Lynne Kiesling
Seriously, how am I going to get any work done if the Tour de France continues to be this exciting? Holy cow! No spoilers here, but yowza.
Archive for July, 2009
The Economist, Computer World on building the smart grid
July 7, 2009Lynne Kiesling
Recently the Economist included a thorough smart grid story in their Technology Quarterly issue; if you are looking for a good overview of the state of play in smart grid at a high level, this story will give you that background, running the gamut from distribution automation to interoperability standards.
Another recent overview article from Computer World illustrates some of the benefits of smart grid investments and provides some good background links.
One thing to which I’d like to draw your attention is an excellent summary of the opportunity cost argument for smart grid investment — a quote from Ahmad Faruqui in the Economist article:
Reducing peak demand in America by a mere 5% would yield savings of about $66 billion over 20 years, according to Ahmad Faruqui of the Brattle Group, a consultancy that has worked with utilities on designing and evaluating smart-meter pilot programmes. Moreover, studies have shown that the best in-home smart-grid technologies can achieve reductions in peak demand of up to 25%, which would result in savings of more than $325 billion over that period, calculates Dr Faruqui. “Technology is expensive,” he says, “but not using it will be even more expensive.”
Innovation in incandescents
July 7, 2009Lynne Kiesling
Want some evidence for why technology mandate legislation is fraught with difficulties? This New York Times article on innovation in incandescent light bulb technology is a datum:
When Congress passed a new energy law two years ago, obituaries were written for the incandescent light bulb. The law set tough efficiency standards, due to take effect in 2012, that no traditional incandescent bulb on the market could meet, and a century-old technology that helped create the modern world seemed to be doomed.
But as it turns out, the obituaries were premature.
The article goes on to describe the energy efficiency improvements in newly-designed incandescents, with the implication that the 2007 legislation mandating efficiency standards induced the innovation. Incandescent innovation is occurring in a very dynamic context, with simultaneous developments in compact fluorescents and LED lighting. As the NYT article notes,
Despite a decade of campaigns by the government and utilities to persuade people to switch to energy-saving compact fluorescents, incandescent bulbs still occupy an estimated 90 percent of household sockets in the United States. Aside from the aesthetic and practical objections to fluorescents, old-style incandescents have the advantage of being remarkably cheap.
But the cheapest such bulbs are likely to disappear from store shelves between 2012 and 2014, driven off the market by the government’s new standard. Compact fluorescents, which can cost as little as $1 apiece, may become the bargain option, with consumers having to spend two or three times as much to get the latest energy-efficient incandescents.
The reality is that we have this efficiency legislation, and by focusing on performance it’s better than an outright ban on incandescents, which would be incredibly distortionary, given the consumer welfare attached to the different light qualities and low price associated with incandescents (dimmable compacts anyone? Not so much.).
But I have to ask: isn’t this yet another situation in which we implement government regulation as a counterweight to the distortionary consequences of existing government regulation? If our individual electricity consumption were more transparent to us, and we had better and more timely information about the electricity consumption of the various appliances and systems in our buildings, AND if we had more accurately timely electricity pricing that wasn’t infused with state legislative social policy, would incandescent light bulbs have stayed this inefficient for this long? If we had those changes in the retail electricity industry, would we need Congressional energy efficiency legislation? How much energy efficiency improvement could we get through organic market processes, without the economic distortions and the restriction of individual autonomy that accompanies such government intervention?
Crude oil price volatility
July 6, 2009Michael Giberson
The New York Times observes that crude oil price volatility has been exceptionally high for the last eighteen months.
New York Times graphic: Daily changes in the spot price of crude oil, 1983-2009
(Hmmm. Eighteen months ago … January 2008 … the Iowa caucuses … the U.S. presidential primary season gets underway in earnest … nahhh, couldn’t be all due to presidential politics.) Actually, eyeballing the chart that accompanies the article, it looks like volatility didn’t really take off until the macroeconomic slide later in 2008. From the story:
“To call this extreme volatility might be an understatement,” said Laura Wright, the chief financial officer at Southwest Airlines, a company that has sought to insure itself against volatile prices by buying long-term oil contracts. “Over the past 15 to 18 months, this has been unprecedented. I don’t think it can be easily rationalized.”
Volatility in the oil markets in the last year has reached levels not recorded since the energy shocks of the late 1970s and early 1980s, according to Costanza Jacazio, an energy analyst at Barclays Capital in New York.
Energy price volatility may have implications for various energy policy proposals seeking to dramatically reshape the industry. Research published in the Energy Journal (“Does oil price uncertainty affect energy use?” Gerard Kuper and Daan van Soest, 2006. Link to abstract.) reported that oil price volatility discourages investment in new energy-using technology:
Volatility clustering implies that high levels of volatility today give rise to the expectation that volatility will remain high in the foreseeable future, and hence the probability of price change reversals is expected to remain high as well. Volatility itself induces firms to respond sluggishly to energy price changes, and this effect is exacerbated if volatility is clustered over time as higher volatility today implies that tomorrow volatility is likely to be high too….
Our results thus give support to the theoretical prediction that energy price volatility renders energy-saving technologies less attractive. The policy implications are that in uncertain times, energy taxes are not expected to be very effective in reducing energy use, and that reducing and managing uncertainty should be high up on the policy agenda.
AN ASIDE: Between when I first read the NYT story yesterday and posting about it this morning, the title of the article morphed from “Volatile swings in price of oil stir fears on recovery” to “Swings in price of oil hobble forecasting.” I wonder if that change is a editorial judgment to minimize negative tone toward the economy, or just an effort to make headlines into statements of the obvious?
ANOTHER COMMENT: The Energy Journal doesn’t make it easy for web-based researchers to locate and link to articles in the journal (as compared to, say, the Electricity Journal or Energy Policy). As research has become increasingly web-based, that is probably not the best long-term approach.
Wired guide to following the Tour de France online
July 4, 2009Lynne Kiesling
The Tour starts today, yay!!!! I’m totally jazzed. Here’s a very useful guide from Wired to various ways to follow the Tour online. And even more cool, it’s a wiki, so if you know of some other sources they are missing, log in and add ‘em!
This year I’m cheering all-American — Christian Vande Velde, Team Garmin-Slipstream, Levi Leipheimer (riding for Team Astana), George Hincapie, Team Columbia-High Road in particular. Dave Zabriskie in the time trials, of course. Oh yeah, and there’s that Lance guy …
My favorite stages are the ones where the sprinters have the advantage (I’m a fast twitch girl at heart), and this year my favorite sprinter, Aussie Robbie McEwen, is out because of rehab from a broken tibia (ouch).
Time to get in the saddle …
Anderson/Gladwell debate brings out all of the web intelligentsia
July 3, 2009Lynne Kiesling
Gee, I really feel like the new, new world has truly arrived, when one of the most visible conversations in the places I frequent is about Malcolm Gladwell’s New Yorker review of Chris Anderson’s Free: The Future of a Radical Price. Chris Anderson responds to Gladwell, continuing the conversation.
But you know that it’s game on when you attract the attention of the digerati, including Anil Dash (focused on the methodology of argumentation from anecdotes vs. data) and Seth Godin (focused on the marketing-related implications of using “free” to capture scarce consumer attention). And, of course, our own Tyler Cowen, although he is circumspect and offers only a pointer to the discussion.
I, too, remain circumspect until I have read the book, but I have read some of Anderson’s articles on the topic. I see the core of Gladwell’s criticism as this: how do we know that “free” is the future when it doesn’t generate revenue streams, and is therefore not a sustainable business model? That’s where I think Godin’s comments are useful — free can be a way to get attention in a crowded retail space, although the firm will have to incur costs to keep that attention in the face of relentless innovation and rivalry. But there are also products for which “free” reflects the marginal cost of producing an additional unit of output, and in that case, to be sustainable the business model has to bundle that free good with others for which consumers are still willing to pay. The changing music business model, evolving toward “free” music and higher prices for concerts, t-shirts, etc., is an example of this type of model.
I won’t wade into the thicket of whether Gladwell is sensitive to Anderson’s argument because of the decline of old-school journalism, although that is definitely part of this debate. Follow the above links if you want to participate.
BTW, when I put “free” in quotes it’s not because I’m necessarily skeptical of Anderson’s argument, but because of my economist pedantry — I prefer to think of goods as having price=0 instead of being “free”. But “zero-price” is a less felicitous word than “free”.
Latitude-specific solar cells
July 2, 2009Lynne Kiesling
How cool is this? Solar cells that can tune to the light angle and quality at different latitudes:
Quantasol has now created GaAs [gallium arsenide] solar cells that can be tuned to the prevailing light conditions of a particular place, to get the most out of the cells wherever they are.
To do that, the firm added indium gallium arsenide (InGaAs) to pores just a few nanometres across on the surface of their cells, called quantum wells. Like the GaAs that makes up the rest of the cell, they can absorb light to produce electric current. But they do so at very specific frequencies.
The pores can be tuned to absorb light at the frequencies that are most common in a particular place but aren’t absorbed well by GaAs. Over time this strategy should extract more energy than an off-the-shelf solar cell.
In fact, this cell has achieved the first real efficiency gains in 21 years. Gallium arsenide cells are more expensive than the traditional silicon-based solar cells, but if the efficiency differences are high enough, they could actually be cost effective:
HT: Slashdot
Plug-in hybrid vehicles and the New York electric power system
July 2, 2009Michael Giberson
The New York Independent System Operator – the folks the manage the electric power transmission system in the state – has released a report on the potential effects of plug-in hybrid vehicles (PHEV) on New York power systems operations. Given the very early stage of technology development – if there are any PHEV’s in the state now they are likely experimental research vehicles or hobbyist homebrews – a lot of the report comes down to saying “it depends on how things eventually work out.”
From the point of view of the power system, the most important issues concern how and where and when the vehicles recharge. As the report points out, consumer recharging choices will be significantly affected by retail rate designs. A flat rate means that consumers will not be dissuaded from adding to overall electric load at peak times, when the transmission system is congested and high-cost generation units must run to keep the system operating. Time-of-use rates or market-driven prices will encourage consumers to shift charging to off-peak periods.
The flat rate scenario will require additional investment in electric generation, transmission and distribution systems, while the more reasonable pricing systems may allow the power system to accomodate significant numbers of PHEV with little or no additional investment in supply-side capacity.
It should go without saying that smart grid systems (devices and commercial practices) could play a critical role in getting the most consumer value out of a PHEV.
The NYISO report draws from three much more detailed technology analyses, one by Oak Ridge National Laboratory, another by the Electric Power Research Institute and the Natural Resources Defense Council, and the third by Pacific Northwest National Laboratory, and several other studies. Despite the tentative nature of the NYISO report, it provides a concise, readable introduction to the issues addressed at more length in the technical studies. In addition, the NYISO report includes an extensive bibliography.
Not a bad place to start if you are interested in understanding these issues.
RELATED: EPRI and PJM conducted a “PHEV Summit” in January of this year, exploring these same issues.
Walmart supports employer health care to raise rivals’ costs
July 2, 2009Lynne Kiesling
I have to admit, I thought that this point was obvious. Clearly Walmart (accurately, I think) sees itself as well-positioned to leverage its size nationally to negotiate better health care arrangements than its competitors, so its newly-announced support of employer-based health care is a classic example of raising rivals’ costs.
Apparently, it’s not so obvious to everyone, as Megan McArdle pointed out:
I find it hard to believe that none of the liberal commentators breathlessly celebrating Wal-Mart’s “capitulation” on national health care have even entertained the most parsimonious explanation: that Wal-Mart is in favor of this because it raises the barriers to entry in the retail market, and hammers Wal-Mart’s competition. Yet somehow, this appears nowhere in any of the analysis. …
Regulation has a very high fixed cost for compliance; the larger the firm, the more dollars/employees over which to amortize the fixed cost. Meanwhile, market leaders have disproportionate bargaining power, and tend to get better rates from suppliers than smaller competitors. Finally, a high fixed cost means either that it’s harder to initially enter the market, or (if there are exemptions for the smallest firms) harder to grow.
Megan also recommends what I think should be universal required reading:
All of which is to say, Bootleggers and Baptists should be required reading in all schools. When you find strange bedfellows in politics, don’t look for a surprising outbreak of spontaneous virtue: looking for the hidden conspiracy.
Note: I don’t particularly care about what “breathless commentators” of various partisan stripes do or don’t claim politically; I do care about the economic content and substance of their analyses. Raising rivals’ costs and the political economy of leveraging regulation to do so is an important economic lesson.
UPDATE: I just got around to reading this morning’s Wall Street Journal, which has a lead editorial making the same point:
The employer-mandate endorsement falls into the same self-interest department. A boost in the minimum wage helps Wal-Mart because most of its workers already earn well over the wage floor, and it hurts smaller, less-profitable competitors that can’t afford to pay more. On health care, an employer mandate will also reduce the margins of their rivals. This is especially true for businesses of a slightly smaller size that cannot insure on the same scale or currently don’t reach the 55% of the 1.4 million Wal-Mart employees who are insured through the company. (Another 40% or so are covered by spouses or the likes of Medicaid.)
Technology and changing the business model in the electricity industry
July 2, 2009Lynne Kiesling
Germany’s utility Yellow Strom is a technology leader. They are leading in the introduction of digital technology in the interface between their wires network and the customer’s home; for example they are one of the first partners with Google to roll out Google’s Power Meter, and they are working on an application that will use data from the customer’s meter and enable customers to set up a Twitter stream for their home’s energy use (like the now-private Andy’s house that I discussed in October 2008).
In an earth2tech article today, Katie Fehrenbacher points out what’s been my drum beat here for a long time: digital (and ultimately transactive) technology transforms the set of possible end-use value propositions, thereby changing the possible range of differentiated retail products and services in the retail electricity industry. It also changes the business models of firms in the industry … if the firms don’t resist it and use political mechanisms to stifle it, and if regulatory inertia doesn’t stifle it.
Compare that type of innovation to what your average utility is doing — just keeping the lights on — and it’s like night and day. “There’s close to a revolution happening,” when it comes to bringing the Internet and energy consumption together, says Martin Vesper, Yello Strom’s executive director. Think about it: The emergence of broadband connections in our homes has changed the way people consume media, communicate with each other, buy goods and work. And the hope, which Yello Strom is betting on and which could do wonders for fighting climate change, is that broadband will also fundamentally change both our energy consumption habits and what it means to be a utility.
However, she then goes on to say that she’s not arguing for retail competition in the US:
While we’re not arguing for U.S. energy deregulation — various U.S. states have already failed miserably at that — it does create a more friendly market for leveraging consumer trends, like the emergence of home broadband connections. It also leads to companies taking bigger risks and being more innovative.
In this instance she is incorrect, and I believe those two positions are internally inconsistent, as the second quote I pulled from her article demonstrates. While many states claim to have retail competition, only Texas has truly rivalrous, meaningful competition for the business of residential consumers. Retail restructuring in other states has been hamstrung by phased-out retail rate caps, by default service contracts that constitute a substantial entry barrier in a market segment where customer acquisition costs are already high, and by other administrative and regulatory half-moves that leave the retail market uncertain and entry costly for the competing retail provider. Thus it is incorrect to say that various US states have failed at deregulation, because they actually have not had the political gumption to do it.
This article, and Germany’s Yellow Strom, illustrate the chicken-egg problem associated with innovation and regulation in the electricity industry. Retail competition is easier with smart meters at the interface between the regulated wires company and the customer premises. But it’s also true that innovation and entrepreneurship flourish, with benefits for both consumers and entrepreneurs, in rivalrous retail markets with low entry barriers. Which should come first?
