A Song in the Key of E: Emissions, Efficiency, Equity, and Electrification

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A lot of folks out there (including we at RAP) have, for the last four decades, been devising ways to make utilities more economically efficient, their customers more energy-efficient, and the power system cleaner, sustainable, more equitable, and non-emitting. But now they have a problem: the world has changed, and suddenly we need more of that thing that they for so long tried to constrain. Now that the time has finally come to make the leap that has to be made if our climate crisis is to be solved, we’re like the proverbial deer in the headlights — if only for a moment. The prospect of wild load growth in electric demand is a bit hard to swallow at first. It’s both frightening and, well, electrifying.

Efficiency has been the central theme of electric sector reform for nearly a half century. It is the recognition that meeting a society’s energy needs is not simply a matter of “more is better” but rather of “no more than is necessary (and it’d better be as environmentally benign as possible).” This insight meant that we should not use energy when it was cheaper and more valuable to save it. And it meant that the traditional business model of the monopoly electric utility had to change—that profitability could no longer be linked to growth in commodity sales but to the least-cost provision of energy service and achievement of express public policy objectives.

So what’s the problem?

Well, it turns out that we need more, lots more, of a particular kind of energy — electricity from non-emitting resources — if we’re going to decarbonize as much of the economy as we possibly can. We need clean electricity for transportation, heating and cooling, agriculture, and industry. Are the regulatory reforms that we’ve advanced in the past thirty-odd years — in particular, integrated resource planning, revenue decoupling, and systems of performance-based rewards and penalties — appropriate to a vision that calls for a great expansion in our use of electricity and therefore a sea change in how we produce and deliver it?

The answer is yes, and it shouldn’t surprise us. It follows directly from an approach to economic analysis and policy — aimed at maximizing the net societal benefits of energy use — that we’ve relied on for decades. Thirty years ago, given the costs, expectations, and constraints we faced, the analyses pointed us in certain directions. Today, given different costs, expanded expectations, and more urgent constraints, they point us in new directions. In both cases, they told us how to minimize the costs — that is, maximize the benefits — of our desired path.

At a conceptual level, the problem isn’t daunting. It’s time to truly look at the energy system in its entirety, not just the electric system. How do we minimize the total costs of energy production and use, while meeting our climate, economic, and social goals?

It’s simple. The least-cost path is characterized by massive fuel-switching — from fossil fuels to clean, emissions-free sources, primarily electricity. But it’s not that simple. It doesn’t relieve us of the duty to make sure those new loads are as efficient as possible and are managed as efficiently as possible — indeed, it insists upon it, since any waste only increases costs. It isn’t right simply to say “Electrify!” How we electrify matters.

The good news is that our planning tools and regulatory methods are up to the task. We know how to think about the problem, consider alternatives, test uncertain futures. We know how to change course when circumstances dictate. And we know that utilities and market actors respond to the forces that act upon them, which means that we should still care deeply about whether their private financial incentives align with the public interest. We want these players to be successful by doing the right things.

So what does this mean for the utility business model? For the “wires” sides of the business — transmission and distribution — in both vertically integrated and competitively restructured markets, there’s still every reason to remove the “throughput incentive.” Whether load is growing or not, a utility whose revenues and profits are a direct function of kilowatt-hour sales (that is, of kWh deliveries) has a very powerful incentive to encourage usage, even if that usage is inefficient. We shouldn’t think that, simply because the electricity is clean, we have license to be profligate. The recent decision of the Massachusetts Department of Public Utilities to scrap Eversource’s decoupling regime, on the grounds that good ol’ fashioned price-only regulation will encourage the company to promote electrification. Probably it will, but, alas, it won’t give the utility much, if any, reason to care whether the electrification is in the best interests of society.

Revenue decoupling remains a critical element of a regulatory regime that aims for least-cost investment in, and operation of, the grid. It keeps the regulated monopoly focused on efficient operations. But, by itself, it doesn’t guarantee utility enthusiasm for preferred outcomes. Legal and regulatory obligations go a long way to solving that problem, but there’s a place for carrots and sticks too. Performance measures, with achievement rewards and penalties, overlaid on a decoupling mechanism, are powerful drivers of policy objectives.

What about the commodity side of the business? Again, in both vertically integrated and restructured markets, investment has been and will continue to be propelled in significant measure by policy requirements, such as renewable portfolio standards and emissions reductions requirements (e.g., cap-and-invest programs). These have been effective in transforming our resource portfolios and, moreover, have helped drive deep cost reductions in clean energy technologies, so that now the relative costs begin to favor the preferred investments. Important wholesale market reforms are still needed, but the outlook is good.

In those places where utilities remain vertically integrated, the question of how power costs should be recovered is of acute interest, especially where price risk has been shifted to consumers by means of fuel adjustment clauses and power-cost pass-throughs. How these mechanisms, intended to insulate shareholders from the volatility of global energy prices, distort management imperatives to manage power costs and investment for the long-term good of both consumers and shareholders has been well understood for decades. It’s time to revisit these tools, to consider whether and how they can be reformed to better align private incentives with the public good. Utilities and other load-serving entities possess the comparative advantage for bearing price, climate, and other market risks. Some simple fixes to power-cost recovery mechanisms will go a long way to reordering those risks and creating the environment in which clean, reliable electricity flourishes.

By all means, let’s let utilities and other market actors make money providing the energy and energy services we want. And that includes where increased load is societally most efficient—which is to say, the least-cost means of meeting demand for reliable, equitable service and, among other things, our climate goals.

Stay tuned for more blogs in this series. We’ll dig into some of the knottier regulatory challenges that large growth in load raises and try to answer the question: “Just what does a regulatory scheme look like that promises to achieve these ends?”

Grid Operations and Why They Matter for Air Quality — Part 2

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In the second part of a training for the Mid-Atlantic Regional Air Management Association (MARAMA), Nancy Seidman explored the air quality and health benefits of energy efficiency and electrification.

Grid Operations and Why They Matter for Air Quality — Part 1

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In a training for the Mid-Atlantic Regional Air Management Association (MARAMA), Nancy Seidman discussed regional transmission and opportunities for collaboration among air quality regulators, state energy offices and utility commissions.

E3-India Book Launch

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E3-India initiative in collaboration with Gokhale institute of Politics & Economics, Cambridge Econometrics and Regulatory Assistance Project are jointly launching a book: Economy-Wide Assessment of Regional Policies in India: Applications of E3-India Model.

The book is an extended synthesis from the E3-India (Economy, Energy, Emissions) project, an initiative aimed at enabling evidence-based policy making at the regional level in India. This volume, edited by Prof Kakali Mukhopadhyay (Gokhale Institute of Politics and Economics, Pune & McGill University, Canada), is a compilation of sector-specific studies that exploit the E3-India model to assess the national and sub-national policy implications and their distribution across states. To this end, the project constructed the first ever set of regional Input-Output tables for 32 States and Union Territories in India for comprehensive economy-wide assessment of regional policies.

E3-India is a macro-econometric model used to simulate the effects of economic and energy policy at the national and sub-national level, providing the information that policy makers need when assessing the merits of policy proposals. The model has been in the public domain and freely available to researchers since December 2019.

We invite you to a virtual book launch and deep dive of regional policy analysis with a panel of distinguished senior experts.

The launch is hosted by:

  • Dr Rajiv Kumar (Vice Chairman, NITI Aayog and Chancellor Gokhale Institute of Politics and Economics, Pune, India)
  • Prof Terry Barker (Honorary Professor, School of Environmental Sciences, University of East Anglia, Founder and Trustee of the Cambridge Trust for New Thinking in Economics and Founder and Director of Cambridge Econometrics Ltd.)

Discussion and remarks by distinguished senior experts

Book contributors will highlight the relevance of modelling wider state level economic impacts of flagship government of India policies, including Make in India initiative, Atmanirbhar Bharat relief packages, India’s nationally determined commitments (NDC’s), and doubling farmer’s incomes.

More details and a schedule of events available here.

Worüber keiner reden will: Der bevorstehende Abschied vom Gasnetz

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Die Gasindustrie investiert aktuell, was das Zeug hält. 2019 flossen rund 2,5 Milliarden Euro in den Aus- und Neubau der deutschen Gasnetze (BNetzA Monitoring-Bericht). Bis 2030 sind laut Netzentwicklungsplan Gas allein für die Ferngasnetze weitere 2,2 Milliarden Euro vorgesehen, wobei die Ferngasnetzbetreiber sogar Investitionen in Höhe von 7,8 Milliarden Euro für nötig halten. Die Zahlen erwecken den Eindruck, dass Gasnetze künftig die gleiche Bedeutung haben werden wie heute. Dabei wissen wir: Diese Planung der Gasinfrastruktur ist falsch. Hier werden erhebliche Kostenfallen für Heizkund:innen und Steuerzahler:innen errichtet.

Denn heute wird ein Großteil der Gasinfrastruktur für die Wärmeversorgung benötigt. 2019 wurden über die gut 700 Verteilnetze 761 Terawattstunden (TWh) fossiles Erdgas ausgespeist. Fast alle Klimaneutralitätsszenarien sehen aber im Gebäudebereich den massiven Umstieg auf Wärmepumpen und den Anschluss an grüne Nah- und Fernwärmenetze vor (siehe unter anderem Agora Energiewende, Ariadne und BMWi).

Weder Erdgaskessel noch wasserstoffbetriebene Heizsysteme erfüllen das Prinzip der klimaneutralen und effizienten Verwendung von grüner Energie. Bei der Gebäudeheizung auf einen (noch) raren und teuren Energieträger wie Wasserstoff zu setzen, ist schlicht kein tragfähiges Konzept zur Klimaneutralität. Immer mehr Gasverteilnetze werden zukünftig kaum noch benötigt.

Fragwürdige Nutzungsdauern von bis zu 55 Jahren

Trotzdem hat die Bundesnetzagentur für die Regulierungsperiode 2023 bis 2027 „attraktive Investitionsbedingungen“ mit einer Eigenkapitalverzinsung von rund fünf Prozent (vor Körperschaftssteuer) für die Netze festgelegt. Auch gelten weiterhin für Neuinvestitionen die Nutzungsdauern aus der Gasnetzentgeltverordnung von 35 bis 55 Jahren. Und zudem hat die Bundesnetzagentur in diesem Jahr für 125 Gasverteilnetze rund 4,5 Milliarden Euro als Erlösobergrenzen genehmigt. Das gleiche finanzielle Volumen ergibt sich, wenn man die im Monitoringbericht der BNetzA bereitgestellten Daten für 2019 hochrechnet: Über den durchschnittlichen Verbrauch eines Gas-Haushaltskunden von 23 Megawattstunden im Jahr ergeben sich für 12,8 Millionen Haushaltsverbraucher mit einem durchschnittlichen Netzentgelte von 1,56 Cent pro Kilowattstunde Netzkostenbeiträge von 4,59 Milliarden Euro.

An dem rund 522.000 Kilometer langen Gasverteilnetz sind mehr als 12,8 Millionen Haushalts- und 1,7 Millionen Gewerbe- und Industriekunden angeschlossen. Der heutige, jährliche Finanzierungsbeitrag der Haushaltskunden über ihren Wärmebedarf (inklusive des geringen Anteils für das Kochen) für diese Gasverteilnetze von über vier Milliarden Euro wird aber im Zuge der Energiewende im Jahr 2045 auf null sinken.

Planung umstellen und Regulierer stärken

Um weitere kostspielige Fehlinvestitionen zu verhindern, muss daher jetzt die gesamte Planung auf die neue, klimaneutrale Welt umgestellt werden. Dafür brauchen wir eine ehrlich geführte Diskussion rund um die Möglichkeiten, Planungen und Kosten der Stilllegung des deutschen Gas-Verteilnetzes. Ansonsten werden weiterhin Investitionen getätigt, die die stillzulegende Infrastruktur durch den Aufbau von Investitionsruinen noch verteuern. Die Folge wären Milliardensummen für Übergänge, Kompensationen und Entschädigungen, Fehler die es beim Kohleausstieg schon genug gibt.

Weitsichtige Energie- und Klimapolitik sollte daher jetzt den bevorstehenden Ausstieg aus dem Gas planen. Dazu muss die Gasnetzregulierung angepasst werden. Alternativen zum Gasverteilnetzausbau müssen genutzt werden, so wie es das Prinzip Efficiency First der Europäischen Union vorsieht, sofern sie günstiger sind. Dies verlangt eine Anpassung des Regulierungsrahmens, weil Verzinsungen sowie Abschreibungs- und Nutzungsdauern aktuell nicht zur Klimaneutralität 2045 passen.

Auch die Rolle des Regulierers muss dafür gestärkt werden, wie es das Urteil des Europäischen Gerichtshofs der Bundesregierung vorschreibt. Dazu gehört zukünftig eben nicht nur der Ausbau, sondern insbesondere im Gasverteilnetz auch der Rückbau. Es bleibt zu hoffen, dass der jetzt zu entwickelnde Koalitionsvertrag diese Ansätze widerspiegelt, damit nicht weitere Jahre verloren gehen – und am Schluss unnötige Kosten für Steuerzahler:innen angehäuft werden. Denn sonst wird im Zweifel der Staat in den 2030er Jahren eingreifen müssen, um Stadtwerke und andere Netzbetreiber zu retten.

Eine Version dieses Artikels erschien in Tagesspiegel Background.

Dr. Barbara Saerbeck ist Projektleiterin für Grundsatzfragen bei Agora Energiewende.


Getting off the fossil fuel roller coaster

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When the global economy picks up steam, so do commodity prices. Gas demand bouncing back to pre-Covid levels started a new upswing in the price cycle. We are seeing classic market dynamics at work: demand outstrips supply and prices rise. Electricity and gas prices are skyrocketing from last years pandemic-induced depths, leaving people reeling.

Experts have come to a clear consensus: the surging international demand for natural gas is the overwhelming cause of todays market upheaval. 

What should governments do next? Is there a way to slow down the roller coaster – or, better yet, to get off? To do so, we need both near and long-term solutions.

Winter is coming

With winter around the corner, the heating season is a particular concern. In Europe, 50–125 million people are already unable to afford proper indoor thermal comfort. Natural gas is the dominant heating fuel in Europe, accounting for 45% of household energy for heating. Rising gas prices may mean dire times for households, especially if the winter is harsh.

Natural gas is the dominant heading fuel in Europe bar chart

Most will agree that panicked reactions are the last thing we need right now, but while governments are rightly preoccupied with short-term measures to help their constituents, there is a risk they will adopt the wrong ones. 

Governments across Europe are scrambling to find ways to help families who are struggling pay their energy bills this winter. Most of these measures require funding. Fortunately, governments have a few possible sources of revenue at their disposal:

EU Emissions Trading System (ETS) revenues: Higher ETS prices result in growing auction proceeds – potentially exceeding €50bn in 2022. Using these additional revenues to support consumers would be a prelude to the Social Climate Fund included in the Commission’s ‘Fit for 55‘ proposals for EU ETS reform. 

Value-added tax (VAT) revenues: VAT revenues increase proportionally with surging gas and electricity prices, a windfall for government coffers. High energy costs, however, put pressure on household budgets, which can lead to lower expenditure on other consumer goods. Careful analysis of the likely net VAT revenues is needed. 

Windfall profit clawback: A more contentious option considered in Spain is to recover possible windfall profits from legacy zero-marginal-cost resources, such as nuclear or hydro. One drawback is that retroactive changes may heighten a sense of regulatory risk and increase the cost of capital.

The focus of government action should be on those who are most affected by the surge in commodity prices: vulnerable consumers. Un-targeted measures, such as lowering VAT rates, may offer advantages in terms of simplicity and transparency, but they will dilute the effectiveness of government action. Targeted measures are more cost-effective. After all, they help only those who need it.

The focus of government action should be on those who are most affected by the surge in commodity prices: vulnerable consumers.

However, the targeting must be appropriate. Again, there are various options available, ranging from lump sum payments, to levy exemptions for vulnerable consumers, to progressive charges on increasing blocks of consumption. While logistically challenging, it is also worth exploring a roll-out of ‘rapid response’ efficiency programmes for specific groups, such as the energy poor or vulnerable. Any energy savings would extend beyond the current crisis.

It is simple: Get off gas

The current crisis is a clear reminder of why the energy transition is so important: removing fossil fuels from the equation removes consumers’ and economies’ exposure to their extreme price volatility. 

Most experts expect prices to remain high through the winter. Analysts suggest a potential pickup in liquefied natural gas and pipeline supply may relieve the pressure on gas prices in spring. High price volatility, however, has long been, and will very likely remain, a feature of fossil fuel markets. Given the multiple factors that will affect future natural gas prices – CO2 prices, more volatile energy demand, producer uncertainty about future demand, the costs of maintaining legacy transportation and storage infrastructure, global shifts from coal to gas, and so on – the level of unpredictability will likely only increase.

Volatile gas prices are pushing up electricity prices across Europe bar chart

The best and most durable solution to mitigate the social and economic impact of volatile gas prices is tackling demand for fossil gas. There are multiple good solutions here, all of which must be pursued.

First, energy efficiency must be the top priority. Energy efficiency programmes have demonstrated that large reductions in energy demand can be achieved, thereby lowering dependence on fossil fuels and reducing the risks associated with their price volatility. As part of this, policymakers should seek to electrify end uses that are currently served by natural gas in the buildings sector. Buildings can be weaned off natural gas through the rapid deployment of heat pumps, supported by a package of policy measures including subsidy programmes, regulation and energy price reform.

European policymakers must ensure equity in the energy transition.

Second, the EU should target a massive roll-out of solar and wind power with a goal of net-zero emissions in the European power system by 2035, as advocated for by the International Energy Agency.  Wind and solar are increasingly the cheapest power generation resources and already save Europe billions in gas import costs. To reduce the need for fossil gas backup, variable renewables can be combined with energy efficiency and demand side flexibility. Meanwhile, better use of transmission networks and integrated markets will buffer fluctuating renewable resources across larger regions.

Third, European policymakers must ensure equity in the energy transition. With millions of people living in energy poverty, governments must ensure the costs and benefits of the transition are shared fairly among consumers. They should address energy poverty by designing fair network tariffs. Carbon revenues can be earmarked for investments in renewables and efficiency, as well as bill support for vulnerable customers. Enabling access to energy services can unlock bill savings for low-income families.

Is the market broken?

Surging electricity prices have stimulated calls to ‘fix Europe’s broken electricity market’, for example by replacing the current market design with an undefined approach to average cost pricing, which was more common before power markets were liberalised across the continent from 1996. 

These attempts to blame market design miss the mark, however. The problem is the cost of fossil fuel, upon which the system remains critically reliant. The European electricity market design is based on sound principles. Until recently, the market produced results that led to calls from governments and investors for increases in wholesale market revenues, either directly through higher energy prices or indirectly through capacity remuneration mechanisms. The current price surges should be seen in this context, as another part of the cycle. 

While the European electricity market can definitely be improved, tinkering with its underlying design as Spain, France and other members states are proposing would leave the root causes of the current situation untouched. It could even exacerbate them, and have wide-ranging and potentially adverse consequences. Making price formation un-transparent, and distorting investment signals, could increase instead of decrease costs to consumers. Moreover, triggering an extended period of change and uncertainty would chill new investment and merely exacerbate supply shortages.

Our certainty is this: as long as we maintain our reliance on fossil gas we will stay on this roller coaster. Volatility is inherent to fossil fuel markets, which goes for gas as much as it does for oil. So let’s get off and save ourselves a ton of money, stress and carbon emissions.

A version of this article originally appeared in Energy Monitor.