Posts by: Carey King

About Carey King

Dr. Carey W King performs interdisciplinary research related to how energy systems interact within the economy and environment as well as how our policy and social systems can make decisions and tradeoffs among these often competing factors. The past performance of our energy systems is no guarantee of future returns, yet we must understand the development of past energy systems. Carey’s research goals center on rigorous interpretations of the past to determine the most probable future energy pathways. Carey is a Research Scientist and Assistant Director at the Energy Institute at The University of Texas at Austin, and appointed also at the the Center for International Energy and Environmental Policy within the Jackson School of Geosciences and Business, Government, and Society Department of the McCombs School of Business. Visit his website at: http://careyking.com and follow on Twitter @CareyWKing

Relations Between Energy and Structure of the US Economy Over Time

by Carey King

If you care to understand how the “energy part” of our economy feeds back and shapes the “non-energy part” of the economy, then this blog is for you.

Essentially every energy analyst and energy economist should understand the results of this paper. Its findings have important implications for economic modeling as they help explain how fundamental shifts in resources costs relate to economic structure and economic growth.

(more…)

Posted in Energy the nexus of everything | Tagged , , , | Leave a comment | Permalink
View all posts by this author  | View this author's profile

Macro and Climate Economics: It’s Time to Talk about the “Elephant in the Room”

This blog was written for the Cynthia and George Mitchell Foundation, and originally appeared here: http://www.cgmf.org/blog-entry/213/.

This is the first of a two-part series. Part 2 is: “The most important and misleading assumption in the world.

If we want to maximize our ability to achieve future energy, climate, and economic goals, we must start to use improved economic modeling concepts.  There is a very real tradeoff of the rate at which we address climate change and the amount of economic growth we experience during the transition to a low-carbon economy.

If we ignore this tradeoff, as do most of the economic models, then we risk politicians and citizens revolting against the energy transition midway through.

On September 3, 2016, President Obama and Chinese President Xi Jinping each joined the Paris Climate Change Agreement to support U.S. and Chinese efforts to greenhouse gas emissions (GHGs) limits for their respective country. This is an important signal to the world that the presidents of the two largest economies and GHG emitters are cooperating on a truly global environmental matter, and it provides two leaps toward obtaining enough global commitments to set the Paris Agreement in motion.

The economic outcomes from models used to inform policymakers like Presidents Obama and Xi, however, are so fundamentally flawed that they are delusional.

The projections for climate and economy interactions during a transition to low-carbon economy are performed using Integrated Assessment Models (IAMs) that link earth systems models to human activities via economic models. Several of these IAMs inform the Intergovernmental Panel on Climate Change (IPCC), and the IPCC reports in turn inform policy makers.

The earth systems part of the IAMs project changes to climate from increased concentration of greenhouse gases in the atmosphere, land use changes, and other biophysical factors.  The economic part of the IAMs characterizes human responses to the climate and the changes in energy technologies that are needed to limit global GHG emissions.

For example, the latest IPCC report, the Fifth Assessment Report (AR5), projects a range of baseline (e.g., no GHG mitigation) scenarios in which the world economy is between 300 and and 800 percent larger in the year 2100 as compared to 2010.

The AR5 report goes on to indicate the modeled decline in economic growth under various levels of GHG mitigation. That is to say, the economic modeling assumes there are additional investments, beyond business as usual, needed to reduce GHG emissions.  Because these investments are in addition to those made in the baseline scenario, they cost more money and the economy will grow less.

The report indicates that if countries invest enough to reduce GHG emissions over time to stay below a policy target of a 2oC temperature increase by 2100 (e.g., CO2, eq. concentrations < 450 ppm), then the decline in the size of the economy is typically less than 5 percent, or possibly up to 11 percent.  This economic result coincides with a GHG emissions trajectory that essentially reaches zero net GHG emissions worldwide by 2100.

Think about that result: Zero net emissions by 2100 and, instead of the economy being 300 to 800 percent larger without mitigation, it is “only” 280 to 750 percent larger with full mitigation.  Apparently we’ll be much richer in the future no matter if we mitigate GHG emissions or not, and there is no reported possibility of a smaller economy.

This type of result is delusional, and doesn’t pass the smell test.

Humans have not lived with zero net annual GHG emissions since before the start of agriculture.  The results from the models also indicate the economy always grows no matter the level of climate mitigation or economic damages from increased temperatures.

The reason that models appear to output that economic growth always occurs is because they actually input that growth always occurs.  Economic growth is an assumption put into the models.

This assumption in macroeconomic models is the so-called elephant in the room that, unfortunately, almost no one talks about or seeks to improve. 

The models do answer one (not very useful) question: “If the economy grows this much, what types of energy investments can I make?”  Instead, the models should answer a much more relevant question: “If I make these energy investments, what happens to the economy?”

The energy economic models, including those used by United States government agencies, effectively assume the economy always returns to some “trend” of the past several decades—the trend of growth, the trend of employment, the trend of technological innovation.  They extrapolate the past economy into a future low-carbon economy in a way that is guesswork at best, and a belief system at worst.

We have experience in witnessing disasters of extrapolation.

The space shuttle Challenger exploded because the launch was pressured to occur during cold temperatures that were outside of the tested range of the sealing O-rings of the solid rocket boosters.  The conditions for launch were outside of the test statistics for the O-rings.

The firm Long Term Capital Management (LTCM), run by Nobel Prize economists, declared bankruptcy due to economic conditions that were thought to be practically impossible to occur.  The conditions of the economy ventured outside of the test statistics of the LTCM models.

The Great Recession surprised former Federal Reserve chairman Alan Greenspan, known as “the Wizard.”  He later testified to Congress that there was a “flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.”

Greenspan extrapolated nearly thirty years of economic growth and debt accumulation as being indefinitely possible. The conditions of the economy ventured outside of the statistics with which Greenspan was familiar.

The state of our world and economy today continues to reside outside of historical statistical realm. Quite simply, we need macroeconomic approaches that can think beyond historical data and statistics.

How do we fix the flaw in macroeconomic models used for assessment of climate change?  Part two of this two-part series will explain that there is research pointing to methods for improved modeling of what is termed “total factor productivity,” and, in effect, economic growth as a function of the energy system many seek to transform.

Posted in Energy the nexus of everything | Tagged , , , | Leave a comment | Permalink
View all posts by this author  | View this author's profile

Just how big is an XL pipeline?

Today we have a lot of options for sizing our purchases. Small, medium, large, extra large, venti, grande, nano, and the list goes on.  These qualitative words are relative to cultures and languages across the world.   For instance, if I order a shirt from an American clothing brand, I might wear a small or medium depending upon the fit.  However, if I travel to China and my luggage is lost by the airline, I would have to buy replacement garments at XL, XXL, or maybe even XXXL to actually be the same absolute size as my normal S or M.  One label does not describe the same fit.

But I primarily concern myself with energy, not fashion (those who know me are chuckling).  Considering the topic of the proposed Keystone XL pipeline to be built by TransCanada, just how “extra large”, or XL, is it?  In analyzing this question, most analyses focus so much on the small question of the relative impact of the pipeline that they miss the extra large picture: more pipelines mean more shipping options, more options provide (possibly) cheaper options, and cheaper options enable more consumption.  In short, more begets more, not less.

One of the major concerns regarding Keystone XL is whether or not it enables the world to produce and consume Canadian oil sands to such a degree as it undermines climate mitigation on the global scale. Usually economic and life cycle analyses come up with conclusions that GHG emissions changes related to Keystone XL will have little to no material impact on GHG emissions when considering alternative oil supplies (e.g., from Venezuela, as if somehow we can predict that economy) and transport options (e.g., other pipelines and rail).  For proponents, Keystone XL is somehow a GHG rounding error.  Using this logic, every oil well in the world is such a “small rounding error” that each one has no discernible impact on GHG emissions.  Yet somehow, if we add up thousands of indiscernible quantities of oil production and GHG emissions, we get quantities that are much greater than zero (If the Canadian government didn’t think oil sands production had a material impact on GHG emissions, perhaps they would have stayed part of the Kyoto Protocol). The same goes for population: somehow couple by couple we reached over 7 billion of us on the planet even though each couple produced a “rounding error” in terms of a number of children.

More shipping options for oil from the oil sands means just that: more shipping options and more shipping capacity.  See Maximillian Aufhammer’s discussion of the various proposed pipelines for oil sands for a good back-of-the-envelope quantitative discussion.  Four options for shipping oil sands is cheaper (and more) or at worst equal in price to only three of the options.  The same logic holds for three instead of two or two instead of one.  Aside from the pure cost of each shipping option, each has to compete with each other, again lowering the price of shipping.  It is possible that the Keystone XL as the next additional shipping option would be the cheapest option to get oil sands to refineries. If that is the case, then the worldwide marginal price of refined petroleum products would possibly decline. And if this price declines then people will be able to afford to produce and consume more, not less, petroleum as well as other goods and services.   TransCanada understands this concept, as the website keystone-xl.com states “… the Keystone XL Pipeline will also support the significant growth of crude oil production …”.

This increase in consumption due to lower cost is due to the rebound effect, or Jevons Paradox.  The Paradox is difficult to measure and model, especially in today’s globalized world.  Small-scoped and short term analyses, like most of those employed in Keystone XL political battles, simply can’t pick up the concept, yet its effect is clearly shown in the long-run data. The world has continually become more efficient, and so far we humans have continually consumed more energy resources and at an increasing rate due to more people and consumption.

Thus, Keystone XL would be one more investment in long line of investments to enable further access to energy resources.  Opponents of the pipeline are correct in stating that it acts against climate mitigation both physically and symbolically.  Anyone claiming that Keystone XL is neutral or insignificant on aggregate GHG emissions is myopically deluding themselves.  Preventing Keystone XL or any other oil sands transport option decreases GHG over the long-run by reducing the number of shipping options from one of the world’s largest fossil resource areas, and thus raising oil prices to some degree.  In almost no instances does a single person have sole authority over a GHG prevention option as does President Obama on denying the northern leg of Keystone XL (from Canada to the U.S.). If the President actually believes in reducing GHG emissions, he has no choice but to prevent construction of Keystone XL.

So just how big is Keystone XL?  Is it XL or is it small? It’s big enough for activists to rally around yet possibly too small for an economist to notice. It’s small enough to finance for TransCanada, yet too big to hide.  Perhaps the Keystone XL debates have taught pipeline companies they must find Goldilocks so they can ask her about the appropriate size that is “just right”: not so small that they can’t make a profit due to high costs and not so large that they can’t even get it approved.  My prediction, no company will again call their next oil pipeline “XL”.

Posted in Energy the nexus of everything | Tagged , , , , , , | Leave a comment | Permalink
View all posts by this author  | View this author's profile

Why the debate over the Fracking Fallacy is a big deal

by Carey King

This post simply links to two posts by Art Berman on the recent controversy about a Nature article (not scientific journal article) discussing how a base scenario from a detailed analysis of the four major shale natural gas plays in the United States shows less gas future gas production than scenarios from the United States Energy Information Administration (EIA).

 

Read the links below and the original article and letters if …

you are interested in the future of energy,

you want to know if the U.S. will become a major natural gas exporter,

 

Art Berman: Friday, December 19, 2014: Nature Responds To EIA and BEG Denial Letters

Art Berman, Sunday, December 21, 2014: Why The Debate Over The Fracking Fallacy Is A Big Deal

 

The short story is …

1. the Bureau of Economic Geology (BEG), a large research unit at The University of Texas at Austin, has performed (still in progress) a detailed study of four major shale natural gas plays in the United States,

2. a reporter wrote a story on this work in Nature, with the interpretation that the production of natural gas from shale will likely not be as much as commonly stated by industry or the U.S. government,

3. the principal investigators of the research, as well as the U.S. EIA, took exception to the portrayal in the Nature article.

Since I work at The University of Texas at Austin, the home to the Bureau of Economic Geology that headed the detailed shale gas basins study, I will refrain from direct comment other than to say that (1) I agree with Art Berman:  it is important that academics, journalists, and the public discuss important findings and assessments regarding energy resources and learn how to have beneficial discussions, and (2) two persons can look at the same graph of numbers and come to two different conclusions as to the implications (given their background knowledge, motivations, and outlook).

Posted in Energy the nexus of everything | Tagged , , , , , | Leave a comment | Permalink
View all posts by this author  | View this author's profile

RE < C: The end of a project and the stereotype of Silicon Valley

by Carey King

A recent article by two Google engineers, Ross Koningstein and David Fork, in IEEE Spectrum has raised quite a discussion. The article entitled “What It Would Really Take to Reverse Climate Change” discusses Google’s investment in the “RE<C” project that sought to “…develop renewable energy sources that would generate electricity more cheaply than coal-fired power plants do”.  The goal was to produce a gigawatt of power (presumably installed capacity).  Google abandoned the project in 2011, according to the article because they believed it would not meet their cost goal and would also not avert significant impacts from climate change (they state the need to keep atmospheric concentrations of CO2 below 350 ppm as suggested by James Hansen).

I commend the two engineers for writing this article discussing their efforts and thoughts. However, I see this foray into energy as typical of the Silicon Valley mentality that is used to “solving” some technological problem quickly, selling the company or idea to a larger company, and then moving on to the next great app.  Whether it is RE<C or making advanced biofuels from algae or cellulosic feedstocks, the Silicon Valley stereotype thinks the “energy problem” will be solvable just like cellular phones and that their “energy days” will be another line on their CV.  Unfortunately, the realities of the energy production business are more difficult to change than realities on the energy consumption side of the business.  Most innovative companies of the last several years are emerging to use information to consume energy more smartly because we no longer have the money and demographics to increase energy consumption.  This is part of the new reality.

The Google engineers don’t mention the solution that will come about but needs no technology: consuming less energy. This will be the only solution that actually reduces CO2 emissions, but it will instead coincide with higher energy prices and costs, not “cheap zero-carbon energy” as is stated as a goal.  The reason is because of the rebound effect, or Jevons Paradox (named after the British economist William Stanley Jevons).   The cheaper energy becomes, the more the world consumes in the aggregate of all people consuming energy and not just a single device (refrigerator, car etc.) becoming more energy efficient.

Even divergent opinions on the limits of the planet and human endeavours agree that the effect of cheap energy is to increase total consumption compared to if energy were more expensive.  I explain this concept via two books I use for my energy class at The University of Texas: The Bottomless Well (TBW) and Limits to Growth: The 30-year Update (LTG). I specifically use these two books (there are other possibilities) to force students to understand widely divergent opinions on how people interpret the past use of energy for guiding (or not) future energy policy and use of natural resources.  TBW is optimistic on human ingenuity, the discovery of new technologies, and increased efficiency to provide the services we crave.  LTG accepts that humans are clever animals, but also understands the physical constraints of a finite planet will eventually even trump gains in efficiency (so that production and consumption do not increase infinitely), forcing the reduction of consumption and physical stocks that we can maintain (largely people and industrial capital).  TBW says it is best for the government to get out of the way of industry in improving technologies. LTG says that forward-looking policies are (really “would have needed to have been already”) necessary to minimize environmental damage and promote the necessary equity that will be needed after the world peaks in annual throughput (e.g. ~ GDP, but not exactly).

From the IEEE Spectrum article, I view Google as starting in the TBW camp, but never quite reaching the conclusion of the LTG authors.  That is to say they no longer believe technology can solve the problem (they stopped their project), but they believe the solution is some new technology that we have yet to create.   The Google authors state in their IEEE Spectrum article: “Our reckoning showed that reversing the trend [of increasing atmospheric CO2 concentration] would require both radical technological advances in cheap zero-carbon energy, as well as a method of extracting CO2 from the atmosphere and sequestering the carbon.”  They further state: “Not only had RE<C failed to reach its goal of creating energy cheaper than coal, but that goal had not been ambitious enough to reverse climate change.  That realization prompted us to reconsider the economics of energy. What’s needed, we concluded, are reliable zero-carbon energy sources so cheap that the operators of power plants and industrial facilities alike have an economic rationale for switching over soon—say, within the next 40 years.”  Businesses choose the most economic solutions because those are the ones that give them the greatest chance of growing, not shrinking.  If all businesses are growing, and storing, streaming, and beaming more and more information in the cloud servers that Google has provided us with, then this requires more resources, not less … more emissions, not less.  Cheap low-carbon energy might coincide with cheap high-carbon energy too, because if it is really cheap enough, we might be growing enough to continue to afford fossil energy.  Personally, I doubt this outcome because the large growth days are over.  But how do we really assess how “cheap” energy really is?  Let’s look to a time series from the UK.

Figure 1 shows a calculation from Roger Fouquet on the cost of energy in England and the United Kingdom.  What a nice piece of work!  (Note: The UK is perhaps the best example of understanding long-term energy costs and the transition to fossil fuel usage starting in earnest in the late 1700s.)  If we use England and the UK as a proxy for the modern world, Fouquet’s calculations indicate that the last decade (2000-2010) was effectively the time of cheapest energy in the history of mankind (see Figure 1).  It was cheap energy that enabled the human population to reach 7 billion.  In other words, cheap energy enabled us to farm land more intensively with less human effort to produce more food such that it was possible to increase the population. Without modern farming (fertilizer inputs based on creating ammonia from the hydrogen in natural gas, liquid-fueled combustion engines in tractors, fossil fueled transport and storage of food) we would not have 7+ billion people on the planet.  It is simply too expensive and physically impossible to feed 7 billion people via subsistence farming.  More expensive food and energy (really, food is energy) puts downward pressure on population, and that in turn puts downward pressure on the environment.

 

UK_PercentGDPOnEnergy_TotalOnly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 1. The cost of energy for energy services as a percentage of England and United Kingdom gross domestic product [Data courtesy of Roger Fouquet].

 

At the end of the article, the Google team states: “We’re not trying to predict the winning technology here, but its cost needs to be vastly lower than that of fossil energy systems.”  There are two mathematical ways for competing technologies to become vastly lower cost than fossil energy systems.  Either the new technologies become cheaper while fossil energy stays roughly constant (or becomes cheaper more slowly), or fossil energy becomes more expensive while the competing technologies get cheaper, stay the same cost, or increase more slowly.  The real curb on resource consumption and CO2 emissions will be indicated by aggregate energy costs per Figure 1.  If energy spending as a fraction of GDP increases, it indicates we are reaching diminishing returns to consumption and our responses (e.g. research, new energy resource extraction) are inadequate to continue increasing consumption.  This would be the interpretation if we are trying to make energy cheaper and cheaper (most people and governments want this).  However, it is theoretically possible to purposely choose (e.g. by policy) to increase energy spending as a fraction of GDP.  Putting a price or tax on CO2 emissions is an example policy (Note: Internalizing the cost of CO2 emissions makes fossil fuel consumption more expensive but does not make renewable energy cheaper.).

Energy has practically never been cheaper than during the time Google has existed as a company.  If energy is already this cheap, how can we say it is not cheap enough to invest in technologies to mitigate fossil fuel impacts (carbon capture from coal-fired power plants and even capture of CO2 from the air)?  The common statement is that we need (low-carbon) energy to be cheaper to mitigate climate change.  This is tantamount to us “Waiting for Godot” to arrive.   It’s as if we’re saying: “we’re so smart, but if only we were a little smarter, we’d have the cheap unobtainium we’ve been hoping for so that we can do as many things as we want with no environmental impact.”  Unfortunately, all elements in the periodic table have mass and obey the laws of physics, not our social laws of economics.  There are fundamental energetic (low energy return on energy invested) reasons why we have yet to be able to “policy induce” cellulosic liquid biofuels into existence.

The climate solution that Google could not find is not made of some more of some new kind of widget; it is made of less of all past and future widgets.  We got into the climate predicament by millions of incremental advancements, and perhaps we’ll only reduce emissions rates in the same way.  In terms of practically playing in the energy space, as a hybrid solution to “solving” the energy problem, Google ventured into energy management by buying Nest (thermostats that learn your habits and program your home climate control) earlier this year.  This should pay dividends for all, with the tradeoff going further into an Orwellian future of increased mass information on citizen activities.  It is unclear if these types of technologies will help Google (and the rest of us) decrease environmental impacts, increase use of low-carbon energy, or decrease greenhouse gas emissions rates.  But we can be sure that Google owning NEST certainly follows their existing business model of gathering more information to continue selling targeted ads based on your habits.

Posted in Energy the nexus of everything | Tagged , , , | Leave a comment | Permalink
View all posts by this author  | View this author's profile

Why only comparing energy prices is the wrong approach: a case study of residential photovoltaic costs in Germany and the United States

Introduction to 3-part discussion:

This 3-part series discusses the cost of residential photovoltaic (PV) panels in the U.S. compared to Germany, and shows that while most aspects are different, there are some important similarities. This creates a nuanced perspective on answering the question: “Is residential PV more or less expensive in the U.S. compared to Germany?”

  1. The paid cost of installing residential PV is much cheaper in Germany versus the U.S.  This relates to the facts that the U.S. and Germany have different:
    1. regulations, experience and learning from installing PV, and profit margins for installers (see Part 1),
    2. financial incentives to promote PV installations: the Feed-in-Tariff (FiT) in Germany versus the Personal Tax Credit (PTC) in the U.S. (see Part 2), and
    3. culture and roles for government that created differences in electricity prices, tax policies (for energy and other goods), and social services.
  2. Despite the differences, the U.S. and Germany both spend the same fraction of their GDP on both residential electricity and total energy (see Part 3). An amazing coincidence? That is a question for further study, but it provides evidence that
    1. overall energy costs are similar in each country, and
    2. you cannot separate the cost of energy in a country from the broader context of that country’s energy and social policies

Part 1: Comparing Cost of Residential PV in Germany versus the United States

Part 1: short intro

Past surveys show that the cost of installing residential PV in Germany are much lower than in the U.S. even though the technology is the same.  In 2011, it cost twice as much to install a PV panel on your roof in the U.S. versus Germany. The major differences in installed costs relate to each country’s different incentive programs, regulations, profits, and labor costs.   Here I use older data on prices and costs (from 1980-2011), but the concepts here are applicable no matter what the updated costs of any particular energy technology. To learn more, click here for more details.

Part 1: more details

Customer financial incentives have been heavily influential in promoting the installation of residential photovoltaics (PV).  As the cost of PV panels themselves has dropped over the past several years (from 4-5.5 $/W in 2006 to 1-4 $/W in 2011, [1]), so has the installed cost of the panels also dropped.  NOTE: All discussion of installation costs assumes the unit of “constant, or real, 2011 U.S. dollars”, or “$2011”, even, but I refrain from specifying the year 2011, and simply use “$”.

What you pay as a PV owner is usually termed the “installed cost.” The cost of the PV panel is one of the major components of the installed cost of PV, but there are other significant costs such as inverters (convert direct current to alternating current), mounting design and materials, regulatory costs, profits, and labor costs.   In other words, you can buy a PV panel and set it on your lawn, but it costs more money to pay someone to put it on your roof and wire it to your house.

Let us focus on the question of PV installation costs for residential applications (as opposed to large scale solar farms).  Lawrence Berkeley National Laboratory (LBNL) investigated this question in comparing the installed costs of PV in the United States and Germany in 2011 [2].  This comparison is interesting because the cost of the PV panels themselves was exactly the same but installed costs of residential PV systems in Germany were much lower than in the U.S. In 2011 the cost in the U.S. was 6.2 $/W versus 3.0 $/W in Germany (see Table 1).

If I define “soft costs” as those other than for materials and hardware, there is a 2.7 $/W difference in “soft costs” between the U.S. and Germany.  This difference accounts for the vast majority of the installed PV cost disparity. Half of this difference is 1.6 $/W in U.S. installer profit versus 0.3 $/W profit in Germany.  However, the labor costs in the U.S. were 0.59 $/W versus 0.23 $/W in Germany. Further, U.S. installers spent an average of 75 person-hours per installation versus 39 person-hours in Germany.  Both electricians and non-electricians involved in installing PV in the U.S. also get paid more per hour than their counterparts in Germany. Thus, U.S. installers spend more time at higher wages when installing PV panels while making higher profit.  According to LBNL, some of the reason for more installation person-hours in the U.S. is due to a higher proportion of PV systems installed on roofs that require penetrating the roof (due to different roofing materials and some higher wind speeds in U.S.) and additional regulatory requirements that govern installation criteria.

Table 1.  Average installed cost of residential PV panels in 2011, in Germany and the U.S., as estimated by the Lawrence Berkeley National Lab [2] (BoS = balance of system).

Cost item U.S. ($/W) Germany ($/W) U.S. 2010 (labor hrs) Germany 2011(labor hrs)
Module 1.83 1.82
Inverter 0.55 0.33
Other hardware 0.47 0.23
Profit + labor + other 3.34 0.62
Installation labor only 0.59 0.23 75 39
Profit only 1.61 0.29
Total 6.19 3.00

The results of the LBNL study are enlightening (all referencing costs in 2011 U.S. dollars):

  • PV module costs are the same in U.S. and Germany: PV modules are sold in a global market and prices are similar around the world,
  • Other “balance of system” hardware was slightly more expensive in U.S. versus Germany,
  • Installation costs are over twice as high in the U.S. than Germany, and perhaps half this cost difference (~ 1.3 $/W) was due to German installers having more experience from installing more capacity than in the U.S. (the more you install, the faster and cheaper you can install), and

There are many reasons for these results, the reasons are difficult to separate, and hence, all people do not agree on the reasons.   Perhaps two of the most influential factors are (i) the differences in financial incentives and (ii) the price of residential electricity in the U.S. and Germany  To read about the financial incentives, click here: Part 2: PV Incentives, and to read about residential electricity prices, click here: Part 3: The Price is Wrong – U.S. versus Germany.

Part 1: References

[1] IEA (2012) TRENDS IN PHOTOVOLTAIC APPLICATIONS: Survey report of selected IEA countries between 1992 and 2011, Report IEA-PVPS T1- 21 : 2012, available January 7, 2014 at: http://www.iea-pvps.org/index.php?id=3&eID=dam_frontend_push&docID=1239.

[2] Joachim Seel, Galen Barbose, and Ryan Wiser (2013), Why Are Residential PV Prices in Germany So Much Lower Than in the United States? A Scoping Analysis, Lawrence Berkeley National Laboratory, February 2013 Revision, (with Updated Data on Installation Labor Requirements), available January 7, 2014 at: http://emp.lbl.gov/publications/why-are-residential-pv-prices-germany-so-much-lower-united-states-scoping-analysis.

[3] ALSO SEE: Galen Barbose, Naïm Darghouth, Samantha Weaver, and Ryan Wiser, (2013). Tracking the Sun VI: An Historical Summary of the Installed Price of Photovoltaics in the United States from 1998 to 2012 (report LBNL-6350E), July 2013, available January 7, 2014 at: http://emp.lbl.gov/publications/tracking-sun-vi-historical-summary-installed-price-photovoltaics-united-states-1998-201.

[4] DSIRE website, Federal Incentives/Policies for Renewables & Efficiency: (http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US37F).

 

Part 2: Residential PV financial incentives

Part 2: short intro

For financial incentives, Germany has used a Feed-in Tariff (FiT) and the U.S. has used a Personal Tax Credit (PTC) for residential installations (the corollary is the Investment Tax Credit (ITC) for commercial systems) [1].   The FiT incentivizes production and sales of electricity whereas the PTC incentivizes capital investment to enable the PV owner to offset the purchase of electricity.  It is important to understand the differences in impacts from these different incentive policies. Some believe the PTC in the U.S. has incentivized U.S. installers to increase the installed cost to obtain the government rebate.

Part 2: More details

For financial incentives of installing residential PV systems, Germany has used a Feed-in Tariff (FiT) and the U.S. has used a Personal Tax Credit (PTC) (the counterpart is the Investment Tax Credit (ITC) for commercial systems) [1].   It is important to understand the differences in impacts from these different incentive policies.

In Germany, the FiT pays the PV owner a fixed price for each kWh fed into the electric grid (i.e., for each kWh not used by the home owner).  In 2004, the value of the FiT was equivalent to 0.90 $/kWh decreasing to approximately 0.40 $/kWh by 2011[1] [2]. This was a planned decrease in the value of the FiT as part of the original incentive law in Germany.  As a comparison, the German residential electricity price, including taxes, was 0.23 $/kWh and 0.35 $/kWh in 2004 and 2011, respectively (see Figure 2.1). For most of its history, until 2012, the FiT was higher than the price of electricity, and is the main reason that Germany has more PV solar capacity than the U.S.

Part2_Figure1

 

 

 

 

 

 

Figure 2.1. Residential electricity prices, including taxes, in the U.S. and Germany based upon nominal U.S. dollars [original data source: IEA Energy Prices and Taxes].

 

In the U.S., the PTC subsidizes the installation of the PV system by reducing the cost of the installation by 30% of installed costs. This incentive is independent of the quantity of electricity actually generated by the PV panels.  An important difference between the FiT and PTC is that the PTC is a “tax credit.” A tax credit reduces the federal taxes for the PV owner.  Thus, if I install a PV system at cost of $10,000, I get a $3,000 PTC (at 30% of $10,000) to help pay my taxes.  If the owner owes fewer taxes than all money received via the PTC during the year of installation, then the owner cannot fully take advantage of the PTC in that year.  The PV owner can carry over the tax credit to the next tax year (at least until 2016 per the Energy Improvement and Extension Act of 2008) [1].

Remember this important distinction: the FiT incentivizes renewable electricity generation, and the PTC acts to reduce the fixed percentage part of the cost of installation.

In Germany, both the FiT (selling PV electricity to grid) and relatively high retail electricity price (compared to the U.S.) incentivize the homeowner to generate PV electricity.  Residential electricity prices in Germany are approximately three times those in the U.S (see Figure 1).  The FiT and electricity price pushes German installers to compete for customers on installed costs since the installer does not benefit from PV electricity sales or a federal rebate.  Some believe the PTC in the U.S. has incentivized (to some degree) U.S. installers to increase the installed cost to obtain the highest government rebate, but not so high as to be uncompetitive.  Here I explain how this can be interpreted.

While the 2011 average total installed system PV costs in the U.S. were over 100% higher than Germany (see Table 1 of Part 1), another common way to compare costs is to look at the cumulative amount of installation costs, rather than during a single year.  The reason for this second method is based on the idea that as more of a technology is installed, the more efficient and cheaper it becomes to install the technology due to installers “learning” how to do better each time.  Thus, it can be considered more ‘equivalent’ to compare installed costs at the same cumulative quantity of installation rather than the same calendar year.

To assess “learning” effects of PV installation, I focus only on costs of installation, or the “non-module” costs (i.e., all costs other than the price of the PV panel). The Lawrence Berkeley Lab study notes that the non-module costs of PV were only about 36% higher (4.9 vs. 3.6 $/W) in the U.S. versus Germany at the same cumulative installed capacity of approximately 4-5 GW [2].  That is to say, after both countries installed 4 GW of residential PV (in 2007 for Germany and 2011 for the U.S.), the U.S. installation cost was 36% higher than in Germany – very close to the PTC level in which the U.S. government subsidizes 30% of the full installation cost.

Is this a coincidence? Perhaps, but there is logic behind the rationale that federal incentives based on installed costs act to increase the installed cost.  In other words, when the federal government provides the PTC to the consumer, the consumer afford a 30% higher price for a PV installation, and the consumer effectively passes that incentive to the installer.

Is the FiT of Germany or the PTC of the U.S. better? I say there is no answer to this question, but you must read Part 3: The Price is Wrong that discusses electricity prices and expenditures to understand why.

Part 2: References

[1] DSIRE website, Federal Incentives/Policies for Renewables & Efficiency: (http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US37F).

[2] Joachim Seel, Galen Barbose, and Ryan Wiser (2013), Why Are Residential PV Prices in Germany So Much Lower Than in the United States? A Scoping Analysis, Lawrence Berkeley National Laboratory, February 2013 Revision, (with Updated Data on Installation Labor Requirements), available January 7, 2014 at: http://emp.lbl.gov/publications/why-are-residential-pv-prices-germany-so-much-lower-united-states-scoping-analysis.

 

Part 3: The price is wrong: how to determine if solar photovoltaic electricity is cheap

Part 3: short intro

It is not the price of residential electricity (or price of energy in general) that is the best determination of whether or not electricity is expensive.  Instead, a better metric is the total expenditures on energy relative to total household incomes, country GDP, or other metrics using some measure of wealth or disposable income.  When compared to GDP, both the United States and Germany spend 1−1.5% of GDP on residential electricity, even though the price of residential electricity in Germany is three times that in the U.S.  Further, the U.S. and Germany spend the same fraction of GDP on total energy. To learn more, click here for more details.

Part 3: more details

In Part 1 I discussed that in 2011 the installed cost of residential photovoltaics (PV) in the U.S. (6.2 $/W) was twice as high as in Germany (3.0 $/W).  In Part 2, I explained that the higher costs are completely due to “non-module” costs, or all costs other than the PV module that houses the PV cells that generate electricity from sunlight.  In this discussion I contextualize the price and expenditures for residential electricity in the U.S. and Germany.

The costs of installed PV are often discussed in units of “dollars per watt of installed capacity,” or “$/W.”  This is different than the cost of the generated electricity over time, stated as “dollars per kilowatt-hour” ($/kWh), or perhaps “cents per kilowatt-hour.”  For most of us, our electricity bill is based upon an electricity price rate in units of $/kWh. Thus, if I consumed 1,000 kWh per month, and my monthly electricity rate is 0.10 $/kWh, I owe $100 for that electricity.

Ultimately as consumers we care more about $/kWh than the installed cost as $/W, but the installed cost is the dominant cost factor that determines the $/kWh cost of PV electricity.  The other major factor is how much the sun shines where you install the panel.  The amount of sunlight in a given location is called “insolation.”  In Germany, the annual solar insolation is 1,000-1,500 kWh/m2/yr whereas the U.S. varies more widely from 1,400 kWh/m2/yr in western Washington to 2,500 kWh/m2/yr in the desert Southwest (see the very informative National Renewable Energy Laboratory map comparing insolation rates in the U.S. to Germany [1]).  The higher the insolation, the more electricity is generated, and the lower the cost (in $/kWh) of PV electricity.  Thus, for the same cost of installation, in $/W or total dollars, the “levelized” cost of electricity in $/kWh can be over twice as high in Germany as in the U.S.

Figure 3.1 shows U.S. and German residential electricity prices (including taxes).  In 2010 the German residential electricity price was approximately three times that of the U.S.  Both prices include taxes.  German taxes are 40-45% of the total price, and U.S. taxes are usually 0%-10% depending upon the state (often based on the state sales tax) [3].  This large difference in taxation reflects one of the main reasons why it is hard to compare price across countries.

The tax rates, not only on electricity, reflect many differences in the culture, politics, energy resource availability, and social structure between each country.  Both the U.S. and Germany are world leaders in technological innovation, so taxes do not describe differences in incentivizing technology, though it is relevant to note that the industrial electricity price in Germany is approximately 1/3 of the residential price.  But because Germany provides more social services than the U.S., taxes on citizen consumption are higher to pay for these services. I won’t pontificate whether either strategy is better or worse, but for now note that they are different.

Part3_Figure1

Figure 3.1.  Residential electricity prices, including taxes, in the United States and Germany.  Units are in nominal U.S. dollars per megawatt-hour.  Data are from International Energy Agency [3].

 

Since residential electricity prices are difficult to compare in the U.S. and Germany due to varying social service and taxation policies, how can we determine if residential electricity, much less PV panels, are cheaper in one place or another?  One way is to look at total expenditures on energy.  Expenditures equal price times consumption. Figure 3.2 shows total expenditures on residential electricity in both countries as a fraction of GDP in each country (another valid metric would be expenditures as a fraction of household income).  The interesting finding is that both the U.S. and Germany spend about the same amount on residential electricity: typically 1.0% – 1.4% of GDP!  This means that while the average American has a lower residential electricity price (1/3 those of Germany) they consume a much higher quantity of electricity than the average German (almost 3 times more).  In 2011, residential electricity consumption in the U.S. was approximately 35% of total electricity at 1,440 TWh & 4,600 kWh/person; in Germany it was approximately 26% of the total at 140 TWh & 1,700 kWh/person [5, 6]. Taking this concept one step further, we can ask: Does one country spend more on electricity but less on natural gas (for example), or vice versa?

Figure 3.3 shows the fraction of country GDP spent on all energy, including commodities such as oil that typically dominate overall energy expenditures.  Amazingly, again since the 1980s, the U.S. and Germany have spent the same fraction of GDP on energy!  This similarity occurs despite very different histories, cultures, social structures, policies, and energy prices.

Because of this similar trend of Figure 3.3, we cannot say that energy is more or less expensive in either one of these countries, since countries allocate the same fraction of their economic output to pay for energy. It therefore might be most accurate to say that energy costs are very close to equal in the U.S. and Germany. Other important details about energy imports versus exports, and their effect on trade balance provide further insight (e.g., Germany net imports a higher share of its energy than the U.S. but has a trade surplus, whereas the U.S. runs an account deficit) but I will save a detailed discussion of this complicated issue for another day.

Part3_Figure2

Figure 3.2. The fraction of country GDP spent on residential electricity, using prices that include taxes, in the United States and Germany.  Data are from International Energy Agency.  Estimated expenditures are from calculations of the author [7].

Part3_Figure3

Figure 3.3  The fraction of GDP estimated as spent on energy in the United States compared to Germany. Energy expenditures are equal to annual price multiplied by annual consumption quantity.  “Energy” is composed of: oil (including crude oil, natural gas liquids, and other unrefined feedstocks), natural gas (residential, industrial, and for electricity generation), coal gas (residential, industrial, and for electricity generation), and both industrial and electricity consumption coming from the fraction of electricity generation from non-fossil generation (e.g., nuclear, hydropower).  Except for oil (first import price), the prices for consuming each energy commodity include taxes. Estimated expenditures are from calculations of the author [7].

Part 3: References

[1] NREL map of solar insolation in the United States and Germany: http://en.openei.org/w/index.php?title=File:NREL-pvmap-usgermanyspain-poster-01.jpg.

[2] How Different Energy Sources Create Electricity Price Differences Between Countries, Available February 6, 2014 at: http://www.theoildrum.com/node/7215.

[3] IEA Energy Prices and Taxes: http://www.iea.org/statistics/topics/pricesandtaxes/.

[4] Finnish Energy Industries (2010), Energy Taxation in Europe, Japan and The United States, available February 6, 2014 at: http://energia.fi/sites/default/files/et_energiav_naytto_eng_040211.pdf.

[5] EIA International Energy Statistics, accessed September 5, 2014 at: http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=2&pid=2&aid=2.

[6] World Bank population data for 2011, accessed September 5, 2014 at: http://data.worldbank.org/indicator/SP.POP.TOTL.

[7] King, Carey W. and Maxwell, John P. (Master’s Thesis), in preparation for journal article.

Posted in Energy the nexus of everything | Leave a comment | Permalink
View all posts by this author  | View this author's profile

Do the math – no, the U.S. can’t punish Putin by exporting oil and gas

Since Russia has taken over the Crimea region of Ukraine, there have been several news articles written regarding the supposed ability of the United States (U.S.) to use our oil and/or natural gas as some sort of geopolitical weapon.  This weapon would somehow hurt Vladimir Putin (not Russian citizens) and probably help the Europeans and Ukrainians that buy natural gas from Russia. I link here a recent Bloomberg article (March 25, 2014) that is an example of an article that does not ask the most relevant questions on this topic. By not asking relevant questions and not using relevant data, the public is not being properly informed.

(more…)

Posted in Energy the nexus of everything | Tagged , , , , , , | 1 Comment | Permalink
View all posts by this author  | View this author's profile

The alternative to the “Clean Deployment Consensus” is also unclear

by Carey W King

Belief in future rate of innovation progress is also not a guaranteed solution to “long-term” climate mitigation

I recently read over the report Challenging the Clean Energy Deployment Consensus by Megan Nicholson & Matthew Stepp for The Information Technology and Innovation Foundation.  The authors define the “clean energy deployment consensus” as those (e.g. Amory Lovins, Al Gore, Mark Jacobson of Stanford) that believe clean (low-carbon) energy technologies are already sufficient to substitute for fossil fuels, and all we need to do is quickly manufacture and install them at a large enough scale to displace fossil fuels.  Contrary to purveyors of the “clean energy deployment consensus,” the authors believe that existing clean (low carbon) energy technologies are not yet sufficient to effectively mitigate climate change and economically substitute for fossil fuel energy supplies:

(more…)

Posted in Energy the nexus of everything | Tagged , , , | Leave a comment | Permalink
View all posts by this author  | View this author's profile

Reaching ‘peak bashing’ of peak oil

by Carey W King

The discussion of the death of peak oil has ramped up along with the increased hydraulic fracturing and horizontal drilling into tight sands and formations across North Dakota and Texas.  In fact, even people that think peak oil will correlate to significant problems for society shy away from the term.  But just as it is becoming more difficult to define what “oil” is in energy databases (it is now popular to report “liquids” that have vastly different life cycles and energy densities), the definition of “peak oil” seems to be in the context of the penholder (or typist).  Since I’m writing this blog, I of course get to define it for myself here, in what is a simple manner:

Peak oil is the concept that someday the rate of oil production for a country, region, or the world will reach a value that will never be exceeded

(more…)

Posted in Energy the nexus of everything | Tagged , , | 3 Comments | Permalink
View all posts by this author  | View this author's profile

Changing trend in energy and food-expenditure trends signify future realities

By Carey King

With the talk in the United States all abuzz about the presidential election this year, President Obama (and advisors) and Mitt Romney (and advisors) have to act as
though they know the solution to lowering unemployment and raising economic growth rates. It is hard for anyone running for an election to admit that they might be powerless to affect some energy and economic realities. In this post, I discuss the trend in the figure below: US monthly personal-consumption expenditures (PCE) for food and energy goods and services as a percentage of total household expenditures.I think it is completely possible that the stop in the declining trend of PCE for food and energy that stopped in the early 2000s is indicative of the new reality facing the United States energy and overall economic (and debt) situation.

US PCE Energy and Food.jpg
Figure 1. Personal-consumption expenditures of US households expressed as a percentage of total expenditures. Data are from the US Bureau of Economic Analysis Table 2.8.5.

(more…)

Posted in Energy the nexus of everything | Tagged , , , , , | 2 Comments | Permalink
View all posts by this author  | View this author's profile