Building Codes That Work

If I got a dollar each time someone says that California’s energy efficiency codes have led to significant decreases in electricity consumption, I could buy a Tesla to help reverse that trend. In the halls of power, climate regulators discuss this source of energy savings potential with a level of excitement rivaling that surrounding the appearance of Harrison Ford as Han Solo in the new Star Wars trailer. New building codes are a significant part of projected emissions reduction goals in the US, Europe, Japan and elsewhere. The question of course is, whether building codes actually cause such decreases in energy consumption.

Figuring out the realized magnitude of energy savings from building codes is tricky. You cannot just compare the energy consumption of buildings built today (post building code) to those built prior to the imposition of building codes for at least three reasons:

  • Today’s homes are much bigger and we are increasingly building new homes in hotter parts of the state/country.
  • People who use a lot of energy consuming services (e.g., cooling) might self select into more efficient newer homes.
  • The imposition of a building code is not random, but a policy choice. Areas with extreme seasons and a greener populace are more likely to adopt such regulations.

There are a number of papers that have tried to overcome some of these barriers. Yours truly tried to overcome the problem of policy endogeneity (problem 3 above) in a cross-state and -time comparison and found savings of about 2-5%. Kotchen and Jacobsen in a nice experiment compare new buildings pre and post a building code in Gainesville, Florida and find savings of a similar magnitude. These savings are significantly smaller that ex ante engineering estimates, yet still economically and statistically significant.

A recent NBER working paper by Arik Levinson, who recently worked for the White House Council of Economic Advisors, argues that there is no evidence that California’s building codes have led to a reduction in electricity consumption after you address the three issues above. This paper struck a nerve with my friends in Sacramento and was featured on the Freakonomics podcast. So what does it do?

Using data from two rounds of California’s Residential Appliance Saturation Survey for about 16,000 homes matched to detailed electricity billing data, he estimates regressions, which account for detailed characteristics of the homes and occupants and the climate zones they are in. The key variables of interest are indicators of year built for each housing unit. He finds no statistically significant evidence that buildings of younger vintages use less electricity than older buildings – with the exception of the most recently constructed buildings.

Levinson then questions this finding for the most recent years. What if buildings become leaky after just a few years? Or maybe new homeowners have no money to spend on electricity and conserve energy right after purchasing a new home. As time goes by and budgets become less tight, they just might turn on the AC more frequently. Figure 3 in the paper makes exactly this point.

arik

What you see here is electricity consumption against building age by construction decade. The fact that the leftmost line segments slope upward most steeply suggests that newly built houses within a construction cohort do consume less electricity. Levinson argues that this is in fact evidence in favor of the point that buildings deteriorate quickly after being built and/or residents turn up the heat/AC once they have more cash.

The paper also shows convincing evidence that buildings built under different building code regimes do not have statistically different temperature response profiles. He digs into national survey data and shows further evidence in support of his findings based on California data.

If you stop reading and thinking here, you might walk away with the idea that building codes are useless and we should spend our money on more worthwhile causes like desalinization (don’t get me started on that bright idea). Don’t walk. One more paragraph. You can do it.

The paper recognizes up front that owners of older homes might spend money on insulation, new windows and better sealing to make their homes more efficient. This would of course make the older pre-code homes more like post-code homes and increase the likelihood of a no effect finding. Does this happen? A three thousand dollar rebate check on its way in the mail to me from Sacramento for my newly sealed 1947 built home is evidence that this happens. Even my politically conservative neighbors have been spotted with the insulation truck outside their 1948 home.

Second, we will never observe the true counterfactual home that would have been built instead of the building code compliant home that was eventually built. Even the most careful econometrician does not observe all relevant characteristics that change over time.

Third, building codes provide many benefits that are not measured in kilowatt-hours, but in comfort. Visit your strange friends living in a house with single pane glass and sit near the window on a cool night.

Finally, much of the benefit from building codes comes from lower natural gas consumption for heating. The paper does not study this dimension in great depth.

Arik, who is an incredibly careful and thoughtful economist, is careful in discussing all of this in his paper, but he still comes to the conclusion that building codes do not result in savings that should be counted as additional under new climate and energy regulation. The main argument there relates to the fact that if people in older homes voluntarily improve the efficiency in their homes, then building codes simply build this into the up front cost of a new home. This makes the new building code essentially a choice that people would make in the absence of the policy eventually and is hence not additional. There is some economic truth to this argument.

In order to settle this, I am afraid, we would need to run one really expensive RCT, where some identical homes are built according to building codes and others are not. We would then have to have random people assigned across these homes and live their very real lives in these homes. If you are a developer, give me a call. I am standing by having a hot cup of tea in my now comfortable, no-longer-leaky California home.

Posted in Uncategorized | Tagged , , , , | 12 Comments

Energy Tourism: The Tesla Taxi in Oslo

2014-04-13 16.08.51 HDRI suspect a fair number of you know what I mean by energy tourism – sure, you’re up for sight-seeing and museums, but you also note the local gas prices, gawk as you fly over wind turbines and grill anyone who will answer about the local energy policy issues of the day.

My husband and I are both in the energy industry, so our kids have gotten used to flipping through vacation photos of solar farms or gasoline in Absolut bottles for sale in Indonesia.

On the first day of a recent trip to Norway, my daughter and I saw two Teslas on a street corner in Oslo – a rare coincidence even at home in Northern California. Over the next couple days in Oslo though, Tesla sightings became so commonplace that we stopped noting them, until we saw the Tesla taxi, pictured below.

tesla taxi

Photo credit: Sylvia Barmack

As we learned, Norway is Tesla’s second largest market after California, and with one-tenth the population of California, this is an amazing penetration of Teslas per capita. Teslas outsold ALL other models in Norway in March 2014.

One of our hosts, who drove us around in her Nissan Leaf, explained all the reasons consumers are drawn to electric vehicles (EVs) in Norway. (Tesla also lists them on their website.)

The big one is that you don’t have to pay the heavy import taxes, so it can be cheaper to buy a Tesla than a regular sedan. It looks like a typical car has to pay a 25% import tax. The exemption from import taxes is set to expire as soon as 50,000 EVs are sold, which may be soon. Anticipating the end of the subsidy, buyers scrambled to buy Teslas and other EVs in March 2015. EV owners also get a break on the annual vehicle tax, paying about $50 while non-electric vehicles pay a couple hundred dollars.

Norwegians also have relatively high gasoline prices – I saw $7/gallon – and low electricity prices, so the operating costs favor EVs more than in the US.

Another benefit of owning an EV is that you get to use the carpool lane. So many people in the well-to-do western Oslo suburb have bought Teslas that they occasionally clog the favored lanes. EV owners are also exempt from parking fees at municipal lots, can ride the ferry for free, can charge for free at certain municipal charging stations – the list goes on.

1006811-14276465406487439-Paulo-Santos

Source: Seeking Alpha.com

If I were a benevolent world planner, and if I believed that we needed a bunch of electric vehicles on the road somewhere, I would definitely drop a bunch of them in Norway. I’d probably even put more there than in California.

First, Norwegians are rich and better able to afford EVs, which, absent subsidies are still more expensive than comparable cars. The World Bank lists Norway as the second richest country in per capita terms, and it has famously flat income distribution, so the wealth is spread across more Norwegians.

There are also important differences in the environmental benefits of electric vehicles depending on where they are located. A recent working paper by Holland, Mansur, Muller and Yates (HMMY) goes through detailed calculations for the United States. As the authors point out, driving and charging a Tesla/Leaf/etc. in Ohio can lead to more CO2 emissions and more damaging local pollutant emissions than driving a comparable car running on gasoline. Ohioans get a lot of their electricity from coal, so there are a lot of GHGs, NOx, etc., emitted when they charge a Tesla.

Here’s where the Norwegians come in: their electricity system runs on over 95 percent hydro, which does not emit GHGs or local pollutants. As HMMY and others have pointed out, though, we want to think about the marginal emissions when an EV owner charges the battery, not the average emissions on a system. In other words, we want to identify which power plants would produce slightly less in a world without that particular EV.

HMMY go through careful calculations to estimate state-by-state marginal emissions from charging EVs. They then use an atmospheric model to figure out how many people the power plant emissions will impact. They use the same model to figure out who is impacted by emissions from gasoline vehicles and summarize the relative benefit of EVs in the map below. Red areas indicate that EVs are more polluting than gasoline cars in much of the Eastern US.

Screen Shot 2015-04-11 at 7.21.14 PM

Source: Figure 1 from Holland, Mansur, Muller and Yates, 2015

An HMMY-style calculation is a bit tricky on a hydro system like Norway’s. Roughly, you can think of charging an EV as draining a reservoir more quickly, so you really want to know whether the reservoir is likely to run dry – in which case, the EV might lead to emissions from a fossil fuel or nuclear plant. Norway is interconnected with Sweden, Denmark and the Netherlands, which have cleaner systems than most of the US, but more polluting than Norway. On the other hand, if new rain or snow will fill the reservoir, the EV charging is pretty much emissions free.

The thing about looking at marginal emissions is that this assumes the main benefits and costs to the EV are abating pollution now. I suspect that, to a large degree, US and Norwegian subsidies for EVs are motivated by policymakers’ desire to jump start EVs.

Those benefits are more uncertain and harder to put a number on, but they include the benefits of helping companies like Tesla down learning curves, incentivizing companies to locate more charging stations (see Max’s recent post), incentivizing more research on lightweight batteries, and making consumers feel more comfortable with EVs.

We do not yet know whether EVs will be an important part of a low-carbon future – biofuels may have a resurgence, or someone may come up with a completely new way to power personal transportation. On the other hand, EVs may be the only game in town in a matter of decades. In the meantime, Norway is the perfect place to be running the EV experiment to help us sort everything out.

Posted in Uncategorized | Tagged , , , , , | 11 Comments

For energy (and water) conservation, moral suasion is no substitute for getting the prices right

My office light switch recently acquired a little sticker that politely reminds me to turn it off when I leave:

switch

Over the past year, an edgy Lawn dude  and an amicable  Bear  have been urging Californians to cut back on water use in order to meet our drought-stricken state’s water restrictions (which have to date relied on public spiritedness versus serious enforcement):

dude

The use of moral suasion to encourage conservation is not unique to California. Public appeals for reductions in energy and water use are ubiquitous. And it is easy to see why. For political and jurisdictional reasons, it is often easier to mount a conservation campaign than raise energy or water prices in times of scarcity. But what impact do these interventions actually have on energy and water consumption?

Prices versus moral suasion

A new E2e working paper explores this question in the context of electricity. More than a year after the Fukishima earthquake, several of Japan’s nuclear power plants were still out of commission and electricity supply was tight. Policy makers were looking for ways to reduce electricity consumption during critical peak times.

Koichiro Ito and his co-authors set out to test the relative effectiveness of an increase in critical peak electricity prices versus “moral suasion”:  a polite request for voluntary reductions in consumption. Customers who volunteered to be part of the study were randomly assigned to one of three groups:

  • A price treatment: Higher electricity prices during critical peak hours. Customers were charged prices ranging from $0.65/kWh – $1/kWh (up from a base rate of approximately $0.25/kWh).
  • A “moral suasion” treatment: Courteous day-ahead and same-day requests for electricity demand reductions during critical peak days.
  • Control group: No notification of/price increases during critical peak events.

The figure below summarizes the average impacts of the two treatments on household electricity consumption during critical peak hours (relative to the control group). Effects are summarized by treatment “cycles”.  Each cycle consists of three non-consecutive critical peak event days, so the graph helps to illustrate how the effect of the treatments persist (or not) across repeated critical peak days throughout the season.

Average effect of treatment on peak electricity consumption

graph

It probably will not shock you to learn that the price treatment had a much larger impact on consumption as compared to moral suasion.  The courteous appeal for voluntary reductions measurably reduced consumption during the initial events, although the effect peters out quickly. In contrast, the response to the price treatment persists throughout the duration of the experiment.

Of course, these quantitative findings may not generalize beyond this set of Japanese electricity customers. But key qualitative findings are consistent with other studies. During the California electricity crisis, for example, researchers similarly found that demand response to public appeals for voluntary conservation was significantly smaller than response to price increases (although the effects of moral suasion were found to be somewhat more persistent).

Can public appeals for conservation hold water in California?

These qualitative results are compelling – and pertinent to a crisis we are currently facing here in California.

140219-california-drought

Source: Bakersfieldnow.com

We are in the midst of the most severe drought on record. Last year, the Governor issued a voluntary reduction order, asking Californians to please cut back on water use by 20 percent. In the latter part of last year, customers in my district cut back a non-trivial 13 percent in monthly year-over-year comparisons. But we are off to a slow start this year, conserving just 4 percent in January and February.

Absent divine intervention (e.g. torrents of rain in the coming dry season), we need more than benign intervention (e.g. public appeals for voluntary conservation). An executive order issued last week signals a move in this direction.  The order  imposes mandatory water restrictions designed to achieve a 25 percent reduction in potable water use by urban residents.

Hitting this conservation target will be difficult – if not impossible – to achieve with only public appeals and hard-to-enforce restrictions. So, to echo arguments that have been made again and again on this blog (we are a persistent bunch), the time is ripe for water prices that reflect the true cost of water use.  This would not only help incentivize sustained conservation, but also help to cover operating and infrastructure costs that currently exceed revenues (see this report for a sobering look at water sector finances).

As far as I can tell, the state does not have the ability to directly control how local water agencies set their rates.  But a perfect storm of rising infrastructure costs and water scarcity could force the issue. We are already seeing water price increases and conservation pricing proposals.

If the current crisis does lead to substantive and widespread water rate reform, there will still be plenty of work for Lawn Dude and friends. In water, like electricity, lack of salience, hassle costs, and other factors can stand in the way of cost- efficient investments in efficiency.  We should put public campaigns in their rightful place: useful complements to – but not substitutes for – efficient price signals.

Posted in Uncategorized | Tagged , | 10 Comments

In Praise of Cleaner-burning Gasoline

Last week was spring break at UC Berkeley, so I took a few days off for a very pleasant vacation, walking by the ocean with friends and enjoying the beauty of California. As a result, I wasn’t able to be at the hearings on gasoline prices in the California State Senate last Tuesday. The state has seen a price spike over the last month that at one point drove pump prices to a dollar above the rest of the country.  We’re used to paying a bit more for gas here — due to higher taxes and the cleaner-burning fuel used only in California — but the difference is usually around 30-40 cents.

Though I missed last week’s hearings, I’ve been at enough legislative sessions on gas price spikes (and read news reports on this one) to have a pretty good guess at what went on.

Some consumer groups and left-leaning politicians confidently accused Big Oil of colluding, manipulating California’s gasoline prices, and gouging drivers.  Then industry representatives and right-leaning politicians responded with equal certainty that recent price spikes are the result of California regulations that since 1996 have required a gasoline blend used nowhere else in the world.

CAGasolinePrice2015Mar

In a blog post a couple years ago, I explained why they are both wrong.  The accusers don’t have evidence that producers are artificially restricting output to drive up prices; real scarcity could completely explain the state’s higher gas prices and occasional spikes.  But the defenders who are claiming that the price fluctuations reflect only competitive market dynamics also have no proof.  In fact, since I wrote that post in 2012, concentration among California gasoline producers has increased further, which has ratcheted up the incentive to create artificial scarcity in the market.

In late 2014, the California Energy Commission appointed a 5-member committee, called the Petroleum Market Advisory Committee, to consider what drives California’s gasoline prices and whether the market is workably competitive.  I’m one of those lucky five.  There will surely be some interesting meetings.

LAsmog

But before diving into the murky world of gasoline price competition, let’s step back and remember the murky air that prompted the California Air Resources Board (CARB) to adopt the world’s strictest gasoline standard (known as CARB gasoline) and effectively separate our gasoline market from the rest of the country.

In the 1990s, California had very poor air quality.  Most of the population lived in counties that were out of compliance with federal standards for ozone, a gas that damages lungs and leads to a variety medical problems, including premature death.  The Los Angeles-San Diego corridor was in “severe nonattainment” for ozone.  Federal standards for reformulated gasoline (RFG) went into effect in the early 1990s, but those standards were critically flawed — as Max Auffhammer and Ryan Kellogg have documented in a 2011 paper published in American Economic Review, which has received far too little attention from the EPA (A nice non-technical summary of the paper is here).  The federal standard has a loophole that allows refiners to meet it by adjusting their gasoline formulation in a way that has little or no ozone-reducing impact.

AuffhammerKelloggOzone

The California standard closes that loophole by requiring a stricter formulation.  Auffhammer and Kellogg show that only California’s standard has had a substantial, and statistically significant, impact on ozone.  Combining their results with medical research on the impact of ozone, they estimate that the California standard saves at least 660 lives per year, which more than justifies the additional cost of our cleaner-burning gasoline.[1]  And their estimates don’t count reduced illnesses (short of death) or other reduced environmental damage that we know are also caused by ozone.  A new study out of USC this month shows that kids in Los Angeles today have substantially healthier lungs than those who grew up there 20 years ago and links the improvement to reduced auto emissions.

The results in California have been tangible.  Ozone concentrations have steadily declined over the last 20 years.  The haze in the LA basin continues to dissipate.  Our air is cleaner and as a result we are healthier.

So, what has the California gasoline standard actually cost consumers?

The most direct measure is retail prices, but they are confounded by taxes, which vary month to month because California and some other states collect both a per-gallon excise tax and a percentage sales tax.  Still, from 2009 to 2013, California taxes averaged about 20 cents per gallon above the national average and our retail prices averaged about 34 cents above national average.[2]  Much of the 14 cent difference is likely attributable to CARB formulation, but it’s difficult to know how much.

CARBGasPriceDiff

A cleaner measure is refinery-level wholesale prices, which do not include taxes and are easier to compare over a long time span.  In the 13 years prior to adoption of CARB gasoline 1983-1995 (as far back as the available data go), California wholesale prices averaged 6 cents above national average (in 2014 dollars).  From 1996 through 2014, they have averaged 16 cents above national average (in 2014 dollars), an increase of 10 cents per gallon.

The average Californian uses about a gallon of gasoline per day, both directly in their car and indirectly in the fuels that are used by businesses that serve them.  So, we are each paying, on average, somewhere in the range of $37-$51 per year.  That’s saving hundreds of lives and preventing lung damage in thousands of other people each year.  And these health benefits go disproportionately to the poorest residents, because they suffer the greatest share of the impact from ozone.

Yes, our occasional price spikes are annoying.  And, yes, they raise real concerns about the competitiveness of the market, which the state should continue to investigate.  But averaged over the years, the cost of our cleaner-burning gasoline is actually pretty modest.  Californians love to gripe about the high cost of living here, but we stay in large part because of the natural beauty and our enjoyment of being outdoors.  Paying a bit more for gasoline — along with the state’s program to check tailpipe emissions at the time of vehicle registration — makes an important contribution towards maintaining that beauty and the ability to enjoy it.

[1] In doing their calculations, Auffhammer and Kellogg use the EPA’s value of a statistical life and assumed that the California formulation raises costs by 8-11 cents per gallon.  Their argument stands up, however, even if the CARB formulation cost more than 30 cents per gallon.

[2] The difference in state levies increased on January 1 with the inclusion of transportation fuels in the state’s cap-and-trade program.  As I discussed last summer, and has since been confirmed by the industry and the Air Resources Board, this is expected to raise California gas prices by about $0.10 per gallon.

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

Posted in Uncategorized | Tagged , , | 8 Comments

How Should We Design Government Policies to Stimulate Innovation?

Last Friday was our 20th Annual POWER Conference. Thanks to all who attended and an especially large thanks to the conference sponsors who made the event possible. For those of you who couldn’t attend, the program is available here with links to several of the research papers that were presented.

One of the highlights was a new paper called, “Financing Constraints as Barriers to Innovation: Evidence from R&D Grants to Energy Startups”, by Sabrina Howell, a PhD Candidate at Harvard who does fascinating work on energy and innovation finance.

The paper focuses on the U.S. Department of Energy’s Small Business Innovation Research grant program. The SBIR program has been around since 1983, and provides more than $2 billion annually in grants to small, high-tech firms. DOE’s program funds technologies across the energy spectrum — previous recipients include Sunpower, First Solar, Evergreen Solar, Oscilla Power, and A123.

sunpowerfirstsolarevergreensolaroscillaa123-logo-white-background

The results in the paper are striking. Howell finds that receiving an early-stage “Phase 1” grant of just $150,000 approximately doubles the probability that a firm will subsequently receive venture capital (VC) funding. Recipients of Phase 1 grants produce more patents, are more likely to commercialize their technologies, and are more likely to exit via IPO or acquisition.

In order to perform the analysis, Howell obtained internal data on successful and unsuccessful applications from 400+ SBIR competitions over a 20-year period. She exploits the fact that SBIR applications are ranked by DOE reviewers, but that only applications above a certain cutoff receive funding and reviewers don’t know what the cutoff will be until after all the applications have been ranked. These rankings allow her to implement a compelling quasi-experimental research design.

 Probability of Venture Capital Financing After Grant Decision Fig1

This figure from her paper illustrates the main idea. The red vertical line indicates the cutoff for a Phase 1 SBIR grant.  Applications to the right of the cutoff were funded, while applications to the left were not. The figure shows for each rank the fraction of firms that subsequently received VC financing. Grants increase this probability from about 10% to 20%, and the difference is strongly statistically significant as indicated by the 95th percentile confidence intervals.

This “rankings” based approach is a significant advance because it allows Howell to make causal statements about SBIR grants. How successful would SunPower, First Solar, and Oscilla Power have been without winning an SBIR grant? This is a very hard question. But what these rankings allow Howell to do is to compare applications that just barely won a grant with those that barely missed the cutoff.  Near the cutoff her approach is akin to a randomized experiment, comparing firms that DOE reviewers deemed similar.

Firms who receive one of these $150,000 Phase 1 grants can then apply for a second round. Phase 2 grants are $1 million and intended to fund later stage demonstrations. Though Phase 1 grants have large positive effects on subsequent VC financing and other outcomes, Phase 2 grants are much less successful, with tiny or negative effects on VC financing and small positive effects on patents. This may reflect selection. For example, Howell finds that the more successful Phase 1 recipients tend not to apply for Phase 2, so the composition of applicants in Phase 2 tends to be lower quality on average.

These results have important policy implications. The DOE spends much more on Phase 2 than Phase 1, but Howell’s results suggest that it probably would be better to allocate more to Phase 1. This is consistent with general economic intuition. For later-stage projects, private sector funding is likely to work better because more information is available and the investments are larger scale.

Some critics of government R&D programs argue that programs like SBIR just crowd out private investment. But if this were the case, you would not expect to see any impact of these grants on subsequent VC funding. Or, more starkly, you would expect to see more private financing received by unsuccessful applicants. Howell’s paper doesn’t tell us exactly what the right level of government funding is, but the paper’s results provide clear evidence against this crowd out argument.

Howell’s website (here) includes a link to the paper and, if you are really interested, to all eight appendices! We need much more research like this aimed at understanding how to best stimulate innovation. It is hard to think of any more important topic, particularly in the energy sector given the enormous scope for spillovers and positive externalities.

Innovation needs to take center stage not only in Washington DC, but also here in California. As Severin pointed out in a blog post here, California produces only 1% of the world’s greenhouse gas emissions. So the success or failure of California’s climate policies hinges on stimulating innovation that can be exported to the rest of the world. We need more emphasis in all of our programs on knowledge creation and we need to rigorously evaluate all of our policies along this dimension.

Posted in Uncategorized | Tagged , , | 7 Comments

The Economics of EV Charging Stations

I live in the northern end of the Silicon Valley and here EVs and Plug-in hybrids are everywhere. From Tesla P85s to C-Max Energis – it’s what the cool kids drive. As the minority academic economist in this nerdster crowd, I am always on the lookout for potential sources of inefficiency and how to get rid of them. The most sobering realization I had after purchasing my shiny new ride is the dearth of charging stations. When I find a spot to charge, I am usually shocked by the prices charged for electricity. One example of this inefficiency can be found at UC Berkeley: We have 1 (!) charger for a university community of 40,000+. What really makes my economic brain cells short circuit is that if you can get the spot, electricity is free (!!).

ev charging station
Given the proximity of the charger to the engineering department, I initially thought this was probably one of the very first EV chargers in California and it is lacking a meter. Surely no one else would be giving away a valuable resource for free. Wrong. I made the fateful mistake of logging onto the Chargepoint site and checking pricing for their network of EV stations in the Bay Area (their charging stations are owned by individuals/firms – they just provide billing and IT infrastructure). Turns out the vast majority of EV chargers in the Bay Area — please start breathing into a paper bag now — provide drivers with free, zero cents per kWh, FREE electricity! I found a few charging stations, which charge a fixed fee (in most cases $0.99) and no variable rate as well as a few stations, which charge $0.49 per kWh.

The giant hippie heart beating in my chest is trying to convince my neoclassical brain that we need free charging in order to incentivize the rollout of this technology! Would you like free electrons with your $7500 federal tax credit plus state subsidies? Well who doesn’t? Hook me up! While this might make some sense in the early days of rolling out a new technology, this cannot be the long run equilibrium.

ev cars
And we are moving out of the cocoon stage into a world where EVs and Plugins are everywhere and need power. A sign of this is an email I got from Chargepoint a few weeks ago stating:

“PG&E has sent a proposal to the California Public Utilities Commission (CPUC) to use your money to own and operate new EV charging stations in your neighborhood. This extension of PG&E’s monopoly will destroy the competitive charging station market and stall the innovation of new features and technologies.”

This gave me food for thought. Those of us living in single-family homes charge our vehicles at home, where we pay the typical inefficient tier based rates (at my house you also have an option for two types of EV rates, but one is pretty expensive and the other requires installation of a second meter which can cost thousands of dollars). All of these are certainly greater than 0 cents per kWh (usually between 20 and 40 cents per kWh). We have our own outlets, or fancy-schmancy quick charging stations, right in our driveways where we can show off our greenness to our not-so-green neighbors.

Well who needs more charging stations? Two types of people. Folks living in a multifamily housing situation and people who need juice during the day (while parked at work or out and about). This group of individuals is not out looking for free electricity, but I would conjecture that they are simply looking for access to an EV plug in many locations. There are about the same number of public charging stations in my town as there are Starbucks. For a successful rollout of EVs, this density has to increase very rapidly.

So I will follow my friend Catherine Wolfram’s new blogging strategy and ask – why should I sign this petition by Chargepoint? More charging stations in my neighborhood, regardless of whether they are operated by my utility or not, strike me as a good thing from a consumer point of view. The proposal does not kick the Chargepoints of the world out of the EV charging business. Yes, the utility is a monopoly. But it is a regulated monopoly. It does not get to charge the markup the textbook monopolist charges. Come join me in my Econ 100 classroom one day and I’ll explain this to you.

Yes, a regulated utility does not have the same strong incentives to innovate – in theory – as a successful startup, which operates the largest network of charging stations in the country. But so what? The technology is pretty simple. A plug hooked up to a 240V outlet and a parking space with a card reader so you can charge me for the electricity I am using. This is an example where supply of charging stations might really drive demand for a technology.

The question that arises of course is what should the price of electricity be at these charging stations? I would argue that the price should be the real time price of electricity with potentially a fixed fee per charge, which accounts for the provision and maintenance of the charging station. If you really need a charge on the hottest day of the year and the price is really high, you’ll pay more. Or you can wait a few hours until it cools down and have an ice cream. If that does not pass hearings, then I would at least hope for a time-of-use rate structure. It’s a brave new world and I hope one in which we will charge for electricity – correctly. Or we might as well start giving gasoline away for free as well.

Posted in Uncategorized | Tagged , | 39 Comments

Better Ways to Stop Natural Gas Pipeline Leaks

Carbon dioxide has received the bulk of policymakers’ attention as the villain of climate change. Now, its henchman methane is facing scrutiny. Methane is an attractive target. It is much nastier than carbon dioxide in the atmosphere. Over one hundred years, a kilogram of methane has a 28-times greater impact on global warming than a single kilogram of carbon dioxide.

Unfortunately, designing practical policies to cut methane emissions is tough. Unlike carbon dioxide, which can be pinned on burning fossil fuels in power plants and vehicles, methane comes from millions of diverse sources. Methane comes from enteric fermentation (the technical term for cow burps), manure (cows again), landfills, and water treatment plants.

Nonetheless, the Environmental Protection Agency (EPA) is going ahead with regulations and has announced plans to go after the largest source of methane emissions—the oil and gas industry. In 2013, methane leaking from natural gas systems was about 2.8% of total energy-related greenhouse gas emissions. The prevalence of leaks may mean that natural gas generation is worse than coal-powered generation for climate change. Meredith explored this in a prior blog.

To me it’s a big puzzle why there’s any methane leaking. Why is the oil and gas industry allowing one of its major products, natural gas, to float away into the atmosphere?

One explanation is that oil and gas producers are plugging some leaks, but not all because plugging all leaks is expensive.  At some point, for private industry, the cost of repairs is not cost justified. The cost exceeds the market value of the gas saved. Policy could reduce leaks further by making the producers face the full social cost of the leaks, including the climate change impacts.

However, the part of the natural gas system that most worries me is the transportation network.

For the most part, the owners and operators of the transportation networks don’t lose money when gas leaks from their infrastructure, and they don’t benefit when they stop leaks. If the amount of gas delivered by a pipeline is less than the gas entering the pipeline, then the shipper, in the case of interstate pipelines, or the end-use customer, in the case of local distribution companies picks up the tab.

This occurs due to cost pass-through mechanisms. The rates charged by pipelines and distribution companies explicitly assume that some gas will be lost. If leaks increase or decrease, rates are adjusted so that shippers or customers continue to bear the cost.

This is a common arrangement in the world of utility regulation. Retail electric and gas utilities have fuel adjustment clauses that pass through changing fuel costs and decoupling mechanisms that pass through capital costs.

Recognizing that these incentive problems may be causing underinvestment in fixing the leaks, federal and state utility regulators are getting involved.

The Federal Energy Regulatory Commission (FERC), which sets rates for the country’s interstate natural gas pipelines, launched a new docket last November. FERC proposes to allow pipelines to recover capital expenditures made to enhance reliability, improve safety and meet environmental objectives. This would be allowed outside of the normal rate-setting process.

In January and February FERC heard from interested parties. The pipeline owners love the idea of being able to collect the cost of repairs from customers. What utility wouldn’t? The environmental groups want leaks reduced, but fret that the utilities will favor expensive capital fixes over low-cost operational solutions. The shippers are not happy at all. They doubt the investments will be cost-effective and fear pipelines will spend money with abandon.

There’s no obvious solution. The principal-agent problem persists with or without FERC’s proposed policy. A pipeline’s interests don’t align with its shippers’.

What I find most jarring, however, is the lack of good empirical leak data. Regulators are developing policy in a data vacuum.

Turns out that the EPA depends on a 1996 study that is based on a very small number of leak measurements. Using the study, the EPA calculates “per mile” emissions factors for cast iron pipes, unprotected steel pipes, plastic pipes, etc. Then the EPA estimates total US emissions by multiplying the factors by the miles of each pipe type in service across the country. This recent report from the EPA’s Office of Inspector General provides a critique of the EPA’s emissions factors.

A cast iron pipe that leaked.

A cast iron pipe that leaked  (http://opsweb.phmsa.dot.gov/pipeline_replacement/)

The 1996 study may have been the best available in the past, but times have changed.

The rapidly falling cost of communicating sensors and cloud computing is enabling real-time measurement that was cost prohibitive in the past. This trend is called the “Internet of Things” or Industry 4.0, in the industrial context. Now it’s feasible to monitor natural gas pipelines and compressors at many locations on a real-time basis.

The value of lost gas is substantial. The DOE estimates that each year 110 Bcf per is lost from transmission infrastructure alone. That equates to over $300 million per year at current natural gas futures prices. Applying a social cost of carbon of $37 per metric ton of carbon dioxide, the cost exceeds $2 billion. Investments in sensors are easy to justify with so much value at stake.

The Environmental Defense Fund and Google have launched an initiative that demonstrates one new approach to leak monitoring. In city after city they are conducting drive-by leak surveys using car-mounted measurement devices. Street View meets leak detection. In the sample maps below, each circle signifies a leak, with darker colors representing bigger leaks. The incidence of leaks varies significantly between and within cities.

Here at the Energy Institute we will soon be initiating a new project that will take advantage of new monitoring technologies in the industrial sector, to find energy saving opportunities.

Better leak detection could enable entirely new policy options. The EPA could even pursue market-based approaches that charge utilities directly for the social cost of the leaked methane.

It’s time for natural gas utilities and their regulators to join the sensor revolution. Improving measurement of natural gas leaks is a great place for federal and state regulators to start.

Posted in Uncategorized | Tagged , , , | 10 Comments

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

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

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

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

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

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

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

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

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

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

Here are a couple conjectures:

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

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

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

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

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

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

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

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

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

Posted in Uncategorized | Tagged | 35 Comments

One university’s attempt to reduce energy waste at work

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

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

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

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

comm

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

Do split incentives cause energy waste at work?

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

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

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

Un-splitting incentives on the UC Berkeley campus

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

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

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

graph

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

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

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

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

Posted in Uncategorized | Tagged , | 5 Comments

The Job Creation Shuffle

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

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

LetsCreateJobs

Photo Credit: Forbes.com

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

Appearing and Disappearing Jobs All Over the Economy

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

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

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

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

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

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

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

Job Creation During a Recession

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

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

Jobs in the Long-Term

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

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

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

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

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

Creating Virtuous Networks?

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

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

We Still Need A Strong Energy Policy

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

 

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

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

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

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

Posted in Uncategorized | Tagged , , | 11 Comments