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

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

Introduction (1) Energy Efficiency (EE) – The Fifth Fuel Conservation: Turn down the thermostat in winter. EE: Maintain the thermostat setting, but add home insulation. Energy Efficiency (EE) – The Fifth Fuel Coal, NG, Nu, Renewables, EE Daniel Yergin – The First Fuel 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

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

Energy Efficiency and Economic Efficiency (1) Amory Lovins: Negawatts: Doing more with less. Energy Efficiency vs. Economic Efficiency Shadow price of CO2 emissions What’s wrong with this picture? McKinsey Report (2010) Will you spend $20 on a lightbulb? Should you? Recall CFLs. of 14

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

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

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

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

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/mWh, 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*(100MWh) = $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

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: Q0 = f (E, K) Isocost (Budget Constraint): B = PEE + PKK L held constant Advance in energy technology Q/E increases. But firm better off Energy declining as portion of economy. Price spike has smaller impact than in the 1970s PE increases EE (Q/E) increases, But firm worse off. of 14

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

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

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