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US Energy Policy

US Energy Policy

Energy Policy

The incandescent lightbulb is now outlawed.[1]  This fact is a perfect metaphor for “energy policy.”  Should it be illegal in the United States to manufacture, sell, buy, and use a traditional incandescent light bulb?  Your informed answer to that question will provide deep insight into your views on hundreds of other energy policy questions.   (BTW, my answer is no, but I bet you guessed that.)

Energy is the lifeblood of our economy; it touches your life in a hundred ways each day.  Yet energy policy--the set of government rules and regulations that prescribe how energy is produced, delivered, and consumed--is a complex and even a chaotic subject.

Energy was an uninteresting subject for the average person prior to the OPEC Oil Embargo in 1973.  Oil prices had been stable at about $20 a barrel in real terms for nearly a century and electricity prices had declined from about 22 cents per kilowatt to about 13 cents from 1960 to 1973, even as consumption of electricity quadrupled from 1950 to 1973, as more and more homes and appliances used electricity and utilities became better at building large coal and nuclear plants.

But the OPEC Embargo changed everything about energy and energy policy.  Four points will illustrate this importance. 

  • President Jimmy Carter’s presidency (1976 to 1980) was dominated by energy issues which he characterized as the “moral equivalent of war.” 
  • A little more than two decades later a California governor was recalled because he botched an electricity crisis in California and Arnold Schwarzenegger was elected Governor. 
  • There is a widespread perception that the US has gone to war in the Middle East over oil issues.
  • The Pope of all people has recently declared war on climate change, most of which is laid at the feet of fossil energy.

Part of the complication in energy policy is that it must be addressed on many fronts; international, national, State, and local governments all have a role in stirring the pot. 

Many books and articles are written on very specific aspects of energy policy but most are written for other experts.  Surprisingly, few are written that cover the broad landscape of energy policy.  Even fewer of these writings take a strong market-oriented perspective; the vast majority take an interventionist approach largely for environmental and oil import reasons.  And none that I have found are addressed to the pro-market political activist who has a real job during the day and then tries to save the country in his or her spare time.  This discussion is for that heroic citizen, The Forgotten Man.

So what’s the bottom line on energy policy? 

  • First, we make energy policy much more difficult than it has to be.  Energy is a commodity just like wheat or cars or hamburgers.  Mostly, we rely on competitive markets in each of these other commodity industries to make sure that we have an adequate supply to meet the consumers’ needs at reasonable prices.  But we treat energy differently.  I venture to guess that there are only a few industries more affected by government intervention than energy.  Why is that?  Does that mean we benefit from that intervention?  Is there a better way?  The article explores these questions.
  • Second, right now energy policy is being driven by climate change.  Even if one is sympathetic to some of the claims made about climate change, many stupid actions are being taken in its name that has profoundly negative effects on energy markets. 
  • Third, oil issues get the most attention but we do not face any real danger in oil markets.  Oil trades in global markets and while there may be price fluctuations (as I write, oil is about $35 a barrel, having been over $100 in the recent past), we will never face a situation where we run out of oil.  Most countries with plentiful oil have built their economies on oil revenue and the recent drop in oil prices has created serious political problems for these countries.  They simply can’t afford not to produce oil.  But problems in oil markets can result in unnecessarily higher prices and thus we need to pay some attention to them in order to promote prosperity. 
  • Fourth and most important, electricity faces real problems that could result in catastrophic failure of the system, thus threatening not only prosperity but human life.  The major framework for electric policy was set in 1935.  That framework worked fine up to the OPEC Embargo.  Electricity can compete against oil and natural gas in many applications.  Thus adjustments were necessary to the historical framework after the Embargo.  But policymakers have only nibbled at the edges of electricity policy and have not fundamentally changed the 1935 framework.  Yet little more than additional tinkering is being done to promote an electricity industry for the 21st Century.  Many special interests are pushing and pulling on the antiquated framework for personal gain but few are fundamentally committed to a complete rethinking of the role of the electric system of the future, especially given the increasing digitalization of our economy.  And as noted above, unsound policies on climate change make electric issues even more difficult.


[1] This is a good place to make a point.  Some pointy headed academics will disagree with even this first sentence.  Technically, Congress did not “ban” incandescent bulbs in the Energy Independence and Security Act of 2007.  Rather, they set a standard that most, if not all, traditional incandescent bulbs could not achieve and established a schedule for light bulbs of different wattages to meet this standard.  So it is fair to say that Congress outlawed incandescent bulbs.  But since the accompanying Article is a synthesis of the broad topic of “energy policy” it would needlessly clutter and complicate the text to be “technically” accurate in every instance.  The size of the document would need to double and the reader would understand less of the essence of energy policy if I did not make some broad generalizations.  Nonetheless, I am sure I will receive some criticism that many of my statements are not “technically correct.”  I hope that making this point early in the article will allow for a better understanding of the content of the Article.

 

Highlighted Article: The "New Energy Economy": An Exercise in Magical Thinking

  • 4/18/19 at 06:00 AM

 

From: Manhattan Institute

By: Mark P. Mills

 

THE “NEW ENERGY ECONOMY”:AN EXERCISE IN MAGICAL THINKING

 

"A movement has been growing for decades to replace hydrocarbons, which collectively supply 84% of the world’s energy. It began with the fear that we were running out of oil. That fear has since migrated to the belief that, because of climate change and other environmental concerns, society can no longer tolerate burning oil, natural gas, and coal—all of which have turned out to be abundant.


“So far, wind, solar, and batteries—the favored alternatives to hydrocarbons—provide about 2% of the world’s energy and 3% of America’s. Nonetheless, a bold new claim has gained popularity: that we’re on the cusp of a tech-driven energy revolution that not only can, but inevitably will, rapidly replace all hydrocarbons..."

 

THE “NEW ENERGY ECONOMY”:AN EXERCISE IN MAGICAL THINKING

 

Tags: Highlighted Article

Future World – How Many Windmills Would We Need?

The US currently consumes approximately 97 quadrillion British Thermal Units (BTU) of energy in all forms each year (97 Quads). Since this quantity of energy and the forms of energy which constitute it vary over time, this analysis will use rounded numbers to avoid the impression of unjustified accuracy or precision.

Current US energy consumption, by fuel source, is approximately:

  Natural Gas 29 Quads
  Coal 14 Quads
  Oil 36 Quads
  Renewables 10 Quads
  Nuclear 8 Quads

 

Current US electricity consumption is approximately 12 quads.

 

 

The objective of the climate change movement is to eliminate fossil fuel consumption by the end of the century, if not before. The climate change movement is also not supportive of nuclear power generation or additional hydroelectric generation. Achieving their goal would require replacing the useful energy services provided by approximately 87 quads of current US energy consumption with renewable sources of energy. As shown above, current US energy consumption produces only approximately 31 quads of useful energy services. The balance of the energy consumed is rejected as the result of process inefficiencies. Therefore, approximately 21 quads of additional renewable energy would be required to replace the useful energy services currently provided by fossil fuels and nuclear, assuming 100% utilization efficiency. At a more realistic utilization efficiency level of 60%, approximately an additional 35 quads of renewable energy would be required.

One scenario would provide the entire 35 quads of additional renewable energy with wind generation. If we assume a mix of onshore and offshore wind generation, an average wind turbine capacity of 3 MW and an average wind turbine capacity factor of 35%, the incremental generating capacity required would be approximately:

35,000,000,000,000,000 BTU/yr

3MW/WT * 0.35 * 1,000,000 W/MW * 3.413 BTU/Whr * 8766 hours/yr. = 35,000,000,000,000,000 BTU/yr

31,000,000,000 BTU/yr = 1,200,000 wind turbines

Normal electric industry practice would provide a capacity reserve margin of approximately 20%, to allow for weather extremes and equipment outage for maintenance and repair. This would increase the number of additional wind turbines required to approximately 1,450,000.

Hourly variations in electricity demand can average approximately 60%, which would require either additional generation capacity or storage capacity equal to approximately 30% of peak demand. Seasonal demand is also higher in summer and winter than in spring and fall, requiring additional, longer term, storage.

Current US electric generating capacity is approximately 1,000 Gigawatts (GW), of which 70 GW is wind generators and 80 GW is hydroelectric generators. Replacing the remaining 850 GW with 3 MW wind turbines at a 35% capacity factor would require approximately 800,000 wind turbines.

Therefore, it would require approximately 2.3 million wind turbines to replace existing fossil and nuclear generated electricity and the current direct uses of coal, oil and natural gas. That is approximately 30 times the current installed wind generation capacity. Other scenarios might rely on a combination of wind and solar initially, with later additions of Ocean Thermal Energy Conversion and Wave Energy. Regardless, this would be a monumental task.

 

Tags: Renewable Energy, Wind Energy

Highlighted Article: Presidential Executive Order on Promoting Energy Independence and Economic Growth

  • 3/29/17 at 10:12 AM
The White House
Office of the Press Secretary
For Immediate Release

 

Presidential Executive Order on Promoting Energy Independence and Economic Growth

- - - - - - -

By the authority vested in me as President by the Constitution and the laws of the United States of America, it is hereby ordered as follows:

(b)  It is further in the national interest to ensure that the Nation's electricity is affordable, reliable, safe, secure, and clean, and that it can be produced from coal, natural gas, nuclear material, flowing water, and other domestic sources, including renewable sources. 

(d)  It further is the policy of the United States that, to the extent permitted by law, all agencies should take appropriate actions to promote clean air and clean water for the American people, while also respecting the proper roles of the Congress and the States concerning these matters in our constitutional republic.

Sec. 2.  Immediate Review of All Agency Actions that Potentially Burden the Safe, Efficient Development of Domestic Energy Resources.  (a)  The heads of agencies shall review all existing regulations, orders, guidance documents, policies, and any other similar agency actions (collectively, agency actions) that potentially burden the development or use of domestically produced energy resources, with particular attention to oil, natural gas, coal, and nuclear energy resources.  Such review shall not include agency actions that are mandated by law, necessary for the public interest, and consistent with the policy set forth in section 1 of this order. 

(c)  Within 45 days of the date of this order, the head of each agency with agency actions described in subsection (a) of this section shall develop and submit to the Director of the Office of Management and Budget (OMB Director) a plan to carry out the review required by subsection (a) of this section.  The plans shall also be sent to the Vice President, the Assistant to the President for Economic Policy, the Assistant to the President for Domestic Policy, and the Chair of the Council on Environmental Quality.  The head of any agency who determines that such agency does not have agency actions described in subsection (a) of this section shall submit to the OMB Director a written statement to that effect and, absent a determination by the OMB Director that such agency does have agency actions described in subsection (a) of this section, shall have no further responsibilities under this section.

(e)  The report shall be finalized within 180 days of the date of this order, unless the OMB Director, in consultation with the other officials who receive the draft final reports, extends that deadline.  

(g)  With respect to any agency action for which specific recommendations are made in a final report pursuant to subsection (e) of this section, the head of the relevant agency shall, as soon as practicable, suspend, revise, or rescind, or publish for notice and comment proposed rules suspending, revising, or rescinding, those actions, as appropriate and consistent with law.  Agencies shall endeavor to coordinate such regulatory reforms with their activities undertaken in compliance with Executive Order 13771 of January 30, 2017 (Reducing Regulation and Controlling Regulatory Costs).

(i)    Executive Order 13653 of November 1, 2013 (Preparing the United States for the Impacts of Climate Change); 

(iii)  The Presidential Memorandum of November 3, 2015 (Mitigating Impacts on Natural Resources from Development and Encouraging Related Private Investment); and

(b)  The following reports shall be rescinded: 

(ii)  The Report of the Executive Office of the President of March 2014 (Climate Action Plan Strategy to Reduce Methane Emissions).

(d)  The heads of all agencies shall identify existing agency actions related to or arising from the Presidential actions listed in subsection (a) of this section, the reports listed in subsection (b) of this section, or the final guidance listed in subsection (c) of this section.  Each agency shall, as soon as practicable, suspend, revise, or rescind, or publish for notice and comment proposed rules suspending, revising, or rescinding any such actions, as appropriate and consistent with law and with the policies set forth in section 1 of this order.  

(b)  This section applies to the following final or proposed rules:

(ii)   The final rule entitled "Standards of Performance for Greenhouse Gas Emissions from New, Modified, and Reconstructed Stationary Sources: Electric Utility Generating Units," 80 Fed. Reg. 64509 (October 23, 2015); and

(c)  The Administrator shall review and, if appropriate, as soon as practicable, take lawful action to suspend, revise, or rescind, as appropriate and consistent with law, the "Legal Memorandum Accompanying Clean Power Plan for Certain Issues," which was published in conjunction with the Clean Power Plan.  

Sec. 5.  Review of Estimates of the Social Cost of Carbon, Nitrous Oxide, and Methane for Regulatory Impact Analysis.  (a)  In order to ensure sound regulatory decision making, it is essential that agencies use estimates of costs and benefits in their regulatory analyses that are based on the best available science and economics.  

(i)    Technical Support Document:  Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (February 2010); 

(iii)  Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis (November 2013); 

(v)    Addendum to the Technical Support Document for Social Cost of Carbon:  Application of the Methodology to Estimate the Social Cost of Methane and the Social Cost of Nitrous Oxide (August 2016); and

(c)  Effective immediately, when monetizing the value of changes in greenhouse gas emissions resulting from regulations, including with respect to the consideration of domestic versus international impacts and the consideration of appropriate discount rates, agencies shall ensure, to the extent permitted by law, that any such estimates are consistent with the guidance contained in OMB Circular A-4 of September 17, 2003 (Regulatory Analysis), which was issued after peer review and public comment and has been widely accepted for more than a decade as embodying the best practices for conducting regulatory cost-benefit analysis.

Sec. 7.  Review of Regulations Related to United States Oil and Gas Development.  (a)  The Administrator shall review the final rule entitled "Oil and Natural Gas Sector:  Emission Standards for New, Reconstructed, and Modified Sources," 81 Fed. Reg. 35824 (June 3, 2016), and any rules and guidance issued pursuant to it, for consistency with the policy set forth in section 1 of this order and, if appropriate, shall, as soon as practicable, suspend, revise, or rescind the guidance, or publish for notice and comment proposed rules suspending, revising, or rescinding those rules. 

(i)    The final rule entitled "Oil and Gas; Hydraulic Fracturing on Federal and Indian Lands," 80 Fed. Reg. 16128 (March 26, 2015);

(iii)  The final rule entitled "Management of Non Federal Oil and Gas Rights," 81 Fed. Reg. 79948 (November 14, 2016); and

(c)  The Administrator or the Secretary of the Interior, as applicable, shall promptly notify the Attorney General of any actions taken by them related to the rules identified in subsections (a) and (b) of this section so that the Attorney General may, as appropriate, provide notice of this order and any such action to any court with jurisdiction over pending litigation related to those rules, and may, in his discretion, request that the court stay the litigation or otherwise delay further litigation, or seek other appropriate relief consistent with this order, until the completion of the administrative actions described in subsections (a) and (b) of this section.  

(i)   the authority granted by law to an executive department or agency, or the head thereof; or 

(b)  This order shall be implemented consistent with applicable law and subject to the availability of appropriations. 

DONALD J. TRUMP

Tags: Clean Power Plan, Coal, Regulation, Executive Order

Energy Efficiency as a Climate Change Reform Strategy: Are we just throwing money at the problem?

(For an introduction to this E3 blog series click here)

Put to one side for a moment whether we need to do anything about climate change.  Assume it is real and we need to do “something.”  There are a wide variety of “somethings” that we can do.  Indeed, right now we are in the “throw spaghetti on the wall and see what sticks” phase.

But let’s face it, we have many more problems than climate change (even assuming it is a real problem).  There is, if you will, strong competition for scarce public resources to solve problems.  I would think it hardly controversial to state that we should spend public tax dollars in the most cost effective way possible.  Bjorn Lomborg makes the point that we don’t want to just feel good, we want to DO good!

For example, if there are two competing proposals to reduce a certain amount of greenhouse gases, all other things being equal, the one that does it cheapest should be chosen.  Similarly, if there are two competing proposals that will save lives, we should choose the one that saves lives for lower costs.  What if one proposal is to save a life a century from now and one to save it today?  More difficult, what if one is to buy mosquito netting for developing countries to mitigate malaria and another to slow the increase in global temperature in 50 years?  These all involve difficult trade-offs on how to use scarce resources.

Nearly every discussion of remedies for climate change discusses the enormous opportunity for energy efficiency.  Based on engineering models, rather optimistic claims are made for the potential for investments in energy efficiency to cure a variety of what ails us, often called a win-win-win situation.  We would use less energy.  Our total energy bills would be reduced.  We would emit less greenhouse gases.  We would need to build fewer electric power plants.  And best of all, the return on investment would rival that of Bernie Madoff’s and it would be tax free.

To be fair, the US does have an energy efficiency problem.  If energy prices (either gasoline or electricity) are distorted, then by definition are we not using energy efficiently.  This has possible environmental, energy security, and economic implications.

Both liberal and conservative energy analysts agree that the way that electricity is priced in the US leaves lots of room for improvement.  Broadly, we set prices that are too low in the peak period and too high in the off-peak period.  Additionally, many states set electricity rates in a way that gives electric utilities incentives to build new power plants rather than to invest in electric efficiency technologies.

The key disagreement between market oriented analysts and many liberals is the technique that should be adopted to correct these problems.  Market analysts promote the use of competition and market forces and market-based regulatory approaches to achieve better pricing signals for consumers.  Once prices are “efficient,” then let the consumer choose how to make the myriad trade-offs as to how to spend their money.  Many liberals promote a much more command-and-control regulatory approach to rectify the distortions created by bad pricing.  In essence, they don’t believe the consumer will make the “right” choices and thus adopt policies that force correct choices.

In 2015, a dramatic study was released by several professors from the University of Chicago and University of California at Berkeley.   The study found that the engineering model that is most often used to project the costs and benefits of energy efficiency technologies was seriously flawed. It found that the model’s projections seriously overestimated the energy savings that would result from investing in a given technology. This is important because public monies are often used to fund investments in energy efficiency. If the study is correct many projects that are funded do not meet the standard of being cost beneficial.

The study caused quite a stir in the energy policy community. It threatened to slaughter one of the sacred cows of progressives. But the study is significant because it is the first of its kind to comprehensively study the actual after-the-fact results to compare projected energy savings to actual energy savings. If the study is correct, it severely undercuts one of the main arguments that is often used to justify significant public investment in energy efficiency.

Some who are climate skeptics will no doubt tout the study as evidence for a variety of propositions, i.e., wasteful government programs, unreliability of engineering models, the triumph of good intentions over good policy.  But even for those genuinely concerned with climate change, if the study is correct and it turns out we have a real climate change problem, energy efficiency strategies will fail to address the intended problem.  This means we are not really addressing climate change.  We are just throwing scarce public resources at the problem.

Tags: Efficiency Standards
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