The invisible hand is blowing it

Energy efficiency vs. neoliberal economics 28

I spent last week immersed in the views of professionals working to advance energy efficiency resource intelligence. I shall spare you more details—I realize there’s a limit to the wonkery even Grist’s audience can tolerate—but I do want highlight what strikes me as a key takeaway.

A few facts to set the stage:

  • Resource intelligence is profitable. Study after study (after study) shows that homes and businesses have available a range of investments, technologies, and practices that cut energy use and pay handsome returns. (See, for the latest, this three-year study of efficiency in buildings.)
  • Resource intelligence isn’t happening on its own. This is something speaker after speaker at the conference returned to, with attitudes ranging from frustration to simple bemusement. Despite the aforementioned studies, people aren’t taking advantage of the opportunities at anything close to the available scale. The low-hanging fruit stubbornly remains unplucked.
  • Resource intelligence is central to the climate/energy challenge. The International Energy Agency describes a scenario for achieving 450 ppm (the widely shared though likely inadequate target for atmospheric concentrations of CO2). Of the emission reductions they project, energy efficiency is responsible for 54%. More than half our efforts to tackle climate change will happen through more intelligent use of energy.

Here’s the point, somewhat provocatively put:

Nos. 1 and 2 constitute a challenge to our naive economic worldview;  No. 3 indicates that tackling climate change will mean disenthralling ourselves of that worldview.

Market economics (of the familiar neoliberal variety) has shaped public attitudes far beyond academia. Many propositions that Americans now take for granted spring from it: taxes are bad, regulation is burdensome, markets can solve virtually any problem, the self-interested rational economic actor is not only a metaphysical fact of life, the atomic unit of the economy, but a moral model. The assumption that addressing climate change (or indeed addressing any environmental problem) will be costly is a subspecies of the   belief that markets always allocate capital efficiently, and thus that government efforts to rechannel capital are by definition less efficient and more costly than the status quo. (Yes, academic economists are cognizant of market failures, but what’s at issue here is not academic economics but the broader sociopolitical cosmology. What are the assumptions, the things that “everyone knows” to which market failures are seen as marginal exceptions?)

That’s why when you hear an establishment journalist interview DOE head Steven Chu about climate change, virtually every question is about cost—won’t that cost a lot? What’s that cost? Isn’t that costly? After all, if these things were cheap or even cost-effective, the private sector would have done them already, right?

When smart energy advocates claim that shifts in policy can produce large dividends, they’re inevitably dismissed as promising “something for nothing.” Dig into that phrase a little and at its root you find faith: the faith that if “something” were available, rational market actors would already have acted to obtain it. The claim that government can make (or induce) investments that offer substantial returns simply doesn’t compute.

But energy efficiency refutes that view. Studies show—at this point beyond reasonable doubt—that there is money lying on the ground that nobody’s picking up. Lots and lots of money. This isn’t some marginal phenomenon. We’re talking about “cost-negative” investments that can in the next few decades increase the aggregate efficiency of the economy by 20, 30, 50 percent. That’s enormous. That’s a central fact of our economic life, not a peculiar marginal phenomenon. People are behaving irrationally on a massive, massive scale.

In Anglo economic circles it’s fashionable to think that the “market-based” solution of raising the price of carbon will, like a push on Archimedes’ lever, solve the problem. But speaker after speaker after speaker at the conference—from governments, NGOs, and large businesses—explicitly noted that a price on carbon, particularly of the size expected in the first years of a trading program, is not enough. It shifts incentives at the margins, but nothing like what’s necessary. People must be spurred, nudged, and directly incentivized to make these investments. You need strong, consistent, and clear regulations—“standards and targets”  was the drumbeat. In some cases it’s about removing or reforming ineffective existing regulations.

There’s need for public-private partnerships to restructure markets or create new ones. There’s need for direct government investment, massive public education, moral suasion, sharing of best practices. The problem of efficiency is not one problem with one solution but thousands, even millions of granular problems requiring painstaking work to address.

The point is, collective action is necessary. Market economics leads to a strangely passive view of public life, wherein our collective welfare is entrusted to markets, to millions of allegedly rational individuals. Our welfare is allowed/hoped to happen. But here we have a problem—the deterioration of the atmosphere—that presents us with great urgency, and a solution—resource intelligence—that requires our active intervention.

We know what we want; we know how to get it. We do not have to sit back, waiting anxiously, for the market to provide it on its own.

David Roberts is staff writer for Grist. You can follow his Twitter feed at twitter.com/drgrist.

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  1. Sean Casten's avatar

    Sean Casten Posted 12:40 pm
    04 May 2009

    Well said.  And an easy refutation to the economists of the world who make these arguments is simply to ask them why they didn't opt for 18" insulation in their own home instead of 12".  Or CFLs.  Or an energy star refrigerator.  I'm going to go out on a limb here and speculate that even Adam Smith himself probably didn't do a cost-benefit assessment of the materials in his chimney to maximize the heat transfer into his home and minimize losses through overall building envelope...

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  2. Scott G Posted 1:37 pm
    04 May 2009

    Your point has been well-made by Amory Lovins' work for years. The guy doesn't even have a boiler, and he lives in the Rocky Mountains! Clearly there's a ton of room for improvement in resource efficiency, and markets haven't done what everybody says they'll do in that realm.To echo what's been said: there's almost a cultural blindness built around the idea that markets can't be improved upon, and never fail to capture the best practices and put them to work.If markets are influenced by cultural assumptions, maybe it's time to look beyond the market to influence culture. Would resource quotas-- cap and trade for a range of natural resources-- be a terrible idea? A cap would at least cut through the cultural blind spot, and let prices do the best they can with the rest.Even better if that cap is something we can democratically set and get behind.

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    1. Sean Casten's avatar

      Sean Casten Posted 1:56 pm
      04 May 2009

      Scott:I largely agree, but be careful asserting that somehow you can get this behavior without a market.  A market is nothing more than a summary of the aggregation of decisions made by a thousand independent actors to allocate capital.  Short of government controlling the flow of all resources - not just what appliances you own, but where you live, what you eat, how you cut your hair - there is no way to facilitate large scale shifts in capital without a market.  Maybe that's a free market, maybe that's a government directed market, maybe it's a little of both - but in all cases, the scale of the challenge we face with AGW requires full market participation.In other words, you can't get there if you have to "look beyond the market".  But you can look at the signals that markets currently operate under and find ways to change them to shift resource allocation towards more socially desirable ends... to the degree that you can ever truly connect cause and effect.

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  3. Michael_Hoexter Posted 3:03 pm
    04 May 2009

    Dave,This is what disturbs me most about the amount of political capital being poured into the cap and trade instrument.  It is not even the cleanest instrument for a carbon price, which is a carbon tax.  Even the politically feasible carbon price via a well-designed carbon tax is not going to stimulate all the investment you need.I've put forward the idea of a "Comprehensive Climate and Energy Policy", though others could call it what they like.  I make the point that pricing and markets are looking at the actions of individuals and not at the creation of public goods.  A carbon price will not bring all relevant externalities into the market.Part 1: http://terraverde.wordpress.com/2009/01/26/carbonpricing1/
    Part 2: http://terraverde.wordpress.com/2009/02/04/carbonpricing2/
    Part 3: http://terraverde.wordpress.com/2009/02/11/carbonpolicy3/
    Part 4: http://terraverde.wordpress.com/2009/02/20/carbonpolicy4/
    Part 5: http://terraverde.wordpress.com/2009/02/26/carbonpolicy5/Incentives, perhaps partly financed by carbon tax revenues, are key to getting some of the more expensive infrastructure built or at least entering the cost curve at all to start gaining economies of scale.Unregulated markets have viewed through rose colored glasses over the last 30 years...we need come down to earth and see them for their strengths AND weaknesses.  By the way "resource intelligence" is a good meme

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  4. heathersway Posted 3:06 pm
    04 May 2009

    I was looking for market research on what motivates homeowners to take the plunge and invest in their homes with energy efficiency upgrades when I found this article.It's an excellent insight into the behavior of building owners and our (U.S.) assumptions about how to create a market for energy efficient services and products.
    I manage a federal/state program (home performance with ENERGY STAR) that aims to renovate homes using building science and diagnostics -- and to create sustainable jobs and reduce dependence on foreign/fossil fuels and by extension reduce climate pollutants and increase homeowner income through reduced fuel and electric bills.  (Sounds rather grandiose, printed here...)
    This is a program for non-low-income homeowners...in other words, for a competitive open market that leverages private-public coordination.
    Motivating the market to move forward with home energy renovations (not just energy audits) and balancing public demand with supply of energy evaluators has proven the biggest challenge for our little program.
    The program may receive a surge of funding via Washington. The big question is, where is the money best spent?  Governments and educators and energy geeks assign moneys to training of energy auditors and installers and weatherization crews.  Separately, there's talk of a carbon tax on fossil fuels.  "Marketing" is frowned upon. 
    Yet, if homeowners aren't informed, educated and buying --despite low interest loans and rational monthly payback scenarios -- then we're left with a trained but disgruntled and frustrated workforce of tradespeople and professionals.  And we will continue to have a public who are in the majority -- and to minimal fault of their own -- clueless about air flow and thermal boundaries and where their electricity actually comes from (the list goes on).  They will continue to brag about the thousands of dollars they just spent on windows and vinyl siding, not understanding where and how to spend their hard-earned middle to upper class money.
    The studies David references reflect what we see on the ground.  Home energy renovations are first and foremost a marketing play...rational decisions based on payback do not move the market.  There are emotions at work here, not just cost-benefit payback calculations.
    Spiking fuel costs led to a short-lived frenzy in the media and a state-based push to train energy auditors this past summer.   There was no marketing or publlc awareness campaign associated with the training.   Whether this push increased homeowner awareness and, more importantly, actual efficiency renovations -- done correctly or not -- is anybody's guess. 
    This past summer I spoke at Tom's of Maine about residential energy efficiency, and the pressing question was whether wood pellet stoves were the answer to surviving a cold winter of high fossil fuel costs.  What this group wanted from me most was DOE's fuel comparison chart.  Air sealant and insulation...well, bore, snore.
    We'll see if marketing will include incentives to the homeowner (that is, cold hard cash).  In other words, will there be marketing in the form of incentives. Will the incentives motivate the public to pay attention to energy efficiency over the long term, will it drive behavioral changes, and will the rules for receiving those incentives be based on sound building science and services (not products like windows and insulation installed without air sealing).  Will there be market messaging that speaks to emotions?I contribute to cleantechblog.com and have wrestled with the use of capitalist mechanisms to fix planetary/human problems.  In preparing for a recent talk on participatory democracy in relationship to the environment, I said to a colleague that cap and trade was an abdication of policymakers to think through a difficult problem...that using a market mechanism to fix a planetary/human dilemma...is  lazy deference.  In the middle-math of the financial breakdown -- and with a stock market that is one of the more emotion-driven institutions outside of marriage -- it's refreshing to know the sacred cows of market liberalism and the reliance on the rationality of markets (aka, homeowners) are being called out.

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    1. amazingdrx Posted 9:45 pm
      04 May 2009

      Well those cows are really sacred to corporate feudalists i think heather, they who are no longer named, or rather misnamed. Neo-liberals.  Neoconservatives are the corporate libertarians.  Revisionism has expunged that hated word, neoconservative.But good response! How to get consumers to invest in renewables/conservation, seeing is believing, am i right? You see your neighbor saving money/energy so you do it too. DR is saying that carbon pricing won't do it? I think he believes in a massive WW II war production like effort to manufacture electric trains, plugin hybrids, ground source heating/cooling, solar, wind, waste stream biogas,and smart grids?  But, only a commercial wave can get this climate cured.  Take the jeep, a very popular vehicle to this day.  started out as a government contract for WW II.  A long strong commercial demand for a brand started under government contract.  A free market wave spurred by government.So divert the subsidies going to oil, gas, coal, and chemical ag industries and direct it to get this manufacturing going, with government contracts.  A few million plugin hybrids over a few years, for instance. Then neighbor to neighbor it spreads until everyone is plugin hybred and solar paneled.  like the frisbee or the bic lighter, that's how free markets work.  Runaway consumer demand.blog: http://amazngdrx.blogharbor.com/blog twitter: http://twitter.com/amazingdrx

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  5. GrupoMillenniumHispaniola Posted 7:53 pm
    04 May 2009

    Hi David,The idea of changing “energy efficiency” into the broader and sexiest term “resource intelligence” seems very similar to what I have been writing about “the development of the resources of the demand side.” I searched the EWPC Blog and found 27 hits, starting with the first post EWPC Superiority in Carbon Emission Reductions of September 13th, 2007.
     
    The first instance on the Grupo Millennium Hispaniola Blog is Let's Get Out of Back Rooms to a Generative Dialogue Part 6 from November 28th, 2006. I counted 57 hits including repeats on some posts.
     
    The first instance that I could find on www.energypulse.net is a comment I posted on October 20, 2006, under the article A Blueprint for Avoiding Blackouts.
     
    Recently I even contrasted the emerging EWPC Regulatory Framework concept of demand side innovation (DSI) with the IOUs Regulatory Framework demand side management (DSM). See the EWPC article Forget Demand Side management (DSM); Think Demand Side Innovation (DSI).
     
    Under the EWPC Regulatory Framework, the “development of the resources of the demand side” is one key job of competitive Second Generation Retailers - 2GRs. Another key job is to integrate those resources into power system planning, operations and control.
     
    Maybe the idea of “resource intelligence” should be compared with the “the development of the resources of the demand side.” Please, by all means comment.
     
    On a different front, yesterday I came to the conclusion that it is absolutely necessary to execute a revolution to replace the IOUs Regulatory Framework while writing the EWPC article Can EPRI Professionals Get Out of the IOUs Box to Join the EWPC Necessary Revolution?

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  6. enviroperk Posted 5:37 am
    05 May 2009

    I thought I would add a couple of points that do not have an advocate. Mainly because no company is going profit from these simple, inexpensive ways to save a lot of energy. "No-tech" is a hard sell, but it works.1). Natural ventilation is a very interesting "technology" "In favorable climates and buildings types, natural ventilation can be
    used as an alternative to air-conditioning plants, saving 10%-30% of
    total energy consumption    "source: http://www.wbdg.org/resources/naturalventilation.php2). Low impact renovation of historic buildings is an energy savings strategy in moderate climes."Older buildings were found to use less energy for heating and
    cooling and hence probably require fewer weatherization improvements. They
    use less energy because they were built with a well-developed sense of
    physical comfort and because they maximized the natural sources of heating,
    lighting and ventilation."Source: http://www.nps.gov/history/hps/tps/briefs/brief03.htm 

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  7. AAADDD Posted 12:41 pm
    05 May 2009

     This article spends more space bashing market economics (the latest
    "intellectual" sport, and I suspect the real motivation for the author) than talking about energy efficiency.  The subject is not really researched and what was reasearched came  only from one side.    This shows lack of integrity and is dangerous. Putting the idea out
    there that mitigation is really cheap, just a matter of some building codes and
    financial incentives for retrofits is giving weapons to the enemies of climate action. If energy efficiency is so cheap and straightforward I invite the author to put his time and money where his mouth is and go out there and get rich while saving the planet. 

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    1. GrupoMillenniumHispaniola Posted 2:06 pm
      05 May 2009

      Taking the essence of your message, that it is not easy to deliver on energy efficiency, I like to add that implementing that resource separate from power system planning leads to an Everyone For Himself (EFH) market. The EFH market which we have experienced in the Dominican Republic for other resources of the demand side has involved capacity investments that compete with the formal power system.2GRs (see the link above) will compete to develop business model innovations, which can only make sense for the federal market, and not just for states markets. EWPC is not deregulation. One essential difference is the policy P1E2 - performance first, economy second. Deregulation had a policy E1P2 -economy first, performance second, that resulted in price spikes and congestion. Please take a deep look at EWPC and you will see that a revolution away from the IOUs paradigm is in the making, as demand can no longer be considered an externality to be forecasted in long term power system planning.

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    2. Sean Casten's avatar

      Sean Casten Posted 2:13 pm
      05 May 2009

      AAADDD,You're too critical of David's post.  And I speak as someone who is running a company with a mission to profitably reduce CO2 emissions, doing exactly what you suggest David should do.  From that vantage point, two things become obvious: (1) there are massive opportunities to lower our CO2 emissions and lower our energy costs but (2) those opportunities are hard to capture, for reasons that neoclassical economics consistently fails to understand. Did you do a cost benefit analysis when you decided whether to buy 12" or 16" insulation for your home?  When you decided whether to buy incandescent or CFL lightbulbs?  If you work in an industrial setting, what is your rate of return threshold for non-core investments?  How many large scale efficiency investments have you not made by virtue of that threshold, even though they delivered above market returns?  If you run an electric utility, do you find that your inability to grow your profits by reducing your operating costs causes you to minimize your focus on energy efficiency that would lower your customers rates?  If you are a property developer, do you seek to maximize your economic return by minimizing construction costs or minimize tenant leases on triple-net-payments by slightly raising your construction costs to facilitate lower energy use?  Would you pay $3000 more for a car that saved you $700/year in fuel costs?If you're like most people - myself included - your honest answers to many of those questions imply that you are not in fact investing in high-return things that lower your CO2 footprint while lowering your energy costs.  And yet economic theory is rife with those who make the same assertions you imply, of the "if it's such a good idea, someone would have done it already" variety. There are lots of good ideas that aren't currently being done.  Good policy understands that, and figures out how to shift behaviors accordingly.  Bad policy starts from the presumption that any deviation from the status quo is detrimental, forcing us to throw all our eggs in a do-nothing basket (or a hope-for-new-technology-to-save-the-day basket).  Both paths are far more dangerous than acknowledging the facts that mitigation can in fact be not just cheap, but profitable.  Acknowledge that fact, understand why it isn't being done anyway, and then you can craft meaningful policy. Ignore that fact, and we simply continue on our current path of inaction.

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  8. AAADDD Posted 2:51 pm
    05 May 2009

    This is a 30 years old debate and there is no free lunch. The opportunity is big but the fruit is not hanging low.Do you model your pleasure vs cost every time you buy an ice-cream vs a hot dog vs a beer? Does the fact that you probably don't cancel all economic theory?People buy houses and cars and computers and art etc. all the time and they are not stupid. What is the cost of an energy audit as a % of an average energy efficiency investment? What is the price of a carfax report / mechaning inspection as a % of an average used car price? How do the two compare? Do you know what you are getting when you buy a car? Do you know what you are getting when you buy energy efficiency?Information costs you outline are real, so are the uncertainties around the energy efficiency investments. Lowering those is where the focus should be and I believe the answer is less crafty policy and more private sector innovation. 

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    1. Sean Casten's avatar

      Sean Casten Posted 6:22 am
      07 May 2009

      AAADDD,That's economically and politically naive.Economically, because homo economicus only makes rational decisions if they have perfect information; and not only do none of us have really good information about energy costs, but businesses work all the time to limit our ability to make fully informed decisions.  (The secret to a successful business being to find a way to lessen your exposure to the competitive pressures that Econ 101 describes).  It's why mutual funds bury their fees in the fine print and health clubs have high initiation fees. Both make it hard for customers to make decisions based on the full cost, and erect barriers to exit / entry.  Applied to an energy context, while one might reasonably argue that energy companies have sophisticated, informed world views about the future cost and supply of various energy resources, why should we assume this same degree of sophistication amongst energy consumers?  Were they rational when they bought Hummers in 2005, rational when they favored Priuses in 2007, rational again today when they curtailed auto purchases by 40% across the board, or might those decisions be based on short-term energy price fluctuations that don't really understand the long-term energy cost characteristics of their (long-term) capital investments?Politically, because it assumes that the only factors driving energy investments are economic, and that politics doesn't interfere.  Regulated electric utilities are legally prohibited from growing their profits by lowering their costs.  Why should we assume that utility CEOs have made economically rational decisions about energy efficiency investments in that scenario?  Air regulations provide grandfathered rights to old combustion sources, causing industrials to have to consider new, more efficient investments not simply on the merits of their energy conservation, but also factoring in the cost of addition pollution control to bring them into compliance with much stricter current air regs as compared to those they currently operate under.  So are those businesses acting in a purely rational way when they decide to keep their old, inefficient boiler running? Many businesses that could invest in on-site generation find themselves facing utility rate structures that raise their rates if they install on-site generation in the name of protecting the incumbent monopoly, such that even though those investments make fantastic financial sense to society, utility rate design conspires to ensure that they do not make sense to the industrial, keeping us running along on deeply suboptimal utility investments - those same ones which were built without an economic incentive for cost control!This list is far from complete, but the point is that to write this all off as the behavior of rational actors places far too much faith in economic theory, and far too little focus on the actual ways in which energy conservation investments are made.Bottom line is that I agree with you that there is a role to be played in lowering information costs; but from my perspective, there is an even greater role to be played not in "crafty" policy, but in policy reform to remove those existing regulatory barriers that prevent individuals and businesses from having an economic incentive to invest in energy conservation.

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  9. GrupoMillenniumHispaniola Posted 5:32 am
    06 May 2009

    Sean and AAADDD, Only with a revolutionary move that eliminates the obsolete IOUs business model of winning rate cases to the regulator can enable the needed transformation. No incremental reform is able to open the IOUs barrier on the demand side. The answer to the 30 year old debate is the need for a proper market structure for the delivery of an innovative financing mechanism. Such mechanism is an integral part of the new mind set involved in 2GRs’ business models, which considers for long term investment of all resources (not just energy efficiency) of the demand side available to the customer. So the name of the game is business model competition that also considers power system expansion to enable business model innovations to reap all economic value available for a given customer. Such mechanism is not available under the IOUs Regulatory Framework.  Earlier I explained that to find the long hanging fruits first you need the proper regulatory framework. The summary of the EWPC post Steven Chu: Four Years of Low Hanging Fruits  is “Dr. Steven Chu can get plenty of results in the next four years, by placing into operation the financial mechanism to exploit the lowest-hanging fruits in the demand side. Such mechanism, enabled by the EWPC EPAct, will shift us away of the fossil fuel era vicious pervasiveness into the emerging digital era virtuous pervasiveness that will spread the clean energy revolution.”    

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    1. Sean Casten's avatar

      Sean Casten Posted 6:32 am
      07 May 2009

      GMH,No objection from me that the IOU model needs reform; I suspect you'll agree with much of my earlier response to AAADDD.  I also agree with you that we know how to encourage businesses to use cost control (fuel being the single biggest variable cost in an integrated electric utility, and second biggest overall cost after capital recovery): fully competitive markets.That said, that kind of reform is probably more dependent on good political ideas than good policy ideas (sadly enough).  Therein lies the challenge to good solutions.

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      1. GrupoMillenniumHispaniola Posted 11:09 am
        07 May 2009

        Sean, Thank you for your timely and generally positive response. The need for fully functional and complete retail and wholesale markets is crucial. To enable them, there is a need to keep electricity transportation (T&D) regulated to make sure that the open market transactions correspond to high performance electricity: no congestion, nor price spikes. I used to be asking for reform for many months, until last weekend I found out that reform is the wrong word in this case. Incremental extensions of the IOUs Regulatory Framework are correctly call reform. To be in accordance with the properly named Green Tech Revolution, the EWPC Regulatory Framework is therefore a revolutionary change. If the Obama administration is committed to the Green Tech Revolution, they will be making a huge mistake if billions of taxpayer moneys are expended in unnecessarily overextending the obsolete IOUs Regulatory Framework. I believe that a good introduction to this issue is the latest EWPC article Competitive Markets for COMPETE Coalition Potential Losers.    

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  10. turanga leela's avatar

    turanga leela Posted 12:33 pm
    06 May 2009

    I ♥ wonkery. Bring it!

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    1. amazingdrx Posted 9:44 am
      10 May 2009

      It's great stuff turanga!  All we need now is a translator.  Hehey.Here's a tip Sean and wonk squad, try to explain this from the point of view of taxpayers, farmers, consumers, and small business owners.  What regulatory change will pay us (a reasonable rate) for the renewable energy we sell into the grid from our solar panels, wind machines, and biogas energy plants?  Which rule changes will allow us to drive around on electric "fuel" instead of oil obtained through murderous wars based on lies and support of tyrants like Saddam.We really want to know so we can get our legislators onboard the renewable energy change wave.  Thanks again wonks!!  Keep fighhting for real free markets.  Instead of this status quo fossil fueled nightmare that is killing the climate and the economy.

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      1. GrupoMillenniumHispaniola Posted 1:55 pm
        10 May 2009

        Amazingdrx is asking us to “try to explain this from the point of view of taxpayers, farmers, consumers, and small business owners.” I suggest that is exactly the marketing and education translation role of 2GRs. Is this approach to draw the line between an expert discussion and the general public fair and reasonable?

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      2. Sean Casten's avatar

        Sean Casten Posted 6:00 am
        11 May 2009

        Dr. X:When you write that "What regulatory change will pay us (a reasonable rate) for the
        renewable energy we sell into the grid from our solar panels, wind
        machines, and biogas energy plants?", I think you're asking the wrong question.  The goal is not renewable energy, but clean, cheap energy.  Getting that out there requires only that we price in externalities and remove the layers of subsidy that bedevil efficient capital allocation in the energy sector. Give local generators revenue streams for all the localized benefits they create, from line loss reduction to higher grid reliability.  Compel central station coal plants to pay for all the externalities they impose, from higher downwind asthma rates to AGW.  But don't presume that this will necessarily lead to the deployment of a specific suite of technologies; it will simply lead to technologies that create the benefits. If you'd prefer the non-wonky version, I can frame this as I framed it to a MA utility regulator years back: if you want to see cheaper, cleaner energy deployed, throw out your textbook and simply take lessons from your local pimp - charge for your services.

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  11. AAADDD Posted 2:47 pm
    07 May 2009

    Sean - rational does not mean perfect. Business strategy does not contradict economics, it re-inforces it.I agree utilities are an issue, if not the biggest issue. That is where the crafty policy should focus. Either open market or decoupling.+incentives

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    1. Sean Casten's avatar

      Sean Casten Posted 3:29 pm
      07 May 2009

      Agree.  My point is simply to go back to your initial comment that there are not huge opportunities to lower costs and lower CO2 emissions which - unless I misunderstood your intent - is based on the premise that rational markets somehow preclude those opportunities from existing.  The reality is that there are massive opportunities to do so - at least a whole "wedge" worth, in Socolow-speak - and our failure to acknowledge that opportunity in the public discussion has caused us to do nothing out of fear of economic disruption rather than act.  As Amory Lovins put it, "if you're standing under a lot of low-hanging fruit, shake the damned tree". Note though that the reasons these opportunities exist isn't because rational markets aren't perfect, but rather because to a significant degree in the energy industry, markets simply don't function the way competitive markets are supposed to function, filled as they are with massive barriers to entry and exit, massive price opacity and massive abilities of single actors to independently affect price and supply.  In other words, all the preconditions of "perfect" markets (in the neoclassical sense) don't exist in energy markets.  Ergo, it is intellectually lazy - and both environmentally and economically dangerous - to presume that the current capital allocation within that sector reflects some degree of rational (if imperfect) capital allocation.

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    2. GrupoMillenniumHispaniola Posted 7:10 pm
      07 May 2009

      AAADDD,Please take a look to the EWPC article Forget Decoupling Under Price Controls and give us your feedback.

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  12. Alec Johnson Posted 8:50 pm
    09 May 2009

    "The occasion is piled high with difficulty, and we must rise -- with the occasion. As our case is new, so we must think anew, and act anew. We must disenthrall ourselves, and then we shall save our country planet." Abraham Lincoln
    I'm confident that if Lincoln were alive today, he'd not object to the adjustment I made to his very inspiring quote.  

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  13. raphsperry Posted 11:13 pm
    09 May 2009

    I think Sean is right that people are missing a lot of opportunities for profitable investments in energy efficiency because of market and information failures.  I work in architecture, green building consulting, and real estate, and see all sorts of problems - only some of which I can successfully address.  For instance, for efficiency investments, the standard measure is "simple payback period," which is the cost of the measure divided by the dollars saved per year.  Very few people will pursue a project with a simple payback greater than five years, let alone ten. Now, readers interested in market economics will probably realize that simple payback is the reciprocal of return on investment (ROI).  So a ten year payback is an ROI of 10%, and a five year payback is an ROI of 20%.  Because these are typically avoided costs on utility bills, they do not seem to be positive cash flow, but they have most (if not all) of the predictability of many other investments.  So basically you have a large investor class (all American real estate developers and property owners) thumbing their noses at a 20% ROI.  I was assisting one client with a LEED building, and we had to state a policy for plumbing fixture upgrades.  I proposed stating that they would pursue all upgrades with a payback under three years (i.e. ROI of 33%), and the property owners insisted on two years.  For some reason, when they are investing their capital in building or purchasing property, they are satisfied (heck, lucky) with an ROI of 5-10%, but if the investment is in qater or energy consuming equipment, the rules are different. Sean's insight into "non-core" activities is part of the answer.  Another common problem is that developers may not own the subject property long enough to realize the returns, and potential buyers may not factor these costs into their thinking.  In buildings there are also split incentives between tenants and owners -- often, owners own the equipment but tenants pay the energy bills.  And of course many property owners of older, inefficient buildings are cash-flow dominated and not well informed about efficiency. And speaking of market economics, these are not people who like fancy new investment vehicles -- this is why they own real estate and not securities (outside of the whole recent problem with mortgage-backed securities, which probably reinforces the notion that old-fashioned real estate investing is the safe way to go for the people who continue to own real properties rather than securitized investment vehicles related to properties).  I think it is appropriate to use policy tools to try to influence the thinking of this group (real estate owners and investors).  They certainly respond to changes in tax codes, ownership rules, lease procedures, and the like.  And frankly, many could use some help appreciating the benefits of what they have been missing.

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    1. enviroperk Posted 5:37 am
      10 May 2009

      You bring up several good points. ROI is can be especially perplexing. Why don't these building owners that obviously understand ROI make good energy investments based on return? By making the investment in purchasing a building, most are pretty happy with a 10 yr ROI of 10%. I believe the issue is WHERE the cash flows, and the value of energy savings perceived by a tenant.   If a building owner leases space, most often, all of the utilities are paid by the tenant, not the landlord. It is difficult for the tenant to see $1 of "potential" (because it may difficult to contractually guarantee this for the landlord) energy savings as the same  as $1 in lease price savings.Result: the Landlord is not receiving  the full calculated return on investment, and his banker will not loan on that basis either. So building owners may be correctly thinking: " I  understand your ROI numbers, but mine are probably going to be half or a quarter of that."   

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    2. Sean Casten's avatar

      Sean Casten Posted 5:50 am
      11 May 2009

      Raphsperry:A minor point, but returns are not the inverse of payback, because returns compound.  If you earn a 10% return on a $100 investment, you get $10 back in year one, but then $11 back in year two (10% of $100 + $10).  That compounding continues, such that you get all of your $100 back in just over 8 years.A 10 year simple payback, by contrast is actually just an 8% return (if you assume a 20 year asset life). It's a bit of a wonky point, but worth bearing in mind if you're talking about rational investors making comparative return investments.  The S&P 500 has historically returned about 10% (albeit not lately).  So in the silly example above, you'd be better off putting your $ in a mutual fund than in a 10 year payback.None of that is to take away from your larger point - just worth noting the mathematical difference.

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  14. GrupoMillenniumHispaniola Posted 7:08 am
    10 May 2009

    Alec's simple and timely change of Lincoln's quote seems to support the idea that we live in revolutionary times. Raphsperry’s post and Enviroperk’s reply may be leaving the landlord and the tenant without key information risks on utility future prices. Under EWPC, competitive Second Generation Retailers - 2GRs will be able to coordinate investments of resources on the demand side. As 2GRs emerge in these revolutionary times to compete with other 2GRs, natural decoupling of sales and profits appears, as 2GRs market their business propositions to landlords, which will then make complete sense. This is what @gmh_upsa was doing in Twitter: Posting Natural Decoupling of Profits and Sales http://twurl.nl/z4dp0z #EWPC    

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