Category Archives: Electricity

The rebound effect: the ACEEE strikes back

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Michael Giberson

The significance of the “rebound effect”  remains a matter of some debate. (The rebound effect is the frequently observed tendency for energy efficiency improvements to increase consumer use of the now more efficient good or service).

Recently the Institute for Energy Research published Robert Michaels’s survey of rebound effects. In the study, Michaels concluded:

Properly accounting for the impact of rebounds is essential to obtaining an accurate picture of how the efficiency policy in question may impact consumption levels, and will also better inform the cost-savings estimates associated with decreasing consumption.  Improving the accuracy of cost-savings estimates will allow policymakers to better evaluate whether the benefits of energy efficiency programs outweigh the problems associated with limiting the choices available to consumers.

This would be a matter of mere technical interest among energy policy economists but for conservation advocates who have seized onto engineering efficiency regulation as a key public policy tool to promote resource conservation. One such group of conservation advocates, the American Council for an Energy Efficient Economy, has produced its own survey of the efficiency and rebound literature. In announcing the study, ACEEE said:

… we found that there are both direct and indirect rebound effects, but these tend to be modest. Direct rebound effects are generally 10% or less. Indirect rebound effects are less well understood but the best available estimate is somewhere around 11%. These two types of rebound can be combined to estimate total rebound of about 20%. We examined claims of “backfire” (100% rebound), but they do not stand up to scrutiny. Furthermore, direct rebound effects can potentially be reduced through improved approaches to inform consumers about their energy use in ways that might influence their behavior. And indirect rebound effects, which appear to be linked to the share of our economy that goes to energy, may decline as the energy intensity of our economy decreases.

Efficiency policy often gets treated as a “win win win” type of policy, which accounts for some of its popularity as a conservation tool. The public gets a reduction in any externalities associated with the production and consumption of the resource, more resources are left in the ground for future generations, and the consumers get more bang for their resource buck. Rebound effects cut into the first two effects, and whether consumers actually get more bang for their buck depends on the cost of the efficiency improvements and the degree to which consumers prefer to save some money now over more money later. The reason efficiency policy advocates want to push back against rebound is that recognizing even modest rebound effects can substantially tilt cost-benefit analysis against energy efficiency policies.

As mentioned in prior posts on rebound effects, the Breakthrough Institute and the Rocky Mountain Institute have dueled on the issue as well.

Trying to fix FERC’s demand response pricing mistake

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Michael Giberson

Last year the Federal Energy Regulatory Commission ruled that RTO and ISO markets should pay retail consumers an amount equal to the market’s real-time marginal price when consumers reduce consumption at peak periods. Economically speaking, it is the wrong price.

Parties opposed to FERC’s action have taken the issue to court. A group of “leading economists and educators” have filed an amicus brief in the case (and somehow I got invited to be part of this group). Here is the introduction:

Amici curiae (listed in Addendum A) are leading economists and educators who have designed, studied, taught, and written about the electricity markets affected by the Federal Energy Regulatory Commission Final Rule under review here, Demand Response Compensation in Organized Wholesale Energy Markets, Order No. 745, 76 Fed. Reg. 16,658 (Mar. 24, 2011), FERC Stats. & Regs. ¶31,322 (2011), reh’g denied, Order No. 745-A, 137 FERC ¶61,215 (Dec. 15, 2011). That Rule establishes the rate wholesale market participants must pay retail customers for reducing purchases of electric energy during peak-demand periods. In particular, FERC now requires market participants to pay the full “locational marginal price” (“LMP”) for electricity that is not consumed, treating non-consumption of energy as the equivalent of costlessly producing energy. See Pet. Br. 45-61.

Although the views of amici may diverge on market-design issues in other contexts, they all agree that FERC’s Rule creates a counterproductive demand response mechanism that produces economically undesirable behavior and wasteful outcomes that will injure consumers and society in the long run. Although FERC invokes economics to justify its course, the Final Rule is economically irrational. Retail customers that reduce their consumption should not be paid as if they generated the electricity they merely declined to buy. Instead, retail customers should be compensated as if they had entered into a long-term contract to purchase electricity at their retail rate but instead, during a peak demand period, resold the electricity to others at the market rate (LMP). In other words, they should be paid “LMP-minus-G,” where G is the rate at which the retail customer would have purchased the electricity. Simply put, the customer must be treated as if it had first purchased the power it wishes to resell to the market.

FERC never adequately explains its decision to adopt its contrary approach. Nor could it. By overcompensating reductions in retail purchases, the Final Rule encourages retail customers to reduce demand even when society would be better off if they continued purchasing electricity needed to engage in productive activity. It encourages inefficient self-supply of electricity. And it leaves market participants paying for the delivered electricity more than once—first to the generator that created it and then to the user who provided the demand reduction. That overpayment harms both suppliers and non-demand-response consumers, to whom the cost of the subsidy ultimately will be passed on.

So far as I can tell, the case Electric Power Supply Association v. Federal Energy Regulatory Commission hasn’t been heard yet at the U.S. District Court of Appeals. The full name of the brief is: ”Brief of Robert L. Borlick, Joseph Bowring, James Bushnell, and 18 other leading economists as Amici Curiae in support of petitioners.”

The fraying of support for wind power’s PTC subsidy

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Michael Giberson

The coalition in support of  wind power’s Production Tax Credit has always had a bit of a “Baptists and Bootleggers” flavor: environmentalists making a clean and green argument in favor of wind power and the multinational wind power development corporations funding the political muscle needed to get things done. The coalition has proven durable even as wind power took a few environmental hits, but now the business side of the coalition is beginning to fray. The Production Tax Credit will expire at the end of 2012 unless Congress acts to extend it.

One example: The Chicago Tribune reports that Exelon Corp., a large electric power company that owns a significant amount of wind power and a member of the American Wind Energy Association, is opposing efforts to renew the tax credit (reg. required).

“The (production tax credit) has been in place since 1992, I believe,” Exelon Chief Executive Christopher Crane said in a conference call with investors and analysts Wednesday. “And I think that’s enough time to jump-start an industry, 20 years.”

The economic logic behind Exelon’s position is clear: ”with nearly half of its profits coming from its nuclear fleet and low-cost wind power cutting into its margins, Exelon is in Washington leading a fight to kill a tax credit the wind industry says is crucial to its survival.” Note that “low cost wind power” is referring to the low marginal cost of production, not the total cost per MWh of energy produced. Most of Exelon’s generating assets are in markets with energy prices driven toward the marginal cost of production, and additional wind power in these markets tends to push average prices down.

It isn’t just the nuclear fleet that sees its profitability pushed down, either. Wind on wind competition is also becoming an issue. If additional wind power comes online near existing wind power, it naturally produces more output at the same time that existing wind power plants produce more output. The profit-suppressing effect of new wind is thereby intensified for existing wind assets.

Wind power project owners contemplating PTC extension have to weigh the benefits from anticipated new projects against the price suppressing consequences for their existing wind power and other generation assets. It is a cost-benefit weighing that is increasingly turning against continued support for the PTC among owners of wind power assets. Of course, on the other hand, manufacturers of wind power turbines and towers, and those developers who build but don’t own wind power projects benefit only from the construction of new projects. Wind power coalition dynamics should see these players taking a bigger and bigger role over time.

The Chicago Tribune article contains more good stuff. They found someone willing to claim that wind power needs the subsidy because it is “on the cusp of seeing real price declines,” and “In three to five years wind energy will be cost competitive … without the subsidy.” The claimant doesn’t explain why we shouldn’t just wait three to five years and build wind power when it is actually competitive.

(Research efforts do seem to be making progress in improving wind power productivity. That progress justifies maybe a few million dollars for continued research, not a few billion dollars to build more not-quite-cost-competitive wind power projects now.)

Other Production Tax Credit news and commentary:

 

India’s electrical system produces largest power blackout ever

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Michael Giberson

From the New York Times: 2nd Day of Power Failures Cripple Wide Swath of India

It had all the makings of a disaster movie: More than half a billion people without power. Trains motionless on the tracks. Miners trapped underground. Subway lines paralyzed. Traffic snarled in much of the national capital.

On Tuesday, India suffered the largest electrical blackout in history, affecting an area encompassing about 670 million people, or roughly 10 percent of the world’s population. Three of the country’s interconnected northern power grids collapsed for several hours, as blackouts extended almost 2,000 miles, from India’s eastern border with Myanmar to its western border with Pakistan.

Perhaps counter-intuitively, India’s largest electrical blackout in history shows how much it has grown. Such a widespread outage means the Indian electrical system has grown large and has become thoroughly interconnected. Not so many years ago the system had too many locally unreliable parts to have brought about such a widespread failure. (And even now, as the article pointed out, “many people in major cities barely noticed the disruption because localized blackouts are so common that many businesses, hospitals, offices and middle-class homes have backup diesel fuel generators.”)

The article highlights some of problems that emerge with local political involvement in interconnected power system operations. Regional dispatch areas may have been able to avoid the blackout through coordinated use of rolling blackouts, but regional power system managers are appointed by local political authorities and are loathe to cut off their area’s customers for the benefit of power consumers elsewhere.

It is easy to say that they should have better procedures in place, but the United States power system has had its share of large-scale blackouts. Here, as elsewhere, experience provides the lesson and motivates improvements.

 

Smart shopping for electric power just got easier in Houston

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Michael Giberson

CenterPoint Energy, the Houston-area electric distribution company, has launched MyTrueCost.com to help area retail electric customers shop for electric power. Help may be needed: currently 43 companies offer a total of 239 different service options in the CenterPoint service territory according to data from Powertochoose.org, the Texas PUC’s retail power website.

The basic idea is pretty simple: customers sign up, TrueCost accesses their smart-meter based electric power consumption data and estimates bills, the customers provide some information on the kind of retailer and contract they want (low price, environmental characteristics, number of PUC complaints, years in service, etc.), and then the website identifies the contracts that appears most suited to the customer.

TrueCost doesn’t search through all possible contracts, however, just contracts from the several retailers that have agreed to participate. Currently 10 of the 43 companies in the area are participating. Customers should be aware that TrueCost gets paid a flat fee by the retailer for each customer that signs up through the service. (TrueCost noted in the Q&A that the flat fee means that the service doesn’t have an incentive to upsell customers to more costly contracts.)

Simple. Smart. Cool. (And speaking of cool, the young people of Houston would like you to know that a Forbes real estate blogger has named Houston the #1 on its list of America’s Coolest Cities to Live.)

By the way, TrueCost also charts average retail power prices offered in Texas’s competitive retail power markets and provides commentary in an accompanying blog.

One-year plans keep momentum from summer price spike

One-year plans keep momentum from summer price spike (July 5, 2012)

INVITATION: If any of our Houston area readers have tried out MyTrueCost, send me an email and let me know what you think. My email address can be found here.

Canada should better integrate electric power markets among provinces

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Michael Giberson

Pierre-Olivier Pineau’s opinion piece in the Montreal Gazette makes a case for greater harmonization of electric power markets among Canadian provinces. He begins:

It is ironic that while a power grid must be in perfect balance to work, the electricity sector both within Quebec and among Canadian provinces is in complete imbalance.

In Quebec, for instance, government policy mandates that we build new wind-powered plants that produce electricity at a cost of more than 11 cents per kilowatt hour while Hydro-Québec is allowed to sign new contracts in which industrial consumers pay about 4 cents per kWh. Does this make sense?

Looking west and then east, the gap is even more staggering. Despite the current electricity surplus in Quebec, Ontario is pursuing solar energy, which sells at 80 cents per kWh. Meanwhile, New Brunswick still prefers to burn large amounts of coal and oil to produce the electricity it needs.

No other sector of the Canadian economy displays such large differentials.

He reports that improving coordination among separated provincial power markets would have significant economic and environmental benefits. There is, of course, a long history behind the current relative isolation and regulatory barriers to overcome.

The article builds on a study published earlier this year by L’idée fédérale/The Federal Idea, a Quebec think tank on federalism.

No, the federal solar power subsidy does not pay for itself

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Michael Giberson

Last Friday the US Partnership for Renewable Finance, a coalition of financiers who invest in renewable energy, issued a report in which they claimed the federal investment tax credit for solar power is not a taxpayer burden because the tax credit “pays for itself” (to use their phrase). As I explain below, the report fails to support its claims.

In essence the US PREF report sums up federal tax collections that can be somehow linked to subsidized solar PV projects and concludes that the sum of the future tax collections is greater than the cost of the current tax break. For example, they claim a $10,500 residential solar credit will eventually lead to $22,882 in federal tax revenues, and a $300,000 commercial solar credit would yield $677,627 in federal tax revenues over the life of the project. Most of the tax revenues are federal income taxes paid by the companies, investors, and employees on income that is associated with the subsidized solar project.

The report led to a couple of rewrites of the press release in the renewable energy trade press. RenewablesBiz: “federal tax credit that has helped energize the recent boom in solar construction pays for itself and even generates excess revenue…”; RenewableEnergyWorld): “finds that the solar investment tax credit … can deliver a 10% internal rate of return … on the government’s initial investment.” Clean Technica wasn’t content with the press release’s own puffery, so it puffed up the report more: “Contrary to erroneous, misleading assertions to the contrary, the federal government’s Solar Investment Tax Credit (ITC) is proving to be an excellent investment for US taxpayers and the federal budget.”

Let’s be clear: the report does not demonstrate that the solar subsidy “pays for itself.” First, the report does not discount future revenues as is traditional in this kind of analysis, so the effects of time value of money and inflation are completely ignored. In effect they suggest it doesn’t matter if the subsidy ‘investment’ is paid back tomorrow, next year, or thirty years from now. Do you know any lenders that loan out money on these terms? If the federal government and current taxpayers had absolutely no other currently useful tasks requiring investments (technically, if current decisions had no opportunity costs), maybe one could ignore the time value of money. An investment is excellent only if the net present value of the future revenues is better with the investment than it would be with any other investment. The report doesn’t tell us if that claim is true of the solar subsidy.

Second, the report mostly neglects the effects of depreciation on the calculated taxes. They did analyze the tax collections with and without depreciation, and it turned out that assuming depreciation has a significant effect on their results. In their residential case assuming a $10,500 tax credit, the eventual federal tax revenue is $12,469 with depreciation instead of the $22,882 in taxes they highlight. In their commercial case, the eventual federal tax revenue collected is $380,127 with depreciation instead of $677,627. But they claim they can ignore depreciation and focus on the larger results.

Their justification for ignoring depreciation is that they’re assessing the effect of the subsidy on eventual federal tax collections, and depreciation would be the same whether a company invested in subsidized solar PV projects or some other unsubsidized capital projects. In their words, they are ignoring depreciation “since the depreciation of capital improvements applies without regard to how the capital improvements have been financed” and “depreciation is not specific to the solar industry.” (See pp. 2-3.)

But income tax laws, too, apply the same for income from subsidized solar projects or income from elsewhere–well, of course, there are thousands of variations in how income gets taxed under the federal tax code, but generally speaking income taxes are “not specific to the solar industry.” If we should ignore depreciation, why don’t we also just ignore income taxes?

This point leads us to the most fundamental of problems with the US PREF analysis. To analyze the benefits of the solar investment tax credit, we’d want to compare the world with the tax credit to the world without the tax credit. For example, the US PREF report simply estimates the corporate income from sales of electricity from the solar projects and then counts a fraction of this as federal tax revenue. But a reasonably safe assumption about a “world without the tax credit” is that electricity sales would have been about the same, so income and income tax revenues would have been about the same. The net effect of the subsidy on future tax revenue is near zero. (In effect, US PREF’s analysis proceeds under the amazing assumption that without the subsidized projects, consumers would have just used less electric power.)

The same criticism applies to investor and employee incomes. In the absence of the subsidized projects, it is safe to assume that investors would have found other investments to profit from and employees would have found other jobs. US PREF might claim that subsidized solar projects are more profitable to investors and lead to higher pay for employees than otherwise, so income tax collections would be a little higher than otherwise. But in this case they should only claim the increment in tax revenue, not the whole of it, as a “return on investment.”

All of this preoccupation with net federal tax collections is mostly, if not entirely, beside the point. Even if the report was any good–and it isn’t–public policy analysis is much more that gross impact on the federal budget over the lives of subsidized projects. The usual first step for sound policy analysis is a benefit-cost analysis, and a reasonable second step is careful considerations of alternative approaches to achieving desired policy goals. There is still more to good policy analysis, but these are useful starts. The US PREF analysis stands woefully short of a complete policy analysis and therefore is mostly useless as an argument for the solar investment tax credit.

PBS story on smart meter protests in California

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Lynne Kiesling

Friday night’s PBS Newshour had a feature story on the protests in California over the installation of digital electricity meters in the PG&E distribution monopoly service territory. These protests focus on two separate issues: one is a claim that the wireless communications from the meters create electromagnetic fields that harm health, and the other is a claim that the digital meters are a privacy threat and make it easier for PG&E and the local, state, and federal governments to access individual electricity consumption data.

I’ve been following these stories closely since they started in 2010, and if you haven’t been following them, this analysis provides a good summary.

Does EPSA support capacity markets? For power markets, yes; for gas pipeline markets…

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Michael Giberson

The Electric Power Supply Association, “the national trade association representing competitive power suppliers,” supports the use of electric power capacity markets to ensure sufficient generation capacity is available to reliably serve peak consumer load. See, for example, EPSA’s policy paper on the topic:

Well-functioning forward capacity markets are a critical component of organized wholesale competitive electricity markets in many parts of the country. These markets provide the capacity needed for the continued reliable operation of the grid through the commitment of existing supply, investment in new generation when needed and participation by consumers to manage their demand (demand response).

So you might expect that when the issue is securing sufficient natural gas pipeline capacity to ensure continued reliable operation of gas delivery at peak times, EPSA would favor a capacity market-style solution.

If you expected that, you would be wrong.

In EnergyWire Peter Behr reports industry viewpoints on coordination between natural gas and electric power markets. From the gas pipeline side of the business:

Generally, across the board, the electricity market is not stepping up … to contract for the reliability that they seek from the gas-fired generators,” said Richard Kruse, vice president of regulatory affairs for Spectra Energy Corp., which operates 19,000 miles of natural gas pipelines….

“We hear all the time from gas-fired generation in New England, ‘We cannot afford pipeline capacity if we don’t get paid to hold that capacity,’” Kruse told reporters at a press briefing Friday sponsored by the Interstate Natural Gas Association of America (INGAA).

“When people step up and say they want to sign up for contracts, that’s when we’ll start working on the infrastructure that they need,” Kruse said.

EPSA’s John Shelk offers the power generators viewpoint, stating they don’t need firm capacity rights on gas pipelines all of the time, just those times the power plant will be dispatched in the power market. He adds that a power generator that pays for firm capacity it can’t use will not be competitive in the power market.

I can see his point, which mirrors in a way, how many power consumers feel about electric power capacity markets. Power consumers don’t want to pay for a lot of extra generation all of the time since they only actually need those extra bits of generating capacity for, typically, just a few hours out of a year.

NOTE: In August the Federal Energy Regulatory Commission will be holding five regional technical conference to explore interactions between natural gas markets and electric power markets.