exp 2 Energy and Society Week 6 Section Handout

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1 Energy and Society Week 6 Section Handout AGENDA 1. Get feedback on section fro students (5 ins) 2. Review oil reserves and Hubbard Curves (15 ins) 3. Group discussion: establish a coon understanding of the ajor thees of Power Loss (pages 1-88, 30 ins) I. HUBBERT CURVES The noral distribution (also called a Gaussian curve) is the ost widely used distribution in statistics. Certain rando variables (e.g. huan weights, heights, etc) have a norally distributed probability functions. Hubbard found that the rate at which you extract a resource like petroleu follows a noral distribution. 2 source: The curve is centered around a ean () and a standard deviation (.) The standard deviation is a statistic that tells you how tightly all the various exaples are clustered around the ean in a set of data. When the exaples are pretty tightly bunched together and the bell-shaped curve is steep, the standard deviation is sall. When the exaples are spread apart and the bell curve is relatively flat, that tells you have a relatively large standard deviation. As the graph shows, one standard deviation away fro the ean in either direction on the horizontal axis accounts for soewhere around 68 percent of the data. Two standard deviations away fro the ean account for roughly 95 percent of the data. And three standard deviations account for about 99 percent of the data. You can also use a Z-table in any stats book to figure out precise values that aren t within these easy-to-reeber standard deviation ranges. Hubbert (1956) argued that production would begin with exponential growth, then plateau, then decline (syetrically) as in bell curve given by this equation: P P 1 t t exp 2 2

2 Where P = production of the resource P = axiu production rate t = tie that axiu production occurs σ = standard deviation So the total aount produced would be an integral over all tie : Q Q P Pdt 2 P 1 t t exp 2 2 dt Exaple: Suppose total US coal reserves aount to 500x10 9 tons. If Hubbard estiates that annual peak production rate of 3x10 9 tons is reached in 2100, then what is the current production rate? II. POWER LOSS Back-of-the-envelope Thought: What sort of qualities do we expect or desire fro the electricity produced by the electric power sector? For exaple, all else being equal, we d like the electricity we use to be inexpensive. What other sorts of qualities are desirable? Are any of these qualities in conflict? When we think about the design and regulation of the electric power sector, we need to recognize that, at least in the short-ter, there are trade-offs between any of the qualities we look for fro the electricity we consue. The rules we ake about the technology deployent and operation iplicitly and explicitly ephasize certain qualities over others. Based on your reading fro Power Loss, which qualities of the electricity power sector (EPS) were the ajor focus during the early stage of developent (roughly 1890 to 1960)?

3 What were the technical, econoic, and social factors that converged and prooted the consistent reduction of costs and increase of supply? Everyone was ade better off by the syste that developed. Custoers enjoyed iproved standard of living at diinishing costs, utilities ade oney, governents prooted progress. So what factors stressed the utility consensus? PURPA (1978) was born fro President Carter s interest in ensuring adequate and increasingly doestic energy sources. Ephasis was placed on prooting efficiency, conservation (e.g., though arginal-cost pricing rather than declining block-rate pricing), and increasing the use of US-based energy resources (like coal). Section 210 of PURPA was designed to support cogen facilities (which generally use their fuel ore efficiently) and other qualifying facilities (sall-scale solar, wind, bioass, etc.) by guaranteeing the a arket for the power (as well as a generous rate for their power). As such, with PURPA, greater ephasis was put on energy security and sustainability. Potential additional questions for discussion (could be sprinkled in throughout the Power Loss section): 1. How did utilities co-evolve with regulators and consuers? 2. What was the utility consensus? 3. What are the advantages of vertical integration? When ight vertical integration NOT be advantageous? 4. How did reaching technical liits in generation size ipact electric utilities? 5. What are benefits to saller generators? Mass production, learning, closer tracking of deand growth, shorter construction tie 6. Why did utilities not have a strong reason to innovate? Guaranteed return on investent 7. Our local utility, PG&E, is a strong prooter of energy efficiency. During the Carter adinistration, why were utilities so opposed to easures like those that required the to provide their custoers with hoe energy audits? 8. Do you see any parallels between the process the Carter adinistration went through with its energy policies in and the experience of the Obaa adinistration with its energy proposals?

4 Relevant Ters (for reference): Natural onopoly: persistent situation where a single copany is the only supplier of a particular kind of product or service due to the fundaental cost structure of the industry i.e. one fir can supply the entire arket at a lower price than two or ore firs can. Natural onopolies are often contrasted with coercive onopolies, in which copetition would be econoically viable if allowed but potential copetitors are barred fro entering the arket by law or by force. Two otivations: (1) the standard econoic arguent that it is siply ore efficient to allow large firs exclusive franchises to operate in specific areas and regulate the to ensure all custoers are served and onopoly power is not abused and (2) the popular arguent that such firs needed to be regulated in order to prevent victiization of powerless consuers. Vertical integration: the sae copany owns all the different aspects of aking, selling and delivering a product or service. In the electric industry, it refers to the historically coon arrangeent whereby a utility would own its own generating plants, transission syste, and distribution lines to provide all aspects of electric service. Utility consensus: set of arrangeents for the doinant structure of the utility industry as a regulated onopoly arrived at tacitly by policy akers, utility anagers and politicians (no consuer interests entioned). Froze the industry in a vertically integrated structure that took advantage of huge econoies of scale, which enabled the to offer lower costs to consuers over tie. Regulation saved utilities fro unicipal takeovers. Ideology of growth: bigger-is-better attitude that pervades any aspects of US culture an unchallenged and hegeonic view. Depicted electricity as a public good, a right of all, a critical aspect of odern living. The power sector becae so crucial to the econoy that it obtained special status aong industries. Technological oentu: a ass of technical, organizational, and attitudinal coponents that aintain steady growth and direction. In utility consensus, oentu was built on anufacturers, consulting firs, universities. Technological stasis: condition that occurs when a technology reaches a liit beyond which iproveents in efficiency or output are prohibitively expensive or physically ipossible (see Fig. 3.1 on p.57 in Power Loss). PURPA (Public Utility Regulatory Policy Act): Law requiring IOUs to purchase power fro QFs at avoided costs of generation Hirsh clais that this outcoe was actually an unintended consequence of PURPA, which was part of a coprehensive set of energy policies pushed through during the Carter Adinistration. QF: A power producer eeting certain criteria such as cogeneration, use of renewable fuels, or achieving a certain efficiency were allowed to ignore governent regulations affecting IOUs. Avoided cost: basis used for deterining the cost that QFs would be offered for their electricity. It was chosen as a politically neutral ter, it included capital costs as well as fuel costs. Market power: arket failure which occurs when one or ore of the participants has the ability to influence the price or other outcoes in soe general or specialized arket. The ost coonly discussed for of arket power is that of a onopoly, but other fors such as onopsony, and ore oderate versions of these two extrees, exist. Efficiency (econoic): A ter that refers to the optial production and consuption of goods and services. This generally occurs when prices of products and services reflect their arginal costs. Econoic efficiency gains can be achieved through cost reduction, but it is better to think of the concept

5 as actions that proote an increase in overall net value (which includes, but is not liited to, cost reductions). Related to Pareto efficiency (also Pareto optiality or allocative efficiency) in which the arket could not reallocate resources through trade, production or consuption to ake at least one person better off without aking anybody else worse off.