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Energy & Greenhouse Gas Solutions

Mission: To provide rigorous and timely information to decision-makers and the public regarding energy and greenhouse gas related policy in Hawaii and beyond.

 

 

 

 

 

 

 

 

The Energy and Greenhouse Gas Solutions research program (EGGS) was launched in 2007 by the University of Hawai‘i Economic Research Organization (UHERO).  It serves as a resource for those interested in issues of energy and greenhouse gas emissions reduction in Hawaii and beyond.  EGGS takes a transdisciplinary approach to research by bringing together economists, planners, engineers and system modeling experts to address urgent issues of energy and climate change mitigation.   

EGGS Core Goals

  1. 1. Engage in rigorous analysis that contributes to a global community of scholars.
  2. 2. Develop and maintain data and models on Hawai‘i’s energy, economy, and resulting greenhouse gas emissions.
  3. 3. Develop solution-oriented analyses for decision-makers and energy-related stakeholders.
  4. 4. Design interactive education and outreach programs for a variety of audiences.
  5. 5. Showcase Hawai‘i-based energy policy solutions that may benefit other jurisdictions, including other States, the U.S., and island areas.

 

 

 

 

News

June 2, 2017 The Role of Policy and Peers in EV Adoption

Electric vehicles (EVs) can be a cleaner means of transportation compared to cars with traditional gasoline engines. They have the added benefit of being able to provide support to the electric power grid—an increasingly important attribute in states like Hawaii with high levels of intermittent renewable energy. To achieve widespread deployment of EVs, we need to know why consumers choose to buy an EV rather than a traditional car. Towards this end, we have conducted two studies that evaluate the effects of state-level policy incentives in the United States and that estimate “spillover effects” from geographic peers in Hawaii who purchase EVs. Preliminary results are presented below.

State EV Policies

Though EV battery costs have fallen rapidly in the last several years, the upfront cost of EVs still remain a barrier to rapid adoption. States have implemented a range of policies to encourage consumers to purchase EVs—financial and otherwise—but it is unclear how effective these policies are at achieving additional EV uptake. We estimate the effect of policy on EV adoption using semi-annual new vehicle registrations by EV model from 2010 to 2015 and a rich dataset of consumer-oriented state-level policies designed to promote EV purchases. We focus our policy analysis on EV vehicle purchase incentives and a range of other policies like home charge subsidies, reduced vehicle license taxes or registration fees, time-of-use rates, emissions inspection exemptions, high occupancy vehicle lane exemptions, designated and free parking, and an annual EV fee (that discourages EV purchase). As a rough indicator capturing the overall number of policies that states have used to incentivize consumer EV adoption, we add the number of policies up by state, illustrated in Figure 1. We separate the “policy index” (ranging from 0 to 9) by battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs) and show how it has changed over time (as shown in Figure 1 for the second half of 2011, 2013, 2015). Overall, there are more BEV policies, where California and Arizona are leaders in the number of EV policies adopted.

Figure 1. State Policy Index: BEVs (top) and PHEVs (bottom)


Our econometric estimates show that state policies positively impact EV adoption for both BEVs and PHEVs. The vehicle purchase incentive has a pronounced effect on BEV uptake. A $1,000 increase in the purchase incentive leads to an approximately 15% increase in sales of BEVs. We test these results by examining states that have ended large purchase subsidies, and find that BEV adoption declines. Other policies—aggregated together into a policy index—likewise increase EV uptake, though more so for PHEVs. This suggests that policies related to usage are perhaps more relevant for PHEVs. Each additional policy increases PHEV sales by 18%. The contrast between the effectiveness of different types of incentives for BEVs and PHEVs offers some guidance for policymakers evaluating current state policies or considering adopting new state EV policies. In sum, we find that state policies have driven additional EV uptake—extending EV purchases to consumers who would not have otherwise entered the market.

Geographic Peer Effects for Teslas

We also examine the role of geographic peers in EV uptake in Hawaii. Hawaii provides an excellent case for studying peer effects because it has strong EV adoption, the second highest amongst U.S. states in EVs per capita (IHS Markit, U.S. Census Bureau, 2010 – 2015). Although federal and state governments offer a variety of consumer incentives, the decision to adopt EVs may also extend beyond economic and policy motivations to include behavioral and social components. Social networks, also called “peer effects,” could have a potentially large influence on vehicle choice if people are influenced in their decision to adopt an EV by peer decisions to adopt EVs. Our second study examines peer effects defined by geographic networks, i.e., by visual observations of EVs registered in one’s neighborhood. Using zip code-level EV registration data from 2013-2016 for Hawaii, we exploit a three-month gap between adoption decisions and deliveries of Teslas to estimate presence and size of peer effects. Tesla EVs were important for reigniting interest in EVs more generally and amount to 13% of registered EVs on Maui, Oahu, and Hawaii Island. Our econometric analysis identifies statistically significant neighborhood effects. Figures 2 and 3 illustrate EV and Tesla uptake, respectively, by zipcode on Oahu, Maui, and Hawaii Island; Kauai is omitted due to data limitations.

Figure 2. EV Adoption on Oahu, Maui and Hawaii Island

 

Figure 3. Tesla Adoption on Oahu, Maui and Hawaii Island

We find that geographic-based peer effects generate one additional Tesla sale for every 26 Teslas sold in a zip code. How meaningful the magnitude of these peer effects may be is likely contextual. If for example policy focused specifically on marketing to peers and social networks, this may not provide much gain. However, as a pure spillover effect, peer effects can be meaningful. If, for example, Hawaii were to offer a second round of vehicle purchase subsidies, the peer multiplier effect estimated in our analysis would increase the additional Teslas purchased by 4-5% over each year of the vehicle’s life. As a lower bound, this amounts to roughly 1 additional Tesla per zipcode as a result of peer effects. One note of caution: whether the peer multiplier for Teslas—a very high-end vehicle—will translate as the peer multiplier for other lower-priced EVs, such as the Nissan Leaf or Chevy Volt, remains an open question.

- Sherilyn Wee, Makena Coffman and Sumner LaCroix


References

IHS Markit. (2016). Dataset of New Vehicle Registrations by state 2010-2015.

U.S. Census Bureau. (2010-2015). 2010-2015 American Community Survey 1-Year Population Estimates.


May 5, 2017 Michael Roberts Receives Agricultural & Applied Economics Association’s Quality of Research Discovery Award

UHERO congratulates Michael Roberts, recipient of the Agricultural & Applied Economics Association’s Quality of Research Discovery Award for his article, "Who Really Benefits from Agricultural Subsidies? Evidence from Field-level Data." Michael will be recognized during the AAEA 2017 Annual Meeting this summer in Chicago.

Michael Roberts is a UHERO Research Fellow, Professor of Economics and co-founder of UHERO's Energy Policy and Planning Group


January 17, 2017 Sherilyn Wee recognized as Outstanding Student of the Year by the U.S. Department of Transportation

Sherilyn Wee at the UTC Awards Banquet January 7 in Washington D.C. with keynote speaker, Dr. Beverly Scott, CEO of Beverly Scott and Associates.

UHERO congratulates Sherilyn Wee on receiving an Outstanding Student of the Year award, presented by the U.S. Department of Transportation (DOT). Sherilyn was recognized in Washington D.C. for her contribution to the transportation field through her research and leadership with the Electric Vehicle Transportation Center. For 26 years, the University Transportation Centers (UTC) Program, under the management of the U.S. DOT's Office of the Assistant Secretary for Research and Technology, has advanced U.S. technology and expertise in transportation through education, research, and technology transfer.

Sherilyn Wee is a postdoctoral researcher and former graduate research assistant at UHERO. She holds a Ph.D. in Economics from the University of Hawaii.


May 3, 2016 What a Difference a Rate Makes

UHERO’s Energy Planning and Policy Group has been writing about how variable pricing of electricity, both wholesale and retail, can lower the cost of intermittent renewables. Get the rates right, and facilitate easy open-access to the grid for both buyers and sellers, and amazing things can happen. The idea is that variable rates will encourage households and businesses to shift electricity demand toward intermittent supply, and facilitate creative, low-cost storage of power, all of which would enable cheaper, faster growth of renewables.

Hawaiian Electric Industries (HEI) seems to be moving in this direction. With the right incentives they might move quicker. Unfortunately, the utility has little incentive to implement variable pricing, except to please the Public Utilities Commission (PUC), since these adjustments might do for free what otherwise requires investment in batteries, new power plants and other grid upgrades. Under current regulations HEI grows its profits by maximizing investment, regardless of whether or not those investments are cost effective.

But here I’d like to focus on another rate that can make a big difference in the cost of renewable energy: the interest rate used to finance capital investment. It’s a good time to write about this little detail as the PUC, Consumer Advocate, legislators and others pour over HEI’s latest, more comprehensive revision of the Power Supply Improvement Plan, or PSIP. While there’s lots to study and think about here—all 1200 pages of it—the interest rate assumptions strike me as, well, high. And I wonder if these could be a key factor underlying some differences between HEI’s plan and our own Matthias Fripp’s plan. The plan also includes off-shore wind, which at a cost of about $4/Watt, may be an economic part of the portfolio—it will be good to incorporate this possibility into Fripp’s planning model.

Table 1. Hawaiian Electric Industries assumed cost of capital in the PSIP (p. J-4)

  Capital Source Weight Rate
  Short Term Debt 3.0% 4.0%
  Long Term Debt 39% 7.0%
  Hybrids 0.0% 6.5%
  Preferred Stock 1.0% 6.5%
  Common Stock 57% 11.0%
  Composite Weighted Average   9.185%
  After-Tax Composite Weighted Average   8.076%

 

Here’s the crux: interest rates have been trending down for the last 35 years, and sit near all time lows today. And there’s little hint in market data that they’re likely to go up much soon. Yet, in the midst of these low rates, HEI’s new PSIP uses rates that were typical for utilities some 20 years ago.

 

HEI’s assumed cost of capital is comprised of 57% equity, for which they claim a cost of 11%, which exceeds rates that many public utility commissions complained about as early as 2004, when market interest rates were much higher than they are today. Expectations for future rates of return on equities are smaller today than they were ten or twenty years ago, and utilities tend to have lower-than-average rates of return because they are considered safe, since returns are all-but-guaranteed by the government. Rates for debt also appear roughly 20 years old. Today, typical rates on corporate “a” bonds, a conservative rating for utility investments, are less than 3 percent on average, and barely over 4% for long-term issues. HEI assumes 7% for long-term debt, which is assumed to comprise 39% of capital costs. The return rate for equity is a policy decision, but it stands to reason that rates ought to follow market rates, which have come down 3-4 percent since 10% was typical.

Clearly, higher overall interest rates would imply higher overall generation costs and higher rates for customers. But the rate also influences the cost-effectiveness of different generation mixes. For wind and solar, nearly all costs are for up-front capital. Conversely, for traditional power generation (oil, coal, natural gas and biofuels), fuel and operation costs generally comprise a larger share of cost than generating equipment. Higher rates therefore favor traditional generation.

Another more subtle consideration is that solar and wind investments have lower risk premiums than traditional fuel-based generation. The reason is that solar and wind pay a higher dividend if fuel prices spike, which is just the opposite of traditional fuel-based generation. This means solar and wind can do more to reduce risk from the larger investment portfolios of typical equity shareholders, and should therefore have a somewhat lower cost of capital.

The upshot of all this is that the high rates used in the PSIP artificially make natural gas and biofuels more attractive from a cost perspective than solar or wind, and generally cause the projected path of customer rates to be higher than they need to be. Two or three percentage points can make a really big difference, as any homeowner with a mortgage can tell you. You can also get a sense of the magnitudes by playing with our solar calculator (now mostly obsolete due to the end of net metering).

We shouldn’t blame HEI for doing what they can to negotiate rates up, for the rate on equity, and the share of capital they finance with equity, is their main channel for growing profits. HEI has a legal obligation to its shareholders to seek to maximize profits, which the new PSIP does skillfully. It’s even better for them if higher rates causes capital investments better-suited to HEI (like developing a new traditional power plant, or retrofitting an old one) to be more attractive than those best suited to a third-party provider. And making the rate for debt similarly high may help to obscure the fact that the equity rate is so high. The problem with cost-of-capital rates falling much less than market interest rates is not unique to Hawaii, although the PSIP rates still appear higher than typical. 

As I’ve argued earlier, regulatory incentives could be changed such that HEI would have an incentive to find the most inexpensive and cost-appropriate capital possible and implement variable rates. This could also help HEI align its profit-oriented goals with the state’s affordable, renewable energy goals. The trick is to divorce their profits from the size of their own capital investments, and instead link profits to improvements in overall cost efficiency of the system, including distributed energy. Other states are also flirting with different incentives for utilities. Finally, build renewable energy goals directly into the cost structure by taxing fossil fuels and/or subsidizing renewables, regardless of source. This approach is one option for a “new business model” that many vaguely refer to.

Other models could work too. I gather that many see these high rates and conclude that a government municipality or cooperative, which would have considerably lower capital costs, as the answer. But it’s important to keep in mind that these alternative structures have incentive problems too. Another option would be to replace HEI with an Independent Service Operator, or ISO. I’m still learning sbout ISOs, but think the model could hold a lot of promise for Hawaii. I’ll have more on ISOs in another post.

Today’s low interest rates, combined with remarkable technological advance in renewable energy, creates what could be an amazing opportunity for Hawaii. It’s conceivable to me that we could transition toward 100% renewable faster than many currently believe. Maybe not in Dinah Washington’s 24 little hours, but soon enough. But to do it, and do it cost effectively, means getting the rates right.

- Michael Roberts


February 26, 2016 Incentives for the Utility

*This post follows up on two previous installments in the Sustainable Energy Blog Series: Embrace Policy Experiments for Demand Response and Four Years to Improve Renewable Energy.

Perhaps the greatest obstacle to a renewable-energy future is that our utility, Hawaiian Electric Industries (HEI), has little or no incentive to transform its operation into a model more suited for renewable energy.  While there has been a lot of hand-wringing and criticism of HEI for its monopoly and slow approval of distributed solar, it’s important to realize the truly unprecedented change they are being forced to undertake.  And worse, the new cutting-edge system they are being asked to adopt will literally undermine its profits. 

Revenue decoupling (PDF) was supposed to correct HEI’s incentives by ensuring that the utility could recover the same revenue toward its operation costs even if they generated less electricity due to growth of distributed solar or improvements in energy efficiency, both of which have factored into higher electricity prices. 

Revenue decoupling does make HEI less vulnerable to improved efficiency and growth of renewable energy over the short run.  But over the long run the utility profits mainly from making new capital investments.  For such investments they receive a nearly guaranteed rate of return that far exceeds low-risk borrowing costs.  If the utility is forced to retire its old power plants and instead buy renewable energy from independent providers—the apparent inclination of the Public Utilities Commission---its rate base and profitability decline.   Thus, even under revenue decoupling, low-cost renewables do not accord with HEI’s interests. 

The larger problem is that the regulatory infrastructure is not conducive to a rapidly changing energy landscape in need of innovative and perhaps distributed solutions.  HEI has little incentive to control costs, much less increase renewable energy in a cost effective manner.

It doesn’t need to be this way.  We can fix regulatory incentives.  But given the novelty of the renewable energy system we are creating, combined with Hawai`i’s geographic uniqueness, it seems unlikely that we can simply borrow a regulatory model from the mainland.  Some are calling for our private utility to be replaced by publicly-run municipality, or possibly a cooperative like the one on Kaua`i.  These models might work.  But it’s not clear how long it would take to transition to these systems, or whether they will bring about the most innovative solutions. 

What’s the fix?  First, the utility needs to have some skin in the game. Full cost recovery via rate adjustments—the current regulatory situation---gives the utility virtually no incentive to be strategic in its management and planning.  Instead, if costs fall due to cost-effective development or contracting of renewables, the utility should get to keep a share of the gains.  The utility’s profits ought to be tied to its cost effectiveness, not the size of the capital outlay. At the same time, if oil prices rise, then the utility should absorb a share of the cost increases, such that it cares about oil price volatility just as its customers do. 

Second, to the extent that the state wishes to favor renewables over fossil fuels, fossil fuels should be explicitly taxed and renewables subsidized.  Such incentives could be made roughly revenue neutral and would be more effective at achieving renewable energy goals in a cost-effective manner than the state’s expensive and seemingly pointless renewable energy tax credits.  Federal credits are more-than-adequate to make distributed generation cost-effective to homeowners, even under revised rate structures.  And we should allow utility-scale and distributed renewable energy generation to compete on equal footing.  Instead of the tax credit, customers should be able to sell all surplus generation to the grid at appropriate real-time rates.

Of course, regulators will need to negotiate a baseline profit level, how the baseline will change over time, the share of overall cost changes born by the utility and passed on to customers, and whether the utility’s share of cost improvements ought to phase out over a number of years.  Regardless of these choices, these kinds of changes in regulatory structure would align the utility’s interests with their customers as well as the state’s renewable energy goals. 

The big, encouraging news is that the cost of reducing greenhouse gas emissions and slowing global warming now looks cheap.  While Hawai`i’s contribution to this global problem is minimal, if we can show the world how to do renewable energy in a smart, cost-effective manner, we could be a true global leader in helping to solve it.  But without smart policy, we’ll only serve the interests of denialists and naysayers who will point to Hawai`i’s renewable energy boondoggle as an excuse for inaction. 

- Michael Roberts