Energy Policy and Energy
Efficiency
James Sweeney
Stanford University
Director, Precourt Institute for Energy Efficiency
Professor, Management Science and Engineering
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
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. andU.S.
CA
Energy Consumption, 2005
and California Energy Consumption, 2005
50%
48%
All United States
California (Source: Gene Berry)
41%
Quadrillion Btu
40%
29%
30%
23%
23%
20%
9%
10%
8%
5%
3%
2%
3%
4%
3%
0.4%
0.2% 0.1%
0%
Petroleum
Products
Coal
Natural Gas
Nuclear
Electric
Power
Hydroelectric
Power
Biomass
Geothermal
Energy
Wind and
Solar
Petroleum
Natural Gas
Coal
Hydro-resource
Nuclear Fuel
Geothermal
Wind
Solar
Electricity
Generation
End-Use
Consumption
Residential
Industrial
Commercial
Transportation
U.S. Sectoral Energy Use: 2005
35
Electricity
(Incl losses)
Hydro, Solar,
Geothermal
Biomass
30
Quadrillion Btu
25
Coal
Natural Gas
20
Petroleum
15
10
5
0
Residential
Commercial
Industrial
Consuming Sector
Transportation
19
4
19 9
5
19 1
5
19 3
5
19 5
5
19 7
5
19 9
6
19 1
6
19 3
6
19 5
6
19 7
6
19 9
7
19 1
7
19 3
7
19 5
7
19 7
7
19 9
8
19 1
8
19 3
8
19 5
8
19 7
8
19 9
9
19 1
9
19 3
9
19 5
9
19 7
9
20 9
0
20 1
20 03
05
P
Thousand BTU per Dollar
Energy Consumption Per 2000 Dollar of GDP
25
20
15
10
5
0
Source: EIA, Annual Energy Review
19
4
19 9
5
19 1
5
19 3
5
19 5
5
19 7
5
19 9
6
19 1
6
19 3
6
19 5
6
19 7
6
19 9
7
19 1
7
19 3
7
19 5
7
19 7
7
19 9
8
19 1
8
19 3
8
19 5
8
19 7
8
19 9
9
19 1
9
19 3
9
19 5
9
19 7
9
20 9
0
20 1
20 03
05
P
Thousand BTU per Dollar
Energy Consumption Per 2000 Dollar of GDP
25
20
10
5
Energy-Crisis,
High Prices
15
Pre-EnergyCrisis, Low
Prices
Low Prices
Through
2003
0
19
4
19 9
5
19 1
5
19 3
5
19 5
5
19 7
5
19 9
6
19 1
6
19 3
6
19 5
6
19 7
6
19 9
7
19 1
7
19 3
7
19 5
7
19 7
7
19 9
8
19 1
8
19 3
8
19 5
8
19 7
8
19 9
9
19 1
9
19 3
9
19 5
9
19 7
9
20 9
0
20 1
20 03
05
P
Million BTU per Person
US Per Capita
Total
Energy Use
Per Capita Energy
Consumption
400
350
300
250
200
150
100
1974
50
0
Source: EIA, Annual Energy Review
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.
Millions of tonnes per year Carbon equivalent
U.S. CO
by Sector
and Fuels
United
States Carbon
Emissions:
2004 2004
2 Emissions
600
Natural Gas
500
Petroleum
Air
Coal
Trucks
Buses
400
300
200
LDVs
100
0
Residential
Commercial
Industrial
Transportation
Electricity
Generation
Source: U.S. EPA Inventory of Greenhouse Gas Emissions, April 2006
Carbon Dioxide Releases: 2002 Actual,
2020 Projections
Japan Other Asia
Australia/ NZ
United
States
Middle East
Former
Soviet Union
China
Europe
Africa India
Canada
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
World Oil Supply, 2004, Total: 83 mmb/d
North Sea
7%
Mexico
5%
Other OECD Iran Iraq
5% 2%
2%
Kuwait
3%
Canada
4%
US
11%
Other NonOECD
15%
China
4%
OPEC NG Plnt
USSR Lqds
3%
Former
14%
Libya
2%
Qatar
1%
Saudi Arabia
11%
UAE
3%
Algeria
2%
Nigeria
3%
Venezuela
3%
Indonesia
1%
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 Equivalent
Saudi Aramco (Saudi Arabia)
302 ExxonMobil
23
National Iranian Oil Co
302 Pertamina (Indonesia)
22
Gazprom (Russia)
Iraqi National Oil Co
Qatar Petroleum
Kuwait Petroleum Co
Petroleos de Venezuela
Adnoc (Abu Dhabi)
Nigerian Natnl Petroleum Co
Sonatrach (Algeria)
Libya NOC
Rosneft (Russia)
Petronas (Malaysia)
198
136
133
109
105
80
41
38
31
28
26
21
19
19
19
16
13
12
12
11
9
State Owned/Controlling Interest.
Lukoil (Russia)
BP
Pemex (Mexico)
PetroChina
Shell
Yukos (Russia)
Chevron
Petrobras (Brazil)
Total (France)
Surgutneftgas (Russia)
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
$70
$68
$66
$64
$62
$60
$58
As of Oct 12
As of Nov 12
As of Jan 16
As of Jan 19
As of March 10
$56
$54
$52
$50
Oct06
Apr07
Oct07
Apr08
Oct08
Apr09
Oct09
Apr10
Delivery Date
Oct10
Apr11
Oct11
Apr12
Oct12
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)
30%
Probability of Price Being in Range
Based on Calls
Based on Puts
25%
20%
15%
10%
5%
0%
Below $35
$35 - $56
$56 - $68
$68 - $80
$80 - $100
Above $100
Energy Efficiency:
Economically Efficient
Reductions in Energy Use
Intensity
Decreased Energy Use
Reduced
Economic
Efficiency
Increased
Economic
Efficiency
Increased Energy Use
Decreased Energy Use
Inefficient Energy
Saving
Waste
Energy Efficiency
Improvement
Economically Efficient
Energy Intensification
Increased
Economic
Efficiency
Decreased Energy Use
Restrict
SUV Sales
Gasoline
Rationing
Overly Strict
Building
Standards
Many Rapid
Transit
Systems
Promote
Incandescent
Lighting
Plug-In
Hybrids
(Now)
Hybrid GasElectric
Vehicles
LED
General
Lighting
(Now)
Gasoline
Price
Controls
LED
General
Lighting
(Future)
“Smart”
Local Land
Development
Plug-In
Hybrids
(Future)
Optimized
Building
Construction
Pigouvian
Energy Tax
Internet
Growth
Economic
development
Plasma TVs
“Smart
Buildings”
Controls
Energy
Audits
LED Traffic
Lights
Compact
Fluorescent
Penetration
Some Rapid
Transit
Systems
Personal
Computer
Penetration
Airline
Deregulation
Tighter
CAFE
Standards
Energy Star
Labeling
Congestion
Pricing
Increased
Economic
Efficiency
Rural
Electrification
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
Per Capita Electricity Consumption
Source: http://www.eia.doe.gov/emeu/states/sep_use/total/csv/use_csv.html
14,000
12,000
United States
kWh/person
10,000
8,000
6,000
California
4,000
2,000
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
Example: Lighting
Commercial Building Energy Uses
Other
Space Cooling
Cooling Load Driven by Ligh
(42% of Cooling Load)
Cooking
Electronics
Lighting
Ventilation
Water Heating
Refrigeration
Space Heating
Heating Assistance from
Lighting
(23% of Space Heating Load)
Source: 2006 Buildings Energy Data Book
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)
$80
Cost of Capital
Cost of Maintenance
Electricity Cost
$70
$60
$50
$40
$30
$20
$10
$0
Incand
CFL
LED
Commercial 900 Lumen Lighting
20 year Lifecycle Cost (Now)
$500
$450
$400
Cost of Capital
Cost of Maintenance
Electricity Cost
$350
$300
$250
$200
$150
$100
$50
$0
Incand
CFL
LED
LEDs Efficacy Increases by 30% Per Year
160
Efficacy / Lumen per Watt
140
120
2002 DOE Roadmap
LED - Standard Chip
LED - Power Chip
100
80
60
40
20
0
1998
2000
2002
2004
2006
2008
2010
2012
Residential 900 Lumen Lighting
20 year Lifecycle Cost (In 5 – 10 Years)
$80
$70
Cost of Capital
Cost of Maintenance
Electricity Cost
$60
$50
$40
$30
$20
$10
$0
Incand
CFL
LED
Commercial 900 Lumen Lighting
20 year Lifecycle Cost (In 5 – 10 Years)
$500
$450
$400
Cost of Capital
Cost of Maintenance
Electricity Cost
$350
$300
$250
$200
$150
$100
$50
$0
Incand
CFL
LED
Energy Implications of 100% LEDs
@ 120 Lm/wt System Efficacy
450
400
Current Mix
All LED @ 120 lm/wt
350
TWhr/yr
300
250
200
150
100
50
0
Commercial
Residential
Industrial
Outdoor
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
Estimated Cost-Minimizing MPG vs. Current
Passenger Cars: NRC CAFE Study
45
3-Year +
Externality
14-Year
Cost Effective MPG vs Base MPG
40
3-Year
3-Year +
Externality
35
14-Year
3-Year +
Externality
3-Year
30
3-Year
25
20
15
Subcompact
Compact
Midsize
Passenger Car Classes
Large
14-Year
Estimated Cost-Minimizing MPG vs. Current
“Trucks”: NRC CAFE Study
3-Year +
Externalit
y
14-Year
Cost Effective MPG vs Base MPG
35.00
3-Year
3-Year +
Externality
30.00
3-Year +
Externality
14-Year
14-Year
3-Year
25.00
3-Year
20.00
15.00
SUV-Small
SUV-Mid
SUV-Large
Truck Car Classes
MiniVan
Pick-up Large
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