In spite of advice to the contrary, I have decided to apply a “best practices” analysis to the sacred cow of “free-ridership” as it relates to public benefits and utility energy efficiency programs. This analysis is all the more important, because energy efficiency- with a measurement, verification and sustainability protocol- is emerging as the single best investment option for economic development and emission reduction in such diverse economies as the European Union, Canada, China, New England and the far western states of the U.S.
In relationship to public benefits and utility energy efficiency programs, one of the most vexing problems surrounding the issues of free-ridership is definitional. To the economic purist, the textbook definition of free-ridership is as follows: “A free rider is a person who consumes a good without paying for it.” However, for a variety of reasons, the working definition of free-ridership as it pertains to public benefits and utility energy efficiency programs is significantly different. In this case, “a free-rider is someone who would install an energy efficiency measure without any program incentives because of the return on investment of the measure, but is able to receive a financial incentive or rebate anyway.” This definition has become the accepted language, as used by utilities, program directors and regulatory bodies, to discuss energy efficiency programs.
It is immediately clear that these two usages have very little to do with each other. In fact, this is another case of a useful economic concept being appropriated and re-interpreted for the needs of policy-makers. While it is true that utilities and regulators need a way to distinguish the actual impact of their energy efficiency programs on the market, employing the concept of free-ridership to do this is both confusing and inappropriate.
Then, there is the matter of public and political perception. In a previous era, “energy efficiency programs” were just a fancy way of describing a social program or corporate welfare. These prejudices are slowly disappearing, thanks in part to better measurement technology and an understanding of the relationship between the cost of building new power plants and employing energy efficiency programs as a new source of energy.
In a recent news release from California’s Flex Your Power, they stated that properly done energy efficiency is one/fifth the cost of building new power plants. In a more recent study implemented for the Northeast Energy Efficiency Partnership, Inc. (NEEP), investments in energy efficiency was 67% cheaper than the avoided cost of electric supply. In other words, the cost/benefit analysis of the two approaches to new sources of electricity suggests that energy efficiency programs are 33% the cost of the new power.
Another source of concern for regulators and administrators are the externalities (i.e. a cost or benefit that falls on people who do not participate in the transaction.) of any public benefits or mandated utility energy efficiency program. In this case, administrators accrue the cost of issuing the rebate and the benefit of the reduced consumption on the electric system. Some people argue that energy efficiency programs that are funded by system-benefits charges constitute a negative externality for consumers, since public benefits charges are added to all customers’ electric bills; and then, it is used to fund public-purpose energy efficiency and renewables programs.
Contrary to that argument, the reduction of the electricity demand has a profound effect on the future of adequate supplies of electricity and the overall costs of generating and transmitting electricity, especially when demand has been going up 2.2% per year for years and the average age of our current fleet of power plants is 39.5 years.
Therefore, the economic and social value of energy efficiency to customers is that it reduces the need for new power plant construction with its accompanying production of new emissions. Therefore, it benefits all customers regardless of their participation in the energy efficiency program in their home or business. For these reasons, it should be clear that free-ridership issues for energy efficiency programs do not arise out of externality concerns.
So, if energy efficiency programs do not create free-riders from public good or externality concerns, what is the source of concern for utilities, regulators and/or program administrators? In the early years of energy efficiency programs, when most programs were administered by utilities, their focus was on resource acquisition. In the mid-1990’s when market restructuring became a major initiative of the utility industry, the goal of energy efficiency often became “market transformation.”
However, a major component of this out-dated philosophy was to employ energy efficiency rebates and incentives to get customers to purchase products and services, which would otherwise be prohibitively expensive for consumers, or did not provide a reasonable rate of return for businesses. These market transformation programs, in other words, sought to pick winners among energy efficiency products; moreover, they typically focused on large-ticket items, boilers, air-conditioning systems, etc., which had large up-front costs and limited returns.
This approach forced program administrators to develop a program rationale, which justified this approach. To this end, program administrators often created payback standards for efficiency funding, which penalized lower-cost projects or projects with over-sized benefits. In addition, the standards were based on the belief that businesses should implement measures that meet a certain arbitrary payback standard without any incentive, and often, the payback standards were set too high.
For example, the dividing line for energy efficiency incentives in Oregon is one year, which means any project with a better return on investment than one year does not qualify for program monies. On the other hand, Wisconsin has established a 50% return on investment rule, which will not fund projects with a two year payback.
In the business world, the decision-making process for capital expenditures is much different than some program directors think. Energy efficiency projects have to compete with all other capital initiatives, including investments in new production assets or processes, which are usually given first priority. Under this scenario, incentives are often required for energy efficiency products and services, even those with significant benefits, to be chosen by businesses. “I suspect that time horizons are a major culprit in sustaining the dichotomy of "free ridership" definitions as applied to EE market transformation programs,” stated Christopher Russell, Director of Industry Sector for the Alliance to Save Energy. “We are all aware of the business community's need to earn MORE, and earn it NOW.”
As utilities and states move out of the restructuring period and increasingly turn to energy efficiency as another source of new energy, it should be remembered that a resource cannot be counted until its purchased and installed by a consumer. By writing a purchase order and a check, no customer is getting anything for free. According to Jon Wellinghoff, longtime energy efficiency advocate, “Energy Efficiency is viewed by both utilities and regulatory commissions very differently than supply side measures. And it shouldn't be. Utilities should be required to acquire demand side measures in the same manner as they acquire those on the supply side if the demand measures can be provided as "utility grade" i.e. reliable and predictable and persistent for a specified period of time.”
The Minnesota Public Service Commission has adopted a very sane approach to the free-rider issue. They assume that “free drivers”-- people or companies that install the energy efficiency measure as a result of the indirect effects of the energy efficiency program but never collect a rebate or incentive—offset each other. Ultimately, the whole free-rider issue hinges on the fact that it is notoriously difficult to measure.
Does anyone actually think that General Motors or Ford spent much time worrying about the “free-riders” of their Employee Discount Sale this summer once they decided to offer it. It was just a part of increasing overall auto sales.
Finally, the best measurement of the program’s effectiveness, other than money spent, is the total of electricity saved. In the 21st Century, we have the technology and the available energy efficiency expertise to stem the growth of electricity consumption and the need for new power plants. We cannot allow the inappropriate use of the concept of
free-ridership to impede the progress of thoughtful deployment of energy efficiency throughout the U.S. After all, every kilowatt saved is another kilowatt available for economic development with all of the benefits of cost savings and emission reductions.
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For information on purchasing reprints of this article, contact Tim Tobeck ttobeck@energycentral.com.
Copyright 2010 CyberTech, Inc.
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Date
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Comment
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Len Gould
10.28.05
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Three points:
1) Any company which has energy efficiency opportunities which can provide less than 1 year ROI and isn't already taking them WITHOUT ANY INCENTIVE is being run by incompetents, probably won't be around long enough to make any difference, and deserves no further support.
2) With present and projected volatility of energy prices I think it prudent for something as slow-to-setup and slower-to-take-down as this sort of corporate welfare program should be viewed very sceptically.
3) Your contention that "everyone benefits from reduction in energy usage, not just the one who reduces" simply doesn't stand up to economic scrutiny. Power plants are (presumeably) constructed with a fixed life expencancy during which they must collect a fixed amount of cash flow. If company A reduces it's consumption, sooner or later the rates for company B next door must rise to make up the power company's required cash flow. There's some space for discussion of fuel, but in many areas (eg. here in Ontario) that is practically a non-issue. Certainly if you believe that renewable will significantly increase their contribution, then again capital cost is the only consideration.
In general, the correct approach is to add taxes to the cost of energy until "? the appropriate level ? " of useage is met, while using the amount collected to subsidize all replacement ond/or new generation construction with more environmentally acceptable types of generation.
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Joel Sandersen
10.28.05
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In interest of disclosure, I work for Orion Energy Services, with Mr. Heins, and I assisted in the writing of the first draft of this paper. At Orion, I work as a Research Analyst and have spent the better part of the last five years working in the trenches of rebate programs and processing. In response to Mr. Gould's points, I provide the following responses colored by my experiences.
1) I have seen a number of well respected, commonly, accepted well-run companies resist or choose to not implement energy efficiency measurements with less than a one-year payback - if there is not an incentive involved. This is because, as referenced, energy efficiency investments are often competing for capital dollars against process equipment investments. This is because as Bill Bordass correctly pointed out, in a relatively recent article for the Association for the Conservation of Energy (October 2001), "organizations would prefer not to think about buildings let alone their efficiency and carbon emissions" (p. 10). Many companies will give greater consideration to process investments that allow them to make more widgets, and then allow to make the same number more efficiently. So to imply that companies who choose to do this are incompetent seems exceptionally shortsighted and inappropriate.
2) Energy Efficiency programs are effective and have great potential. As A.B. Lovins writes in his article in The Encyclopedia of Energy (2004), “energy efficiency is generally the largest, least expensive, most benign … way to provide services” (p. 384). Moreover, as Optimal Energy found in its recent analysis of energy efficiency opportunities in the Northeast, Achievable Energy Efficiency Potential in New England, “energy efficiency is a cost-effective means of offsetting load growth and beyond. In fact, saving electricity cost 67 percent less than to supply it” (p. 9). Clearly then, energy efficiency is a legitimate tool to address the current capacity concerns facing the United States.
Additionally, as Mary Novak pointed out in a recent Barons Online column (October 10th, 2005), "Electricity prices will cause a shift in expenditures to energy-efficient equipment. You get a permanent effect in businesses and a transitory effect in consumers." Moreover, in their analysis, of achievable energy efficiency potential in the Northeast, Optimal Energy points out that “commercial and industrial retrofit programs would be needed to capture the remaining 75 percent [of energy efficiency potential] by 2013” (p. 6). Additionally, programs in California, Wisconsin, and the Northeast (particularly Connecticut) suggest that energy efficiency programs can ramped up exceptionally quickly to meet the needs of a region and run in direct opposition to Mr. Gould’s claims that energy efficiency programs are slow to set-up and slow to take down. I could provide additional examples, but it should become clear that the concept of energy efficiency programs as corporate welfare programs is tired, overused and does not appear to hold up to reasonable scrutiny.
3) In addressing the article’s contention that when one entity saves, everyone saves, Mr. Gould presents the typical populist approach, that much like his corporate welfare suggestion above, that shows an undue fear of business, and a lack of understanding of the energy efficiency market. Energy efficiency investments benefit all consumers in the form of providing a hedge against future infrastructure investments, by reducing the amount of capacity required to serve a region’s electric needs. By reducing their demand, individual customers benefit the entire region by reducing the required future load, and thereby the additional capacity required to serve the region. By reducing the future investment of utilities in generating capacity, the total outlays of the community in the form of increased rates will be reduced.
4) Addressing Mr. Gould’s plan to tax the market to equilibrium and use the proceeds to fund new generating resources, while an interesting and somewhat laudable idea in terms of trying to allow market prices to reflect the true cost of the generation of power, it is a political and social non-starter. Neither local, state nor the federal government will be willing to tax the cost of energy to consumers, especially in the current market of sky-rocketing energy prices.
5) Finally, as I mentioned above, I work for Energy Services Company, and I admit that association colors my views; I have sought to present a response that is not colored by my corporate bias. I suggest to Mr. Gould to state his corporate affiliations which may likely illuminate how his experiences color his responses. Finally, I look to reading and review Mr. Gould’s paper detailing his proposed tax and subsidy plan that he discussed in his third point.
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Todd McKissick
10.28.05
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I cannot come up with any logic rationale to treat an energy conservation program as anything other than a high maintenance subsidy. If one spends all this time and effort on getting someone else to make decision A which saves energy, how do they get any return on their investment? Sure the whole of society benefits but that's not different than a "55 saves lives" campaign. There's no benefit for anyone other than the person(s) directly involved in that single specific result. To me, it's an industry like the environmentalists have. They tout benefits and far reaching reasons, but in the end, it's nothing more than an enormous drain on society that gives them jobs.
I have to heartily disagree with Mr. Sandersen in that a company allowing 1 yr. ROI improvements would be well respected. NO. They may make enough money to cover up their stupidity but if you ask the common sense maintenance guy involved with that specific piece of equipment, he's going to have a different opinion. Corporations are very skilled at covering up everything they don't want you to see... like inter-level management competition.
If we have installed all this new capacity now known as efficiency, where are the savings? Year after year, we hear projections of how much we can save if we were to start conserving. We also hear more about how much is installed (i.e. saved). They're nearly always the same and the new years bring new expensive conservation programs. What I mean is that each year we hear that people/companies are putting in really neat new efficient equipment while each year our energy use goes up 2-4% and it's still predicted that we could save 30-75% somehow. So how come the use doesn't drop or the predicted benefits don't get reduced?
I work on the measuring side of the energy industry and can tell you that most large projects don't get used very long in the manner (tighter operating rules) very long and become only marginally better a year after this large sum of money was spent. The small projects rarely survive longer than the promotion (or monitoring) of them.
My biggest complaint with these programs is that they only support the people earning a check by promoting the program. Sure there are examples to the contrary, but you can't find anything farther from reality than trying to compare people's actions to what Excel says they should have done. You can never be sure that they wouldn't have conserved on their own if you had stayed out of it. It's not only a waste of time, it is a waste of money and prolongs & distracts from spending our country's remaining resources on a real and sustainable solution. If that's not clear enough, try this. It really ticks me off.
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Len Gould
10.28.05
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Mr. Sanderson: You provide a sequence of arguments which bolster my contention of incompetence, then state: "So to imply that companies who choose to do this are incompetent seems exceptionally shortsighted and inappropriate. "
You declare: "it should become clear that the concept of energy efficiency programs as corporate welfare programs is tired, overused and does not appear to hold up to reasonable scrutiny." with no evidence. Anyone who has worked in the energy efficiency "industry", as I have, will certainly need more convincing arguments.
I agree the programs are more easily implemented than dismantled, and it's the dismantling part I'm most concerned about. History indicates that once a taxpayer-supported program gets in place with it's coterie of dependents, it becomes extremely difficult or impossible to dismantle.
Finally you completely ignore the core econimics-based argument presented in my point
"Energy efficiency investments benefit all consumers" [i] a little bit, but the actual site of the investments far more than others since not only does the company doing the reducing produce their product with lower energy bills, they also participate along with everyone else in any theoretical reduced infrastructure costs [/i]
Effectively these programs amount to a taxpayer-supported REWARD for those companies installing inefficient systems and not having the brains to fix their problems themselves. Obviously the corallary is also true, that they amount to a PENALTY against those companies who've had the common sense and good management to take care of their problems themselves.
Nuff said for now.
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Len Gould
10.28.05
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It would also be interesting to determine how much the ANTICIPATION of such programs, based on discussions such as this, has amounted to a DISINCENTIVE for companies to take care of problems themselves, delaying known fixes in hope of cashing in on a promised program as proposed.
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Graham Cowan
10.30.05
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I don't know if it's just me, but these waters seem muddy.
Gould seems skeptical of the use of public money to encourage energy wasters to stop, but in favour of the use of public energy revenues "to subsidize all replacement ond/or new generation construction with more environmentally acceptable types of generation".
If these nicer power sources are taxed just the same, this would create "a coterie of dependents" whose long-term income prospects are as good as the usual civil service / government contractor dynamics can make them; whatever results are achieved will be advertised as the best that could have been achieved, and if they aren't what was projected, this will be grounds for funding to increase.
If these nicer power sources are taxed less, the disbursers of the subsidy will be in a punishment-for-performance, funding-for-failure system. Think Partnership for a New Generation of Vehicles, think hydrogen fuel cell cars. Or hey -- think publically funded energy-efficiency initiatives.
Try it this way. Add up the tax secretly collected on retail natural gas sales, the tax in motor fuel prices, production royalties, and every other significant thing that makes the civil service marginally richer when an extra joule of fossil fuel is dug up, sold, and burned. For the USA these taxes will probably add up to US$100 billion a year.
Require the public to fund energy efficiency initiatives, and other things that tend, if done with a genuine will, to reduce fossil fuel revenue, in proportion to how far this revenue falls short of some mark. I'm thinking the mark might be US$120 billion a year, but whatever it is, it must be comfortably north of the total public fossil fuel revenue. And let the proportionality be ~0.1.
So this year, if 100 billion is correct, the US would fund anti-fossil-fuel measures two billion dollars. Next year, if they have had some effect and public oil and gas revenue has dropped to US$96 billion, the shortfall is US$24 billion; funding rises to 2.4 billion.
Maybe the revenue shouldn't drop below, I dunno, thirty billion dollars a year. So the funding should stop increasing at seven billion a year. But that would take decades, right? To reduce US coal, oil, and gas use so much that the public exchequer's profit on them drops 70 percent?
--- Graham Cowan, former hydrogen fan boron as energy carrier: real-car range, nuclear cachet
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Len Gould
10.30.05
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Graham:
I realize a forum post is a difficult venu to present a logical sequence of ideas and perhaps it's just me, but your last seems particularly obscure. I'm thinking Monty Python.
Are you proposing that if, in year 1 of your program, fossil fuel tax revenue comes to 98 billion, then 0.1 x (120 - 98) = 2.2 billion be allocated to subsidizing energy efficiency? Doesn't that strategy simply add to the government's incentive to maintain high useage rates? The intended purpose is unclear.
It would seem more logical to me to use a variable tax on all (or better, only imported, though "free" trade rules would no doubt be a problem) fossil fuels to generate a flat amount each year regardless of rates of use. That way there is no government dis-incentive to either a) defeat viable alternative systems or b) support effective alternative energy strategies if such is indeed possible.
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Len Gould
10.30.05
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last sentence should read "That way there is no government incentive to either a) defeat viable alternative systems or b) fail to support effective alternative energy strategies (if such is indeed possible). "
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Sean Casten
10.31.05
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Great article, Steve. The need for the discussion is amply demonstrated by the subsequent debate, which is frankly tired. In the idealized view, all energy efficiency measures have been made because our economy is so efficient. The reality is quite different, as demonstrated most famously by Amory Lovins' joke about the economist who walks past a 20-dollar bill in the street because our market economy would not allow such inefficiencies to exist, and therefore someone else must have picked it up.
To those who disagree with the idea that a failure to build rapid-payback projects is a sign of incompetence, I'd pose the following question - look around your own home and business. Did you spend the extra few bucks for an extra few inches of insulation? Do you have motion detectors on your light switches? Are your furnaces recuperated? Have you caulked all your air-leaks? There are a thousand tiny changes we could make in our own lives and yet - even for those of us who make our living in energy efficiency - we don't make these investments, for reasons that are no different than the businesses that Mr. Gould calls incompetent.
So why don't we? Two reasons: (1) In many cases, these investments aren't big enough to be meaningful. Many EE projects fall into a capital budgeting limbo wherein they are big enough to require corporate authorization, but too small to make a measurable difference in a business' bottom line. Good, competent managers don't focus on these investments for good, competent reasons: their incentives are directed towards the generation of cash, not the manufacture of returns. Thus, a $10 million business may not invest in efficient lighting that saves them $2000/year for the same reason that a $100 million business doesn't invest in 1 year payback, $20,000 energy efficiency projects. (2) Paybacks are in the eye of the beholder. To an energy efficiency professional, many of these investments are no-brainers. We know from experience exactly what the costs and savings will be. However, to the EE investor, there is much less familiarity and therefore a risk premium. Should I trust the vendors' assertions of capital costs, operating life, long-term O&M, etc? Often, the business making the investment will load the pro-forma project up with contingencies potentially pushing the percieved payback out beyond accepted capital thresholds. This latter point is best illustrated by example. Suppose you ran a paper mill and had $1 MM to spend. Option 1 is a new paper machine that your plant manager claims will deliver 20% returns. Option 2 is a hot stock tip you got from the same plant manager, which he claims will deliver 50% returns. Which do you do? More often than not, competent managers will stick to their core business, temper the stock deal with all sorts of uncertainty and go for the "lower" return. And while that may be bad from a societal perspective to the extent that we lose the benefits of EE, it's not necessarily bad management.
Given these two barriers, EE funds have a critical role to play. Barrier (2) is clearly helped by state funds to lower paybacks, even if they are already quite fast. (This barrier is also indirectly helped by the credibility which comes from neutral third-parties in state agencies vetting EE performance numbers, and thus in some cases lowering the percieved project risk.) Barrier (1) is frankly harder to address through purely financial measures, but can sometimes be helped by the PR which comes from state support for these types of projects. But in no cases is it accurate (or productive) to cast aspersions of incompetency on businesses who don't invest in EE without state support.
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Todd McKissick
10.31.05
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My humble opinions tells me to be worried about some of the proposals put forth here. Be it either complexity beyond easy (for the people who count - i.e. the investors) comprehension or the involvement of the government with the poor track record of doing things right and without the bias we all know to exist in energy related government sponsored programs.
What is wrong with providing a universal benefit of some sort for PRIVATE investment that leads to the end goals. Those goals should be clearly defined as sustainability and energy independence. They can include efficiency as well, but only for actual savings and not for awareness programs. Those programs seem to multiply worse than rabbits and drain valuable development funds enormously. Take the subsidies away from poluters as much as you can politically muster and allocate it towards investment breaks for the above programs. If these private investments' tax savings were based largely on barrels of oil eq. saved or CO2 saved, that puts the incentive to the decision makers. Personally I've never seen a company go after operating expense savings as vehemently as they do for tax savings. ...so why not let them do what they do best ...for all our benefit?
The added benefit would be that the market would favor the renewable OR efficiency gain with the largest impact on our one problem - energy use - without some bean counter 'picking the winner' technology.
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Stephen Heins
10.31.05
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Dea Joel, Graham and Sean,
Thanks for your effforts to expand the economic discussion! The emerging energy technologies are best understood as a cost-effective approach to America's energy future, because they are measured, verified and sustainable acts of energy efficiency.
As for Len and Tood, I will repeat a comment I made to both of you about an earlier article of mine:
"Todd & Len, I am happy you have bonded with each other, but I fail to see any sign of RealEnergy in your exchanges. Between the notion of "free" energy and total government regulation, the U.S. energy market stands like an unsightly 1600# gorilla. From a RealPolitik and real energy policy perspective, U.S. regulators and politicians will influence the energy markets, period the end. As an energy participant, my company seeks to provide several practical options of energy efficiency to supplement the "exotics" potential so that current energy policy includes the best of today and the most fruitful possibilities of the future. This is a modest goal, but it can be achieved now. After all, a good plan today is better than a perfect plan ten years from now."
Steve
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Todd McKissick
10.31.05
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Steve,
I think you may be minunderstanding one of my specific point. I am not promoting wasting energy, nor am I trying to stop people from implementing efficiency projects. I actually commend what your company does greatly! You are the perfect example of my point that the government does NOT need to be involved. I do not believe that my taxpaid dollars are very well spent on any government program to supposedly promote these projects. I can cite you tons of examples where one government program begets another and another endlessly with no significant impact. I live in a state with the 6th largest potential of renewables, the 47th least usage of renewables, and almost zero concern over the issue and have found a great many state payrolled individuals passing information on for how to get a project funded. The problem is that they all point to each other and none actually fund it. I've hit them all and every one has their own excuses. It's way beyond frustrating. So I say get the government out of the picture. I'm not even going into the federal government issues.
Regarding the "free energy" comment you make, if I understand your comment any better this time than I did originally, you are referring to alternatives non-ability to make a significant dent in the overall problem. I contend that you are sadly misinformed. There are quite a few alternatives with a positive payback and others with the capacity to fully satisfy the entire demand.... or as much as 1400 time the need. Take a few minutes and calculate the ROI and other measurables of Solar 1, Solar 2, and the SEGS Trough projects of the last decade or so. They were/are already cost effective and the trough one (still running) is still the largest/cheapest/most efficient solar project to date. The problem is not one of a technical nature, but a political one. So by your own admission, the 1600 Lb gorilla will prevent it at all costs. Yes, take that to mean the winner-picking subsidies are going to the ones incapable of the solution. (Here's a good question: When's the last time you saw any significant debate on the solar thermal electric market in here? I can't even get it differentiated from PV which has no similarities.) It's for this reason that you rarely see news of the other guys. They're keeping under the radar for two reasons. The mass media only cites the major news events of which few exist and that means less investment dollars for them. Secondly, the only way they can enter the market is with a 'commercially available' system - meaning they need that investment dollar that's unavailable.
My opinion on the grand situation is that if we concentrated our wasted dollars (selective subsidies, efficiency programs and political rouses) into the development of these projects and got the technology to market 1, 2 or 10 years earlier, that's just that much less fossil fuel we need to waste. Let companies like yours advertise their benefits to customers, as I'm sure you already do, to do the promoting of efficiency. If it really saves on electric bills, (and it will) those programs will multiply with the money going into self escalation of this process. Win-win for all.
Regarding "..a good plan today is better than a perfect plan ten years from now." I don't believe this to be true if you waste all your money and energy resources waiting on someone else to pay the bill. Energy saved today only prolongs the inevitable, it does nothing to reduce it's cost or make it more viable, period the end.
I completely understand the investment banker who will not listen to concentrated solar technology, but it baffles me that I can't get a group of technical engineer types to even discuss it's pros and cons on a level playing ground. How about we cut through the red tape of discussing politics, figure out the technical solution, put our efforts toward that now instead of wasting time and money on some half baked plans like building a whole new infrastructure of LNG ports which will be totally unecessary in not that long. Add to that building new pipelines and subsidizing mature energy technologies to hide their true cost. The only way I see anything real working is in the private sector. Just my opinion.
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Graham Cowan
10.31.05
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Let me fix the runaway italics.
Gould seems skeptical of the use of public money to encourage energy wasters to stop, but in favour of the use of public energy revenues "to subsidize all replacement ond/or new generation construction with more environmentally acceptable types of generation".
If these nicer power sources are taxed just the same, this would create "a coterie of dependents" whose long-term income prospects are as good as the usual civil service / government contractor dynamics can make them; whatever results are achieved will be advertised as the best that could have been achieved, and if they aren't what was projected, this will be grounds for funding to increase.
If these nicer power sources are taxed less, the disbursers of the subsidy will be in a punishment-for-performance, funding-for-failure system. Think Partnership for a New Generation of Vehicles, think hydrogen fuel cell cars. Or hey -- think publically funded energy-efficiency initiatives.
(I hope this is the part that McKissick is talking about when he speaks of being worried. Punishment for performance is bad setup. Funding for failure is a bad setup.)
Try it this way. Add up the tax secretly collected on retail natural gas sales, the tax in motor fuel prices, production royalties, and every other significant thing that makes the civil service marginally richer when an extra joule of fossil fuel is dug up, sold, and burned. For the USA these taxes will probably add up to US$100 billion a year.
Require the public to fund energy efficiency initiatives, and other things that tend, if done with a genuine will, to reduce fossil fuel revenue, in proportion to how far this revenue falls short of some mark. I'm thinking the mark might be US$120 billion a year, but whatever it is, it must be comfortably north of the total public fossil fuel revenue. And let the proportionality be ~0.1.
So this year, if 100 billion is correct, the US would fund anti-fossil-fuel measures two billion dollars. Next year, if they have had some effect and public oil and gas revenue has dropped to US$96 billion, the shortfall is US$24 billion; funding rises to 2.4 billion.
This makes Gould wonder why I'm proposing to cure government's dislike of a $4 billion reduction in fossil fuel income by turning it into a $4.4 billion one. The answer is, there's no way for government to like this, but we can usefully distinguish between government as a whole, and the small part of it that handles the subsidy.
Government as a whole is only ten percent more miffed; the people closest to the decarbonation and efficiency efforts are negatively miffed, rewarded for their success, and that, I contend, is what will make all the difference.
Maybe the revenue shouldn't drop below, I dunno, thirty billion dollars a year. So the funding should stop increasing at seven billion a year. But that would take decades, right? To reduce US coal, oil, and gas use so much that the public exchequer's profit on them drops 70 percent?
That "seven billion" should of course read "nine billion". Whatever it is, it's way down the road. Does anyone disagree?
--- Graham Cowan, former hydrogen fan boron as energy carrier: real-car range, nuclear cachet
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Richard McCann
10.31.05
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This article and subsequent discussion appears to miss the real point of identifying "free riders" (a concept equally applicable to public and private goods). A well designed program attempts to minimize "policy leakage"--the funds or effort spent that do nothing to help achieve the program's goals. "Free ridership" is one example of this type of policy leakage. Why subsidize the purchase of energy efficiency measures for a group of customers who would purchase the item in any case? And the related question of why should the subsidies be so large if a smaller amount would induce the same behavior? The article seems to belittle even asking these questions.
Unfortunately, the attitude that policy leakage should be ignored is much too common in the political realm. Any handout policy is a good policy. Those who ask hard questions should be encouraged, not attacked. The authors raise a good point that maybe the expected payoff periods are too tight for some programs, but that is a technical issue, not one that is a basis for an ad hominum attack on those who ask whether the policy leakages are so large as to render the program costs too high.
The fact is that measurement of conservation savings are both extremely difficult and currently inaccurate. We can't simply just add up the expected installations and assume that those represent the final savings--customer behavior is too dynamic. Program assessments need to be better refined and better able to incorporate a complete customer response. Only in that way can we assess policy leakage and free ridership.
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Stephen Heins
10.31.05
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Richard,
Finally, I get a chance to talk about my article and not the way the world should be. Anyway, I gree with your statement: "Program assessments need to be better refined and better able to incorporate a complete customer response." Although I might add that it is much easier to do accurate measurement and verification with the emerging use of dedicated and on-going metering systems. This also ensures that the energy efficiency applications are sustainable. Finally, any EE provider worth its salt must be willing to guarantee peformance. This would create a irrefutable virtuous circle that will silence even the most anti-business and anti-government critics.
Thanks for noticing my text!
Steve
P.S. Actually, I was trying to ask the "hard questions" about free-ridership.
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Len Gould
10.31.05
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Richard has nailed the problem with the statement
"Any handout policy is a good policy." That appears to be the basis of this article, eg. "As long as you're subsidizing energy production you should subsidize US as well"
I'll grant Steven that I'm no more in favour of subsidizing currently economically viable energy generation industries than of efficiency programs. What I do contend is that
i) if an efficiency program needs a subsidy to "break through the economic barriers" with present prices then present prices are too low, whcih economics dictates should be fixed by increasing prices, not a general tax levy supported subsidy which rewards inefficient users at the expense of the more efficient ones.
ii) no-one can possibly contend that this sort of program is in step with present "deregulation" offensives against the small ratepayers. The energy industry can either have it's "deregulation / market based pricing / passes true cost signals on to end users" argument, OR this type of program, BUT NOT BOTH. I'll support this sort of program the day the industry stops pushing for deregulation.
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Todd McKissick
11.1.05
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Steve,
I have to appologize for taking your venue and using it to further my personal agenda. Your article was a very well laid out set of thoughts regarding a specific issue of a path that you and I disagree on at the most basic level and I took the opportunity to bring out that basic argument. Thanks to Richard for seeing that and bringing it back on topic. My complete frustration at the lack of discussion of the technical issues (most recently in Mr. Henry Valentine's "The Future Potential for On-Site Small-scale Power Generation" which began technical and went political) should not justify do the same thing here.
On topic: One question that I have in these programs is what is the point of diminishing returns on the effort spent on chasing the difference between the so far removed end receipients and determining whether they are valid or free riders? When I first entered the field of plant automation and found all the wonderful things that could be monitored, my starry eyes dreamed of all the metrics that could be placed on each piece of equipment and system. Life could be wonderful and everything would be so efficient and in harmony. But the resources required to make that happen greatly outweighed the gains when the plant had only one product (clean drinking water) which was billed only by quantity and not quality. To equate this to EE programs such as you're discussing, you're end goal is that same quantity and there is no quality of those saved KWs considered. I don't see any way to differentiate between 1) a saved KW on it's own, 2) one resulting from the EE program and 3) one that was postponed just to take advantage of the EE program. People are sneaky and that truth would take some serious resources to investigate reliably. (These and the other untold externalties are probably the biggest reason I'm against government sponsored EE programs at all.)
My sense is that until an ROI comparison can be made of 1) tracking the resources needed to track who qualifies as a free rider vs. 2) the actual resources up for grabs by those free riders, it is probably not an answerable question.
Todd
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Glenn Garland
11.1.05
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I really enjoyed the article Stephen. At CLEAResult, we feel that any discussion on the topic of energy efficiency is good discussion period! The case is clearly made that more energy efficiency is great for expanding the capacity of electricity systems. A number of the commenters seem to overlook the other benefits of energy efficiency including the increased competitiveness of American businesses the implement the energy efficiency measures, the financial benefit to public entities by reducing budgets and lowering the demand on the tax base. A number of the people commenting on the energy efficiency policies seem to inadvertently apply the problems of decision-making around energy efficiency investments to the public benefit programs that promote energy efficiency, as opposed to the decision-making processes of Americans around energy efficiency. Corporate America is now waking to the realization that a dollar saved in energy efficiency DOES fall straight to the bottom-line profitability of the company. Taxpayers are realizing that energy use in their public facilities has a direct impact on their tax rates and homeowners that have made investments in energy efficiency have realized that these investments carry a much better return than investments in a volatile stock market or through competing financial instruments. As the author seemed to allude, the issue isn't free ridership, it's changing a mind-set regarding the cost of energy.
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mary ann sheehan
11.1.05
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I would not have agreed that free ridership and free drivership cancelled each other out 10 years ago. I like to review the studies that have determined these are still major factors. I would suggest that for new techologies as they emerge, free ridership would outweight free drivership. However, many technologies have become much more common place and likely free drivership out weighs free ridership for those technologies. For those accepted technologies, free riders would have installed the technology by now.
What I missed in the acticle is the next stage of issues, where we are now. What about the snap back effects and the removal effects. Monitoring and Evaluation of long lived programs should be in by now and the impact of acceptance and retention of measures I would suggest would have more impact on the economics to justify programs than free ridership or free drivership do at this point in the evolution of energy efficiency.
It amazes me how the energy efficiency business runs such of cycle of being in fashion and then out of fashion as the price of energy cycles. Long term analysis should be endorced more by regulators so the industry can stabilize and attract new "energy" among those seeking life long careers.
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Jim Beyer
11.1.05
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A similar situation was discussed recently at a energy conference in Michigan. In a sentence, a program had a hard time getting applicants because many of them didn't believe the cost savings that would accrue, despite the benefits being guaranteed by the program. There seems to be a lot of "low hanging fruit" of efficiency improvements that can pay for themselves in 1-2 years. I confirmed this view from other sources as well.
So I agree with the author's concern about at least questioning this tactic. Something so valuable should not be such a hard sell. I'd think even banks may be able to understand and help to finance paybacks that are this rapid.
Rather than rebates, perhaps resources should be put into education. If several companies get benefit from such improvements, then perhaps it will catch on and more businesses and individuals will look to this as a way of finding free money (which is exactly what it is). So, I agree that one shouldn't have to pay people to pick up the $20 dollar bill, as it were.
But I can't help but think that deep down, utilities are in the business of selling energy, so the whole notion of efficiency really doesn't help them that much. It's hard to see how much a utility, deep down, really wants to push for this, at least across the board.
Part of the problem is that utilities need to reorient their business model from selling kilowatts to providing service (or some such thing). With no push from the providers (due to the business model) and no pull from the consumers (due to poor education on opportunities), it's no surprise that there is little occurring. I can see fixing the 'pull', but we also have to fix the 'push' as well.
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Jose Antonio Vanderhorst-Silverio
11.4.05
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I have a perception that under a different scenario, the dialogue might become simpler and converge to avoid altogether the free riders problem. That scenario is true retail deregulation, where retailers compete with each other to serve customers. In such a scenario, the regulator changes its job from rate case procedures (price controls) with utilities to prudential regulation of retailers.
In that respect, I find that the article by Joel Gordes “ElectroFinance: A Proposed Product for Insurers in a Deregulated Electric Market” http://www.energypulse.net/centers/article/article_display.cfm?a_id=382 as the means to finance energy efficiency (and Demand Response as well) efficiently.
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Stephen Heins
11.10.05
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Ladies and Gentlemen,
Thank you for your input, and in Todd's case, apology. In particular, Jim B.'s point about utilities is absolutely correct, which is why I have argued for allowing utilities to make a comparable return-on-investment for their energy efficiency activities as they currently do for new plants and transmission; and, Mary Ann's point about the erratic history of energy, which has been changing again (and, probably forever) because 3 billion more people are participating in the global marketplace than were 15 years ago.
In principle, the U.S. has the need and the technology to control energy consumption in real time and it is crucial we find the practical ways to make us more globally competitive and environmentally responsible. That's my story and I am sticking to it.
Steve
P.S. Len, you have used my writings to make 20 individual comments, all without ever really addressing the text. In addition, you have hijacked the discussion on numerous other articles besides my own. Could you please write you own article (s) and stop squatting on mine?
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Len Gould
11.10.05
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Steven: Fine, you lose poorly.
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