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Category — Conservationism

‘Demand Response’ in Electricity: Economists vs. FERC on (Over)Pricing

“The [Federal Energy Regulatory] Commission’s recent progress in promoting competitive wholesale energy markets has the potential to be undone as a result of this well-meaning, but misguided Rule.”

- FERC Commissioner Philip Moeller, “Demand Response Compensation in Organized Wholesale Energy Markets,” Order No. 745 (2011).

Renewable energy subsidies are at the forefront of the public policy debate with constant talk of “green” jobs and the looming expiration of the production tax credit, a familiar subject at this blogsite. But qualifying renewables get other subsidies too, such as accelerated depreciation and state-level must-buy mandates.

The Federal Energy Regulatory Commission (FERC), regulating interstate electricity, is arguably subsidizing another favorite “green” resource – the practice of energy abstinence called “demand response.”

FERC Order Nos. 745 and 745-A established, for the first time, a uniform compensation scheme for demand response in organized electricity markets. Before Order No. 745, each regional transmission organization was free to develop its own compensation scheme, and demand response was already being implemented in organized markets such as PJM. Commenters disagreed with several aspects of the order, including the appropriate level of compensation. When FERC denied rehearing on that issue (and others), protesters sought review by the Court of Appeals (Electric Power Supply Ass’n, et al. v. FERC, No. 11-1486, et al.). The case is at the briefing stage, with oral arguments to be scheduled.

The MasterResource-worthy part of this case is the amicus brief filed by a group of academic energy economists. It takes a lot for economists to agree in the first place, let alone to jointly file a 30-page brief on a nuanced issue in the field of electricity markets. To raise the stakes a bit, I should also note that one of FERC Chairman Jon Wellinghoff’s main priorities, along with integrating renewables, is encouraging demand response. A reversal on this issue would be a big deal.

Background: ‘Demand Response’

Retail electricity customers tend to pay a fixed rate for their electricity. However, in organized wholesale markets, the price of electricity at different points in the transmission grid can vary widely between seasons and even throughout the day depending not only on demand and supply, but also on transmission constraints. That wholesale market price is often referred to as the Locational Marginal Price (LMP).

That price structure means there is a disconnect between wholesale and retail electricity markets, and therefore retail customer usage is not responsive to wholesale price fluctuations. This can be troublesome as price-insulated electricity demand reaches the upper limits of the grid’s physical capacity to supply. Grid reliability is threatened, and despite sky-high prices at the wholesale level, retail customers carry on using electricity, blind to the wholesale price signal.

Enter demand response (or imputed demand response to be fair to the electricity nerds out there). The promise of demand response is to bridge the wholesale-retail gap by giving retail customers the incentive to withhold consumption when wholesale prices are high, easing the strains on the system at times of peak electricity usage. This “peak-shaving” effect can strengthen the reliability of the system and put off costly transmission investments. However, significant differences of opinion remain as to the best way to send wholesale price signals to retail customers. This is where the economists and the FERC majority are at odds.

The FERC Majority: Pay Demand Responders Full LMP

In Order No. 745, FERC reasoned that, “when a demand response resource has the capability to balance supply and demand as an alternative to a generation resource,” the demand response resource should be paid the full LMP. Some commenters agreed – some not so much. As FERC stated: [Read more →]

September 13, 2012   15 Comments

Energy Consumers vs. Regulators: Who Knows Best? (Mercatus study stands up to critics)

“Perhaps the main failure of rationality is that of the regulators themselves.”

-Ted Gayer and W. Kip Viscusi, authors, Overriding Consumer Preferences with Energy Regulations

In a working paper for the Mercatus Center titled Overriding Consumer Preferences with Energy Regulations, economists Ted Gayer and W. Kip Viscusi examine several energy use regulations and the accompanying Benefit-Cost Analyses (BCAs). They find the regulations would not pass a BCA (provide net benefits) without two assumptions: first, that individuals make systematic and financially significant mistakes in their energy consumption choices, and second, that government policies can correct these mistakes.

The regulations cited in the paper include mileage requirements for vehicles and energy efficiency standards for household appliances and light bulbs. The BCA numbers are telling – the authors show, for example, that the vast majority (about 85 percent) of the estimated benefits of the mileage requirements proposed in 2011 accrue to the individual user, mostly in the form of avoided fuel costs.

Without counting these private benefits (strictly counting avoided external costs, including CO2 emissions), the regulation would fail the BCA. That is, the regulations only make economic sense if we assume consumers behave irrationally when left to their own devices.

“Energy Efficiency Gap”

One type of irrationality discussed in the paper manifests as an energy efficiency gap, defined by some as “the difference between the actual level of energy efficiency and the higher level that would be cost-effective from the individual’s or firm’s point of view.” (International Energy Agency, 2007) The idea is that consumers neglect significant future energy savings by forgoing gainful investments in more energy-efficient cars, appliances, light bulbs, etc. According to proponents of the concept, consumers in such situations reveal irrationally high discount rates by their willingness to pay higher energy costs over the life of the product.

However, the authors criticize the concept of the energy efficiency gap on several levels, including the basic methodology for calculating the gap. “Since the engineering studies focus only on capital costs and operating costs,” the authors find, “they do not allow for any heterogeneity of preferences and use of products across consumers.” [Read more →]

August 6, 2012   8 Comments

Energy ‘Rebounds’ and ‘Backfires’: An Introduction and Literature Overview

Much of today’s energy policy assumes that regulations mandating greater energy efficiency will reduce energy use. But that isn’t always the case, and energy efficiency improvements are seldom as large as promised by engineering calculations because of “rebounds.” Such is the most general conclusion from hundreds of studies pertaining to the effects of energy efficiency, whether market or nonmarket.

Such is the message from my literature review published by the Institute for Energy Research (pictured here):

For example, people who install lighting that is 50 percent more efficient frequently leave the lights on longer, negating some of the energy savings from greater efficiency. This is called an energy efficiency rebound. Sometimes these mechanisms even bring about net increases in energy use known as backfires.

Rebounds have a direct implication for energy efficiency mandates and incentives. If rebounds are substantial, efficiency policies will be less effective at reducing air pollutants, for example, because the “saved” energy gets consumed elsewhere. Energy consumption may even increase on net to cause backfires.

Rebounds, and certainly backfires, fall into the ‘unintended consequences’ category of government intervention into the complex market. It is reason to ‘let the market decide’ with energy usage, as in energy production. [Read more →]

July 17, 2012   5 Comments

Economic Efficiency, Not ‘Energy Efficiency’ (Economist Cordato parses a sacred cow)

Energy efficiency and energy savings are considered to be intrinsically good. Politicians of all stripes sing the praises of less-is-more. Only one problem: this view is simplistic and wrong from the economic point of view.

Energy efficiency is so central to the current energy conversation that to criticize it is to take on the unenviable role of the contrarian or, as some have called me, the curmudgeon. In a recent paperRoy Cordato of the John Locke Foundation happily takes on the role of critic as he dissects energy efficiency as a policy goal.

Dr. Cordato states in part:

It seems that no matter what governments at any level do, from building buildings to formulating and implementing legislation, “energy efficiency” has to be a consideration…. The problem is that the term, as defined by those who embrace it as a policy guide, is focused strictly on saving energy even if it means sacrificing overall economic efficiency.

Cordato draws a key distinction between energy efficiency and economic efficiency. Strictly speaking, energy efficiency is a type of technical or engineering efficiency focused on reducing one input, energy, in providing a given service or product. On the other hand, economic efficiency is a broad and all-encompassing concept that takes into account the relative costs of all inputs. Cordato explains: [Read more →]

July 6, 2012   17 Comments

The Conundrum – by David Owen (Jevons’ “rebound effect” enters the New Yorker mainstream)

Whether it is a new fuel efficiency standard for cars, bans on incandescent light-bulbs, or those commercials touting businesses’ commitment to lowering their carbon footprint, the idea that we can reduce carbon emissions by using energy more efficiently is a mantra of our age.

In fact, energy efficiency is considered to be so important that it is sometimes said to be a “fifth fuel” along with coal, petroleum, nuclear, and “alternative” energy. And who can forget Amory Lovins’s term negawatt in this regard?

But as New Yorker staff writer David Owen details in his new book The Conundrum, the idea that we can reduce our energy use by buying the right products is based on flawed economic reasoning.

Background

Improving efficiency and related conservation are not unique to energy but all resources. They are part of the natural, self-interested capitalist process. Resource economist Erich Zimmermann noted back in 1933:

Today the conservation movement is led by sober business men and is based on the cold calculations of the engineers. Conservation, no longer viewed as a political issue, has become a business proposition…. The old school looked on conservation as a governmental function; the new school believes in entrusting it to the hands of business men and engineers.

The energy conservation movement of our era begin during the 1970s energy crisis, when oil and natural gas price controls in the United States spawned the energy crisis. [1] Since then, energy efficiency has had a life of its own in the public discourse and in government capitals. [Read more →]

May 2, 2012   9 Comments

Remembering the Birth of Conservationism (Part II: Amory Lovins’s “Soft Energy Path”)

[Editor note: Part I on energy conservationism examined Richard Nixon's price control order of August 1971 as the birth of peacetime conservationism , with shortages leading to mandatory allocation law.]

A tract for the energy-shortage times was a 1976 essay in Foreign Affairs by Amory Lovins, the 29-year-old energy representative of the U.K. environmental group, Friends of the Earth. In “Energy Strategy: The Road Not Taken?” Lovins coined the term soft energy paths to differentiate energy conservation and decentralized renewable technology from the “hard” path of central-station power plants fueled by oil, gas, coal, or uranium.

Neo-Malthusians such as Paul Ehrlich and John Holdren sang his praises, and the article became the most reprinted piece in the history of Foreign Affairs. Lovins was soon testifying before the U.S. Congress and advising President Carter on the proposition that the least-cost energy option was not to produce energy, but to save it.

Unlike S. David Freeman of the Ford Foundation Energy Project (see post yesterday), Lovins, an Oxford don, specialized in the technical minutiae of energy and wrote, footnoted, and argued his opponents into despair, never mind how hypothesized and obscure his engineering-grounded pontifications were from demonstrated market preferences. Lovins became the most talked about energy guru in the world during the crisis period, with a deceptively simple message that less was more. To critics, however, Lovins was “selling a dream without presenting the bill.”

Lovins held a deep-rooted suspicion—even phobia—about the energy market. “It is hard to think of any current energy technology in extensive use that does not hold the potential for serious long-term environmental risks—risks which may today be wholly unsuspected,” he warned. From this premise came his worldview, later dubbed whole systems thinking, that saw current energy usage—thus production—as a massive market failure. “We must devise a science and a technology of energy impact analysis so that we can make energy a critical variable in all policy decisions, rather than leaving it to emerge de facto from decisions taken on other grounds,” he wrote in 1975. “Boundary conditions on the energy inputs are now needed.” This message was new to the United States energy debate, although the “small is beautiful” theme of E.F. Schumacher was already popular in Europe.

Lovins’s first order of business was to push for a short-term phase-out of nuclear power—a signature issue for Friends of the Earth. Lovins feared that the rapid depletion of oil and gas would segue to super-abundant coal and nuclear—a bad transition and worse long-run lock-in to him. Lovins wanted “transitional technologies that use fossil fuels briefly and sparingly to build a bridge to the energy-income [energy-renewable] economy of 2025.” However wrong this would turn out to be, Lovins would fare better with his second aim: full-scale deployment of conservation technologies to reach a “realistic long-term goal” of “modest, zero, or negative [energy] growth” per unit of output. [Read more →]

May 3, 2011   7 Comments

Remembering the Birth of Conservationism (Part I: President Nixon’s price controls, not Arab OPEC, produced energy crisis, demand-side politicization)

[Editor note: Part II on energy conservationism tomorrow examines the energy conservation faddism of Amory Lovins.]

Richard Nixon (1913–94) got on the wrong side of economic law three years before his Watergate-related resignation from the U.S. presidency. In August 1971, in a surprise decision, Nixon imposed the first peacetime wage-and-price controls in American history.

Businessmen reined in their surprise to pragmatically offer support. John Kenneth Galbraith and Paul Samuelson offered quick congratulations. There was public approval of the ‘temporary’ action that was intended to just quell inflationary expectations (as if the problem was psychological and not the inherent consequence of expansionary money). The inflation rate was then running at about 4 percent per year.

Free-market economist Milton Friedman, knowing that shortages lay ahead, lambasted the move. So did Ayn Rand in the Ayn Rand Letter. Murray Rothbard was fiercely critical (“on August 15, 1971, fascism came to America,” he wrote); he had seen price controls and shortages before.

Nixon’s edict disabled the market process responsible for coordinating supply with demand and allocating resources to their most profitable use. Predictably, oil shortages developed, which resurrected long dormant depletionist thinking and pointed policymakers toward conservationism. After all, if price controls did not allow prices to rise and “regulate” demand to available supply, then government had to—at least according to the majority of policymakers and neo-Malthusians whose worldview dovetailed nicely with public sentiment against the energy industry.

Birth of Peacetime Conservationism

The oil crisis, contrary to popular remembrance, did not begin with the Arab Embargo of October 1973. It began with petroleum product shortages that arose in late 1972 when price controls became constraining. In February 1973, Senate hearings on fuel shortages demonstrated, in the opinion of committee chair Henry Jackson (D-Wash),

One, there has been an unprecedented breakdown in our energy supply and distribution system;

Two, the fuel shortages now being experienced are far more extensive than anticipated;

Three, more severe shortages of fuels, particularly gasoline, are in the offing. [Read more →]

May 2, 2011   No Comments

Daylight Saving Time: Arrogant Central Planning

Although smart phones and computers make it easier to remember, last month Americans endured the semi-annual hassle of changing their clocks an hour. “Daylight Saving Time” (DST) was originally started during World War I to allegedly save energy. Jimmy Carter gave it to us in peacetime as part of his National Energy Plan. In practice, DST causes needless headaches—and even heart attacks!—and arguably doesn’t even save energy.

Chalk it up to yet another failed government intervention.

 The Hubris of DST

Joe Romm is not afraid to recommend society-changing government intervention in order to achieve a conservation goal, and he proposes drastic carbon legislation to prevent what he sees as “hell and high water.” Yet even this central planner hit the nail on the head when he complained: “You can’t save daylight by moving around the hands on your clock, of course. So daylight saving time remains as absurdly named as it ever was.”

For those who are skeptical of the current suite of climate models, Romm’s complaint is ironic. The same mindset that led government wartime planners to alter time, leads today’s planners to project what the global temperature will be in the year 2080.

The Harm of DST

There are many harms to DST. Most obvious, there is the hassle every household endures in actually changing the numerous clocks (microwaves, nightstand, watch, car, etc.). Although this doesn’t seem like a big deal, imagine if the federal government mandated that every U.S. citizen sit in a timeout corner for 15 minutes twice a year. Multiplied over hundreds of millions of people, that would add up to a significant waste of time, unless there were some corresponding benefit to the practice. [Read more →]

December 3, 2010   4 Comments

“Why Energy Efficiency Does Not Decrease Energy Consumption:” Comment on Harry Saunders

One of the most curious facts about energy is that economies continue to use more of it even as they use it more efficiently. This strikes us as strange because it has become an article of faith that making cars, buildings, and factories more energy efficient is the key to cheaply and quickly reducing energy consumption, and thus pollution.

But energy experts have never seen this as particularly mysterious. As energy historian Vaclav Smil notes, “Historical evidence shows unequivocally that secular advances in energy efficiency have not led to any declines of aggregate energy consumption.” A group of economists beginning in the 1980s went further, suggesting that increasing the productivity of energy would increase economic growth and energy consumption.

Efficiency advocates dismiss the evidence of rebound of energy use pointing to direct behavioral changes at the household or business level that are easiest to measure. But the most significant energy rebounds are indirect — in the production of energy, raw materials, and consumer goods — not in the “end use” consumer products.

Below, a leading energy economist, Harry Saunders, explains why energy efficiency does not decrease energy consumption in the way we conventionally understand it. In the process, Saunders clarifies the controversy over his recent co-authored study for the Journal of Physics, which reviews 300 years of lighting history to predict the impact of new solid-state lighting technologies (e.g. LEDs).

Against the widespread belief that new lighting technology will reduce energy consumption, Saunders and his colleagues found that they will likely increase it — greatly expanding the global use of lighting in the process, especially in developing countries. Saunders clarifies some important questions, and explains the basics of “the rebound effect.”

With the new study, rebound has firmly moved from the theoretical to the empirical, and the implications of it must now be dealt with by all of us who were counting on efficiency to be an easy way to reduce greenhouse gas emissions.

Here is Saunders’s latest thinking: [Read more →]

October 1, 2010   20 Comments

Demand-Side Management: Government Planning, Not Market Conservation (Testimony of Dan Simmons Before the Georgia Public Service Commission)

Editor Note: Demand-Side Management (DSM) is an electric-utility program where all ratepayers subsidize the energy conservation investments of those ratepayers who participate in the program. Dan Simmons, director of state affairs for the American Energy Alliance and for the Institute for Energy Research in Washington, D.C., submitted the following testimony in opposition to Georgia Power Company’s request to implement a DSM program.

Summary from Testimony: Market vs. Non-Market Conservation

Advocates of demand side management frequently overlook the human dimension. People make conservation decisions every day. Families are constantly striving to maximize the benefits they receive from using energy with the cost of using that energy.

Some economic analyses try to argue that ratepayers systematically misestimate the proper discount rate and therefore DSM is required to fix this error. But those analyses fall victim to assuming they know what’s best for ratepayers. The people who know best are ratepayers themselves. Only the individual ratepayer can decide how he or she best allocates their scare resources.

DSM leads to inefficient outcomes. It increases rates for all ratepayers, but only benefits a few of the ratepayers. Because history shows that DSM programs do not typically lead to the demand reductions claimed, they do not lead to lower electricity rates overall.

DSM is not new. It has been tried and studied for years. DSM is subject to the well known problems of the rebound effect, free riders, moral hazard, to name a few. Georgia Power’s 2010 Integrated Resource Plan and Application for Certification of Demand Side Management Programs analysis does not explain how this program will overcome these well-known economic problems nore does it explain how it will overcome the problems with Georgia Power’s DSM program from the 1990s. Without an analysis, it is difficult to believe Georgia Power’s DSM programs will achieve the benefits Georgia Power projects.

TESTIMONY

Q. PLEASE STATE YOUR NAME, TITLE AND BUSINESS ADDRESS.

A. My name is Daniel R. Simmons. I am the Director of State Affairs for the American Energy Alliance and the Institute for Energy Research, non-profit organizations that educate the public on energy policy. Our offices are located at 1100 H Street, Suite 400, Washington, DC 20005.

Q. PLEASE SUMMARIZE YOUR EDUCATION AND PROFESSIONAL EXPERIENCE.

A. I received a Bachelor of Science in Economics from Utah State University in 1998 and a Juris Doctorate from George Mason University School of Law in 2003. In 1998, I moved to Washington, D.C. and worked for the Competitive Enterprise Institute as an environmental policy analyst. In 2000, I went to work for the Committee on Resources of the United States House of Representative as a professional staff member. From 2002 to 2005, I was the Emmett McCoy Research Fellow at the Mercatus Center and from 2005 to 2008, I was the Director of the Natural Resources Task Director at the American Legislative Exchange Council. From 2008 and presently, I am the Director of State Affairs at the American Energy Alliance and the Institute for Energy Research. [Read more →]

May 20, 2010   3 Comments