New music recommendation: The National-High Violet

Lynne Kiesling

It’s been too long since we’ve done any decent music recs here at KP, and last Sunday’s release of The National’s new album High Violet is a good reason to do one now. I’ve heard a couple of songs from it, including “Bloodbuzz Ohio” that they are offering as a free download, and they are great. Lush, layered, sophisticated, interesting. I think I will frequent my local indie record shop tomorrow and get the deluxe CD …

Tim Harford asks about inclining block rates …

Lynne Kiesling

… he just doesn’t realize it, or doesn’t know that it’s an established regulatory concept. Recently in his Undercover Economist blog, Tim Harford picked up on an idea floated by another FT columnist:

… we need tariff schemes that encourage conservation.

One option is “reverse pricing”, a simple framework that would increase the marginal cost of energy without introducing new taxes or raising average prices. This is important because marginal prices affect our behaviour, but total expenditure affects our wealth. So if we can increase one but not the other, we will create incentives to consume less without leaving households worse off overall.

Actually, what we need is retail competition, retail choice, and the removal of sclerotic and obsolete entry barriers that prevent motivated suppliers from providing innovative electricity-related products and services to residential retail customers. But I digress.

The pricing structure to which Tim alludes in his post is called “inclining block” pricing. When it emanates from a regulatory procedure, it is an inclining block rate. Inclining block pricing means that you price intervals of consumption, and the price per unit for each interval increases. For example:

  1. Block 1: 0-1000 kilowatt hours  $0.06/kwh
  2. Block 2: 1001-1750 kilowatt hours  $0.10/kwh
  3. Block 3: 1751-  kilowatt hours  $0.15/kwh

A few things to note. First, this logic is similar to that underlying David Zetland’s “some water for free, pay for more” proposals for water pricing. Second, the devil’s in the details when these rates are set by regulatory fiat; where do you draw the dividing lines, and what price per unit do you charge?

One of the best electricity economists, Ahmad Faruqui at the Brattle Group, has written extensively about the economic efficiency and conservation effects of inclining block pricing. In that list of resources I’d also recommend this NRRI report for regulators on how and why to consider “economic rates”, including inclining block pricing.

Levitt and Becker on health care

Lynne Kiesling

I noticed recently that Steve Levitt opined briefly on the health care bill in ways that are consistent with my earlier argument that unless Congress tackled the third-party payer problem head on they would be wasting our time and money. In his Freakonomics post, Levitt recommends Gary Becker’s analysis to us:

In Becker’s opinion, the health care bill that passed recently is a disaster for at least two reasons.  First, it seems to do little or nothing to deal with the single most important shortcoming of our current system: the fact that people pay very little on the margin for the medical care that they receive.  Imagine that you could show up at a car dealership and have any car you wanted, and as many cars as you wanted, for no marginal cost.  The market for cars would be in complete chaos, and people would have too many cars, and the ones they had would be too nice.

That is more or less the situation we now have with health care.

I second Levitt’s recommendation; Becker’s post provides a thoughtful and careful analysis of the likely unintended consequences of the health care bill, most of them reducing economic welfare. Becker also focuses on the third-party payer problem:

For the most part, however, the bill increases our dependence on employer-based health care by imposing sizable penalties on companies that do not provide their employees with sufficient health insurance. Many companies are already beginning to add to their projected future costs the anticipated increase in the cost to them of insuring their employees. These changes will particularly affect the costs of smaller companies since they are the main ones that do not provide health insurance for their employees. Since smaller companies are responsible for a disproportionate share of additions to employment during recent years, this provision of the bill will tend to reduce the demand for workers and hourly wages.

The US health care market is over-regulated rather than under-regulated. One example is that families in one state are generally not allowed to buy their health insurance from companies located in other states. Another example is the mandates that states impose on insurance companies, such as coverage of the costs of normal birth deliveries. Such coverage has little to do with insurance against unexpected health costs, whereas coverage of extraordinary delivery costs is a desirable protection against unexpected health care risks. The bill generally pushes in the direct of greater regulation, such as the limitations imposed on how much health insurance companies can spend on administrative costs relative to their other costs, the mandated reviews of the premiums charged by health insurance companies, and the mandated provision of health insurance by small companies.

My conclusion matches Levitt’s too: “Ultimately, it is hard to believe that this bill will be a net positive.  It remains to be seen whether it will be a wash, or far worse.”

Grid-connected energy storage taking off

Michael Giberson

Yesterday’s announcement by General Compression, Inc. and ConocoPhillips that the companies would cooperate in developing compressed air energy storage systems (CAES) in Texas is yet another indication that grid-connected energy storage is beginning to take-off.

For more background on CAES see the recent article by Alexis Madrigal in WIRED, “Bottled wind could be as constant as coal.” From WIRED:

The nation’s largest energy storage option right now is pumped hydroelectricity. When excess electricity is present in a system, it can be used to pump water up to a reservoir. Then, when that power is needed, the water is sent through a turbine to generate electricity. The U.S. electric system has 2.5 gigawatts of pumped hydro storage capacity, but most of the good, cheap sites are already occupied, and creating new reservoirs is not environmentally benign.

While wind farmers say storage isn’t technically necessary until the amount of wind power on the grid exceeds 20 or 30 percent of the electrical load, private analysts, the Electric Power Research Institute, and the Department of Energy have identified grid-scale storage as a key need for the rapidly diversifying electricity system.

And going forward, compressed-air energy storage looks like the cheapest option available. Independent analysts have come to similar conclusions.

No specific projects or development dates were included in the General Compression/ConocoPhillips announcement.

On March 31 of this year Electric Transmission Texas, LLC, energized a 4-MW NaS battery near Presidio, Texas. While a few other such systems are in use – AEP first installed such a system in Ohio in 2002 – the ETT project is the largest grid-connected battery system in the United States.  National Geographic Daily News provides more details on the ETT battery project, “Texas pioneers energy storage in giant battery.”  ETT is owned in part by AEP.

I believe I’ve mentioned before in this space that cheap energy storage will revolutionize the electric power business.  We are not quite to the revolutionary stage yet, but these are signals that the day is coming nearer.

The ethanol industry rises to defend itself

Lynne Kiesling

We were in Columbus, Ohio over the weekend and early this week and, not surprisingly, the airwaves were full of news of a new ad campaign to rehabilitate ethanol and, in the words of one of the news stories we heard, “correct myths about ethanol”. So are they saying that it’s a myth that the ethanol production that receives generous federal taxpayer subsidies raises the prices of corn and other grains while not reducing greenhouse gases? No, that’s true, so Growth Energy is having to deflect these criticisms by steering inside-the-Beltway attention to other effects of ethanol that in truth are economically specious but potentially politically potent, such as “Ethanol has not shipped a single job overseas. America’s economic fuel.”

This one really made me laugh: “No beaches have been closed due to ethanol spills. America’s clean fuel.” Why? Because ethanol is incredibly hydrophilic and corrosive, so if it spills it absorbs all water in its reach, and it can’t be shipped long distance in existing pipelines, so the federal ethanol mandates and subsidies mean that we employ trucks to transport ethanol nearer to the point of consumption to blend it with gasoline. Yeah, that’s clean! How’s that for some truthiness for you?

I prefer the list of advertising tag lines that Ron Bailey devised yesterday, although I doubt that the ethanol industry would! You should check them all out because they are funny, but my favorite is “No carbon dioxide emissions have been cut due to ethanol subsidies. America’s greenhouse fuel.” That really hits at the heart of the boondoggle that is the perverse bootleggers-and-Baptists energy-agriculture policy in the U.S.

Why all of this action right now? Congress appears to be working on a new energy bill, and some of the federal ethanol subsidies are set to expire soon. As noted in this New York Times article on Tuesday,

Domestic ethanol producers are facing the expiration at the end of this year of the Volumetric Ethanol Excise Tax Credit, also known as VEETC and the blender’s tax credit. The federal benefit that started in 2005 gives a tax credit of 51 cents for every gallon of pure ethanol blended into gasoline. Reps. Earl Pomeroy (D-N.D.) and John Shimkus (R-Ill.) have introduced legislation with a five-year extension of the benefit.

The tax credit could be worth plenty in the future. The 2007 energy bill created a requirement that the United States use 36 billion gallons a year of biofuels by 2022.

The NYT also reports a new ad campaign in support of Brazilian cane sugar ethanol imports, arguing for elimination of the 54-cent import tariff per gallon of cane sugar ethanol, which is more energy-efficient through its life cycle than corn ethanol. Clearly the elimination of the import tariff is the economically sensible policy … for everyone except the politically powerful corn and sugar industries. Sadly, as Mancur Olson pointed out in The Logic of Collective Action, those folks with their concentrated benefits will vote on the basis of this issue, but the rest of us will not, even if we see its costs and despise its cravenness.

The way to avoid this inferior outcome is to lower government spending and the size of government overall, which gives all lobbyists and special interests less of a target.