With apologies for the dueling clichés in today's title, that image conveys the conflicting messages I received from a pair of events on the topic of energy efficiency this week. Yesterday I watched a panel discussion on energy efficiency finance, part of the valuable First Wednesday series of seminars from Resources for the Future in D.C. Yet as I listened to the discussion of creative mechanisms for overcoming the numerous financial and behavioral obstacles impeding the widespread adoption of efficiency technologies, I couldn't help framing it in the context of Tuesday's blogger call on "efficiency rebound", also known as the Jevons Paradox, hosted by the Breakthrough Institute. This latter, offsetting effect has been controversial in the US but is apparently more widely accepted in EU policy circles.
Energy efficiency is probably the energy topic to which I've devoted the least space in this blog in the last seven years. That hasn't been a deliberate slight, though perhaps it reflects the bulk of my personal experience on the supply side of energy. It's also a tricky subject because it's a moving target. We often hear efficiency described as the low-hanging fruit in discussions of energy security or emissions reductions, but that usually ignores the fact that the truly low-hanging fruit in efficiency was mainly captured during the energy crises of the 1970s and early 1980s, and in subsequent price spikes in electricity and natural gas. That doesn't mean there isn't still ample scope for further improvement, but it does leave those efforts subject to the long list of barriers described in yesterday's presentations. They include lack of funding, low awareness, landlord/tenant issues, and lack of expertise.
One of the other obstacles that intrigued me was the mismatch between the scale of most efficiency projects, even in the commercial sector, and the much larger scale of investor interest in financing efficiency, as described by the panelist from Citibank. He suggested the answer lies in aggregation, in which the financing of numerous smaller projects would be bundled and sold off in tranches to investors. If that sounds familiar, it should, because it reflects a similar approach to securitization to the one that contributed to the recent housing bubble. However, I would stress that efficiency instruments need not be inherently very risky, as long as they are assembled with due concern for the creditworthiness of the project owners, and without heroic assumptions about the risk-abating portfolio effect of aggregation. Another element that could assist this process is the sort of project performance guarantees described by the panelist from Johnson Controls. In any case there is no shortage of federal, state and local programs focused on energy efficiency financing, including the controversial Property Assessed Clean Energy (PACE) mechanism.
I hope you get the sense from this brief summary that implementing energy efficiency on a large scale is quite difficult enough in its own right, even when those investing in such improvements can safely assume that they will enjoy 100% of the promised cost savings when the projects are completed. The research on rebound by a team commissioned by the EU's Directorate General for the Environment highlighted a number of mechanisms by which efficiency gains may lead to additional energy consumption, either by the individual or organization implementing it or within the larger economy. In some cases this could even lead to post-efficiency consumption exceeding the pre-efficiency level, a condition referred to as "backfire." The potential for these offsetting effects not only makes efficiency a tougher sell on a project basis, but it also undermines the efficacy of macro-scale efficiency measures in mitigating climate change or reducing energy imports. This view is consistent with the findings concerning rebound assembled by the Breakthrough Institute.
The logic of rebound begins simply and locally, before becoming complex and widespread. When you invest in efficiency, your energy bill goes down, leaving you more money to spend on either more of the services that consume energy (e.g., transportation, lighting, heat or air conditioning) or on other goods or services, after accounting for the cost of the upgrade or the cost of financing it. Now think about what happens in the economy: the demand for energy has dropped by a little bit, as has the money spent on it. You'd expect energy prices to fall and the freed up money not spent on energy to result in consumption or investment somewhere else. But those goods and services likely consume energy, too, along with the embedded energy in the efficiency technology, the installation of which started this cascade. And as overall energy productivity goes up, economic growth should also increase, resulting in additional energy use. The EU report found evidence of rebound in the range of 10-30%, including 26% for the UK efficiency investments that were studied. For example, the UK government apparently assumes that 15% of the benefit of home insulation will be lost to rebound.
Some of these mechanisms are more intuitive than others, and I am still thinking through what I heard, particularly in terms of why much of the rebound effect wouldn't be offset by market feedback mechanisms or by the reaction of company management to disappointing post-expenditure reviews on efficiency projects. When I raised these points during the call, Dr. Maxwell, the co-leader of the EU study team, assured me that my concerns weren't supported by the empirical research they examined.
If this rebound effect is as prevalent as the evidence seems to indicate, then the implications aren't very positive. Although individuals and companies implementing efficiency measures are likely to get most of the value they expect, even if it's in some form other than direct savings on their energy bills (e.g., more mobility, more comfort, higher output) society likely wouldn't see the expected energy and emissions savings at the level of the entire economy. That requires increasing efforts on efficiency even further--against all the barriers discussed above--or expending more effort on the supply side of energy, through promotion of higher energy production and more investment in renewables. In other words, those low-hanging efficiency gains that have defied so many efforts to implement look even harder to achieve in practice and somewhat less valuable.
I'm not sure to what extent I buy into all this, yet. Direct rebound due to less expensive energy services for the individual or firm seems fairly straightforward, but the wider ripple effects involve positive and negative feedback loops requiring complex modeling to assess--with all the uncertainties to which such models are subject. Nor does it require the existence of a large rebound effect to appreciate just how difficult it will be to move the needle on total energy consumption and emissions very far by means of efficiency measures that must ultimately be implemented by individual companies and consumers that already face a large array of competing priorities. I intend to look into this further and report later on any insights that turn up.
Showing posts with label breakthrough. Show all posts
Showing posts with label breakthrough. Show all posts
Thursday, October 06, 2011
Monday, November 29, 2010
Cancun Climate Talks: Irrelevant?
The mood going into this week's global climate conference in Cancun, Mexico is decidedly different than that for last year's session in Copenhagen, which had been intended to culminate the process begun two years earlier in Bali. It's not just that expectations for a comprehensive and binding global climate treaty have been dramatically lowered; much of the debate since Copenhagen has moved away from the notion that it's even possible to reduce emissions sufficiently to avert many of the adverse consequences of a warming and less stable climate. It's no coincidence that the cover story of this week's Economist is dedicated to the increased need for adaptation to climate change, while the lead op-ed in the energy pull-out section in today's Wall St. Journal highlights an agenda for making clean energy the cheapest kind--not by subsidizing it even more than we already are, but by driving innovation.
After describing the magnitude of the challenge involved in decarbonizing the global economy by enough, soon enough, to limit the increase in global average temperatures in this century to 2° C, The Economist concludes, "The fight to limit global warming to easily tolerated levels is thus over." That doesn't mean that agreements to bend the trajectory of emissions growth below the status quo trendline aren't worth pursuing, but it suggests that we need to devote much greater attention and resources to adapting to a world that will likely include more droughts, floods, famines, and human migration than we've had to deal with thus far, and for which both the drivers and consequences are being amplified by economic development and population growth. The Economist sees climate adaptation focused on three main areas: infrastructure, migration and food, and their analysis is worth reading.
Another factor I believe the magazine should have highlighted is the difficulty of undertaking any of these efforts at a time when the developed world is hobbled by weak economic growth and related deficit and debt problems that threaten to render even the current level of subsidies for renewable energy sources unsustainable. As the EU grapples with the debts of Greece and Ireland, with Portugal and Spain waiting in the wings, it's no accident that Spain has just cut its feed-in tariff for solar power, which had already been reduced from previously lavish levels. The elephant in the room in Cancun, as it was in Copenhagen, is that binding agreements requiring severe emissions reductions by and large transfer payments from the developed countries might have looked attainable when the economy was booming, but they have become much less feasible in the wake of the worst recession and financial crisis since the Great Depression.
That same fundamental challenge makes the innovation arguments raised by Ted Nordhaus and Michael Shellengerger of the Breakthrough Institute more urgent than they would be otherwise. Because today's renewable energy technologies remain more expensive without subsidies than coal, oil and natural gas--even when the consumption subsidies the latter receive are stripped away--the cost of replacing our existing, high-emitting energy sources with entirely green ones looks unaffordable in today's world. I would add that reliance on experience curve effects--building out a subsidized green energy economy and depending on volume to drive down its cost to the point of competitiveness--is unlikely close that gap, and where it can, there is no guarantee that the country providing the incentives will receive the benefits it is entitled to expect. To cite the most obvious current example, Germany has invested tens of billions of Euros subsidizing solar energy and has indeed created a globally competitive solar industry--mainly in developing Asia.
What makes Nordhaus and Shellenberger's suggestion seem much more practical than global climate treaties and mountains of green subsidies is that the money currently being spent on renewable energy deployment incentives, which constitute a small fraction of the total annual investment in energy infrastructure, would go much farther buying R&D, rather than hardware. The US investment tax credit paid to a single 100 MW wind farm could fund an entire university energy innovation laboratory and graduate degree program.
Of course none of these strategies should be regarded as entirely either/or propositions. Adaptation doesn't let us off the hook for trying to address the causes of climate change, nor does shifting more of government's limited resources into clean energy R&D mean we don't need any of the real-world learnings that only come from deploying technology and seeing how it works under uncontrolled conditions. There's also a parallel role for research into geoengineering to provide a backstop--a potential Hail Mary pass--should all of these other efforts fall short and climate change move beyond a range we can live with. If nothing else, the COP 16 meeting in Cancun might shed more light on the degree to which the UN body is the right umbrella to cover all this work.
Tomorrow at 1:00 PM EST I'll be presenting in a webinar entitled, "Natural Gas: Sustainability Friend or Foe". To sign up follow this link.
After describing the magnitude of the challenge involved in decarbonizing the global economy by enough, soon enough, to limit the increase in global average temperatures in this century to 2° C, The Economist concludes, "The fight to limit global warming to easily tolerated levels is thus over." That doesn't mean that agreements to bend the trajectory of emissions growth below the status quo trendline aren't worth pursuing, but it suggests that we need to devote much greater attention and resources to adapting to a world that will likely include more droughts, floods, famines, and human migration than we've had to deal with thus far, and for which both the drivers and consequences are being amplified by economic development and population growth. The Economist sees climate adaptation focused on three main areas: infrastructure, migration and food, and their analysis is worth reading.
Another factor I believe the magazine should have highlighted is the difficulty of undertaking any of these efforts at a time when the developed world is hobbled by weak economic growth and related deficit and debt problems that threaten to render even the current level of subsidies for renewable energy sources unsustainable. As the EU grapples with the debts of Greece and Ireland, with Portugal and Spain waiting in the wings, it's no accident that Spain has just cut its feed-in tariff for solar power, which had already been reduced from previously lavish levels. The elephant in the room in Cancun, as it was in Copenhagen, is that binding agreements requiring severe emissions reductions by and large transfer payments from the developed countries might have looked attainable when the economy was booming, but they have become much less feasible in the wake of the worst recession and financial crisis since the Great Depression.
That same fundamental challenge makes the innovation arguments raised by Ted Nordhaus and Michael Shellengerger of the Breakthrough Institute more urgent than they would be otherwise. Because today's renewable energy technologies remain more expensive without subsidies than coal, oil and natural gas--even when the consumption subsidies the latter receive are stripped away--the cost of replacing our existing, high-emitting energy sources with entirely green ones looks unaffordable in today's world. I would add that reliance on experience curve effects--building out a subsidized green energy economy and depending on volume to drive down its cost to the point of competitiveness--is unlikely close that gap, and where it can, there is no guarantee that the country providing the incentives will receive the benefits it is entitled to expect. To cite the most obvious current example, Germany has invested tens of billions of Euros subsidizing solar energy and has indeed created a globally competitive solar industry--mainly in developing Asia.
What makes Nordhaus and Shellenberger's suggestion seem much more practical than global climate treaties and mountains of green subsidies is that the money currently being spent on renewable energy deployment incentives, which constitute a small fraction of the total annual investment in energy infrastructure, would go much farther buying R&D, rather than hardware. The US investment tax credit paid to a single 100 MW wind farm could fund an entire university energy innovation laboratory and graduate degree program.
Of course none of these strategies should be regarded as entirely either/or propositions. Adaptation doesn't let us off the hook for trying to address the causes of climate change, nor does shifting more of government's limited resources into clean energy R&D mean we don't need any of the real-world learnings that only come from deploying technology and seeing how it works under uncontrolled conditions. There's also a parallel role for research into geoengineering to provide a backstop--a potential Hail Mary pass--should all of these other efforts fall short and climate change move beyond a range we can live with. If nothing else, the COP 16 meeting in Cancun might shed more light on the degree to which the UN body is the right umbrella to cover all this work.
Tomorrow at 1:00 PM EST I'll be presenting in a webinar entitled, "Natural Gas: Sustainability Friend or Foe". To sign up follow this link.
Friday, April 23, 2010
Eating the Seed Corn
Some days it's hard to find a salient topic on which to blog. Today I'm spoiled for choice but wish I weren't, at least in the case of one of the three I considered. The full implications of the Deepwater Horizon disaster won't be known until rescue efforts end, the well is brought under control, and the resulting oil spill contained. That doesn't prevent speculation and knee-jerk responses, but I'll reserve my analysis until the facts are clearer. Meanwhile, the EU has been forced to release yet another study finding that many biofuels could be worse for the environment than the petroleum products they are intended to replace. I'll say more about the issues that raises, soon. For today, I want to focus on the challenge that Bill Gates highlighted in an op-ed published in today's Washington Post, concerning the need for significantly more energy R&D spending by the US government.
Since recently turning his attention to energy, Bill Gates has made some astute observations about it, while falling into few of the traps that await those attempting to transfer their high-tech experience to this much larger, more basic industry. Past remarks suggest he grasps the scale of the problem. His recommendation for more innovation and explanation for why energy R&D has been underfunded by the public and private sectors are apt, though I'm less sure that the R&D investment rates of firms whose business is selling technology provide quite the right basis of comparison for an industry that produces vast quantities of interchangeable commodities. Nevertheless, he's right that discovering and developing revolutionary energy technologies is beyond the scope of most companies that operate on a scale to be able to afford the sums required. Most R&D by major oil & gas or power generation companies is devoted to improving what they're already doing, for good reasons. Things that don't deliver prompt results inflate costs without providing immediately-offsetting benefits, making companies pursuing such efforts less competitive in the market and often less attractive to investors.
Government doesn't have these constraints, and historically it has been a relatively uncontroversial role of government, even in the US, to devote significant resources to long-term projects. (The old Bell Labs looks like an exception, until you consider that most of its truly ground-breaking work in basic science was undertaken when its corporate parent functioned as a tightly-regulated monopoly--effectively an extension of government.) Mr. Gates suggests that spending less than $3 billion per year on clean energy research is inadequate, and I must agree. However, Gates stops short of explaining that the federal government already spends much more than that on clean energy, but that most of it is focused on the deployment of current technologies. As of its most recent update, the US Treasury had issued more than $3 billion in Renewable Energy Grants to wind, solar, biomass and geothermal project developers under the stimulus, and this is just a fraction of what the government is now spending on direct and indirect subsidies, tax incentives, loans and loan guarantees to support the deployment of corn ethanol and advanced biofuels; wind turbines, solar panels and the factories to make them; factories to build electric vehicles and the advanced batteries to power them; as well as new nuclear power plants, to name a few.
The innovation imperative articulated by Bill Gates thus stands in tension with a range of policies focused on overcoming the market barriers that current alternative energy technologies face. For some of these technologies, the case for providing temporary subsidies to enable them to become sufficiently established to benefit from economies of scale and experience-curve effects is solid. The same can be said for assisting a new generation of nuclear power plants that are so expensive that no company can risk its entire future to build the first one. This logic is much less compelling for conventional biofuels that are still not competitive without subsidies that are now in their fourth decade, or federal loans to finance EV factories for companies that have made just a handful of hand-built cars in their entire existence.
Without a major new funding source dedicated to long-term federal energy R&D, and in an era of increasingly-unsustainable budget deficits, the choice between energy R&D and the deployment of existing energy technologies becomes a zero-sum game. Eating the seed corn in this manner is indefensible, particularly when we realize that deploying today's technologies is very unlikely to yield a technology breakthrough of the kind that real energy transformation will ultimately require. While hardly simple or easy, the remedy is relatively obvious. If we agree that we need more federal research on new energy technologies that could supplant conventional energy sources on the basis of superior performance, and not just lower emissions, then we must wean current alternative energy technologies off massive subsidies as quickly as possible--in a few years at most, except for those that have been feeding at the federal trough for decades. Those should begin to be phased out at once. And if we agree that climate change is a serious risk that we must address urgently, then putting a price on the emissions contributing to it would ensure that the companies making and installing today's wind turbines, solar panels, and other technologies would have a decent chance of surviving the elimination of the direct subsidies upon which they depend, but that will eventually squeeze out R&D spending.
Since recently turning his attention to energy, Bill Gates has made some astute observations about it, while falling into few of the traps that await those attempting to transfer their high-tech experience to this much larger, more basic industry. Past remarks suggest he grasps the scale of the problem. His recommendation for more innovation and explanation for why energy R&D has been underfunded by the public and private sectors are apt, though I'm less sure that the R&D investment rates of firms whose business is selling technology provide quite the right basis of comparison for an industry that produces vast quantities of interchangeable commodities. Nevertheless, he's right that discovering and developing revolutionary energy technologies is beyond the scope of most companies that operate on a scale to be able to afford the sums required. Most R&D by major oil & gas or power generation companies is devoted to improving what they're already doing, for good reasons. Things that don't deliver prompt results inflate costs without providing immediately-offsetting benefits, making companies pursuing such efforts less competitive in the market and often less attractive to investors.
Government doesn't have these constraints, and historically it has been a relatively uncontroversial role of government, even in the US, to devote significant resources to long-term projects. (The old Bell Labs looks like an exception, until you consider that most of its truly ground-breaking work in basic science was undertaken when its corporate parent functioned as a tightly-regulated monopoly--effectively an extension of government.) Mr. Gates suggests that spending less than $3 billion per year on clean energy research is inadequate, and I must agree. However, Gates stops short of explaining that the federal government already spends much more than that on clean energy, but that most of it is focused on the deployment of current technologies. As of its most recent update, the US Treasury had issued more than $3 billion in Renewable Energy Grants to wind, solar, biomass and geothermal project developers under the stimulus, and this is just a fraction of what the government is now spending on direct and indirect subsidies, tax incentives, loans and loan guarantees to support the deployment of corn ethanol and advanced biofuels; wind turbines, solar panels and the factories to make them; factories to build electric vehicles and the advanced batteries to power them; as well as new nuclear power plants, to name a few.
The innovation imperative articulated by Bill Gates thus stands in tension with a range of policies focused on overcoming the market barriers that current alternative energy technologies face. For some of these technologies, the case for providing temporary subsidies to enable them to become sufficiently established to benefit from economies of scale and experience-curve effects is solid. The same can be said for assisting a new generation of nuclear power plants that are so expensive that no company can risk its entire future to build the first one. This logic is much less compelling for conventional biofuels that are still not competitive without subsidies that are now in their fourth decade, or federal loans to finance EV factories for companies that have made just a handful of hand-built cars in their entire existence.
Without a major new funding source dedicated to long-term federal energy R&D, and in an era of increasingly-unsustainable budget deficits, the choice between energy R&D and the deployment of existing energy technologies becomes a zero-sum game. Eating the seed corn in this manner is indefensible, particularly when we realize that deploying today's technologies is very unlikely to yield a technology breakthrough of the kind that real energy transformation will ultimately require. While hardly simple or easy, the remedy is relatively obvious. If we agree that we need more federal research on new energy technologies that could supplant conventional energy sources on the basis of superior performance, and not just lower emissions, then we must wean current alternative energy technologies off massive subsidies as quickly as possible--in a few years at most, except for those that have been feeding at the federal trough for decades. Those should begin to be phased out at once. And if we agree that climate change is a serious risk that we must address urgently, then putting a price on the emissions contributing to it would ensure that the companies making and installing today's wind turbines, solar panels, and other technologies would have a decent chance of surviving the elimination of the direct subsidies upon which they depend, but that will eventually squeeze out R&D spending.
Subscribe to:
Posts (Atom)