https://drive.google.com/open?id=14YlCBNY88qeLv57YkvBDmnulThVeHqhk
the story of modern energy policy and
00:12
the understanding you need to have of
00:14
energy policy from a public from the
00:17
public policy standpoint is so
00:20
intimately tied up in the provision of
00:23
renewables and the problems that
00:25
surround them and thus things are trying
00:27
to solve that wind is an excellent
00:30
illustrative use to take us through
00:32
modern policy in this regard
00:34
now we're gonna structure this a little
00:36
bit because we're going to talk about
00:38
true cost of wind okay now what do I
00:42
mean when I say true cost what do i what
00:44
do we mean when we say cost the
00:48
resources required exactly okay and
00:52
we're interested in that in energy in
00:53
particular because different energies
00:55
end up having different costs and they
00:58
will end up having different benefits as
00:59
well so what do we mean when we say true
01:02
cost well there are some costs that are
01:05
relatively easy to account for there are
01:07
some costs that we can look at and say
01:09
these are the costs that go into
01:11
something in order to build a windmill
01:14
buying the turbine but leasing the land
01:17
setting it up having the crew in order
01:20
to run it those are costs that are
01:22
relatively simple to estimate and
01:24
they're pretty straightforward right if
01:27
you think it through most of you could
01:29
sit down and at least conceivably come
01:31
up with a way that you want to try to
01:33
estimate these things but it turns out
01:37
that the price consumers pay at the end
01:40
for wind power is not the same either as
01:44
the cost is not the same as the total
01:48
cost to society of wind power they end
01:52
up paying a price that's different so in
01:55
order to understand when but we're going
01:58
to do with wind power we have to know
01:59
what the cost of consumers also knows
02:01
the price of the energy plus the other
02:03
cost to society are and the story of
02:07
energy policy is largely wrapped up in
02:10
that second line
02:13
the true cost so why do we care about
02:15
energy policy
02:17
why does energy matter energy production
02:20
ends up being a precursor to oh so many
02:23
things that exist in the economy that if
02:26
in fact you're going to power consumer
02:28
goods you're gonna power factories
02:30
you're gonna power automobiles they're
02:33
tied to the ability to produce energy
02:35
now does anybody want to guess what the
02:37
energy market looks like in the US I
02:40
know you're all going to assume that it
02:42
is a free-market paradise in the
02:44
production of energy right that what it
02:47
is
02:49
okay louder give a name it's a nightmare
02:55
of regulations yeah okay state sponsors
03:03
monopolies so you have what are known
03:04
often as public service Commission's
03:06
that if they're not a state monopoly
03:08
that where the state actually owns it
03:11
the state is centrally regulating and
03:13
setting the price they can charge yes so
03:19
we so you bring up the regulation the
03:22
flip side of regulation is the subsidy
03:24
market and energy in the u.s.
03:26
particularly renewable energy is very
03:29
heavily subsidized here okay fear rather
03:35
than efficiency what do you mean by that
03:42
okay so we have some fear of nuclear all
03:45
right so this is federal policies in
03:48
terms of subsidies from the US federal
03:51
government so you can look at sort of
03:52
the various estimates so coal is getting
03:56
some level of subsidy so is nuclear
03:58
actually wind is getting a tremendous
04:02
amount natural gas is slightly lower
04:04
Soler's right around 9% the others are
04:08
getting in the 12 to 15 range but that
04:11
this illustrates that not only do we
04:14
have a web of regulatory compliance
04:15
issues we also have large-scale
04:19
intervention to distort the price of
04:22
energy because the end price
04:26
even in coal fossil fuel-based the price
04:31
consumers pay is something different
04:33
than what the market price would be
04:35
absent and if you look at wind in
04:38
particular it's substantially different
04:41
and in fact this graph lays out where we
04:45
get our electricity from in particular
04:48
so you can sort of see there's not a ton
04:51
there so the little tiny sort of yellow
04:54
sliver is wind winds about two percent
04:57
if you look at solar it's that next
04:59
little percent there and if you look at
05:01
the others which are there we're getting
05:03
less than about twenty we're getting
05:04
right around twenty percent from what
05:07
could be classified into the Renewable
05:10
category although that other one
05:12
actually also actually includes a tiny
05:14
amount of petroleum that gets burned to
05:17
make electricity now
05:20
all the wind that we wind at power we
05:22
consume is produced inside the US
05:24
transmission of wind you cannot move the
05:27
wind to have it generate someone else
05:29
and you cannot transmit electricity
05:31
across vast distances yeah do we do we
05:40
stop so this is a great question do we
05:42
store electrical energy somebody said no
05:47
right we do not store industrial levels
05:51
or even household levels at the moment
05:54
although musk has decided that if he can
05:57
get enough federal subsidies he can
05:59
figure out how to do it on a house
06:00
bubble we don't store it so what is
06:03
generated exists for as long as it can
06:06
be transmitted and used now we do store
06:10
kinetic energy which so we have stores
06:13
of electrical generation called dams so
06:17
hydroelectric dams store the kinetic
06:19
energy of the water that will run the
06:20
mill okay we have stores of coal that
06:25
are locked up they're either in the
06:26
ground or they're in giant piles but the
06:28
electricity itself the electrical grid
06:32
operates on an on-demand basis it is
06:34
producing as close to as possible the
06:37
current demand at any given time
06:39
and we're asleep again okay why is that
06:46
make the electrical market a little bit
06:48
problematic why could it we have to
06:54
produce it on demand because we can't
06:56
store it and we can't transmit a huge
06:58
distances your name if there's a huge
07:01
spike in demand okay so we have to
07:06
account for spikes so there's a great
07:09
study in the United Kingdom about when
07:11
their primary electrical demand spike is
07:14
anybody anybody want to guess it's right
07:20
at the traditional tea time in Britain
07:22
when everybody plugs in an electric
07:24
kettle okay
07:27
and so you see a sudden short-lived
07:31
spike and somehow you have to produce
07:34
the electricity necessary to meet that
07:37
in an on demand scenario so how do you
07:41
do that well you have to have something
07:46
that's highly responsive and is able to
07:50
turn on and off very quickly and so as
07:53
we talk about electricity power as we
07:56
talk about energy generation one of the
07:59
things I need you to envision with me is
08:00
that there are two types of demand that
08:03
we need to meet in the electrical market
08:04
one is called base load so imagine that
08:08
we know this is the amount that's
08:10
traditionally being consumed we can
08:12
predict it very very well so during the
08:15
day what does base load look like it's
08:19
relatively low okay we're not generating
08:22
a ton at night what happens to power
08:24
consumption until about midnight goes up
08:27
then it drops and then it Peaks and
08:31
that's the level of base load that we
08:33
have to provide now it turns out some
08:35
types of production are better at
08:38
producing base load power than others
08:40
okay nuclear coal are great at producing
08:45
base load turns out can you you can't
08:49
turn a nuclear plant on and off turns
08:52
out turn
08:53
a coal plant on and off is possible but
08:56
it takes about four days to cycle down
08:58
at another to to cycle up so you can
09:01
turn it off but it's going to take you a
09:04
full week to get it done and get it back
09:05
on line so those are generating the base
09:08
load and then you have natural gas which
09:12
can be turned on route very quickly some
09:15
natural gas can be used immediately
09:16
these are called combined cycle turbines
09:19
other natural gas is more intense and it
09:22
can produce for the spikes now as we
09:25
think about renewables one of the issues
09:29
with wind is how do we know when wind is
09:31
going to produce when does wind is a
09:34
wind turbine produce electrical power
09:37
when there's wind okay and only when
09:42
there's wind and so how do we know when
09:46
there will be wind okay you lick your
09:52
finger we're a little bit better than
09:55
that we're not quite in those days where
09:57
we're only gonna look out at the world
09:58
and say use our senses to determine we
10:02
know when wind is more likely and we
10:04
have good patterns of wind wind blows
10:05
but we know it blows at some of the
10:07
times that are most interests that are
10:08
interesting the greatest production of
10:11
wind is at night when base load is lower
10:13
when our total sorry what our total
10:16
demand is lower and so for the first few
10:19
hours as we go in tonight when did wind
10:23
is producing and consumption is high and
10:25
that's okay but as we come into daylight
10:27
you start to see the reduction now
10:31
despite the fact that wind isn't a
10:33
terribly good peak producer it really
10:37
has to be thought of as being in base
10:38
load and still has to have a backup of
10:41
something else that can be cycled on
10:43
we've seen the number of federal wind
10:46
related initiatives by agency this is
10:48
2011
10:49
so Department of Energy the one you'd
10:52
predict has 22 Interior has 16 USDA has
10:57
14 Commerce has 11 Treasury has 10 EPA
11:02
and NSF have 3 the Small Business
11:04
Administration has to infer
11:07
the Federal Energy Regulatory Commission
11:09
has one we've seen massive investment in
11:14
wind and massive focus by federal
11:17
policymakers on wind which leads us to
11:20
the question why why all this interest
11:23
in wind so they're there they're able to
11:34
go to government right and there's an
11:36
incentive why does government want to
11:37
respond to them supporting green energy
11:41
is popular so they get the opportunity
11:43
to claim the environmental high ground
11:46
at relative low cost to the policymaker
11:50
and they're able to put in place this
11:54
policy now there's some problems with
11:57
this we're going to talk about in even
11:59
more detail as we go forward because
12:02
there's a second thing that they've done
12:04
with wind energy in something called the
12:06
production tax credit okay Jenny wait
12:08
anybody know what a production tax
12:10
credit is so if you produce energy for
12:14
that production the government will
12:16
issue a credit which is essentially
12:18
refundable to you you will be paid for
12:21
every megawatt you generate you're gonna
12:24
be you're gonna be being paid two point
12:27
three cents per do you remember I always
12:31
get the unit's bad when I try to give
12:33
this lecture without having my paper in
12:36
front of me probably kilowatt hours that
12:38
sounds right okay we'll look it up and
12:41
I'll tell you later
12:45
yeah and I think it's twenty two point
12:47
three cents a kilowatt an hour and
12:48
twenty three dollars a megawatt hour I
12:50
think that's the math that works okay so
12:52
for every kilowatt hour you generate you
12:56
have a guaranteed price to start with of
12:59
two point three cents you get that in
13:04
addition to whatever price the market
13:06
will pay for the electricity generated
13:08
and this is regardless of what the
13:12
market looks like regardless of whether
13:14
or not the power is demanded by the
13:16
network because in addition to be having
13:20
the production tax
13:21
the regulatory environment says in
13:23
general once you install a wind farm
13:26
that's been approved they will accept
13:28
wind power into the larger network and
13:31
so you have a guaranteed fixed ability
13:34
to receive the production tax credit
13:36
it's limited generally for ten years of
13:39
production life and you can see what
13:43
happens to wind production over the
13:45
course of the product of the history of
13:47
the production tax credit so if you look
13:50
with me here you're going to notice
13:52
there are high years and there are low
13:53
years and those high and low years tell
13:57
us something about whether or not the
13:59
production tax credit was in place so in
14:02
2000 there wasn't the production tax
14:05
credit was allowed to expire did not
14:07
apply in that year but in 2001 the
14:10
production tax credit was in existence
14:12
okay what is that what does that
14:14
difference tell you it says that supply
14:17
is flexible that they're producing more
14:19
for some reason in 2001 and we might
14:22
have the hypothesis that it's because of
14:24
this PTC but we need more data and we
14:28
have to look across the whole spectrum
14:29
and it we see that places where PT Pease
14:34
PTC has a problem or is allowed to
14:38
expire so in 2012 it's in force in 2013
14:43
it expires what happens for the
14:46
installation of wind it drops
14:49
dramatically right okay these are new
14:52
wind installations I should make that
14:53
clear from the total this is total this
14:56
is expansion on total installed wind
14:58
okay
14:59
so they build almost new no new wind in
15:03
2013 yeah
15:07
it seems to indicate that the subsidy is
15:10
what's enticing people into the
15:12
marketplace that for some reason that
15:16
2.3 cents per kilowatt-hour is what
15:19
works well it turns out that the PTC is
15:22
almost exactly equal to the profit that
15:25
many of these companies make on wind now
15:29
we saw that a bunch of other energy
15:32
sources also got subsidies and so you
15:35
can imagine something similar playing
15:36
out although to a much smaller scale
15:38
that whether or not they choose to
15:41
produce is tied to whether or not the
15:43
subsidy is available this is
15:45
particularly true in solar
15:48
although the subsidies are less and it's
15:50
somewhat true historically in natural
15:53
gas not currently those subsidies are
15:56
way down now let's talk a little bit
15:58
about what the total of these policies
16:01
have been so the federal policies
16:04
increase that larger true cost of wind
16:06
when we think about both the cost to
16:08
consumers and the larger societal costs
16:10
so we know so they're estimated at about
16:13
five billion dollars a year since 2009
16:16
in terms of real dollars that come up
16:19
but we've also seen a reduced
16:20
reliability in the energy grid because
16:24
when wind is on they cycle down other
16:27
things and wind is not it is not as
16:30
predictable as a natural gas generator
16:32
or or a coal generator and then there's
16:38
also the question of opportunity cost so
16:41
a tremendous amount of capital
16:43
investment goes into the into the
16:45
creation of wind farms and we don't have
16:48
a good way of estimating what the what
16:50
those costs would look where those funds
16:52
could go those capital funds if in fact
16:55
they weren't being drawn to the
16:56
guaranteed return of something like the
16:58
production tax credit or a regulated
17:01
market now so that's this so that's the
17:07
first is we've so we can trace wind
17:09
through its own production cycle in
17:11
terms of regulation and in particular
17:13
subsidies but there's a second set of
17:16
policies that in that impact this
17:19
because it's not just the Fed
17:20
government that's gotten involved in
17:22
regulating the energy market state
17:25
governments have also jumped into the
17:26
center of this with things they call
17:28
renewable portfolio standards it's a
17:31
mandate that electrical generator
17:33
electrical generating companies will
17:35
produce by a date certain so all of the
17:39
red states except for Kansas which
17:41
repealed about two weeks ago have RPS
17:46
standards that require by us by a date
17:49
certain a percentage of the energy in
17:52
their state to be generated from
17:53
renewable sources when they say
17:55
renewables they generally mean four
17:57
things wind solar biomass geothermal
18:03
generally hydroelectric does not count
18:05
so look at look at some of these so for
18:08
example New York State by 2015 by this
18:12
year they're supposed to generate twenty
18:14
nine percent of electricity from
18:17
renewable sources Texas has a relatively
18:21
small one they have by almost 6,000
18:25
megawatts by 2015 by this year but it's
18:27
still a mandate California's is the
18:31
largest in the country there's talk of
18:33
raising it again it's 33 percent
18:36
currently and you can look through and
18:39
anything in orange is a goal which is
18:41
slightly different it doesn't have a
18:43
mandate it's still a goal but in general
18:46
even in Utah which is one of the reddest
18:48
of the red states the goal has led to
18:51
substantial changes in state agency
18:54
policies in order to push towards this
18:56
so one of the state agencies that
19:00
encourages the reaching of this goal is
19:02
the Public Service Commission they're
19:05
set up to monitor the pricing of
19:07
electricity and other things but
19:10
generally electricity at this point at
19:12
any producer that's offering in the
19:16
state's often these are quasi monopolies
19:19
at the very best where they have they
19:21
own the lines they own the pipes so
19:23
these are things like natural gas
19:24
providers to homes these are things like
19:26
Rocky Mountain Power in the West they
19:30
have to approve all price changes
19:32
through the Public Service Commission
19:34
you can imagine that if you're in that
19:36
level of a market and your state has a
19:39
goal and the Public Service Commission
19:41
is pushing towards that goal
19:45
it gets a little uncomfortable if you
19:48
say yeah we know it's the goal but we're
19:53
not interested in meeting and so even in
19:56
states with the goal which in my mind is
19:58
slightly better you've seen lots of
20:00
pushes to this now some of the goals are
20:05
are a little bit amusing South Carolina
20:10
has a very specific goal and you could
20:12
guess on public choice grounds how they
20:14
get there which is they have a goal of
20:16
2% of an electricity production from
20:19
solar who would want a mandate of 2%
20:24
from solar solar companies right and
20:28
those you can see they've cropped up in
20:30
a number of the states with those
20:32
specific requirements and so you have 28
20:36
states plus DC and two territories have
20:39
a standard as I said Kansas just changed
20:41
theirs and ten states and two
20:43
territories have goals policies become
20:46
almost ubiquitous of either a goal or a
20:48
standard for renewable electricity
20:51
generation across the country now think
20:55
this through with me for a second
20:58
so we have large-scale federal subsidies
21:01
for things like renewable energy and
21:03
then we have state mandates for use tell
21:09
me about what that market does does it
21:12
do most of the things a market should do
21:20
well it's it's not an organic market by
21:22
any stretch yeah ah yes it fells at
21:28
something fundamental the price paid by
21:32
consumers does not carry the information
21:36
that a price signal does in other
21:37
marketplaces it gets lost and in fact
21:42
when we talk about the true cost of
21:44
energy what we really should be talking
21:48
about but we don't because we're talking
21:51
to policy members is we're interested in
21:53
what should the price actually be for
21:57
these different types of energies if we
21:59
had a market actually working though
22:03
could that was transmitting this
22:05
information well what would the price
22:08
look like what would the those
22:12
externalized costs that are being
22:14
transferred either through subsidy or
22:15
mandate if they had to be taken in what
22:19
would the actual price look like alright
22:22
well there's been some folks that have
22:24
tried to do some estimates about what
22:26
the price of solar should be they're
22:28
kind of all over the board you've got
22:30
Lazard near out and EIA that is said
22:33
they have some assumptions built into
22:35
them that essentially the markets
22:36
working pretty well okay they would
22:40
argue that there's very little
22:41
distortion happening particularly lizard
22:44
lizard' has been hired by lots of the
22:47
renewable industries to do the estimates
22:49
and they're arguing that per megawatt
22:52
hour for wind the total cost is about
22:55
$59 per megawatt on the other side you
23:01
have Tenten and Taylor which have
23:03
attempted to bring in a whole bunch of
23:06
the things we listed that I'll show you
23:07
here in a second and they come up with
23:09
about a hundred and fifty one dollars
23:11
and even AIA is well above the
23:17
industry's own estimations at $80
23:20
interestingly does anyone know the most
23:25
interesting part of all of this is the
23:28
price per megawatt hour of wind is not
23:30
anywhere near $59
23:33
even Lazard indicates that in fact there
23:37
are cost transfers happening so this is
23:40
the cost breakdown okay so the biggest
23:43
cost for wind is in capital costs and
23:46
then you have operating and maintenance
23:48
costs that add up to the cot of the
23:51
general cost but then you also have
23:54
things like capacity factor which come
23:57
in that they estimate based on how much
23:59
these windmills produce and then this is
24:02
measured in percent of the time they're
24:04
actually generating electricity by the
24:06
blades spinning so the low is 33% and
24:10
the high is 41%
24:11
so even in the high estimates windmills
24:15
are off are not operating sixty percent
24:17
of the time to generate in a worst case
24:20
scenario we're skating a worst case
24:22
scenario they're operating about a third
24:25
of the time not terribly high capacity
24:31
factors now what's the impact of
24:34
baseload cycling so you can see the
24:37
difference between Giberson and Taylor
24:38
tot and in part of why they emerge it
24:40
different Giberson says it's $2 per
24:42
megawatt hour Taylor Tenten says its 23
24:46
might indicate we have a lot we don't
24:49
have good information here that we have
24:51
such varied estimates transmission costs
24:54
again you see substantial differences
24:56
but it does in fact cost to transmit
24:58
electricity there are social and
25:01
environmental costs which I'm usually
25:03
loathe to add this slide to any
25:05
presentation because we're really really
25:08
bad at estimating them but there are
25:12
there are cost to the carbon benefits of
25:15
wind when you have to refire up the coal
25:17
plant or the natural gas plant the
25:19
turn-on process produces more carbon
25:22
emissions than an ongoing running and
25:24
then we have our favorite one which is
25:26
the bird and bat deaths birds and bats
25:30
who come into contact with large
25:32
windmills don't win they die for a whole
25:38
host of reasons but there are
25:40
substantial kill that happens and in
25:44
fact one of the few industries that
25:46
it's a strong exemption from ESA
25:48
requirements in order to get lots of
25:51
incidental take permit s-- is the wind
25:53
industry in terms of endangered birds
25:54
and bats they get expedited kill permits
25:59
or take permits compared to other
26:01
industries cost of subsidy range is
26:05
pretty wide but at the end of the day so
26:08
as you look at this at least this is our
26:10
perspective these are the things at
26:12
least that need to be included if we
26:14
were going to try to estimate the actual
26:15
price in a real market capital operation
26:20
capacity factor costs transmissions
26:23
based on cycling social and
26:25
environmental costs state policies and
26:27
regulations federal policies and
26:29
regulations the opportunity cost and
26:31
reduced reliability now the great thing
26:35
is if we were operating in a free market
26:37
guess what happens in the price of
26:39
electricity the price of electricity
26:42
would sum up to a very large extent not
26:46
perfectly because mark markets are not
26:48
perfect but it would take into account
26:50
these things naturally as the
26:53
transactions occur but we don't live in
26:57
a free in a market that's even mostly
26:59
free for energy and so trying to
27:02
understand what the price should be is
27:04
difficult now our best estimate is that
27:09
for wind the true cost of wind is
27:12
somewhere about 48 higher 48 percent
27:15
higher than the standard Lazard
27:17
NREL and EIA estimates that if you take
27:21
into account and try to internalize
27:22
these other costs wind the path of the
27:26
true cost of wind is is something like
27:29
48 percent higher a substantial
27:33
distortion from what it was what it
27:36
could be if it were operating in an open
27:38
market
27:39
now there's the policy implications in
27:43
my mind from this because one of the
27:45
things that if you hang around strata or
27:47
Utah State's Center very long is we're
27:52
interested in ok so we've we've done all
27:54
this study what are the policy
27:55
implication well the first is that the
27:58
claims about wind
28:00
need to be pushed back pushed back on it
28:03
actually costs more than the claims are
28:05
out there because it sounds really good
28:07
and this is the way it usually goes when
28:10
you're talking about wind policies is
28:11
the wind industry shows up as I would
28:15
expect them to these are people are
28:17
acting in alignment with their
28:19
incentives and says this is what the
28:21
current price of wind is this is what
28:25
we're generating at this is what we can
28:26
sell it to consumers for it's it's on
28:30
par with all the other types and so why
28:33
not require some wind there seems like
28:37
an easy thing for for elected officials
28:39
to do so they get their green bump and
28:41
it doesn't appear to them that they're
28:43
doing anything negative to taxpayers and
28:48
consumers suffer so you end up paying
28:51
you end up subsidizing through the least
28:55
efficient way possible the price of
28:58
electricity and in our mind we'd be much
29:01
better trying to get to a policy that
29:03
some that approximates something like
29:05
the true cost all right now the
29:08
interesting thing is we've actually been
29:10
doing these on all of the different of
29:12
the energy sectors is one of the things
29:14
that's fair
29:15
so you'll notice natural gas in color
29:17
there they do receive subsidies if you
29:19
receive regulatory advantages and so
29:23
understanding what those are important
29:25
it's not just renewables that we want to
29:28
bash on although that's a fun hobby the
29:31
energy market in the u.s. is problematic
30:00
you
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