A study in the Journal of the Association of Environmental and Resource Economics entitled “External Impacts of Local Energy Policy: The Case of Renewable Portfolio Standards” finds that increasing the renewable portfolio standard (RPS) in one state reduces coal generation in neighboring states through trading of renewable energy credits (RECs). This contrasts with findings on greenhouse gas emission “leakage” under California’s cap and trade program put forth by the authors at the Energy Institute at Haas at the University of California here and here.
These latter set of findings has been used California Public Utilities Commissioners to argue against the use of RECs and implication that community choice aggregators (CCAs) are not moving forward increased renewables generation. This new study appears to land on the side of the CCAs which have argued that even relying on RECs in the short run have a positive effect reducing GHG emissions in the West.
Severin Borenstein’s post raises an important issue that economists have ignore for too long. I posted the following comment there:
We gave politicians the tool of benefit-cost analysis which they have used to justify their policy objectives, but we completely failed to drive home the requirement that those parties who are on the losing end need to be compensated as well. I looked in my edition of Ned Gramlich’s book on Benefit-Cost Analysis (who taught my course), and the word “compensation” is not even in the index! Working on environmental regulations, I regularly see agency staff derive large positive ratios for the “general public” and then completely dismiss the concerns of particular groups that will be carrying all the burdens of delivering those benefits. If we’re going to teach benefit-cost analysis, we need to emphasize the “cost” side as much as the “benefit” that politicians love to extol.
Catherine Wolfram at UC Berkeley posted about their paper looking at costs of distributed energy systems in Kenya and concluding that these were too expensive for households compared to connecting to the grid. However, the paper came under immediate criticism.
Here’s my thoughts based on her representation of the paper’s findings, some of which are mirrored by other commentators:
First, the paper talks about costs on one side, but doesn’t put them in perspective to the alternatives. The post lists the cost of the individual systems, but not the expected connection costs to the grid.
Further the paper takes a static look at current costs and doesn’t account for the differential trends in the sets of costs for an home-based system versus connecting to the grid. The latter costs can be expected to be steady or even rising, while it’s well known that both solar and storage costs have fallen rapidly.
Different scales of “grid” also are important. For example, solar projects show scale economies up to about 3 MW but then modular construction flattens the per kW cost. A village microgrid separate from a national central grid may be quite cost competitive.
Finally, the paper appears to lump large hydro in with other utility-scale renewables. The environmental (and economic development) record for large-scale hydro projects in the developing world is dubious at best. There is evidence of significant methane emissions from tropical reservoirs. Habitat is destroyed and poorly designed projects don’t deliver expected benefits. Hydro is by far the largest energy supplier on these grids, and they may be little better than coal from an overall environmental perspective.
Severin Borenstein at the Energy Institute at Haas makes the case for giving customers the choice of TOU or fixed price rates. I’ve commented several times on the Energy Institute blog about this approach, and blogged myself about the need for this option.
Maximillian Auffhammer at UC’s Energy Institute @ Haas focuses on the issue of exporting coal from the Port of Oakland, but he turns to the issue I highlighted recently–the path to accomplishing environmental objectives should travel through compensating those who are worse off from such policies.
A study just released from the E2e Project finds that the investment costs in residential energy efficiency greatly exceed the realized benefits. Earlier the same research program found that even if the energy efficiency measure packages, costing up to $5,000, were given away for free, only 6% of low income homeowners would participate. This is one of the first projects to track from start to finish a full set of energy efficiency projects. Much controversy has swirled around the accuracy of the engineering calculations used to estimate energy savings, and whether market barriers are impeding participation in what appears to be obvious cost saving actions. This study calls into question the premise of “costlessly” promoting energy efficiency actions.
The Project is run jointly by the University of California’s Energy Institute at Haas, the University of Chicago’s EPIC, and MIT.
Severin Borenstein at the Energy Institute at Haas blogged about the debate over moving to residential fixed charges, and it has started a lively discussion. I added my comment on the issue, which I repost here.
The question of recovery of “fixed” costs through a fixed monthly charge raises a more fundamental question: Should we revisit the question of whether utilities should be at risk for recovery of their investments? As is stands now if a utility overinvests in local distribution it faces almost no risk in recovering those costs. As we’ve seen recently demand has trended well below forecasts since 2006 and there’s no indication that the trend will reverse soon. I’ve testified in both the PG&E and SCE rate cases about how this has led to substantial stranded capacity. Up to now the utilities have done little to correct their investment forecasting methods and continue to ask for authority to make substantial “traditional” investment. Shareholders suffer few consequences from having too much distribution investment–this creates a one-sided incentive and it’s no surprise that they add yet more poles and wire. Imposing a fixed charge instead of including it as a variable charge only reinforces that incentive. At least a variable charge gives them some incentive to avoid a mismatch of revenues and costs in the short run, and they need to think about price effects in the long run. But that’s not perfect.
When demand was always growing, the issue of risk-sharing seemed secondary, but now it should be moving front and center. This will only become more salient as we move towards ZNE buildings. What mechanism can we give the utilities so that they more properly balance their investment decisions? Is it time to reconsider the model of transferring risk from shareholders to ratepayers? What are the business models that might best align utility incentives with where we want to go?
The lesson of the last three decades has been that moving away from direct regulation and providing other outside incentives has been more effective. Probably the biggest single innovation that has been most effective has been imposing more risk on the providers in the market.
California has devoted as many resources as any state to trying to get the regulatory structure right–and to most of its participants, it’s not working at the moment. Thus the discussion of whether fixed charges are appropriate need to be in the context of what is the appropriate risk sharing that utility shareholders should bear.
This is not a one-side discussion about how groups of ratepayers should share the relative risk among themselves for the total utility revenue requirement. That’s exactly the argument that the utilities want us to have. We need to move the argument to the larger question of how should the revenue requirement risk be shared between ratepayers and shareholders. The answer to that question then informs us about what portion of the costs might be considered unavoidable revenue responsibility for the ratepayers (or billpayers as I recently heard at the CAISO Symposium) and what portion shareholders will need to work at recovering in the future. As such the discussion has two sides to it now and revenue requirements aren’t a simple given handed down from on high.
I have an observation that that has only been alluded to indirectly in the debate. The main point of the legislators’ letter calling for a delay in implementation is that low income groups may be particularly hit. The counter argument that we need the inclusion of transportation fuels under the cap to incent innovation seems to pit the plight of the poor against the investment risk of wealthy entrepreneurs. We haven’t really done a good job of addressing affordability of the transformative policies that can change GHG emissions. The proposal to use carbon tax revenues to rebate to low income taxpayers has been floated at the national level, but of course that died with the rest of the national cap and trade proposal. A similar proposal was made to mitigate electricity price impacts.
Our state legislators are rightfully concerned about the impacts on those among us who have the least. Nevertheless, that problem is easily addresses with the tools and resources that are already available to the state. Those families and households who now qualify for the CARE and FERA electric and natural gas utilities rate discounts can be made eligible for an annual rebate equal to the average annual gasoline consumption multiplied by the amount of the GHG allowance cost embedded in the gasoline price. This rebate could be funded out of the state’s allowance revenue fund. For example, if the price is increased by 15 cents per gallon and the average automobile uses 650 gallons per year, an eligible household could receive $97.50 for each car.
About 30% of households are currently eligible for CARE or FERA. On a statewide basis, the program would cost about $650 million, which is comparable to the cost for CARE for a single utility like PG&E or Southern California Edison. Those legislators who are most concerned can coauthor legislation to put this program in place.
(BTW, I think the DOE fuel use calculator is outdated–on my many trips to LA I haven’t seen these types of fuel economy changes. My average MPG is pretty much the same no matter how much traffic there is on I-5. But that’s just a fun fact aside…)