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Energy Policy and Energy Efficiency

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

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Energy Policy and Energy Efficiency

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  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

  4. Background Energy Data

  5. U.S. and CA Energy Consumption, 2005

  6. 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)

  15. 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

  18. 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

  19. Oil and Gas Reserves, Billion Barrels Oil Equivalent State Owned/Controlling Interest.Private Sector Owned

  20. Economic Issues

  21. 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

  22. Crude Oil Futures Prices: As of Five Dates

  23. 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

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

  25. Energy Efficiency: Economically Efficient Reductions in Energy Use Intensity

  26. Decreased Energy Use Reduced EconomicEfficiency Increased EconomicEfficiency Increased Energy Use

  27. Decreased Energy Use Energy Efficiency Improvement Inefficient Energy Saving Increased EconomicEfficiency Economically Efficient Energy Intensification Waste

  28. 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 Plug-In Hybrids (Future) Optimized Building Construction 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

  29. 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

  30. Per Capita Electricity Consumption

  31. Example: Lighting

  32. Commercial Building Energy Uses Source: 2006 Buildings Energy Data Book

  33. 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

  34. 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

  36. Residential 900 Lumen Lighting 20 year Lifecycle Cost (Now)

  37. Commercial 900 Lumen Lighting 20 year Lifecycle Cost (Now)

  38. LEDs Efficacy Increases by 30% Per Year

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

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

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

  42. 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

  43. Example: Fuel Economy of Light Duty Vehicles

  44. 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

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

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

  47. Political

  48. 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

  49. Supreme Court Decision on Carbon Dioxide • Carbon Dioxide can be regulated under the Clean Air Act • States can regulate carbon dioxide emissions

  50. 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

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