Energy Policy and Energy Efficiency James Sweeney Stanford University Director, Precourt Institute for Energy Efficiency Professor, Management Science.

Energy Policy and Energy Efficiency

James Sweeney

Stanford University

Director, Precourt Institute for Energy Efficiency

Professor, Management Science and Engineering

• 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

Policy Drivers

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

Background Energy Data

U.S. and California Energy Consumption, 2005

41%

23% 23%

8%

3% 3%

48%

9%

29%

5%

2%3% 4%

0.4% 0.2% 0.1%0%

10%

20%

30%

40%

50%

PetroleumProducts

Coal Natural Gas NuclearElectricPower

HydroelectricPower

Biomass GeothermalEnergy

Wind andSolar

Qu

adri

llio

n B

tu

All United StatesCalifornia (Source: Gene Berry)

U.S. and CA Energy Consumption, 2005

Petroleum

Natural Gas

Coal

Hydro-resource

Nuclear Fuel

Geothermal

Wind

Solar

Electricity Generation

End-Use Consumption Residential Industrial Commercial Transportation

0

5

10

15

20

25

30

35

Residential Commercial Industrial Transportation

Consuming Sector

Qu

ad

rill

ion

Btu

Electricity(Incl losses)Hydro, Solar,GeothermalBiomass

Coal

Natural Gas

Petroleum

U.S. Sectoral Energy Use: 2005

Energy Consumption Per 2000 Dollar of GDP

0

5

10

15

20

25

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

P

Th

ou

san

d B

TU

per

Do

llar

Source: EIA, Annual Energy Review

Energy Consumption Per 2000 Dollar of GDP

0

5

10

15

20

25

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

P

Th

ou

san

d B

TU

per

Do

llar

Pre-Energy-Crisis, Low

Prices

Energy-Crisis, High Prices

Low Prices Through

2003

Per Capita Energy Consumption

0

50

100

150

200

250

300

350

400

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

P

Mil

lio

n B

TU

per

Per

son

1974

Source: EIA, Annual Energy Review

US Per Capita Total Energy Use

Environmental

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.

United States Carbon Emissions: 2004

0

100

200

300

400

500

600

Residential Commercial Industrial Transportation ElectricityGeneration

Mill

ion

s o

f to

nn

es p

er y

ear

Car

bo

n e

qu

ival

ent

Natural Gas

Petroleum

Coal

LDVs

Trucks Buses

Air

U.S. CO2 Emissions by Sector and Fuels 2004

Source: U.S. EPA Inventory of Greenhouse Gas Emissions, April 2006

Carbon Dioxide Releases: 2002 Actual, 2020 Projections

China

IndiaAfrica

Middle East

United States

Europe

Canada

Australia/ NZJapan Other Asia

Former Soviet Union

Source: International Energy Outlook 2005 (US Dept of Energy)

Security Issues

• 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

Other OECD2%

Former USSR14%

Venezuela3%Indonesia1%

Nigeria3%

Algeria2%

UAE3%

Saudi Arabia11%

Qatar1%

Iraq2%

Libya2%

Kuwait3%

Iran5%

North Sea7%

Mexico5%

Canada4%

US11%

Other Non-OECD15%

China4%

OPEC NG Plnt Lqds3%

World Oil Supply, 2004, Total: 83 mmb/d

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

Oil and Gas Reserves, Billion Barrels Oil EquivalentSaudi Aramco (Saudi Arabia) 302 ExxonMobil 23

National Iranian Oil Co 302 Pertamina (Indonesia) 22

Gazprom (Russia) 198 Lukoil (Russia) 21Iraqi National Oil Co 136 BP 19Qatar Petroleum 133 Pemex (Mexico) 19Kuwait Petroleum Co 109 PetroChina 19Petroleos de Venezuela 105 Shell 16Adnoc (Abu Dhabi) 80 Yukos (Russia) 13Nigerian Natnl Petroleum Co 41 Chevron 12

Sonatrach (Algeria) 38 Petrobras (Brazil) 12Libya NOC 31 Total (France) 11Rosneft (Russia) 28 Surgutneftgas (Russia) 9

Petronas (Malaysia) 26

State Owned/Controlling Interest. Private Sector Owned

Economic Issues

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

Crude Oil Futures Prices: As of Five Dates

$50

$52

$54

$56

$58

$60

$62

$64

$66

$68

$70

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

Delivery Date

As of Oct 12As of Nov 12As of Jan 16As of Jan 19As of March 10

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

Oil Price Uncertainty December 2009 Delivery (data March 10, 2007)

0%

5%

10%

15%

20%

25%

30%

Below $35 $35 - $56 $56 - $68 $68 - $80 $80 - $100 Above $100

Pro

bab

ility

of

Pri

ce B

ein

g in

Ran

ge

Based on Calls

Based on Puts

Energy Efficiency:

Economically Efficient Reductions in Energy Use Intensity

Increased EconomicEfficiency

Decreased Energy Use

Reduced EconomicEfficiency

Increased Energy Use

Economically Efficient Energy Intensification

Energy Efficiency Improvement

Inefficient Energy Saving

Waste

Increased EconomicEfficiency

Decreased Energy Use

Rural ElectrificationGasoline

Price Controls

Compact Fluorescent Penetration

LED Traffic Lights

Energy Star Labeling

Gasoline Rationing

Promote Incan-descent Lighting

Congestion Pricing

Personal Computer Penetration

Optimized Building Construction

Overly Strict Building Standards

Pigouvian Energy Tax

Increased EconomicEfficiency

Decreased Energy Use

“Smart” Local Land Development

Tighter CAFE Standards

Many Rapid Transit Systems

Some Rapid Transit Systems

Restrict SUV Sales

Airline Deregulation

Energy Audits

Hybrid Gas-Electric Vehicles

Plasma TVs

Plug-In Hybrids (Now)

Plug-In Hybrids (Future)

LED General Lighting (Now)

LED General Lighting (Future)

Internet Growth

“Smart Buildings” Controls

Economic development

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

Per Capita Electricity Consumption

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1960 1965 1970 1975 1980 1985 1990 1995 2000

kWh/

pers

on

Source: http://www.eia.doe.gov/emeu/states/sep_use/total/csv/use_csv.html

United States

California

Per Capita Electricity Consumption

Example: Lighting

Commercial Building Energy Uses

Source: 2006 Buildings Energy Data Book

Space Cooling

Lighting

Space Heating

Refrigeration

Water Heating

Ventilation

Electronics

Cooking

Other

Cooling Load Driven by Lighting(42% of Cooling Load)

Heating Assistance from Lighting(23% of Space Heating Load)

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

From “U.S. Lighting Market Characterization”, prepared for DOE EERE by Navigant Consulting, 2002

From “U.S. Lighting Market Characterization”, prepared for DOE EERE by Navigant Consulting, 2002

Residential 900 Lumen Lighting 20 year Lifecycle Cost (Now)

$0

$10

$20

$30

$40

$50

$60

$70

$80

Incand CFL LED

Cost of CapitalCost of MaintenanceElectricity Cost

Commercial 900 Lumen Lighting 20 year Lifecycle Cost (Now)

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Incand CFL LED

Cost of CapitalCost of MaintenanceElectricity Cost

LEDs Efficacy Increases by 30% Per Year

0

20

40

60

80

100

120

140

160

1998 2000 2002 2004 2006 2008 2010 2012

Eff

ica

cy

/ L

um

en

per

Wat

t

2002 DOE Roadmap

LED - Standard Chip

LED - Power Chip

Residential 900 Lumen Lighting 20 year Lifecycle Cost (In 5 – 10 Years)

$0

$10

$20

$30

$40

$50

$60

$70

$80

Incand CFL LED

Cost of CapitalCost of MaintenanceElectricity Cost

Commercial 900 Lumen Lighting 20 year Lifecycle Cost (In 5 – 10 Years)

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Incand CFL LED

Cost of CapitalCost of MaintenanceElectricity Cost

Energy Implications of 100% LEDs @ 120 Lm/wt System Efficacy

0

50

100

150

200

250

300

350

400

450

Commercial Residential Industrial Outdoor

TW

hr/

yr

Current Mix

All LED @ 120 lm/wt

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

Example: Fuel Economy of Light Duty Vehicles

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

15

20

25

30

35

40

45

Subcompact Compact Midsize Large

Passenger Car Classes

Co

st E

ffec

tive

MP

G v

s B

ase

MP

G

3-Year

3-Year + Externality 14-Year

3-Year

3-Year + Externality

14-Year

3-Year

3-Year + Externality 14-Year

Estimated Cost-Minimizing MPG vs. CurrentPassenger Cars: NRC CAFE Study

15.00

20.00

25.00

30.00

35.00

SUV-Small SUV-Mid SUV-Large MiniVan Pick-up Large

Truck Car Classes

Co

st E

ffec

tive

MP

G v

s B

ase

MP

G

3-Year

3-Year + Externality

14-Year

3-Year

3-Year + Externality 14-Year

3-Year

3-Year + Externality 14-Year

Estimated Cost-Minimizing MPG vs. Current “Trucks”: NRC CAFE Study

Political

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

Supreme Court Decision on Carbon Dioxide

• Carbon Dioxide can be regulated under the Clean Air Act

• States can regulate carbon dioxide emissions

California’s 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

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

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

Policy Agenda

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

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

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

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

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

Encourage Technology Development

• Governmental R&D– Federal

– States (California Public Interest Energy Research Program)

• R&D incentives– In energy bill

• Technology competitions• Green labeling

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. 

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

Precourt Institute for Energy Efficiency

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

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

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.

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”

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