Riddles and Questions in the Economics of Water and...

Riddles and Questions in the Economics of Water and Power!

When is a backstop not a backstop? • When it’s a frontstop. • When it’s cost is increasing • When it’s an intermediate “stop”

• Recycled water • When it’s a bridge to another resource

Dynamically Optimal Steady State Net recharge, growth rate

Head

MSY

hmax

DOSS (high discount rate)

DOSS (high or steep costs)

Coastal aquifer cross-section Rainfall

Recharge (R)

Head (h)

Groundwater

Saltwater

Caprock

Ocean

Extraction (q)

Leakage (L)

When  it’s  a  frontstop  

dp/dt=0   dh/dt=0  

cb  

p*  

h*  

Desalina8on  is  a  front  and  backstop  

dp/dt=0   dh/dt=0  

cb  

p*  

hb*  h*  

The Pearce Equation

D

C0+MUC0

C1+MUC1

C2+MUC2

q0 q1 q2

p08

p15

p30

$

Extraction

When  it’s  a  temporary  backstop  (costs  of  recycling  eventually  increase)  

pH   pA  

p*  

cr  FMCgH  

FMCgA  

FMCrA  

p*  

cw  

FMCg  

FMCw  

When  it’s  a  watershed  

Energy  costs  of  desalina8on:  Will  the  real  backstop  please  stand  up?    

FMCb(0)  

FMCg  FMCb  

FMCb(∞)  

Technical Change in Desalination

Philippine Power Policy: Too many objectives? • EPIRA (RA 9136) – Unbundling • RE (RA 9513) – Promote renewable energy

• Sustainability • Self-sufficiency • Renewability • Security • Reliability • Affordability •  Inclusivity • Efficiency

Mission Impossible => Rent-seeking

Pursue each as it promotes the general welfare • Facilitate and coordinate (incl. sensible infra) to increase consumer welfare, net of environmental costs

• Large subsidies shrink the economy.

Inclusive electrification

•  Only to the extent that it promotes general welfare

•  Most cost effective way to spend PhP 1 billion – Extend minigrids (outer islands and remote

locations) – New microgrids (e.g. sitio size) – New nanogrids (e.g. 1-3 homes)

•  How much is poverty reduced? •  Cost effectiveness vs. CCTs?

Sustainability ala Jack Johnson or as promotion of the general welfare?

• Non-economics version (chaos) • Reduce • Reuse • Recycle • Renew

• Economics version •  Production function natural resource use •  Intertemporal equity • Maximize intertemporal welfare

39%  

27%  

19%  

6%  7%  

1%   1%  

Percentage  Share  of  Energy  Sources  US  Electricity  Genera=on  2014  

Coal  

Natural  gas  

Nuclear  

Hydropower  

Other  renewables  (Biomass,  Geothermal,  Solar,  Wind)  

0

20

40

60

80

100

120

EU-2

8

Aus

tria

Swed

en

Port

ugal

Latv

ia

Den

mar

k

Cro

atia

Rom

ania

Spai

n

Slov

enia

Italy

Finl

and

Ger

man

y

Gre

ece

Irela

nd

Slov

akia

Bul

garia

Fran

ce

Uni

ted

Lith

uani

a

Esto

nia

Cze

ch

Bel

gium

Pola

nd

Net

herla

nds

Cyp

rus

Hun

gary

Luxe

mbo

urg

Mal

ta

Nor

way

Source: Eurostat (online data code: tsdcc330) "

22%  in  EU  

13%  share  in  US!  (EIA)  

Volunteering to play the sucker? Phils share of renewables =33%

Borenstein, von Kooten et al: High renewable subsidies

lower prices

• Philippines has highest energy prices in Asia (except Japan)

• Denmark, Germany, Spain, California, Hawaii

• High RE subsidies • High prices

Feed-in-Tariff (FIT)

Tied to be FIT

Pnondisc  =  562.73  

Pdisc  =  530.85  

Preg  =  200  154  150  

J  

894.41  

K  

M   P  D  

1659.59  

$  /  MW  

MW  

MSCNR  

MCR  

MCR  

MW*  

Current Situation •  Two separate objectives

– Bring electricity rates down –  Environmental goals

•  Two contradicting instruments –  EPIRA (RA 9136) – RE Law (RA 9513)

•  Need to reconcile objectives in order to reform law

•  Reduce costs of generation, transmission, retailing, distribution and COSTS OF POLLUTION.

Current Situation •  Two separate objectives

– Bring electricity rates down –  Environmental goals

•  Two contradicting instruments –  EPIRA (RA 9136) – RE Law (RA 9513)

•  Need to reconcile objectives in order to reform law

•  Reduce costs of generation, transmission, retailing, distribution and COSTS OF POLLUTION.

Suggestive results/questions

•  Coal: Transport and transmission costs dominate econ-of-scale.

•  Hydro

– Adequate water: baseload – Seasonal water: specialize in peak

•  Gas has comparative advantage in peak periods.

But Gas-Gen Used as Baseload!

 -­‐        

 1,000    

 2,000    

 3,000    

 4,000    

 5,000    

 6,000    

 7,000    

 8,000    

 9,000    

1   3   5   7   9   11   13   15   17   19   21   23  

Megaw

aV  

Hour  

Luzon  -­‐  Coal  

Coal   Total  Gen  

 -­‐        

 1,000    

 2,000    

 3,000    

 4,000    

 5,000    

 6,000    

 7,000    

 8,000    

 9,000    

1   3   5   7   9   11   13   15   17   19   21   23  

Hour  

Luzon  -­‐  Comb.  Hydro,  Diesel,  etc.  

Total  Gen   Others  

 -­‐        

 1,000    

 2,000    

 3,000    

 4,000    

 5,000    

 6,000    

 7,000    

 8,000    

 9,000    

1   3   5   7   9   11   13   15   17   19   21   23  

Hour  

Luzon  -­‐  Natural  Gas  

Natural  Gas   Total  Gen  

Visayas Typical Load Curve – Dry Season

 -­‐        

 200.00    

 400.00    

 600.00    

 800.00    

 1,000.00    

 1,200.00    

 1,400.00    

 1,600.00    

 1,800.00    

1   3   5   7   9   11   13   15   17   19   21   23  

Megaw

aV  

Hour  

Visayas  -­‐  Geothermal  

Geo   Total  Gen  

 -­‐        

 200.00    

 400.00    

 600.00    

 800.00    

 1,000.00    

 1,200.00    

 1,400.00    

 1,600.00    

 1,800.00    

1   3   5   7   9   11   13   15   17   19   21   23  

Hour  

Visayas  -­‐  Coal  

Coal   Total  Gen  

 -­‐        

 200.00    

 400.00    

 600.00    

 800.00    

 1,000.00    

 1,200.00    

 1,400.00    

 1,600.00    

 1,800.00    

1   3   5   7   9   11   13   15   17   19   21   23  

Hour  

Visayas  -­‐  Diesel,  Hydro,  etc.  

Total  Gen   Others  

Current Situation •  Two separate objectives

– Bring electricity rates down –  Environmental goals

•  Two contradicting instruments –  EPIRA (RA 9136) – RE Law (RA 9513)

•  Need to reconcile objectives in order to reform law

•  Reduce costs of generation, transmission, retailing, distribution and COSTS OF POLLUTION.

Renewable Location •  Wind and solar in far north (avoided

transmission cost) •  Only solar in far southern portion of the

grid •  Wind vs. Solar

– Mg cost of wind is lower – But mg benefits (avoided cost) also lower

•  Wind dominated by solar in South – More sun, less wind – Higher differential between peak and off-peak

Renewables: What Size?

Burgos exports: Rational or

Rope-a-Dope?

Export Solar?

•  Import solar: MB = LACE + TC = LCOE •  Export Solar: MB = Smaller LACE =

LCOE + TC

Possible reforms and directions

•  Failure to exploit mg cost pricing – Volumetric rates include fixed cost of

infrastructure – Two-part tariff for transmission? –  Time of day charges will increase net benefits

thru demand side conservation including intertemporal substitution (e.g. price responsive thermostats)

– Result: partial convergence of peak and off-peak rates may increase comparative advantage of coal, even including emission charges.

•  Possible that gas should be conserved for future.

To do:

•  Build analytical and numerical models capable of delivering these results, albeit w/ demand functions instead of exogenous “loads.”

•  Add uncertainty about demand and equipment failure.

•  Results from econ model still must be validated in EE model.

Maraming Salamat and Mahalo!

Tel.  Nos.  +63  (2)  9279686  loc.  239  Telefax  Nos.  +63  (2)  9205465

Website: www.upecon.org.ph/epdp Email: infoepdp@gmail.com

Comparison of Power Rates

Del  Mundo  (2014),  Understanding  and  Reducing  Power  Rates  in  the  Phils.    

RENEWABLE SUBSIDIES SHRINK THE ECONOMY!

To do:

•  Build analytical model capable of delivering these results, albeit w/ demand functions instead of “loads.”

•  Build operational model along similar lines. Google Fripp the SWITCH.

•  Then add uncertainty about demand and equipment failure.

•  Results from econ model still must be validated in EE model.

Feed-in-Tariff (FIT)

Progeria in the economy

Philippines     South  Korea   Thailand   Indonesia   Malaysia  1965   763     1,285     437     279     1,173    2012   1,501     23,303     3,390     1,732     6,790    

 -­‐        

 5,000    

 10,000    

 15,000    

 20,000    

 25,000    

GDP  per  capita  in  2005  USD,  1965  vs.  2012  

Source:  WDI.  

Great  improvements  in  GDP  p.c.  in  Phl.’s  neighbors  associated  with  increased  industrializa8on  and  manufacturing.  

Progeria in manufacturing

Philippines     South  Korea   Thailand   Indonesia   Malaysia  1965   23.6   14.3   14.2   8.4   9.5  2012   20.5   31.0   34.0   24.0   24.2  P.p.  change  (%)   -­‐3.1   16.7   19.8   15.6   14.8  

-­‐5.0  

0.0  

5.0  

10.0  

15.0  

20.0  

25.0  

30.0  

35.0  

40.0  

Manufacturing  share  to  GDP,  1965  vs.  2012  (%)  

Source:  WDI.  

Philippines     South  Korea   Thailand   Indonesia   Malaysia  1965   31.1   21.3   22.9   12.6   27.5  2012   31.1   38.1   43.6   46.8   40.8  P.p.  change  (%)   0.0   16.8   20.7   34.2   13.4  

-­‐5.0  

0.0  

5.0  

10.0  

15.0  

20.0  

25.0  

30.0  

35.0  

40.0  

0.0  

5.0  

10.0  

15.0  

20.0  

25.0  

30.0  

35.0  

40.0  

45.0  

50.0  

Percen

tage  point  cha

nge  (%

)  

Industry  share  to  GDP,  1965  vs.  2012  (%)  

Great improvements in GDP p.c. in Phl.’s neighbors associated with increased industrialization and manufacturing.

Source:  WDI.  

Sec 4. Renewable Portfolio Standards

Optimal generation and transmission

•  Levelized Cost of Electricity (LCOE) –  But cost depends on spatial and temporal use patterns

and other resource availabilities –  Supply not independent of demand

•  Levelized Avoided Cost of Electricity (LACE) –  Compare avoided cost benefit w/ levelized cost –  Still somewhat ad hoc. You don’t know what resources

you will use when until you do the optimization. (But could iterate.)

•  Electrical engineering practice: minimize total LCOE plus subject to exogenous “loads,” transmission losses and constraints.

•  Ideal: endogenize transmission as well as generation given somewhat elastic demand functions, not exogenous loads.

Source: Southeast Asia Energy Outlook September 2013 "

Philippines ahead of Thailand and Malaysia in RE generation!

DISTRIBUTION!TRANSMISSION!POWER !PLANTS!& IPPs!

END!USERS!

END!USERS!

SYSTEMS!OPERATIONS!

NATIONAL POWER CORPORATION!

•  18 PRIVATE ! UTILITIES!•  2 LOCAL ! GOVERNMENT! UNITS!•  120 ELECTRIC! COOPERATIVES!

OTHER IPPs!

Source: ERC Restructuring the EPIRA Powerpoint Presentation"

Before the reforms…

R.A. 9513 Renewable Energy Act of 2008

§  On-Grid Renewable Energy Development!§  Renewable Portfolio Standards (RPS)!§  Feed-In Tariff System!§  Renewable Energy Market!§  Green Energy Option!§  Net-metering for Renewable Energy!

§  Off-Grid Renewable Energy Development!§  Minimum RE generation capacities!

Source: ERC FIT Powerpoint Presentation"

Sec. 7, R.A. 9513"For emerging renewable energy resources to be used in compliance with the Renewable Portfolio Standard, to wit:"

q Wind"q Solar"q Ocean"q Run-of-river Hydro"q Biomass"

Feed-In Tariff System!

Source: ERC FIT Powerpoint Presentation"

Geothermal  excluded!  

After the reforms…!

DISTRIBUTION!TRANSMISSION

POWER !PLANTS!& IPPs!

END!USERS!

END!USERS!

SYSTEMS OPERATIONS

NATIONAL!TRANSMISSION!CORPORATION!

•  18 PRIVATE ! UTILITIES!•  2 LOCAL ! GOVERNMENT! UNITS!•  120 ELECTRIC! COOPERATIVES!

OTHER IPPs!

OTHER IPPs!

MARKET !OPERATOR!

SUPPLY!

GENERATION! SUPPLY!DISTRIBUTION!TRANSMISSION!

Source: ERC Restructuring the EPIRA Powerpoint Presentation"

OPEN!ACCESS &

RETAIL COMPETITION!

R.A. 9136 (EPIRA)!The BLUEPRINT of

the electricity industry.!

RESTRUCTURING!

PRIVATIZATION!

Objective of EPIRA!

Source: ERC Restructuring the EPIRA Powerpoint Presentation"

Phl. manufacturing and GDP p.c. stagnated with respect to its neighbors

(note: 1965=100).

RESTRUCTURING!

Performance!Based!Regulation!!Benchmarking!

Competition at the wholesale & retail level!

Source: ERC Restructuring the EPIRA Powerpoint Presentation"

Too many objectives => rent-seeking … unless we interpret each acc to its contribution to “common good” (public welfare).

• Sustainability • Self-sufficiency • Renewability • Security • Reliability • Affordability • Inclusivity Efficiency

Household electricity consumption

Del  Mundo  (2014),  Understanding  and  Reducing  Power  Rates  in  the  Phils.