Do Two Electricity Pricing Wrongs Make a Right?

Transcription

1 Do Two Electricity Pricing Wrongs Make a Right? Cost Recovery, Externalities, and Efficiency Severin Borenstein Haas School of Business and Energy Institute at Haas U.C. Berkeley James B. Bushnell Department of Economics U.C. Davis and Davis Energy Economics Program

2 Marginal Cost Pricing: the elusive utility standard Utility prices deviate from Short run Social Marginal Cost for multiple reasons: Natural monopoly setting, average cost pricing Other costs recovered in volumetric price, eg, energy efficiency AC >< MC due to capacity investment/demand mismatch Externalities are not a cost to the utility Much less time variation in prices than in SMC Leads to DWL in consumption choices Mismatch of P vs SRSMC in electricity also raises other allocative efficiency issues Carbon pricing impact on electricity price Value of energy efficiency programs Incentives for installing rooftop solar 2

3 ~marginal cost Fixed/sunk costs 2nd Annual Asia Pacific IO Conference, 12/16/17 3

4 Marginal Cost Pricing: the elusive utility standard Utility prices deviate from Short run Social Marginal Cost for multiple reasons: Natural monopoly setting, average cost pricing Other costs recovered in volumetric price, eg, energy efficiency AC >< MC due to capacity investment/demand mismatch Externalities are not a cost to the utility Much less time variation in prices than in SMC Leads to DWL in consumption choices Mismatch of P vs SRSMC in electricity also raises other allocative efficiency issues Carbon pricing impact on electricity price Value of energy efficiency programs, rooftop solar Goals of electrification 4

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6 This paper Attempts to quantify the difference between residential marginal prices and social marginal cost across the US electric sector during Accounting for wholesale prices, distribution marginal costs, and environmental externalities Measures relative consequences of the lack of time variation vs. average cost pricing. Covering basic residential rates Some Punchlines Much of fixed private cost recovered through marginal prices Externality costs are significant In many places offsets inefficiency of average cost prices Large regional variation Distribution marginal costs (losses) are large For most utilities time variation may be main source of DWL However, large share of the DWL comes in a small number of places where the price is well above average SMC (e.g. CA) 6

7 Outline Calculate marginal retail price Calculate private marginal cost of supply Wholesale grid price plus estimated MC of distribution Estimate marginal externality costs Compare P to SMC (=PMC+EMC) Decompose P SMC into average SMC deviating from P and hourly variation in SMC 7

8 Marginal Retail Price Calculation Two part pricing is common in US utility pricing. Sales and revenue data do not decompose Annual revenues, sales, and customers from EIA 861 Some issues in retail choice states US Utility Rate Database Comprehensive but idiosyncratic collection of tariffs across US Detailed look at rate structure Isolate standard residential tariff through string searches Extract monthly fixed charge component of standard rate in each utility region. Remove fixed charges, and divide remainder by kwh to get average variable price Does not capture increasing block or decreasing block pricing But outside CA steps in block pricing are small Fixed charge is from standard tariff, but we assume it is similar for all of a utility s residential customers 8

9 Heat Map Results Presentations We present results in heat map form to show variation in measures These are just geographic approximations to the actual data, 2090 state/utilities over 3 years Approximations because we don t have shape files for each state/utility In some cases we only know utility service territories by counties For each location, data in heat map for a location are average of 2014, 2015 and total state/utility/year observations 9

10 Average Residential Retail Price 10

11 Monthly Fixed Charges on Residential Rates 11

12 Residential Retail Variable Price 12

13 Social Marginal Cost Calculations Generation (private costs) Primarily use reported market ( spot ) prices in regions covered by organized markets. EIA 714 system lambda for regions with no market data Environmental Estimate marginal damage based on: estimates of change in generation with marginal demand combined with AP3 air pollution/air transport damages model Distribution marginal costs Wholesale prices include marginal cost of transmission (high voltage) losses, but not of distribution losses Power delivery incurs losses that are greater on lower voltage e.g., residential distribution lines Distribution losses scale up both private and external marginal costs 13

14 ISO Pricing Points and Utility System Lambdas 14

15 Wholesale Grid Prices 15

16 Some important variation in wholesale prices over time 16

17 Average Private Marginal Cost (load weighted) 17

18 Why is PMC so low? Natural gas prices were very low, and gas fired generation is often the marginal supply Fuel cost of efficient combined cycle gas turbine between $0.02/kWh and $0.03/kWh PMC of coal often even lower Systems are overbuilt so PMC<LRAC Due to miscalculation in planning Due to additions of subsidized renewables Due to compensation through capacity markets and ancillary services 18

19 Hourly Utility Scale Solar Output on CAISO System

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21 Composition of PG&E Rates 21

22 Hour of day average price impacts: of an incremental GWh of Solar

23 Interpretation Output of solar increased from 5 to about GWh/day range from 2012 to 2017 Each GWh of daily solar reduced mid day DAM price by around 20 cents/(daily GWh of solar) About $14/MWh decreases in mid day prices Each GWh of daily solar increased evening price by around cents/(daily GWh of solar) Morning price increases 5 10 cents/mwh About $7 11/MWh increase in morning/evening

24 How much of wholesale compensation is from energy? Are the other costs marginal? Is their impact greater or smaller on the margin? 24

25 The Art and Science of Estimating External Electricity Cost Need to trace effects through three levels 1. Change in end use demand changes output in various power plants 2. Power plant emissions travel to various places, changing air quality 3. Air quality causes various bad things monotized into dollar damages We follow Holland, Mansur, Muller, and Yates (HMMY 2017), with some changes to step 1. Steps 2&3 apply Muller s AP3 model. 25

26 Average External Marginal Cost Accounting for Distribution Losses (load weighted) 26

27 Distribution Losses Share of power lost increases At lower voltage residential distribution Along longer distribution lines res distribution When there is more flow on the line a quadratic relationship L= Q t2, where are no load losses, so marginal losses, dl/dq t =2 Q t, are approximately twice as large as average load based losses Data are available by utility from EIA 861 But aggregated across all customers and all hours of the year Not available for all utilities, about 90% of load We estimate average losses on residential distribution 27

28 Estimating Distribution Losses Average losses strongly correlated with residential share of load, load/km 2, circuit optimization, load variation We control for these plus state and utility type, and whether utility operates transmission (13%) Use this to estimate the average losses attributable to residential load 28

29 Estimating Average Distribution Losses 29

30 Histogram of Estimated Average Residential Distribution Losses 30

31 Marginal Distribution Losses Assume for each utility i relationship L i = i i Q it 2 where i is 25% of that utility s system losses and i Q it 2 accounts for 75% Then invert to get i = L^it/ Q it2, where L^it is the utility s estimated load driven total residential losses. Estimated marginal losses in hour t are then it =dl it /dq it =2 i Q it Scale up PMC and EMC by 1/(1 it ) in every hour 31

32 Histogram of Estimated Hourly Marginal Residential Distribution Losses 32

33 Average Social Marginal Cost Accounting for Distribution Losses (load weighted) 33

34 Residential Retail Variable Price 34

35 Retail Electricity Price Minus Average Social Marginal Cost 35

36 Histogram of P SMC avg across utilities 36

37 Histograms of hourly P SMC by state 37

38 Deadweight loss calculations 38

39 Decomposing deadweight loss from mispricing If demand slope same in all hours, so response is same to change in average price as to hourly price change, then But demand changes hour to hour We assume that the elasticity of one unit of demand at retail price is the same in all hours and for hourly or average price change so where 39

40 Deadweight loss decomposition s^ set to yield = 0.2 at utility s retail price 40

41 Deadweight Loss Per Unit Demand from Price Differing From Average SMC 41

42 Deadweight Loss Per Unit Demand Due to Time Varying SMC 42

43 Why does SMC variability create so little deadweight loss? Excess capacity and system operator use of reserves to dampen wholesale prices => less cost (wholesale price) volatility In the short term, this almost certainly overstates DWL from SMC variability Because price responsiveness to hourly price changes is likely small In the long term, maybe understates Automated price responsiveness increases price elasticity, load shifting, and value of hourly pricing Less reliance on excess capacity, more on rationing with price 43

44 Total Deadweight Loss Per Unit Demand 44

45 Implications and Applications Passthrough of GHG cost to residential electricity Hard to justify in some areas where P>>SMC Not sufficient in other areas where P<SMC But also important implications for other utility policies Energy efficiency Rooftop Solar PV Net Metering 45

46 Mis targeted Energy Efficiency Price Avg Social MC Per Customer Energy Efficiency Spending 46

47 Rooftop Solar where P>>SMC Price Avg Social MC Net Metered Res PV Capacity Total Res Customers 47

48 Conclusion Multiple reasons that residential electricity is not sold at the right price => SRSMC Externalities appear to (currently) comprise nearly two thirds of SMC on average Surprisingly (to us) nearly 40% of customers face P<=SMC avg Residential prices also virtually never move with time varying costs, causing DWL But whether DWL due to lack of time variation is larger or smaller than due to price differing from average social marginal cost depends on elasticity of each response 48

49 Thank You! Questions and Comments? 49