Friday, January 2, 2015

Happy 2015!

This is a sort of grab-bag check-in on my perennial concerns with energy and the economy.

First, some tempered optimism, then bringing some energy perspective to an otherwise reasonable conventional view, and lastly a sampling of just what a range of views there is out there.

The optimism comes from a piece in Grist about changes in bidding rules at ISO New England, the independent system operator that decides which power sources to buy from for the New England market.

In the New England ISO, some renewable sources have been bidding in at $0/MWh. That is, they’re confident the actual price at which the market clears will be positive, so they’ll get paid for the power they sell, but since their “fuel” cost is zero, they want to make sure that they get chosen.

The ISO has implemented a rule change that allows sources to bid in at negative rates: take the electricity I’m producing, and I’ll pay you.

Why on earth would anyone bid negative? Because these producers are eligible for “renewable energy credits,” but they only receive those credits if their power is actually bought. So they’re willing to pay the system operator to take their power, and they’ll still make money on net because of the credits they receive.

And not only have there been negative bids, there have even been periods when the market-clearing price has been negative.

The article concludes, “Within the next year or two, New Englanders are going to enjoy cheap, dispatchable renewable energy, something VSPs said was impossible. It must be a Christmas miracle.”

But it’s not that simple, because of the role that those credits are playing in the whole scheme.

There are good policy reasons for having those credits, but 1) they're not an inherent part of the economics of renewable energy; and 2) they're not free (I think they're generally paid out of a surcharge on electricity bills, but they could in principle be paid out of general taxes; either way, the money for them has to come from somewhere).

While the "fuel" for a wind, solar, or hydro installation is free, building and maintaining the installation costs real money, and the operators need to earn that back, or else they go bankrupt and new operators won't enter.

If renewable energy credits are discontinued, then $0 bids can still make sense, so long as the bidders are confident that, at least most of the time, the clearing price will be substantially above $0.

And if the credits remain in place, then New England may continue to see very low wholesale energy prices, occasionally negative, but that means that the cost of building and maintaining renewable-energy installations will be shifted off of the wholesale price of electricity, onto either some other place on people's electricity bills, or onto the taxpayer in general.

Those may actually be perfectly acceptable outcomes; if the credits are paid for out of a tax on carbon emissions, then it could be a fairly desirable arrangement. But the market-clearing wholesale price of electricity will be a misleading indicator of the cost of electricity.

The second piece of this post is an article by Joseph Stiglitz on how the current global stagnation is stupid and unnecessary, caused by misguided austerity policy.

The basic outlines are familiar to anyone who reads Krugman: the Eurozone is engaged in austerity; the U.S. isn’t being as stupid, but even in this country, “there are 650,000 fewer public-sector jobs than before the crisi there are roughly 650,000 fewer public-sector employees than there were before the crisis; normally, we would have expected some two million more.”

Stiglitz argues that this is further support for Keynesianism, and I don’t disagree. What’s entirely missing from his analysis is a sense of the physical context.

This figure shows oil consumption in the countries of the Organization for Economic Cooperation and Development, from 2000 through August of 2014. (The data are from the Energy Information Agency).

If we take the January-August average of 2000, 2007 (the last year before the crash) and 2014 (the most recent data), we get:
  • 2000: 48,176
  • 2007: 49,863
  • 2014: 45,327
In other words, for the first 7 years of the period, oil use in the OECD grew by 3.5%, while in the following 7 years, it shrank by 9.1%.

If that consumption had just remained at its 2007 level, the OECD would be using an additional 4,536 thousand barrels per day.

If it had continued growing after 2007 at the same rate it had been up to that point, by 2014 it would have reached 51,609 thousand barrels per day, which is 6,281 barrels per day more than it was actually using.

The 2014 data aren’t yet available, but global consumption in 2013 was 90,379 thousand barrels per day. In other words, the “missing” consumption from the OECD is between 5.0% and 7.0% of global consumption.

The next question is whether this is significant, and I’d argue that it is.

From 2007 (the pre-crash peak of global consumption) to 2009, global consumption fell by just 2.0%.

If global consumption were 7%, or even 5%, higher than its current level, it’s entirely possible that oil prices would be back up in the range of $150 that they reached in July, 2008. That would be great news for Russia, Saudi Arabia, and other major oil exporters (as well as, to an extent, oil-producing states within the U.S.).

But it would be no picnic for the global economy as a whole.

At least within the rich countries, the current stagnation is being visited disproportionately on households with middle and lower incomes, and that’s a policy choice. But at the level of overall growth, we may be faced with a choice between slow growth by policy, or slow growth by resource constraint.

Lastly, Business Insider published a very optimistic piece claiming that “The world doesn’t need fossil fuels to prosper.”

While there are points in there I agree with, the overall tone downplays the difficulties of actually applying a much larger portion of the solar energy hitting the earth. That said, “RagnarD” in comments is a piece of work.

“Increased fossil fuel usage over the last 100 years has made our climate the safest and cleanest it has ever been for human beings. Climate related deaths have decreased by 98% in the last 100 years.”

I’m not sure how he defines a “safe” climate. Maybe he means our ability to protect ourselves from the ravages of nature, and certainly being richer helps with that, but he’s ignoring the influence on the frequency of those ravages of nature. And I have no idea where he gets that statistic about climate-related deaths, or how he’s defining the term.

“If you want a CO2 (plant food) energy source that is concentrated, cheap, reliable, plentiful, produces more energy per acre of land use and scalable then you should advocate nuclear power.”

I think he means to be advocating nuclear power, in which case I think he means to have a “non” before “CO2”. But then there’s that delicious mention that CO2 is plant food, so presumably he’s suggesting that the more we have of it, the better.

“We need to use more energy to enrich our lives and improve our standard of living. Worldwide energy usage needs to increased 4 times the amount we currently use so that the rest of the world can have the standard of living of the US.”

He’s about right that to replicate rich-country material standards of living using existing technologies, the world would need to use about four times as much energy as it currently does. It’s just that I don’t see how that’s remotely possible without wreaking devastation on the planet.

“The fact of the matter is that nature doesn't give us a clean environment. We have to use energy to clean the dirty natural environment.”

I don’t even know what to say about this one.

Granted, this is just some random dude in the comments section of a site that’s good at click-bait headlines. But I suspect he’s not alone, and he’s illustrative of the range of where people are on the subject of energy and the economy.

Here’s to a brilliant 2015!

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