Energy Policy and Energy Efficiency

1
Energy Policy and Energy Efficiency

• James Sweeney
• Stanford University
• Director, Precourt Institute for Energy
  Efficiency
• Professor, Management Science and Engineering

2
Policy Drivers

• Environmental Protection
• Global Climate Change
• Security
• Oil/International vulnerability
• Vulnerability of infrastructure to terrorism,
  natural disaster, or human error
• Economics
• Prices of electricity, gasoline, natural gas
• Price volatility oil, natural gas, wholesale
  electricity

3

• Policy Pushes U.S. and California
• Reducing greenhouse gas emissions
• Mechanisms Market based Command and Control
• Energy Efficiency Automobile Fuel Economy
• Alternative Fuels Ethanol, Biodiesel
• Energy Infrastructure Investments
• U.S. Oil Exploration
• LNG terminals
• Energy Technology Development
• Green -- Low greenhouse gas energy
• Energy Efficient technologies

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Background Energy Data
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U.S. and CA Energy Consumption, 2005
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Petroleum
Natural Gas
End-Use Consumption Residential Industrial
Commercial Transportation
Coal
Hydro-resource
Electricity Generation
Nuclear Fuel
Geothermal
Wind
Solar
7
U.S. Sectoral Energy Use 2005
8
Source EIA, Annual Energy Review
9
Energy-Crisis, High Prices
Pre-Energy-Crisis, Low Prices
Low Prices Through 2003
10
US Per Capita Total Energy Use
1974
Source EIA, Annual Energy Review
11
Environmental
12
Fossil fuels account for

• 98 of the US carbon dioxide net releases into
  the atmosphere
• 82 of the releases of greenhouse gases, measured
  on a carbon equivalent basis.

13
U.S. CO2 Emissions by Sector and Fuels 2004
Source U.S. EPA Inventory of Greenhouse Gas
Emissions, April 2006
14
Carbon Dioxide Releases 2002 Actual, 2020
Projections
Source International Energy Outlook 2005 (US
Dept of Energy)
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Security Issues
16

• Production of oil concentrated into unstable
  areas of the world
• Sudden supply reductions can sharply increase oil
  price
• Short run demand elasticity about - 0.1 to - 0.2
• Percentage price increase will be 5 to 10 times
  the percentage supply reduction
• Sudden oil price increases can lead to worldwide
  recession
• Petroleum revenues fund terrorist activities

17
World Oil Supply, 2004, Total 83 mmb/d
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Ownership of oil industry

• The largest 13 firms as measured by oil and gas
  reserves are all owned by nations or are
  controlled by other nations
• Oil supply may be manipulated for political
  purposes by those nations controlling the reserves

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Oil and Gas Reserves, Billion Barrels Oil
Equivalent
Saudi Aramco (Saudi Arabia) 302 ExxonMobil 23
National Iranian Oil Co 302 Pertamina (Indonesia) 22
Gazprom (Russia) 198 Lukoil (Russia) 21
Iraqi National Oil Co 136 BP 19
Qatar Petroleum 133 Pemex (Mexico) 19
Kuwait Petroleum Co 109 PetroChina 19
Petroleos de Venezuela 105 Shell 16
Adnoc (Abu Dhabi) 80 Yukos (Russia) 13
Nigerian Natnl Petroleum Co 41 Chevron 12
Sonatrach (Algeria) 38 Petrobras (Brazil) 12
Libya NOC 31 Total (France) 11
Rosneft (Russia) 28 Surgutneftgas (Russia) 9
Petronas (Malaysia) 26
State Owned/Controlling Interest. Private
Sector Owned
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Economic Issues
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Crude Oil prices

• Crude Oil prices are currently high
• Prices on futures markets suggest that crude oil
  prices are most likely to further increase
• World demand continues to grow
• Development of China and increase in the number
  of passenger cars
• India is likely to follow
• Expectation that conventional oil supply may peak
  soon
• Incentives for dominant suppliers to limit
  investment in new production capacity so as to
  keep prices
• Incentives for dominant suppliers to keep future
  prices uncertain so as to limit competitive
  investments

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Crude Oil Futures Prices As of Five Dates
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Price Risk

• Possible to estimate probability distribution of
  future oil prices by observing options based on
  the futures market
• Puts and calls are priced in the market
• Prices of puts and calls reflect the beliefs of
  market participants about price uncertainty
• Significant uncertainty in the near term
• Uncertainty increases over time
• Data quality
• Relatively good through 2007
• OK, but limited to December 2009
• Risk of either very low or very high prices

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Oil Price Uncertainty December 2009 Delivery
(data March 10, 2007)
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Energy Efficiency Economically Efficient
Reductions in Energy Use Intensity
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Decreased Energy Use
Reduced EconomicEfficiency
Increased EconomicEfficiency
Increased Energy Use
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Decreased Energy Use
Energy Efficiency Improvement
Inefficient Energy Saving
Increased EconomicEfficiency
Economically Efficient Energy Intensification
Waste
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Decreased Energy Use
Smart Buildings Controls
LED General Lighting (Future)
Smart Local Land Development
Energy Audits
Restrict SUV Sales
LED Traffic Lights
Tighter CAFE Standards
Plug-In Hybrids (Now)
Gasoline Rationing
Optimized Building Construction
Plug-In Hybrids (Future)
Compact Fluorescent Penetration
Energy Star Labeling
Overly Strict Building Standards
Hybrid Gas-Electric Vehicles
Pigouvian Energy Tax
Some Rapid Transit Systems
Congestion Pricing
Increased EconomicEfficiency
Internet Growth
Many Rapid Transit Systems
LED General Lighting (Now)
Personal Computer Penetration
Economic development
Promote Incan-descent Lighting
Rural Electrification
Airline Deregulation
Gasoline Price Controls
Plasma TVs
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Some Sources of Efficiency Failures

• Externalities of Energy Use
• Global Climate Change
• Risks of Energy Price Shocks
• Limitations on our Foreign Policy Options
• Terms of Trade Impacts (Pecuniary
  Externalities)
• Safety externality in autos
• Pricing Below Marginal Cost
• Non-time-differentiated Electricity Pricing
• Information Asymmetry
• Consumer Product Marketing
• New Building Construction
• Incomplete Technology Options
• Under-investment
• Sub-optimal technology directions, due to
  externalities
• Non-Convexities
• Learning By Doing Technology Spillovers
• Chicken and Egg Problems

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Per Capita Electricity Consumption
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Example Lighting
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Commercial Building Energy Uses
Source 2006 Buildings Energy Data Book
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Lighting as Share of U.S. Electricity

• Lighting use
• About 800 Terawatt hours (1012) per year
• Electricity Generation
• 3815 Terawatt hours per year
• Lighting is 21 of all electricity use

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From U.S. Lighting Market Characterization,
prepared for DOE EERE by Navigant Consulting, 2002
35
From U.S. Lighting Market Characterization,
prepared for DOE EERE by Navigant Consulting, 2002
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Residential 900 Lumen Lighting 20 year Lifecycle
Cost (Now)
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Commercial 900 Lumen Lighting 20 year Lifecycle
Cost (Now)
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LEDs Efficacy Increases by 30 Per Year
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Residential 900 Lumen Lighting 20 year Lifecycle
Cost (In 5 10 Years)
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Commercial 900 Lumen Lighting 20 year Lifecycle
Cost (In 5 10 Years)
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Energy Implications of 100 LEDs _at_ 120 Lm/wt
System Efficacy
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Economy-Wide Impacts of All LED

• Lighting use 21 of all electricity use
• All LED saves about 60 of this electricity in
  long run
• 13 of all electricity use after all
  adjustments
• Adjustment time
• How long until LED system efficacy reaches 120
  lm/wt? 5 years?
• 50 adoption 15 years afterwards?
• 50 adoption will save 6.5 of all electricity
  use
• Electricity impact Perhaps 6.5 reduction in 20
  years
• Electricity cost impact
• Total cost of U.S. electricity
• Retail 300 Billion per year
• Variable Costs say 200 Billion per year
• 6.5 of 300 Billion dollars 20 Billion per
  year
• 6.5 of 200 Billion dollars 13 Billion per
  year

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Example Fuel Economy of Light Duty Vehicles
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Forces Shaping Energy Use

• Transport Sector
• Chosen Level of Mobility
• Income and Free-time Dependant
• Urban/Suburban/rural land use patterns
• Modes of Transport (personal vehicle, airplane,
  bus, trains)
• Value of Time
• Costs of Alternatives (Influenced by oil price)
• Availability of Alternatives
• Vehicle Characteristics
• Performance
• Size
• Engine, Drive Train Technologies
• Choices influenced by oil price

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Estimated Cost-Minimizing MPG vs.
CurrentPassenger Cars NRC CAFE Study
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Estimated Cost-Minimizing MPG vs. Current
Trucks NRC CAFE Study
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Political
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Change of Senate and House Majorities

• CO2 mitigation will be a major push
• Senate Energy Committee leadership change
• Cap-and-Trade system for carbon management under
  debate
• Study Group Developed
• Group does not have rights to draft legislation
• More direct regulations are likely also

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Supreme Court Decision on Carbon Dioxide

• Carbon Dioxide can be regulated under the Clean
  Air Act
• States can regulate carbon dioxide emissions

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Californias AB 32

• Market based instruments
• Allowed but not required
• May face opposition from legislature
• Development of Cap-and-Trade system
• Under way through Cal EPA and CARB
• Executive Order on Carbon content of fuels
• Average Content
• Including hydrogen and electricity
• Trading system
• To be designed

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Other California Rules

• Autos Pavley Bill
• CO2 limits on average of new vehicles
• Under court challenge
• But Supreme Court decision should help greatly
• Utility regulation
• Renewable Portfolio Standard
• Responsibility for CO2 content of electricity,
  where ever the electricity generated
• Other regulations
• Buildings standards
• Plug load standards

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Political Bottom Line

• Many changes to be expected
• Regulations still be developed
• High payoff for getting involved in the process
• Many groups are involved interests vary across
  groups
• Personal involvement can make great difference

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Policy Agenda
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Bottom Line

• Increases of economic efficiency can be
  accomplished through decreases of energy use
  energy efficiency improvements
• In principle, based on understanding of market
  failures
• In practice, based on observations of options and
  human choices
• In practice, based on technology and systems
  innovation
• The potential, I believe, is large for
  improvements in energy efficiency

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Get Prices Right

• Oil
• The world oil price is passed through to the
  economy
• International security externality not included
• CO2 externality not included
• Other travel externalities not included
• Congestion
• Highway/Road mortality/injury
• Criteria pollutants
• Thus price we pay for gasoline is too low

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Get Prices Right

• US oil price should include an international
  security externality premium/tax/fee
• Gasoline tax
• Higher CAFE standards on light duty vehicles
• Prices for oil substitutes should not be kept
  artificially high
• Import tax on ethanol -- .54 per gallon --
  should be eliminated

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Get Prices Right

• CO2
• Need US national carbon dioxide cap-and-trade
  system
• The United States could implement a cap and trade
  system even if we do not ratify Kyoto protocol
• System can be implemented
• The nations that have ratified the Kyoto protocol
  now are operating such a system
• Currently states are beginning to implement such
  systems, but a national system would be
  preferable
• We have experience in cap-and-trade
• Acid Rain SOx trading
• RECLAIM program for criteria pollutants
• Chicago Climate Exchange

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Encourage Technology Development

• President Bush state of the Union speech
• Call for more research and development
• Primarily supply technologies
• Equally important if not more important
  energy efficiency technologies
• Rapid change possible through more efficient
  vehicles
• Hybrid electric vehicles
• Plug-in hybrids
• Electric vehicles
• Longer run Possibly hydrogen vehicles
• Buildings
• Lighting light emitting diodes
• Building design, technologies, operating processes

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Encourage Technology Development

• Governmental RD
• Federal
• States (California Public Interest Energy
  Research Program)
• RD incentives
• In energy bill
• Technology competitions
• Green labeling

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Encourage Entrepreneurial Efforts

• May look like no policy at all. 
• Encourage technical and market experimentations
• Some will ultimately make it big  others will
  not. 
• But the genius of Silicon Valley involves
  entrepreneurial efforts, risk-taking, pioneering
  efforts. 
• Some of these will be failures, some successes. 
• Successes will live on, grow to become the
  household names. 
• will spawn more entrepreneurial challenges
• The failures will typically lead to different
  attempts, some successes, some failures. 
• Ahead of time impossible to know which will
  disappear and which will be the next Google. 
• Lighting, vehicles are poised for fundamental
  change. 

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Adopt Sector-Specific policies

• Autos
• Higher CAFE standards
• Restructure CAFE standards with marketable
  efficiency credits
• Labeling using common metrics people ( per
  year?)
• Electricity
• Renewable Portfolio Standards Carbon Dioxide
  Adders
• Buildings
• Building Efficiency Standards
• Appliances
• Appliance efficiency standards Energy Star
  labeling

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Precourt Institute for Energy Efficiency
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Precourt Institute

• A research and analysis institute at Stanford
• Established in October 2006
• Initial funding 30 million pledge by Jay
  Precourt
• Mission
• To improve opportunities for and implementation
  of energy efficient technologies, systems, and
  practices, with an emphasis on economically
  attractive deployment
• Focus on the demand side of energy markets
• Energy efficiency
• Economically efficient reductions in energy use
  (or energy intensity)
• Directed by James Sweeney

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PIEE Advisory Council

• George Shultz, Council Chair, Thomas W. and Susan
  B. Ford Distinguished Fellow Hoover Institution
  
• Jay Precourt, Council Vice Chair, Chair and CEO,
  Hermes Consolidated
• John Boesel, President and CEO
  WestStart-CALSTART
• Joseph Desmond, Former Chair, California Energy
  Commission
• TJ Glauthier, TJG Energy Associates, LLC
• Agatha Precourt, Consumer Marketing/Brand
  Management Consultant
• Debra Reed, President and Chief Executive
  Officer, San Diego Gas Electric and Southern
  California Gas Co.
• Burton Richter, Director Emeritus, Stanford
  Linear Accelerator Center Nobel Laureate,
  Physics
• Ben Schwegler, Vice President / Chief Scientist
  Walt Disney Imagineering
• Byron Sher, Former California State Senator
• Erik Straser, Partner Mohr, Davidow Ventures
• Bill Valentine, Chairman of the Board HOK
• Ward Woods, Retired President and CEO of Bessemer
  Securities
• Jane Woodward, CEO Mineral Acquisition Partners

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Intended Activities

• Deepening theoretically-based and
  empirically-based understanding of the forces
  shaping energy use
• Developing innovative approaches for
  understanding the decision-making environment in
  corporations, public organizations and households
  that determine the deployment and use of energy
  efficient technologies and practices
• Undertaking physical and engineering research
  designed to create or improve energy efficient
  technologies and systems
• Designing and analyzing policies or other
  practices to enhance economically attractive
  deployment, for example, by overcoming market and
  policy barriers
• Engaging students and faculty in research and
  education associated with energy efficiency
• Working with affiliates and other organizations
  outside of Stanford to improve deployment of
  energy efficient technologies, systems, and
  practices.

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Research Projects Now Underway Faculty/Student
Teams

• Frank Wolak
• Designing Mechanisms to Involve Final Demand in
  Wholesale Electricity Markets
• John Haymaker
• An Occupancy Model for Energy Efficient Design
• Larry Goulder
• Policies to Improve Automobile Efficiency/ US
  Climate Change Policy
• Hamid Aghajan/Stephen Boyd/Andrea Goldsmith
• Wireless Sensor Networks Technology for Smart
  Buildings
• Jim Sweeney
• Assessment of Solid State Lighting
• Hydrogen-fueled Internal Combustion Vehicles
  Economic Assessment

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Research Projects Now Underway Faculty/Student
Teams

• Pedram Mokrian (PhD Candidate)
• Assessing the Value of Demand Side Resources
• Kenny Gillingham (PhD Candidate, EPA STAR
  support)
• Behavioral responses to Corporate Average Fuel
  Economy Increases
• Jiyong Eom (PhD Candidate)
• Game theoretical model of utility supplied energy
  efficiency measures
• John Weyant/ Jim Sweeney
• Energy Efficiency session for Snowmass Workshop
  on Integrated Assessment of Global Climate Change
• Holmes Hummel (Postdoc)
• Incorporation of Energy Efficiency into Long-Run
  Energy Systems Model