 Hello, everybody. Good afternoon. It's wonderful to see all of you here with us. I'm Susan Collins, the Joan and Sanford Wildein here at the Gerald R. Ford School of Public Policy, and it is wonderful to see everyone here this afternoon for one of our public policy talks at the Ford School series. So before I begin, I'd like to thank Carl Simon, who directs our Science, Technology, and Public Policy program for sponsoring the event today. I'd also like to welcome Director Mark Bartow of the University's Energy Institute. It's great to have you here with us as well this afternoon, and we're delighted to have all of the rest of you here as well. Well, today's speaker is a former member of the Ford School and the University of Michigan, and so it's really a special pleasure to be able to welcome him back here to speak with us, and I will be introducing Professor Severin Bornstein more formally in just a few moments, but it is our centennial year, and those of you who have already been joining us for some of our events this year know that I've decided to take just a little bit of time at the beginning of each of these events to say a bit in context of the Ford School centennial. So I hope many of you have had the opportunity to look at the most recent issue last spring of State and Hill, the school's magazine, and their copies outside if you haven't seen it and would like to take a look. One of the things that it features is the school's history, a timeline, and that's also on our webpage, and I encourage you to take a look at it. It has photos and stories from a century, 100 years of faculty, students, and staff, and alumni of the Ford School. Well, as you read that timeline, you'll notice that we weren't always called the Gerald R. Ford School of Public Policy. The university first began awarding advanced degrees in public administration in 1914, and in 1946, we were called the Institute of Public Administration. That was then when that name was born. In 1968, a period we're particularly proud of, we launched the nation's first public policy degree, and the program was renamed the Institute of Public Policy Studies, fondly known as IPS, and we have many, many folks who are very fond alumni of the IPS program. It was during the IPS era that Severn Borenstein joined the community, and he made many friends and admirers here, and there are a number of members of our extended family who were here during the IPS period, who are still here today. That includes John Chamberlain, Paul Carad, and Edie Goldenberg, and we have a number of stories on our timeline about that period. I also just wanted to mention that a particularly favorite part of the school community has always been our sense of humor. We have had a long legacy of doing skits, and that continues to this day. There was also an irreverent tradition at that period, known as Ips Rips, which was a humorous magazine that many of the students had a major hand in, and I won't go into great detail, although I'm happy to, in other venues, because many of those articles, some of them in particular happened to roast Severn, and so it was fun to go back and to take a look at some of the stories that happened during that time period. Well, in addition to all of the humor and the engagement in the community and the many ways that Severn has been connected historically, he's a very highly accomplished scholar, and I wanted to just spend a moment telling you a little bit about that background before I welcome him to the podium. He is a very widely published in the field of energy and environmental economics. Since 1996, he has taught at the University of California, Berkeley's Haas School of Business, and there he was named the E.T. Grether Professor of Business Administration and Public Policy in 2000. He's advised both public and private institutions created educational software that's used in universities, courses around the world, and is the recipient of a number of prestigious awards and honors for research as well as for his teaching. He's just recently stepped down from 20 years directing the University of California's Energy Institute, and he returns to Ann Arbor. We're delighted to have him spend the first half of the fall semester here with us at the Ford School. We're really glad to have you here. Severn has agreed that after his remarks, he is happy to take questions, and we're going to be a little bit more informal than we are in some of our policy talks series. There will be microphones that staff will bring around. If you are watching online, I invite you to tweet your question in. Please use the hashtag policy talks, and a member of our staff will read your question to Severn. And with no further adieu, it is my pleasure to welcome Professor Severn Bornstein to the podium. Thank you, Susan. Susan didn't mention that actually we were colleagues in graduate school, so we go back even before the Ips era or my Ips era. Thank you all for coming, and it has so far been a wonderful visit here. I'm sad to say it's almost half over, but it has been really fun to be at the Ford School and to get to know new people and to get to hang out with old friends as well. I want to apologize for the title of this talk. Carl and I were sort of bouncing around titles. We came up with this, and we found out afterwards that utility means different things to different people. There is the economist's view that this is about utility functions, and there is the more, I think, common view that this is about something being useful, which may not apply to utility functions. But this is a reference to an electric utility and the future of the way we distribute energy and the market for that. I want to start by saying and just being really clear on this, I'm an economist. I don't pretend to understand the science of climate change. I talk to a lot of scientists who do work on climate change, and from them I have become convinced that there's an overwhelming probability that manmade greenhouse gases are the primary cause of climate change, and that the potential for major potentially catastrophic climate change is very real. But I'm certainly not going to debate that scientific area with anyone in the audience, and so maybe that will avoid some questions. As a result, there's a great need to transition to other energy sources than we've traditionally used, particularly burning fossil fuels. Ones that don't make greenhouse gases. I'm not religious about how we do that. And I think it's important when we start looking at solutions to recognize that there are a lot of possibilities, and that for politically, political, economic, and I think ultimately moral reasons, it's going to be critical to find possibilities that can be pursued at reasonable costs, particularly in the developing world, where there are many other concerns on the agenda, saying that we're just going to transition to some very expensive alternative that will ultimately undermine economic growth just isn't going to be acceptable. So all options have to be on the table. And when we talk about all options, we have the traditional ones like hydro and nuclear and geothermal, which have been used for years, wind power, which is growing very quickly, not just the United States, solar PV, which is now starting to take off, central station solar thermal, these are the mirrors in the desert that reflect heat and through the heat generate electricity, things that really aren't market ready yet like tidal power but are being pursued, carbon sequestration, which would actually allow us to continue to burn coal, which is a huge resource and very, very cheap. And if it worked would be a way to store the CO2 emissions and reduce the impact on the climate. And finally, energy efficiency, which has got to be a major player in any discussion of how we think about approaching the climate change challenge. All of those are going to play a role to a greater or lesser extent. I think the necessity is to pursue all of them and see which ones actually work out. I have been told over the last many years that each about each of these that they'll never be economic, they'll never be able to compete with fossil fuels by some people. And I've also been told by other people that they're already economic and they're already are cheaper than fossil fuels. There are a lot of views out there. I actually am not going to take a stand on where things are going to be in the future. I think predicting future technology is extremely difficult. And it's certainly not my forte. But I am going to take a stand on how we can set up a format a markets and institutions that actually allow us to get to the most cost effective solutions. Way back in 2008 I had a colleague physicist at Berkeley who told me that for reason something to do with the physics of crystalline silicon technology solar panels could never cost less than $2 a watt. They were at the time around $3 a watt. And within a couple of years they were below $1 a watt. And solar technology has just made huge strides in the last five years. It's incredibly exciting. My colleague who said this I think understood a lot about physics and not very much about markets for the inputs to crystalline silicon technology. It turned out a lot of things in the design that had nothing to do with violation of fundamental laws of physics changed. And as a result they were able to push costs down tremendously in a way that actually no one really predicted you were going to see that sort of progress that quickly. We're not going to be able to predict technological progress. And I think that's the primary lesson we should take from the last decade. There's going to be a lot of changes and we're going to I hope pursue a lot of possibilities. And some things are going to be huge disappointments and other things are going to be much bigger successes than we could have predicted. And as a result we what we need to do is set up institutions and markets that can accommodate that and can give the right incentives for pursuing those technologies. It's critical to do that to make real progress on climate change but I actually think there's another reason that sometimes lost at least among the climate change discussions. And that is climate change is not the only threat facing the world. And when you get into these discussions you sometimes run into people who say well we need to do this and costs really are secondary. And it's you just can't I think realistic be taken seriously with that attitude. Because there are many other challenges that the world is facing and particularly in the developing world there are many other challenges and costs aren't secondary in those other challenges in health challenges in wars and so forth costs are always taken into account. And those are also going to be challenges in the future and they're going to compete for resources. So we have to be realistic about what we can really do and what things really cost. And we cannot pursue a let's just do everything policy. I think we do pursue a let's investigate everything let's research everything. But if something's really really expensive and shows no signs of getting cheaper then we really have to recognize that that's probably not going to be a solution that we can pursue. What I want to talk about today is the electricity industry in particular which of course is not the only source of greenhouse gases. In the United States the electricity industry is about a third of all greenhouse gases directly indirectly within industry there's also a lot of internal generation. So some of that green is you would also the technologies for improving electricity would also apply to. Ultimately we might see transportation become electrified. And so we might have an even bigger share coming from electricity making it even more important to address the electricity issue. So decarbonizing electricity is a very high priority. What does that mean. Well the first thing it means is replacing coal fire generation coal fire generation produces more greenhouse gases per megawatt hour than any other electricity source. It is producing way over half of the entire greenhouse gas emissions in the electricity industry and finding a replacement for coal fire generation is going to be the first priority in electricity. We can do that in many ways as I mentioned we can do that with nuclear hydroelectric or geothermal and there are advocates out there pushing for those but they've been out those technologies have existed for a while technological progress in those areas is likely to be slower and each of those has real environmental concerns. So while nuclear and geothermal and hydro are on the table and I think we do need to continue to work on them. The fact is that we're also going to push ahead in other areas and the people I frequently meet who tell me that nuclear is still incredibly cheap just don't seem to be matching up with the data. So I think we need to be thinking about other alternatives as well. Then at the other end as I mentioned there are alternatives that are really not ready for market yet title power which is something that sounds very exciting but so far we haven't really gotten the technology to turn it into electricity cost effectively. Carbon sequestration which again you will meet people who will tell you it's already ready and it is already cost effective but at this point it really hasn't gotten there. So right now we're focused a lot on wind and solar. Wind and solar are the two renewable energy sources that we really do have a good handle on the technologies. The costs have come way down even recently and wind particularly people thought five years ago as a pretty mature technology and it has gotten a lot more cost effective in just the last few years. With solar and wind there is a problem that we don't face with most of these other energy sources and that is what's called intermittency. Intermittency doesn't quite capture what the problem is because it isn't just that they fluctuate a little bit up and down or that they can go within solar for solar PV within seconds from high production to very very low production. It's also that they can go for days without producing much at all. I used to live in Ann Arbor so I remember what winter is like here and certainly there are some pretty dark days sometimes many of them in a row and so and likewise you can have very windy periods and periods where the wind really dies down and so when we think about these resources we have this additional challenge of intermittency and how to integrate these and how to use them when they fluctuate and are not predictable and not controllable. Now of course that wouldn't be a problem in itself if we had cheap electricity storage and what makes electricity so much more challenging than other energy sources is that the electricity itself is not storeable at a reasonable cost at this point. That is another area we're doing a lot of research in and there have been some exciting breakthroughs but I've actually been studying energy since the mid-1970s and cost effective batteries were right around the corner in the mid-1970s and there still right around the corner and so we do have work to do in that area still as well. The other concern and it is still a concern but it has really been changing is just the cost of these resources but that has really dramatically changed in the last few years. Just to give you to sort of fix ideas the long run cost these days of producing electricity from a combined cycle of gas turbine is generally thought to be about six cents per kilowatt hour. Wind power these days is down to four or five cents per kilowatt hour in good locations and that can sound pretty exciting but there's a pretty big caveat and that is the timing of wind and this gets back to the intermentancy and the lack of storability. This is wind on a typical day in California but it's pretty representative of all in all of North America and that is you get a lot of wind in the middle of the night the middle of the day the wind dies out it picks up in the afternoon and into the evening again but it's basically producing power at the times you need at least or translated into economics at the times that it's least valuable. So well you might think that the average price wholesale price of electricity is five or six cents a kilowatt hour. For comparison the middle of the night price can very well be less than half that. So well wind power is getting a lot cheaper right now it's still producing at a time and it will continue to in North America at a time when it's really not that valuable. By the way in Europe this is completely different. The Europeans particularly in England the demand for electricity peaks late in the evening because they do very little air conditioning and a lot of heating and the wind picks up in the evening. And so actually wind has really good timing in Europe and in some ways has very much greater potential and I think that's a great example of how we have to be opportunistic and think about what resources match with our needs and wind is probably not going to be a major a major solution to daytime until we get good storage but in Europe they still could be a very attractive resource and in the United States it certainly has usefulness as well. Solar power from photovoltaic panels has also had huge gains in the last five years has gotten massively cheaper but massively cheaper brings it down to again for comparison purposes 11 or 12 cents a kilowatt hour. So it's still a lot more expensive than gas fire generation. On the other hand solar power has much better timing. I'm not sure how readable this is. This dark line is wholesale prices in California this is again a California example. The light dashed line is what solar production looks like if you point the panels south. The darker line is what solar production looks like if you point the panels west. You get later in the afternoon power by pointing them west but you get less power. The one of the exciting things is we now can do both particularly in large-scale solar farms we can mount solar panels on trackers that actually move and point to the sun as it moves across the sky seems like a pretty basic technology and it is a basic technology but it's been mastered in the last five years in a way that's very reliable and cost effective. So when you build these big solar PV farms now you build them on trackers so that they you don't face this issue of what what's the highest value way direction to point them. So solar power has a lot of attraction in both cases I have to just put a caveat in this. The cost numbers depend very much on where you put them. The solar cost numbers generally are in really attractive locations in the southwest for instance in the United States. The wind power are in the windiest locations. They also and this doesn't get as much attention depend very much on the cost of capital. Now everything depends on the cost of capital when you start investing in anything but solar and wind have a particular dependence on the cost of borrowing money because all of the cost of these of these sources are up front almost all of them are. It's a completely fixed cost technology so you spend everything up front and you get all the payoff later. So the rate at which you trade off now and future really drives how cost effective they are and to the extent that the cost of capital is high these become much less attractive technologies. The third alternative and the one I want to talk about today and the one that the title is based on is distributed generation. And distributed generation right now means rooftop solar PV. If you work in the electricity industry this is the thing you're spending your most of your time worrying about right now. The idea that end users will install their own electricity source and start crowding out the utility electricity source. Companies like solar city are growing rapidly in fact solar city is doubling every year. Solar city is the largest installer of distributed generation photovoltaics and for the last five years they have just taken off. At the same time utility investors and analysts are seeing this as a huge threat to utilities. In fact Morgan Stanley put out a report recently that said the biggest threat to U.S. utilities is expansion of distributed generation that could eventually eliminate the utility. I think we are long long ways from that happening for reasons I'll talk about but it is definitely a real concern to investors. So I'm going to take as given that we need to move away from electricity generation with fossil fuels and I'm going to ask the question is distributed generation the direction that we're going to move or how do we figure out whether it's the direction that we should be moving. Behind this question there are two views the the future of the electricity utility industry and they sort of book in the possibilities one is well yeah we need to move away from utility we need to move away from fossil fuels but there are these utility scale alternatives and the utility is going to do basically the same thing they're just going to do it with wind, solar, nuclear, hydro, etc and last with coal and natural gas. Now that's one view the other view is that we're going to see a complete revolution in the electricity industry that within a decade although I think that's highly implausible distributed generation will be the dominant form of electricity consumption that not only will the cost of the generation fall so much remember this is still the solar panels are still much more expensive than natural gas but also that the cost of storage will decline I think realistically that's not going to happen this is the chart of grid scale renewable energy that the orange is wind the blue is biomass the red is geothermal the green that you can't really see is solar that is grid scale solar I didn't this graph does not have distributed solar but it's smaller than the green of the grid scale solar so solar is still a really tiny part of the industry it has grown tremendously but at this point it is being put in in places where either there is a strong economic incentive because the way utility is pricing that I'm going to talk about in a minute or because people want to do it regardless of whether it's economic which is fine and I'm all for people doing that if they want to pay for it but I think we have to keep in mind what we're really aiming at which is solving the global climate change problem and if it's a really expensive technology it's not going to solve the global climate change problem so the more moderate views are that well DG is going to be in the mix and it's going to gradually grow and some of the more optimistic views is it's going to grow pretty aggressively and become a significant share of the electricity we consume both residential and commercial and that's actually where the economics of either the utility industry or of distributed generation doesn't really work and that's where the title of the talk comes from is is the future utility of the future sustainable because there is a vision out there that we're going to have a utility that is providing electricity and at the same time we're going to have a very large share of electricity from distributed generation and for reasons I want to try to get across today that doesn't really that's a model that doesn't really make sense so imagine walking into your supermarket with a bag of zucchini and telling the grocer that you would like to trade the zucchini straight up for zucchini next month so you're going to give them the bag of zucchini and next month you'll be back to get your to get zucchini from them the store manager would probably explain that first of all they're not really in the business of buying zucchini on such a small scale when they buy wholesale and second of all even if they were buying wholesale at such a small scale they wouldn't be paying the same price that you pay retail that is there's a margin between the wholesale price and the retail price and that is why you don't trade zucchini with your local grocer what is that margin for well that margin pays for the building it pays for the heat it pays for the labor that stocks the shelves it pays for lots of things that are mostly fixed with respect to you walking in and doing business with the supermarket well that's the same problem in electricity almost only more so the same economics exists the retail price that we pay for electricity is does not reflect the incremental cost of generating electricity it's paying for a lot of things they're actually pretty fixed with respect to how much electricity you consume it's paying for the distribution system which it turns out is mostly a fixed cost it's paying for billing and all of the contracting that the utility does for you which well it is true that as they buy more electricity their costs go up a lot of that is fixed with the number of customers and if each customer just consumes less their costs do not go down proportionally so the cost structure really is not going to allow them to just trade electricity with you at the whole at the retail price but that's what we do the other thing that the other thing that the zucchini trader is going to be asking for or is not asking for that the utility will is reliability so you flick on your light and you expect electricity to come out and you expect never to go to the electricity store and find there's nothing on the shelf imagine if the grocer had to always have zucchini in stock imagine if the grocer just was not allowed to ever run out of zucchini not surprisingly you'd find out that there'd be a lot of zucchini that goes to waste and sure enough that's what happens with electricity there's a lot of capacity that sits idle waiting for the peaks because there is not really the possibility of not meeting or there's not it's not acceptable to not meet the demand so the zucchini analogy is telling us a lot about the challenge that a utility faces and that challenge in solar has become particularly salient because in 48 states or sorry in 42 states they've adopted a policy called net metering net metering is zucchini trading it basically says if you have solar PV when you produce it you put you can put it into the grid and you can get it back one for one later and that all you're billed for is the net okay so net metering has been adopted almost everywhere and it creates exactly the same problem that people can invest in solar PV can sell it retail but still are demanding all the services from the utility that they were demanding before they are demanding that there's a distribution system that can actually meet their peak demand if their solar system isn't working and they're demanding reliability throughout the day so then in a typical residential solar system about half of the power that you generate on your rooftop is not used in your house it goes into the system you're constantly by selling power into the system and then getting power back if you put in a solar system and I get asked by friends all the time you know is this a good idea it may be a good idea for you because of this policy but the fact is when you buy less electricity because of solar PV and this net metering policy the utility saves less money from you buying less than their cost then their revenues go down so they have a revenue shortfall and that revenue shortfall has to be made up somewhere and it's being made up in other and the rates for other people that's particularly disturbing and I'm doing work right now on this because when you look at the income distribution of who puts in solar PV it is massively skewed to wealthy consumers so this is really changing it's reversing the the sort of older idea of the economics of utilities where we are actually trying to use this trying to have rates that help poor people lifeline type rates what this is doing is actually subsidizing wealthy people but what net metering is doing is actually only ratcheting up pre-existing problems with the utility business because even before we got solar even before we started got net metering we had a business model that really didn't charge for electricity the way its costs were its costs came to the utility that is you pay a volumetric charge for electricity and in most parts of the United States you pay almost no fixed charge so if you consume less electricity whether it's because of solar PV or anything else what you pay goes down much more than proportionally with the much more than the cost the utility goes to go down and as a result the utility has a revenue shortfall so even net metering aside the way we have set up charging for electricity for years creates the same sort of issue that's not to say solar PV can't be part of the solution and at some point is possible and I'll talk about the benefits and cost of it that the benefits will get so large and the cost will get so small that solar PV will be the way we should go but it does say that we really have to face up to the difference between the private incentives that people might have for putting in solar PV and societies benefits from putting in solar PV and recognize that those two could be out of line and could lead to and this is what a lot of policy people are worried about a big move to distributed solar when it's actually not the most cost effective way to address climate change and in doing so raise the cost of climate change of addressing climate climate change this wasn't always the case and this is sort of an interesting history if you look back over the hundred years of utility of electric utilities almost all that time they were monopolists and almost all that time they had prices that had very little to do with incremental costs they eventually through the regulatory process were allowed to charge rates that allowed them to cover all of their costs but they but any the price of a kilowatt hour did not necessarily reflect what it cost to supply it it didn't reflect the time-varying aspect of it that it costs more at the peak to supply electricity it didn't it didn't reflect locational differences and that was fine because these utilities were monopolists they could charge pretty much what they want and people paid it and so it was more a fairness discussion than anything else to say who had to pay what because there was no real substitute now that is changing and it's changing particularly with distributed generation so now having rates that are out of line with incremental cost actually does create a real problem and is part of what the threat is to utilities right now this is a bigger issue in California because California actually you also have increasing block pricing in Michigan but what you have is nothing like we have so this is the rate schedule for the southern California utility actually a couple years ago but it's about right still that you the first chunk of electricity you can buy you buy at a fairly low price goes up a little bit if you go above what is about the median consumption level it goes up quite a bit and if you're a pretty heavy consumer your marginal cost of the incremental you kilowatt hour is about 30 it's actually about 35 cents a kilowatt hour right now now the true cost of providing that last unit of electricity even when you count the cost of greenhouse gas emissions is probably less than 10 cents a kilowatt hour so what you see is if you're crowding out this if you're avoiding paying that electricity that for that electricity you can you're saving quite a bit of money it can really justify a big investment in solar PV but you're actually not saving society that you're saving that but if they charge a flat rate you'd be down here and if you actually were paying the full social marginal cost you probably be down about there this gap is a revenue shortfall for the utility so when you put in solar PV which you have a very strong incentive to do here you're actually you're saving money but that's most of that's just getting transferred to other ratepayers not a real savings to society now this problem is of course bigger in California because I don't think there's any other state that has anything remotely as steep as our increasing block pricing California is also the place that has half of all solar PV residential solar PV those two are not unrelated to each other that is a big part of why California is also a beautiful and sunny place where the sun always shines and never rains but but a big part of it is we have very expensive electricity particularly on the margin the work I'm doing right now suggests that as the solar PV industry is expanded in California we've actually seen people get more sophisticated so that they're installing systems that get them right back to here not wiping out all of their consumption in fact solar city has gotten very good at advising people on exactly how much they have to put in to get themselves down to these blocks because they can't compete with these blocks they can compete with these blocks and save people a lot of money so that means that most of the savings we're not getting savings where people are paying the social marginal cost or something close to worrying savings where people are avoiding a price way above the social marginal cost okay last thing and then I would like to stop and leave time for questions when you get into these discussions a bunch of people will start raising their hands and saying well what about this subsidy and that subsidy and this extra benefit and that extra benefit so I'm just going to run through a laundry list of things you've almost if you've thought about solar you've heard about solar produces more in the middle of the day and I said as I said and that's true and that actually increases the value of solar about 20 percent right now I've written a paper on that that sort of tried to do that calculation relative to it if it just produced at the overall shape of demand solar reduce our solar PV reduces line losses because we're producing at the site and that's right and line losses in a typical electricity system amount to about 8 or 10 percent and so that's a cost advantage for generating on site and that's one reason eventually we might get to the point where generating on site actually does make economic sense because it does avoid some costs it saves on distribution costs the upgrading distribution costs it turns out that's a pretty minor savings because it turns out when you put in distribution lines for a new neighborhood you put in a huge system so that you never have to go back and dig up the streets and so that is mostly a fixed cost now that's not entirely true you have to change transformers as the jet as the load increases but mostly that's not really helping of course of the cost of greenhouse gas emissions that's a big part of what we're talking about here but let me just put this in context the latest numbers on the social cost of carbon suggests that we should be thinking about carbon CO2 emissions at about $40 a ton I think that number is too low let's say $100 a ton which is a pretty big number and $100 a ton by the way is large enough that grid scale solar starts making a lot of sense and even at $100 a ton distributed solar probably doesn't make much sense so even if we start and that's right now at least the case that distributed solar is so much more expensive than grid scale renewables that right now it's the case that we probably even when we price carbon to really get some reductions that's going to point to getting those reductions at the grid scale not it distributed last point on this you can't have this discussion without people saying well what about all the subsidies to fossil fuels yes there are subsidies to fossil fuels there are tax breaks for coal and natural gas they're bigger tax breaks for oil but we don't really use oil for electricity so I'm going to set those aside but for coal and natural gas there are billions of dollars in tax breaks but when you divide billions of dollars by billions of terawatt hours of electricity or megawatt hours of electricity it turns out it's not very much per kilowatt hour in fact when you look at those subsidies even the pretty aggressive estimates they turn out to be about a tenth of a cent per kilowatt hour so when we're remember I was comparing six cents and four cents and twelve cents a tenth of a sense really just doesn't change the calculation on the other hand solar is also getting big subsidies 30% tax credit right now through 2016 they also get accelerated depreciation which takes a little math to calculate but basically works out to another 15% tax subsidy for solar PV the net metering I talked about which basically allows you to trade zucchini without any cost to that trading and then finally this intermittency if we're really thinking about moving to a heavily solar system and this isn't just distributed it's even at the grid scale we have to recognize that the timing of that is going to really change if we have a lot of solar and that has brought us to what in California is known as the duck chart as you can see why this is a forecast and I will just be clear this is an extreme case but it does illustrate the problem this is a forecast the top line follows what is called load that is the total demand for electricity and then these lower lines say well how much is left if you take out solar PV and the point it makes is that if you start putting in a lot of solar PV you run into a problem that when the sun comes up in the morning you suddenly have a big drop-off in demand from the system because all those solar panels are generating suddenly you actually need fairly low production in the middle of the day so this is sort of turning on its head what we usually think of when the valuable electricity is we actually will have too much electricity in the middle of the day and then when the sun sets you suddenly need to ramp up those other generators very quickly in order to meet the demand at the end of the day so this and this is an extreme case this is a spring afternoon which is the worst case scenario in California a sunny spring afternoon very moderate temperatures so not much air conditioning but solar panels don't care about the heat in fact they dislike heat they need light and so a sunny day they're producing a cool sunny day is their maximum production so what's happening here is you're seeing huge production of the solar panels taking load off the system this creates a problem even if it's completely predictable because when that happens you have to have other generation which is generally thought of as gas fire generation ready to produce when the sun sets but you can't turn a gas fire generator on that quickly so you actually have to have it running during the day in order to be ready to ramp up and in fact in a recent study the solution to this problem that was when looking at a lot of possibilities including storage the solution that was deemed most cost effective was to actually run the gas generation during the day at a low level and throw away some of the power that comes from solar PV that is to throw away free power now the economists in the room should be cringing at this it really it does make you think if you're actually throwing away something with a zero price that if you could send signals out into the world of we're throwing away electricity and it's free people would think of something to do with it and that's a pretty good argument for why we need to start pricing electricity to actually reflect these fluctuations and that's going to be a huge and that's gonna be a huge change that will be an important complement to integrating these intermittent resources so let me just wrap up there's been huge progress in low-carbon energy sources that's very exciting I'll get to that but I do have to point out there's also been huge progress in fossil fuel energy sources as everyone knows we've seen the shale gas and oil revolution and that's going to continue to there's a lot of money on the table figuring out how to extract fossil fuels more cost effectively just as there is with renewables and it is not at all clear who's going to win that race so it may be that we really are going to have to ultimately say a big sacrifice has to be made we have to leave a lot of cheap fossil fuels in the ground if we're going to actually address a climate change but it's going to be the more the cheaper we can get the alternatives to be the smaller that gap is going to be in the less sacrifice it's going to require there are five there are alternatives that are that are adaptable to distributed use that's fine and distributed use may for the reasons I mentioned turn out to be a really good way to generate electricity because you avoid line losses there are arguments about resiliency and being more reliable in storms so far those aren't really supported by the technology we use most solar systems shut all virtually all solar systems on houses shut down when there's a power outage so it's not they're not currently protecting you from a power outage but they could and that might be an argument and the technology may get a lot cheaper but right now we're sending price signals that don't reflect any of that and as a result we're sending it we're setting up incentives for distributed solar when it might be that central station generation of thought from from renewables is actually much more cost effective and a much better way to reduce our greenhouse gases the current way we sell electricity doesn't sell to send those signals what do we have to do first of all we have to price greenhouse gases appropriately the appropriately is a really important word because when you talk to policy makers in california these days they say we already have a market for greenhouse gases which we do the market for greenhouse gases is clearing at the price floor right now which is twelve dollars a ton which for gas fire generation raises the price of electricity about half a cent a kilowatt hour that's not going to change anything twelve dollars a kilowatt hour doesn't move the needle on greenhouse gas emissions we need to if we're going to actually take market incentive seriously it's going to require a higher price than that we're going to have to start pricing electricity that in a way that actually reflects fixed and variable costs so that we don't put our thumb on the scale among of these renewable alternatives and we're going to have to start pricing electricity that reflects the time-bearing nature not everyone agrees on this this is a letter from today's san jose mercury news sent by the sierra club that says that pg&e the big utility in california is involved in some shenanigans where they're trying to increase your fixed monthly charge to ten dollars a month and that this is an attempt to kill off solar this is definitely bad news for solar if it happens but this is definitely a move towards prices that actually reflect the cost of providing utility service it is bad news for D distributed solar it is good news and supported by central stations or grid scale solar and wind power for exactly the same reason that right now what we're doing is by the pricing electricity in a way that doesn't reflect these fixed costs accurately we're actually giving homeowners a way too strong an incentive to invest in a certain kind of renewables that may not be the final answer so there are a lot of alternatives I think they're all really exciting some of them make me more nervous nuclear power definitely continues to have problems both safety problems and cost problems it's still a very expensive technology as much as it shouldn't be in some sense there are lots of new ideas for modular nuclear power that may help bring it down geothermal has there's ideas for deep drilling geothermal that can generate more heat but it also does cause seismic activity wind kills birds solar kills birds too it turns out everything's got problems and we got to keep working on all of them and I think if we do we are going to continue to make progress and I think the way best way to make that progress is to not decide in advance what the answer is but let these all face incentives that actually reflect their true value thank you very much thank you Severin so we're gathered both to celebrate Severin's being here he's just retired after 20 years of directing retired is not the word I would use been kicked out you just finished his term of 20-year term of directing the University of California Energy Institute and we're very glad to have Mark Bartow here who directs the University of Michigan Energy Institute and there are a lot of students here and I wanted to also celebrate that there are plenty of energy related courses here including a couple in the school public policy so Katie Hausman teaches a course on energy and energy policy and Herb Salmaine teaches an undergraduate course here on energy policy we've had most of the really exciting people we've had here in the school of public policy were actually students of Severin including Katie and so I mean Severin's impact on energy and energy economics is vast and so we're glad they have them here there are time for questions and then we'll have refreshments there after I would ask you to keep your questions to under 30 seconds and for longer comments we'll save that for the refreshments afterwards and we have microphones so Josh and Katie have their hands up early so two questions how should we think about the EPA's clean power rule in light of everything that you've just told us and if you had a group of like motivated do-gooder students who really cared about climate change but found these economics overwhelming what would you tell them that they could do so I'll do the second question first because that's the easy one you don't have to understand this to contribute to the solutions just as I don't understand the science and I think I'm contributing to the solution if the science is more helpful or something that is more appealing that's an area to work it turns out there's also a lot of work being done now and sort of the human factor the psychology of energy consumption and how to get people to change their behavior in that way so I think that there are a lot of places even if the economics is not that compelling or appealing to you the clean power plan I think I'm going to punt on because it's a half hour discussion it is President Obama has announced a new plan to change the way that to encourage states to reduce the carbon content of their electricity generation it's multi-layered and I think if I start trying to unpack it it will take the rest of the comment time but it does interact in interesting ways with the alternative it's distributed alternative generation sources so I was intrigued by why utilities don't don't charge a fixed cost and in particular the comparison to say telephones if I get a landline telephone I pay a fixed cost and then maybe I pay something permitted and so sort of two questions one is I guess this letter gives me some idea of why they don't now why didn't they 50 years ago when you would have been writing letters about solar yeah so first of all there's a distributional aspect to it the fact is is when you move to a fixed charge it has unattractive distributional consequences it's regressive poor people do use less electricity and so that I mean that's also true of telephone charges and so we could but with electricity I think regulators didn't have to confront this for many years they were they were regulating a monopolist the monopolist was perfectly happy to charge volumetric prices or mostly pretty perfectly happy and it worked and in fact they not only didn't charge fixed charges they went in the opposite direction of charging increasing black pricing which is the opposite of a fixed charge it's actually ratcheting up the volumetric part of the charge and they could get away with that for many years because there really wasn't much efficiency consequence to it and now it turns out there really is and in California we're really seeing it California's solar I mean I showed you that small slice but California is actually looking at much bigger solar distributed generation as a result of the the retail rates can I see a question back there so this is Doug Calbao who he's the dean of school urban plans can you hear me okay I can hear you okay in between sort of middle scale which seems very promising what are your thoughts on that I'm not sure I'd agree it's very promising in a true societal economic impact let me first say in California a lot of what our electricity bills are paying for is the electricity restructuring disaster that's a that's a sunk cost that we're gradually paying off and so if you're avoiding that you're not really doing something good for society it is true that there are arguments that micro grids might be a more efficient way to distribute electricity and I'm if they are I'm all for it I it just has to be made clear that if you leave the system and this is a big issue right now community choice alternatives if you leave the system you do it because you actually have a way to generate and distribute electricity more cheaply than the cost of doing it not then the price which includes your share of all those mistakes of the past because then you're just going to get inefficient exit from the system where people leave not because they actually have a more efficient way to do it but because they're avoiding paying their share that certainly has been an issue in the past in during the California electricity crisis and I think that we just need to set up price systems that if that turns out to be the most cost-effective way to generate and distribute electricity then it gets the right incentives thank you very much for coming it was very informative and enjoyable too is it the case that the net metering where the same price is charged for electricity that you would pump back into the grid it was necessitated by the electromechanical metering and with digital programmable smart meters and all that that you can you have different rates forward and backward I'm not sure I think the answer is no 20 years ago the answer is certainly no 10 years ago when we certainly could be putting them on separate meters and have been for a long time whether how cost-effective that was I'm not sure now it is completely cost-effective so the net metering and at some point at some level the scale was so small it wasn't really an issue the issue is now that the scale is ratcheting up what's the right policy to pursue thank you for your interesting lecture question that I have in the US certainly and in Europe we have a large sunk cost what's your view on distributed electricity for the developing world where the sunk cost has not yet been invested yeah so this is a really important question because a lot of people are saying well distributed systems make a lot more sense in the developing world my colleague Catherine Wolfram at Berkeley is doing some work on this that is actually yielding a really surprising result she's working in Kenya and it turns out that in Kenya 20% of all households are connected to the grid but it turns out 80% of all households live within 600 meters of a transformer so the problem is not that they're out in some rural area and for those people it's almost certainly cheaper to actually connect them to the grid if you price it correctly and this is another problem that they're trying to actually recover a bunch of past investment the reason that everybody lives so close to the grid is over the last 20 years Kenya pursued a policy to hook every school to the electricity grid and it turns out if you hook every school to the electricity grid you're around most of the houses and so as a result now most people live near electricity and the most cost effective way for them is almost certainly going to be to hook them to the grid now that's one special case again we need to design systems that actually reflect that so that when that's the cheapest way to do it we do it but when the alternative of microgrids or solar pv on residential or in small and small units is more cost effective we do it that way of course Cliff has a question from Twitter and then there's a question here and then I'll give it back yeah this question comes from Twitter are there any models to follow i.e. places where electricity prices accurately reflect costs do we have to fix this from scratch there are a lot of models there are ones that are pretty old it turns out that meters for 40 years have been able to do simple peak and off peak pricing and France has been doing that for at least 40 years so people definitely are able to adjust to this there are also more recent models more on the industrial level where we're seeing in New York State for instance large industrial customers have been forced to pay time-bearing pricing for the last three or forced as the default if they can find somebody to sell them power on a fixed rate they're welcome to but the default is time-bearing pricing so we're getting more and more experience with it in how people find what people find acceptable and what they don't find acceptable and I think we are going to gradually figure out a way to move to pricing that makes more sense and reflects real costs hi back to the fixed cost at least in California do we know if we were to set the fixed charge for the customer to fully match the fixed cost utility what that number would be I'm guessing it's a lot more than ten dollars per month it might be but actually that's not the way you would want to set it what you'd want to do is you'd want to set the marginal price to reflect the marginal cost and then figure out what's left over it turns out that the fixed charge might not be that might not be that high right now because utilities don't have to pay for their greenhouse gas emissions but if we actually priced it as if they did the utilities would recover a lot of revenue and we might not need a very big fixed charge eventually we probably would eventually the average residential electric city bill in California is 60 dollars it wouldn't surprise me in fact I think I've seen an estimate that the fixed charge would be 20 of it that is where Sacramento Municipal Utility is headed and they are sort of the leaders in this in the state yeah so you seem to downplay the the role of subsidies if I understood that right and a little bit deferred the notion of talking about the EPA kinds of rules and that caused me then to wonder if you have some general picture of whether government has a role to play and if so what general kind of role might that be oh yeah so maybe I should have said this up front government clearly has I think two very important roles to play first of all greenhouse gases are an externality markets don't solve externalities we need rules that make people take those into account and that's true whether it's greenhouse gases or auto emissions or other sorts of toxic pollutants and that the role the government really has to be to figure out how we're going to get producers of this pollutant to incorporate that the other role that I think is widely agreed upon by economists in the very basic research is that we need to subsidize basic R&D because the market doesn't provide enough incentive I actually have a much more expansive view of that than most economists and I think if you watch this up close you develop this which is it's not just the basic research there's huge spillovers even as you go downstream from a company trying being the first one to try something there's huge knowledge spillovers so subsidizing the first carbon sequestration plant subsidizing the first nuclear the first new modular nuclear power plant subsidizing the solar thermal plant in the Mojave Desert I think all of those made sense there was huge spillovers in the learning and so we should be doing a lot more of that and how does that seem to be future projected growth of geothermal or tidal or projected cost it is certainly possible to find objective estimates but you certainly wouldn't want to take them as facts you'd want to take them as wild guesses because if you had taken the objective estimates of solar PV 10 years ago you would not be where see where we are today technology changes in really unforeseen ways for instance there are colleagues of mine at Berkeley and I'm sure here too are working on biofuels and it's turned out to be a lot harder in some areas to get plants to give up there to break down in a way that makes them cheaply convert to biofuels some people projected that was going to be the next breakthrough it's the way you see this most clearly is you get in a conference of electric vehicle people and you get in a conference of biofuels people and each of them speak as if the other doesn't exist so the biofuels people just know biofuels is obviously the way we're going to do transportation and it's just a matter of which biofuels and the electric vehicle people think biofuels make no sense at all and so everyone is working on their particular technology and they don't know what which ones are going to win even when they tell you they do $30 a month fee even though I don't go out there most of the time so I assume that's a basic rate that's an extremely high fixed charge for the United States it's not actually for some other areas but that yes there are places where fixed charges are higher than that as I mentioned Sacramento they're moving up to $20 but most of the United States Detroit Addison is $6 that's not even close to where you would end up I'm pretty sure the bosses versus electrical bosses because they seem to be different animals yep what what percentage of it is what percentage of the total is distribution cost yeah so that that varies massively in California it's on the order of a third in the northwest and the southeast it's probably over half because they're generating the northwest is using hydropower and the southeast is using coal so the energy component is much smaller there and so the distribution cost which doesn't change nearly as much across systems is a much bigger share of the bill the back of the envelope number that gets used frequently in electricity systems is that distribution runs three to four cents a kilowatt hour and that's actually a pretty reliable number but the entire price in the northwest is on the order of six or seven cents a kilowatt hour whereas in California the average retail rate for the utility I showed you is 17 cents a kilowatt hour in New York it's slightly higher than that I'm going to stand up so we can see each other you mentioned a number of the drawbacks of nuclear power and I certainly agree that there are drawbacks but it also certainly has some advantages in terms of continuity of service of greenhouse gases emissions and so on and modular nuclear power plants seem like a promising idea do you see that coming in the near future I'm an economist it is definitely an idea that is getting a lot of excitement it's gotten a lot of excitement for five or ten years now so it gets a little less exciting the longer we're excited about it but it's definitely one of the technologies we should be pursuing the basic idea is nuclear power plants are incredibly expensive to build but each one is built idiosyncratically on its location that if we could just build them in factories and the idea is essentially rail car size plants that you could just stamp them out and they'd be much cheaper it's really exciting I hope it comes true we really need breakthroughs but I have no idea if it really will so we could put them on our roofs like we do our solar features sorry one more questionnaire and we'll go to the next slide yeah the district generation of rooftop solar is a big issue in california and california is california utilities but is it creating any anxiety in utilities in other states in the united states oh yeah actually in some places you'd be pretty surprised to see so it's creating anxiety in the southwest and that sort of makes sense but actually the state that has the plan right now that's creating the most disruption is new york new york has a plan under proposal at the new york public service commission to completely revamp the way they regulate utilities to make them into distributed service providers where they are buying and selling electricity including from every household and to change the entire way they regulate it to make them purely a middleman and utilities are pretty nervous about that now does solar make sense in new york probably not yet but if you make the subsidies large enough they can you know solar doesn't make well it's a quick story i recently a few years ago talked to a guy who was showing me an estimate of the production of a new plant in california and he said look there's this plant in leipzig we built in germany where our estimates really nailed what actually happened and i said yeah but the capacity factor is 10 percent which is like almost a little over half of california to which he said well of course germany is a stupid place to build solar but our estimate really nailed it germany is the biggest producer biggest installer of solar pv in the world and germany is not a sunny place but if you subsidize it enough you're going to you're going to make it cost effective and utilities are very worried about that so let me ask the last question because it turns out our refreshments will run out soon but before i do that i'm going to introduce jim cook who uh jimman who is a past vice president and deeply involved in consumers power in a gas industry so i wanted to welcome you thank you urb t is an undergraduate course for you undergraduates on on that energy policy and and we'll let you have the last good question i have a question that i haven't got a clue what the answer is but if you look at the current distribution of generators in the u.s there's a significant number not in total power but it's a number of activities in municipals and in cooperatives do the cooperatives and municipals have the same pricing problem or are they able to recover their fixed costs and if that's true is there a model or are things to be learned about running these small scale systems from looking at the existing cooperatives and municipals well yeah my knowledge of this is mostly in california so i'm going to speak to that and i'm maybe somebody else knows more about vermont particularly which is just all small cooperatives california one of the utilities sacramento municipal utility has been the leader in getting this right they're moving to time-bearing pricing they have big fixed costs they they really are very forward thinking the other is los angeles department of water and power which has been the trailer in getting this right they have pretty much a straight volumetric charge they are the largest coal burner in state of california by far and so i have been told that one of the differences is ladwp is part of the city of los angeles and is under tremendous pressure to generate revenues for the rest of the city whereas smud is a completely separate utility organization and just does what it thinks is best so there may be organizational stories there about what allows a utility transition to things that make the most sense but i certainly wouldn't want to get too far ahead of that from two examples so there are refreshments they'll only be there for half an hour