Our Newest Energy Consumer

We recently added a new member to our family. Since I have a tendency to look at the world through an energy lens, I’ve being wondering, what is the likely energy and climate change impact of our family expanding the global population by one? And more broadly, what is the current thinking about how global population trends will affect greenhouse gas emissions?

Within our household the impact is apparent. We’ve been running the heater more than usual to make sure the baby isn’t cold at night. We’re doing more laundry, thus using more natural gas and electricity. We’re also consuming more—diapers and baby toys. In other words, we’re directly and indirectly, through our consumption of goods and services, using more electricity, oil and gas. The little squirt is racking up a significant greenhouse gas deficit already!

Now let’s assume our child is going to be an average American. How much greenhouse gas emissions does the average American account for? Yikes! According to World Bank statistics, carbon dioxide emissions per capita in the US were 17.0 metric tons per capita in 2011. That’s over 3 times the world average!

World Bank Group. 2016. Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0669-8. License: Creative Commons Attribution CC BY 3.0 IGO

World Bank Group. 2016. Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0669-8. License: Creative Commons Attribution CC BY 3.0 IGO

Ah, but our daughter is not an average American, she’s a Californian. According to the US Energy Information Administration’s (EIA’s) latest state-level analysis California per capita greenhouse gas emissions are 45% below the national average. If she had been born in Texas, where I grew up, the statistics would suggest her contribution would have been 45% above the national average.

Is it appropriate to look to averages like these to determine the environmental impact of expanding the population?

Dr. Paul Ehrlich thought so in the late 1960s, when his book The Population Bomb popularized the idea that population growth will cause widespread environmental damage. His analysis proposed multiplying the population by the per capita environmental impact to predict the total negative environmental damages.

The Population Bomb

If you take this analysis at face value, policymakers wanting to address climate change should not only promote policies that reduce the amount of greenhouse gas generated by energy, but also push policies that reduce population and economic activity. That sort of narrow logic, however, ignores all the other ways in which growing populations and economies improve human welfare, and has, fortunately, fallen out of favor. (For an excellent history of the debate between Paul Ehrlich and his critics check out Paul Sabin’s 2014 book The Bet.)

In the early 1990’s, an update of this analysis by Dr. John P. Holdren, President Obama’s current Director of the White House Office of Science and Technology Policy, used a similar, simple model to conclude that, globally, population growth from 1850 to 1990 was responsible for 52% of energy growth, with the remainder being attributed to a growth in per capita energy use.

More recently several studies (for example, here and here) have taken a fresh look at relationships between greenhouse gas emissions and population. The papers try to model relationships between population growth, economic growth, aging, urbanization and other demographic factors.

As far as I can tell, unraveling what’s causing what among all these factors is extremely difficult. In some cases these papers imply causal relationships, but I’m skeptical that we really understand these interactions yet. I hope to see more vigorous research in this subject area because I believe that policymakers addressing climate change should try to understand demographic trends.

Two types of trends deserve special attention. First, policymakers should consider overall projections of population growth by region to help set energy priorities. Second, policymakers should look beyond the headline numbers and consider how the age profiles of populations are changing in different ways in different regions.

First, the overall projections. The United Nations Population Division develops a set of widely used population projections. A supplemental probabilistic analysis published in Science projects that global population will grow from 7.2 billion people in 2014 to between 9 billion and 13 billion in 2100, with a 95% probability.

The difference in projections between continents is especially remarkable. Asia, the most populous continent, could see a peaking population mid-century, but Africa is projected to triple or even quintuple in population. So, while today’s emissions per capita in Africa are lower than anywhere else in the world, the aggregate emissions from Africa could grow dramatically over the century, even more so if per capita emissions converge with higher income countries.

SOURCE: Gerland et al. (2014), "World population stabilization unlikely this century," Science 346(6206):234-237.

SOURCE: Gerland et al. (2014), “World population stabilization unlikely this century,” Science 346(6206):234-237.

One takeaway is that policies and technologies that are effective in Africa will have a tremendous impact over the course of the century. Catherine, for one, is exploring important issues related to energy use in Africa (here, here and here). Also, as Lucas explored last week, getting energy prices right is important, especially before countries’ get too far down the path of investing in inefficient automobiles and other capital stock.

Second, policymakers should consider how the characteristics of the global population are changing, and how these characteristics vary between countries. The World Bank tackled these trends in its latest Global Monitoring Report. The report describes how children have represented a shrinking share of the population since the late 1960s and working age adults’ share of the population peaked in 2012. Adults aged 65+, on the other hand, represent a growing share.

However, Africa diverges from the overall trend. Children and working age adults still represent a growing share of the population. Africa may eventually converge towards global aging trends, but it isn’t there yet.

In higher income countries with aging populations policymakers will need to pay more attention to 65+ energy consumers, and how they may differ from the average consumer. For example, income-tested subsidy programs that disregard overall wealth capture disproportionate numbers of older adults. Some of these programs encourage inefficient use of energy by setting lower prices for energy rather than transfers to pay for a certain basic level of energy use. Programs aimed at the poor should be better targeted to those they’re intended to help and also consider any negative impacts on the environment. Improving the energy efficiency of low-income senior housing programs could also be an important use of resources long term.

Also, energy use within sectors like healthcare could become more significant and is ripe for technological innovation that focuses on energy conservation. Policy and technology should turn attention to these kinds of problems and opportunities.

On the flip side, in lower income countries, especially those in Africa, policymakers should keep in mind that populations are younger and will remain that way for quite some time. Prioritizing access to the latest energy innovations for young people there will have long lasting effects. For example, energy efficiency within rapidly expanding mobile phone networks will be important.

Of course our new daughter will be hearing a lot about the importance of being a thoughtful energy user. We’ll also have to get her some carbon offsets for her first birthday to make her feel better.

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Getting Energy Prices Right

Last month Meredith wrote about coal being too cheap and Max wrote about gasoline being too cheap. But what is the right price for energy?

Nobody in recent years has done more to try to answer this question than Ian Parry, a University of Chicago trained economist now at the International Monetary Fund.  Over the last 20 years Parry has written dozens of articles on this topic, including influential work on gasoline taxes, pollution externalities, traffic congestion, and the double dividend.

ianparry

In his latest work, Parry has turned his attention in an ambitious new direction.  Together with a team of IMF researchers, Parry set out to quantify energy externalities for 156 countries.  The result is the aptly-named study, “Getting Energy Prices Right”.  The summary can be accessed for free here, or the entire report can be purchased for $28 here.  Following best practices for open science the team has also made all of the data from the project publicly-available here including all of the information on power plant locations, mortality rates, emissions factors and transport data.

These figures begin to give a sense of the scale of the project.  You want to know local pollution damages from coal in Bangladesh?  They have it. Traffic congestion damages from gasoline in Morocco?  Sure.  Vehicle accident externalities from diesel consumption in Sri Lanka?  Yep.  Previous studies had measured marginal damages for particular energy types and for particular individual countries, but this new work provides comprehensive estimates for the entire planet.

CoalCostsGasolineCosts

The results are fascinating.  Coal is indeed too cheap.  The bars in each figure indicate marginal external damages by externality type. Local pollutant damages from coal vary widely across countries because of differences in population exposure and other factors, but external costs exceed current tax levels everywhere.  Local pollutant impacts are also large enough so that, for most countries, carbon pricing would be welfare improving even if you ignore benefits that accrue to other countries. Meredith blogged about Parry’s related paper on these co-benefits here.

Gasoline and diesel also tend to be too cheap, but the story is more complicated.  Whereas coal and natural gas taxes are low around the world, many countries do have substantial fuels taxes. In fact, according to Parry’s estimates, Germany and the United Kingdom, for example, have taxes that exceed the marginal external damages from gasoline consumption. The United States has a much lower gasoline tax, well-below external damages. This is true even here in California, with our higher-than-average state gasoline tax.

But even more interesting are the countries like Egypt, Indonesia, and Nigeria that have gasoline subsidies rather than taxes. Despite increasing calls for reform, there are about two dozen countries that continue to provide subsidies for gasoline and diesel. In a new Energy Institute working paper available here, I use Parry’s estimates to quantify the external costs of global fuel subsidies. Cheap gasoline leads people to drive more, causing increased vehicle emissions as well as traffic congestion and accidents. Based on conservative assumptions about price elasticities, I find that global fuel subsidies cause $44 billion in external costs annually. This includes $8 billion from carbon dioxide emissions, $7 billion from local pollutants, $12 billion from traffic congestion, and $17 billion from accidents. To put this in some perspective, this $44 billion is about 1/3 the total size of the fuels market in countries that subsidize gasoline and diesel ($128 billion annually).

EX_Top_Ten

This figure shows annual external costs for the top ten countries. The list is dominated by OPEC members, mostly in the Middle East and Northern Africa. Cheap energy has long been a permanent fixture in many of these countries and is often viewed as part of sharing the resource wealth. This approach to redistributing resources is expensive, however. I find that it costs more than $1 in inefficiencies for each $1 that is transferred to consumers. This is very expensive, particularly when alternative approaches exist that could achieve the same distributional goals at much lower cost. Residents of Alaska, for example, receive an annual divided ($2,000 in 2015) derived from oil and gas revenues.

Also interesting is the large degree to which these external costs are driven by traffic congestion and accidents.These externalities are rarely mentioned in policy discussions about fuel subsidies but are quantitatively very important. Riyadh, Caracas, Tehran, and even Kuwait City, are well-known for severe traffic jams, so drivers are imposing a significant negative externality on other drivers in the form of reduced driving speeds. Moreover, a growing literature including Max’s work (here) shows that accident-related externalities are a major component of the external costs from driving.

caracas

Caracas

kuwait

Kuwait City

I’m a big believer in the idea that some number is better than no number. Quantifying the external costs from energy for 156 countries is an incredibly ambitious task that is impossible to get exactly right. Can the IMF numbers be refined and improved? Absolutely. But in striving to assign actual numbers to these externalities, Ian Parry and co-authors have taken a significant step forward. If policymakers are going to make informed decisions they need to be able to weigh the full social benefits and costs of different alternatives.

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No More Berning of Fossil Fuels

I am currently sitting in my yard enjoying the post El Nino 75 degree weather, while typing away on my locally made (…well invented at least) MacBook which was charged from the highly subsidized solar panels on my roof. I am still reeling from the large number of Oscar worthy performances during the recent presidential debates. For the energy sector a lot is at stake with this next election.

Of the GOP front runners, only Marco Rubio has an energy or climate plan on his website. A few choice nuggets are doing away with “Obama’s carbon mandates” (whatever that means), approving Keystone XL immediately, rewriting the offshore drilling plan and creating a National Regulatory Budget to Limit the Power of Unelected Regulators. There is no plan to address climate change, because that’s not a problem in the Rubio world. I can hear my great grandchildren crying into their organic pillows across the space time continuum. I don’t even want to speculate about Trump’s energy plan. Well, maybe he will put gold plated windmills made in U.S.A. on his wall to Mexico.

On the other side of the aisle, the two front runners have spelled out their energy and climate plans pretty well on their respective sites. Hillary Clinton’s plans are an aggressive acceleration of the agenda set during the Obama administration, and it focuses (perhaps wisely) on executive actions that are feasible without new acts of Congress. The two main goals listed are:

  • The United States will have more than 500,000,000 solar panels installed by the end of 2020.
  • The United States will produce enough renewable energy to power every home in America by 2026.

Goal one is ambitious and smartly stated in units that the voter can visualize (what is a MW anyway?). This is equivalent to putting solar panels on 25 million homes or a seven-fold increase of current levels. I assume that a significant share of these panels will not be on residential roofs but in PV plants, but this is not spelled out.

Goal two is broader than goal one, since it pulls in the other sources of renewable energy (wind, hydro, etc.). Promising to power “every home” implies covering residential consumption, which accounts for about a third of energy consumption. This would require a doubling of renewable energy sources over a decade. I’m mildly skeptical (professional hazard), but intrigued. The “how we get there” section lists a 60 billion dollar “Clean Energy Challenge.” The plan involves cutting red tape to get panels onto roofs faster, transmission infrastructure investments, a Solar X-Prize and …..drum roll…. tax incentives. I don’t want to be Debbie Downer here, but achieving this goal in four years is going to take net metering on steroids across large swaths of the country and tax credits that are significantly higher than the 30% you get now. If you spent all 60 billion dollars on subsidies (which I don’t believe is the plan) this would amount to roughly $3000 per new solar household. While that sounds like a lot, it is not. For a $21k install, you already currently get $7k in federal tax credits.

While there is no explicit mention of market based mechanisms to fight climate change, Hillary’s plan pushes for a continuation of the Clean Power Plan as proposed, which has some market mechanisms built in. Further, a carbon tax or national cap and trade is beyond the power of the executive and lacking a tidal change in Congress, is simply politically not feasible. There is also talk of more energy efficiency, reforming leasing of public lands, ending subsidies for oil and gas and cutting methane emissions.

Bernie Sanders’ agenda is significantly more aggressive. The stated goals make this liberal heart sing. Accelerating a just transition away from fossil fuels, investment in clean energy, revolutionizing the electric and transportation infrastructure, and taking a leadership position in the international fight against climate change. How to get there? Bernie plans to charge a revenue neutral carbon tax, repeal fossil fuel subsidies and invest massively in energy efficiency and clean energy. A candidate arguing for a REVENUE NEUTRAL CARBON TAX? Sign me up! And then I read on.

“Create a Clean-Energy Workforce of 10 million good-paying jobs by creating a 100% clean energy system. Transitioning toward a completely nuclear-free clean energy system for electricity, heating, and transportation is not only possible and affordable it will create millions of good jobs, clean up our air and water, and decrease our dependence on foreign oil.”

This sounds good. Real good. Much like free Krispy Kreme donuts that don’t make you fat good. Then there is a link where for each state you can see what this 100% clean energy system for your state will look like. I clicked on California. The future mix looks like this:

transWWS

This is 35% from Wind, ~55% from Solar and the remainder from a mix of sources. No nuclear, no gas, no coal. All clean. This plan will generate 315,982 forty-year jobs in construction, and 142,153 permanent operating jobs. Also, the private costs of this system are projected to be 9.7 cents per kwh, which is one cent lower than projected costs of the fossil energy. This plan will avoid 127.9 billion dollars in health damages. And the final conclusion is that because of customer-side solar and improving energy efficiency, total demand will go down by 44%. This is not fat free donuts. In my humble opinion achieving this goal is about as likely as me starting to work out today and looking like Ryan Gosling next week.

Why? California’s population is projected to grow by 28% by 2050. So in order to decrease demand by 44% over today, you will have to do that and add 11 million carbon free individuals. California is famous for its aggressive energy efficiency policies. They have contributed to keeping our per capita consumption relatively constant. But a decrease in demand of this magnitude is beyond what even the most optimistic energy efficiency advocates would consider reasonable.

I don’t even want to get started on these job creation figures. Severin has written about this. I realize that you have to promise jobs to get elected in some places, but these wildly exaggerated claims are simply not honest. And neither are the claims about the costs of renewables.

We need to craft an ambitious path forward towards this brave new energy system that will address climate change and local pollution externalities. Germany is trying the path of nuclear free renewables and it is turning out to be an expensive and not necessarily “coal reducing” one. Let’s study this case closely and learn from it. I realize that in order to get elected one has to make promises one can’t keep. But this economist dislikes it when as an adult he is promised Santa, when we know that Santa does not exist.

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The Risks of Going Solar

rolling_dice-Article-201504021454If you’re thinking of putting solar panels on your roof to save money on your electricity bills, you should recognize that there is risk involved. In some ways, this is no different from any other long-lived investment. For example, if you pay extra for a hybrid or plug-in car, you run the risk that gas prices fall after you buy the car and your investment doesn’t pay off.

What’s different with distributed solar is that much of risk is in the hands of a regulator. That changes the nature of the uncertainty. With most financial risks, there’s a big chance that the underlying prices will go up or down by say 5% but a much smaller chance that they’ll change by over 50%. Also, we have years of experience tracking things like gas prices, so we think we have some understanding of their likely future variations.Monthly Dow Returns

Regulators around the world are making decisions that either highlight the solar risk or attempt to mitigate it. We’ll get to a couple examples below, but first, let’s go through the basic components of an investment calculation for a potential solar customer.

If you don’t have solar, you pay your local utility for electricity. In most parts of the world, you pay a monthly fixed charge and then a price for each kilowatt-hour you buy. In some cases, the price you pay per kilowatt-hour increases with the amount you consume over the month with what’s known as increasing-block pricing.

If you’re contemplating solar, the crucial question to ask is how the kilowatt-hours produced by your solar panels will be treated. The two prominent options are “net metering” and “buy-all, sell-all.”

Under net metering, the solar production is netted off your electricity consumption and you pay your utility for the balance. For example, if you usually consume 1,000 kWh of electricity per month and then install solar panels that generate 600 kWh per month, your net electricity consumptions goes down to 400 kWh. Most states in the U.S. have net metering.

You should also estimate what your new monthly utility bills will be. Given that utility rates are very rarely as simple as a single price per kWh, a 60% reduction in net consumption, as in our example above, could lower your bill by more or less than 60%. For example, if the fixed monthly charge is large, the percentage bill reduction could be considerably smaller, but if you have increasing-block pricing the saving could exceed 60%. Also, if you will ever be selling electricity back to the grid, you’ll want to know how the utility will reimburse those sales.

Will these always be a good deal?

Will these always be a good deal?

Finally, if your solar will be net metered, you should determine over what time period the netting takes place. While most states net on a monthly or even annual basis, smart meters allow utilities to track electricity consumption at the hourly or even sub-hourly level. My read of the recent Nevada Public Utilities Commission decision suggests that they are moving to netting out solar consumption hour-by-hour (see point 126 on p. 66 of the Nevada order while NV Energy’s tariff suggests that it could even be every 15-minutes).

With hour-by-hour netting, you’re more likely to be selling to the utility in some hours and buying in other hours, whereas with monthly netting, you’re more likely to always be buying, which effectively credits the solar production at the retail rate. (Solar providers typically size the solar systems so that customers are at least buying a little electricity from the grid over a month.)

Under a buy-all, sell-all system, customers with solar panels continue to pay the utility for 100% of their consumption, and simultaneously sell 100% of the solar output back to the utility. This is also sometimes referred to as a “value of solar” tariff, as the ideal is for the regulator to determine the true value of the solar to the electric system and set the solar purchase price equal to that value.

Once you’ve calculated how much less (or more) you’ll be paying for electricity over the life of your panels, the key thing to recognize is that there could be regulatory decisions in the future that change the answer. And, regulators tend not to dabble in small 5% changes, so the changes can be dramatic.

Here are some recent regulatory decisions that either highlight that risk, or have attempted to mitigate it.

Nevada (high risk). Two months ago, Nevada regulators issued a decision that left many existing solar customers holding bad investments. Nevada is a net-metering state. The regulators didn’t eliminate net metering, but they implemented three changes that

Chairman of the Public Utilities Commission of Nevada, a regulator

Chairman of the Public Utilities Commission of Nevada, a regulator

made existing solar owners considerably worse off: (1) they increased the monthly fixed charge that solar customers will pay from $12.75 per month to almost $40, though the increase will be phased in over time, (2) they changed the netting to hourly rather than monthly, and (3) they instituted a low rate for sales to the grid. If the decision sticks, Greentech Media calculated that customers who signed 10-year contracts in 2015 would be losing money relative to not going solar beginning in 2017.

Minnesota (low risk). Minnesota decided in 2014 to allow its utilities to adopt a value of solar tariff, but so far none of them has. If they do, they must recalculate the value of solar every year, but individual customers are guaranteed the rate that they started with for at least 20 years. Also, solar customers are still paying for 100% of their consumption, so they will experience any changes to rates exactly the same whether or not they have solar.

With a locked in payment for your solar, you run the risk that you buy solar at the wrong time (e.g., right before the value of solar goes up) but other than this timing risk, solar customers are pretty insulated from future regulatory changes. Note that low risk is different from high return. The benefits to going solar in Minnesota are a function of the yet-to-be-determined value of solar.

California (medium risk). California recently issued a decision affirming that solar customers would continue to be net metered through 2019. Also, California grandfathers existing solar customers to the net-metering rates for 20 years, meaning they are effectively paid the full retail rate for 20 years, whatever the retail rate happens to be.

But, customers are still exposed to changes in the rates, which are very much in flux. This can impact both what solar customers are paying to their utility and what they would have paid without solar.

As Severin has explained, California’s investor-owned utilities have steeply increasing block rates, but those are scheduled to flatten over time. For example, PG&E’s rate for consumption in the top tier in the beginning of 2015 was 33.3 cents/kWh, but it’s scheduled to come down to 23 cents/kWh by 2019. So, if you calculated what you would save with solar based on the early 2015 rate, your solar investment will be worth considerably less than you thought. Also, California has committed to moving to time-of-use pricing as the default in 2019, with yet-to-be-determined peak periods.

Spain (high risk). Solar customers in much of Europe are in a buy-all, sell-all model. Consumers continue to pay for 100% of their consumption and the utility installs a second meter to measure the solar production and compensates it with a “feed-in-tariff” (FIT) rate. My read is that Spanish regulatory changes in 2013 (a) made consumers pay for hourly meters and (b) started CHARGING them for every kWh generated onsite.AdvancedMath

In an attempt to help customers recognize the inherent risk, Arizona now requires solar customers to sign a form acknowledging that, “the Commission may alter its rules and regulations and/or change rates in the future. If this occurs, your PV system is subject to those changes and you will be responsible for paying any future increases to electricity rates.”

Regulatory decisions like these are becoming more and more common. They are also arcane, long and dense, as regulators operate through adjudicatory processes and need to address stakeholder comments. So, expect change if you’re contemplating going solar, and get ready to access your inner lawyer to wade through the changes.

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Coal is too Cheap

 

Two weeks ago on this blog, Max drew our attention to the fact that gas is too darn cheap. To underscore this point, he noted that  the average American is purchasing gasoline at half of its true social cost. Well, by that measure, coal is even cheaper!  The average coal plant is paying around a quarter of the estimated social cost of coal (more on this below).

coalcars

Coal delivery (source)

The economist’s prescription for this coal-is-too-cheap problem is simple and elegant: raise coal prices to reflect the true cost of extracting and burning coal. But it’s proving extremely difficult to fill this prescription in practice.  Last week’s SCOTUS decision reminds us just how hard it’s going to be to implement domestic policies that significantly reduce coal consumption.

First, some good news

Last year, the U.S. passed a milestone. As of July 2015, domestic electricity generators have been burning more natural gas than coal. This is kind of a big deal, given that coal has been the leading source of electricity generation in the US for as long as anyone can remember.

fuels

EIA Data released earlier this month show coal’s share of annual electricity generation in 2015 hit  record lows (this is jumping the gun a bit, official December numbers not released yet. 2015 estimated using December 2014 as a proxy for December 2015).

Tweets from Donald Trump might lead you to believe that the decline of domestic coal is the result of Obama’s personal  “war on coal”.  Economists looking closely at the historic decline in coal-fired electricity generation paint a different picture.

In a recent working paper, Harrison Fell and Dan Kaffine argue that the two most important drivers have been the dramatic decrease in natural gas prices (largely due to the supply shock that is the shale gas boom) and the policy-induced increase in renewable energy supply. These two factors working together have pushed coal plants closer to the margin- and to some extent out of the market entirely.

Joseph Cullen and Erin Mansur look at how the drop in natural gas prices – and the associated increase in the coal price:gas price ratio-  has affected CO2 emissions in the power sector. The graph below maps out the historical relationship they estimate between power sector emissions and natural gas prices, holding other factors (such as renewable energy capacity and coal prices) constant.

cullen

The graph shows that a decrease in the natural gas spot price from $12/mmbtu to $2/mmbtu, roughly what we saw over the period 2008-present, is associated with more than a  ten percent drop in domestic power sector CO2 emissions.

Coal consumption has dropped – but not far enough

While we’ve seen a significant increase in relative coal prices since 2008, actual coal prices have been – and continue to be-  astonishingly low.

The delivered coal price averaged $2.23/MMBtu in 2015. A study commissioned by the National Academy pegs damages unrelated to climate change at approximately $0.03/kWh (or more than $3.00 per mmbtu assuming average heat rates) . Using current Social Cost of Carbon estimates,  greenhouse gas related damages work out to about $3.60/mmbtu (this assumes $38/ metric ton and 210.2 lbs CO2/mmbtu) . Taking these numbers at face value, the market price for coal amounts to approximately a quarter of the social cost.

At this point, the economist has to re-enforce the point that an across-the-board, across-the-globe tax that properly internalizes the health and environmental damages caused by fossil fuels would constitute an efficient policy response to the coal-is-too-cheap problem.

But the pragmatist has to point out that the theoretically preferred approach seems far out of reach when you consider the current state of affairs (recall that the much celebrated climate agreement coming out of Paris features voluntary actions with no enforcement provisions). So we are left to find the best possible policy within a politically constrained set of options – or do nothing.

Coal is too cheap– What are we going to do about it?

The Clean Power Plan(CPP) sits at the core of the Obama administration’s efforts to do something in the sector that matters most– electricity.   Last week, the Supreme Court made a surprising and disheartening decision to put a stay on the implementation of the plan. Proponents of the rule – including Obama himself-  are determined to see the rule through to implementation. But at the very least, this is a frustrating bump on the road to a domestic climate change policy that would significantly  reduce coal-fired electricity generation in the US.

Given the uncertainty and upheaval surrounding the CPP,  now seems like a good time to consider other (possibly complimentary)  policy alternatives that are gaining momentum.

The U.S. government owns approximately one third of total domestic coal reserves.  For some time, there have been calls to modernize the outdated Federal coal program to ensure taxpayers get paid a fair market price. More recently, environmental economists and other stakeholders have argued that reforms should go further to account for the environmental costs of coal.

Last month, the Obama administration announced that it was suspending new coal leasing on federal lands until a thorough review of how to overhaul the program to better reflect environmental costs can be conducted .

On the face of it, imposing a tax that reflects the social cost of coal at the point of extraction has clear appeal.  Charging the full social cost would mean that federal coal will only be extracted if the coal will generate benefits in excess of these costs. Revenues could be used to fund investments in climate change mitigation and to help coal-dependent communities transition.

But there are complications. The big one, of course, is that the Federal Government controls a relatively small share of global coal reserves. A significant increase in the cost of federal coal would likely lead to substitution of other sources. If taxing federal coal simply shifts production to other coal mines outside the reach of the BLM,  leaving federal coal in the ground will have limited impact on coal consumption or associated emissions. This report provides a more detailed look at these (and other) challenges.

Eliminating inefficient federal coal program subsidies is a clear-cut no-brainer. Economic arguments for taxing the carbon in federal coal are more nuanced.  That said, a reform of the federal coal program that takes into account the substitution of un-taxed sources for taxed sources, in addition to other real-world complications (such as interactions between overlapping policies), would be a step in the right direction.  Policies that raise domestic coal prices would reduce coal-related emissions, and lay some foundations for the more comprehensive, across-the-board climate change policies that the economist in me still dreams of.

 

 

 

 

 

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Is “Community Choice” Electric Supply a Solution or a Problem?

Big news! If you live in California, Massachusetts, New York, Illinois, or a few other states you may soon have the opportunity to ditch your local investor-owned utility and buy your electricity from a competing retailer.  And in a few locations in those states, you recently got that option.

Wait. Is that really new? “Retail choice” for electricity has existed in Texas, Pennsylvania, and Connecticut and a number of other states (as well as England, Australia, New Zealand, and other countries) for more than a decade.

CCAs1What’s new is that increasingly it’s not private for-profit companies providing consumers retail alternatives to the utility, but local governments or coalitions of governments.  These entities, known as Community Choice Aggregators (CCAs), are usually set up with environmental and other social goals in mind, such as getting a larger share of power from renewable (and sometimes local) sources, or reducing or eliminating purchases from coal-fired generation or nuclear plants.

And that’s why some people refer to CCAs as “politically correct retail choice.” (One of Jim Bushnell‘s many insightful and humorous comments.)

But snarky labels aside, what do CCAs do? Are they a good idea? And what risks might they bring?

First, retail choice, whether with a for-profit firm or a CCA, does not mean you are ditching your local utility.  The utility still owns and manages the distribution lines that carry electricity to your house.  And in most cases the utility is still in charge of metering each customer’s usage and sending them a bill.  That’s because on each kilowatt-hour you use, you still have to pay the utility’s distribution charge and, in many cases, fees for transmission and for public interest programs like energy efficiency investment and assistance for low-income customers.

CCAs3Retail choice means that your CCA or for-profit retailer replaces the utility in contracting to purchase electricity on your behalf.  The hope is that competition will have the same effect in electricity procurement as in most other markets: better prices and a wider variety of products. Of course, we have learned that electricity is not always like other markets.

For example, the electricity itself is not differentiated once it is on the transmission grid. You are not getting electricity from any particular source. Once it is injected into the grid, it all gets “mixed together” and what you get is your helping from that soup (OK engineers, you can stop wincing now). Still, if your retail provider is out there on your behalf signing contracts to put more renewable electricity generation onto the grid, that is likely to help change the mix and make the soup greener.

For instance, if your utility has a goal of getting 20% of its electricity from renewable sources, and you want your consumption to be associated with 100% renewables purchases, then a retail choice provider that contracts 100% for renewables may be the solution. Interestingly, among the for-profit retail choice providers few tout high rates of renewable generation. But among CCAs, the vast majority do.

Yet, while offering much higher renewable shares than the IOUs, CCAs are also charging prices that are generally very close to those of the incumbent IOU they compete with, sometimes even a bit lower. How can they do that?

I’ve been at a number of public discussions of CCAs and watched as this question led to raised voices and red faces.

CCAs2 

Making the case for CCAs

CCA advocates generally rest their case on two arguments: renewables are cheaper than you think and utilities are less public spirited than they claim.

First, supporters argue that renewables are much less expensive than they used to be and can compete head-to-head with conventional generation.   There is no doubt that renewables costs have dropped drastically in the last decade.  With the very favorable federal tax credits and depreciation rules they receive, wind and grid-scale solar power may cost about the same as gas for a new plant built today.

Second, the CCA advocates argue that utilities have all the wrong incentives and don’t procure power cost-effectively. In particular, utilities like to build their own power plants so they can earn a rate of return on their investment.   And when they do buy power from merchant generators they get to pass those costs along, so they are not out there searching for the best possible deal.

There is clearly some truth to this argument. One need not look far to find examples of utilities that have not been as cost-conscious as they should, even with the oversight of regulators.  Of course, it is also not hard to find examples of local governments spending money unwisely.

But CCA advocates can point out that at least governments are supposed to be acting in the interest of consumers, while the fiduciary responsibility of an IOU is to its shareholders. Furthermore, advocates argue, CCAs don’t replace the monopoly utility retailer with a monopoly CCA retailer. Rather, the CCA has to compete with the utility.

 

But are CCAs really looking for a fair fight?

The incumbent utilities and other skeptics respond that the competitiveness of renewables-heavy CCAs is mostly smoke and mirrors.  They point first to the historical obligation of the utility to procure electricity every year, not just at a time when renewables costs happen to have dropped. In many cases, regulators required utilities to purchase renewables under long-term contracts that are much more expensive than current renewables prices.

This is clearly true, but it’s not a reason that CCAs shouldn’t be allowed to compete. It’s just a reason that customers leaving the utility for a CCA need to pay their fair share of the costs of past contracts. Most CCA advocates agree that some sort of “exit fee” is justified. The fight comes down to what a “fair share” is and how high that exit fee should be. A lot of accounting hocus-pocus can be introduced on both sides.

While the accounting can be complicated, the fundamental concept isn’t. A CCA should succeed or fail based on its ability going forward to procure power from the sources its customers prefer at a cost that is competitive.  Whatever regulatory mandates, managerial mistakes, or incompetence occurred in the past, customers switching to a CCA should not be allowed to shift their share of costs from past decisions onto other ratepayers.

If the exit fee is set too low, it’s easy for a CCA to offer “competitive” rates that are just a cost shift.  But it is also easy for the utility to squash efficient competition if it gets to charge the CCA’s customers an excessive exit fee.  Getting the exit fee right is central to making sure that retail choice provides fair and efficient competition.

CCAs4

Who Gets To Be the Default Provider?

Utilities also complain about a particular advantage that CCAs usually get, default status.  Most CCAs that have been established have been allowed to tell customers in the community that they are joining the CCA unless they explicitly opt out. That turns out to be a big advantage, because most customers pay little or no attention to the issue.  Utilities say that is unfair, and they are right. But the opposite is unfair as well.

In fact, from the deregulation of long-distance telephone service in the 1980s, to the introduction of electricity retail choice in the 1990s, to CCAs today, the choice of default provider has tilted the competitive landscape during the transition. No one has come up with a great solution that doesn’t unfairly advantage the incumbent monopolist or arbitrarily assign customers to a seller they have never dealt with before. CCAs argue that they are different, because they are affiliated with the local government that is supposed to be acting in the interests of residents.

 

Recreating Flawed Deregulation?

Nearly two decades of retail choice experience with for-profit companies has made clear a problem when customers have too much flexibility to jump back and forth between a utility and a competing retail provider. During California’s disastrous deregulation, when wholesale prices skyrocketed in 2000-2001, many retail providers folded and sent their customers back to the utility.

In that case, the utilities were obligated to take the customers back, but it was clear that customer option created an incentive for some retailers to bet on risky procurement strategies.  They (and their customers) knew that if the strategy failed the customers could just return to the utility rates.  But that meant the utility would then have to buy more power when it was especially costly, driving up the rates for all.

This problem has been solved in other deregulated electricity markets by making rules that customers who switch will not automatically be able to switch back to the utility’s standard rate.  In some markets, the “provider of last resort” utility just has to sell them power at a rate that reflects wholesale electricity prices, even if those prices are sky high.

Applying this scenario to utilities and CCAs, one could argue that without clear rules customers from either side might later want to switch opportunistically, creating the same sort of free riding problem we saw during the California crisis. There might, however, be one important difference of perception. Without clarity about switching rules, CCA customers seem more likely to expect they have a free option to switch back to the utility than the other way around.

CCAs5

Do These Contracts Make Me Look Green?

Finally, as I blogged about last month, merely buying unbundled Renewable Energy Certificates doesn’t necessarily mean that the electricity provider’s purchase is increasing the total amount of renewable energy on the grid, or decreasing greenhouse gases.

There are generally strict rules about what utilities, CCAs and any other retailer can count towards a Renewable Portfolio Standard, the minimum renewable share that many states mandate. But beyond a state’s RPS, there are often few restrictions on what a retailer can claim counts as providing renewable power.  So, regardless of the retailer, green energy claims deserve close scrutiny.

 

So Is Community Choice Aggregation a Problem or a Solution?

My own view is that carefully implemented CCAs may benefit a community without dumping costs onto other utility ratepayers.   Benefits are more likely if either (a) the community wants a much greener power mix than the utility will provide, and the community is sophisticated about the prices and greenness of the power it buys, or (b) the utility is doing a poor job of procuring electricity cost-effectively and the community can do better.   Of course, if either situation exists, why should retail electricity competition be limited to local governments?

Regulated investor-owned utilities are flawed organizations that operate under a distorted set of incentives. But local governments are also flawed organizations subject to their own set of distortions, a fact that is often less appreciated by the local government leaders who are promoting the CCA.  If your community is considering a CCA, you need to think about which organizational structure is most likely to have the sophistication and the incentives to serve you best.

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

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Gas is too cheap

Readers of this blog are likely aware that oil is really cheap right now. While in July 2008, the U.S. benchmark price peaked at just above $140 a barrel, its price dipped to below $27 in mid-January.

gasprices

The internet is on fire telling us that oil is now cheaper than the barrel (it actually doesn’t) come(s) in, the equivalent volume of Perrier sparkling water or Coca Cola. But there is a much more frightening comparison. The national average price for gasoline is $1.80 this week, with a minimum of $1.29 in Tulsa, Oklahoma. The external costs for a gallon of gasoline, as estimated in a now classic paper, are approximately $2 per gallon. This means that the average American is currently purchasing gasoline at half of its true social cost.

Now, higher oil price won’t fix the external costs of course and we have argued ad nauseum for a carbon tax on this blog to fix one of the market failures. Michael Anderson and I have a nice paper suggesting that one would need to charge a gas tax somewhere significantly north of $2 to make drivers internalize all of the external costs you spew on your fellow citizens faces while hurling your Dodge Hellcat down I-80 at rush hour.

But low gas prices have all kinds of negative effects for a society that does not properly tax gas. People drive more and hence cause more congestion. People purchase less fuel efficient cars, since they think gas prices will always stay where they are any given day, which is rational. (What is not, is that folks buy more convertibles on sunny days.) So we drive our bigger cars more on a road network that is falling apart. Bridges and highways are in terrible condition, as has been documented widely.

The smartest energy economist I know and Energy Institute colleague, Severin Borenstein, has suggested a perceived outrageous solution to this problem a while back. A price floor for gasoline. Stop the presses! A neoclassical economist suggests a price floor. My version of the idea goes like this. If the price of oil drops below a certain price, say $70 per barrel, gas prices get frozen at the average local historical price for $70 oil. Yes, we would keep gas prices artificially high. This would discourage consumers from driving more and maintain disincentives to purchase really fuel inefficient cars.

But what to do with the profits? Give it to refiners? Oil companies. No. The idea is for the regulator to capture this windfall and use it to put our highway system back together or improve public transportation systems. You are shaking your head. Well, the Chinese are not. In the first week of January, the National Development and Reform Commission (which is China’s economic planning agency) announced that price of Diesel and Gasoline would not be lowered as long as the price of oil is below $40.

This is a big deal. China had 279 million registered cars in 2015. In the US this number is 257.9 million. Due to regulatory controls, the market for gasoline is less complex in China than the fragmented US market. So how one would calculate the exact floor by region would be subject to lengthy regulatory processes. Still, the basic economics are right. While I agree that the tightened CAFE standards will improve fuel efficiency, they will not generate revenues that will prevent our then smaller and lighter cars from falling in to giant size potholes. Let’s get on it.

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New CAFE Standards: The Good, the Bad and the Ugly

New vehicles sold in the United States have long been subject to a set of fuel economy regulations known as the Corporate Average Fuel Economy (CAFE) standards. CAFE has been tightened several times during the program’s 40-year history, but no previous change was as significant as the new program rules which took effect starting in 2012. Four years into the new CAFE rules there has been surprisingly little discussion or analysis. This is about to change, however, as both proponents and critics of the policy begin gearing up for the US EPA’s required midterm review that will determine what form the program takes through 2025. The review formally kicks off in June 2016 when the EPA will release its Draft Technical Assessment Report for public comment.

assembly

Economists have long complained that fuel economy standards are an inefficient way to reduce gasoline consumption. In a University of Chicago survey, 93% of economists said they would prefer a gasoline tax over fuel economy standards. I know I would. That said, there are some interesting features of the new CAFE standards. From an economic perspective the design features of the new rules can be divided into three categories: (i) the good, (ii) the bad, and (iii) the ugly.

 

The Good

The new CAFE rules allow for trading. This is a good thing. As with any cap-and-trade program, the “cap” is a good start, but it is the “trade” that can substantially lower compliance costs.

How does it work? Each year, the standard is assessed for each manufacturer. If a manufacturer is above the minimum fuel-economy standard, then it has a surplus and receives credits. If instead a manufacturer is below the standard, then it has a deficit and must buy credits.

Under the new CAFE rules these credits can be traded across manufacturers. This trading improves efficiency by equalizing the marginal cost of improving fuel economy across manufacturers. Opportunities for improvements in fuel economy vary widely across manufacturers. For some manufacturers there is low-hanging fruit, e.g. they already have relative expertise in producing and marketing fuel-efficient vehicles, whereas for other manufacturers it can be much harder. Under trading, investments are made where there is the biggest bang-for-the-buck, achieving the targeted aggregate level of fuel economy at lowest total cost.

The new rules have particularly important implications for companies like Toyota and Honda who tend to already sell relatively fuel-efficient vehicles. Under the old CAFE rules, Toyota and Honda were usually well below the standard, so for them, it was as if the CAFE standards did not exist. There was no penalty, but also no incentive to make further improvements in fuel economy. (In fact, these manufacturers had an incentive to make larger vehicles to pull market share away from other manufacturers who were constrained by CAFE.) Fast-forward to the new CAFE rules. Now any improvement in fuel economy generates CAFE credits, and thus profit. All manufacturers now have an incentive to improve fuel economy, including those who are perennially well-above the standard.

Under the new rules manufacturers can also bank and borrow credits across years. This is good too. It means that manufacturers can smooth over year-to-year fluctuations in demand driven by macroeconomic shocks, changes in gasoline prices, and other factors. The banking and borrowing also provides stability for the permit market, helping to avoid permit price spikes and crashes, and mitigating concerns about market power in permit markets.

 

The Bad

Unfortunately, the new CAFE rules also introduce a feature which makes little sense from an economic perspective. As has always been the case with CAFE standards, automakers are required to meet a minimum sales-weighted average fuel economy for their vehicle fleets. Unlike in previous years, however, with the new rules this target now depends on the footprint of vehicles in the fleet.

footprint

How does it work?  Each vehicle sold has a different emissions target based on its footprint. Larger vehicles have larger targets.

curves.png

My Mini Cooper has a footprint of 39 square feet so in 2012 would have received an emissions target of 244 grams of carbon dioxide per mile. Actual emissions are 296 grams per mile, significantly above the emissions target. Even though my car is one of the smallest on the road weighing only 2,500 pounds and with a paltry 115 horsepower, it is less fuel-efficient than its footprint-based target. Thus if BMW wants to sell more Mini Coopers, it also needs to sell more of some other vehicle that is below its target and/or BMW needs to buy permits from some other manufacturer.

This a bit surprising isn’t it?  Mini Coopers can and probably should be made more fuel-efficient, but at the same time with a respectable 31 MPG (36 highway) most people don’t typically think of them as enemy #1 when it comes to climate change. Herein lies the main problem with footprint-based targets. For a given vehicle footprint, the standards encourage automakers to make their vehicles as fuel-efficient as possible. But the new standards create no incentive for consumers to switch to smaller vehicles. In fact, the footprint-based targets may actually incentivize manufacturers to increase the average footprint of their fleet. This may make sense from a political point-of-view because domestic manufacturers produce large numbers of SUVs and pickups, but it doesn’t make sense from the perspective of reducing GHGs. Jim Sallee and Koichiro Ito have a paper exploring the economic costs from this type of “attribute-based” regulation.

Another problem with the new CAFE rules is that they give preferential treatment to trucks. In one way or another, preferential treatment for trucks has long been a feature of CAFE (more here). The CAFE rules encourage manufacturers to sell more trucks and fewer cars, as well as to relabel vehicles as trucks. Remember the PT Cruiser? Back in the early 2000s, Chrysler was making big profits on its Dodge Ram pickups, and desperately wanted to sell more, but was running up against CAFE. Ingeniously, Chrysler responded by introducing the PT Cruiser which looked like a car but was built on a “truck” platform, thus raising Chrysler’s average MPG for trucks. This meant Chrysler could sell more low-MPG pickups. This distortion continues under the new CAFE rules because of the higher emissions targets for trucks.

ptcruiser 

The Ugly

Worst of all, CAFE continues to suffer from a couple of more fundamental problems which greatly reduce its effectiveness. These problems existed under the old CAFE standards and they continue to exist under the new CAFE rules. These are problems inherent in any policy aimed at trying to reduce GHGs through fuel economy standards for new vehicles.

First, fuel economy standards do not encourage people to drive less. To efficiently reduce gasoline consumption you need people to buy more fuel-efficient cars and to drive less. You have to have both working together. Second, CAFE only applies to new cars. Mark Jacobsen and Arthur van Benthem have shown that fuel economy standards cause old fuel-inefficient vehicles to stay on the road longer. Why scrap your 1996 Ford Bronco if there is nothing similar available in the new car market?  A gasoline tax gets all of these margins right – both vehicle purchase and driving decisions – and both new and used vehicles.

Economists have estimated that per gallon of gasoline saved, the old CAFE standards cost 3 to 6 times as much as a gasoline tax. See here and here. As we approach the midterm review there is going to be a flood of new research and it is going to be interesting to see comparable estimates for the new standards. With both good and bad changes in program design it is not clear yet whether, on net, CAFE has become more or less cost-effective. For sure, however, the program is going to continue to be a very expensive way to reduce gasoline consumption compared to increasing the gas tax.

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“Real” Electricity Still Comes from the Grid

A recent article in the New York Times describes how a solar home provider will, “help some of the 1.2 billion people in the world who don’t have electricity to leapfrog the coal-dependent grid straight to renewable energy sources.” Does that mean someone didn’t read my previous attempt to stamp out the phrase “leapfrogging” in the context of distributed solar energy for households in the developing world?!? Alas!

One of the reasons I object to the phrase leapfrogging is that, at least given current technologies, home solar systems do not provide anywhere close to the same level of service as electricity from the grid. By contrast, a mobile phone, the oft-cited analogy in the leapfrogging discussions, has at least one notable advantage over a landline – it’s mobile.

Preferred to the grid?

Preferred to the grid?

Together with my co-authors Ken Lee and Ted Miguel, I just released a working paper that provides direct evidence that home solar users have not leapfrogged the grid.

We surveyed over 2,500 rural households in Western Kenya, some of whom had grid connections, some of whom had home solar systems and some of whom were un-electrified. (I’m also not nuts about the term “un-electrified” in this context as it suggests that electrification is a binary outcome and a home solar system “electrifies” a household, but please bear with me.)

Households in the “home solar” category had either a solar lantern or a small solar home system. They had paid on average $55 for the solar lanterns and $235 for solar home systems – a lot of money to households whose average annual incomes are likely less than $1,000. Many of them probably have the M-KOPA system, as it’s the most popular in Kenya. It currently costs over $200 and provides an 8-watt panel, two LED bulbs, an LED flashlight, a rechargeable radio and mobile charging adapters.

Here’s what we found:

  1. People want high wattage appliances, such as irons. We asked households to list all of the electrical appliances they own. We then asked them to name the appliance that they would ideally purchase next (that they did not currently own). The chart below shows the most desired appliances among the three groups in our study: “grid connected”, “home solar” and “un-electrified”.Desired

For both the home solar and the un-electrified households, televisions and radios are the most coveted appliances. These do not have to be high wattage, although even a pretty efficient small television at 15 watts is asking too much from the typical 8-watt home solar system in Kenya. Irons, which are the third most desired appliance among home solar households and the fourth most desired appliance among un-electrified households, are very high wattage – typically 1,000 to 1,500 watts.

We also asked the households about their general standard of living, and the home solar users appear richer and better educated than un-electrified households. These higher living standards, however, do not translate into meaningful differences in appliance ownership.

  1. The set of appliances owned by home solar households is much more similar to un-electrified households than the households with grid connections. The set of appliances that home solar and un-electrified households most desire is exactly the same as the set of appliances most likely to be owned by households with grid connections – televisions, radios, mobile phones, and – you guessed it – irons. The grid accommodates high wattage appliances like irons because it has a large capacity and because not everyone uses an iron at the same time, so households can share the infrastructure. So, it looks like both home solar and un-electrified households aspire to the energy consumption of a grid-connected household.Owned
  1. Home solar owners still use almost as much kerosene as un-electrified households. We asked households how much kerosene they had purchased in the past month. Kerosene is primarily used for lighting in our sample — almost none of the households report cooking with kerosene. So, we would expect to see a substantial drop in kerosene consumption for a household enjoying electric lighting.

On average, un-electrified households had spent $3.90 while home solar had spent $3.41. Perhaps the home solar owners are still buying kerosene to light additional rooms or to compensate for days when they cannot charge their solar systems. A greater share of home solar customers reported spending nothing on kerosene — almost 25% compared to 3% of un-electrified households, though this implies that three-quarters of the home solar owners are still relying on kerosene.

Don’t get me wrong. I’m not opposed to solar lanterns or solar home systems. For some households, they provide a real improvement over kerosene lighting. Most solar solutions seem to be priced to give households slight savings compared to buying kerosene. And, to the extent households are using less kerosene, they’re exposed to less indoor air pollution and lower risks of fire or burns. But, they are best described as steps up the energy ladder, rather than leapfrogging.

The Center for Global Development describes recent research that makes a similar point. They found that nearly 90% of households in Tanzania who already had “access to electricity outside of the national grid, such as solar power” still wanted a connection to the national grid. They also link to an article that describes villagers with a solar microgrid in India who still want “real” electricity, by which they mean grid.

Certainly, grid connections provide very different levels of service, depending on the reliability levels. We did not see this in our data, but it’s conceivable that households would have both a home solar system and a grid connection – using the home solar system for basic lighting and cell-phone charging when the grid was unavailable. Fortunately, the World Bank is starting to collect data that will elicit more information on the different level of services that households experience.

Our paper also provides perspective on the potential environmental benefits of home solar. If we’re thinking of home solar as an alternative to a grid connection, it’s important to know how the grid electricity is generated. Over 60 percent of the existing generation in Kenya and other parts of sub-Saharan Africa comes from hydro, geothermal and other non-fossil-fuel sources.

So, pushing households to home solar in Sub-Saharan Africa may not save nearly as much fossil fuel as some proponents would have you believe. But, just because Sub-Saharan African grids are green now, though, does not mean they will continue to be. If all the new generation is expected to come from coal, home solar could have large benefits by offsetting this marginal generation.

We looked at countries’ plans for growing their grids and saw that most countries are projecting they’ll get an even higher fraction of their generation from non-fossil sources over the next 10-20 years (see Figure 2B in the paper).

Think of it this way. As countries in Sub-Saharan Africa develop, they will need more and more electricity to power manufacturing facilities, high rise office buildings, subway systems and all the (mostly urban) residential customers who are already connected to the grid. To meet environmental goals, we need to figure out a way to supply that power with as few emissions as possible. But as long as we’re trying to de-carbonize the grid, providing rural households with home solar systems doesn’t provide many environmental benefits and may even distract from attempts to, for instance, build grid-scale solar.

So, let’s stop talking about leapfrogging and help more people get access to “real” electricity.

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Double Counting Virtue

If you’ve installed solar at your home and are now basking in the I’m-saving-the-planet warm glow, you may be in for a splash of ice water.  There’s a good chance someone else has purchased your halo and is wearing it right now.

You see, in practically every state, rooftop PV is recognized as green with Renewable Energy Certificates (RECs) that correspond to the amount of electricity they produce.  But if you are leasing the panels or buying the electricity they produce under a power purchase agreement, then the third-party owner (TPO) of the system gets the RECs.   Most TPOs are selling those RECs to another electricity vendor or customer, who can match them up with power from a “brown” source and magically turn those brown electrons green.

Certificate image              A Renewable Energy Certificate (Source: EnergyBrokerNetwork.com)

Here’s how it works: Joe’s Solar puts a 5 kilowatt system on your roof and sells you the electricity under a power purchase agreement. Because Joe owns the panels, he gets credit — in the form of RECs —  for the 7000 kilowatt-hours (kWh) of renewable electricity it produces each year.  Meanwhile, Bob’s all-fossil utility wants to “green up” so it buys the RECs from Joe to match with its coal or gas-fired generation.  Then Bob can claim that 7000 kWh of its power is renewable.

Before discussing why that might be a problem, let’s first remember why such renewable energy accounting systems exist, and can be a good idea.  Let’s say a state has a 20% renewable electricity standard for utilities. Utility A is in an area with few opportunities for renewable generation, but utility B has lots of wind and sunshine, and can cost-effectively generate more renewable power than it needs to meet the standard.  Utility B can build extra renewable energy sources in its area and sell the extra certificates to utility A.  In that way, utility A is helping to finance new green generation in area B. RECs are the currency that allows the overall goal to be met at lower cost.

REC_Diagram_3Degrees            A nice graphic of how RECs work from 3degrees (a company that brokers RECs)

Let’s say utility B generates 28% of its power from renewables, but sells the RECs from the extra 8% to utility A.  No problem with that.  But most people would be concerned if utility B still claimed it was 28% green powered, while utility A also counted those RECs it bought towards its own renewables goal.  That’s essentially the problem that is cropping up with some rooftop solar.

About 70% of new rooftop solar systems are now owned by third parties, and nearly all of the RECs associated with such systems are retained by the TPO.  (The solar homeowner is notified in the fine print of their contract, which s/he probably never reads.)  The TPO companies typically sell those RECs either to a company with a well-publicized goal of being “carbon neutral” or to a “community choice aggregator” that wants to claim a high percentage of green energy for its customers.

One might see this as a creative way to make both the solar homeowner and the RECs buyer feel good about saving the planet.  But the Federal Trade Commission and the Vermont Attorney General are killjoys when it comes to such double counting of virtue.  If the certificates are stripped off and sold to some other entity as “unbundled RECs” (that is, sold separately from the electricity), the FTC says (see §260.15) it is deceptive for the TPO to advertise or tell solar buyers they are getting “clean,”  “renewable,” or maybe even “solar” electricity with their lease or power purchase agreement.

Example 5: A toy manufacturer places solar panels on the roof of its plant to generate power, and advertises that its plant is ‘‘100% solar-powered.’’ The manufacturer, however, sells renewable energy certificates based on the renewable attributes of all the power it generates. Even if the manufacturer uses the electricity generated by the solar panels, it has, by selling renewable energy certificates, transferred the right to characterize that electricity as renewable. The manufacturer’s claim is therefore deceptive

From the Federal Trade Commission’s guidance on marketing renewable power

Just to be clear, there is nothing wrong with installing solar panels in one location while credit is claimed by someone in another location, as long as everyone understands that is happening.  But I suspect many PV homeowners wouldn’t be too happy if they knew their systems were being used by some fossil-powered company to claim it had gone green.

The problem is exacerbated in California, because none of the large utilities here are allowed to buy more than a tiny number of RECs from rooftops solar installations to meet their renewables goals. Due to high electricity prices, lots of sunshine, and generous compensation for rooftop solar generation, we still have about 45% of the nation’s new rooftop PV — mostly under leases or power purchase agreements — which are creating a glut of unbundled RECs that sell for practically nothing. That means that the RECs aren’t doing much to incentivize new rooftop solar systems, but the REC buyers still get to claim their electricity is green. That’s all legal, as long as all parties to the transaction, including the homeowner, are consenting (and fully informed) adults.

The lesson here is that if you choose to go solar, find out what will happen to the RECs.  If they are sold to someone else, you still get to use the electricity, but you have to give back the halo.

 

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

 

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