Archive for the ‘Energy markets’ Category

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How green is your EV?

April 18, 2012

Lynne Kiesling

On Monday the Union of Concerned Scientists released an analysis estimating the MPG equivalence of electric vehicles. The point of the analysis is this: taking as given an objective of greenhouse gas emission reduction, how do electric vehicles compare to internal combustion vehicles in that dimension? To do such an analysis requires comparing the GHG emissions across the two types of engines, taking into account that the electricity generation fuel mix varies across the country. Here’s how they did that:

Most drivers are familiar with the concept of miles per gallon (mpg), the number of miles a car can travel on a gallon of gasoline. The greater the mpg, the less fuel burned and the lower your global warming emissions. But how can such consumption be figured for electric vehicles, which don’t use gasoline? One way is by determining how many miles per gallon a gasoline-powered vehicle would need to achieve in order to match the global warming emissions of an EV.

The first step in this process is to evaluate the global warming emissions that would result at the power plant from charging a vehicle with a specific amount of electricity. Then we convert this estimate into a gasoline mile-per-gallon equivalent—designated mpgghg, where ghg stands for greenhouse gases. If an electric vehicle has an  mpgghg value equal to the mpg of a gasoline-powered vehicle, both vehicles will emit the same amounts of global warming pollutants for every mile they travel.

For example, if you were to charge a typical midsize electric vehicle using electricity generated by coal-fired power plants, that vehicle would have an  mpgghg of 30. In other words, the global warming emissions from driving that electric vehicle would be equivalent to the emissions from operating a gasoline vehicle with 30 mpg fuel economy over the same distance (Table 1.1).3 Under this equivalency, the cleaner an electricity
generation source, the higher the mpgghg . When charging an EV from resources such as wind or solar, the mpg equivalent is in the hundreds (or thousands) because these resources produce very little global warming emissions when generating electricity.

This map, from a New York Times feature on the report, summarizes the results:

The results reflect the regional variety in electricity generation fuel mix — hydro power in the Pacific Northwest increases the mpgghg there, as does the predominance of nuclear around Chicago. The results suggest that even in the coal-intensive Midwest and plains states, electric vehicles using coal-generated electricity outperform the standard 4-door 27 MPG sedan in the greenhouse gas dimension.

I found this analysis useful and informative. Frankly, I often take UCS analyses with a grain of salt, because they are an advocacy group and generally start their analyses with presumptions of catastrophic global warming that directs their conclusions, while I think it’s more scientific to make assumptions that weaken your conclusion so that you don’t bias your analysis toward your desired conclusion. This analysis, while still a piece of advocacy, presents the calculations and mpgghg comparisons in a more dispassionate fashion that I found informative. The New York Times also had an article on Sunday summarizing the report.

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Reducing the size of the Strategic Petroleum Reserve

April 12, 2012

Michael Giberson

Yesterday’s Wall Street Journal carried an essay by Austan Goolsbee in which he advocates reducing the size of the Strategic Petroleum Reserve. Even better, he suggests a rule by which the SPR could be managed in a transparent fashion: aim to be able to replace 90 days worth of imports from non-North American sources.

Goolsbee noted that “economists are generally uneasy with the whole idea of the strategic reserve. Self-sufficiency is not really an economic concept, and it seems an odd goal for a product that trades freely around the world at a market price.” He argues, though, that we need not grapple with that issue to grasp the case for reducing the current size of the SPR.

His argument runs like this: “self-sufficiency” is a kind of physical insurance against disruption; the economics of insurance are well understood, as the size of the risk falls then less insurance is needed; and the boom in domestic U.S. and other North American production has reduced strategic risks. Therefore, we need less SPR insurance.

Interesting aside: Notice that so conceived, domestic oil production provides a public good in the form of reducing strategic risks faced by the country. Would Goolsbee agree that his logic supports the idea of a subsidy to domestic oil production?

Previously I’ve said here that I have never been “much of a fan of the SPR, having never been convinced that there was a coherent economic and political plan for management of the reserve during either the accumulation or release phases of operation.” While in principle oil is supposed to be released only when the United States is economically threatened by a disruption in  oil supplies, in practice SPR management has been a less than transparent mix of strategic, political and practical considerations. (See the DOE history of SPR drawdowns here, which mostly minimizes the political angles.)

Goolsbee’s suggestion supplies a potentially coherent, non-political rule to govern operations during normal times (i.e. times lacking a market disruption threat), it doesn’t provide any guidance for the much more critical emergency release phase of operation.  I’m still anti-SPR.

IN RELATED NEWS: China is believed to be building up its strategic oil reserves, also from the Wall Street Journal.

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Measuring success by how much you spent on the program: A renewable energy example

April 10, 2012

Michael Giberson

In general, in public policy analysis, you’d like to judge ultimate success or failure of a program by its net results, by actual benefits less the costs involved in achieving those benefits. Admittedly sometimes benefits are hard to measure, but ultimately the point of a policy change is to bring about some improvement in something somewhere. Ultimately it would be nice, once a program is done, to try to find and measure that improvement.

What we often get instead, however, is an attempt to infer a benefit based on the expenditures on the program: how much money was spent, how many people were employed, how many miles of ditches were dug, and so on. This is, more or less, what we see this week from the U.S. Department of Energy in the study it commissioned from the National Renewable Energy Lab on the impact of the Section 1603 Treasury Grant Program.

The Section 1603 grants were payments made to qualifying renewable power projects in lieu of those projects claiming the Investment Tax Credit or Production Tax Credit subsidies for which the projects would have otherwise qualified for. The NREL study looked at the $9.7 billion in program spending up through November 10, 2011; by the time the program ended it’s three-year run in December 31, 2011 over $11 billion in federal funds had be committed.

The DOE asked NREL to estimate the effects of the 1603 program on jobs and economic expenditures. In NREL’s report they explicitly state that their work is an estimate of “gross jobs, earnings, and economic output.” This means that they don’t consider any private sector crowding out, any disincentives from the taxation needed to support the program, any consequences from duplication of other government incentive programs, and so on. They simply treat the federal resources as if it were manna falling from the heavens, and the jobs, capital, and industries that became involved in building renewable power plants would have otherwise sat idle. (Note that I’m not criticizing NREL in performing just a piece of the overall analysis, they just did the work that DOE asked for and paid them to do.)

But note that this is primarily a study which just measures the expenses of the program and a part of what the expenditures bought. So, it is a partial study of the costs of the Section 1603 program, and not any kind of estimate of any of the benefits of the program.

Nonetheless, in the DOE press release accompanying publication of the study, they said the study found “the program has been a huge success.” How does it justify its claim of success? By noting how much was spent, how many people were employed, and how many things were subsidized by the program.

The DOE is not the only one to claim success. At Climate Progress, Stephen Lacey’s assessment is titled, “Grant Program Supported Up To 75,000 Wind And Solar Jobs: Congress Killed It Anyway.” Lacey’s post does mention some of the construction activity might have happened even without the grants, and he observes it estimates just the gross impact (and, by implication, doesn’t reflect any negative effects due to the crowding out of unsubsidized economic activity). But along the way Lacey keeps claiming the program was a success. How does he know? Well, he summarizes from the NREL report: the government spent a lot of money, hired a lot of people, and subsidized the purchase of a lot of things.

Great, but resources consumed is not a measure of success. Any fool can spend money, but spending it well can be a challenge. Is there any evidence in the NREL report that the money was well spent?

If the answer to that question is “no,” then we can’t conclude that the program was a success.

ADDITIONAL LINKS: Reactions to the NREL report from North American Windpower, Solar Industry magazine, and Clean Technica. Rep. Ed Markey (MA) cited the report in calling for Republicans to support “revisions to the tax code that level the playing field for clean energy.”

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Danish wind power ♥s Norwegian hydropower

April 6, 2012

Michael Giberson

From time to time a promoter of wind power will encourage the U.S. to follow Denmark’s lead and aim for a much higher levels of wind power on the grid. (Recently Denmark’s legislature established a goal of attaining 50 percent of its energy from wind power by 2020.)

A working paper by Johannes Mauritzen explains one of the key factors supporting Denmark’s current wind power capability: the flexibility inherent in Norway’s vast hydro-power capability. Mauritzen’s abstract:

It is well established within both the economics and power system engineering literature that hydro power can act as a complement to large amounts of intermittent energy. In particular hydro power can act as a “battery” where large amounts of wind power are installed. In this paper I use simple distributed lag models with data from Denmark and Norway. I find that increased wind power in Denmark causes increased marginal exports to Norway and that this effect is larger during periods of net exports when it is difficult to displace local production. Increased wind power can also be shown to slightly reduce prices in southern Norway in the short run. Finally, I estimate that as much as 40 percent of wind power produced in Denmark is stored in Norwegian hydro power magazines.

So, a first step for the United States renewable power policy might be to pick up and move the country a little closer to Norway.

Less facetiously, and projecting a little bit, we might casually infer that the New York power market won’t have too much trouble with a moderate amount of wind power since it also has access to a lot of hydro-power. (11 percent of generating capacity is hydro and another 4 percent is pumped hydro, plus it imports hydro-power from Quebec.) Similarly, we might be more puzzled about all of the difficulties that power system administrators in the Pacific Northwest are having integrating wind into the regional grid, given the extensive hydro-power resources available. (With hydro about 2/3rds of the electric capacity in the region.) Finally, we might be still more surprised by the relative growth of wind power in Texas, which has relatively little hydro-power capacity on its system. (About 0.6 percent of capacity.)

Admittedly, the thing that a mostly-uncontrollable, variable-output technology like wind needs isn’t hydro-power per se, but rather a certain amount of flexibility and control within the power system it is connected to. The necessary flexibility is one part technology and one part power system rules.

The Nordic power system has both the technical means and the supportive power market rules, same for New York, and same for the ERCOT market in Texas (only in Texas the “technical means” are not hydro-power, but rather fast-ramping gas generation along with other resources over which the market has some control).

The Pacific Northwest has tons of flexible capability on the technical side of things* and it has the federal Bonneville Power Administration on the power system rules side of things. Yet somehow the combination of lots of capability and federal agency management produces as much conflict as cooperation.

*About the only caveat in BPA’s defense is that, to some degree, many competing claims to that technical flexibility have already been granted to non-power system users of the water resources involved in the form of environmental constraints, irrigation demands, treaty obligations with Native American organizations, and so on. Maybe the residual flexibility is smaller than it appears.

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RTO forward capacity markets are unlikely to succeed

April 6, 2012

Michael Giberson

The Gulf Coast Power Association meetings earlier this week included a debate over the future of resource adequacy within the ERCOT power system. Debate moderator Eric Schubert, BP Energy Company, introduced the issue with a critique of capacity market structures that is heavy on its reliance on Hayek’s knowledge problem. It is a topic dear to our heart here at the Knowledge Problem blog, so I thought we’d share a bit of it.

Here’s Schubert:

Hayek’s “Knowledge Problem” and its optimal solution – decentralized commercial markets – provide the best lens for regulators to see the fundamental issue in electricity market design in response to rapid technological change and increasingly diverse groups of buyers and sellers. As the procurement and use of electricity cross a complexity threshold, as a few customer classes are transformed into a multitude of individual market participants, the electricity market design needs to move away from centralized planning to a decentralized procurement of resources, to be both sustainable and efficient.

… In trying to adapt the centralized forward capacity mechanism to changing market and technological conditions, regulators and RTOs play a never-ending game of “whack-a-mole” because they can never overcome the “Knowledge Problem.” Even worse, under centralized procurement or any type of explicit “top-down” procurement of new resources mandated by regulators, unintended consequences of centralized procurements arise at the speed of markets and are corrected at the speed of administrative law.

Both long-standing economic theory and recent economic practice suggest that centralized forward capacity mechanisms are very unlikely to succeed. If they fail, state and federal regulators in the US will be forced to choose between the two known solutions to the “Knowledge Problem”:

  • A return to full integrated resource planning conducted by regulators, or
  • A move to fully decentralized wholesale and retail markets where individual customers make their own choices.

… Integrated resource planning, however, solves the “Knowledge Problem” by suppressing it. Having regulators in charge of integrating 21st century technologies would prevent consumers, retailers, and other market participants from using their local knowledge and ingenuity to find the next killer app or great idea that would provide all of us cleaner, more efficient and thoughtful use of energy. Or put another way, would we even have I-Phones today if regulators had never broken up Ma Bell?

[The alternative approach is that] with the proper price signals, buyers and sellers in ERCOT’s energy-only market will procure and manage sufficient resources to meet their individual needs and preferences while keeping the market resource adequate. Such decentralization of decision-making is the most efficient solution to the “Knowledge Problem.” The challenge of this path, however, is keeping the lights on during the transition; none of us can fully understand at this moment how the integration of the new technologies will happen, and what new ways of doing business and managing electricity use will spontaneously emerge over time.

By the way, in that first ellipsis I excised a reference to and quote from a great paper by Kenneth Rose that takes a detailed look at RTO capacity market structures.

Schubert’s full introduction is publicly available on the GCPA website, but only for the next month or so. Get it while it’s hot (and available).

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Current oil prices: scarcity rents, political unrest, inflation hedging, or speculation

April 5, 2012

Michael Giberson

An article by Sarah Kent in the WSJ, “Gulf in oil prices may set up market for a fall,” takes notice of wide gap that has emerged between the current price of oil on the world market and the futures price of oil a few years into the future.

A variety of explanations for recent prices have been tossed around, from peak-oil related tightness in the market (aka “scarcity rents” in the jargon of economics), political unrest in some key oil exporting nations, use of commodity markets as an inflation hedge, or simple manipulations of evil speculators.

Here is the WSJ chart illustrating the matter:

The evil speculator story is mostly a useful story for politicians and regulators to grab more power over financial markets that lacks substantial evidence in support. The inflation hedge view would require future prices to be higher, not lower, than current prices. So is it peak oil or political unrest (or maybe some other view)?

The article notes that some analysts attribute the gap to an increasing expectation that oil production capabilities will rise, so future prices have eased, contrary to the beliefs of at least some peak oil advocates (for an example, see this post at the Scientific American blog). I’m sympathetic to the resource optimist view, but I think political unrest is the more obvious explanation.

The timing of the price moves in the WSJ chart are quite supportive of the exporter political unrest story. Both the May 2012 and December 2018 prices begin a sustained rise at the end of 2010, when the Tunisian Revolution erupted and began to spread. After about three months, though, the December 2018 price eased while the May 2012 price continued upward – this is approximately when the Libyan civil war became hot. The pattern would reflect an expectation that Libyan oil exports would not recover fully by mid-2012, but the market anticipated production would recover by 2018.

Note the most recent divergence between the May 2012 and December 2018 prices, emerging during the escalating political conflict surrounding Iran. The near term price is up $15/barrel while the more distant price has been unmoved by the conflict. Market concern about a potential interruption in supply, but not one that will endure, seem an entirely sufficient explanation.

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Natural gas “expectations were rewritten in the last decade”

April 2, 2012

Michael Giberson

A brief mention, for those of you keeping track of Giberson media appearances at home, of a brief appearance in a brief story on natural gas supply issues on last Friday’s Marketplace radio news program.

As the story says, natural gas industry expectations were rewritten in the last decade. (But of course you already know all about that.)

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Fracking at the Becker-Posner blog

April 2, 2012

Lynne Kiesling

Fracking and energy self-sufficiency is the topic of the week at the Becker-Posner blog. Becker’s contribution provides a stream-of-consciousness overview that is consistent with the past fracking discussions here; it touches on fuel source competition, the quest for self-sufficiency, the environmental impact of fracking, and the likely effects of fuel export regulation. I’m disturbed by seeing the spectre of fuel export regulations rise again, and Becker correctly points out that at least in oil, as long as the world price is higher than the US domestic price, export regulations will have no impact. And with natural gas inventories so high that natural gas prices are falling toward zero, why harm US natural gas companies by restricting their ability to export to countries with higher prices when we have a surfeit?

Becker’s ultimate focus is how fracking contributes to energy self-sufficiency in the US: “Fracking has made the US self-sufficient in gas, and it is leading to reduced imports of oil. If this progress continues, before too long US consumption of oil as well as natural gas would not be drastically affected even by an entire breakdown of imports from the Middle East.” This conclusion depends on there being a reasonably high elasticity of substitution between oil and natural gas, but natural gas is not perfectly substitutable for oil in all instances. Take, for example, electricity generation. According to the EIA’s Electric Power Annual for 2010, there are 55,647MW of generation capacity using petroleum for fuel, and 40.2 percent of that capacity is switchable with natural gas (Table 1.8). Total nameplate generation capacity in 2010 was 1,138,638MW (Table 1.2), which means that only 4.89% of generation capacity uses petroleum fuel, and thus that 1.96% of total nameplate capacity is switchable to natural gas. Electricity is not where the oil-natural gas substitutability is. Coal-natural gas is a different story, but neither Becker nor Posner touch on that analysis, which is less relevant to their main question of energy self-sufficiency.

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Refiners are getting squeezed by high crude oil prices and faltering U.S. demand, so let’s increase their costs!

March 29, 2012

Michael Giberson

The Houston Chronicle reports on the difficult financial position of many U.S. refineries. Crude oil prices are up for refineries relying on international markets, but U.S. consumers are moderating their gasoline consumption at higher prices and so refiners find their margins to be getting squeezed.

A good article, but right at the end we get this oddball proposal:

Still, refineries could do more to curb skyrocketing gasoline prices, said Amy Myers Jaffe, fellow at Rice University’s Baker Institute. A government mandate for refineries to maintain a certain level of gasoline in storage would help to curb market fears of a shortage, fears that fuel rapid price spikes, she said.

“We should be requiring inventories of gasoline,” Jaffe said, to reassure the market that supplies won’t run short.

Seems to me a non sequitur wrapped in a riddle: refineries should be doing more to curb skyrocketing gasoline costs? Why refineries? Every indication is that gasoline prices are being driven by world oil crude oil prices (expect for the bottlenecked supplies of the northern Rocky Mountain states). There is no indication that “the market” is fearing a shortage of gasoline, is there? By the way, gasoline inventories are pretty high for this time of year AND consumption has been trending down, so who thinks consumer fears of a gasoline shortage are a problem?

And, I guess this is my real question, what makes Jaffe think that the solution to the refineries’ current woes is to impose regulations that would significantly add to their costs? Exactly how is this going to “do more to curb skyrocketing gasoline prices”?

Jaffe is usually smarter than this, so I’m a bit confused by the idea.

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Hamilton on the main reason oil prices are high

March 29, 2012

Michael Giberson

Saudi oil minister Ali al-Naimi said  there was “no rational reason” for current high oil prices, since there were enough supplies and all consumers were getting oil.

James Hamilton rises to object, “if oil prices were lower, the world would want to consume more than is currently being produced.” Hamilton examines what the quantity demanded might be at lower prices and concludes we’d need about an additional 15 million barrels a day in supply to meet consumer demand at oil prices of a decade ago.

So the higher price is encouraging some consumers to reduce their consumption while urging suppliers to increase, if they can, the amount of oil they bring to the market.

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