Archive for Economics

The Psychology of Energy Efficiency

Efficiency is unquestionably the largest, cheapest, and cleanest wedge among the many we need decarbonize our energy economy.  Energy efficiency tends to cost just 1 to 3 cents per kWh saved, far less than even coal-fired generation.   Every renewable technology, from wind to solar, to biomass, has trade-offs.  At the very least, we have to decide if the energy we are using for one purpose is not better used for something else.

Energy efficiency is the exception to this rule: you can not use a kilowatt-hour or a BTU over and over again.  Given these advantages over generation, it’s amazing that energy efficiency is nevertheless so extremely cheap.  Given an even moderately efficient [pun intended] market, you would expect that all the cheap energy efficiency measures would long ago have been taken until the marginal price of the next efficiency measure was above the marginal price of added electricity generation.

So why hasn’t it? 

Why is TXU trying to build a half dozen coal fired power plants in the face of broad opposition from the community when, for a fraction of the cost, they could instead pay to help people insulate their homes, change to more efficient air conditioners, and replace energy efficient lighting and save as much power as they plan to generate with the coal plants without any cost for fuel and harm to the environment from mining and emissions?

For that matter, why don’t TXU’s customers (and the rest of us) take these steps ourselves, when the internal return on investment is many time what we can rationally hope to achieve in the financial markets, and in many cases is even higher than the interest borrowers with the worst credit ratings pay on their credit cards.  (Like most financial advisors, I hate debt, especially credit card debt, but even if you’re drowning in $30,000 of credit card debt at 25% APR, it still makes sense for you to buy a pack of CFL’s at $3 each on that high-interest credit card, and replace every incandescent light bulb in your house that you use more than 2 hours a day.)

Here’s a blog which does a good job outlining the usual answers: lack of financing, perverse incentives, and disinterest on the part of people for whom energy is only a tiny part of the budget (all of which are true.)  He goes on to outline perscriptions that will undoubtably help to break down the barriers to the adoption of many Energy Efficiency measures.

I see other barriers that lie behind these.  Not just a failure of normal market forces, but conceptual problems.   While energy in general is a fuzzy concept to most people, using less energy is even less tangible.  You just can’t drop energy efficiency on your foot.  You’re not even at risk of electricution from it.

The pernicious consequence of systems of measurement is always that things we can’t measure go unnoticed.  If you have a hammer, everything looks like a nail, but even more insidiously, things that will never look like nails no matter how hard you squint dissappear from your vision altogether.  It is this psychological quirk that makes energy efficiency go unnoticed.

What image comes to your mind when I say “wind power”?  If you’re anything like me, you probably had a image of a forest of giant wind turbine blades turning gracefully on the horizon like ballet dancers.  Or, you might be like my wife, who would also have an image of a wind farm, but thinks they are ugly (although not so ugly as the haze from a distant coal plant) despite recognizing their necessity.  She wishes they were painted to camouflage them into the background.   Whatever your attitude towards wind power, you probably saw an image.

 Now try “energy efficiency.”  It’s a lot trickier, isn’t it?  I think about energy efficiency all the time, the way a teenage boy thinks about sex (okay, maybe not quite that much), and even I can’t settle on an image.  My mind flashes from the act of replacing an incandescent bulb with a compact fluorescent lightbulb (CFL) to an industrial scale combined heat and power facility, to closing the blinds at night to keep the heat in.

Not only is energy efficiency hard to picture, it’s also hard to measure.  To compute the energy savings from any activity, you have to establish a baseline: how much energy would you have used if you had not changed your methods.   Even in the simplest case of replacing a CFL, we don’t really know that the bulb we replace would really have stayed in the socket until the CFL breaks: A CFL can easily last 10 years, and by that time, we may be replacing all our bulbs with LEDs.  And that does not even begin to account for the effects on our HVAC systems.

Is your mind spinning?  That’s my point.  It can be so hard to get our minds around all the impacts of energy efficiency that, for most people, the most people, it may actually be rational to waste a little energy in order to avoid the headache that trying to get their mind around efficiency may entail.

The problem is, that decades of conserving brain power has left us as a society that wastes energy egregiously.

My prescriptions, designed to make thinking about efficiency easier:

  1. Measure energy use at every opportunity.  Many Prius drivers report that the real-time MPG gauge on the dash causes them to change their driving habits to grive more efficiently.  Getting a Kill-a-Watt energy meter makes us think more about our next electronics purchase.   Getting to know your electric meter can also motivate you to track down wasted energy.  A radical idea: on new homes, the electric meter should be inside, along with the circuit breakers.  New meters can be read (and even turned on and off) remotely, so there is no reason any longer to have them on the side of the house where we never see them. 
  2. Another thing we need to measure is when we use our electricity, not just how much.  Wholesale electricity prices can vary from a few cents per kWh to 30 cents or more during peak consumption.  As we move to a grid based on renewable energy supplies, most of which are intermittent and non-dispatchable, we need to get used to paying the real-time price of the energy we’re using.  Wide-spread adoption of time of use metering will drive the invention and adoption of appliances that can adapt themselves to changing prices.  There are direct, immediate benefits to the system by shaving peak loads, but the real benefits will come when people adopt new ways of doing things and new devices that will cause our appliances to run and our devices to charge when electricity is plentiful, and runonly the most essential uses of electricity when it is scarce.   Xcel is currently doing a pilot study on Time of Use Pricing in Colorado.  The preliminary result are that the right pricing scheme encourages customers to change their energy use much more than they had anticipated… but it still would not be “economic” to change out meters for more sophitocated models capable of handling this sort of billing.  Their definition of “economic” almost certainly does not include the benefits of the creativity which realistic pricing would unleash. 
  3. Allowing utilities to profit from selling less rather than more.  This concept, known as decoupling, is covered well here.  It’s important to remove (or even reverse) the incentive of utilites to sell us more electrons when we really want them to help us use less.

Finally, I do call this blog EE/RE Investing, so here are the sectors that I see benefiting from these recommendations as they are adopted:

  1. Companies selling advanced metering devices, and control systems that adapt to changing electric rates.
  2. Companies that sell building management systems.
  3. Energy storage technologies, such as as advanced batteries, flow batteries, and compressed air energy storage.
  4. Broadband over power lines technology, to handle the increased flow of information.
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Holistic Approaches to Energy Problems

H. L. Mencken said, “For every human problem, there is a neat, simple solution; and it is always wrong.”  When it comes to solving the problems of peak oil and global warming, I also think that the loudest barking is up the wrong tree.  We look for the quick fix, trying to find a substitute energy source that allows us to change the way we do things little as possible, when the real problem is actually what we’re doing, not how we’re doing it.   We need holistic solutions, not quick fixes.

Too abstract?  Here are some concrete examples:

 Problem: Peak Oil

Quick fixes: Ethanol and slight increases in vehicle efficiency standards.

Holistic solutions: Change our driving culture and infrastructure, by changing the way car use is priced from fixed charges to a per mile basis (“Pay as you drive”).   Removing subsidies to use cars when other forms of transport are available, and redesigning our cities to make them easier to get around on foot, bike, and public transport.  Like other holistic solution, all these steps increase safety and reduce congestion, reduce obesity and associated health problems, as well as reducing the use of gasoline.

Problem: Wind and Solar are intermittent resources, but coal produces too much CO2 and natural gas prices are rising rapidly.

Quick Fixes: Nuclear power and “Clean” Coal.

Holistic Solutions: Shift our demand for electricity to times when it is available, by using time of use pricing, energy storage and demand alignment, and distributed energy storage such as plug in hybrid vehicles.

Investing opportunities:On thing that’s striking about these examples is it’s much easier to find investment opportunities in the quick fixes than in the holitistic solutions.  To invest in ethanol, you can just buy ADM or one of the multitude of ethanol stocks that have been going public recently, but I have yet to come up with a satisfactory way to invest in better urban planning (except buy a house in a walkable community, which is something I’m planning on doing this summer.   Stapleton is the community.  I currently live there, but I’ve been renting and waiting for the end of the housing bubble.  I actually don’t think that housing is going to go up again any time soon, but I’m tired of waiting.) 

The investment landscape is a little better when it comes to energy management.  Itron and Siemens both have divisions that help utilities manage their grids better, and there are many battery and other energy storage companies to choose from.  Still, it’s a lot harder to pick through battery companies than to just buy a nuclear powered utility or uranium miner.

Holistic solutions, by their nature, have weak boundaries… the benefits tend to be diffuse, and spread over society as a whole, so it is difficult to charge fairly for them.  This, I think, is why there are so few companies pursuing them when they can pursue a quick fix that they can charge for up front.  

Companies have an obligation to their shareholders to make money.  It’s our job, as human beings, to work towards regulations that make it easier for companies to make money with holistic solutions that actually solve the problem than it is to make money with quick fixes that just cover the problem up.

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Win-Win Auto Insurance

On Thursday, I attended NREL’s Energy Analysis seminar, which this week featured Todd Littmann of Canada’s Victoria Transport Policy Institute, on Win-Win Transportation Solutions.

As an economist focused on policy, Todd Littman Photo of Todd Littmanhas done a lot fo thinking about what are the costs to society of transport, and what sorts of perverse incentives are there that are making these costs much higher than they would be otherwise.  He has a ton of extremely interesting ideas which will be useful to reduce transportation energy use for little or no cost, by simply removing perverse incentives.  I’m only going to go into a couple that I thought were most surprising or innovative here, so I urge you to read the whole paper on which his talk was based on VTPI.org.

One surprising result for me was that the greatest costs to from driving may not be the costs of gas, pollution, or global warming, but the cost of accidents, which are infrequent, but can be extremely expensive.  Even before adding in additional costs of congestion, wear on roads, etc., you do not need to be concerned at all about global warming to want to reduce vehicle miles traveled.

 And reducing vehicle miles a is far more effective and quick way of reducing transportation energy use (as well as vehicle accidents) than improving vehicle efficiency.

He has many ideas on cost neutral ways to reduce vehicle mileage, from broadly discussed ones such as smart growth, price shifting fuel taxes, and road and congestion pricing, and he does analysis on how cost effective all of these are.

What really got me to sit up and pay attention was an I dea I had heard no where else, which was all the more interesting because he feels it is the most cost effective (in fact, cost-negative: it pays more than it costs) method of reducing vehicle use: Pay-As-You-Drive pricing.  The idea is simple: instead of paying vehicle registration and auto insurance based on how long we have the car, we should pay based on how far we drive it.  

Since the safest place for out vehicle is in our garage (including theft and hail damage) this makes more economic sense than the current monthly payments for auto insurance, and since the costs we place on the transport system also increase the more we drive, it also makes sense for vehicle registration fees.   Because rich people with fancy cars not only tend to drive more than the poor, but because their registration fees are also already higher than those for inexpensive cars, this may even make the fees more progressive than they currently are, but some fine-tuning may be needed.

Since this is a purely regulatory reform, costs of implementation are minimal, consisting of only an annual odometer audit after the system is set up; an audit which could easily be combined with other scheduled service to minimize the cost.

According to his numbers, pay as you drive insurance and registration would average about 21 cents a mile for most people (about twice the cost of gasoline,) which I can easily see as enough to make most people think harder about how to maximize how efficiently they drive, or even consider public transport where it is an option… most public transport would become much more cost effective for people, without adding to their financial burden.

You might worry that people with long commutes and no public transportation might be unduly burdened by this shift, but we need to remember that they already pay more for auto insurance, because these are questions the auto insurance company asks.  The big difference is that there would be an increased marginal cost of driving, and it is the marginal cost of an activity that has the greatest effect on behavior, not the average or total cost.

The Vattenfall Institute recently found that the cost of stabilizing the United States’s share of CO2 concentrations at 450 ppm by 2030 would actually be negative, and it’s innovative solutions like those coming out of VTPI that let us get paid to cut emissions.

What are we waiting for?

Links: Victoria Transport Planning Institute: www.vtpi.org

Win-Win Transportation Solutions

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Vestas coming to Northern Colorado

It now looks likely that Vestas, the world’s largest wind turbine manufacturer will build a blade manufacturing plant in Nortern Colorado, near Windsor.  I’d guess that some of the factors that made Danish Vestas consider locating here are:

  1. The proximity to NREL’s Wind Technology Center for turbine testing.
  2. Amendment 37, which will require large investments in wind farms in Colorado.
  3. The State’s central location, making it easy to ship blades anywhere in North America.
  4. Political support for wind, especially from newly elected Bill Ritter and the Democratically controlled state legislature.
  5. Colorado’s excellent wind resource.

The 500 high-paying jobs will be ones wind advocates can point to when talking about the benefits of renewable resources over fossil fuels.

UPDATE:

It’s official. According to this follow-up article in the Rocky Mountian News, transport was indeed crucial to winning the bid. In particular, they wanted a site with rail service.

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Banking decisions: Returns or Environmental Responsibility?

Follow-up on my 1/15/07 blog entry

I heard back within an hour when I emailed New Resource Bank… I still have not heard back from Eco-Bank, two days later, so they are out of the running for my business. 

I have to admit, I’m leaning against going with New Resource anyway, and looking into local banks so that I have the added convenience of local ATMs.   I believe that it is good to put our money where our morals are, but that we should not pay too much to do so…  If I go with New Resource, I effectively tie up $4000 of my money at zero interest, vs. $1000 tied up at the local credit union. 

If I go with the local credit union, the $3000 difference will naturally be invested in projects that help the environment AND are likely to earn good returns, but $1000 is tied up, possibly financing someone else’s Hummer. 

If I go with New Resource, my $4000 minimum earns no returns, but is still invested in projects that help the environment.  Is the loss of earnings on the $3000 worth the fact that the other $1000 will be invested in an environmentally sound manner?

I think I’ve talked myself out of using New Resource… For me, my money is better deployed elsewhere.  For you, the calculation could easily be different: my job is to find investments that are both good for the environment and good for the pocketbook… so I always have more environmentally sound opportunities than I have money to put into them.  

For most people, the opposite is true.   Finding sound investments is extremely difficult (and usually harder than it seems), but complicating things with the added requirement that the investments also be environmentally sound moves the task totally out of reach.  So, given that you are probably not a green investment professional, you will be giving up less potential earnings on the account minimums, and using them for your banking needs is an easy way to ensure that your money is being used responsibly.

Keep in mind, this entire discussion is based on the requirements of New Resource’s Business Checking accounts…. the account minimums are much lower for their personal checking accounts, and so the trade-offs there are not so dire.  Unfortunately for New Resource, I am not in the market for personal banking services… I have an excellent deal through my broker (a deal which they are unfortunately unable to extend to my business account.)

See comments for a response from Peter Liu, New Resource VP & Founder.

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Energy’s Place in Economic Theory

I recently started studying for the second (in a series of three) CFA® examinations (I passed the first one last June.)  The CFA charter is a credential often used by stock analysts and money managers.  In addition to an industry work requirement, there are 3 tests, which are administered once a year, covering a curriculum including Statistics, Economics, Financial Theory, Ethical standards, markets and the like.    

I expect to study about 200 hours for the exam, which is in June. By the way, if there is anyone reading this in Denver who also is studying for the Level II exam, I’d be interested in getting together to work through some of the problems and share study materials.

I just finished a reading on theories of economic growth, a chapter from Economics by Michael Parkin, which is probably one of the best basic Economics text books out there.  It’s been a long time since I took an Economics course, and so I had forgotten how economic growth theory is taught.   

I was disappointed. 

Why?  Because the role of energy use in labor productivity is almost completely ignored. (Labor productivity is simply the sum of all economic activity divided by the number of hours worked.  Since the number of hours worked is relatively easy to measure, growth in labor productivity is the key factor which needs to be understood in order to understand economic growth.)  All three theories covered attempt to explain labor productivity through the interaction of two factors: the ratio of capital to labor employed, and technological change.  As a short aside, the role of energy use is given a slight nod, because the drop in productivity growth in the United States in the 1970s is attributed to the Energy Price Shocks of ’73-4 and ’79-80, in addition to a diversion of effort for coping with environmental problems.  To me, that sounds eerily familiar.  Those are precisely the same problems I expect the world will be trying to cope with for the next decade and beyond.   It’s not that economists as a whole fail to recognize the role of energy use in keeping our economy going.  For example, the effects of the recent rise in energy prices have been widely discussed, and many pessimists (myself among them) have been surprised at how little effect rising energy prices have had on the economy.   The explanation for the lesser effect on economic growth is that our economy has become (partly as the result of the ‘70s price shocks) much more efficient, requiring less energy per unit of GDP. What bothers me is that energy is dealt with as an aside, not as one of the major factors in determining economic growth.  For most of the 20th century, we were blessed with energy supplies which we could increase at will to meet increasing demand, so supply constraints were seldom a factor in determining the growth rate.  In a sense, economist theory is like military strategy: there is too much emphasis on figuring out how to win yesterday’s battles, not tomorrow’s.  Tomorrow’s economic battles, as I see them, will be learning to cope with diminishing supplies of fossil fuels.  Economists, who are the ones who will be helping society plan those battles, should be taught the role of energy in economic growth as part of their framework of understanding, not as an aside or afterthought.  This brings to mind the other aside in the chapter: The other cause given for the slowing of productivity growth in the 1970s was due to the expansion of laws and resources devoted to protecting the environment.  This is perhaps a graver weakness of economic dogma than the minor role for energy.  Because we measure only economic growth, and do not count natural resources like clean air and water among our assets, destruction of those assets is much more likely to be overlooked or minimized by policy makers than it would be otherwise.   This concept is known as Green GDP, and is still very much a fringe theory in economics, in large part because it is fiendishly tricky to measure accurately.  Unfortunately, what isn’t measured is usually ignored, and, like the unmeasured risk of terrorists flying airplanes in to skyscrapers, is likely to come back to haunt us in time.

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