Energy Policy Update

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Energy Policy Update

• Clinton Andrews
• Bloustein School of Planning Public Policy,
  Rutgers University

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Recent Headlines

• Enron Arthur Anderson
• Global warming Kyoto
• Blackouts California
• Price spikes California
• CAFE standards Pickup trucks
• ANWR Renewables

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Overview

• Energy in historical perspective
• Markets vs policies gt Regulated markets
• Petroleum
• Natural Gas
• Electricity
• Future challenges

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U.S. Energy Use, 1635-2000 (Quadrillion Btu)
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U.S. Energy Supply Demand
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Rationale for Policy Interventions

• Government as rulemaker umpire
• Meant to correct market failures (monopoly power,
  externalities, public goods, imperfect
  information, instability)
• Meant to avoid government failures (inefficiency,
  bureaucratic Leviathan, capture)

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Economic Rationales

• Strategic commodities--oil affects macroeconomic
  stability--coal, hydro, biomass support regional
  development reduce import dependence--nuclear
  supports military objectives
• Network utilities (natural monopolies?)--natural
  gas--electricity

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Social Rationales

• Environmental protection
• Resource needs of future generations
• Resource needs of developing nations
• Thriftiness as a moral virtue
• Its difficult to distinguish economic and social
  rationales!

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In Plain English

• Why care about energy policy?
• Security of supply
• Economic price tag
• Environmental impacts
• (Regulated) energy markets usually make the best
  allocational decisions, but
• they ignore important long-term concerns

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Petroleum Market

• Supply global market, US imports 60
• Demand transportation dominates, no current
  substitute
• Current status cheap, plentiful, vulnerable,
  market working ok
• Longer term finite resource, climate change
  driver, geopolitics, VMT vs MPG

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Petroleum Supply Demand
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World Oil Price Chronology
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U.S. Macroeconomic Impacts
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Strategic Commodity Oil

• Price-setting Rationing Texas Railroad
  Commission, OPEC
• Exploration rights royalties
• Severance taxes depletion allowances
• Antitrust
• Military intervention

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Natural Gas Market

• Supply regional markets, North America
  self-sufficient
• Demand space process heat, electricity
  production
• Current status recently deregulated, clean fuel
  choice
• Longer term bridging fuel, new supplies

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Natural Gas Supply Demand
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Natural Gas Supply and Price
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Other Primary Energy Sources

• Coal
• Nuclear fission
• Nuclear fusion
• Hydroelectric
• Need universal carriers

• Solar photovoltaic
• Solar thermal
• Wind
• Geothermal
• Biomass

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Electricity

• Supply regional markets, no storage
• Demand increasing
• Current status undergoing deregulation, serious
  regional problems
• Longer term inadequate transmission system,
  siting problems, no RD , huge potential for
  innovations

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The Problem of Natural Monopoly

• Free market leads to redundant investment,
  destructive competition
• Unregulated monopoly incentive to restrict
  supply, drive up price
• Regulatory solution exclusive franchise with
  obligation to serve at regulated prices

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Has Anything Changed?

• Experiments with deregulation
• Smaller efficient minimum scale new gas
• Class defections (industrial customers facing
  globalization)
• Lack of accountability of the exclusive franchise
• PUC administrative process captured by special
  (social) interests

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Interstate Price Gradient
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17 SC
3 SC
1 SC
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State Disparities in Price
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Deregulation Status (0-100 scale)
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Diffusion of Deregulation
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Diffusion of Deregulation Why?

• Event history analysis showed
• Early studies done in states with high prices,
  capable regulators, non-Democratic control,
  innovative neighbors
• Early implementation in states with high prices,
  Republican control

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Vertical Dis-Integration
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Evolution of Policy (a)

• PUCHA (1935)
• Broke up holding companies
• Empowered state control of vertically integrated
  utilities
• State regulation of generation distribution
  Federal regulation of transmission
• PURPA (1978)
• Created QFs (renewable and cogenerators)
• Demonstrated viability of wholesale competition
• Energy Policy Act (1992)
• Created Exempt (from PUCHA) Wholesale
  Generators
• Transmission wheeling for retail distribution

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Evolution of Policy (b)

• Reticent role of FERC
• Orders 888, 889 (1996)
• Nondiscrimenatory terms for transmission access
• Unbundling of costs just pricing of transmission
• Concept of Independent System Operators
• Order 2000 (1999)
• Concept of Regional Transmission Organizations
• Regional negotiations and plans voluntary
  participation file plans or identify obstacles
  little progress
• Summer 2001
• Ninety days to develop plans for four RTOs

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Evolution of Policy (c)

• Spring 2001 Bush/Cheney energy plan
  (supply-oriented)
• Fall 2001 House passes Bush plan
• Today Senate debates energy policy (Democrats
  want energy efficiency, Republicans want Bush
  plan, interesting sideshows)

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Electricity Supply Demand
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20 Increase
5 Increase
Capacity (MW) Peak Demand (MW) Transmission
(Circuit Miles)
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Reliability NERCs Hot Spots
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CA 2000 The Perfect Storm?

• Important factors in 2000 included
• Demand growth
• Natural gas prices (doubling to tripling)
• NOx permit prices (peaking over 80,000 per ton,
  or 240/MwH for oldest peaking turbines)
• Flawed market rules
• Exploitation of market power?

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Events in 2001

• Up to 40 rate increase
• Proposed purchase of transmission lines
• Relax NOx rules
• Wholesale price caps
• Emerging supply response
• Tremendous demand response

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California Demand Response Normalized for
weather and economy.Note absence of peak load
price signals leads to undifferentiated response.
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The EnvironmentElectricitys share of air
pollution
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Sectoral Trends Air Pollutants
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Capacity Additions 1990 2000
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In Future Distributed Generation

• Smaller, cleaner, some renewable photovoltaics,
  wind, fuel cells, microturbines, reciprocating
  engines
• Technological maturity whats commercially
  available?
• Institutional barriers interconnection, net
  metering, financing

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Current Cost Multiple Solar
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Energy Lags in RD Comparison
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Key Policy Challenges

• Petroleum import vulnerability (how?)
• Lack of energy RD
• Climate change policy commitment
• Preserving reliability during electricity
  deregulation (need incentives)
• Write your Senator this week!

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For more information

• http//radburn.rutgers.edu/andrews

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References

• Andrews, C.J., 2000, Diffusion pathways for
  electricity deregulation, Publius.
• Burtraw,D., 2001, Deregulation Is it the
  problem or the solution? Presentation at the
  Mark O. Hatfield Institute for International
  Understanding.
• Margolis, R.M., 2002, Photovoltaic RD Policy,
  PhD dissertation, Princeton University.
• North American Electric Reliability Council
  (NERC), 2001a, Electric industry national
  security preparedness, Presentation at the
  Annual Meeting of the National Association of
  Regulatory Utility Commissioners.
• NERC, 2001b, NERC 2001-2010 Reliability
  Assessment.
• US Dept of Energy, 2001, Energy Annual 2000.
• US Dept of Energy, 2000, History of US Energy
  Since 1635.
• US Dept of Energy, 2002, Petroleum Supply
  Disruptions.