ECO314 NOTES

LEC 1

 SCALEABILITY

- PAST  DVP new oil sources = costly investment ( $billions); lead times measured in yrs
and project lifetimes last a decade or long
- Barriers to entry into production high due to OPEC threat to lower prices for a time to
dissuade entry and reinforce market power
VS
- Shale oil  feasible: low cost of drilling (around $2M); lead times measured in months;
project lifetimes short as output from shale wells decline after the 1st yr; scalable
delivery through rail network
- Additional supply can be brought on in tiny increments; additional prod can be brought
to market by increasing fleet of tanker cars + avoid costs and delays associated w
expanding pipeline capacity

Shale oil is a game changer; highly scalable: low K investment (can be dug individually from
wells for between 5M/well to 2M/well); breakeven price (<$50/BBL + rising productivity);
efficient transportation through railroad but less safe compared to pipeline transport (i.e Lac
Megantic)

OPEC market P threatened by ability of additional shale supply to come quickly whenever $ ↑

- Game changer in renewables – solar generation highly scalable (solar powered

calculators & parking meters); storage (i.e lithium-ion batteries) very scalable and
movable

 OIL PRICES
Saudi Arabia’s strategy used to be lower output to maintain $ levels, now focus = market share
Possible motives:
- Better to sell more at lower $
- Drive out high cost producers + discourage investment in new ventures such as deep-
sea exploration, oil sands and high-cost shale produces
- Put pressure on Iran, historic adversary

 FRACKING ENVIRONMENTAL CONCERNS:

- Vast Qs of water used
- Water used to fracture shale gas well can contain chemicals and additives so should not
be allowed to enter watershed; contamination risk (usually disposed of by injecting it
deep below earth’s surface into rock formations)
 - Earthquake/tremors?

 ENERGY POLICY TRIANGLE (Fracking + interplay b essential energy policy elements)

- Security  shale oil + gas can make America energy independent
- Economics  shale resources create jobs, generate exports = beneficial to economy
- Environment continued exploitation of oil, gas (+coal) will continue to ↑global
warming. Water usage + contamination issue; fugitive methane; tremors

Confrontation b Russia/Poutine = illustration of interplay b essential energy policy decision

elements:
- Security – dependence E.U on Russian nat. gas limits E.U’s ability to exert leverage on
Russia
- Economics – the West relying economic sanctions to affect Russian behavior. (in process
some E.U countries will experience adverse eco impact)
- Environment – E.U energy has been very proactive in promoting environmentally
friendly technologies. But this has weakened European economic recovery; trump
proposes to reduce support of NATO unless certain countries increase their
contributions (will environmental objectives be sacrificed in the face of. New threat
from Russia?)

 ENERGY AND ENVIRONMENT INTERDISCIPLINARY

Study of energy interdisciplinary, many disciplines inform our understand of energy:
- Sciences: science of energy production + its environmental impacts, most importantly
climate change; vast potential for non-carbon energy sources; need for breakthrough
tech
- Humanities: Historical evolution of energy use, + how it has affected technological,
institutional and civilization change; the role that energy and related technologies have
played in a succession of human epochs
- Social sciences: economics and politics of energy, our current dependence of
hydrocarbons (provide > 80% of energy we use) + role that economic principles can play
in resolving the often-conflicting objectives of economic growth and environmental
protection; the interplay of economics, politics and energy security

 SOURCES OF ENERGY
- Hydrocarbons: coal, oil, natural gas
- Renewables: hydro, wind, solar, geothermal (not solar) , biomass
- Nuclear

*Not solar energy: tidal, geothermal, nuclear

 SOURCES OF ENERGY – CANADA

- Hydrocarbons 83%
- Renewables 11%
- Nuclear 6%
Worldwide – about 80% of energy comes from hydrocarbons

 WHAT ARE HYDROCARBONS?

- Molecules consisting of hydrogen and carbon: Cx Hy
- Natural gas; methane: CH4
 HYCROCARBON FORMS
- Gas:
Methane
o dry gas
o wet gas
- Liquid:
o Conventional oil – pumped from large underground pools/reservoirs
o Tar sands – thick liquids (bitumen) lodged in sand and clay
- Solid:
o Coal – hard coal is mostly pure carbon (dead plants  peat lignite 
bituminous coal  anthracite)

 CARBON ECONOMY
Combustion of hydrocarbons produces energy; for e.g., burning natural gas (methane)

CH4 + 2CO2  CO2 + 2 H2O + energy produces water; energy and carbon dioxide  global
warming

Burning hydrogen: 2H2 + O2  2 H2O + energy produces water and energy

 ENERGY AND LIFE

Living organisms rely on an external source of energy – ration from sun in case of green
plants; chemical energy in some form in case of animals – to be able to grow and reproduce

 What is in a BARREL OF OIL?

Mixture of various hydrocarbon molecules; many types of molecules are separated through
distillation; others require further processing/refinement

*chemicals in a barrel of oil are separated using fractional distillation

 What is GASOLINE?
 Mixture of hydrocarbons usually containing between 4 and 12 carbon atoms; i.e octane
C8H8 (octane for 8 carbon atoms)

*also blending agents and other additives

 PEAK OIL
Some have argued that we are running out of cheap sources of oil; will we run out of oil?
“The stone age did not end because we ran out of stones”
Hydrocarbon age will not ed because we run out of oil

 GLOBAL WARMING
Composition of atmosphere:
- Nitrogen 78%
- Oxygen 21%
- Argon 0.9%
- Carbon Dioxide 0.04%
↑ concentration of CO2 traps heat; effects on oceans, polar icecaps, weather, climate are
difficult to predict
*the industrial revolution has caused a dramatic rise in CO2
*atmospheric oscillation due to season, there’s much more land mass in northern hemisphere
than southern hemisphere so when we have summer in the northern hemisphere and trees
grow, it traps carbon dioxide and general co2 levels are reduced; but overall, atmospheric CO2
trend is upwards

 FRACKING AND ELECTRICITY GENERATION

The fracking phenomenon – cheap gas; for 1st time since US energy information administration
has been keeping tack, coal  no longer dominant fuel used to generate electricity in US

 PRIMARY ENERGY VS SECONDARY ENERGY

Primary energy  source of energy that hasn’t been through conversion or transformation
process:
- Oil, nat gas, coal
- Nuclear
- Hydraulic
- Wind
- Solar
Secondary energy involves conversion
- Electricity
- Fuels
o Gasoline
o Kerosene
o Heating oil

*three gorges dam?

 LAWS OF THERMODYNAMICS
First law of thermodynamics: conservation of energy
o Energy can be changed from one form to another but can’t be created or
destroyed
Second law of thermodynamics: law of entropy
 o When energy is converted from one form to another within a system, the
potential energy of the system is reduced

 FOUR FORCES OF PHYSICS

- Strong nuclear – holds nuclei together
- Weak nuclear – radioactive decay
- Electromagnetic
o Carried by photons
o Spectrum – radio, microwave, infrared, visible light, ultraviolet, X-rays, gamma-
rays
o Responsible for chemical reactions
- Gravity

 FORMS OF ENERGY
- Mechanical (associated w motion; wind, falling water)
- Chemical (energy released when chemical bonds are broken/created/rearranged; wood
and biomass, oil, natural gas, coal)
- Thermal (heat, vibration of molecules; geothermal)
- Radiant (light and other electromagnetic radiation, solar)
- Nuclear (arises from strong nuclear force; fission, fusion)
- Electric (movement of electrons)

 ENERGY EFFICIENCY
Conversion of energy results in losses
- Second law of thermodynamics
- How much is actually used vs how much escapes (i.e as heat)
- Primary energy  secondary energy  work

 HUMAN HISTORY FROM ENERGY PERSPECTIVE

- Age of biomass
Wood is made of predominantly cellulose, hemicellulose and lignin. All three are composed of
carbon, hydrogen and oxygen in various combinations
The need to collect wood as principal source of energy limited the size of cities – cities needed
to be near forests that were as much as 100x their size
- Beasts of burden
Complementary technologies (wheel, plough)
- Water wheels
Initially used for grinding grain, efficiency (human grind 3kg/hr; horse grind 10kg/hr; water
wheel 100kg/hr)
- Bronze age
o Bronze – 88% copper 12% tin
o Coal used in small quantities
o Brass – copper and zinc in varying proportions as much as 40% zinc
 - Iron age
Stronger weapons, melting point of iron 1500C
- Wind energy
Sail-ships, invention of lateen sail allowed tacking, windmills
- Industrial revolution
Coal, coke
External combustion (steam) engine
o Newcomen engine 1712
o Watt engine – more efficient, can covert “up and down” motion into rotary
motion
o Steam locomotives  rapid dvpmt of rail transport
o Steamships  more efficient sea transport
o Mass production lines
19 century  internal combustion engine of all kinds
th

20th century  turbines

Oil; natural gas; electricity

 UNITS OF MEASUREMENT
1. Energy content
MTBU – thousand british thermal units
Joules
Calories
Watt-hours (MWh mega watt-hours)

2. Volume
Barrels – bbl (oil)  mmdb millions of barrels per day; mmbdoe millions of barrels per day of oil
equivalent
Cubic feet (gas)  mcf thousand cubic feet; mmcf; bcf; bcfd

3. Weight
Tones; MTOE million tonnes of oil equivalent

4. Electricity
Energy  GWh; TWh; PWh
Peak  MW; GW

5. Global warming
Carbon dioxide emissions v carbon emissions
1 ton of CO2 contains about 545 of C that is 27% of carbon dioxide is carbon
Atomic weight of C = 12 and atomic weight of O = 16; CO2 = 44 weight; 12/44= 0.273

 Coal adds about 2x as much CO2 as nat gas; oil products add abt 1.5x as much CO2 as
nat gas
  If we replace all electricity generating stations and other facilities that use coal, with
natural gas we will cut their carbon footprint in half
 Some argue that natural gas is the “bridge fuel” that will take us from the carbon era, to
the next era
6. Rules of thumb
World consumption about 90million (allegedly 100 mil now) barrels per day; 30 billion barrels
of oil per year
World consumption of natural gas is about 300 billion cubic feet per day or about 100 trillion
cubic feet for year

LEC 2: major milestones in Energy History

The pursuit, collection and conversion of energy determines the potential and limits of
organisms, population of organisms, communities and ecosystems.
History seen as a process by which humans increase their mastery of energy, enabling more
complex societies, higher levels of production and consumption, scientific progress and culture

 ENERGY EPOCHS
1. Prehistory – energy use limited by the ability to produce it by human muscle
2. Mastery/control of fire – i.e. ability to start/sustain fire at will using biomass
3. Domestication of beasts of burden
4. Early mechanical prime movers – sails and windmills, waterwheels
5. Invention of engines – external combustion, internal combustion engines. Biomass
energy replaced by carbon/hydrocarbon fuels
6. The age of electricity – produced by various sources such coal, natural gas, hydraulic
energy, nuclear, and most recently solar and wind

 THREE GREAT REVOLUTIONS

- Promethean revolution
- Agricultural revolution
- Industrial revolution

 PRIME MOVERS
Prime movers – animals, devices and machines that convert naturally available energy into
mechanical energy
i.e. horses, oxen, mules; waterwheels; windmills; combustion engines

 PRE-HISTORY – FORAGING AND HUNTING

- Foraging (=search) for plants an early important source of food energy for early humans
- Hunting brought strong net energy returns, particularly if done collectively (this survives
to this day: Innuit populations that hunt for whales, seals, reindeer)
- Use of fire for cooking and heating dates back to about 250 000 BC
 - About 20-25% of energy in food can be converted to mechanical (muscle) energy;
additional food energy is converted to heat which sustains body temperature
 PROMETHEUS
- Brought fire to man, for which he was punished forever by the “gods” (each day an
eagle would eat his liver, which would grow back only to be eaten again the next day)
- Symbol of human striving of knowledge, particularly scientific knowledge

 MASTERY OF FIRE
Changed everything:
- Where humans could live – they could migrate to temperate latitudes
- The foods they ate – they could cook
- Their ability to defend and protect themselves – eventually by manufacture of metal
weapons

 PREHISTORY – FORAGING AND HUNTING

- Pottery:
o Allowed storage for food
o First Thought that it arrived during age of agriculture
o Seems to suggest a sedentary lifestyle bc pottery is fragile and therefore cannot
be moved around easily
o Earliest known pottery during Jōmon period in Japan beginning about 14 000 BC
(Jōmon means ‘cord-marked’)

 AGRICULTURAL REVOLUTION
Agriculture required significant expenditures of energy (clearing land; planting, cultivating;
harvesting)
- Maximum supportable population density (foraging societies could support less than 1
person/sq km; shifting agricultural societies could support 20-30 ppl/ sq km)
- The availability of energy from cultivated crops determined the size of communities and
permitted the emergence of cities
- The appearance of early densely populated and organized societies in river valleys
(tigris-euphrates  babylon, nile  egypte, indus and ganges harappan civilization,
yellow river  chinese dynasties)
- Rivers provided: water for consumption and hygiene; water for irrigation and efficient
agriculture; an energy efficient means of transportation (even total transport by water is
cheaper than land (rail/truck) or air

*Nile (longest river in world)

Annual flooding cycle provided natural irrigation in midst of an arid north Africa
Egyptian surveying and math have their roots in the flooding cycle
Remarkable from a navigational perspective

 PERMANENT SHELTERS
Bricks begin to be used in Mesopotamia around 3500 BC
Gradual shift to agriculture and an increasingly sedentary lifestyle
Higher firing temperatures
 THE WHEEL
- 1st appears in Mesopotamia, north caucasus and central Europe
- Wheel improves efficiency of land transportation – main force to be overcome is friction
and perhaps changes in elevation
- Earliest wheels were disks, later replace by spoked wheels which were lighter and
required less material

 WIND ENERGY
- Square sails in Egypt around 3000BCE
- Sailing to windward in chine during Han dynasty
- Fore and aft rigging in Mediterranean around 200BCE
- Triangular/lateen sail appears around 200BCE  Indian ocean/Mediterranean
- Windmills in Middle East/Iran around 600CE

- Bernoulli principle  an ↑ in speed of fluid occurs simultaneously with a decrease in

pressure
- Applications:
o Sailing against the wind – the sail is pulled forward (as opposed to just being
pushed from behind)
o The shape of the wind causes air to flow faster across the upper surface,
reducing pressure there
o Optimal wind turbine design

 CHINESE INVENTIONS / DEVELOPMENTS

- Rice cultivation
- Triangular ploughs
- Rowing oars
- Stern mounted rudder
- Early use of coal, oil or even natural gas
- Percussion drilling
- Gunpowder
- Coke as fuel
- Compass

 Major Chinese dynasties; Major early Islamic period (i.e. Umayyad dynasty)

 MEDIEVAL ADVANCES
Collar harness – better use of powerful shoulder and breast muscled of beasts of burden
Iron horseshoes – improved traction, protected hooves (required smelting, forging, smithing
iron)
Watermills (common in England)
Windmills – used to move water, milling of grain
  FROM BELLOWS TO CHIMNEYS
- Air-flow (i.e. increased oxygenation) accelerates combustion and ↑temperatures
- Bellows used to ↑air flow
- Vents and chimneys rely on natural convection flow
- How the chimney revolutionized dwelling design and industrial processes

 AGE OF “DISCOVERY”
Ocean route from E.U to India, china, Indonesia – spurred by desire to avoid overland travel via
silk road; search for shorter route led to discovery of Americas
 made possible by advances in sailing (airfoil, fore and aft rigging, stern mounted rudder) and
navigation (compass…)

Due to rise of ottoman empire + conflict w E.U powers, travel and trade along silk road is risky
and costly option for e.u traders

Columbus found Americas + west indies; Magellan found westward route to India; De Gama
found eastward route to India

Routes shortened later w Suez Canal and Panama Canal

- ↑exchange of goods
- ↑exchange of ideas
- ↑tech innovation

 DUTCH GOLDEN AGE

Rise of peat
Dutch golden age propelled by cheap energy:
- Windmills
- Wide availability of peat (precursor to coal)
- Early industrial revolution

- Dutch has vast trading fleet called VOC

Fall of peat
Extensive exploitation eventually led to serious environmental pb as low lying land sank further
and arable land declined
Eventually peat replaced by coal which has much higher energy density… unfortunately Dutch
did not have their own coal

 SUN NEVER SETS ON BRITISH EMPIRE

Rise of coal
Coal  good supply in England; eventually need to dig deeper to extract
Pb water seeps in, pump driven by muscle power inefficient/insufficient;
  Invention of external combustion engine
Productivity growth rapid, British economy, military, rapid overseas expansion to secure
resources for production and markets for sale of manufactured goods

 EXTERNAL COMBUSTION engine can be applied to other settings

o Factories – mass production lines
o Steam locomotives  rapid dvp of rail transport  coal shipmt easier
o Steamships
 External combustion engines that use coal are cumbersome
o Difficult to control temp
o Inefficient (use abt 3% of combustible fuel)
o Solid fuel
o Ash must be disposed

 INTERNAL COMBUSTION ENGINE

- Uses liquid fuel, high energy density
- More compact
- More efficient
- Nothing to dispose of (exhaust goes into air)

 RISE OF OIL
- Oil based substances have been used for millenia (petroleum – rock oil)
- Bitumen was used in mummification process in Egypt
- Petroleum based substance used for medicinal purposes in ancient Persia
- Petroleum used in ancient Sumer as adhesive/cement
- In indus valley civilization as a sealant

. Absheron peninsula in Baku has been source of oil for centuries; 90% of world oil production
used to be from Azerbaijani
. Presence of a lot of oil in Pennsylvania, produces half of world’s oil until 1901 finds in Texas:
. Oil drilling on “Spindletop Hill”; became largest gush ever at an initial rate of 100 000 bbl/day
more than all other wells in U.S combined

Spindletop  symbolic importance, ppl began to realize potential of oil; launches Texas oil
industry; birthplace of oil giants (gulf oil, Amoco, humble oil company)

Standard oil by Rockefeller family, antitrust act breaks it into 34 companies

 TRANSITION TO MODERNITY
Earlier prime movers (human and animal power, waterwheel, windmills, sails) replaced by
engines (external combustion engines w solid fuel [biomass, coal] internal combustion engines
w liquid fuel [gasoline, diesel] turbines w liquid fuels + gas fuels [methane]
  TEMPERATURE RISING
- Many technical advances through history associated w ability to sustain ever high temps
(progression from bronze age to iron age linked to fact that iron requires higher
temperatures than copper)
- Superior tools (i.e in agriculture) led to greater productivity and superior weaponry
which facilitated capture of territory + resources
- Dvpmt of ovens, kilns and forges played critical role in human ability to raise temp in
controlled way
-
*iron age could’ve have preceded bronze age bc iron has higher melting point than copper + tin
(components of bronze)

 PYROLYSIS
 removes impurities and organic material + concentrates carbon-based fuel by heating to
high temp w/o combustion
 Production of charcoal from wood, coke from coal, petroleum products from shale oil

 TEMPERATURE CONTROL
- In an internal combustion engine water is constantly circulated and excess heat radiated
out (through car radiator, invented for cars by Benz)
- Engine temp remains more less constant bc compressed liquid/steam pressure
regulated through pressure control valves
- Properties of coolant permit control of temp of engine

 FROM TEMP RISING TO TEMP CONTROL

- “stone boiling” allows control of temp by putting liquid in animal skin
- March 2011 – massive earthquake off coast of japan; causes tsunami and devastation in
coastal areas; including destruction of nuclear generating stations at Fukushima

Why was there meltdown at Fukushima?

- These are boiling water reactors that require constant circulation of water to remove
heat generated by nuclear fission
- LOCA – Loss of coolant accident, much like a car overheating when it loses its coolant, or
a ‘boiling stone’ burning through an animal skin

 DISTILLATION
- Known to Greeks in Alexandria around 1st century
- Improved during Islamic golden age – distillation of kerosene (now used as jet fuel)
- used widely today. Fractional distillation = primary method for separating various fuels +
chemicals in barrels of oil (petrochemical  chemical obtained from oil and nat gas)

LEC 3: economic tools

  ECONOMIC THEORY – TOOLS
- Demand and supply
- Consumer theory
- Producer theory
- Competition, oligopoly, monopoly
- Externalities
- Public goods
- Taxes
- Resource economics
- Regulation and competition policy
- International trade

LEC 4: global warming and other externalities

 ENVIRONMENTAL ISSUES
- Climate change
- Nuclear accident risks and waste disposal
- Off-shore drilling and oil tanker risks
- Fracking technologies and water supplies
- Air pollution

*Carbon dioxide drastically increased since 1950s

*Temp increased since 19s

 TURNING POINTS
- Fact that both CO2 + temp are rising at the same time may be a coincidence
- The fact that they both “turned” at about same time is less likely to be a coincidence
- Historically, turning points are fairly synchronized

 CORRELATION V. CAUSALITY
- Is ↑CO2 causing temp to ↑ or is it other way around?
- Both variables are correlated but which one is causing the other?

 TEMP AND CARBON DIOXIDE

. Direct measurement of temp only since 19th century; direct measuring of CO2 in 20th century
. Reconstruction of historic temp and CO2 concentrations has required big ideas,
interdisciplinary science
. reconstruction from: ice-cores; tree rings; boreholes
. corroborating evidence on sea-levels, snow/ice cover, habitat ranges, historical documents
  EXPANDING THE ARGUMENT – how?
- Experiment – conduct experiments on processes and subsystems
- Modeling and prediction – use computers to model event more complete/realistic
representations of the various sub-systems and their interactions
- Correlation v. causality – dvp improved historical data and analyze them using statistical
techniques

 GLOBAL WARMING
Nordhaus’ rule of thumb
Doubling CO2 from preindustrial lvl (280ppm) to 560ppm gives a temp ↑ of abt 3C above pre-
industrial lvl

Slide 14 on Intergovernmental panel on climate change (IPCC)

 STABILIZATION WEDGES (approaches on

stabilizing carbon emissions)
1. 2.
3.

 WHAT IS A “WEDGE”
 strategy to reduce carbon emissions that growths in 50yrs from zero to 1.0GtC/yr. The
strategy has already been commercialized at scale somewhere. Cumulatively, a wedge redirects
flow of 25 GtC in its 1st 50 yrs (= $2.5 trillion at $100/tc)

 15 WEDGE STRATEGIES IN 4 CATEGORIES

- Energy efficiency & conservation
- Nuclear power
- Fossil fuel-based strategies
- Renewables & biostorage

 EFFICIENCY
 produce today’s electric capacity w double
today’s efficiency (av coal plant efficiency =
32%)
 double fuel efficiency of world’s cars or
halve miles traveled (abt 600M cars today, w 2B
projected for 2055)
 use best efficiency practices in all residential
+ commercial buildings (replace world’s
incandescent bulbs w CFLs would provide ¼ of
one wedge)

*sectors affected: electricity, transport, heat $

 FUEL SWITCHING
Substitute 1400 nat gas electric plants for an equal nb of coal-fired facilities
A wedge requires an amount of nat gas equal to that used for all purposes today
*sectors affected: electricity, heat $

 CARBON CAPTURE & STORAGE

Implement CCS at:
- 800GW coal electric plants or
- 1600GW nat gas electric plant or
- 180 coal synfuels or
- 10x today’s capacity of hydrogen plants

Hydrocarbon industry hasn’t invests in storage; currently  3 storage projects that each inject
$1M tons of CO2/yr

*sectors affected: Electricity, Transport, Heat $$

 NUCLEAR ELECTRICITY
Triple world’s nuclear electricity capacity by 2060; the rate of installation required for a wedge
from electricity equal to global rate of nuclear expansions from 1975-1990
*electricity $$

 WIND ELECTRICTY
Install 1M 2MW windmills to replace coal-based electricity or use 2M windmills to produce
hydrogen fuel
A wedge worth of wind electricity will require increasing current capacity by factor of 10

*E, T, H $$

 SOLAR ELECTRICITY
Install 20 000 sq km for dedicated use by 2060
A wedge of solar electricity would mean ↑ current capacity 100x

*E $$$

 BIOFUELS
Scale up current global ethanol prod by 12x
 you need land to grow these in large volumes —> which is why he’s pessimistic abt this
price of food will increase if more and more of the land is used to grow crops for biofuels

Using current practices, one wedge requires planting an area the size of India w biofuels crops

T, H $$

 NATURAL SINKS
Eliminate tropical deforestation or plant new forests over area the size of continental US or use
conservation tillage on all cropland (1600 Mha)

Conservation tillage is currently practiced on less than 10% of global cropland

*B $

 KEY TAKEAWAY
- In order to avoid doubling of atmospheric CO2, we need to rapidly deploy low-carbon
energy technologies and/or enhance natural sinks
- We already have an adequate portfolio of technologies to make large cuts in emissions,
but they’re not cheap enough yet.
- Dvpmt of storage technologies is essential
- No one technology can do whole job – a variety of strategies will need to be used to stay
on a path that avoids a CO2 doubling
- Every “wedge” has associated impacts and costs

REGULATION AND GVT INTERVENTION ( POLITICAL ECONOMY,

SUBSIDIARITY AND SEPERATION)
What is the right size and role of gvt?
- In les miserables, V. Hugo anticipates one of the most dramatic themes of the 20 th
century: how do we draw the line b individual responsibility and responsibilities that
belong to state and its institutions ?

Late 19th century

 The industrial rev gave rise to capitalism (accumulation of financial and physical capital)
which was required for ever greater productivity
 But w capitalism came profound changes in social conditions: workers has moved from
farm to work in city factories, many lived in utter poverty and destitution
 Dickens had earlier written of the misery and destitution of workers and their families
 Marx saw fundamental pbs w system of capitalism
o He believed that K should be communally owned
o He wrote a game-changing book dedicated to the subject: Das Kapital

Early 20th century

 As the industrial rev continued into the 20th century, western Europe, north America
experienced rapid eco growth and democratization, but some empires persisted
(Russian empire, Austro-Hungarian empire, ottoman empire, British empire)… some
would not survive the coming world war
  Many intellectuals saw a bigger role for gvt as solution to excesses of capitalism; at
extreme centralized (gvt) ownership of the means of production was seen as the
solution to the inequities of capitalism. Some believed it would also lead to a more
efficient economy
 The Russian rev in 1917 replaced Tsarist regime w communism. In 1949, after decades
of conflict, Mao’s forces would be victorious and communism would prevail in china

The fundamental ideological battle of the 20th century

- Should we rely on Klsim and markets as the fundamental organizing principal of
economic activity OR should we rely on gvt to direct how much to produce, who
produces it and who receives it?
- Markets vs central planning? Capitalism vs communism? Small or big gvt?

World Wars
 20th century saw 3 world wars: 1st collapse of aged empires; 2nd rise and fall of fascism;
3rd cold war

Origins of Regulation in Western Market-Based Democracies

Origins of regulation – failures of the “market”
 Early 20th century monopoly abuses (i.e. Rockefeller and Standard Oil Trust; many
descendant S.O companies  Esso)

Market Failure
The great depression
 Failure of “markets” to provide employment during the 1930s
 Central planning advocated by many as a better approach

Increasing Regulation…
From 1930s on, steady increase in regulation, gvt ownership and “nationalization”, and
expansion of the role of gvt

Gvt failure
The great stagflation
- The 1970’s is a period of stagflation (high inflation and high unemployment  related to
1973 price shocks)  viewed as gvt failure
- People begin to ask whether gvt is too large, and whether pendulum has swung too far
left
- Alfred Kahn  prof at cornell brought in to deregulate airlines

Deregulation, Libertization, Privatization

 Since 1980s: turn towards liberalization, deregulation + privatization
 Election of western gvts which seek the reverse the tide  thatcher, Reagan, Mulroney
  “competition where possible, regulation where necessary: UK, US, AUS
 Rejection of central planning; collapse of soviet union; expanding belief in economic and
political benefits of free markets and pv ownership; eco liberalization + privatization in
china, Vietnam, eastern europe, south america

Failures of “deregulation”
 Enron failure
 Collapse of Cali electricity markets in 2001
 Financial markets meltdown in 2008
 Is rising inequality a consequence of deregulation, or other factors

Reregulation
 Recognition that “reregulation” may be necessary in certain sectors  financial
markets; energy markets

Two guiding principals

 Separation
o Western democraties rely on certain critical “separations” to try to ensure that
power does not become overly concentrated
 Separation of powers
 Separation of religious institutions from state
 Separation of gvt from economy
 Separation of gvt from media
 Subsidiarity
o Decisions should be taken, and tasks should be performed at lowest level at
which they can be competently be decided and completed
o The gvt should undertake responsibilities only if individuals or groups of
individuals cannot fulfill them competently on their own

 Principle of subsidiarity
Arguments favouring decentralization:
o Individuals should take responsibility for themselves, else eventually they lord
the ability to do so
o Centralization concentrates power, which, w/o proper checks and balances, can
be abused
o Unnecessary centralization can lead to inefficient resource allocation
o Provides a rationale for markets (as opposed to central planning)
o Helpful in establishing regulatory boundaries
o Used for delineating boundaries b local, provincial and federal gvt
responsibilities (why is defense a federal responsibility while garbage collection
is at municipal level)
 o Cornerstone of Maastricht treaty which establishes the European union – limits
infringement of national sovereignty

In energy
 Recall “competition where possible, regulation where necessary”
 Informs the discussion of how to deal w climate change. What is the best tool (carbon
tax? Command and control? Gvt subsidies? FIT?...)

Carbon taxes or Feed-in Tariffs (an application of subsidiarity)

 Carbon tax
o A tax that is proportionate to the amount of carbon that is being injected into
the atmosphere when a particular fuel is being burned; for i.e. on gasoline, jet
fuel, coal burned in electricity generation stations…
o By applying a sufficiently high tax, users are discouraged from burning as much
carbon-based fuel and encourage to switch to other sources of energy
 Cap-and-trade is another mechanism for putting a price on carbon; similar arguments
apply
 FITS
o Regulator or gvt decides to promote certain types of renewable energy by
requiring that they be paid high prices
o For i.e. solar photo-voltaic (PV) or wind
o “Feed-in” bc producer feeds the electricity that is produced into the grid
o Comparison of prices paid for electricity
 Conventional coal, nat gas, hydro, nuclear – 4c to10 c /kwH
 Wind 10c to 20 c /kwH
 Solar 35 to 80c/kwh
 Under carbon taxes, gvt sets magnitudes of tax, but individuals and firms choose the
best way to reduce or avoid the tax
 Under FIT, gvt in effect selects technologies and appropriate prices to be paid for
electricity from these techs
Which is better?  arguments on both sides

Separation
 mechanism for:
- Reducing concentration of power
- Creating checks and balances
- De-politicizing implementation of policy

Concentration of power
In politics:
 Plato sets out arg that the best form of gvt is a philosopher-king who has absolute
power; but plato doesn’t solve pb of succession – how to ensure that ruler selected is
truly virtuous; democratic forms of gvt seek to distribute rather than concentrate power
In economics:
 Economists believe that competition is far better than monopoly; if monopoly cannot be
avoided, it must be controlled by laws, regulations, agencies of gvt

Checks and balances?

1. Gvt should set policy; regulator should implement
2. Gvt have recognized importance of independence of CBs. Governors are appointed for
extended terms (Bank of Canada, US Federal Reserve; Bank of England)
3. What are benefits of this separation?

Separation of gvt and regulator

 Integrity of currency/money/supply is so critical that separation of gvt and CB is
institutionalized
 Energy decision often much more susceptible to politics of the day: i.e. locations of nat
gas plants in Ontario, should this be decided by provincial gvt or regulator (with input
from local and provincial gvt?); location of wind turbines?

Green Energy Act 2009

 Objectives: promote renewable energy promote conservation; promote green jobs
 Details: establish FITs; promote “smart grid”; enables various directions
 The GEA created the potential for fundamentally changing the institutional structure
and energy related decision-making
o Previously, the OEB, prime regulator, operated ostensibly at arms-length form
the provincial gvt
o Under the GEA, the gvt provided itself much broader scope to directly influence
choices; e.g. through the use of “directives”
Issues: regulator is not only subject to gvt policy but to directives on the specifics of the
implementation. There are risks that political exigencies will lead to less than optimal
outcomes. It would be preferable to return to model where regulator has greater autonomy

LEC 6 – ELECTRICITY
Networks
 Have strong natural monopoly characteristics
 access and pricing there often require some degree of regulation

e.g: electricity transmission and distribution (the wires); natural gas and oil pipelines; telecom
(copper and fibre networks; networks of poles, conduits and other support structures?)

Electricity system basics

Oil prices went up, so price hike transferred to consumers through electricity price
Electricity producers then switch to natural gas and coal, after increase of price of oil. Since coal
+ nat gas = substitute, their prices slightly went up

Electricity system structure

Sl.5 = old model; now there are a lot of little generators that generate heat on site and
electricity is generated through that. Local generation is increasing

Sl.9 : In Canada 8% of total generation is lost in transmission and distribution. Those losses are
due to density, Canada has low population density, the more you have to travail to transmit
electricity, the more you lose on the way.
Australia however has lower losses for about the same density due to country’s urban
organization. Cities are dense and gathered so not much travel to do

Electricity Demand Follows Wide Cycles

- Electricity demand follows wide cycles
o Morning/afternoon/evening/night
o Weekdays/weekends
o Spring/summer/fall/winter
Demand varies according to the different cycles aforementioned
And electricity always have to be available…

Sl.12 peak electricity demand/consumption is around 6 oclock

Sl.14 At 6oclock, its dark, solar plays no role. Nuclear however plays a significant part
Sl.17 why is there a reduction of electricity demand in the middle of the day? More and more
people/businesses are buying solar panels therefore they cut their electricity
consumption/purchase when the sun rises. But as the sun goes down, electricyt demand rises
back up

Designing an electricity system

In designing and electricity system, there are general three category of supply
- Baseload
- intermediate
- peaking plant

Base-Load Generation
 Produces electricity all the time (except when down for maintenance)
 Usually high K facilities such as nuclear or hydraulic
 Coal is also used for base-load

Intermediate Generation
 Needs to be able to adjust to changing demand easily (i.e. follow the load)
 K costs should generally be lower bc the unit is not used all the time
Peaking plant
 Used a relatively small proportion of the time to meet high demand periods
 Should have relatively low K costs
 Must be able to turn it on (and off) on short notice
o Nuclear cannot serve as peaking plan bc it cannot be turned on and off. If it
could be, what would not have happened ? fukushima melt-down. They
would’ve just shut nuclear off after coolant loss

Load Duration Curve

- Critical for designing the electricity system:
o Generation of various types
o Transmission
o distribution

- The load duration curve plots nb of hours that various quantities of capacity must be
available
o The maximum electricity capacity that the electricity system is required to meet
o The minimum electricity capacity that must be available at all times

Sl.25 you’re going t

Sl.26 100% of the time, you’re going to need 10 000 mwH in 2009; Why is that curve ≠ ?
because of the recession, crash of financial markets. That is why electricity demand in Ontario
that year has dropped
Important to understand load duration curve

Sl.27

Costs of generating electricity

 Major cost components
o K costs
o Operations and maintenance cost (O&M)
o Fuel costs
 Some technologies have high K costs:
o Nuclear
o Hydrauhlic
o Solar
o Wind
 For others, fuel comprises a relatively high proportion of costs
o Coal fired (pulverized coal, PC; integrated gasification combined cycle IGCC)
o Natural gas (natural gas combined cycle NGCC; conventional turbine CT)

 In order to compare technologies on an equal footing, one must

 o Distribute k costs over the number of energy units that are produced
o Forecasts fuel costs (i.e. natural gas prices are very low, but will this continue
into the future?)
o Build in maintenance costs, which often increase as the facility ages
o Incorporate efficiency (i.e. heat rates – how many btu’s of primary fuel are
required to produce a kwh of electricity)
o Incorporate capacity factors

LCOE (Levelized Cost Of Electricity) L.33

Smart Grid Innovation

 Advances in information and communication technologies have created an environment
where various new technologies can now, or in near future, be incorporated into
electricity grids
These techs have the potential of improving operations in multiple dimensions by:
- Increasing efficiency with which power is delivered
- Reducing costs through remote sensing and automated recovery
- Shortening response times in the event of malfunctions
- Facilitation the integration of distributed generation, renewable resources, storage and
electric vehicle charging techs
- Improving overall system security

 Advanced metering infrastructure (AMI)

o Time of use pricing
o Dynamic pricing
 Phasor measurement units (PM)
o Permit simultaneous measurement of key characteristics at numerous points
throughout the grid
o This can provide system operators w earlier warnings of any system instabilities
which may be emerging and require attention

Smart-Meters and Time-of-Use Pricing

- The nature of electricity systems is such that system operators must adjust supply to
meet demand at any given moment. Although operator management of demand has
been part of electricity operations for many years, for i.e. through interruptible load,
this component has comprised a relatively small proportion of the overall supply-
demand balance. The inability to affect demand response over short intervals has
generally increased the level and volatility of system costs
- Recent tech advances have created the possibility of greater responsiveness on the
demand side. Makor categories of tech which are central to demand response include:
o Meters that record electricity consumption by time-of-day enable the
implementation of static time-of-use rates which can be calibrated to
approximate expected system costs averaged over time
 o Information systems that transmit current system costs to consumers enable to
the implementation of dynamic time-of-use rates which reflect actual system
costs
o Information and control systems can facilitate end-user response to real-time
prices. These include “apps” which permit integration of price and usage info in
real time and smart appliances which can automate response to such info

Sl.26 area under curve = total annual electricity consumption; the steeper the LDC, the higher
the peak
The flatter le LDC, the lower the peak, and that’s the goal, to lower peak and reduce total
annual consumption
Some companies ask you to lower your consumption during peak hours and rather consume
during off-peak in order to reduce overall total consumption and yield a flatter curve.

Sl.37 summarizes ≠ b existing grid and smart grid implications

Sl.39

Ontario Electricity Generation and CO2 Production

 In 2014, Ontario generated 14 twH of electricity using natural gas

 How much CO2 did that generate? Look at sl.40: 7.7MT/14TWH

LEC X – RENEWABLES (37:10)

In order to decarbonize transportation sector, you need to electrify it. In order to electrify it
however, you need to have a vast and cheap amount of energy available.

INTRO

 Decarbonization agenda has led many countries to consider alternative schemes for
promoting/supporting renewable energy
 Wind, solar, hydro, biomass have been primary targets
 But other targets include electricity storage; carbon capture storage; electrification of
transportation…

 Markets fail to fully capture effects of carbon use

o Most economists advocate direct policy, such as putting a price on carbon
emission (Pigouvian tax)
o Few governments have imposed significant economy-wide carbon taxes
o Support for renewable energy can be seen as a second-best policy to reduce
emissions in the absence of direct measures
 o Second-best policies are often more complex than direct interventions, and thus
more prone to gvt failure

 Many renewable technologies are immature

 Gvt support may be justified if there are externalities, i.e. learning spillovers, which
private sector is unable to capture
*Newcomen engine  external combustion engine
 A country that specializes early in a fast-growing sector may be able to dvp a successful
export industry
o Quantum leaps in renewable energy tech are more likely to occur at level of
basic science, so support for research initiatives is essential
o Incremental improvements to existing tech are more likely to be induced by
financial incentives to private enterprise seeking to serve energy markets today

Policies can be grouped into three broad categories:

1. Policies which require consumers or companies to pay for renewable power

o FIT – Feed-in-tariffs
o RPS – renewable portfolio standards
o TGC – Tradable green certificates
2. Fiscal incentives – taxes, subsidies
3. Public financing – public investments, loans and grants

Effectiveness and Efficiency

 Dynamic efficiency is the central objective – appropriately balance short-run (static
efficiency) w concerns in the LR (focusing on encouraging R&D)
o Gvt intervention may lead to SR inefficiencies (e.g. higher prices)
o But, need to ensure sufficient R&D resources and their rational allocation across
burgeoning technologies in the LR
 Of course, measurements of effectiveness and efficiency in achieving dynamic efficiency
objectives are difficult

 Narrower criteria are more quantifiable

o Are prices for tech declining (e.g. solar module prices)
o Does policy achieve adoption targets
o Are generation prices consistent w costs (one would expect faulty or otherwise
poor price signals to result in inefficient allocation of resources)
o Do prices paid for specific generation technologies create incentives for
maximizing their benefits to the system (e.g. wind generators that are located
closer to demand nodes; are they maximizing output at peak time – when are
maintenance outages)
  Poorly designed markets can be a major source of inefficiency
o Wide disparities in the marginal costs of meeting renewable targets would
suggest the presence of substantial inefficiencies of this type
o Moreover, to the extent that unnecessary segmentation reduces the liquidity of
market-based instruments, further inefficiencies are induced
o Here too, market indicators of thinness and responsiveness can be used to
assess market depth; see Schmanlensee (2011)

 Administrative cost, complexity and regulatory burden are important elements of

instrument evaluation
 Stable and predictable government policies:
o Reduce politicization
o Promote arms-length relationship b gvts and regulators

 How much risk is shared?

o Too much risk on producers may thwarts production
o Too much risk on consumers may undermine political acceptability
o Renewable generation can bring portfolio diversification benefit
o Support schemes contracts that fix the price of renewable generation reduce risk
for both groups: generators have fixed their incomes, and consumers have fixed
a proportion of their bills

Costs to consumers and taxpayers

 Limiting rents – while still allowing the sector to earn a proper (risk-adjusted) return on
its investments – is another key criterion
 Short term economic rents might be justified if the encourage long term investment in
R&D
 How are technologies picked and remunerated?
o Winners and losers
o Rent seeking

Political Feasibility and Sustainability

 politics and history play a crucial role

United States
 Federal/state structure has engendered a patchwork of policies which has both
advantages and disadvantages – a diversity of approaches and experiments on the one
hand, a lack of coordination on the other
 National carbon taxes, though proposed on a number of occasions, have not been
implemented, in part bc of powerful opposition to increased taxation
 State renewables programs are often premised on limiting ratepayer impacts to a few
percentages points
  Direct burden has largely been placed on the electricity industry itself through RPS
programs

Europe
 Polities more accustomed to a larger role for gvt and higher taxes
 European countries have consented to the implementation of aggressive pgs, e.g. FIT
schemes in Germany and spain
 E.u gvts agreed to the “20-20-20” targets – a 20% reduction in greenhouse gases, 20%
improvement in energy efficiency and a 20% share of renewables in total energy – all to
be achieved by 2020

China
 Political feasibility, at least from the standpoint of consent of the governed, represents a
lesser hurdle
 China which has responded with an aggressive industrial policy dedicated to promoting
the manufacture of renewable energy technologies
 A large amount of (particularly wind) capacity has been installed by state-owned utilities
responding to targets set by the gvt

Political feasibility of a policy instrument depends on

 Attributes of the instrument
 Existing institutional structures, traditions and political sensibilities

The sustainability of a policy, as opposed to its initial feasibility depends also on

 The ease with which it can be reversed
 The rapidity with which the instrument induces an efficacious response
 The magnitude and distribution costs which may differ from those anticipated when the
policy was introduced (for i.e. FIT contracts difficult to reverse)

New taxes are often resisted vigorously in part bc of the perceived addictive properties of
revenues for gvt

Paradoxically, this means that once introduced, taxes have a high degree of resilience,
sustainability and therefore stability
 New taxes are often heralded as temporary measure, but do not turn out to be so
 i.e. income taxes in CA introduced in 1917 as a temporary measure to pay for Canada’s
war time effort in WWI. They were of course made permanent

Evaluation of Instruments and Policies

 role of economic theory
o properly calibrated Pigouvian taxes on carbon would be a powerful and efficient
tool for promoting renewable generation
 o in the LT, probably best solution, bc of importance of pricing externalities into
production and consumption decision
o any additional policy to support renewables could only be justified as a means to
correct a separate market failure

Evaluation: Uncertainty and Risk

 uncertainty and risk – in the Knightian sense
o renewable generation technologies are at varying degrees of maturity
o uncertainties surround the future cost paths of renewables, their integration into
energy systems, and developments that could convert non-dispatchable sources
into dispatchable ones
o these uncertainties represent the single most important unknown from a policy
point of view
o both economic theory and historical experience generally support a diversified
approach which relies on market-based incentives as far as possible
 in addition to this technological uncertainty, there are various risks that a prospective
provider of renewable power must face, even using current technologies
o output price risk
o demand risk
o cost risk (i.e. capital costs)
o political and regulatory risk
 a FIT mitigates price and demand risk by design
 in a quote regime, these risks can be mitigated through LT contracts if a counter-party
can be found

Evaluation: Barriers to Entry

1. cost of producing energy from renewable sources, such as wing or solar, as compared to
conventional generation. Buyer must be compelled to purchase this energy
2. ease of access to transmission and distribution grids. In many jurisdictions this barrier
has been effectively eliminated through mandated access requirements
3. a historically important barrier to entry into electricity generation: the need to build
large facilities in order to be competitive. For most renewables this is not an important
issue – the scalability of the technology suggests that minimum efficient scale can be
achieved by relatively small enterprises

PROGNOSIS

- Rapidly developing economies will be able to afford renewable technologies only if price
of low-carbon technologies drop dramatically; and if price of carbon fuels increased

- Hydrocarbons remain dominant source of energy worldwide; demand is growing

prodigiously, particularly in the expanding economics (china, india, SE Asia, South
America); contrary to “peak oil” analysts, supplies of hydrocarbons are arguably
 unconstrained “stone age did not end bc we ran out of stones, the oil age will not end
bc we run out of oil”
- We know that temps are rising, but the consequences are much more uncertain
- I expect that a global consensus on truly meaningful carbon reductions is unlikely in the
absence of an imminent threat “if others are not doing it, why should we?” it would
hamper our economy; oil sands, shale gas, shale oil give north America energy security;
besides, temperatures have leveled off in recent years

Necessity if the mother of invention

- Need to avoid silk road  exploration of maritime routes and discovery of West indies +
India
- Need to pump out water of coal mines  invention of engines  industrial revolution
- Need for motor fuels  production of “synfuels” form coal by nazis bc unable to
capture conventional oil supply
- Need to ensure nazis don’t dvp atom bomb  Manhattan project which led to the atom
bomb

Role of gvt
- Current technologies insufficient to solve pb + expensive
- Most important role of gvt: promote R&D that will lead to new findings in basic science
and engineering
o Companies can invest in research that leads to cost recovery and ultimately
profits (ie. Patents and intellectual property)
o But some of the most important science that needs to be done may not be
patentable
- Principle of subsidiarity would place such tasks at the feet of the gvt

LEC 6C – THE FUTURE OF ELECTRICITY INDUSTRIES

Industry structure (and regulation) driven by scale economies

 Scale economies are a critical factor in determining industry structure, concentration,
and regulation
 In the past, electricity industries characterized by
o Strong economies of scale in generation,
o Extreme economies of scale in ‘wires’ (natural monopolies in transmission and
distribution)
 As deregulation spread to electricity industries,
o Unbundling of wires, which remained fully regulated
o Generation exposed to competition
o Incentive regulation

New technologies driving decentralization (scale declining)

  Current electricity industries characterized by decentralization, digitization and
decarbonization (the “three” d’s)
 Decarbonization policies are driving technological innovations that alter “minimum
efficient scale” in generation (think 800+ MW coal generator vs. 2 MW wind or 5kW
roof-top solar)
 Digitization is facilitating integration of distributed energy resources (DERs) and
decentralization of wires (think microgrids)

Scalability is a Profoundly disruptive force

- Scalability of hydraulic fracturing is a major driving factor behind revolution of nat gas
and oil markets (think fracking wells which cost abt 3 million dollars vs. offshore oil
fields which cost billions of dollars)
 it is becoming a disruptive fore in electricity markets
Read sl.6; 7; 8; 9

Other “economies”
 Traditionally, in addition to economies of scale, there have been economies of
o Density and contiguity in distribution
o Scope
 Vertical integration (of generation, transmission and distribution)
 Horizontal – multi-utility model (e.g. natural gas and electricity)
 Decentralization and digitization is driving two “new” economics
o Vertical scope economies at a much more granular level – “wires” + DERs
o The “network effect” – ability of individual participants on the grid to interact w
others for purposes of coordination and exchange

Integration of Renewables
 Decentralized resources present major challenges – traditional utilities + DERs
 Intermittency of renewables requires backup
 The need for adequate supply has spawned capacity markets
 Distribution system planning is further complicated by uncertainty about supply,
reliability and flexible/responsive demand
o Some DERs are substitutes for distribution system enhancements (e.g. storage)
 Electrification of transportation will drive proliferation of charging stations

Uncertainty and Risk

 Technological change spawns risk and uncertainty (there is a ≠)
 Who should bear these?
o Utilities and their shareholders
o Other supply side participants
o Energy purchasers (industrial, commercial, residential)
o Taxpayers
  Risk allocation has important implications for investment, tch adaptation and
innovation, and it therefore represents a critical challenge for instrument design, in the
presence of technical change

The literature is still grappling with…

 How industry structure, particularly at the distribution level affects:

o Innovation and tech adoption,
o Cost efficiency,
o System planning,
o Competition
 What should be the ownership structure of wires, platforms and DERs?
o Leveling the playing field when wires companies own DERs
 What info is desirable (even necessary) to drive efficient investment in DERs?
o Locational prices, values at the distribution level?

ENERGY AND CAPACITY MARKET

Electricity market models

- Energy only market model: a market model where power plants are paid only for the
energy they actually produce
- Capacity market model: a market model where generators are paid for hving generation
available to supply, whether or not any energy is actually produced and supplied
- Find definitions on sl.21

The invisible hand vs. the visible hand

 Can energy-only markets produce sufficient revenues to attract investment in a K
intensive industry such as electricity?
o Is the invisible hand sufficient?
 What has led to the widespread implementation of administered capacity markets?
o Is a visible hand required?

 Rationales for capacity markets

- Missing money
- Generation adequacy
- Distributed, intermittent resources

 Missing money
- Long-lived assets, large k outlays
- Price-caps in energy-only markets
- Increased penetration of intermittent resources
- Subsidies to renewables
- Policy uncertainty/regulatory uncertainty
 - Technological uncertainty

Generation adequacy
 Left to itself, an energy-only market might not produce sufficient capacity
 Electricity outages have political consequences
o Citizens believe that electricity supply, reliability and prices are within the
control of gvt entities
o Administratively determined level of reliability may be higher than the market
would produce

Distributed resources – Scalability

 The scalability phenomenon – electricity can now be produced at much smaller scales
than in the past
o Think rooftop solar (5 KW), wind generators (2 MW) vs. nuclear or coal units
(500+ MW)
o How could resources be “distributed” if they were not available at small scale?
o Short lead times
 Increased uncertainty for traditional generators and wires companies
o Grid volumes
o Self-generation, behind the meter

Distributed resources – prosumers

 Increasing number of “prosumers”  the term “prosumer” (producer-cum-consumer),

was coined in the 1980s by futurist Alvin Toffler; it is not clear that Toffler anticipated
either small scale ‘self-generation’ of electricity, or 3-d printing. Except a ‘self-
manufacturing’ revolution

Distributed resources – storage

 Storage can contribute to peak-shaving, limiting price spikes on which energy-only

markets rely
o Plays a key role in electrification of transportation
 Storage costs continue to decline, along w solar (and wind)
o In the not too distant future, may lead to a tipping point where even low volume
“prosumers” seek to untether themselves from the incumbent utility

LEC 2ND DEC

Motive, means opportunity

In order to make progress on challenges like climate change, there are at least three essential
pre-conditions:
1. There needs to be sufficient motivation and incentive to seek solutions. But what is
it that motivates humans to devote themselves to solving problems?
2. There needs to be sufficient resources devoted to finding solutions. Should these
resources be public or pv?
3. There needs to be opportunity, facilitated by support, infrastructure and the
creation of market niches. How are these created?

What were the motives?

 Around 1500CE, when E.U empires couldn’t use silk road to trade w Far East, they found
ocean routes. This led to 1st globalization
 When it became progressively more difficult to mine coal bc of flooding, Newcomen
invented engine which could pump out the water. This launched the industrial
revolution
 When napoleon was finally defeated, Sadi Carnot, sought to understand why, and
concluded that it was Britain’s superior use of energy. Carnot’s investigations led to the
field of thermodynamics
 When the Nazis were stopped from reaching the oil fields of the Caucasus, they
converted coal to motor fuels (synfuels)  same process was later used by apartheid
south African gvt during oil embargos
 When a group of scientists, led by Einstein, realized the terrifying possibility that the
nazis might dvp atomic weapons, they urged prsdt Roosevelt to launch what became
known as the Manhattan project

Motives for innovation

- Curiosity (newton, Einstein, Marie curie)
- Ethics (right thing to do)
- Recognition, glory, honor (carnot)
- Material gain (+ other forms of self-interest)
- Power (yesterday’s empires, today’s superpowers)
- Necessity (WWII, climate change)

Good policy harnesses various types of motivations to mxm chances of success  Where
would you place Edison ? what were his motives?

Who does what?

 If bsnss can produce the necessary innovation, then their path should be facilitated
 But bsnss cannot be expected to undertake the entire responsibility. Where does one
draw some rough lines?

First approximation
  If a pg of innovation can lead to commercial benefits, then firms are usually best
equipped to pursue it
o Intellectual ppty, patents, monetizable investment in research
 However, some of the most important research (basic research) does not typically lead
to monetary benefits sufficiently quickly

Gvt role
- Funding and promoting basic research
- Facilitating innovation that can be commercialized
- Infrastructure
- Education

*CO2 emission based on production per Gt; Britain from a production POV looks good, but is
actually consuming much more bc of imports (13:50)

Carbon leakage pb
 Carbon taxes and other forms of carbon pricing (i.e. cap-and-trade) are considered a
“first-bet” instrument for creating incentives for carbon reduction
 Domestic carbon taxes can lead to carbon-intensive production being moved abroad to
jurisdictions w/o restrictions on carbon
o If prod moves to more carbon-intensive jurisdiction (i.e. India, China) then global
emissions may actually increase
 Furthermore, the carbon tax can result in domestic job losses. Leading to