Energy Efficiency and Energy Energy Efficiency and Energy Policy

James SweeneyJames SweeneyStanford University

Director, Precourt Institute for Energy EfficiencyDirector, Precourt Institute for Energy EfficiencyProfessor, Management Science and Engineering

Policy Drivers

• Environmental Protection• Global Climate ChangeGlobal Climate Change

• Security• Oil/International vulnerability

Vulnerability of infrastructure to terrorism • Vulnerability of infrastructure to terrorism, natural disaster, or human error

• Economics• Prices of electricity, gasoline, natural gas• Price volatility: oil, natural gas, wholesale

electricityelectricity

41 40

45U.S. Energy Usage: 2005, 2006

35

40

2005 2006

23 2323 2225

30

on Buts

3 22

15

20

Quadrillio

8 8

2 9 3.0

10

15

2.7 2.9

0.3 0.07 0.18

2.9 3.0

0.3 0.07 0.26

0

5

Source: EIA, Annual Energy Review

Energy Efficiency Compared to CO Free Energy SupplyCO2-Free Energy Supply

• A 10% reduction in all energy intensity gy yimplies that 8.5 quads of fossil fuels are not used, reducing CO2 emissions by 8.5%

• A 25-fold increase in wind plus solar can displace about 8.5 quads of fossil fuels.p q

• A doubling of nuclear power can displace 8 quads of fossil fuels.

Environmental

Energy Related Activities Account For

• 85% of the releases of greenhouse gases, measured on a carbon equivalent basismeasured on a carbon equivalent basis.

• 98% of the US carbon dioxide net releases into the atmosphere

• 38% of methane

• 11% of nitrous oxide

U.S. CO2 Emissions by Sector and Fuels 2005: 1,568 Tonnes Carbon (5,751 Tonnes CO2)

600vale

nt

500

r C

arbo

n eq

ui Natural GasPetroleumCoal Air

300

400

nnes

per

yea

r

Trucks Buses

200

Mill

ions

of t

on

LDVs

0

100

Residential Commercial Ind strial Transportation Electricit

M LDVs

Source: U.S. EPA Inventory of Greenhouse Gas Emissions, April 2007

Residential Commercial Industrial Transportation Electricity Generation

U.S. CO2 Emissions by Sector and Fuels 2005: 1,568 Tonnes Carbon (5,751 Tonnes CO2)

600vale

nt

Through Electricity

500

Car

bon

equi Natural Gas

PetroleumCoal Air

300

400

nnes

per

yea

r

Trucks Buses

200

Mill

ions

of t

on

LDV

0

100M LDVs

Source: U.S. EPA Inventory of Greenhouse Gas Emissions, April 2007

Residential Commercial Industrial Transportation

45

US Primary Energy and Electricity Use by Sectors

40

5

30

35

tu

20

25

drill

ion

Bt

15

20

Qua

5

10Through Electricity: Res, Ind, CommPrimary: Res, Ind, CommTransportation: Primary

01950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Transportation: Primary

Energy Efficiency:

Economically Efficient Reductions in Energy Use

IntensityIntensity

Decreased Energy Use

Increased E i

Reduced Economic Economic

EfficiencyEconomicEfficiency

Increased Energy Use

Decreased Energy Use

Energy EfficiencyI ffi i t E Energy Efficiency Improvement

Inefficient Energy Saving Increased

EconomicEconomicEfficiency

Economically EfficientEconomically Efficient Energy IntensificationWaste

Some Sources of Efficiency Failures• Externalities of Energy Use

Gl b l Cli t Ch• Global Climate Change• Risks of Energy Price Shocks• Limitations on our Foreign Policy Options• Terms of Trade Impacts (Pecuniary “Externalities”)• Terms of Trade Impacts (Pecuniary “Externalities”)• Automobile risk shifting by purchase of heavy vehicles

• Pricing Below Marginal Cost• Non-time-differentiated Electricity PricingNon time differentiated Electricity Pricing

• Information Asymmetry/ Agency Problems• Consumer Product Marketing• New Building Constructiong

• Suboptimal Technology Options• Incomplete capture of intellectual property• Under-investment• Sub-optimal technology directions, due to externalities

• Non-Convexities • Learning By Doing Technology Spillovers

“Chi k d E ” P bl• “Chicken and Egg” Problems

Minimizing Economic Cost of Reducing CO2

• Multiple market failures imply multiple instruments Multiple market failures imply multiple instruments are needed

• Best instruments depend on nature of failures– Carbon dioxide externality

• Carbon tax or carbon cap and tradeI f ti t liti– Information externalities

• Labeling, standards, regulations, disclosuresBehavioral issues– Behavioral issues

• Education, marketing, cultural shift– Risk shifting externalitiess s t g e te a t es

• Regulations, incentives– R&D under-investment

• Incentives, government R&D, IP protection

Decreased Energy Use“Smart” Regional Land

Energy AuditsPlug-In

Hybrids

LED General

“Smart Buildings” Controls

Compact

LED Traffic Lights

GasolineOptimized Building

gDevelopment

Reformed CAFE Standards

Halt SUV Sales

Hybrids (Now)

Plug-In

Lighting (Future)

Controls

LED Task Compact Fluorescent Penetration Energy

Cost Labeling

Gasoline Rationing

gConstruction

Overly Strict Building

Efficient AC-DC Converters

Plug-In Hybrids (Future)

Lighting (Now)

Old appliance replacement

Congestion Pricing

Building Standards

Pigouvian Energy Tax

ConvertersHybrid Gas-Electric Vehicles

Behavioral Change:Program ThermostatLights, Tire pressure

Personal Computer Penetration

Increased EconomicEfficiencyMany Rapid

Transit S t

LED General

Internet Growth

Increased commercial space

Incan-descent

SystemsAirline Deregulation

High Definition

Lighting (Now)

Economic development

Gasoline Price Controls

descent Lighting

High Definition TV Accessible

Business Travel

CAFE Standards

Actual (2001) vs DPV Cost Minimizing Fuel Economy – Without Hybrids – NRC CAFE Study

MPG Gallons Per 100 Miles

DPV Cost DPV Cost Optimal %Type 2001

DPV Cost Minimizing 2001

DPV Cost Minimizing

Optimal % Reduction

Subcompact 31.00 36.00 3.23 2.78 14%

Compact 28.00 33.00 3.57 3.03 15%

Mid Size 25.00 30.10 4.00 3.32 17%

Large 21.00 29.00 4.76 3.45 28%

SUV Small 25.10 32.50 3.98 3.08 23%

SUV Mid 21.00 28.00 4.76 3.57 25%

SUV Large 17.50 25.00 5.71 4.00 30%

Mi i 22 00 30 00 4 55 3 33 27%Minivan 22.00 30.00 4.55 3.33 27%

Large Pickup 18.00 27.00 5.56 3.70 33%

45

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

40

3-Year + Externality 14-Year

35

Bas

e M

PG

3-Year3-Year + Externality

14-Year

3-Year +

30

ve M

PG v

s

3-Year

3-Year

3-Year + Externality 14-Year

25

Cos

t Effe

cti

20

C

15Subcompact Compact Midsize Large

Passenger Car Classes

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

35.00

3-Year + Externalit 14-Year

30.00

Bas

e M

PG 3-Year

3-Year +

3-Year + Externality 14-Year

25.00ve M

PG v

s

3-Year

Externality 14-Year

3-Year

20 00Cos

t Effe

cti

20.00C

15.00SUV-Small SUV-Mid SUV-Large MiniVan Pick-up Large

Truck Car Classes

Truck Standard Before Recent Changes

Car Standard

Restructuring of CAFERestructuring of CAFE

• Tradable Fuel Economic Credits• Attribute-Based Targets

Tradable Fuel Economy Credits• Government sets target fuel economy• Government sets target fuel economy

– Should vary with weight or footprint of vehicles

• Manufacturers must meet average target fuel economy or acquire enough credits

• Credits can be purchased from other manufacturers or from government

• Excess credits can be sold if manufacturer exceeds average fuel economy targets.

• Government sales of credits at a legislated price would set a cap on price of credits.

Advantages: Tradable Fuel Economy Credits• Incentives for all manufacturers, including those

b ti t t t i f l beating targets, to increase fuel economy

• Incentives available for new entrants to the industry

• Flexibility to meet consumer preferencesy p

• Limit costs if standards turn out to be more difficult to meet than expecteddifficult to meet than expected

• Will reveal information about costs of fuel economy improvementsimprovements

• Keep aggressive fuel economy goalsfrom creating irreparable harmfrom creating irreparable harm

Attribute Based TargetsC t Att ib t B d St d d• Current Attribute Based Standards:

Vehicle is a Car or a TruckHeavy Vehicles Not Regulatedy g

• Large Incentive to Design Vehicle to be a TruckE g : PT CruiserE.g.: PT Cruiser

• Better Approach: Make Targets Continuous with Meaningful VariablesMeaningful Variables

E.g.: Gross Vehicle Weight or Footprint

• Target Rule May or May Not Provide Incentives To Change Meaningful Variables

Truck Standard Before RecentBefore Recent Changes

Car StandardStandard

35mpg

Possible Integrated Targets

C

AB

Possible Integrated Targets

C

AB

18

Gasoline (Or Equivalent) Use: Light Duty Vehicles

16

18

12

14

Per

Day

8

10

of B

arre

ls P

4

6

Mill

ions

35 MPG Standard

0

2

35 G Sta da d

No CAFE Changes

02005 2010 2015 2020 2025 2030 2035 2040

Example: Lighting

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)

$70

$80 Cost of CapitalCost of MaintenanceElectricity Cost

$50

$60

Electricity Cost

$40

$50

$20

$30

$10

$20

$0Incand CFL LED

Commercial 900 Lumen Lighting 20 year Lifecycle Cost (Now)

$450

$500

$350

$400 Cost of CapitalCost of Maintenance

$250

$300 Electricity Cost

$150

$200

$50

$100

$0Incand CFL LED

LEDs Efficacy Increases by 30% Per Year

140

1602002 DOE Roadmap

LED Standard Chip

100

120

er W

att LED - Standard Chip

LED - Power Chip

80

100

Lum

en p

e

40

60

ffic

acy

/ L

20

40

Ef

01998 2000 2002 2004 2006 2008 2010 2012

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

$70

$80

$60

$70

Cost of CapitalCost of Maintenance

$40

$50Cost of MaintenanceElectricity Cost

$20

$30

$

$10

$20

$0Incand CFL LED

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

$450

$500

$350

$400 Cost of CapitalCost of Maintenance

$250

$300 Electricity Cost

$150

$200

$50

$100

$0Incand CFL LED

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

400

450

Current Mix

300

350

400 Current MixAll LED @ 120 lm/wt

200

250

300

Whr

/yr

150

200TW

50

100

0Commercial Residential Industrial Outdoor