Energy and Society Week 6 Section Plan GSI Notes

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1 Energy and Society Week 6 Section Plan GSI Notes AGENDA 1. Get feedback on section from students (5 mins) 2. Review oil reserves and Hubbard Curves (15 mins) 3. Establish a common understanding of the major themes of Power Loss (pages 1-88, 30 mins) I. HUBBERT CURVES The normal distribution (also called a Gaussian curve) is the most widely used distribution in statistics. Certain random variables (e.g. human weights, heights, etc) have a normally distributed probability functions. Hubbard found that the rate at which you extract a resource like petroleum follows a normal distribution. 2 source: The curve is centered around a mean ( ) and a standard deviation (.) The standard deviation is a statistic that tells you how tightly all the various examples are clustered around the mean in a set of data. When the examples are pretty tightly bunched together and the bell-shaped curve is steep, the standard deviation is small. When the examples 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 from the mean in either direction on the horizontal axis accounts for somewhere around 68 percent of the data. Two standard deviations away from the mean 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-remember standard deviation ranges. 1

2 Hubbert (1956) argued that production would begin with exponential growth, then plateau, then decline (symmetrically) as in bell curve given by this equation: P = P m exp [ 1 2 (t t m σ ) 2 ] Where P = production of the resource Pm = maximum production rate tm = time that maximum production occurs σ = standard deviation So the total amount produced would be an integral 2 over all time would be: Q = Pdt = P m exp [ 1 2 (t t m )2 ] dt Q = σp m 2π σ Example: Suppose total US coal reserves amount to 500x10 9 tons. If Hubbard estimates that annual peak production rate of 3x10 9 tons is reached in 2100, then what is the current production rate? 2

3 II. POWER LOSS Back-of-the-envelope Thought: What sort of qualities do we expect or desire from the electricity produced by the electric power sector? For example, 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-term, there are trade-offs between many of the qualities we look for from the electricity we consume. The rules we make about the technology deployment and operation implicitly and explicitly emphasize certain qualities over others. Based on your reading from Power Loss, which qualities of the electricity power sector (EPS) were the major focus during the early stage of development (roughly 1890 to 1960)? What were the technical, economic, and social factors that converged and promoted the consistent reduction of costs and increase of supply? 1. Utilities were granted a natural monopoly (see definition below). Among other things, this prevented infrastructural redundancies that would have increased overall costs of operation. Part of the utility consensus. 2. Vertical integration of utilities cut out cost-increasing middlemen. 3. Huge improvements in generation technologies (see graph on page 57). This was enabled in part by the rapid expansion of the EPS and movement along the learning curve. 4. Rapidly expanding customer base meant that more power plants could be built (more learning) and existing power plants would have improved capacity factors (lower average costs). Demand was encouraged by both promotional campaigns and improved and expanded end-uses. Everyone was made better off by the system that developed. Customers enjoyed improved standard of living at diminishing costs, utilities made money, governments promoted progress. A successful grow and Build strategy was being used by utilities to maintain the system. So what factors stressed the utility consensus? Quiz: 1. Which is not an advantage of utility consensus? A. Reduced case of electricity B. More efficient regulation/reduction in corruption C. Increased innovation in power generation technologies 3

4 2. Why did utilities not have a strong reason to innovate? A. Guaranteed return on investment B. They were tech advocates C. They also owned the turbine manufacturing plants Public Utilities Regulatory Policy Act (PURPA) (1978) was born from President Carter s interest in ensuring adequate and increasingly domestic energy sources. Emphasis was placed on promoting efficiency, conservation (e.g., though marginal-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 more efficiently) and other qualifying facilities (small-scale solar, wind, biomass, etc.) by guaranteeing them a market for the power (as well as a generous rate for their power). As such, with PURPA, greater emphasis was put on energy security and sustainability. Quiz 1. Which is not a qualifying facility? A. Cogeneration facility B. Utility scale solar C. Large scale fossil fuel plant D. Waste to energy plant 1. What are benefits to smaller generators? A. Mass production available expedited manufacturing of smaller units B. Availability to put closer to load C. Close tracking of demand more flexibility D. Shorter construction time of plants For discussion Our local utility, PG&E, is a strong promoter of energy efficiency. During the Carter administration, why were utilities so opposed to measures like those that required them to provide their customers with home energy audits? Relevant Terms (for reference): Natural monopoly: persistent situation where a single company is the only supplier of a particular kind of product or service due to the fundamental cost structure of the industry i.e. one firm can supply the entire market at a lower price than two or more firms can. Natural monopolies are often contrasted with coercive monopolies, in which competition would be economically viable if allowed but potential competitors are barred from entering the market by law or by force. Two motivations: (1) the standard economic argument that it is simply more efficient to allow large firms exclusive franchises to operate in specific areas and regulate them to ensure all customers are served and monopoly power is not abused and (2) the popular argument that such firms needed to be regulated in order to prevent victimization of powerless consumers. Vertical integration: the same company owns all the different aspects of making, selling and delivering a product or service. In the electric industry, it refers to the historically common arrangement whereby a 4

5 utility would own its own generating plants, transmission system, and distribution lines to provide all aspects of electric service. Utility consensus: set of arrangements for the dominant structure of the utility industry as a regulated monopoly arrived at tacitly by policy makers, utility managers and politicians (no consumer interests mentioned). Froze the industry in a vertically integrated structure that took advantage of huge economies of scale, which enabled them to offer lower costs to consumers over time. Regulation saved utilities from municipal takeovers. Ideology of growth: bigger-is-better attitude that pervades many aspects of US culture an unchallenged and hegemonic view. Depicted electricity as a public good, a right of all, a critical aspect of modern living. The power sector became so crucial to the economy that it obtained special status among industries. Technological momentum: a mass of technical, organizational, and attitudinal components that maintain steady growth and direction. In utility consensus, momentum was built on manufacturers, consulting firms, universities. Technological stasis: condition that occurs when a technology reaches a limit beyond which improvements in efficiency or output are prohibitively expensive or physically impossible (see Fig. 3.1 on p.57 in Power Loss). PURPA (Public Utility Regulatory Policy Act): Law requiring IOUs to purchase power from QFs at avoided costs of generation Hirsh claims that this outcome was actually an unintended consequence of PURPA, which was part of a comprehensive set of energy policies pushed through during the Carter Administration. Qualifying Facility (QF): A power producer meeting certain criteria such as cogeneration, use of renewable fuels, or achieving a certain efficiency were allowed to ignore government regulations affecting IOUs. Avoided cost: basis used for determining the cost that QFs would be offered for their electricity. It was chosen as a politically neutral term, it included capital costs as well as fuel costs. Market power: market failure which occurs when one or more of the participants has the ability to influence the price or other outcomes in some general or specialized market. The most commonly discussed form of market power is that of a monopoly, but other forms such as monopsony, and more moderate versions of these two extremes, exist. Efficiency (economic): A term that refers to the optimal production and consumption of goods and services. This generally occurs when prices of products and services reflect their marginal costs. Economic efficiency gains can be achieved through cost reduction, but it is better to think of the concept as actions that promote an increase in overall net value (which includes, but is not limited to, cost reductions). Related to Pareto efficiency (also Pareto optimality or allocative efficiency) in which the market could not reallocate resources through trade, production or consumption to make at least one person better off without making anybody else worse off. 5