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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When it Makes Sense to Worry About Jevons Paradox, and When it Doesn’t

Why High MPG Cars May be a Problem, But Efficient Lighting Isn’t

Tom Konrad, Ph.D.

Jevons Paradox: is the proposition that technological progress that increases the efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource.

Wikipedia

Recently The Economist reported on research that concluded “making lighting more efficient could increase energy use, not decrease it.” Micheal Giberson at Knowledge Problem thought this was worth commenting on as an example of Jevons Paradox. I’m here to tell you that before we get worried about more efficient lighting, we should keep in mind when Jevons Paradox applies and when it does not.

Jevons’ Paradox is a consequence of the downward slope of the demand curve: when the price of something falls, we tend to demand more of it. The slope of the demand curve is also known as the elasticity of demand. A gently sloped demand curve (where consumption increases rapidly with decreasing price) is said to be "elastic," while a steeply sloping demand curve (where consumption increases only slowly with decreasing price) is said to be inelastic.

I recently wrote about some research showing that the elasticity of the demand for driving has increased in recent years. That means that the effect of Jevons Paradox is becoming more significant when it comes to driving: increases in automobile efficiency that decrease the cost of driving will have the effect of increasing driving more than they would have in the past, meaning that we should not count on increases in CAFE standards (which increase the efficiency of automobiles) to do much to reduce gasoline usage. Instead, we should focus on structural changes that reduce driving by increasing its marginal cost or decrease the marginal cost of alternative modes, such as mass transit.

Micheal Giberson’s note prompted me to look at the paper on which the Economist article was based. I found that the researchers assumed that the demand elasticity for light had not changed over the last 160 years, and would not change in the future. I find this assumption highly questionable, given that the structure of the lighting market has changed greatly as technology changed from candlelight to gas light to electric light.

When candles were the primary light source, acquiring light required a lot more effort than just flipping on a light switch, and it was possible to see the light you purchased being used up as a candle burned down. Today, we would have to go outside our house (at night) and watch the meter spin to see visual evidence of the cost of light, and even then it would be difficult if not impossible to isolate the effect of the cost of light from the cost of watching TV or running our refrigerator.

Because it’s much harder today for a consumer to determine the true cost of the light he is using, I expect that consumers will be much less sensitive to changes in the price of light than they were in the past. In other words, contrary to the assumptions in the paper, demand for light has most likely become much more inelastic in recent years, and so we should not expect that increases in lighting efficiency (and the associated decreases in lighting cost) will have much effect on total light consumption.

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Hedging the Value of a Home with S&P/Case-Shiller Futures

I’m currently looking for a rental house in Fairfield County, CT, but have been totally disgusted with the rents… they are high enough that it currently makes more sense to buy (in terms of a basic time-value of money calculation)… if you assume that you’re going to stay there for a few years and housing prices won’t depreciate further in the meantime.

Unfortunately, I’m not comfortable assuming that house prices will not drop further, so I looked into the idea of hedging my expected exposure to the New York housing market with a short position in futures on the S&P/Case Shiller New York Real Estate Index.

These Futures contracts trade on the CME with a notional value of $250 per point. With the index currently trading at around 170, each contract is enough to hedge $42,500 worth of housing in Fairfield County (which is included in the calculations of the New York index.) So a $425,000 generic house in the New York area could be hedged with 10 contracts. (In fact, you’d probably need 20-30% more than that, because profits and losses on the futures would be taxable, while capital gains and losses on the house would not be, at least up to a limit of a $250,000 gain if you had lived in it 2 out of the last 5 years.

The problem lies in market liquidity. It currently looks like the longest dated futures are trading at 170, which means that they are predicting the market will not rise or depreciate significantly over the next four years (although shorter-term contracts are predicting a short-term decline followed by a recovery. But to hedge that $425,000 house if you’re subject to a 30% tax rate, you would need about 13 contracts. As I look at the quotes today, the current bids for even the closest November 2010 contracts are for only 3 contracts, and the bid-ask spread is 10 points, or $2500 per contract.

There is no bid for the November 2014 contracts that I’d be most interested in, meaning that I can be confident that my order to sell would move the market significantly. Assuming unrealisticly optimisticly that an ask for 13 November 2014 contracts moved the market only as much as the spread on the closest-in contract, that means a transaction cost of 10 x $250 x 13 = $32,500, which is about a full year’s rent in a comparable house.

I’m going to have to file this one under "it seemed like a good idea at the time."

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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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Renewable Energy World Podcast: The Renewables Gap

As a long-time listener to the Stephen Lacey’s weekly podcast, I was happy to join in as he takes an in-depth look at the Renewables Gap: the question of where the energy is going to come from to power the necessary transition to a clean energy economy, an issue I looked at in Managing the Peak Fossil Fuel Transition.

I’m in great company on this podcast, so if you don’t tune in for me, you might want to know what Bill McKibben has to say about it.

You can download or listen to the podcast here.

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The ERoEI of Energy Efficiency

In previous articles, I’ve often claimed that the Energy Return on Energy Invested (ERoEI) for energy efficiency measures is much higher than the ERoEI for Renewable or fossil energy generation. This was based on the logic that a high ERoEI is needed to sustain the high financial returns from energy efficiency. Unfortunately, there are few studies of the energy return on energy efficiency, so most of my evidence was anecdotal.

No longer. I was just reading the 2009 Annual report for Green Building company PFB Corporation (PFBOF.PK.) PFB manufactures SIPS (Structural Insulated Panels) and ICFs (Insulated Concrete Forms) and in their sustainability report, they found that the energy saved by their insulation over 50 years would be approximately 130 times the energy used in its manufacture (see chart.)

Since ERoEI is a flawed measure, I also calculated the Energy Internal Rate of Return (EIRR), using both 25 year and 50 year lifespans… they worked out to be 262% and 264%, respectively. For comparison, the highest EIRR I’ve found for a energy generation technology is 205% for wood cofiring. The EIRR for a wind turbine is around 84%, and a combined cycle natural gas plant has an EIRR about 164%.

In otherwords, insulation is a slam-dunk when it comes to energy economics. That’s no surprise, but it’s nice to have some numbers, so we have a better idea of just how good a slam dunk it is.

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Many “Social” and “Sustainable” Mutual Funds Owned BP

Marc Gunther takes a look at why so many “Sustainable” and “Socially Responsible” mutual funds owned large stake in BP.

Worth a read.

Some of the biggest offenders were
* the Dow Jones Sustainability Index
* Pax World Funds
* MMA International Fund
* Legg Mason Social Awareness Fund

while the Sentinel Sustainable Core Opportunities Fund has Transocean (which operated Deepwater Horizon) as its biggest holding.

Among the relatively rare sustainable funds that were practicing what they preach (at least as far as oil companies are concerned) were Portfolio 21 and the Highwater Global Fund.

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Other Objections to PACE Programs

Micheal Giberson over at Knowledge Problem bounced off my article on why PACE financing would be unlikely to damage the mortgage market to mention several of his own worries about how such programs are implemented.

He and I are in agreement that there’s little wrong with PACE programs in principle, but they raise some thorny issues in practice. Here are a few of his worries. Micheal says:

If PACE is just a way for homeowners to scrape up subsidies – i.e. to improve their properties and make their neighbors’ pay for it – then I’m against it.

I agree, but with a caveat: one justification for subsidies for energy efficiency is that energy efficiency has positive externalities, and creates societal benefits. To the extent that energy efficiency subsidies are societal payments for societal benefits, there is no problem with using PACE to scoop up as many as possible. In fact, it should be encouraged.

Here are some of the societal benefits of energy efficiency:

1. Lower energy consumption reduced the need to build and upgrade energy infrastructure, a cost which is borne by all.
2. Lower greenhouse gas emissions.
3. Predictable energy bills reduce bankruptcies and foreclosures, lessening the need for social services and raising property prices.
4. Less money spent on energy assistance programs.
5. Local jobs from the economic multiplier when money is not spent on fossil fuels imported from outside the region.
6. Reduction in local air pollution from local power plants.
7. Lower water use in electricity generation.
8. Lower energy prices because of reduced energy demand.
9. More total jobs because energy efficiency improvements tend to be more labor-intensive than capital-intensive energy production.

Micheal goes on to say:

If my local government was proposing such a program, I’d worry that mismanagement would lead to future obligations for non-participating taxpayers. What is the mechanism that ensures civil servants will be effective loan officers? Will they get bonuses for doing good work or just be paid the same salary and promoted on schedule whether or not the loans they approved achieve intended results?

I agree with Micheal on this one, but this all depends on the particular implementation, although I just finished reading Micheal Lewis’s excellent book The Big Short: Inside the Doomsday Machine
on the Wall Street’s role in the subprime mortgage meltdown, and so I’m compelled to point out that civil servants would be hard pressed to do a worse job extending loans to unqualified buyers than any of dozens of mortgage lenders from 2005 to 2008.

And finally:

Maybe the more interesting question is how and why the retail energy and home mortgage marketplaces became so bollixed up that a municipal-government-sponsored home-improvement-lending tax authority work-around is seen as a promising way to help consumers make sensible energy-related improvements to their homes.

Now that’s a great question. If you want to know why the mortgage market is so messed up, I highly recommend The Big Short, a book that makes highly technical subjects easy to understand. I can say that because I had to learn exactly how CDS’s on CDO’s work in order to pass my Chartered Financial Analyst exams, and I wish this book had been around back then… it would have made the task much simpler.

As for why the energy market is bollixed up, I think it has to do with lack of just about everything that improves market efficiency. The consumer energy market has limited price transparency, a lack of price information and real-time pricing, a single monopoly supplier, a lack of knowledge on the part of the consumer, regulated prices, a cost-plus pricing model for most suppliers, and subsidies for the purchase of energy for many classes of customers. With all this going against it, it’s no surprise at all that the market is so dysfunctional that civil servants as loan officers starts to sound like a good idea.

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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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Fannie and Freddie Trip Up PACE Financing Program

Bad news for both her economic stimulus and energy efficiency. The New York Times reports that PACE (Property Assessed Clean Energy) financing for energy efficiency improvements, for which $150M in stimulus money was set aside is running into a roadblock from another arm of the government: the mortgage agencies Fannie and Freddie.

See the full article here: http://www.nytimes.com/2010/07/01/business/energy-environment/01solar.html?_r=1&pagewanted=1&hp

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Wind Power: Cool Breeze or Hot Sirocco?

Jamie Bull brought to my attention a paper saying that land based wind turbines are likely to create a small degree of earth surface warming.

Jamie was concerned that there might not be a net surface cooling, even once the effects of reduced greenhouse gas emissions were taken into account. He did some calculations, and showed that the net effect of wind power on surface temperatures was still strongly negative.

He need not have worried. An understanding of the mechanism of this surface heating, and the conservation of energy make it clear that the surface heating effect of wind is smaller than the surface heating effect of thermal electricity generation such as coal, gas, nuclear, and Concentrating Solar Power (CSP) on a per kWh basis.

Conservation of energy tells us that all the energy in wind is eventually dissipated by friction, creating heat. The effect of wind turbines is to take some of this energy that might have become heat in the atmosphere, and create electricity, which will eventually become heat on the earth’s surface, and some will become heat in the turbine itself.

The net heat added to the Earth by wind turbines is zero: heat that would have been created in the atmosphere is now created on the surface instead, and the net effect is zero.

Now consider thermal electricity generation. When a fossil fuel is burned, or when a nuclear power plant or CSP plant makes steam, heat is either created from a fuel or captured from the sun, reducing the amount that would reflect back into space. All this heat is dissipated at some point near the earth’s surface, creating more surface warming than wind power, and also creating net warming where wind power creates none.

The direct surface heating effect from wind is likely to be only a fraction of the direct surface heating effect of thermal electricity, even before the effects of greenhouse gasses are accounted for.

Solar PV and Solar CSP capture heat from the sun that might otherwise reflected into the atmosphere, so more precise calculations are probably needed to determine if their net effect is negative before the effects of greenhouse gasses, but wind is clearly cool by any thermometer.

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GreenerMoney.com

A lot of people have been coming to this blog looking for a site called “Greener Money” that supposedly offers free green financial advice. I don’t know where it is, but here is a series of articles about how to invest in Green Energy for beginners.

I’ve closed the comments on this post because people were writing to ask me for a free book. I don’t know where to get this free book, I just write a magazine column called Greener Money, and that is drawing search engine hits.

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Energy Internal Rate of Return (EIRR) Numbers from a Literature Review

Jamie Bull at oCo Carbon Blog has conducted a literature review of Energy Return on Investment (EROI) for electricity generation technologies.

He also calculated Energy Internal Rate of Return (EIRR), a concept I promoted here and here to incorporate the timing of energy flows. Timing of energy flows is as important as total energy flows because renewable electricity generation typically requires almost all energy to be invested up front, while fossil generation technologies spread out this investment over the lifetime of the plant.

Jamie’s numbers make fossil generation technologies look much worse than mine did, but mine came from just one report and some simplifying assumptions, while his were based on a literature search. We’re still trying to determine the source of the discrepancy, but until we do, you should assume that his numbers are more accurate.

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Shale Gas: Not Clean, Either?

Not only are there serious questions about just how abundant natural gas from shale plays is, it now turns out that this “Cheap, Clean, Abundant, and Domestic” resource may turn out to only be domestic.

In a draft paper, Cornell researcher Robert Howarth calculates that, when methane leakage from hydraulic fracturing is included, along with secondary contributions from forest clearance and water transport are included, the carbon footprint of shale gas is slightly worse than coal’s.

Source: Robert W Howarth, Preliminary Assessment of the Greenhouse Gas Emissions from Natural Gas obtained by Hydraulic Fracturing

via Peak Oil Review

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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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Better Software Enables Better Wind Integration

A year ago, I wrote an article about the Dumb Grid, complaining that the reason that many utilities find wind power so hard to integrate is because they aren’t using any brains. I used the infamous Feb 2008 incident when wind power in Texas dropped right as demand picked up because of a cold front to make my case: Both the rise in demand and the drop in wind power were predictable consequences of the cold front, but the ERCOT controllers were not using that weather information in their dispatch planning. Hence, the problem was not wind power or even the cold front: it was failure to use the available information.

Fortunately, things are much better today. There’s an excellent article on Power-Gen Worldwide about the Texas electric grid’s control center two years later. Here’s an excerpt about how they deal with wind variability today:

    The wind resource is more manageable now that ERCOT has wind resource forecasting software at its disposal. […]

    ERCOT has begun using forecasting tools from AWS Truewind to help it manage wind energy resources. In the coming days ERCOT will begin using a ramping tool, from the same vendor, to improve its forecasting of wind resource ramping events. Just a week before our visit, the AWS Truewind software–operating in a test mode–predicted a 2,000 MW drop in wind resource followed 15 minutes later by a 2,000MW recovery. The predicted ramp event matched the actual event almost perfectly.

    Joel Mickey told me that ERCOT is happy to dispatch as much wind energy as is available.

Thanks to Micheal Giberson over at Knowledge Problem for bringing this article to my attention.

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About 3x as Much Wind Power Available at 80m than at 50m hub heights

A new National Renewable Energy Laboratory (NREL) study, taller wind turbines can produce more power.

This is no surprise to anyone. Trees and other objects on the ground slow the wind, and as you get higher, you enter the region of smooth laminar flow where more energy is available. Laminar flow starts at about 50m.

A wind turbine with a hub height of 50m will have half its swept area above 50m. A wind turbine with 50m blades and a hub height of 80m. See my drawing:

What is interesting is that we may need to revise all our assumptions about how much wind is available for electric power. In Colorado, NREL found 3x as much wind potential at 80m than a previous Colorado study using the 50m hub height assumption. After all, not only is there more swept in the laminar flow, but there are more areas where tall wind turbines would have the 30% minimum capacity factor NREL assumes is enough to make them economic.

Here’s a graph showing the increase in capacity factors going from 80m to 100m hub height.

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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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