Energy Efficiency The Fifth Fuel Peter Schwarz Professor

Energy Efficiency: The Fifth Fuel Peter Schwarz Professor of Economics, Belk College of Business and Associate, Energy Production and Infrastructure Center (EPIC) UNC Charlotte of 14 1

Outline • Introduction • Energy Efficiency and Economic Efficiency • Energy Efficiency in Production and Consumption • Energy Efficiency Gap • Rebound Effect • Government Intervention to Encourage Energy Efficiency of 14 2

Introduction (1) • Energy Efficiency (EE) – The Fifth Fuel • Coal, NG, Nu, Renewables, EE • Daniel Yergin – The First Fuel Conservation: Turn down thermostat in winter. EE: Maintain thermostat setting, but add home insulation. • Boeing 787 Dreamliner • Speed vs. fuel efficiency • EE vs. Conservation • Conservation • Save energy by consuming fewer energy services • EE • Reduce energy while consuming the same amount of services • Or use the same amount of energy while consuming more services. • EE = Energy Output/Energy Input • Output could be comfort, as measured by thermostat setting of 14 3

Introduction (2) • Energy efficiency is not the same as economic efficiency • Dreamliner has benefits (fuel savings) and costs (lighter materials, R & D) • Insulation has benefits and costs • Former VP Dick Cheney famously said, “Conservation is a private virtue, not a basis for (economically) efficient policy. ” • But EE and conservation reduce emissions, and may cost less than nuclear or renewables. • So there is potential justification for government to encourage EE. • Examine EE, Energy Intensity (EI) from economic perspective • • • EE, Energy Intensity (EI) and economic efficiency EE in production and consumption EE Gap: Do consumers save too little energy? Rebound Effect: Does EE increase EI and partially offset energy savings? Government Intervention: Potential to improve economic efficiency • Correct energy efficiency market failures of 14 4

Energy Efficiency and Economic Efficiency (1) • Energy Efficiency vs. Economic Efficiency Shadow price of CO 2 emissions Amory Lovins: Negawatts: Doing more with less. What’s wrong with this picture? Mc. Kinsey Report (2010) Will you spend $20 on a lightbulb? Should you? Recall CFLs. of 14 5

Energy Efficiency and Economic Efficiency (2): Ban the Bulb? DWL from ban DWL from on Edison’s light Pc s Qc of 14 6

Energy Efficiency and Economic Efficiency (3) • Energy Intensity (EI) • Energy Input/ Output (GDP) • Looks like inverse of energy intensity • But the two measures can tell different stories • EE is more of a micro measure. • Part of production process • Q = f (K, L, E) • EE = Q/E • Great Recession: Decrease energy to construct house from 10 to 9 MWhs. • Increase in EE. • EI is more of a macro measure • EI = E/Q, where Q can be GDP. • Great Recession • House production plummeted. • Even though EE increased, EI could increase if Q decreased by a large amount. of 14 7

Energy Efficiency and Economic Efficiency (4) • EI depends on: • Manufacturing vs. services • Services less EI than manufacturing. • Industry mix within manufacturing • Cement, textiles most EI • Beverage mfg. low EI. • Energy prices • Temporary high energy price reduces EI • But transitory • Long-term high energy price • Technological change • Reduces EI long-term. of 14 8

Energy Efficiency and Economic Efficiency (5) EI declining even when energy use per capita increasing. During recession, EI (k. Wh/$ GDP) declined. Energy use declined faster than GDP. of 14 9

Energy Efficiency in Production: Energy Input/Product Output Relationship (1) • Q = f (K, L, E, (M)); K = capital, L = labor, E = energy, M = materials • Q/E is EE (APE) • Cost minimization • MRPE = MFCE • MRPE = MPE* PQ • Want MP, not AP. • MFC = PE • Example: A car producer can produce one more car from its automated plant using 100 MWh(1 GWh). Each MWh sells for $100/m. Wh, and a car sells for $20, 000. Do you recommend producing more cars? Solution: Compare MRP to MFC. MRPE = MP*PQ = 1 car*($20, 000/car) = $20, 000. The MFC = $100/MWh*(100 MWh) = $10, 000. MRPE > MFCE, so keep producing. Typically, MRP will eventually decline, due to crowding of the fixed capital plant. When we get to the point where MRPE = MFCE, we should stop at that quantity of cars. of 14 10

Energy Efficiency in Production: Energy Input/Product Output Relationship (2) • Long Run • Cost minimization • MPE/PE = MPK/PK = MPL/PL • Want MP, not AP. E, K can be substitutes or complements. Why does it matter? Isoquant: Q 0 = f (E, K) Isocost (Budget Constraint): B = PEE + PKK PE increases EE (Q/E) increases, But firm worse off. Advance in energy technology Q/E increases. of 14 But firm better off L held constant Energy declining as portion of economy. Price spike has smaller impact than in the 1970 s 11

Energy Efficiency in Production: Energy Input/Energy Output Relationship (3) • Keystone Pipeline • Would have transported oil from Canadian oil sands • Low energy output per unit of energy input • No longer worthwhile given low oil prices. • Natural gas combined cycle (NGCC) • Recycles waste heat • Produces more electricity than conventional NG plant • Coal • Supercritical and ultra-supercritical plants use less coal to generate a unit of electricity than conventional (sub-critical) plant of 14 12

Energy Efficiency in Consumption (1) • You consider whenever you buy a • Car • House • Appliance Maximize your utility subject to a budget constraint Decrease in PE increases insulation (and comfort ‘t’) Rebound: As EE increases, set thermostat at more comfortable level, partially offsetting energy savings Part B will provide details. of 14 13

Energy Efficiency in Consumption: Energy Efficiency and Electric Utility Capacity(2) • You buy a programmable thermostat • Turn down temperature at night • Saves energy (k. Wh) • But not capacity (k. W) • You buy more energy-efficient air conditioner • Saves energy, capacity • Except for surge when it comes on. • LEED, ENERGY STAR • Focus on k. Wh, not k. W. • EE programs need to consider both. of 14 14