Archive for Policy

New York’s Energy Highway: Public Comment until July 31

In his 2012 State of the State address, Governor Andrew M. Cuomo put forward an initiative to upgrade and modernize New York State’s electric power system.  The goal is to systematically plan new electricity generation and transmission in the state with all the relevant government agencies and private developers at the table.

The first stage of the proposal was a request for information about proposed generation and transmission from developers, utilities, and interest groups.  These responses are in, and are shown on these maps:

NY Energy Highway Transmission

Ny Energy Highway Generation Map

The Energy Highway taskforce will be taking comments from the public on these proposals until July 31, and issue an action plan based on all the information received sometime this fall.

More information is available at the NY Energy Highway website.

You can submit comments here.

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Risk Aversion and Pricing Climate Risk

I felt the “Editor’s Corner” article in the most recent Financial Analysts Journal (Sept/Oct 2011) “Pricing Climate Change Risk Appropriately” does an excellent job explaining why the possibility of extreme climate scenarios justifies a considerably higher price for carbon than would be warranted under the most likely or average scenario: Humans are risk averse.

Equities… have low prices (and high expected returns) because their cash flows are discounted by society at high rates. The reason has to do with the anti-insurance aspect of equities: Their cash flows are highest in good states of nature whereby the value placed on the cash flows is low. In contrast, efforts to mitigate climate change by pricing carbon emissions will be most valuable to society if climate change turns out to have catastrophic consequences for society’s well-being. Because of this insurance aspect, society should be willing to pay higher prices for climate change mitigation.

FAJ Executive Editor Robert Litterman goes on to explain the mechanics behind carbon pricing models and their flaws, as well as why equity analysts are uniquely qualified to do these assessments.

I’ve long thought that financial market theory is uniquely applicable to understanding climate and the measures needed to mitigate climate change. what I don’t understand is why I hear so few analysts talking about it, so it was very refreshing to come across this article applying a deep understanding of economic pricing theory to what the greatest challenge the world will confront in the 21st century.

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Fossil Debt

An off-hand comment by Marc Gunther in an article on Solyndra about the started an email chain between the two of us on green jobs.

We agree that most of the debate is silly, but I see some interesting economics underlying green jobs. I explore those ideas in this article: The Microeconomics of Green Jobs.

The article also gave me the opportunity to explore a parallel between using fossil fuels and running up the deficit:

[I]f we spend too much borrowed money to create jobs today, the long-term drag on the economy caused by paying back the debt will leave everyone worse off.

Economic growth fueled by the extraction of non-renewable resources is very similar to economic growth fueled by debt. When we extract these resources and use them, we increase economic activity today, but their non-renewable nature means that we lose the opportunity to extract and use them tomorrow. Hence, the economic stimulus today comes at the cost of an economic drag tomorrow, and the future economic drag will generally be larger than today’s stimulus, since improving technology should allow us to get more benefit from each unit of resource in the future.

Using renewable resources to stimulate growth does not have this problem: Tapping the wind or the sun for energy today does nothing to diminish the wind or sun tomorrow.

In my mind, this is a deep contradiction in current Conservative politics: they don’t like debt (and I agree) but they do like fossil fuels.

I’d be a conservative, if being a conservative actually meant conserving things.

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Savoring the Irony

I recently bought an e-Bike (Currie Technologies iZIP Hybrid Via Mezza), mainly for trips to the grocery store. There are some serious hills between me and the grocery store, and I’m not up to tackling them with a full load of groceries.

It may be a cheatercycle, but especially on hot days like today, it’s very nice to be able to take advantage of the cooling breeze you get while you’re pedaling without having to pedal so hard you’re overheated anyway. If an electric motor gets me to take the bike when I would have been tempted to get into the car, it’s a good thing.

I couldn’t resist riding it to the DMV today to register my car. How’s that for irony? Of course it would be better if I could get by without the car at all, but I live a bit to rural for that.

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The Rebounding Rebound Effect & How to Dodge Jevons’ Paradox

There’s a new paper from the Victoria Transportation Policy Institute looking into the price elasticity of both miles driven and fuel use. The author, Todd Litman, has done an in-depth literature survey which will be of interest to readers who liked my recent look into Jevons’ Paradox.

Jevons’ Paradox, also known as the rebound effect, states that increasing efficiency can lead to increased use of a resource, because the resource is now cheaper. I pointed out that this is only true in elastic markets, where the use of a resource is sensitive to price. In inelastic markets, it makes sense to mandate efficiency, because efficiency will not greatly increase use. In elastic markets, the best policy avenue is to increase the marginal price of usage.

One great example of this is the potential benefits of smart metering. While the early results of smart metering trials were very positive, seeming to show that average people would reduce their energy use by 10-15% when given good data, more recent and broader trials have shown that the actual effect is much smaller. The difference is that the early trials tended to be focused on particularly price-sensitive populations, such as people who had trouble paying their electricity bills who reduced their energy use for Woodstock Hydro. More recent trials have shown much lower reductions in bills because they have been serving the general populace, not just a particularly price sensitive subgroup, like the poor or people who volunteer to have smart meters installed.

Litman’s survey of price sensitivities reaches several interesting conclusions:

1) While the price sensitivity of driving is quite elastic, the price sensitivity to fuel cost is much less elastic because fuel only accounts for about a quarter of the cost of driving.
2) Price sensitivities were temporarily depressed over the last 25 years due to various demographic changes, and now seem to be rebounding. As a result, many policies meant to reduce fuel use (such as higher CAFE standards) are likely to be less effective than expected due to the rebound effect. Better policies would work to increase the marginal cost of driving without increasing the total cost. Such policies include Pay as you drive car insurance and registration.

There’s much more. I highly recommend it or anyone interested in policies to reduce our dependence on foreign oil. Blurb follows:

Changing Vehicle Travel Price Sensitivities, The Rebounding Rebound Effect (www.vtpi.org/VMT_Elasticities.pdf ).

There is growing interest in various transportation pricing reforms to help reduce traffic congestion, accidents, energy consumption and pollution emissions. Their effectiveness is affected by the price sensitivity of transport, that is, the degree that travelers respond to price changes, measured as elasticities (the percentage change in vehicle travel caused by a percentage change in price). Lower elasticities (price changes have relatively little impact on vehicle travel) imply that pricing reforms are not very effective at achieving objectives; that higher prices significantly harm consumers; and rebound effects (additional vehicle travel that results from increased fuel efficiency) are small so strategies such as fuel economy mandates are relatively effective at conserving fuel and reducing emissions. Higher elasticities imply that price reforms are relatively effective, consumers are able to reduce vehicle travel, and rebound effects are relatively large. Some studies found that price elasticities declined during the last quarter of the Twentieth Century, but recent evidence described indicates that transport is becoming more price sensitive. This report discusses the concepts of price elasticities and rebound effects, reviews information on vehicle travel and fuel price elasticities, examines evidence of changes in price elasticity values, and discusses policy implications.

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JouleBug

Competition may just be the key to getting normal people to adopt energy efficiency. Keeping up with the Joneses is a lot more important to most people than saving money (otherwise, we’d never buy an expensive car to impress the neighbors.)

That’s why I’m excited to hear about JouleBug, a social App/game for the iPhone (and soon Android) that turns saving energy into a reality-based friendly competition.

Players compete to earn badges from various energy-saving activities

JouleBug launched today at the South by Southwest Trade show. Press release follows. Read the rest of this entry »

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New Light Rail Stations May Not Increase Transit Ridership

A report (pdf) by the Kitty and Michael Dukakis Center for Urban and Regional Policy at Northeastern University found that new rail stations and transit-oriented development often fail to increase transit ridership.

New stations can sometimes lead to gentrification that prices out renters and low-income households. Since such households are core users of transit services, the new station may have the perverse effect of actually causing local ridership to decrease.

The study did not look at system-wide effects of such stations; I would expect new stations to lead to an increase in system-wide ridership over time, since the displaced renters and low-income households will most likely continue using transit in their new neighborhood, and many of the new higher-income residents will use transit for some trips that they would not have before they lived in a neighborhood with easily accessible transit.

Here are some highlights from the report compiled by Andrew Nusca at SmartPlanet:

* For 64 percent of the neighborhoods around the new rail stations in the study (that’s 27 of 42 total), population grew more quickly than the rest of the metro area.
* 55 percent of those neighborhoods showed a “dramatic” increase in housing production.
* 62 percent of those neighborhoods showed a faster increase in owner-occupied units than the rest of the metro area.
* 50 percent of those neighborhoods showed an increase in the proportion of non-Hispanic white households relative to the rest of the metro area. (The other half showed no change or a decrease.)
* 62 percent of those neighborhoods showed an increase in median household income; 60 percent showed a boost in the proportion of households with incomes of more than $100,000.
* Perhaps most tellingly, 74 percent of the neighborhoods showed rents that increased faster than the rest of the metro area. A full 88 percent had a relative boost in median housing values, too.
* In 40 percent of the new transit neighborhoods, public transit use declined relative to the rest of the metro area.
* In 71 percent of the neighborhoods, ownership of a vehicle increased; in 57 percent, ownership of two or more cars increased.

The report was published with a “Toolkit for Equitable Neighborhood Change in Transit Rich Neighborhoods” with several sensible suggestions for moderating the adverse effects (mainly on renters and low income households) of a new rail transit station, mostly related to planning and zoning.

Of course, a transit agency primarily concerned about increasing ridership and equity at the same time might simply consider adding more and better bus service in a neighborhood, something which can be done at much lower cost than adding a new rail station. In my mind, the ideal option would be to do some of both, with new rail stations complemented by frequent bus routes that bring riders to the station from surrounding areas.

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Net Benefits of CAFE stadards

I just frittered away an hour poking holes in a 2002 paper from the American Enterprise Institute and the Brooking Institution that purports to show a net cost to society from higher CAFE standards. Even using the paper’s questionable results, my calculation show an a posteriori net benefit had CAFE standards been raised at the time the paper was written.

Here are links to the original article on Knowledge Problem that spurred me to defend CAFE standards, a link to the AEI/Brookings paper, and my comments on the weaknesses in the paper’s analysis.

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Who’s Afraid of the Big Bad Price Gouger?

Until I started reading Micheal Giberson’s posts on price gouging, I had not given the subject of price gouging much thought.

The main question of debate is “Is it moral for a retailer to charge more for a product when demand surges due to outside circumstances?” A classic example is charging for snow shovels in a snowstorm. In a recent post, Micheal poses the question:


Consider two hardware stores: one prices snow shovels at $15 when there is no snow and at $20 when there is snow; the other maintains a fixed price for snow shovels under both no-snow and snow conditions. In equilibrium, the second store will carry a smaller inventory than the first and offer it a price between $15 and $20. Which pricing policy is more moral?

I have to say that I don’t have a ready answer. I’m tempted to think that both store owners are acting morally, and that morality rests not with the store owner, but with the snow shovel customer.

If the customer plans ahead and receives the low “no snowstorm” price, there is no reason to complain. After all, who ever complains about a sale?

If the customer does not plan ahead, and is forced to buy the $20 shovel from the first store because the second store has run out, whose fault is it? I place the fault squarely on the customer who did not plan ahead for a snowstorm, and if that customer subsequently complains about price gouging, that complaint seems immoral in my eyes.

I think it’s everyone’s right to not plan for disaster if the consequences fall only on themselves. But if they then complain because they are being taken advantage of in the vulnerable position they’ve put themselves in, I have no sympathy. Buyer morality grid

Put simply, the store owners are planning for the snowstorm, and willing to accept the consequences of their actions. Buyers may or may not plan ahead, but it’s only when they are not willing to accept the consequences of their actions that I consider them immoral.

The only circumstance in which I’d place any moral onus on the store owner is when the disaster could not be foreseen. In this case, neither store owner will have snow shovels on hand because there will have been no market for snow shovels before the storm, so the whole question is moot anyway.

On the other hand, if the disaster can be be foreseen, but the consequences of not planning fall on society as a whole, then those who oppose preparing for the disaster are immoral because they are forcing others to share in the consequences of their decision.

If you read this blog regularly, you can probably figure out which coming disaster I have in mind. Are you advocating preparation, or opposing it?

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Drivers’ Rising Price Elasticity

A recent paper from Todd Litman at the Victoria Transport Policy Institute shows that drivers have become more sensitive to changes in the price of driving (and gasoline) in recent years.

Recent estimates of the long-run elasticity of driving are between -0.4 and -0.6, meaning that a 10% increase in the cost of driving should decrease miles driven by 4-6% over time.

There are several policy implications of rising elasticity:

1. People are more able to adjust their driving habits in response to changing prices, so pricing measures such as gas taxes, parking fees, and Pay-as-you-drive pricing are becoming more effective, and they are also more fair to the poor, who are likely to reducing driving more with an increase in price.

2. Vehicle efficiency standards will be less effective at cutting gasoline consumption due to the rebound effect: as the cost of driving drops with increased vehicle efficiency, people will drive more, partly offsetting the gasoline savings.

You can read the full paper here: http://www.vtpi.org/VMT_Elasticities.pdf

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Will PACE Financing Damage the Mortgage Market?

The Federal Housing Finance Agency (FHFA), which oversees the government agencies Fannie Mae and Freddie Mac, is now joining them in saying that Property Assessed Clean Energy (PACE) financing “could damage the mortgage market.”

PACE financing is an important program that addresses multiple barriers to energy efficiency. First, it addresses upfront cost: although energy efficiency measures usually pay for themselves, most require an up-front investment which many people have trouble making. PACE financing also helps address split incentives. Because efficiency improvements can take several years to pay back, and most Americans move every few years, the benefits of efficiency don’t always accrue to the people who invest in them. With PACE, the loan used to make the improvement is assessed on the property, so the person who is saving money in energy costs is always the same person who is paying for the energy improvements.

Jonathan Hiskes at Grist makes the counter-argument that PACE financing is not really something new, as the FHFA and the mortgage giants claim, and I agree with him, but there are several stronger arguments against the mortgage regulator’s position that I have not yet seen made.

The FHFA is worried that the “lending is not based on the homeowner’s ability to pay, it bypasses consumer protections such as the Truth-in-Lending Act, and it may not lead to meaningful reductions in energy consumption.” I’ll address each of these points in turn:

Ability to pay. The lending does not need to be based on the borrower’s ability to pay, because the energy improvements improve that ability to pay. For example, Boulder Colorado’s now canceled PACE program required that the homeowner first get an energy audit, which is then used to estimate the cost savings of possible energy improvements. If the homeowner is able to pay for his or her current mortgage (which, supposedly, is based on his ability to pay), then after the energy improvements and the PACE loan, he or she should have better cash flow, and be better able to pay. In other words, PACE should improve the owner’s ability to pay, and actually strengthen the mortgage market.

Consumer protections Unlike complex mortgages, the most important thing about a PACE loan is that the monthly payment be less than the monthly savings, so they are inherently easier for consumers to understand. But if consumer protections are necessary, there’s no reason they could not be added to PACE lending programs without canceling the whole program, as the FHFA seems to want.

May not lead to meaningful reductions in energy consumption. Quite simply put, this is an attempt to throw the baby out with the bathwater. A good PACE program requires an energy audit and professional installation in order to ensure energy savings. It’s important to design PACE programs carefully, but that’s true for any lending program, or any program whatsoever.

Rather than putting a stop to all PACE lending, as has happened, good programs (such as Boulder’s) that do provide some assurance that energy savings will be achieved should continue, since they strengthen borrower’s ability to pay rather than weakening it.

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Can the Poor Afford a Community Solar Garden Subscription?

Yesterday, I wrote about Community Solar Gardens (CSGs) and their uses from an investment perspective. One of the goals of CSG legislation is to allow people without access to large amounts of credit the opportunity to invest in solar. Yet there is a clause in the bill that places the size of the smallest allowable CSG subscription at 1kW. A typical home system is usually between 2kW and 10kW, so a 1kW system does not seem unreasonable if the intent is to simulate a home system. However, if the intent is to allow people of all economic means to participate, the 1kW minimum may be onerous.

According to Rick Coen, Director of Engineering at Colorado solar installer Bella Energy, a 1 kW solar garden subscription would probably cost about $2,500 after current Colorado incentives and federal tax credits. Colorado incentives have been dropping quickly recently, as have solar panel prices, so this cost could either rise or fall, depending on which falls faster. Nevertheless, $2,500 seems like more money than most typical low income earners are likely to have at one time, so the minimum subscription may present a barrier.

A bill that was designed to allow low income earners to participate would either remove the 1 kW minimum, or provide for some type of monthly payment plan.

Financing

The Community Solar Gardens bill (HB1342) does allow the developer of the CSG to provide financing to subscribers, but for someone with low income, such loans would likely need to be secured against the subscription itself in order to achieve a low interest rate. If the income from the subscription came close to covering the payments on the loan, a CSG developer could package together a CSG subscription and a loan so that a 1 kW subscription could be bought on a monthly payment plan.

In sunny Colorado, solar farms often have capacity factors as high as 20%. At that capacity factor, typical monthly production for a 1kW nameplate system would be 146 kWh, which is worth about $14.60 a month at typical Colorado residential rates of 10 cents per kWh. Using a mortgage calculator, I found that the income from the subscription would be enough to pay off a $1,400 ten-year loan at 5%, an $1,800 fifteen-year loan at 5%, or a $2,200 20 year loan at 5%. That means that with $300 down, a low income subscriber could pledge the income from the CSG subscription for 20 years, and would eventually be able to use the income from it after the loan was paid off 20 years later. Solar panels can last for well over 20 years, so the subscription could still be worth something at that time.

A more likely option would be for the subscriber to make the initial $300 down payment on the 20 year plan, followed by smaller amounts each month to accelerate the debt repayment, and end up owning the subscription outright sooner.

Despite the potentially daunting $2,500 initial cost of a 1kW subscription, it looks as if developer financing could bring this down to a manageable initial payment. All of this assumes that incentives for solar do not fall faster than the price of solar installations, and that currently low interest rates stay low. On the other hand, if electric rates rise, the income from a CSG subscription might be enough to cover the entire subscription.

Truly Affordable Solar

While financing can in principle allow the low income earners to purchase a Community Solar Garden subscription, it remains to be seen if there will be enough demand for an asset that has no tangible value for twenty years among people without much cash to spare. I doubt that the demand will be sufficient to entice a CSG developer to offer such a complex financing arrangement. A much simpler way to make CSG subscriptions affordable would be to allow subscriptions smaller than 1 kW.

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Community Solar Gardens

A new bill being considered in the Colorado legislature would create "Solar Gardens." Solar Gardens allow people to participate financially in owning part of a solar array even if they do not have a suitable site on their own property. My reading of the proposed legislation is that subscriptions in a Solar Garden would be financial securities, and fall under securities laws. That’s probably a good thing.

Solar for Everyone

Solar panels are elitist: They cost a lot of money, and only homeowners with good solar access can usefully install them. This means that renters and people who can’t come up with at least $5,000 to $10,000 worth of cash or credit can’t own them. That’s the problem Colorado House Bill 10-1342 (HB1342): Community Solar Gardens aims to correct.

HB1342 defines a Community Solar Garden(CSG) as "A solar electric generation facility with a nameplate rating of two megawatts or less… where the beneficial use of the electricity generated by the facility belongs to the subscribers to the community solar garden." A subscriber is a "retail customer of a qualifying retail utility who owns a subscription and who has identified one or more physical locations to which to which the subscription shall be attributed" withing the same county or municipality as the CSG. The bill allows subscribers to change the premises to which a subscription is attributed, and also to sell them to other qualifying subscribers, something which is necessary in case a subscriber were to move out of the county or the utility’s territory.

It’s a worthy idea, although local solar installers are concerned that the superior economics of large installations will eat into their market share, by easing the requirements in House Bill 10-1001 for customer-sited generation. People who own perfectly good sites for rooftop solar may instead choose to buy a CSG subscription because of the convenience and potentially lower price. I think fears that residential customers who are good candidates for rooftop solar might instead subscribe to CSGs are overblown. Although the economics may be better, buying solar in Colorado is not yet a great investment because of the cost an return involved. Instead, I believe people are investing in solar because it gives them satisfaction to think that they are using green energy, and because they want to show off their environmental bling to their neighbors. I know that some people are more interested in the bling aspects of solar panels than the economic aspects, because otherwise there would not be a market for fake panels in Japan, although I don’t know of anyone who knowingly bought fake solar panels in the US.

On the other hand, there is currently a multiplier in the bill which would allow 2 kW of CSG subscriptions to substitute for 3 kW of rooftop solar that I think needs to be fixed to avoid undermining the residential set-aside of Colorado’s renewable energy standard as envisioned in HB 1001.

Energy Sprawl

My greatest concern with the bill is not that it will cause a move towards large installations, but that it will lead to more ground-mounted installations taking up open space, contributing to Energy Sprawl. No matter what you think about the economics of photvoltaics, one advantage that they have over almost every other type of electricity generation (both fossil and renewable) is that they can be placed on otherwise unused rooftops and other structures, giving a use to otherwise wasted space. Only energy efficiency and conservation have less physical impact on the environment than rooftop solar. Some people have told me that their air conditioner ran less after they put solar on their roof.

Any law which makes solar more likely to be ground-mounted than rooftop is a step in the wrong direction. I think the bill should be amended to prohibit CSGs from being ground-mounted, effectively limiting them to large rooftops and other structures such as awnings for parking lots. This would also have the effect of doing something to limit the practical size of CSGs to available rooftops, which would probably make the solar installers a bit happier.

The Secondary Market for Community Solar Garden Subscriptions

Provisions for a secondary market for CSG subscriptions are included in the bill, since a subscriber moving out of the county in which their CSG is located will not be able to benefit from their subscription. The secondary market and and other security-like characteristics of subscriptions may make them a useful financial tool for small investors. Most importantly, a CSG subscription is (as intended) an excellent hedge against rising electricity prices.

The only real reason to hold a CSG subscription for the long term is as a hedge against rising electricity prices because, like all utility-subsidized solar installations in Colorado, the utility ends up owning the Renewable Energy Credits (RECs), which are defined as all the “environmental attributes of the electricity.” Although most people with solar panels don’t understand this, the fact that they cannot legally claim the RECs means that they are using electricity that is just as dirty as any other Coloradan, with the exception of direct purchasers of RECs or Carbon Offsets, such as Windsource or Colorado Carbon Fund subscribers.

Although the secondary market for CSG subscriptions is likely to be very illiquid, it will probably become a good direct indicator of local expectations for utility rates. CSGs will not be much use to speculators, however, because there are restrictions in the bill which limit the investment to only 120% of estimated electricity usage at the designated physical location of the subscription. Nevertheless, experienced local market professionals with an understanding of market psychology may be able to make small profits trading subscriptions, since the illiquid and unprofessional nature of the market will likely make prices extremely volatile and subject to strong behavioral biases. When electricity rates are rising, subscription prices will likely overshoot their true value as potential subscribers overestimate future increases, and prices will likely undershoot if falling natural gas prices lead to falling interest in CSG subscriptions.

Allowing investors into the subscription market would probably create a more liquid and stable market for subscriptions, but such an outcome is unlikely because of the general public distaste for speculators. It’s also impractical because of the fact that payments to subscribers are at the retail electricity rate, which is considerably higher than the owners of commercial solar farms are allowed, and hence are effectively subsidized by all utility customers, over and above the direct subsidies given to encourage solar in Colorado.

CSG subscriptions have other aspects that will be familiar to investors. The law allows for the CSG to finance the purchase of a subscription (buying on margin.) It also allows the payments for electricity production to either go to offset the subscriber’s electricity bill, or to go to the CSG sponsor. In the latter case, I could see a small subscriber buying a small subscription, and enrolling in the equivalent of a Dividend Reinvestment Plan (DRIP): rather than cash payments, the electricity generation would be used to increase the size of the CSG subscription over time, until the subscriber decided to start taking cash payments. A CSG with a large number of subscribers enrolled in DRIP-like plans might add a new solar module to the farm every month, in order to keep up with the growing subscriber base.

CSG subscriptions could become a valuable financial planning tool for retirees and others on fixed incomes. Because a CSG subscription rises in value with utility rates, an owner would be better able to budget for the utility bill, no matter how wildly electricity prices gyrate. As subscription prices fall with the falling cost of photovoltaics, I can see the purchase of a CSG subscription becoming standard financial advice for retirees.

CSG Subscriptions as Securities

Although professional investors and speculators will have at most a limited role in the trading of subscriptions, CSG subscriptions may legally be securities. The legal definition of a "Security" is an investment in an enterprise with the expectation of profit from the efforts of other people. If I’m right and the draft law is not changed, CSG subscriptions will fall under Colorado securities regulations. (Because CSG subscriptions cannot be sold outside the state, they are clearly matter for Colorado security regulators.)

For small CSGs set up by community organizations, this is unlikely to have a tremendous impact, because securities laws include a number of exemptions for sales to a small number of related individuals. (Note that this is not intended as legal advice! I am not qualified to give legal advice, and even a small CSG should need to consult with someone familiar with the relevant laws.) For large CSGs with many subscribers, securities law may actually require the delivery of a prospectus and fall under a variety of other rules about communications that apply to the CSG developer and its representatives. In general, this is probably a good thing, since it provides a strong legal framework under which regulators will be able to sanction unscrupulous CSR developers who might be tempted to cold-call unsophisticated utility customers and over-promise the benefits of a small subscription in a Solar Garden.

Conclusion

The intent of Community Solar Gardens is a good one, because it allows many more people the opportunity to hedge their electricity price risk. The people in most need of such a price hedge, those living on small fixed incomes, generally do not have both the home ownership and credit that installing a solar system requires. So I’m glad to see Colorado pioneering this concept, and it will be very interesting to see how CSGs and the market for their subscriptions evolve when the final bill passes. With luck, and a few people emailing Claire Levy, the bill’s sponsor, that final bill will have been amended to exclude ground-mounted Community Solar Gardens, and help preserve Colorado open space.

I also hope that some among the majority of my readers who are not in Colorado will suggest your own legislators consider local variations of this idea.

Tom Konrad PhD CFA

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Colorado House Bill 10-1001 Passes Senate: Will Raise Renewable Energy Standard to 30% by 2020

This article was written before the HB10-1001 passed the Senate on March 5, and so focuses on the arguments for and against. Read on, and you’ll see why I think the passage was a good idea. I’m publishing now without updating what follows because it looks like I’ll be the first to break the news. Please bear with any typos, my proofreader has not had a chance to see this yet. The full text of the bill is here. All that is needed to pass this bill into law is for the House to approve minor amendments made in the Senate, and Governor Ritter’s signature. Neither is expected to be a barrier to adoption.

Tom Kornad, Ph.D.

Colorado has a good chance of increasing the requirement for electricity from renewable sources for the second time since I’ve been blogging here. When I moved to Colorado in 2005, the state had recently passed the first renewable energy standard (Amendment 37 or A37) to be directly approved by voters in the United States. A37 required that the state’s investor owned utilities (Currently Xcel Energy (XEL) and Black Hills (BKH) to produce 15% of their electricity from renewable sources, with a small set-aside for solar and residential solar by 2020, 15 years in the future at that time.

The reason A37 was voter-approved was not because the state was trying to capture some "first" but because of steadfast opposition in the Colorado Legislature from many of the state’s leading politicians. As of April 2009, Xcel was getting, 10% of its electricity from non-hydro renewable generation (mostly wind), and the cost of that achievement has been a surcharge (called the RESA or Renewable Electricity Standard Adjustment) on our electric bills of 0.6% until after the first doubling of the RPS, and stayed at 1.4% for at least a year after the first doubling. The the current House Bill 10-1001 (HB1001) raises the standard to 30% without raising the statutory cap on the RESA, although the full 2% will most likely to be needed. Yes, our transition to clean energy costs money, but it is altogether lower than the costs caused by constant fluctuations in natural gas and coal prices.

Andrew Winston, in the Plenary address at this year’s Sustainable Opportunities Summit the next day described the debate currently going on on in Washington DC as surreal. He likened Climate Change to a bunch of people in a house where one room is on fire. The current discussion at the international level he thought was analogous to debating about who started the fire and who should put it out. The debate in Washington, DC, he likened to debating if the room is actually on fire.

The debate in Colorado is often similarly surreal. The opposition to the bill, which came more from committee member Lundberg rather than the people who testified, centered on cost. Keep in mind that the cost is capped at 2% of electric bills… if the target cannot be met within this cost, the target will not be met. More intelligent (if not completely accurate) opposition came from the Oil and Gas industry. Officially, they were neutral on the bill, but opposed it on the ground that wind in Colorado has not reduced pollution in Colorado, because wind variability has forced existing coal plants to ramp up and down faster than they were designed to do. This makes them run less efficiently, and emit just as many pollutants such as SOx, NOx, and particulates, even though they are producing less power. Further, there are plans to close most of these coal plants by 2017.

The oil and gas argument about a lack of reduction in pollution from coal plants is more serious than the cost argument, but still does not stand up to scrutiny. First of all, they are focusing on conventional pollutants, not Greenhouse Gasses, which are what we are most concerned about. More importantly, there are already a couple of factors in place which will help to mitigate the problems which cause the quick ramping to diminish. I just recently wrote about better predictive software which allows utilities to predict wind production much more effectively. What forces Xcel to ramp their coal plants quickly is not that wind power is variable so much as the fact that the utility gets surprised by quick changes in wind output. When a utility knows that wind ouput is going to rise by 100MW an hour ahead, they can start lowering the output from their coal plants slowly in the time, and replacing that power with power from natural gas, which can ramp up and down much more quickly.

Second, as we get more renewable electrity on the system, we will also have more diverse electrity sources on the system. Right now, most of the wind farms in Colorado are located in the Northeast of the state. This clustering is because that corner of Colorado not only has a good wind resource, and also has available existing transmission lines to bring the wind power to the load centers in Denver and the Front Range. That means that wind power production in Colorado is mostly a function of the wind in Northeast Colorado. The lesson here is not that we should not add more renewable electricity to the grid, but that as we add non-wind renewables, and wind in other parts of the state. Adding large wind farms in other parts of the state requires new transmission. The main barrier against new transmission is not cost, but the difficulty of permitting and the time it takes to build. But Colorado is working to overcome this barrier by looking ahead and and planning the transmission we need for wind and other renewable resources ahead of time. I wrote about a report that came out of this process and the cost of transmission a couple months ago, and some new projects are alredy well into the planning stages.

Other renewables are not at all correlated to the existing wind power in the Northeast of the state. Solar power is also variable, but it forms a natural complement to wind, because wind in Colorado tends to peak at night in the winter, while sun is most abundant during the day in the summer. Other renewables such as cofiring biomass, such as a recent project from Colorado Springs Utilities, are baseload power, and small hydropower has some variablity depending on stream flows, but it is completely uncorrelated with wind.

Just like in a stock market portfolio, a diversified portfolio of energy sources leads to a less variable and more stable grid. Diversified energy sources not only means power from a variety of sources, but also geographic divesity. HB1001 has a 1.5% set aside for Distributed Generation (DG), which means (in the context of this bill) renewable generation that does not require new electricity distribution facilities. By definition, DG will not be big wind in the Northeast corner of the state. Much of it will be solar, bit it also opens the field to small scale biomass, hydropower in water municipal water and sewage systems, and biogas electricity from anaerobic digestion. There was some opposition to this set-aside from interests that worry that building any renewable generation other than big wind would cost too much, but this set aside is an investment in diversification. Yes, many of these diverse resources cost more now than large wind turbines, but they are an investment today in establishing new industries and technologies which can then get to a scale where they can contribute to a diverse and more robust electric grid.

If the financial crisis taught us anything, it should have taught us that a single-minded focus on short term return and projections from complex models, leads to fragile financial systems. A single-minded focus on electricity generation that has the lowest cost similarly leads to a fragile electric grid. Utility least cost planning is driven by cost models for the price of each form of generation, and models for the prices of the fuels which go into them. We need to acknowledge that our models have been flawed in the past, and will continue to be flawed in the future. Predictions of fossil fuel prices are more often wrong than right, and even the projections of the cost to build generation are often wrong as well.

Since we know that the cost models are wrong, but we don’t know how they are wrong, it makes sense to make sure that we invest in electric resources that may not appear to be lowest cost when we run them through those models, but which add diversification and resilience to our electric grid in preparation for the day when the models fail. That day does not have to be a catastrophe like the financial crisis, but a crisis is more likely if we put all our faith in least cost modeling and don’t want to pay an extra 2% for renewable energy insurance.

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San Miguel Power Association leaves CREA

I never thought it was going to become a movement!

Delta-Montrose was first.
Who’s next? Holy Cross, maybe?

Press release follows
Read the rest of this entry »

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The Nitrogen-Biochar Link

by Tom Konrad, Ph.D.

Promoters of Biochar should ally with fishermen and other groups concerned about ocean dead zones caused by nitrogen runoff.

The folks at the Carbon War Room are trying to save the world by tackling the trickiest problems in addressing climate change.  One of their current focus points is biochar [pdf].  I’m one of very few investment writers who has taken notice of biochar so far, and they called me to ask what I thought needed to be done to bring in private investment dollars. 

Getting investors interested in biochar is going to be tricky.  The problems are three-fold:

  1. The science of biochar is not yet well understood.
  2. An agriculturalist who uses biochar only gains a fraction of the total benefit; other benefits are positive externalities felt far and wide. 
  3. Creating biochar is fairly low-tech (you can get plans for a charcoal burner on the internet, and make one in your back yard.)  This makes it difficult for companies to profit from it by producing and selling superior technology.

My third point about producing biochar being low tech may not turn out to be a problem.  I ran a draft of this article by Jonah Levine, an industry insider, currently Vice President of Technical Sales at Biochar Engineering, a technology startup.  He says, "The biomass industry is used to driving biomass to ash to garner all of the potential energy benefits. Driving off H and N from the biomass and leaving as much C as possible in a continuous, automated process is not simple. The reaction would like to either take off and reduce everything to ash or not start at all."

If my first two points can be addressed, creating a market for quality-controlled biochar, and portable biochar producing units like Biochar Engineering’s  technology can be produced at a cost low enough that the extra char yield compensates for the extra production cost of the pyrolyzer, then there will be investors interested in biochar, and much more funding will be available.

The Carbon War Room is already supporting research to flesh out the science, and they are working to get biochar included in the World Bank’s biocarbon fund, but I was able to give them one idea: work with others concerned about nitrogen runoff from the overuse of fertilizer to get stricter restrictions or fines imposed for nitrogen runoff.

Nitrogen Runoff

Nitrogen runoff is a massive environmental problem, if not on the same scale as global warming.  Farmers often use more fertilizer than their plants really need because the costs to them of using too little (low yields) outweigh the costs of using excess fertilizer.  Incentives that increase the price they get paid for producing corn and other nitrogen intensive crops only aggravate this tendency, since they increase the benefits of high production without changing the costs of excess fertilizer use. 

The excess fertilizer is not taken up by the plants, and instead runs off into the river system, causing marine dead zones, and contaminating freshwater sources.  This increases the costs of water purification as well as harming people and livestock who drink the untreated water, and is the cause of "blue baby" syndrome.

Biochar and Nitrogen

Biochar, used as a soil amendment, improves water and nutrient uptake by plants.  It has its greatest effects in poor soils, helping the plants access the nutrients that are available, and this effect can last for centuries after the soil has been amended with biochar.  Biochar-ameneded soil should reduce the risks to farmers of using too little fertilizer, and hence reduce the incentive to over-apply, benefiting both the farmers and everyone else in the watershed.

Studies suggest that fertilizer taxes are the most economically efficient way to reduce Nitrogen runoff.  If such taxes were in place, farmers would have a stronger incentive to use biochar in order to make the most of the suddenly more expensive fertilizer.  For environmentalists interested in reducing carbon emissions, this would have the added benefit of reducing nitrous oxide (N2O) emissions from heavily fertilized soils, for an additional reduction of greenhouse emissions.

Hence, Biochar advocates should team up with groups concerned about the fisheries and health effects of runoff to advocate for higher taxes on nitrogen fertilizer.  When farmers complain, perhaps we can buy them off by using the revenue for a biochar subsidy?

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Cheap and Free Ways to Promote Energy Efficiency

by Tom Konrad, Ph.D.

Big spending Demand-Side Management programs are not the only way to promote Energy Efficiency.

The Sierra Club’s Rocky Mountain chapter has decided that one of their priorities for 2010 is promoting Energy Efficiency. Since that decision was, at least in part, due to my suggestions as part of their Energy Committee, I volunteered to chair the effort for at least as long as I’m still in Colorado. (I’m planning a move to Connecticut with my wife, but we are waiting for our house to sell first.)

In normal times, we might consider lobbying the state government for incentives to promote energy efficiency, such as those offered as part of the stimulus package. However, a state legislator who came to our last Energy Committee meeting was quite clear: Colorado will be eliminating all (or nearly all) tax incentives next year, so Energy Efficiency programs that rely on state funds are not going to be an effective way forward. For people who, like me had hoped to use Colorado’s recently passed 85% tax credit for PHEV conversions next year, that means we’re probably out of luck. You heard it here first.

Not All Bad News

As I wrote at the start of the financial crisis, even though there may be less subsidies for energy efficiency, leaner budgets make people more open to the idea of cost saving from energy efficiency. Since subsidies are less likely to be available to break down some of the cost barriers against energy efficiency, it makes sense to use our efforts to break down some of the non-cost barriers.

Eric Hirst of Oak Ridge National Laboratory identifies these barriers to energy efficiency improvements:
Barriers to improving U.S. energy efficiency:

Structural barriers­conditions beyond the control of the end user

  • distortions in electricity pricing
  • supply infrastructure limitations

Behavioral barriers­conditions that characterize end users

  • efficiency attitudes and awareness
  • perceived riskiness of efficiency measures
  • obtaining and processing information
  • limited access to capital
  • misplaced incentives
  • inconvenience, loss of amenities

The ones that might be addressed without much money are:

  • efficiency attitudes and awareness
  • perceived riskiness of efficiency measures
  • obtaining and processing information
  • misplaced incentives

Attitudes and Awareness

This barrier has to do with people’s mistaken beliefs: For instance, the belief energy efficiency always requires giving something up (not true: a better sealed and insulated home is less drafty and more comfortable as well as being more energy efficient.) Similarly, some people like to waste energy because conserving is un-macho.

Public relations efforts to make people feel better about efficiency can be very inexpensive. For instance, SMUD’s monthly reports to its customers as to how their consumption compares to their neighbors is something that could be emulated by other utilities.

Another method that might also help to make energy efficiency a social norm also involves competition with neighbors: households with low energy use might also be given inexpensive yard signs, allowing them to brag about their energy sipping lifestyle. This might also address some of the perceived riskiness barrier, because when people see others doing something, they are much more inclined to feel that it is both acceptable and safe.

Misplaced Incentives

Misplaced incentives occur when the person who would pay for efficiency improvements is different from the person who pays the energy bill (and would receive the benefits.) Two examples are landlords and tenants, and homebuilders and home buyers.

Builders have been making strides communicating the energy efficiency of their homes through various certification schemes, such as LEED, Built Green, and Energy Star. When the building buyer can assess the efficiency of a building because it carries a widely recognized green certification, he is likely to be willing to pay more for that building. The same is true for renters.

These voluntary moves are a start, but making energy use disclosure mandatory, as opposed to voluntary, should help bring along the reluctant majority who are not already following these practices. If an energy audit or past energy bills were required to be provided by the seller or landlord whenever a building is sold or leased, buyers and renters could decide for themselves how much more they would be willing to pay for an efficient building, and the current owner would have an incentive to make cost-effective improvements beforehand.

Markets and Information

Efficient markets require good information. A large part of the reason that so many opportunities for energy efficiency exist is that information about energy use is not widely available and often difficult to come by. Measures such as those I suggest above all improve information about energy use, and hence should promote the more efficient use of energy at very little cost.

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