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Energy Policy and Energy Efficiency James Sweeney Stanford University Director, Precourt Institute for Energy Energy Policy and Energy Efficiency James Sweeney Stanford University Director, Precourt Institute for Energy Efficiency Professor, Management Science and Engineering

Policy Drivers • Environmental Protection • Global Climate Change • Security • Oil/International vulnerability Policy Drivers • Environmental Protection • Global Climate Change • Security • Oil/International vulnerability • Vulnerability of infrastructure to terrorism, natural disaster, or human error • Economics • Prices of electricity, gasoline, natural gas • Price volatility: oil, natural gas, wholesale electricity

Policy Pushes: U. S. and California • Reducing greenhouse gas emissions • Mechanisms: Market Policy Pushes: U. S. and California • Reducing greenhouse gas emissions • Mechanisms: Market based; Command Control • Energy Efficiency: Automobile Fuel Economy • Alternative Fuels: Ethanol, Biodiesel • Energy Infrastructure Investments • U. S. Oil Exploration • LNG terminals • Energy Technology Development • “Green” -- Low greenhouse gas energy • Energy Efficient technologies

Background Energy Data Background Energy Data

U. S. and CA Energy Consumption, 2005 U. S. and CA Energy Consumption, 2005

Petroleum Natural Gas Coal Hydro-resource Nuclear Fuel Geothermal Wind Solar Electricity Generation End-Use Consumption Petroleum Natural Gas Coal Hydro-resource Nuclear Fuel Geothermal Wind Solar Electricity Generation End-Use Consumption Residential Industrial Commercial Transportation

U. S. Sectoral Energy Use: 2005 U. S. Sectoral Energy Use: 2005

Source: EIA, Annual Energy Review Source: EIA, Annual Energy Review

Energy-Crisis, High Prices Pre-Energy. Crisis, Low Prices Through 2003 Energy-Crisis, High Prices Pre-Energy. Crisis, Low Prices Through 2003

US Per Capita Total Energy Use 1974 Source: EIA, Annual Energy Review US Per Capita Total Energy Use 1974 Source: EIA, Annual Energy Review

Environmental Environmental

Fossil fuels account for • 98% of the US carbon dioxide net releases into Fossil fuels account for • 98% of the US carbon dioxide net releases into the atmosphere • 82% of the releases of greenhouse gases, measured on a carbon equivalent basis.

U. S. CO 2 Emissions by Sector and Fuels 2004 Source: U. S. EPA U. S. CO 2 Emissions by Sector and Fuels 2004 Source: U. S. EPA Inventory of Greenhouse Gas Emissions, April 2006

Carbon Dioxide Releases: 2002 Actual, 2020 Projections Source: International Energy Outlook 2005 (US Dept Carbon Dioxide Releases: 2002 Actual, 2020 Projections Source: International Energy Outlook 2005 (US Dept of Energy)

Security Issues Security Issues

 • Production of oil concentrated into unstable areas of the world • Sudden • Production of oil concentrated into unstable areas of the world • Sudden supply reductions can sharply increase oil price • Short run demand elasticity about - 0. 1 to - 0. 2 • Percentage price increase will be 5 to 10 times the percentage supply reduction • Sudden oil price increases can lead to worldwide recession • Petroleum revenues fund terrorist activities

World Oil Supply, 2004, Total: 83 mmb/d World Oil Supply, 2004, Total: 83 mmb/d

Ownership of oil industry • The largest 13 firms – as measured by oil Ownership of oil industry • The largest 13 firms – as measured by oil and gas reserves – are all owned by nations or are controlled by other nations • Oil supply may be manipulated for political purposes by those nations controlling the reserves

Oil and Gas Reserves, Billion Barrels Oil Equivalent Saudi Aramco (Saudi Arabia) 302 Exxon. Oil and Gas Reserves, Billion Barrels Oil Equivalent Saudi Aramco (Saudi Arabia) 302 Exxon. Mobil 23 National Iranian Oil Co 302 Pertamina (Indonesia) 22 Gazprom (Russia) Iraqi National Oil Co Qatar Petroleum Kuwait Petroleum Co Petroleos de Venezuela Adnoc (Abu Dhabi) Nigerian Natnl Petroleum Co Sonatrach (Algeria) Libya NOC Rosneft (Russia) Petronas (Malaysia) 198 136 133 109 105 80 41 38 31 28 26 21 19 19 19 16 13 12 12 11 9 Lukoil (Russia) BP Pemex (Mexico) Petro. China Shell Yukos (Russia) Chevron Petrobras (Brazil) Total (France) Surgutneftgas (Russia) State Owned/Controlling Interest. Private Sector Owned

Economic Issues Economic Issues

Crude Oil prices • Crude Oil prices are currently high • Prices on futures Crude Oil prices • Crude Oil prices are currently high • Prices on futures markets suggest that crude oil prices are most likely to further increase • World demand continues to grow • Development of China and increase in the number of passenger cars • India is likely to follow • Expectation that conventional oil supply may peak soon • Incentives for dominant suppliers to limit investment in new production capacity so as to keep prices • Incentives for dominant suppliers to keep future prices uncertain so as to limit competitive investments

Crude Oil Futures Prices: As of Five Dates Crude Oil Futures Prices: As of Five Dates

Price Risk • Possible to estimate probability distribution of future oil prices by observing Price Risk • Possible to estimate probability distribution of future oil prices by observing options based on the futures market • Puts and calls are priced in the market • Prices of puts and calls reflect the beliefs of market participants about price uncertainty • Significant uncertainty in the near term • Uncertainty increases over time • Data quality • Relatively good through 2007 • OK, but limited to December 2009 • Risk of either very low or very high prices

Oil Price Uncertainty December 2009 Delivery (data March 10, 2007) Oil Price Uncertainty December 2009 Delivery (data March 10, 2007)

Energy Efficiency: Economically Efficient Reductions in Energy Use Intensity Energy Efficiency: Economically Efficient Reductions in Energy Use Intensity

Decreased Energy Use Reduced Economic Efficiency Increased Energy Use Decreased Energy Use Reduced Economic Efficiency Increased Energy Use

Decreased Energy Use Inefficient Energy Saving Waste Energy Efficiency Improvement Economically Efficient Energy Intensification Decreased Energy Use Inefficient Energy Saving Waste Energy Efficiency Improvement Economically Efficient Energy Intensification Increased Economic Efficiency

Decreased Energy Use Restrict SUV Sales Gasoline Rationing Overly Strict Building Standards Many Rapid Decreased Energy Use Restrict SUV Sales Gasoline Rationing Overly Strict Building Standards Many Rapid Transit Systems Promote Incandescent Lighting Plug-In Hybrids (Now) Hybrid Gas. Electric Vehicles LED General Lighting (Now) Gasoline Price Controls LED General Lighting (Future) “Smart” Local Land Development Plug-In Hybrids (Future) Optimized Building Construction Pigouvian Energy Tax Internet Growth Economic development Plasma TVs “Smart Buildings” Controls Energy Audits LED Traffic Lights Compact Fluorescent Penetration Some Rapid Transit Systems Personal Computer Penetration Airline Deregulation Tighter CAFE Standards Energy Star Labeling Congestion Pricing Increased Economic Efficiency Rural Electrification

Some Sources of Efficiency Failures • Externalities of Energy Use • Global Climate Change Some Sources of Efficiency Failures • Externalities of Energy Use • Global Climate Change • Risks of Energy Price Shocks • Limitations on our Foreign Policy Options • Terms of Trade Impacts (Pecuniary “Externalities”) • Safety externality in autos • Pricing Below Marginal Cost • Non-time-differentiated Electricity Pricing • Information Asymmetry • Consumer Product Marketing • New Building Construction • Incomplete Technology Options • Under-investment • Sub-optimal technology directions, due to externalities • Non-Convexities • Learning By Doing Technology Spillovers • “Chicken and Egg” Problems

Per Capita Electricity Consumption Per Capita Electricity Consumption

Example: Lighting Example: Lighting

Commercial Building Energy Uses Source: 2006 Buildings Energy Data Book Commercial Building Energy Uses Source: 2006 Buildings Energy Data Book

Lighting as Share of U. S. Electricity • Lighting use – About 800 Terawatt Lighting as Share of U. S. Electricity • Lighting use – About 800 Terawatt hours (1012) per year • Electricity Generation – 3815 Terawatt hours per year • Lighting is 21% of all electricity use

From “U. S. Lighting Market Characterization”, prepared for DOE EERE by Navigant Consulting, 2002 From “U. S. Lighting Market Characterization”, prepared for DOE EERE by Navigant Consulting, 2002

From “U. S. Lighting Market Characterization”, prepared for DOE EERE by Navigant Consulting, 2002 From “U. S. Lighting Market Characterization”, prepared for DOE EERE by Navigant Consulting, 2002

Residential 900 Lumen Lighting 20 year Lifecycle Cost (Now) Residential 900 Lumen Lighting 20 year Lifecycle Cost (Now)

Commercial 900 Lumen Lighting 20 year Lifecycle Cost (Now) Commercial 900 Lumen Lighting 20 year Lifecycle Cost (Now)

LEDs Efficacy Increases by 30% Per Year LEDs Efficacy Increases by 30% Per Year

Residential 900 Lumen Lighting 20 year Lifecycle Cost (In 5 – 10 Years) Residential 900 Lumen Lighting 20 year Lifecycle Cost (In 5 – 10 Years)

Commercial 900 Lumen Lighting 20 year Lifecycle Cost (In 5 – 10 Years) Commercial 900 Lumen Lighting 20 year Lifecycle Cost (In 5 – 10 Years)

Energy Implications of 100% LEDs @ 120 Lm/wt System Efficacy Energy Implications of 100% LEDs @ 120 Lm/wt System Efficacy

Economy-Wide Impacts of All LED • Lighting use: 21% of all electricity use – Economy-Wide Impacts of All LED • Lighting use: 21% of all electricity use – All LED saves about 60% of this electricity in long run: • 13% of all electricity use – after all adjustments – Adjustment time: • How long until LED system efficacy reaches 120 lm/wt? 5 years? • 50% adoption: 15 years afterwards? – 50% adoption will save 6. 5% of all electricity use • Electricity impact: Perhaps 6. 5% reduction in 20 years • Electricity cost impact – Total cost of U. S. electricity • Retail: $300 Billion per year • Variable Costs: say $200 Billion per year – 6. 5% of $300 Billion dollars = $20 Billion per year – 6. 5% of $200 Billion dollars = $13 Billion per year

Example: Fuel Economy of Light Duty Vehicles Example: Fuel Economy of Light Duty Vehicles

Forces Shaping Energy Use • Transport Sector – Chosen Level of Mobility • Income Forces Shaping Energy Use • Transport Sector – Chosen Level of Mobility • Income and Free-time Dependant • Urban/Suburban/rural land use patterns – Modes of Transport (personal vehicle, airplane, bus, trains) • Value of Time • Costs of Alternatives (Influenced by oil price) • Availability of Alternatives – Vehicle Characteristics • • Performance Size Engine, Drive Train Technologies Choices influenced by oil price

Estimated Cost-Minimizing MPG vs. Current Passenger Cars: NRC CAFE Study Estimated Cost-Minimizing MPG vs. Current Passenger Cars: NRC CAFE Study

Estimated Cost-Minimizing MPG vs. Current “Trucks”: NRC CAFE Study Estimated Cost-Minimizing MPG vs. Current “Trucks”: NRC CAFE Study

Political Political

Change of Senate and House Majorities • CO 2 mitigation will be a major Change of Senate and House Majorities • CO 2 mitigation will be a major push – Senate Energy Committee leadership change • Cap-and-Trade system for carbon management under debate – Study Group Developed – Group does not have rights to draft legislation • More direct regulations are likely also

Supreme Court Decision on Carbon Dioxide • Carbon Dioxide can be regulated under the Supreme Court Decision on Carbon Dioxide • Carbon Dioxide can be regulated under the Clean Air Act • States can regulate carbon dioxide emissions

California’s AB 32 • Market based instruments • Allowed but not required • May California’s AB 32 • Market based instruments • Allowed but not required • May face opposition from legislature • Development of Cap-and-Trade system • Under way through Cal EPA and CARB • Executive Order on Carbon content of fuels • Average Content • Including hydrogen and electricity • Trading system • To be designed

Other California Rules • Autos: Pavley Bill • CO 2 limits on average of Other California Rules • Autos: Pavley Bill • CO 2 limits on average of new vehicles • Under court challenge • But Supreme Court decision should help greatly • Utility regulation • Renewable Portfolio Standard • Responsibility for CO 2 content of electricity, where ever the electricity generated • Other regulations • Buildings standards • Plug load standards

Political Bottom Line • Many changes to be expected • Regulations still be developed Political Bottom Line • Many changes to be expected • Regulations still be developed • High payoff for getting involved in the process • Many groups are involved; interests vary across groups • Personal involvement can make great difference

Policy Agenda Policy Agenda

Bottom Line • Increases of economic efficiency can be accomplished through decreases of energy Bottom Line • Increases of economic efficiency can be accomplished through decreases of energy use – energy efficiency improvements – In principle, based on understanding of market failures – In practice, based on observations of options and human choices – In practice, based on technology and systems innovation • The potential, I believe, is large for improvements in energy efficiency

Get Prices Right • Oil – The world oil price is passed through to Get Prices Right • Oil – The world oil price is passed through to the economy – International security externality not included – CO 2 externality not included – Other travel externalities not included • Congestion • Highway/Road mortality/injury • Criteria pollutants – Thus price we pay for gasoline is too low

Get Prices Right • US oil price should include an international security externality premium/tax/fee Get Prices Right • US oil price should include an international security externality premium/tax/fee – Gasoline tax – Higher CAFE standards on light duty vehicles • Prices for oil substitutes should not be kept artificially high – Import tax on ethanol -- $. 54 per gallon -- should be eliminated

Get Prices Right • CO 2 – Need US national carbon dioxide cap-and-trade system Get Prices Right • CO 2 – Need US national carbon dioxide cap-and-trade system • The United States could implement a cap and trade system even if we do not ratify Kyoto protocol – System can be implemented • The nations that have ratified the Kyoto protocol now are operating such a system • Currently states are beginning to implement such systems, but a national system would be preferable • We have experience in cap-and-trade – Acid Rain SOx trading – RECLAIM program for criteria pollutants – Chicago Climate Exchange

Encourage Technology Development • President Bush state of the Union speech – Call for Encourage Technology Development • President Bush state of the Union speech – Call for more research and development – Primarily supply technologies • Equally important – if not more important – energy efficiency technologies – Rapid change possible through more efficient vehicles • Hybrid electric vehicles • Plug-in hybrids • Electric vehicles • Longer run: Possibly hydrogen vehicles – Buildings: • Lighting: light emitting diodes • Building design, technologies, operating processes

Encourage Technology Development • Governmental R&D – Federal – States (California Public Interest Energy Encourage Technology Development • Governmental R&D – Federal – States (California Public Interest Energy Research Program) • R&D incentives – In energy bill • Technology competitions • Green labeling

Encourage Entrepreneurial Efforts • May look like no policy at all. • Encourage technical Encourage Entrepreneurial Efforts • May look like no policy at all. • Encourage technical and market experimentations – Some will ultimately make it big; others will not. – But the genius of Silicon Valley involves entrepreneurial efforts, risk-taking, pioneering efforts. – Some of these will be failures, some successes. – Successes will live on, grow to become the household names. • will spawn more entrepreneurial challenges • The failures will typically lead to different attempts, some successes, some failures. – Ahead of time impossible to know which will disappear and which will be the next Google. – Lighting, vehicles are poised for fundamental change.

Adopt Sector-Specific policies • Autos – Higher CAFE standards – Restructure CAFE standards with Adopt Sector-Specific policies • Autos – Higher CAFE standards – Restructure CAFE standards with marketable efficiency credits – Labeling using common metrics people ($ per year? ) • Electricity – Renewable Portfolio Standards; Carbon Dioxide Adders • Buildings – Building Efficiency Standards • Appliances – Appliance efficiency standards; Energy Star labeling

Precourt Institute for Energy Efficiency Precourt Institute for Energy Efficiency

Precourt Institute • • A research and analysis institute at Stanford Established in October Precourt Institute • • A research and analysis institute at Stanford Established in October 2006 Initial funding: $30 million pledge by Jay Precourt Mission – To improve opportunities for and implementation of energy efficient technologies, systems, and practices, with an emphasis on economically attractive deployment – Focus on the demand side of energy markets • Energy efficiency – Economically efficient reductions in energy use (or energy intensity) • Directed by James Sweeney

PIEE Advisory Council • George Shultz, Council Chair, Thomas W. and Susan B. Ford PIEE Advisory Council • George Shultz, Council Chair, Thomas W. and Susan B. Ford Distinguished Fellow: Hoover Institution • Jay Precourt, Council Vice Chair, Chair and CEO, Hermes Consolidated • John Boesel, President and CEO: West. Start-CALSTART • Joseph Desmond, Former Chair, California Energy Commission • TJ Glauthier, TJG Energy Associates, LLC • Agatha Precourt, Consumer Marketing/Brand Management Consultant • Debra Reed, President and Chief Executive Officer, San Diego Gas & Electric and Southern California Gas Co. • Burton Richter, Director Emeritus, Stanford Linear Accelerator Center; Nobel Laureate, Physics • Ben Schwegler, Vice President / Chief Scientist: Walt Disney Imagineering • Byron Sher, Former California State Senator • Erik Straser, Partner: Mohr, Davidow Ventures • Bill Valentine, Chairman of the Board: HOK • Ward Woods, Retired President and CEO of Bessemer Securities • Jane Woodward, CEO: Mineral Acquisition Partners

Intended Activities • Deepening theoretically-based and empirically-based understanding of the forces shaping energy use; Intended Activities • Deepening theoretically-based and empirically-based understanding of the forces shaping energy use; • Developing innovative approaches for understanding the decision-making environment in corporations, public organizations and households that determine the deployment and use of energy efficient technologies and practices; • Undertaking physical and engineering research designed to create or improve energy efficient technologies and systems; • Designing and analyzing policies or other practices to enhance economically attractive deployment, for example, by overcoming market and policy barriers; • Engaging students and faculty in research and education associated with energy efficiency; • Working with affiliates and other organizations outside of Stanford to improve deployment of energy efficient technologies, systems, and practices.

Research Projects Now Underway: Faculty/Student Teams • Frank Wolak – “Designing Mechanisms to Involve Research Projects Now Underway: Faculty/Student Teams • Frank Wolak – “Designing Mechanisms to Involve Final Demand in Wholesale Electricity Markets” • John Haymaker – “An Occupancy Model for Energy Efficient Design” • Larry Goulder – “Policies to Improve Automobile Efficiency/ US Climate Change Policy” • Hamid Aghajan/Stephen Boyd/Andrea Goldsmith – “Wireless Sensor Networks Technology for Smart Buildings” • Jim Sweeney: – “Assessment of Solid State Lighting” – “Hydrogen-fueled Internal Combustion Vehicles: Economic Assessment”

Research Projects Now Underway: Faculty/Student Teams • Pedram Mokrian (Ph. D Candidate) – Assessing Research Projects Now Underway: Faculty/Student Teams • Pedram Mokrian (Ph. D Candidate) – Assessing the Value of Demand Side Resources • Kenny Gillingham (Ph. D Candidate, EPA STAR support) – Behavioral responses to Corporate Average Fuel Economy Increases • Jiyong Eom (Ph. D Candidate) – Game theoretical model of utility supplied energy efficiency measures • John Weyant/ Jim Sweeney – Energy Efficiency session for Snowmass Workshop on Integrated Assessment of Global Climate Change • Holmes Hummel (Postdoc) – Incorporation of Energy Efficiency into Long-Run Energy Systems Model