hoffman

Modeling the Energy System: Creating Evolutionary Models Useful to Evaluating a Full Range of Policies : 

Modeling the Energy System: Creating Evolutionary Models Useful to Evaluating a Full Range of Policies Prepared by John S Hoffman President WorkSmart Energy Enterprises Inc. hoffman@etollc.com 7 November 2006

Economists Assert and Policy Makers Have Tended to Agree: 

Economists Assert and Policy Makers Have Tended to Agree Costs of limiting global warming are high Raising prices Is the least expensive means to reduce global warming Taxes or ‘Cap and Trade’ Is this assertion scientifically valid ?

Why do most economists make such claims: 

Why do most economists make such claims Economy already efficient Buyers Producers Transaction facilitators Supply curves No diminishing marginal cost Innovation fixed (or static) Exogenously determined The claims are disproved by a large body of evidence

Energy Models Are Flawed in Assumptions: 

Energy Models Are Flawed in Assumptions Buyers not efficient Supply curves Slope down with increasing volume Innovation endogenously determined Speed and magnitude of market acceptance important Perceptions of future Institutional supports

Energy Models Are Flawed in Process Representation: 

Energy Models Are Flawed in Process Representation Models Now Static behavior Producers Buyers Institutions Policies primarily influence price Response to price tends to be fixed Reality Behavior is changing Agenda setting/mindshare is critical Responses to prices and stimuli vary Prices often peripheral

Slide6: 

We want Services Not to use energy Inefficiency means energy can be reduced at a profit Innovation means their will be greater opportunities

Enormous body of evidence:Buyers Of Products And Services  Using Energy Do Not Act Like Economically ‘Rational Investors’: 

Enormous body of evidence: Buyers Of Products And Services Using Energy Do Not Act Like Economically ‘Rational Investors’ Habit dictates most purchases Some buy lowest first cost products that meet desired attributes Fewer buy products with efficiency as attribute But do not buy ‘enough’ efficiency Fewer use simple rules of thumb like a two year payback Very few use net present value after taxes Cost of capital (or alternative investment return) Long term stream of savings Investment of savings Net present value or future value of options Results Large cache of untaken opportunities to improve energy intensity Dynamic efficiency (innovation) lags due to lack of market pull Efficiency is a peripheral buying issue

Slide8: 

Habit Economic Logic

What can be done???? Prices Have Not WorkedMake it easy !!!!!: 

What can be done???? Prices Have Not Worked Make it easy !!!!! Find policy to reduce first cost of products to products with lowest true cost & Make buying efficiency a habit

How to Get Solution:Three Options: 

How to Get Solution: Three Options Efficiency standards Taxes on product at sale related to energy used Transaction bridges

Standards: 

Standards Minimum lumens per watt

Evaluation of Option: Standards: 

Evaluation of Option: Standards DISADVANTAGES All benefit goes to the buyers Manufacturers finance transition Absorb risk in transition Tendency towards political gridlock in setting standards Lack of continuing incentive for manufacturers Rarely are standards set at best point economically Due to political process ADVANTAGES Setting standards is very simple to understand

Set tax on lamps: Light Bulbs: 

Set tax on lamps: Light Bulbs Set tax on lumens/watt Advantage Over Efficiency Standard: some dynamic efficiency Continuing incentive to produce better lamp

Option: Create Transaction Bridges: 

Option: Create Transaction Bridges Transactions bridge: a form of social infrastructure that creates market intermediaries to achieve more effective market

Transaction Bridges Already Exist: 

Transaction Bridges Already Exist Grid acts as agent for buyers Assures future power available Constant voltage Provides whatever supply demanded Finances expansion Allocates cost De-regulation has not changed much Buyers power never worry

Energy Supply: Transaction Bridge(Currently the grid operates as a transaction bridge for buyers of power): 

Energy Supply: Transaction Bridge (Currently the grid operates as a transaction bridge for buyers of power) Grid Operator Assures Power Supply Purchasing MWH End Users Send Dollars to Load Serving Entities $$$ $$$ Generators

Buyer Never Worries: 

Buyer Never Worries No matter how inefficient product Grid invests in new generation Everyone shares cost End user does not finance/buy new capacity Always Here For you

No Equivalent Transaction Bridge For More Efficient Products: 

No Equivalent Transaction Bridge For More Efficient Products Buyers on their own: inefficient products Result: Grid spends more on costly generation But the Grid could help me reduce my plug load

Option: Transaction Bridges(Including Fair Treatment of Producers of Efficient Products): 

Option: Transaction Bridges (Including Fair Treatment of Producers of Efficient Products) Grid Operator Assures Power Supply Purchasing MWH End Users Send Dollars to Load Serving Entities $$$ $$$ Generators CFL Makers Get paid For negawatt hours: Long term sale Based on agreement That they always Accept less than Generators Each nkWh paid At percent Of lowest cost For dispatch Of power

Result of Transactions bridge: 

Result of Transactions bridge Manufacturers Lower Price to gain market share Revenue stream from energy savings very profitable Markups Avoided Scale Economies CFL become lowest priced product Incentive for dynamic efficiency: Innovation

Scale Economies Ubiquitous: Marginal Costs decrease with increasing sales: 

Scale Economies Ubiquitous: Marginal Costs decrease with increasing sales Economists and models assume rising or static marginal costs: Volume $ per unit Demand Alan Blinder from Princeton Many curves have scale economies: lower costs as volume increases Higher volume higher usually reduces marginal cost

Transactions Bridge in Auto Sector(go to www.mpgplus.org): 

Transactions Bridge in Auto Sector (go to www.mpgplus.org)

Lock Out: New Energy Supplies: 

Lock Out: New Energy Supplies

Note80% keystrokes on home rowvowels on left, consonants on right: 

Note 80% keystrokes on home row vowels on left, consonants on right Historical lock in causes: Typists needed to be flexible OEMS did not want to produce extra machines Current: Out of box use for adults, kids start learning on QWERTY T

Obstacles for Low or No Carbon Options: 

Obstacles for Low or No Carbon Options Lack of long term market for purchasing energy Financing billion dollar projects without long term buyer almost impossible Other obstacles cascade, creating lock in Lack of commitment from manufacturers to create new technology Lack of insurance Lack of long term service agreements Lack of experienced engineers

Slide29: 

Solar Thermal CAES

 New IdeaInfrastructure Parity: 

New Idea Infrastructure Parity PVC Pipe: Natural gas companies pay for its installation to carry gas Electric utilities do not pay for its installation to gather solar energy from ground Idea: Create Parity by expanding Electric Utility Payment on rate base for solar collecting ground loops With loops geoexchange: 1 unit of electric energy moves up to 5 units for heating, hot water, cooling With a 55% efficient combined cycle plant = 275% ‘Efficiency’ Best gas furnances/95% efficient NET: 67% Reduction in use of natural gas when powered by combined cycle power plants

New IdeaUtilities finance efficient systems: 

New Idea Utilities finance efficient systems Green Credit Card Super efficient houses etc Overcomes budget issues for buyers Supplements transaction bridges for system of products working together

New Concepts:Consistent with 60 Years of Prize Winning Economic Research: 

New Concepts: Consistent with 60 Years of Prize Winning Economic Research Herb Simon (1957 Nobel Prize Winner) Buyers satisfice not optimize Alan Blinder: Gordon S. Rentschler Memorial Professor of Economics at Princeton University; former Vice Chairman of Federal Reserve and former member of Council of Economic Advisors 90% industries declining or flat marginal costs Kahneman (2002 Nobel Prize Winner) Decisionmakers make many errors in making decisions Far from having capacity to make ‘rational decisions Coase (1991 Winner of Nobel Prize) Transaction costs always exist Important: finding, evaluating, contracting, monitoring performance etc One cannot understand existence of firm without transaction costs Oliver Williamson and many others Expanded scope of work to show many imperfections within and between firms Brian Arthur: Increasing returns and path dependency Paul Romer, Stanford Professor New growth theory Technological change does not magically appear Product of economic system Much of the change outside market: scientists Institutional issues dominate Learning by doing (Arrow: Nobel Prize Winner 1972) Douglas North (1993 Nobel Prize Winner) Institutions, Institutional Change and Economic Performance Economic transactions depend on myriads of Laws Customs Organizations Standards Property rights Performance varies with how well institutions contend with real problem and opportunities of the transaction streams Richard Nelson & Sidney Winter Economy always of equilibrium

Summary of Evidence: 

Summary of Evidence Economists wrong Costs much lower than apparent Economists Wrong Price rises not efficient or effective by themselves New Policy Options Needed Based on Realistic portrayal of buying and producer behavior Modeling must be evolutionary to be useful

Most Significant Implementation Issues: 

Most Significant Implementation Issues Business as Usual Attitudes Failure to recognize grave threat of global warming and climate to human future Failure to overcome inertia and act decisively False claims of models that extrapolate past to future

The End: 

The End

Slide36: 

Supplemental Slides

Other Potential Opportunities for Strong Attractors: 

Other Potential Opportunities for Strong Attractors Ocean Currents Solar Thermal Advanced Wind Safe nuclear GAX heating system CAES

New Options Do Not Exclude Old: 

New Options Do Not Exclude Old Cap and Trade Advantages Creates limit on emissions Brings need for emissions reductions To top of agenda of many organizations Will raise prices R&D Advantages Utilizes more diverse resource pool: Universities etc.

National Power Purchase Corporation (NEPC)(Strong Attractor): 

National Power Purchase Corporation (NEPC) (Strong Attractor) Bids for LONG TERM MWH (20 Years): Output of 10,000 MW per year Long term power purchase agreements (PPAs) Portfolio of Low or No Carbon Options NEPC re-sells MWH Bids for Storage of kWh Treasury Risk Difference Between Buy and Sell Price Resolution Risk: Could Go in Either Direction

New Idea: Strong Attractors to Overcome Lock In/Out: 

New Idea: Strong Attractors to Overcome Lock In/Out Examples of strong attractors Government creates guaranteed purchase (National Energy Purchasing Corporation) Corporations band together to create guaranteed purchases Households band together to create guaranteed purchases Risks become technological, not commercial Cost of being strong attractor Exposure limited to commercial risk Profit potential may eliminate any cost

Lock In/Lock Out CommonMany Fields: 

Lock In/Lock Out Common Many Fields Good technology is locked in or locked out Qwerty Keyboard locked in Superior Key arrangement Dvorak cannot gain market share CFC113 Production was locked in in 1980s for electronics cleaning Military specifications required CFC113 Other options could not compete Future Energy Technology Locked Out Against Proven Technology By Multiple risks {financial, technical, insurance etc)

Key Concepts of proposed transaction bridges: 

Key Concepts of proposed transaction bridges Producers AUTOMATICALLY share value of energy savings Resulting benefits: Reduced transaction costs Reduced cost of introducing new products Means quicker achievement of decreasing marginal cost with scale Organizations will reward energy productivity producing behavior Careers made off efficiency Mark-up amplification eliminated from value chain

Energy Savings Opportunities Everywhere: 

Energy Savings Opportunities Everywhere Current products can reduce energy use dramatically Un-commercialized proven technologies can save more Greater market pull New Technology can produce even greater savings

Benefit of Marginal CostsFor Energy Systems: 

Benefit of Marginal Costs For Energy Systems Current Situation Inefficient goods sell more, price becomes lower Scale economies lower price more Efficient goods sell less, price becomes higher Lack of scale economies increases prices Pricing through distribution chain raises price differential even more Mark up (gross margin) at each stage multiplies manufacturing cost difference Anecdotal evidence that mark ups demanded are higher for ‘niche efficient products’ Future Lower costs/prices for efficient goods Result from greater sales, thereby increasing economic benefit

Producers: 

Producers Limited number Many options unexplored Large Knowing/Doing Gap Marginal costs decline with volume Change can be abrupt

Stabilizing Human Forcing Will Not Stabilize Climate: 

Stabilizing Human Forcing Will Not Stabilize Climate Lag in experiencing warming Past emissions will continue to raise temperature/change climate for decades/centuries just from thermal lag As warming occurs, biogeochemical changes will occur Increased respiration of soils Increased forest fires/soil fires Decline in ocean circulation/ carbon emissions Methane hydrate emissions Methane emissions from soils MORE EMISSIONS Hadley group considering CO2 alone Suggests nature will double forcing of humans

Magnitude of Climate Change Could Be Larger than Standard Range of Uncertainty: 

Magnitude of Climate Change Could Be Larger than Standard Range of Uncertainty Climate Net: Monte Carlo using many computer runs over internet Tests one by one uncertainties Extends range of possible warming to much higher level Needed: Monte Carlo with many uncertainties simultaneously tested Paleo-evidence Past forcings from orbital variations Led to large changes in emissions Consistent with mid range estimate of sensitivity But boundary conditions will be different in future

Stabilizing Human Forcing Climate: 

Stabilizing Human Forcing Climate Output: Economic activity including growth Energy Intensity per unit of economic activity GHG emissions per unit of energy Total GHG= Sum (output* energy intensity per unit of output *GHG per unit of energy) Probable Reductions Required CO2: 90% CH4: 25% N2O: 90% (?) HFC: 90%

New Ideas Can Workto Make Old Solutions More Viable: 

New Ideas Can Work to Make Old Solutions More Viable New Ideas Transaction Bridges, Strong Attractors, Infrastructure Parity Et al. Cap & Trade Higher Prices R&D Command and Control Voluntary Programs

IGCC: Potential Major Opportunity: 

IGCC: Potential Major Opportunity Coal widely available and inexpensive Gasification allows relatively inexpensive carbon sequestration Technologies not optimized but proven Technological Improvement possible Scale economies Power Costs could be below current average cost Barrel of diesel ~$30