Pragmatic Environmentalist of New York Principle 8: Gresham’s Law of Green Energy

This is a background post for my pragmatic environmentalists principles listed in the about section of this blog. Jonathan Lesser has coined “Gresham’s Law of Green Energy” that I believe is another principle of a pragmatic environmentalist.

Gresham’s Law is named after Sir Thomas Gresham, a 16th-century British financier who observed that “bad money drives out the good.” Lesser shows that green energy subsidies transfers wealth and does not create wealth. The subsidies or “bad” money take money out of the system that was “good” inasmuch as it was being used productively. In particular he notes that “subsidized renewable resources will drive out competitive generators, lead to higher electric prices, and reduce economic growth”.

He explains his rationale as follows:

“The subsidies paid by ratepayers transfer wealth from existing generators to a chosen few renewable resource owners. One may like to rail against the existing generators — as many politicians have — but the long-run implications of such subsidies will be to destroy competitive wholesale electric markets and drive out existing competitors. This course of action will cost jobs because businesses, forced to pay higher electricity prices, will either relocate, contract, or disappear altogether. It will reduce the disposable income of consumers, who will forever be forced to subsidize renewable resources (just as they must now subsidize corn ethanol producers) — all in the name of ’green energy’.”

This is a particularly important principle for renewable energy benefit analyses, in particular “price suppression” such as that used in NY’s Clean Energy Standard. The idea is that increasing the supply of “cheap” electricity causes market prices to decrease so that consumers benefit. However, Lesser shows that these benefits are temporary and costly in the long run. Subsidizing the construction of renewable generation in a de-regulated state results in resources that manipulates the market to make it less efficient. Moreover, it eventually drives out existing generators and reduces the likelihood that new unsubsidized generating facilities will enter the market. Lesser notes that rather than building a better mousetrap, these policies are using subsidies to artificially and temporarily reduce the price of mousetraps.

Real Climate and Cost Effectiveness

Update 9/1/2017: My responses showed up on Real Climate.  Not sure why I could not see them but the timing on the posts indicates they were there but I could not see them?!?

On August 28 I read a post called Sensible Questions on Climate Sensitivity on the Real Climate blog. In the comment section there was a comment that, in my opinion, mis-characterized the position of the luke-warmers I know so I responded. I have heard that comments are censored sat this site o that those who do not comply with the positions of the web masters are not shown but have never had personal experience with it. Although my first comment was posted my responses to the follow up comments were not. Because my original post included the link to this blog I am posting the comments and my responses. If you wanted a response to your comments and checked my blog here you go. If the comments show up then I will delete this post.

The relevant comments are shown below. The particular comment (#25) that engendered my response claimed that luke-warmers insist “that published ECS confidence limits can only mean the most cost-effective public policy is to do nothing.” First an explanation then the comments and finally a conclusion.

I consider myself a luke-warmer. Luke-warmers are not a well-defined party in the global warming debate. My definition is that we simply believe that the ECS or equilibrium climate sensitivity (the amount of warming caused by greenhouse gases) is at the lower end of the Intergovernmental Panel on Climate Change range. As soon as you get to policy responses luke-warmers diverge but those who also claim to be luke warmers (e.g., Tom Fuller, Blair King and Judith Curry) all don’t think public policy should be to do nothing.

I don’t want to speak for their particular public policy opinions so I will give my preference for public policy. I don’t think the climate is so sensitive to GHG that we have to use current renewable technology in order to stave off catastrophe. I don’t think we can ever be so sure of future climate to say it is not a problem or it will be a catastrophe. Therefore I am convinced that we have to develop cheaper low carbon technology because as long as fossil fuels are cheaper they will be used. Fossil fuels are the best thing that ever happened to mankind because without them our lives would be brutal and short. Until we have a replacement that can provide the benefits of abundant and affordable power then it is immoral to not use fossil fuel. In the meantime because society is not resilient to current extreme weather I think that in addition to funding research for cheaper fossil fuel alternatives we should be spending money on adapting to extreme weather rather than subsidizing any current technology renewable energy.

Comments

Here are the blog comments. I responded to comment 25 in comment 29. Comments 30, 31, 32, and 33 were posted in response to my comment. I submitted two responses that went to moderation. I copied the text and pasted it into a document for archival. Several hours later they disappeared and were not posted.

25   Mal Adapted says:

22 Aug 2017 at 9:35 AM

DDS:

Interpretation: There is enough uncertainty that a little humility need apply.

Scientists, like all genuine skeptics, are required to be humble before Nature. It’s necessary, though not sufficient, to not fooling themselves. Pseudo-skeptical AGW deniers, OTOH, who keep saying “it’s not happening”, “it’s not our fault”, “it won’t be bad” or “We’ll be lucky” are letting hubris fool them.

That last AGW-denier meme has been labeled ‘luck-warmerism’. Luckwarmers selectively mask the upper half of the ECS PDF, while falsely accusing climate realists of masking the lower half. The luckwarmer insists that published ECS confidence limits can only mean the most cost-effective public policy is to do nothing.

How about you, Dan? Are there limits to your confidence?

29   Roger Caiazza says:

28 Aug 2017 at 11:20 PM

Mal Adapted, Two questions relative to “The luckwarmer insists that published ECS confidence limits can only mean the most cost-effective public policy is to do nothing.”

This Luke warmer thinks that the trend in ECS confidence limits is shrinking the fat tail. Is that what you mean by masking the upper half?

However the science ends up, this Luke warmer thinks that adaptation is a more cost-effective public policy than mitigation. Do you think that today’s technology is capable of mitigating our way out of GHG forcing climate change?

30   zebra says:

29 Aug 2017 at 9:36 AM

Roger Caiazza #29,

What exactly does “cost effective” mean in this context?

I’m always hearing this sky-is-falling claim about the “economic disaster” that is supposed to result from doing things like installing solar panels or building wind farms or driving EV or reducing energy consumption, and so on.

But, I never see any numbers! And, I never see any cause and effect!

If you want to deal with fat tails, let’s do it on both sides of the discussion. Why should anyone give any credibility to your alarmist position, given that you don’t have any basis for it other than your opinion?

31   MartinJB says:

29 Aug 2017 at 12:59 PM

Roger (@19): SO, “however the science ends up” you think that adaptation is cost effective. Interesting… that suggests that you have a preconceived notion of what you’re willing to do that is not dependent on the reality of the situation. I will freely admit that at a low enough level of ECS, adaptation is more cost effective. But surely, the higher the ECS the more relatively cost-effective mitigation becomes. What’s more, mitigation is more likely to cut off some of the tail risk than adaptation.

One other thing to consider: In general, efforts at mitigation do a better job of assigning more of the costs of dealing with global warming to the the people who have contributed more to in-the-pipeline global warming. Admittedly, that is not a strictly economic metric and likely puts more cost on me and mine, but I am happy to give up a little for the purpose of justice and equity…

32   Mal Adapted says:

29 Aug 2017 at 6:16 PM

Roger Caiazza:

However the science ends up, this Luke warmer thinks that adaptation is a more cost-effective public policy than mitigation.

Uh…if you don’t care about the science, what makes you think adaptation is a more cost-effective public policy than mitigation? Stipulating, of course, that adaptation might be a more cost-effective private policy for you, even if climate sensitivity ends up to be above the modal estimate. If you’re lucky, that is.

33   Phil Scadden says:

29 Aug 2017 at 7:50 PM

Roger – your opinion based on hope, preference – or some actual peer-reviewed analysis of numbers that you would like to share with us? Link please.

Roger Caiazza says:

Your comment is awaiting moderation.

29 Aug 2017 at 8:43 PM

Zebra, Here is a cost estimate for New York State to meet part of Governor Cuomo’s Executive Order reaffirming the state policy to reduce greenhouse gas emissions by forty percent by 2030, and eighty percent by 2050 from 1990 levels, across all emitting activities of the New York economy. The Manhattan Institute recently published “New York’s Clean Energy Programs, The High Cost of Symbolic Environmentalism” (https://www.manhattan-institute.org/html/new-yorks-clean-energy-programs-high-cost-symbolic-environmentalism-10565.html) by economist Jonathan Lesser that provides cost estimates for some of the programs referenced in the Executive Order.

Here are the key findings: Given existing technology, the CES’s 80 by 50 mandate is unrealistic, unobtainable, and unaffordable. Attempting to meet the mandate could easily cost New York consumers and businesses more than $1 trillion by 2050.

The CES mandate will require electrifying most of New York’s transportation, commercial, and industrial sectors. (In 2014, for example, fossil-fuel energy used for transportation was twice as large as all end-use electricity consumption combined.) Even with enormous gains in energy efficiency, the mandate would require installing at least 100,000 megawatts (MW) of offshore wind generation, or 150,000 MW of onshore wind generation, or 300,000 MW of solar photovoltaic (PV) capacity by 2050. By comparison, in 2015, about 11,300 MW of new solar PV capacity was installed in the entire U.S. Moreover, meeting the CES mandate likely would require installing at least 200,000 MW of battery storage to compensate for wind and solar’s inherent intermittency.

Meeting the CES interim goals—building 2,400 MW of offshore wind capacity and 7,300 MW of solar PV capacity by 2030—could result in New Yorkers paying more than $18 billion in above-market costs for their electricity between now and then. By 2050, the above-market costs associated with meeting those interim goals could increase to $93 billion. It will also require building at least 1,000 miles of new high-voltage transmission facilities to move electricity from upstate wind and solar projects to downstate consumers. No state agency has estimated the environmental and economic costs of this new infrastructure.

For what it is worth I think his estimates don’t include all the costs.

Roger Caiazza says:

Your comment is awaiting moderation.

29 Aug 2017 at 9:03 PM

For the cost effective commenters,

Using your science for the ECS and the New York State Energy Research and Development Authority numbers referenced in the Manhattan Institute report referenced above what do you think the change in global warming temperature would be? For New York the reduction would be 76.2 MMtCO2e from 2014 levels for the 2030 goal and 170.6 MMtCO2e from 2014 for the 2050 goal. For costs use just the $18 billion in above market electricity costs. My question to you is the money spent on the mitigation reduction that you predict going to have tangible results? However I do that calculation I don’t see a measurable impact on temperature. If you have a different approach suitably referenced in the peer reviewed literature please show me.

On the other hand spending that money on adapting New York would provide tangible benefits by making the state more resilient to extreme weather. Remember global warming is going to increase the probability of extreme weather and make it more severe. It is not going to prevent the extreme weather we have observed in the past and, in my opinion at least, we are not nearly as resilient to historical weather as we need to be. So my cost effective argument against mitigation is a lot of money spent for little effect might better be spent adapting to the past.

Conclusion

I really am not sure why my comments were censored other than they reveal some inconvenient points. If the moderators do not think that adaptation is a better alternative or can show that the costs for the 80% goal are reasonable then why not let the commenters provide those numbers or better yet disprove them with their own post. New York State has never shown their numbers so surely someone somewhere can prove their case for them.

The High Cost of New York’s Symbolic Environmentalism

In response to President Trump’s decision to withdraw from the Paris Climate Agreement, Governor Cuomo issued an Executive Order reaffirming the state policy to reduce greenhouse gas emissions by forty percent by 2030, and eighty percent by 2050 from 1990 levels, across all emitting activities of the New York economy. The Manhattan Institute recently published “New York’s Clean Energy Programs, The High Cost of Symbolic Environmentalism” by economist Jonathan Lesser that provides cost estimates for some of the programs referenced in the Executive Order which are clearly symbolic only. In this post I will summarize his findings but I recommend that you read his entire paper.

The Executive Order states that “New York has already committed to aggressive investments and initiatives to turn the State Energy Plan goals into action through its Clean Energy Standard (CES) program, the $5 Billion Clean Energy Fund (CEF), the $1 Billion NY-Sun solar program, the nation’s largest Green Bank, and unprecedented reforms to make the electricity grid more resilient, reliable, and affordable.” Dr. Lasser shows that meeting the Clean Energy Standard mandate could easily cost New York consumers and businesses more than $1 trillion by 2050. Amazingly he does not include all the costs so it is an underestimate. He does not include costs of Reforming the Energy Vision mandates that are buried in the rate case requirements, the recent changes to the Regional Greenhouse Gas Initiative or the cost to incorporate a carbon fee on generators. I will address those programs at some point on this blog.

Disclaimer: I am writing this series of posts on New York State (NYS)energy policy because I am concerned that this whole thing is going to end as an expensive boondoggle and drive electricity prices in particular and energy prices in general significantly higher without any appreciable improvement to global warming in general and certainly will have no effect on the purported impacts in NYS. It is a very sad commentary on this process that the State has not provided either an analysis of total costs or disclosed the actual impacts of these reductions. Before retirement from the electric generating industry, I was actively analyzing energy and air quality regulations that could affect company operations. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Evaluation Summary

There are three sections in the analysis: The New York Clean Energy Standard, An Introduction to Cost-Benefit Analysis Concepts, and Evaluating the Benefits and Costs of New York’s Clean Energy Programs. The description of the Clean Energy Standard (CES) describes the focus of the report. The introduction to cost-benefit analyses review of key concepts that “provide the framework for evaluating the costs and benefits of the CES, identifying specific categories of costs and benefits relevant to the evaluation”. The last section assesses the costs and benefits of the CES, and two related components: the solar PV Programs, Cuomo’s January 2017 mandate to install 2,400 megawatts (MW) of offshore wind generation off Long Island by 2030, and Cuomo’s March 2017 “Drive Green” program that will subsidize purchase of electric vehicles.

The summary of the Clean Energy Standard includes an analysis of the required Greenhouse Gas (GHG) emission reductions which is a good overview of the planned reductions and the scale of the mandate. Notably he shows that the Clean Energy Fund mandates are not clearly defined and as far as can be determined are ambitious. For example, to meet the 600-TBTU savings mandate, the cumulative savings will have to increase by an average of 30% each year. He concludes: “The gulf between the 600-TBTU energy-efficiency goal and the optimistic projections by NYSERDA, to say nothing of the still-lower forecast of electric savings recently projected by NYISO, calls into question the ability of New York to realize anything close to that goal, apart from the costs of doing so.”

His analysis also looks at the feasibility of the 80 by 50 mandate. His first conclusion is important: even if NY electric generation was 100% fossil free, the resulting decrease in emissions will not even come close to meeting the interim 40% goal much less the 80% goal. Therefore, emissions will have to decrease from all end-use fossil fuel energy consumption: residential, commercial, industrial and transportation. The problem is that in order to reduce emissions in those sectors increased electrification is necessary. He concludes that “the generating mix would have to be about 63% renewables and 37% natural gas, assuming that no other higher CO2-emitting fossil generation, e.g., coal, was used. That means that by 2050, there would need to be sufficient renewable generation to provide 1,420 TBTUs of end-use energy, equivalent to about 400 TWh of electricity.” He then goes on to equate the amount of renewable energy needed, the land needed and the supporting requirements. Ultimately concluding that, given today’s technology, meeting the 80 by 50 mandate appears to be technologically impossible, regardless of cost.

One would think that his analysis could be compared to the state’s implementation plan for all these programs. However, this is NYS and the answer is no implementation plan has been provided. While I could find a couple of points that I think were stretches in his evaluation I also think that he missed some implementation issues vis-à-vis storage and transmission support requirements for the 63% renewable target. I agree that the plan is technologically impossible to implement with today’s technology.

I found his introduction to cost-benefit analysis fascinating. I have never taken a course on economics so this helped me better understand concepts I have “learned” from my work over the years. It confirmed my suspicions on several issues. After describing the alleged benefits for four analyses of green energy programs he explains “Claims of economic benefits arising from new investment and job creation are erroneous. Using subsidies to increase investment in low carbon energy sources and to create jobs is simply a transfer of wealth from electricity consumers and unsubsidized electricity generators to renewable energy and energy-efficiency providers.”

He goes on to say:

“When businesses and consumers pay more for electricity, they have less money to spend on everything else. Consumers have less money to spend on other goods and services; businesses have less money for investments that increase economic output. Goods and services whose production requires electricity also increase in cost, leaving less money to spend on goods and services, which cost more to produce. Thus, subsidizing electric generation—of any kind— effectively imposes two separate taxes on businesses and consumers: the first is a direct tax associated with higher electric bills; the second is an indirect tax in the form of higher costs for purchased goods and services that require electricity as an input.”

In the final section of the report, the benefits and costs of the New York programs are evaluated. He points out that to do a proper cost benefit evaluation you need to compare the proposed plans with how the future would evolve without them. For example, the pollution reduction estimates in all the State analyses include emissions from coal-fired power plants but the reality is that the cost difference between natural gas and coal drove NY coal plant retirements so including coal emissions in the benefits is improper.

He also discusses nonmarket cost in his evaluation. While the New York evaluations of the programs provide all the benefits they have not, to date, included the costs. For example, in order to install the large amounts of solar power proposed the land necessary cannot be used for agricultural crops. Displacing those crops takes money out of the economy that is not reflected in the State analyses.

Moreover, I believe that he has not included the nonmarket cost of fuel diversity. Proponents of renewable energy claim that it provides fuel diversity but that is only true if it includes the full cost of dispatchable electricity. Moreover, one of the strong points of the NY electrical system was that there was a wide range of truly diverse power: hydro, nuclear, coal, oil and natural gas. Even the diversity within the fossil fuels had value because if there was an interruption in supply to any fuel there were alternatives. NY is going to be dependent upon natural gas but what happens if the gas transmission lines get disrupted due to an earthquake?  Renewables will not provide any value in this regard.

The final, and most important aspect of his evaluation, is his discussion of the State’s use of the Social Cost of Carbon (SCC). The SCC is the present day value of projected future net damages from emitting a ton of CO2 today. In order to estimate the impact of today’s emissions it is necessary to estimate total CO2 emissions, model the purported impacts of those emissions and then assess the global economic damage from those impacts. The projected global economic damage is then discounted to present value. Finally, part of the future damage is allocated to present day emissions on a per ton basis.

The vast majority of benefits in both recent NY agency cost-benefit analyses are associated with the value of reduced CO2 emissions, which are, in turn, based on the SCC. The SCC values estimated by Obama Administration are not based on marginal CO2 emissions changes. Instead, the SCC estimates are average values, equal to the estimated impact of a large change in CO2 emissions in a given year, divided by the present value of lost economic output, as measured by a decrease in world GDP.

 However, when the increase in CO2 emissions is small, the marginal damage is not even measurable. Equivalently, the marginal benefit of a small reduction in worldwide CO2 emissions is also small. This will be the case with NY policies to reduce CO2 emissions. He notes that “Temperature changes that are too small to physically measure and impossible to separate from natural climate variability cannot be associated with changes in climate and economic output.” Thus, the benefits of equivalent CO2 reductions are effectively zero. Also note that even if there were a measurable impact, virtually all the benefits would, by definition, accrue outside the state. Nor does the NYS approach account for increases in emissions in the rest of the world.

 Key Findings

In conclusion, I recommend readers go directly to the source.  The report lists four key findings:

“Given existing technology, the CES’s 80 by 50 mandate is unrealistic, unobtainable, and unaffordable. Attempting to meet the mandate could easily cost New York consumers and businesses more than $1 trillion by 2050.”

“The CES mandate will require electrifying most of New York’s transportation, commercial, and industrial sectors. (In 2014, for example, fossil-fuel energy used for transportation was twice as large as all end-use electricity consumption combined.) Even with enormous gains in energy efficiency, the mandate would require installing at least 100,000 megawatts (MW) of offshore wind generation, or 150,000 MW of onshore wind generation, or 300,000 MW of solar photovoltaic (PV) capacity by 2050. By comparison, in 2015, about 11,300 MW of new solar PV capacity was installed in the entire U.S. Moreover, meeting the CES mandate likely would require installing at least 200,000 MW of battery storage to compensate for wind and solar’s inherent intermittency.”

“Meeting the CES interim goals—building 2,400 MW of offshore wind capacity and 7,300 MW of solar PV capacity by 2030—could result in New Yorkers paying more than $18 billion in above-market costs for their electricity between now and then. By 2050, the above-market costs associated with meeting those interim goals could increase to $93 billion. It will also require building at least 1,000 miles of new high-voltage transmission facilities to move electricity from upstate wind and solar projects to downstate consumers. No state agency has estimated the environmental and economic costs of this new infrastructure.”

“The New York Department of Public Service and the New York State Energy Research and Development Authority claim that renewable energy and the CES will provide billions of dollars of benefits associated with CO2 reductions. Not so. Regardless of one’s views on the accuracy of climate models and social-cost-of-carbon estimates, the CES will have no measurable impact on world climate. Therefore, the value of the proposed CO2 reductions will be effectively zero.”

Cuomo’s Executive Order 166: Part 3 Global Warming Effects

In response to President Trump’s decision to withdraw from the Paris Climate Agreement, Governor Cuomo issued an Executive Order reaffirming the state policy to reduce greenhouse gas emissions by forty percent by 2030, and eighty percent by 2050 from 1990 levels, across all emitting activities of the New York economy. I believe it is appropriate to ask how much is this plan to mitigate climate change going to cost and how much will the plan actually reduce global warming. This post sum estimates how much global warming would be prevented by the proposed reductions.

The Executive Order states that “New York has already committed to aggressive investments and initiatives to turn the State Energy Plan goals into action through its Clean Energy Standard (CES) program, the $5 Billion Clean Energy Fund (CEF), the $1 Billion NY-Sun solar program, the nation’s largest Green Bank, and unprecedented reforms to make the electricity grid more resilient, reliable, and affordable.” In order to make my analysis manageable I am breaking it up into three posts. The first post addressed costs of each the first four components. The second post estimated costs of for the “unprecedented reforms” comment which refers to the Reforming the Energy Vision component.

Disclaimer: I am writing this series of posts on New York State energy policy because I am concerned that this whole thing is going to end as an expensive boondoggle and drive electricity prices in particular and energy prices in general significantly higher. Before retirement from the electric generating industry, I was actively analyzing energy and air quality regulations that could affect company operations. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

How Much Will REV Affect Global Warming

In the absence of any official quantitative estimate of the impact on global warming from REV or any other New York State initiative related to climate change I did my own calculation. I simply adapted data for this emission reduction from the calculations in Analysis of US and State-By-State Carbon Dioxide Emissions and Potential “Savings” In Future Global Temperature and Global Sea Level Rise. This analysis of U.S. and state by state carbon dioxide 2010 emissions relative to global emissions quantifies the relative numbers and the potential “savings” in future global temperature and global sea level rise. All I did in my calculation was to pro-rate the United States impacts by the ratio of New York emissions divided by United States emissions to determine the effects of a complete cessation of all CO2 emissions in New York State as well as the REV plan for the 167.1 million metric ton reduction.

The first step is to quantify NY emissions. In 2010 the NY total was 172.8 million metric tons.  According to the Energy Information Administration total New York carbon dioxide emissions in 1990 were 208.9 million metric tons so the reduction to the REV goal of 80% is 167.1 million metric tons. The New York impacts were calculated by the ratio of the NY emissions reductions to the US reductions in the report. For example, the NY % of global total emissions equals the % of US global total (17.88%) times the 2010 NY emissions (172.8) divided by the US emissions (5631.3)

These calculations show current growth rate in CO2 emissions from other countries of the world will quickly subsume New York total emissions much less any reductions in New York CO2 emissions. According to data from the U.S. Energy Information Administration (EIA) and based on trends in CO2 emissions growth over the past decade, global growth will completely replace an elimination of all 2010 CO2 emissions from New York in 79 days. For the emissions reductions proposed in REV, global growth will completely replace the expected reductions in 76 days. Furthermore, using assumptions based on the Intergovernmental Panel on Climate Change (IPCC) Assessment Reports we can estimate the actual impact to global warming for REV. The ultimate impact of the REV 80% reduction of 167.1 million metric tons on projected global temperature rise would be a reduction, or a “savings,” of approximately 0.0025°C by the year 2050 and 0.0051°C by the year 2100.

These small numbers have to be put in context. First consider temperature measuring guidance. The National Oceanic & Atmospheric Administration’s Requirements and Standards for NWS Climate Observations states that: “The observer will round the entered data to whole units Fahrenheit”. The nearest whole degree Fahrenheit (0.55°C) is one hundred times greater than the projected change in temperature.

Although this change is too small to measure I am sure some will argue that there will nonetheless be some effect on the purported impacts. However, if these numbers are put into perspective of temperatures we routinely feel then that argument seems hollow. For example, in Syracuse NY the record high temperature is 102°F and the record low temperature is -26°F so the difference is 128 °F or 71.1°C which is nearly 14,000 times greater than the predicted change in temperature in 2100. The annual seasonal difference ranges from the highest daily average of 71.6°F to the lowest daily average of 23.2°F, or a difference of 48.4°F or 26.9°C which is over 5,000 times greater than the predicted change in temperature in 2100. The average difference between the average daily high and average daily low temperature is 10.4°C or 2,000 times greater than the predicted change in temperature in 2100. In order to give you an idea of how small this temperature change is consider that temperature normally drops as you go higher in the atmosphere. The dry adiabatic lapse rate is the change in temperature with height when no energy is added or subtracted and equals 1°C per 100 meters. For a six foot man this temperature change is 0.018°C between his head and feet which is four times greater than the predicted change in temperature in 2100. Clearly claiming impacts for that small a change in temperature is a stretch at best.

 

How Much for Cuomo’s Executive Order 166 Part 2: REV

In response to President Trump’s decision to withdraw from the Paris Climate Agreement, Governor Cuomo recently issued an Executive Order reaffirming the state policy to reduce greenhouse gas emissions by forty percent by 2030, and eighty percent by 2050 from 1990 levels, across all emitting activities of the New York economy. I believe it is appropriate to ask how much is this plan to mitigate climate change going to cost and how much will the plan actually reduce global warming.

The Executive Order states that “New York has already committed to aggressive investments and initiatives to turn the State Energy Plan goals into action through its Clean Energy Standard (CES) program, the $5 Billion Clean Energy Fund (CEF), the $1 Billion NY-Sun solar program, the nation’s largest Green Bank, and unprecedented reforms to make the electricity grid more resilient, reliable, and affordable.” In order to make my analysis manageable I am breaking it up into three posts. The first post addressed each the first four components. This post speaks to the “unprecedented reforms” comment which refers to the Reforming the Energy Vision component. The final post will summarize the costs and estimate how much global warming would be prevented by the proposed reductions.

Disclaimer: I am writing this series of posts on New York State energy policy because I am concerned that this whole thing is going to end as an expensive boondoggle and drive electricity prices in particular and energy prices in general significantly higher. Before retirement from the electric generating industry, I was actively analyzing energy and air quality regulations that could affect company operations. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Reforming the Energy Vision Costs

The Executive Order refers to “unprecedented reforms to make the electricity grid more resilient, reliable, and affordable” which is referencing the Governor’s Reforming the Energy Vision program. This comprehensive energy strategy for New York is supposed to help consumers make more informed energy choices, develop new energy products and services, and protect the environment. However, it does not have a comprehensive description of all the component programs, how they are supposed to work together, how much the programs will make the grid resilient and reliable or a description of the costs so it can be shown to be affordable.

There are seven general REV initiatives:

  1. Renewable Energy
  2. Buildings & Energy Efficiency
  3. Clean Energy Financing
  4. Sustainable and Resilient Communities
  5. Energy Infrastructure Modernization
  6. Innovation and R&D
  7. Transportation

There is a lot of overlap between the other commitments mentioned in the Executive Order and REV. In order to put a limit on the scope of this effort to estimate costs, I am going to only try to include those REV costs that directly affect electricity rates associated with energy infrastructure modernization. In part this is because I am also interested in how much of the current rate request for my electricity supplier is required by REV. According to the website:

60% of New York’s power generation infrastructure is over 35 years old. As we develop distributed energy resources statewide, it is critical for the safety and resiliency of our current energy system that we maintain—and in some instances enhance—the central grid. It is only by doing so that we can continue to meet the energy needs of New Yorkers and integrate clean and distributed power at scale into our energy system.

One of the sample initiatives listed under energy infrastructure modernization is the Energy Highway.

The 13 actions presented in the Energy Highway Blueprint (issued in October 2012) includes a wide range of measures to provide up to 3,200 megawatts (MW) of additional electric generation and transmission capacity and clean power generation—enough to serve about 3 million homes—through up to $5.7 billion in private- and public-sector investments.

For this analysis I am assuming that these costs are included in other initiatives and have already been counted elsewhere in this analysis. However I am pretty sure that there are projects that were it not for REV would be required so that means the total costs estimated are going to be low.

In addition to that initiative, the Load Serving Entities are required to do demonstration projects to implement the Governor’s vision. Those projects are buried in rate case requests so teasing out their costs is a monumental chore. What I have tried to do in the following is figure out what National Grid, my electric provider, is going to spend on REV demonstration and infrastructure projects.

In the National Grid rate case under Information Services capital projects and investments there are 22 projects listed under the NY REV/Grid Modernization program label for fiscal years 2018 to 2021. The total capital expenditures for those projects is listed as $161 million. It is not clear how exactly these modernization projects will actually affect REV goals. Consider that there are eight projects associated with Advance Metering Infrastructure (AMI) meters totaling $48.9 million. The idea for these AMI meters is that they incorporate two-way communication between the utility and the customer. The goal is to reduce peak generation charging for electricity by an hourly rate which will induce the customer to use less at those times. What is not clear is any quantitative estimate of the specific impacts of these projects nor how the results will be integrated into the plan. Specifically, will the results of the demonstration projects be evaluated relative to the goals to see if they provide the expected benefits and can be used as anticipated or is this simply a formality and implementation of the Governor’s executive order will proceed heedless of the results?

Back to the analysis of REV. In their Electric Customer Panel testimony, National Grid described six REV demonstration projects and listed a deferral balance of $3.283 million.

  • The Fruit Belt Neighborhood Solar demonstration project seeks to engage low to moderate income residential customers in the Fruit Belt neighborhood of Buffalo with solar photovoltaic (“PV”) installations and energy efficiency products and services. The project involves the installation of solar PV panels on the rooftops of 100 customers’ residences. The energy generated by the solar systems will be used to provide the Fruit Belt neighborhood with bill credits. Installation of the solar PV systems is scheduled to be completed in 2017.
  • The Potsdam Community Resilience project will examine the feasibility of building a community microgrid to add resiliency to the electric infrastructure in the area. The Company is partnering with Clarkson University to develop and test the microgrid through use of an underground distribution network, new and existing DER, and other utility services. The project commenced in early 2016 and design, outreach, and testing will continue in 2017. The Company anticipates final stakeholder decision whether to fully implement the community microgrid in late 2017.
  • The Distributed System Platform (“DSP”) project is aimed at testing how the Company can integrate customer-owned energy resources to manage system demands. As part of the project, the Company will partner with the Buffalo Niagara Medical Campus to incorporate customer-owned DER and other energy and ancillary services into the distribution system. The first phase of the project began in September 2016, with the technology development phase expected to continue in 2017 and field testing to begin in 2018.
  • The Clifton Park Demand Reduction project is aimed at reducing customers’ energy bills and peak demand through a combination of infrastructure upgrades and customer engagement. The project involves 2 the installation of Advance Metering Infrastructure (AMI) meters for residents of Clifton Park and other infrastructure upgrades to test whether price signals, tools, community outreach, and innovative rate design concepts, such as voluntary time-of use rates, will reduce electric demand. AMI meter deployment has begun and the Company anticipates that all offerings and services will be available by the end of 2017.
  • Linked to the already approved Clifton Park Demand Reduction project is the Smart Home Rate demonstration project. Under this project, customers in Clifton Park enrolled in the Company’s residential voluntary time-of-use rate will be provided with voice-recognition technology that will enable them to control home appliances via use of a phone application or other technology to reduce their electricity consumption when prices are high.
  • The DG Interconnection demonstration project seeks to test whether the Company’s upfront investment to make the system “DG-ready” combined with an alternative cost allocation methodology will enhance DG interconnections in Upstate New York.

National Grid was asked “Are the costs of the demonstration projects described above included in the revenue requirement?” The testimony response:

Yes, with the exception of the Smart Home Rate and DG Interconnection demonstration projects because they have not yet been approved by Staff. The Track One Order authorized utilities to defer the revenue requirement impacts of the incremental demonstration project costs until their next rate plan. The actual deferral balance at the end of the Historic Test Year (the 12 months ended December 31, 2016) for the four approved projects is $0.274 million and the forecast deferral balance through March 31, 2018 is $3.283 million, as shown in Exhibit ___ (RRP-7). Treatment of the deferral balance is discussed by the Revenue Requirements Panel. With respect to future costs, beginning in the Rate Year, capital and O&M expense for the four approved demonstration projects are included in the revenue requirements.

I assume a ratepayer cost of $3.283 million but trying to figure out the impacts of the demonstration projects is not nearly as simple. For example, the Fruit Belt Neighborhood Solar demonstration project is for 100 residential rooftop solar installations and the average reduction in CO2 tons per year is 0.5 so the total CO2 avoided is 50 tons. However, that is the only project that will have direct CO2 savings. The Potsdam Community Resilience project will determine if a microgrid is feasible, Distributed System Platform project will test ways to integrate distributed energy resources into the grid, the two projects in Clifton Park are associated with AMI meters as previously discussed and the final project will evaluate distributed generation interconnections.

The Transmission and Distribution Capital Investment Plan submitted to DPS on 1/31/2017 includes projects totaling $3,012 million. It is not clear how much of this plan is included solely to meet the Reforming the Energy Vision. As far as I can tell the REV costs are buried in three categories: the Customer Requests/Public Requirements spending rationale includes the Company’s Advanced Metering project, the Communications / Control Systems spending rationale includes costs associated with AMF communications and the DER – Electric System Access appears to be all REV. Table 1-2 in the Investment Plan notes that $147.2 million is needed for the AMF Investment Plan.

In conclusion I estimate that the REV costs buried in this rate case total $271.7 million dollars (Table 1 REV Costs in National Grid Rate Case). However, I suspect that I am double counting some costs and have neglected other costs.

Reflections

There are two inconvenient problems with the REV demonstration projects: ultimate feasibility and a funding death spiral. The requirement that each utility sponsor demonstration projects begs the ultimate question whether they would all ultimately provide cost effective savings. Working in isolation the utilities are not charged with overall feasibility and the State has been remiss in providing an overall summary of expectations and costs. Until the State provides a detailed plan how all the bits and pieces will work together an estimate of feasibility is not possible.  The reality of this problem is described very well in a post on An analysis of electricity system flexibility for Great Britain from November 2016 by Carbon Trust. The United Kingdom has legislation in place to make similar reductions as proposed by Cuomo. The post itself notes that “solving a problem requires understanding the scale of the problem and especially the hardest challenges – before you start on the main project.” I strongly recommend that you read this evisceration of the UK policy and think how similar the situation is to New York.

The death spiral is an overlooked component. The National Grid Fruit Belt demonstration project provides 100 low/moderate income residential customers with “the benefits of solar photovoltaic installations and energy efficiency products and services” paid for by the rest of the National Grid customer base. The problem is that to pay for all low/moderate income residential customers to get this benefit then costs necessarily increase such that more people become eligible for the benefit. In order to pay for those people fewer people are available to cover those costs so the increase necessary is larger and the death spiral kicks. Ultimately the question is whether this kind of program is feasible for everyone and if not who chooses who benefits.

 

 

Academic RGGI Economic Theory of Allowance Management

This is another in a series of posts on the Regional Greenhouse Gas Initiative (RGGI). The program includes periodic reviews to consider program successes, impacts, and design elements. In the current program review process one issue is the potential to add a new component to the program called the Emissions Containment Reserve. Resources for the Future (RFF) and University of Virginia (UVA) had a webinar on June 14, 2017 on the results of their analyses of that component and RFF followed up with comments submitted to RGGI on July 17, 2017. This post addresses what I believe is a fundamental problem with the academic theory of RGGI allowance management.

I have been involved in the RGGI program process since its inception. Before retirement from a Non-Regulated Generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Dr. William Shobe (UVA) and Dr. Dallas Burtraw (RFF) described their analysis of the effect of an Emissions Containment Reserve (ECR) in the June 14, 2017 webinar. RFF used a model to project future allowance supply, demand and cost. UVA did a laboratory experiment at the UVA Economics Laboratory using students as allowance managers.

I believe they both have the same perception of the economic theory of RGGI allowance management. The UVA theory is summarized in slide 19 of the webinar slide presentation. That slide states that it is the long-run supply that counts. “In markets for storable commodities (like allowances, for example), the current price and the plan for accumulation of a stock of the commodity depend on

  • The expected long-run total supply compared to
  • The expected long-run total demand.”

Similarly, in the RFF comments to RGGI it is noted that the allowance banking “propagates and adjusts the value of an allowance over time in light of the opportunity cost of holding the allowance as a financial asset (versus buying one at a later point in time).”

However, I believe that RGGI allowance management is different because the affected sources do not treat allowances as a storable commodity or a financial asset in the usual sense of the term. Instead allowance management is overwhelmingly driven by regulatory requirements for the current compliance period. i.e., do I have enough allowances to cover expected emissions? Financially it is simply another cost of operating and not a potential profit center. The important difference is that the academic economic theory holds that affected sources are looking years down the road but in reality there is no such long-term time horizon for affected sources. Their decision to buy allowances is driven by their expected operations in the period between auctions and at most the entire compliance period and to include a small margin for operational variations and regulatory compliance.

I have worked in New York for a long time and I have been unable to find a single company that will admit to long-run allowance planning. In the first place, allowance purchases cost a significant amount of money. New York electric generating companies are on a tight margin with little extra money available, so the idea that money could be available to purchase allowances for needs more than three years in the future is laughable amongst my sources. It is also important to note that in New York that the non-regulated generating companies have been in a constant state of change since de-regulation began before 2000. Very few facilities are still owned and operated by the same companies that purchased when de-regulation began. As a result of that turmoil there are few incentives to purchase allowances for future needs because the expectation is that facility ownership changes will continue going forward.

In addition, the RGGI cap and auction CO2 allowance program is different than a traditional cap and trade program for SO2 or NOx. In a traditional program, allowances are allocated proportionally to affected sources based on historical operations. When the cap is established the total emissions in the State have to be lowered to that level. On the basis of the cap level, affected sources can determine if it makes sense to install control equipment or purchase allowances to comply with their compliance obligations. As long as somebody can over control and generate surplus allowances to subsidize their control investments then allowances should be available on the market for use if control costs are not cost-effective at a particular affected sources.

In the RGGI cap and auction system, everyone has to buy allowances. Even if there were an option to control CO2 emissions (and there isn’t anything available for existing sources that is cost effective) a source installing controls has to buy allowances so there wouldn’t be an offset to the control costs. As a result of all these factors the affected sources have universally adopted an allowance management strategy with a short time horizon.

So how does this affect the analyses and what could be done?

I am not sure how this affects the modeling and the lab experiment for allowance management. I note, however, that the presentation and the comments both imply decisions should be based on future expectations of allowance costs. I believe that is an outgrowth of their mistaken RGGI allowance management theory. Instead I believe that the ECR should be based on observed allowance price behavior.

I would love to see the UVA allowance tests be repeated using actual industry allowance managers and industry allowance compliance staff. It would be educational for both the academics and industry staff and would confirm or blow up my perception of the differences between academic theory and actual allowance management practice. It would also confirm whether the conclusions based on the academic theory are consistent.

One final note relative to the economic analyses done by RFF and UVA. As far as I can tell they both presume future emission cap reductions (RFF modeled a 3.5% reduction). The presentation and comments both implicitly assume that the primary motivation for the ECR is because there is a potential that future emission reductions will be greater than cap reductions leading to an over-supply of allowances and lower prices than are deemed acceptable.

I believe the more likely scenario is that emissions don’t continue at the historical decrease rate and that an allowance deficit is more likely[1]. Consequently, I think that using the ECR to determine future emission reductions instead of arbitrarily picking a percentage reduction is less risky. The academic presumption that future reductions are “easy” also influences their recommendations relative to the ECR. At the very least they should consider a scenario where reductions less than expected.

[1] My rationale is that historical emissions decreases have been largely driven by fuel switching from a more expensive to cheaper and less emitting fuel. The potential for similar future reductions is largely gone. In an earlier post I showed that the experience so far of RGGI induced emission reductions is pretty low. The upper bound is an econometric model that estimates that emissions would have been 24 percent higher without the program. RGGI estimates that emissions would have been 17% higher than without a program. If you assume that all the savings in fossil fuel use only displaced natural gas use then emissions would have been only 5% higher.

RGGI Costs Relative to NYS Electric Supply Rate Requests

This is another in a series of posts on the Regional Greenhouse Gas Initiative (RGGI). The program includes periodic reviews to consider program successes, impacts, and design elements. In the current program review process one of the big issues is whether to set new lower caps after 2020. Ultimately however ratepayers will have to bear the costs of further reductions. This post compares the proposed costs relative to recent rate requests and approved rate increases by New York State (NYS) electric utilities.

I have been involved in the RGGI program process since its inception. In the final years before my retirement I analyzed air quality regulations that could affect electric generating company operations. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone. I am motivated to write these posts on RGGI because the majority of the stakeholder opinions expressed at meetings and in submitted comments are, in my opinion, overly optimistic about the potential value of continued RGGI reductions and ignore the potential for serious consequences if things don’t work out as planned. I am particularly disappointed that a bunch of government bureaucrats can simply decree additional costs to ratepayers without any substantive scrutiny by the respective State public service organizations or public knowledge.

Ratepayers in New York State have electricity bills made up of delivery and supply charges. The delivery charge is what is paid to transport electricity to the customer over power lines. The supply charge is what is paid for the electricity used. In order for the local electric utility to change the rates paid to transport the electricity delivered they have to go through a rate request process with the New York State Department of Public Service. On the other hand the price paid for electricity used is not directly regulated.

I think it is instructive to compare the indirect allowance costs with recent rate case costs for the delivery charge. I was unable to find a single summary of the most recent requested and granted rate case values for the delivery charge component of ratepayer bills. I searched for numbers and using a combination of news reports and rate case documents came up with an estimate. The NY total for the most recent rate requests for electric delivery for the investor owner utilities and LIPA is $1,282 million (Table 1, NYS Electric Delivery Rate Cases).

The cost of allowances eventually and indirectly works its way back to ratepayers. RGGI is a “Cap and Auction” program that caps electric generating unit emissions and then auctions permits to emit CO2 or allowances. The proceeds from the auctions are supposed to be invested in “strategic energy and consumer programs” but on two occasions New York Governors have raided the RGGI proceeds for other uses. The allowance costs are buried in the supply charge.

The RGGI states use the production cost model Integrated Planning Model (IPM) to analyze the impacts of air quality policies including emissions and allowance costs. This is a massive model that purports to estimate how the entire United States utility sector will react to changes in air quality regulations. In order to do that they have to model not only generator operations, fuel costs and control equipment strategies, but also the transmission system.  I think there are problems with the IPM results that will be addressed in another post but for this analysis I will just accept the numbers the RGGI states are using.

In the current program review analysis there are three draft policy scenarios for possible changes to the RGGI program after 2020. As it stands now there are no further reductions promulgated for the RGGI cap after 2020 but the RGGI states are considering and have evaluated three reduction scenarios: continuing the 2.5% reduction in place up to 2020 until 2030, a 3% reduction and a 3.5% reduction. The IPM model results for the scenarios are compared to a reference case so the results are consistent. In order to cover the full range of outcomes sensitivities are run for each scenario. In the high sensitivity cases assumptions are made for plausible reasons why emissions could be higher than the reference base case and in the low sensitivity the emissions are lower. In addition, sensitivity cases with and without a national program were run. As a result there were a total of nine policy case runs.

On the RGGI website in the 2016 program review documents the model output for each of the policy runs (June 27, 2017 Meeting Materials) and the reference cases (April 20, 2017 Meeting Materials) are listed in spreadsheets. Each spreadsheet lists the model estimates of capacity additions (what electric generating capacity the model and what the states tell the model to include because of regulations); generation (how much the existing and projected units will produce); prices (including firm power prices, energy prices, capacity prices, allowance prices, natural gas prices, and renewable energy credit prices); total CO2 emissions; fuel consumption for different fuel types; and transmission flows into and out of the RGGI power grids. Those results are presented by region and each state. Note that the model output does not include projections for every year. For the 14 years 2017-2030 there is model output for six years.

For this analysis I extracted and consolidated the projected emissions and allowance prices. I estimated annual emissions and prices by interpolating between model projections. The ultimate cost to the ratepayer should be equal to the total revenue at the auctions which equals emissions times the allowance prices. Table 2, IPM 2017 modeling of annual CO2 credit price, CO2 emissions and CO2 allowance auction, lists the results from 2017 to 2030 for all the reference case scenarios and all the policy case scenarios. The Key to the 14 different modeling runs lists the assumptions made for each run. RGGI compares the reference case to the IPM modeling results. The difference between the reference case, no national program and each of the policy scenarios is shown in Table 3. Depending on the changes made to the program, consumer costs for allowance revenues are projected to increase between $134 and $604 million in 2021 to between $254 million and $1,011 million in 2030 for the nine RGGI states. For each scenario the relative share of New York emissions is listed for 2030 along with the cost for just New York. The New York share of those costs ranges from $108 million to $391 million. Table 3 also compares the RGGI allowance costs to total electric delivery costs ($1,282 million).

My point is that completely outside of any DPS review and the glare of ratepayer advocacy scrutiny, government bureaucrats are contemplating additional costs of between 8% and 31% of the most recent rate requests. I think that it would be in the best interests of the State that there was more recognition of this process.