## R&D – crack for techno-optimists

I like R&D. Heck, I basically do R&D. But the common argument, that people won’t do anything hard to mitigate emissions or reduce energy use, so we need lots of R&D to find solutions, strikes me as delusional.

The latest example to cross my desk (via the NYT) is the new American Energy Innovation Council’s recommendations,

Let’s look at the meat of this – \$16 billion per year in energy innovation funding. Historic funding looks like this:

Total public energy R&D, compiled from Gallagher, K.S., Sagar, A, Segal, D, de Sa, P, and John P. Holdren, “DOE Budget Authority for Energy Research, Development, and Demonstration Database,” Energy Technology Innovation Project, John F. Kennedy School of Government, Harvard University, 2007. I have a longer series somewhere, but no time to dig it up. Basically, spending was negligible (or not separately accounted for) before WWII, and ramped up rapidly after 1973.

The data above reflects public R&D; when you consider private spending, the jump to \$16 billion represents maybe a factor of 3 or 4 increase. What does that do for you?

Consider a typical model of technical progress, the two-factor learning curve:

cost = (cumulative R&D)^A*(cumulative experience)^B

The A factor represents improvement from deliberate R&D, while the B factor reflects improvement from production experience like construction and installation of wind turbines. A and B are often expressed as learning rates, the multiple on cost that occurs per doubling of the relevant cumulative input. In other words, A,B = ln(learning rate)/ln(2). Typical learning rates reported are .6 to .95, or cost reductions of 40% to 5% per doubling, corresponding with A/B values of -.7 to -.15, respectively. Most learning rate estimates are on the high end (smaller reductions per doubling), particularly when the two-factor function is used (as opposed to just one component).

Let’s simplify so that

cost = (cumulative R&D)^A

and use an aggressive R&D learning rate (.7), for A=-0.5. In steady state, with R&D growing at the growth rate of the economy (call it g), cost falls at the rate A*g (because the integral of exponentially growing spending grows at the same rate, and exp(g*t)^A = exp(A*g*t)).

That’s insight number one: a change in R&D allocation has no effect on the steady-state rate of progress in cost. Obviously one could formulate alternative models of technology where that is not true, but compelling argument for this sort of relationship is that the per capita growth rate of GDP has been steady for over 250 years. A technology model with a stronger steady-state spending->cost relationship would grow super-exponentially.

Insight number two is what the multiple in spending (call it M) does get you: a shift in the steady-state growth trajectory to a new, lower-cost path, by M^A. So, for our aggressive parameter, a multiple of 4 as proposed reduces steady-state costs by a factor of about 2. That’s good, but not good enough to make solar compatible with baseload coal electric power soon.

Given historic cumulative public R&D, 3%/year baseline growth in spending, a 0.8 learning rate (a little less aggressive), a quadrupling of R&D spending today produces cost improvements like this:

Those are helpful, but not radical. In addition, even if R&D produces something more miraculous than it has historically, there are still big nontechnical lock-in humps to overcome (infrastructure, habits, …). Overcoming those humps is a matter of deployment more than research. The Energy Innovation Council is definitely enthusiastic about deployment, but without internalizing the externalities associated with energy production and use, how is that going to work? You’d either need someone to pick winners and implement them with a mishmash of credits and subsidies, or you’d have to hope for/wait for cleantech solutions to exceed the performance of conventional alternatives.

The latter approach is the “stone age didn’t end because we ran out of stones” argument. It says that cleantech (iron) will only beat conventional (stone) when it’s unequivocally better, not just for the environment, but also convenience, cost, etc. What does that say about the prospects for CCS, which is inherently (thermodynamically) inferior to combustion without capture? The reality is that cleantech is already better, if you account for the social costs associated with energy. If people aren’t willing to internalize those social costs, so be it, but let’s not pretend we’re sure that there’s a magic technical bullet that will yield a good outcome in spite of the resulting perverse incentives.

Gallagher, K.S., Sagar, A, Segal, D, de Sa, P, and John P. Holdren, “DOE Budget Authority for Energy Research, Development, and Demonstration Database,” Energy Technology Innovation Project, John F. Kennedy School of Government, Harvard University, 2007.

There’s a long-standing argument over the extent to which rebound effects eat up the gains of energy-conserving technologies, and whether energy conservation programs are efficient. I don’t generally side with the hardline economists who argue that conservation programs fail a cost benefit test, because I think there really are some \$20 bills scattered about, waiting to be harvested by an intelligent mix of information and incentives. At the same time, some rebate and credit programs look pretty fishy to me.

On the plus side, I just bought a new refrigerator, using Montana’s \$100 stimulus credit. There’s no rebound, because I have to hand over the old one for recycling. There is some rebound potential in general, because I could have used the \$100 to upgrade to a larger model. Energy Star segments the market, so a big side-by-side fridge can pass while consuming more energy than a little top-freezer. That’s just stupid. Fortunately, most people have space constraints, so the short run price elasticity of fridge size is low.

On the minus side, consider tax credits for hybrid vehicles. For a super-efficient Prius or Insight, I can sort of see the point. But a \$2600 credit for a Toyota Highlander getting 26mpg? What a joke! Mercifully that foolishness has been phased out. But there’s plenty more where that came from.

The Zero-Emission Agricultural Utility Terrain Vehicle (Agricultural UTV) Rebate Program will credit \$1950 in the hope of fostering greener farms. But this firm knows who it’s really marketing to:

Is there really good control over the use of the \$, or is public funding just mechanizing outdoor activities where people ought to use the original low-emissions vehicle, their feet? When will I get a rebate for my horse?

## Other bathtubs – capital

China is rapidly eliminating old coal generating capacity, according to Technology Review.

Coal still meets 70 percent of China’s energy needs, but the country claims to have shut down 60 gigawatts’ worth of inefficient coal-fired plants since 2005. Among them is the one shown above, which was demolished in Henan province last year. China is also poised to take the lead in deploying carbon capture and storage (CCS) technology on a large scale. The gasifiers that China uses to turn coal into chemicals and fuel emit a pure stream of carbon dioxide that is cheap to capture, providing “an excellent opportunity to move CCS forward globally,” says Sarah Forbes of the World Resources Institute in Washington, DC.

That’s laudable. However, the inflow of new coal capacity must be even greater. Here’s the latest on China’s coal output:

China Statistical Yearbook 2009 & 2009 main statistical data update

That’s just a hair short of 3 billion tons in 2009, with 8%/yr growth from ’07-’09, in spite of the recession. On a per capita basis, US output and consumption is still higher, but at those staggering growth rates, it won’t take China long to catch up.

A simple model of capital turnover involves two parallel bathtubs, a “coflow” in SD lingo:

Every time you build some capital, you also commit to the energy needed to run it (unless you don’t run it, in which case why build it?). If you get fancy, you can consider 3rd order vintaging and retrofits, as here:

To get fancier still, see the structure in John Sterman’s thesis, which provides for limited retrofit potential (that Gremlin just isn’t going to be a Prius, no matter what you do to the carburetor).

The basic challenge is that, while it helps to retire old dirty capital quickly (increasing the outflow from the energy requirements bathtub), energy requirements will go up as long as the inflow of new requirements is larger, which is likely when capital itself is growing and the energy intensity of new capital is well above zero. In addition, when capital is growing rapidly, there just isn’t much old stuff around (proportionally) to throw away, because the age structure of capital will be biased toward new vintages.

Hat tip: Travis Franck

## Painting ourselves into a green corner

At the Green California Summit & Expo this week, I saw a strange sight: a group of greentech manufacturers hanging out in the halls, griping about environmental regulations. Their point? That a surfeit of command-and-control measures makes compliance such a lengthy and costly process that it’s hard to bring innovations to market. That’s a nice self-defeating outcome!

Consider this situation:

I was thinking of lighting, but it could be anything. Letters a-e represent technologies with different properties. The red area is banned as too toxic. The blue area is banned as too inefficient. That leaves only technology a. Maybe that’s OK, but what if a is made in Cuba, or emits harmful radiation, or doesn’t work in cold weather? That’s how regulations get really complicated and laden with exceptions. Also, if we revise our understanding of toxics, how should we update this to reflect the tradeoffs between toxics in the bulb and toxics from power generation, or using less toxic material per bulb vs. using fewer bulbs? Notice that the only feasible option here – a – is not even on the efficient frontier; a mix of e and b could provide the same light with slightly less power and toxics.

Proliferation of standards creates a situation with high compliance costs, both for manufacturers and the bureaucracy that has to administer them. That discourages small startups, leaving the market for large firms, which in turn creates the temptation for the incumbents to influence the regulations in self-serving ways. There are also big coverage issues: standards have to be defined clearly, which usually means that there are fringe applications that escape regulation. Refrigerators get covered by Energy Star, but undercounter icemakers and other cold energy hogs don’t. Even when the standards work, lack of a price signal means that some of their gains get eaten up by rebound effects. When technology moves on, today’s seemingly sensible standard becomes part of tomorrow’s “dumb laws” chain email.

The solution is obviously not total laissez faire; then the environmental goals just don’t get met. There probably are some things that are most efficient to ban outright (but not the bulb), but for most things it would be better to impose upstream prices on the problems – mercury, bisphenol A, carbon, or whatever – and let the market sort it out. Then providers can make tradeoffs the way they usually do – which package of options makes the cheapest product? -without a bunch of compliance risk involved in bringing their product to market.

Here’s the alternative scheme:

The green and orange lines represent isocost curves for two different sets of energy and toxic prices. If the unit prices of a-e were otherwise the same, you’d choose b with the green pricing scheme (cheap toxics, expensive energy) and e in the opposite circumstance (orange). If some of the technologies are uniquely valuable in some situations, pricing also permits that tradeoff – perhaps c is not especially efficient or clean, but has important medical applications.

With a system driven by prices and values, we could have very simple conversations about adaptive environmental control. Are NOx levels acceptable? If not, raise the price of emitting NOx until it is. End of discussion.

Two related tidbits:

Fed green buildings guru Kevin Kampschroer gave an interesting talk on the GSA’s greening efforts. He expressed hope that we could move from LEED (checklists) to LEEP (performance-based ratings).

I heard from a lighting manufacturer that the cost of making a CFL is under a buck, but running a recycling program (for mercury recapture) costs \$1.50/bulb. There must be a lot of markup in the distribution channels to get them up to retail prices.

## Idle wind in China?

Via ClimateProgress:

China finds itself awash in wind turbine factories

China’s massive investment in wind turbines, fueled by its government’s renewable energy goals, has caused the value of the turbines to tumble more than 30 percent from 2004 levels, the vice president of Shanghai Electric Group Corp. said yesterday.

There are now “too many plants,” Lu Yachen said, noting that China is idling as much as 40 percent of its turbine factories.

The surge in turbine investments came in response to China’s goal to increase its power production capacity from wind fivefold in 2020.

The problem is that there are power grid constraints, said Dave Dai, an analyst with CLSA Asia-Pacific Markets, noting that construction is slowed because of that obstacle. Currently, only part of China’s power grid is able to accept delivery of electricity produced by renewable energy. “The issues with the grid aren’t expected to ease in the near term,” he said. Still, they “should improve with the development of smart-grid investment over time.”

The constraints may leave as much as 4 gigawatts of windpower generation capacity lying idle, Sunil Gupta, managing director for Asia and head of clean energy at Morgan Stanley, concluded in November.

China has the third-largest windpower market by generating capacity, Shanghai Electric’s Yachen said.

It’s tempting to say that the grid capacity is a typical coordination failure of centrally planned economies. Maybe so, but there are certainly similar failures in market economies – Montana gas producers are currently pipeline-constrained, and the rush to gas in California in the deregulation/Enron days was hardly a model of coordination. (Then again, electric power is hardly a free market.)

The real problem, of course, is that coal gets a free ride in China – as in most of the world – so that the incentives to solve the transmission problem for wind just aren’t there.

## The Energy Transition and the Economy

Model Name: The Energy Transition and the Economy: A System Dynamics Approach

Source: Replicated by Miguel Vukelic (a heroic effort)

Units balance: Yes

Format: Vensim (Contains data variables and thus requires an advanced version or the free Model Reader)

The Energy Transition and the Economy (Vensim .vpm)

## The 2009 World Energy Outlook

Following up on Carlos Ferreira’s comment, I looked up the new IEA WEO, unveiled today.  A few excerpts from the executive summary:

• The financial crisis has cast a shadow over whether all the energy investment needed to meet growing energy needs can be mobilised.
• Continuing on today’s energy path, without any change in government policy, would mean rapidly increasing dependence on fossil fuels, with alarming consequences for climate change and energy security.
• Non-OECD countries account for all of the projected growth in energy-related CO2 emissions to 2030.
• The reductions in energy-related CO2 emissions required in the 450 Scenario (relative to the Reference Scenario) by 2020 — just a decade away — are formidable, but the financial crisis offers what may be a unique opportunity to take the necessary steps as the political mood shifts.
• With a new international climate policy agreement, a comprehensive and rapid transformation in the way we produce, transport and use energy — a veritable lowcarbon revolution — could put the world onto this 450-ppm trajectory.
• Energy efficiency offers the biggest scope for cutting emissions
• The 450 Scenario entails \$10.5 trillion more investment in energy infrastructure and energy-related capital stock globally than in the Reference Scenario through to the end of the projection period.
• The cost of the additional investments needed to put the world onto a 450-ppm path is at least partly offset by economic, health and energy-security benefits.
• In the 450 Scenario, world primary gas demand grows by 17% between 2007 and 2030, but is 17% lower in 2030 compared with the Reference Scenario.
• The world’s remaining resources of natural gas are easily large enough to cover any conceivable rate of increase in demand through to 2030 and well beyond, though the cost of developing new resources is set to rise over the long term.
• A glut of gas is looming

This is pretty striking language, especially if you recall the much more business-as-usual tone of WEOs in the 90s.

## Battle of the Bulb II

The White House has announced new standards for lighting. As I’ve said before, I prefer an economic ban to an outright ban. A less-draconian performance standard may have advantages though. I just visited Erling Moxnes in Norway, who handed me an interesting paper that describes one possible benefit of standards, even where consumers are assumed to optimize.

A frequent argument against efficiency standards is that they prohibit products that represent optimal choices for customers and thus lead to reduced customer utility. In this paper we propose and test a method to estimate such losses. Conjoint analysis is used to estimate utility functions for individuals that have recently bought a refrigerator. The utility functions are used to calculate the individuals’ utility of all the refrigerators available in the market. Revealed utility losses due to non-optimal choices by the customers seem consistent with other data on customer behavior. The same utility estimates are used to find losses due to energy efficiency standards that remove products from the market. Contrary to previous claims, we find that efficiency standards can lead to increased utility for the average customer. This is possible because customers do not make perfect choices in the first place.

The key here is not that customers are stupid and need to be coddled by the government. The method accepts customer utility functions as is (along with possible misperceptions). However, consumers perform limited search for appliances (presumably because search is costly), and thus there’s a significant random component to their choices. Standards help in that case by focusing the search space, at least with respect to one product attribute. They’re even more helpful to the extent that energy efficiency is correlated with other aspects of product quality (e.g., due to use of higher-quality components).

Estimating customer utility of energy efficiency standards for refrigerators. Erling Moxnes. Economic Psychology 25, 707-724. 2004.

## Battle of the Bulb

The NYT covers the resistance movement against incandescent light bulb bans. I think most of the resistance’s arguments are flimsy. Good-quality CFLs have better color reproduction and much longer lifetimes than incandescents. Start up times are now pretty fast, flicker is not a problem, and cold weather operation is fine outdoors, even here in Montana. Bad-quality bulbs are more problematic, but you get what you pay for; if you pay for quality, you still come out ahead with CFLs.

Still, I sympathize with the resistance, because an outright ban makes little sense. CFLs don’t work in some applications, and don’t even save energy or money when used in locations that are infrequently on. They also make lousy chicken incubators. Instead, we should ban inefficient lighting economically, by pricing GHGs, local air quality, light pollution, energy security, and whatever else motivates us to seek efficient lighting in the first place. Then incandescents can stick around for things that make sense, and disappear for things that don’t. The resistance won’t have to hoard bulbs, because they can run their little tungsten filaments as long as they feel like paying for the privelege. While we’re at it, we should price mercury, so the indoor and outdoor pollution effects of CFL disposal and coal combustion are properly traded off.

Command and control is so 20th century.