S. government social cost of carbon. We found the estimated climate impacts are about six times the current market price. Royalty payments could be increased to reflect some of these damages.

graph2Authors: Kenneth Gillingham, James Bushnell, Meredith Fowlie, Michael Greenstone, Charles Kolstad, Alan Krupnick, Adele Morris, Richard Schmalensee, James Stock.

The recently released scoping report lays out a series of proposed changes that could address these problems, such as calculating royalties using the private market price of coal and adjusting royalty rates to account for climate change impacts.

Winners and losers under federal coal reform

In our paper, we highlight knowledge gaps that need to be filled before we can definitively assess the impacts of potential coal program reforms. These gaps notwithstanding, there’s a lot we can learn based on information we already have.

In this spirit, economists Jim Stock and Ken Gillingham have been hard at work looking at the likely impacts of increasing the royalties paid per short ton of federal coal sales. They examine how a royalty increase or “adder” would impact future U.S. coal production. To put these royalty adders into perspective, a $20 increase per ton would capture roughly 20 percent of estimated climate change damages in 2030.

The figure below summarizes their 2030 projections. It should come as no surprise that, as federal royalties increase, coal production on federal lands falls. Some of these reductions are offset by increased production at other US coal mines which are not subject to these federal royalties.

graph

Source: Results reported in this paper

A somewhat surprising finding: Increasing federal royalties would increase national mining employment, even as total domestic coal production falls. That’s because the largest projected increases in production are found in Northern Appalachia and the Illinois Basin. Because these regions are relatively labor-intensive, increased employment in these areas more than offsets reductions in employment on federal lands.

Increased royalties would also benefit taxpayers and the environment. Through 2030, Gillingham and Stock estimate that additional royalties under an increase starting at $15.80/ton and ramping up to $20/ton by 2030 for Powder River Basin coal could exceed $35 billion (undiscounted). The higher price for coal would also lead to power sector emissions reductions on the order of three percent in 2030, they found.

Those who stand to lose the most under reform are the handful of companies that have invested in mining federal coal and the services (such as railroads) that serve them. Electricity consumers would see a very small increase in electricity prices. Gillingham and Stock calculated that under the $20 royalty increase, wholesale electricity prices in 2030 increase by approximately 0.1 cents/kWh, which is less than one percent of current average retail prices.

We snooze, we lose

As President Trump took the oath of office last Friday, the White House website was transformed to reflect the arrival of the new administration. References to climate change were removed. During Senate hearings for his Cabinet, there was no indication this administration intends to make action on climate change a priority.

But a refusal to acknowledge the existence of this problem does not make the problem go away. On the contrary, halting progress toward a meaningful policy response just makes it a harder hill to climb when members of a future administration inevitably resolve to roll up their sleeves and deal with the problem.

A Wyoming open mine in the Powder River Basin, where much of the coal  production on U.S. federal land is located. Bureau of Land Management

In the same vein, the time to act on federal coal program reform is now. Momentum has been building behind the “open and honest conversation about modernizing the coal program.” Judging by the hundreds of thousands of comments filed so far on the scoping report, there is broad-based support for meaningful reform.

If the Trump administration decides to turn a deaf ear on this conversation, we will be in a different place when a future administration picks up this ball. More leases will be auctioned in the coming years, and more federal coal will be covered by long-term contracts. Hitting the snooze button will deliver more good deals to the coal companies operating on federal lands, at the expense of taxpayers and the environment.

The Conversation

This blog is available on The Conversation. Read the original article.

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Fight Both Local and Global Pollution, But Separately

Since discussions of California’s cap and trade program for greenhouse gases (GHGs) began more than a decade ago, many environmental justice (EJ) leaders have voiced concerns about the fairness of cap and trade to disadvantaged communities.  Like most environmental economists, my reaction to these concerns was simple or, I would now say, rather simplistic.ejvsghg_1 The standard economist view goes something like this:

  • Greenhouse gases are global pollutants, causing damage everywhere on earth regardless of the point of emission. A cap and trade program for GHGs is not designed to address local pollutants (nitrogen oxides, volatile organic compounds, sulfur dioxide, and sometimes heavy metals, which do most of their damage near their source) that are emitted from major energy-using facilities, such as electricity generators, oil refineries, and cement manufacturers.
  • Emissions of GHGs from these facilities are imperfectly correlated with emissions of local pollutants. More importantly, the change in total GHG emissions when these sources respond to climate policy, is very imperfectly correlated with the change in local pollution.  In fact, lowering one type of emissions could quite possibly raise the other. (More on that below.)
  • So, we should not count on, or expect, GHG policies to control local pollution emissions. We should pursue separate policies to reduce those local pollutants.

My views on these points haven’t changed, but over the last year I’ve realized that the relationship between GHG and local pollution policy is not that simple.   While listening to EJ leaders in the recent debate over extending cap and trade through 2030, two points have persuaded me that in order for California to make real progress on GHG emissions, addressing the effect of local pollution in disadvantaged communities must be part of the process.ejvsghg_2

First, while it is clear there are more direct ways to control local pollution than through GHG regulation, these communities feel that they do not have the political power to achieve those direct measures.  Absent greater political clout, the rational EJ strategy may well be to climb on the GHG-reduction train and try to bend its path towards addressing local pollution.

Second, most of these emitting facilities are not shutting down.  They often generate higher-paying jobs and in some cases are the center of a community’s economy.  But, if they are to continue operating, the surrounding communities deserve detailed public emissions monitoring, reliable scientific analysis of the impact of those emissions, and compensation for the damage that is still done.

Yet, in talking to EJ leaders, academic researchers, managers at emitting facilities, and air quality regulators, I have heard widely divergent claims about the amount of monitoring, level of emissions, and damage from local pollution, an issue Meredith touched on in October.  Agreeing on the current facts is a necessary first step to diagnosing the local pollution problems and reaching equitable solutions.

Besides the obvious public policy imperative to mitigate local pollution, doing so is also critical because the alternatives — which tie local pollution abatement to GHG reduction — would undermine the state’s climate policies.

For instance, one alternative circulating in various forms has been dubbed “cap and tax.”  The idea is to establish GHG caps on existing facilities — no trading allowed, just limits at each facility — and then have them pay a tax for their GHG emissions.  Now I’m all for a GHG tax as I have written previously, but there is no good argument for capping GHGs from particular facilities. It’s a global pollutant.thumb.php

In contrast, there are clearly good arguments for capping local pollutants from a particular facility, and taxing those pollutants that are emitted. And for distributing at least some of that revenue to individuals who may be harmed by the local pollution, particularly when they are already disadvantaged.

Ironically, one of the primary ways facilities that burn fossil fuels reduce their local pollution is by using “scrubbers” that remove the pollutants from the effluent stream. But scrubbers themselves consume substantial energy, so they increase GHGs while lowering local pollution.

If caps on GHGs at specific facilities are binding, they would likely reduce the overall level of operations at those sites, and thus reduce local pollution.  But that would most likely do little or nothing (or less than nothing) to reduce total worldwide GHGs, which is all that matters for climate change.

If, for instance, a California oil refinery has to scale back operations, the overwhelming evidence is that the gasoline and diesel shortfalls will be imported from refineries outside the state.  This “leakage” offsets any in-state GHG reductions, and possibly even increases the total, due to additional shipping.  The same is true for electricity generation, cement production, and other industrial production.

Some advocates of GHG caps respond to the leakage argument by saying that we just need to find lower-GHG ways of providing transportation, electricity generation, and other energy intensive goods and services.  That is surely true, but we are not going to accomplish it by capping GHGs at specific California facilities. California doesn’t — and under the U.S. Constitution California can’t — control trade across its borders.  Reducing in-state supply without reducing demand will just increase imports.

The future of California’s climate policy will be front and center in 2017. As the U.S. federal government steps back from leadership on this challenge (and apparently closer to denying that it exists at all), it is critical that the Golden State presents policies that will have real impact on global GHG emissions, while at the same time treating fairly the most vulnerable in our society.

I’m still tweeting interesting energy news articles, research, and stats @BorensteinS

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Risks of Going It Alone

A number of cities recently rang in the New Year with spectacular professional fireworks shows. Some parts of the US also allowed individual consumers to purchase fireworks and put on their own shows. That was the case where I grew up in the suburbs of Houston, Texas.

Fireworks are banned in the City of Houston due to the risks to public safety. The surrounding unincorporated areas of Harris County are, apparently, less concerned about the risks. I lived outside of the city, so was able to legally enjoy the teenage thrill of almost blowing off a finger.

Despite the ban, city residents could shoot off fireworks outside city limits or sneak them into the city and surreptitiously shoot them off there. Like clockwork, each year before New Year’s Eve, fireworks stands would appear just beyond the city’s boundaries to serve the city-dwellers.

fireworks-stand

BUY 1 GET 11 FREE” by Paul Long is licensed under CC BY 2.0

When a regulation covers some jurisdictions, but not others, the effectiveness of the regulation can be undermined, as in the case of Houston’s fireworks ban. This phenomenon is referred to as “leakage”.

Sneaking Greenhouse Gas Emissions across State Borders

Leakage has been recognized as a challenge when individual states attempt to regulate electricity sector greenhouse gas emissions.

There are a couple reasons for this. First, states share a common grid and electrons do not respect state boundaries. This means electricity production can easily move from one state to another. Second, over time electricity demand can move from one state to another as well. For example, firms can move their manufacturing activities across state borders if energy costs are lower on the other side. Demonstrating this, Matthew Kahn and Erin Mansur found that energy-intensive firms tend to cluster in low cost counties, and high polluting industries tend to cluster in counties with laxer regulations.

The Energy Institute’s Meredith Fowlie authored a paper that illustrates how leakage can undermine a state’s efforts to address greenhouse gas emissions when other states aren’t playing along.

She considers one scenario in which greenhouse gases from power plants are regulated throughout the western US. In another scenario, the regulations only apply in California. She estimates the California-only scenario would only achieve one-third of the emissions reductions of the west-wide scenario. Since California is a net importer of electricity, some in-state emissions decreases would be offset by out-of-state emissions increases.

There are ways for a state to mitigate leakage, but those approaches can undermine the regulations in other ways.

The US was headed down the road of addressing the leakage through implementation of the Clean Power Plan (CPP). Through the CPP, states were assigned greenhouse gas emissions targets that would, in aggregate, reduce the nation’s greenhouse gas emissions by 30% relative to 2005 levels by 2030.

President-elect Donald Trump, however, has said he will kill the CPP. This means that states that remain committed to taking bold action on climate change, such as California and New York, need to consider the risk of leakage.

copy-of-map-of-the-united-states-1

States identified as pro-CPP are those supporting the CPP. The states identified as Anti-CPP are those suing the EPA. Created using info from EENews

Get Ready for the Fireworks

It’s possible that some or all of the 27 states that have sued the EPA to kill the CPP, the anti-CPP states, will toss out their plans to cut greenhouse gas emission from the power sector.

Ohio, an anti-CPP state, could be the canary in the coal mine for this scenario. In December, the Republican-controlled legislature, anticipating the CPP’s demise, passed legislation that would gut the state’s renewable energy and energy efficiency requirements. Republican Governor Kasich vetoed the bill, but bill proponents have promised to come back in the next session, when the Republicans will have a veto-proof majority, and finish the job.

Other anti-CPP states could take similar actions. Some may find ways to proactively support more greenhouse gas intensive power plants. These states could become sanctuary states for dirty power plants and industries.

Leakage could become more challenging to mitigate if the anti-CPP states pursue a carbon intensive path at the same time that the pro-CPP states are regulating greenhouse gases more aggressively.

This is especially true because the anti-CPP states are net exporters of electricity to the pro-CPP states. Based on my calculations using Energy Information Administration data, over 10% of pro-CPP state electricity demand is imported.

The anti-CPP states also have, on average, dirtier generating fleets. Their power plants emit 16% more greenhouse gases per unit of electricity than the plants in the pro-CPP states, based on EPA data.

Together these factors could undermine the efforts of pro-CPP states to cut greenhouse gas emissions.

Building Bridges with Other States

The pro-CPP states need to carefully evaluate their next moves.

One approach is for the pro-CPP states to coordinate more closely together through joint efforts. California’s focus on expanding the cap-and-trade market to include other jurisdictions such as Quebec and Ontario is a good example of how sub-national entities can work together. In the same vein, the New England states are planning joint efforts to bring more clean energy onto the grid.

Perhaps there will also be opportunities for the pro-CPP states to cooperate with anti-CPP states in specific areas.

For example, Republican-leaning states in the windy Great Plains have pursued meaningful renewable energy goals.  Also, since the election in November, Michigan, a state that voted for Trump and has a Republican legislature and governor, has even increased its renewable energy goals. There may be opportunities for pro- and anti-CPP states to cooperate on renewable energy development.

"Hoover Dam Bypass Bridge Construction 3" by Alan Stark is licensed under CC BY-SA 2.0.

States can continue to build bridges for climate cooperation. “Hoover Dam Bypass Bridge Construction 3” by Alan Stark is licensed under CC BY-SA 2.0.

The expected demise of the CPP comes at a particularly tricky time in the West. California and its neighbors have been moving toward greater integration of their electric grids. California Governor Jerry Brown continues to be committed to this effort.

Integrating markets across the region could enable the grid to accommodate more wind and solar energy at a lower cost. That would tend to be good for climate change policy.

Yet, in a post-CPP world, it’s important to consider whether closer integration between pro- and anti-CPP states in the West could lead to more leakage and undercut progress toward targets. This could occur if coal power plants are able to operate more and stay in business longer in an integrated market. The analysis thus far suggests this is unlikely, and the other benefits are significant.

Mitigating climate change on a global scale is going to require significant cooperation between governments in a number of areas, including to address leakage. The US states that are committed to climate change action should take that to heart and demonstrate how they can work together to tackle the challenge.

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Does Anyone Really Know How Much Electricity Goes into Cars?

There are lots of government policies that economists like to roll their collective eyes about and use as examples of bad incentives in economics textbooks. In many cases these policies are well intentioned, and may even be the best option in a second (or third, or fourth) best policy world, but we just can’t let it go.   For many environmental economists, the Low Carbon Fuel Standard (LCFS) provides just such a target-rich environment.   A wide list of criticisms have been made by Holland, Hughes, Knittel and others, but these high-level concerns can at times seem abstract.

symbol_electric_vehicle_charging_stationsPeriodically, however, one comes across details about the implementation of a policy that can take you through-the-looking-glass and starkly illustrate what economists have been complaining about.   One such case is the relationship between two of economist’s favorite boogeymen: the LCFS and incentives to drive electric cars.

The LCFS is intended to transition an economy from petroleum-based transportation fuels to alternative fuels that have a lower carbon-intensity (CI). One criticism of the LCFS is that it targets only one element of transportation-based carbon emissions; the CI of the fuel.   It doesn’t reward driving a more fuel-efficient vehicle. It doesn’t reward driving less. In fact, in some cases it can reward driving a less efficient vehicle more often.

The LCFS works by charging firms for selling high CI fuels (fuels whose carbon content is above the standard) and using those funds to reward firms who sell lower CI fuels (whose carbon content is below the standard).   In theory, competition would force sellers to pass this value on to customers in the form of lower fuel prices, thereby increasing demand for lower CI fuels and the vehicles that can use them.

Gasoline is a high carbon fuel. Electricity is a low-carbon fuel, but only when it is used in vehicles.   Firms that sell gasoline pay a surcharge for LCFS compliance. Firms that sell electricity earn credits, when the juice goes to transportation. This is where the trouble starts.   For most EV owners who charge at home, no one actually knows how much electricity goes to transportation. Most homes have just one electric meter, and it is costly to put in a separate service dedicated to vehicle charging.

evcart1a

This Benier cartoon appeared in the Sydney Daily Mirror in October, 1977

Despite this lack of information, LCFS credits are being awarded every year to electricity distribution companies. PG&E just held an auction to sell off 65,000 of them. How does the State know how many credits PG&E should get? It appears that it assumes that the juice used by the handful of vehicles that do have their own meter is the same, on average, as that used by each of the other EVs.   If you take the average daily charging of the metered vehicles, and multiply that by the number of vehicles in a distribution company region, then you get the amount of electricity that is assumed to be distributed for the purposes of home EV charging.

All sorts of potential problems can result. The metered vehicles are not a random sample. EV owners who do the most home charging have the most incentive to pony up for faster charging units and dedicated meters. And utilities may have an incentive to put the heavy charging vehicles on meters and keep the lighter ones off them. What if the metered vehicles are all long-range Teslas and the non-metered ones are all less-used Leafs? Or what if the metered vehicles do all their charging at home, and others utilize remote charging far more often?   This system could also subtly disadvantage commercial EV charging operations, whose output is fully measured and (I would hope) isn’t going into DVRs.

Now, a reader may be tempted to say that EVs are still a small share of the transportation market, and a small fudge of the accounting can’t matter that much in the big scheme of things.  Even if this overstates the value of EVs, this can help accelerate their adoption.  If those arguments sound familiar, it’s because they were (and continue to be) made in defense of net-metering of residential solar systems.  Those small fudges have grown to the point that we now talk about the uncertain financial future of distribution utilities.

How much money are we talking about?  A Leaf, driven 12,ooo miles, uses about 3600 KWh per year, a Tesla probably about 4500 KWh per year.  At a $100 LCFS price, the subsidy amounts to 8 cents/KWh.  This, by the way, is about the marginal cost of electricity in California.   If California reaches its goal of 1.5 Million EVs by 2025, that could mean upwards of $500 million in LCFS credits going to EV “fuel” that is poorly measured and possibly manipulable.   Maybe EV credits for distribution utilities constitute a regulatory  “make-up call” for net metering.

The only way to really know how much juice is going into the vehicles would be to either require separate meters in every home with an EV, or (my preference) have each EV submit to an onboard computer meter-read once a year.  One could get an odometer reading off every vehicle, but not all miles travelled use the same amount of juice.  The differences can be large.  However, even if we can establish a system that accurately measures the juice going into a car, that may not guarantee that this would measure the juice going to driving.  If there is enough of a rate difference, folks could get very creative with the home appliances they run through their car.

What this discussion illustrates are two of the shortcomings of the LCFS.  First it applies only to one sector (transportation) and only the fuels content of that sector.  Second, it subsidizes the consumption of carbon-creating energy, if that energy is used in transportation.  Electricity used for plasma televisions is bad, creates carbon, and is discouraged by CA policy.  The same electricity used for driving a quarter mile up the block for milk, with the AC blasting and the windows open is good, and rewarded by CA policy.

These inconsistencies may be tolerable at small scales, but as the transportation system integrates with the electricity and natural gas systems, regulating the same energy in different ways depending upon its usage will be untenable.  If only there were policies that could reward and penalize fuel sources consistently, no matter what their use was…..

[Thanks to Nick Bowden from the TTP program at UC Davis for collecting a lot of the policy details in this post, any errors are my own.]

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Top 10 Most Read Blog Posts of All Time

This has been a record-breaking year for the Energy Institute at Haas Blog as readership has continued to grow. We’re proud that so many of you have come back week after week.

We publish fresh, timely content to start each week, but in many cases the content stays relevant for years. This year a New York Times column by Eduardo Porter referenced a 2013 post by Catherine and pushed it to #1 in our rankings.

We’re looking forward to engaging with you even more in 2017. Many nations are committing to tackle climate change like never before. Meanwhile, we face unprecedented uncertainty and potential reversals in US energy and climate policy. Thoughtful, independent economic research and analysis will be more important than ever. Through the Energy Institute at Haas Blog we strive to bring that kind of insight directly to practitioners and researchers like you.

Please keep spreading the word through social media and old-fashioned in-person discussions. New followers can sign up to receive the blog through our home page. Thanks to all of you for helping to make this blog a success.

And now, here’s the countdown of all-time top 10 Energy Institute blog posts.

#10 “Real” Electricity Still Comes from the Grid
Home solar users in Kenya have not leapfrogged the grid.
by Catherine Wolfram
January 19, 2016

 

6222453924_7492197980_b#9 It Just Doesn’t Add Up
Why not building Keystone XL will likely leave a billion barrels worth of bitumen in the ground.
by Maximilian Auffhammer
March 24, 2014

 

Three converted Prius Plug-In Hybrids charging at San Francisco City Hall#8 The Economics of EV Charging Stations
We need more charging stations and electricity that is not free.
by Maximilian Auffhammer
March 16, 2015

 

19360685906_178744fce3_b#7 The Politics of Renewable Energy
Where facts are arguments and arguments are facts.
by James Bushnell
January 26, 2014

 

duck_curve#6 The Duck has Landed
Renewables integration strengthens the case for regional coordination.
by Meredith Fowlie
May 2, 2016

 

 

Solar_panels_on_house_roof_winter_view#5 Rationalizing California’s Residential Electricity Rates
It’s time to ditch bad pricing policy from the California electricity crisis.
by Severin Borenstein
September 29, 2014

 

china#4 Air Conditioning and Global Energy Demand
Rising global incomes will drive increased adoption of air conditioning and electricity consumption.
by Lucas Davis
April 27, 2015

 

SmartMeter2#3 What’s So Great about Fixed Charges?
All fixed costs don’t justify fixed charges.
By Severin Borenstein
November 3, 2014

 

TopazSolarFarm#2 Is the Future of Electricity Generation Really Distributed?
Incentives that are tied to real benefits will let us find out.
By Severin Borenstein
May 4, 2015

9266173540_8e4a302539_b

 

#1 What’s the Point of an Electricity Storage Mandate?
Why look to electricity storage before giving incentives for load shifting?
By Catherine Wolfram
July 29, 2013

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Policy Uncertainty Discourages Innovation and Hurts the Environment

Large-scale changes are anticipated for U.S. environmental policies heading into 2017. The new administration has promised a “comprehensive review of all federal regulations,” which include policies aimed at carbon dioxide emissions from power plants, fuel economy standards, oil and gas production, and tax credits for solar panels, wind turbines and electric cars.

Exactly what form these changes will take is unknown. Some believe that most of these policies will be dismantled, while others argue that most of the policies will remain in place. But this is all speculation.


Oklahoma Attorney General Scott Pruitt has been nominated to be the next EPA administrator, a move widely perceived to indicate large changes ahead. gageskidmore/flickr, CC BY

What the discussion over what may or may not happen has missed, however, is that this uncertainty in itself is costly. Not knowing what the future holds, companies are less likely to invest in new technologies. To address today’s environmental problems, we need breakthrough technologies that can be widely adopted and exported to the rest of the world. Economists have shown, using both theory and data, that policy uncertainty makes this type of innovation less likely to happen.

Automakers’ Dilemma

Perhaps in no other sector is there as much uncertainty as automobiles. U.S. fuel economy standards have been around since the 1970s, but new rules introduced in 2012 mandate a steep climb toward 50+ miles per gallon (mpg) in 2025. There are real questions, however, about whether these rules will be relaxed and, if so, by how much.

The sheer complexity of U.S. fuel economy standards leaves policymakers with lots of options for policy changes. In a new working paper, fellow economist Chris Knittel and I review the complicated requirements imposed on automakers. Different-sized vehicles are treated differently, trucks are treated differently than cars, and alternative-fuel vehicles receive special credits and exemptions. Any or all of these rules could change.


Innovation companies, including Tesla Motors, were founded during a time when federal policy placed a clear emphasis on fuel efficiency. Will that continue?  Wikipedia, CC BY

This uncertainty puts automakers in a difficult position. Do you assume that standards will remain in place, and invest in producing high-mpg vehicles? Do you assume standards will be relaxed, and move toward lower-mpg vehicles? Or do you lie back and make little new investment, waiting to see what will happen?

Irreversible Investments and ‘Option Value’

Economists have long written about exactly this type of decision-making under uncertainty. There is broad evidence, based on both theoretical models and empirical evidence, that companies invest less when they face uncertainty. Using data from the United States and 11 other countries, a new paper by economists Scott Baker, Nick Bloom and Steven Davis, for example, shows a robust negative impact of uncertainty on investment. Companies in the health care and financial sectors are particularly affected by uncertainty, and cut not only investment but also production and employment.


Economist Steven Davis, founder of the Economic Policy Uncertainty Index, presenting his work on the effect of uncertainty on investment earlier this month. Bosse Johansson, Author provided

Why? The idea is simple. When there is uncertainty, there is “option value” to delaying irreversible investments. In other words, it is often better to wait and see what happens, rather than to make a costly mistake. R&D investments are particularly affected by uncertainty, because the return on these investments is sensitive to what happens with policy.

This literature has clear implications for current U.S. environmental policy. By any measure, there is today an unusually large amount of policy uncertainty, which creates an incentive for companies to delay investments. Why invest today in a new alternative fuel vehicle if fuel economy standards are uncertain? Why invest today in a new technology for producing solar panels, if federal support for renewable energy is in flux?

The Aluminum F-150

Will Ford regret investing in the new aluminum F-150, for example?

Ford just spent US$1 billion over six years to develop a new F-150 truck, with a lighter aluminum-based body and smaller, more fuel-efficient engine. The new truck was built to meet the new fuel economy standards. But if the standards are substantially weakened, Ford could be stuck with a $1 billion mistake.


Ford has invested about $1 billion in making an aluminum truck to improve fuel efficiency based on the assumption that regulations will remain in place. Sarah Larson, CC BY

Investments like Ford’s new F-150 are particularly sensitive to uncertainty because of the long time horizon. It takes many years for an automaker to develop a new vehicle model, so companies must be particularly careful when pulling the trigger. Today’s policy uncertainty makes it less likely that other companies will follow Ford’s footsteps with large investments in innovative new technologies.

Breakthrough Technologies

Perhaps most at risk from policy uncertainty are breakthrough technologies. In energy, in particular, companies often need a long time and lot of money to develop their technologies before coming to market – the so-called valley of death – and uncertainty over government policies can be the difference between success and failure.


Trump’s administration and Congress plan to roll back environmental regulations with the goal of improving corporate profits but the questions around the changes – which regulations will be rescinded and how, for instance – will depress investment in clean energy innovations. Tony Webster/flickr, CC BY-SA

Imagine trying to convince a venture capital firm to invest in your clean-tech start-up given today’s uncertainty. Sure, you can point to state-level policies in California and elsewhere (although there is uncertainty here too), but the questions around federal policy looms large.

If you are concerned about climate change, like I am, then this delay in the pace of innovation is deeply troubling. With carbon dioxide concentrations continuing to climb, small incremental changes are not going to be enough to address global climate change. We need big, game-changing technologies that can be widely adopted and exported to the rest of the world. And, unfortunately, today’s uncertainty makes this type of innovation less likely to happen.

The Conversation

This blog post is available on The Conversation.

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