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Mark C. Thurber
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The Program on Energy and Sustainable Development (PESD) and the California Public Utilities Commission (CPUC) are partnering on an Impact Lab to design and implement next-generation policies and regulations that support California's ambitious renewable energy goals. “Public support for aggressive climate action in California could decline if there are adverse grid reliability and cost implications from pursuing these goals,” said Frank Wolak, professor of economics and director of PESD. Wolak and the PESD team are working with the CPUC to develop: 1) policies to ensure resource adequacy with a very high share of intermittent renewable energy, 2) distribution pricing to support cost-effective and equitable renewable energy deployment, and 3) transmission planning frameworks that are robust to high wind and solar shares as well as future climate impacts. Read more (fifth white box near the bottom)

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On June 3, Program on Energy and Sustainable Development (PESD) Director Frank Wolak participated as one of three energy experts in a virtual panel discussion evaluating the pros and cons of proposed “reach codes”  banning natural gas in the city of Los Altos, California.  The panel discussion - "Mandating All Electric:  Is Banning Natural Gas Really The Answer?" - was organized by a group of Los Altos residents who believe city residents’ voices need to be considered in government decisions. 

Reach codes are being considered for all new residential and commercial building construction, and all “scrape” remodels in the city.  A reach code is a local building energy code that reaches beyond the state minimum requirements for energy and its use in building design and construction. These codes facilitate local government’s efforts focused on clean air, climate solutions, and renewable energy economics.

Recorded discussion

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To maximize environmental benefits from the rollout of its cap-and-trade program for greenhouse gas emissions, California should focus on achieving a positive demonstration effect from the program by doing as little as possible to harm the state's economy, as transparently as possible and as fast as possible.

 

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Commentary
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Sacramento Bee
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Frank Wolak
Frank Wolak
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Last week, Stanford's Board of Trustees announced that the university would not directly invest funds from its endowment in coal mining companies.  Even the strongest advocates of this action acknowledge that it is a symbolic gesture with little direct effect on the coal industry or global greenhouse gas emissions.  But if a university administration wants to take symbolic (or real) action on climate change, is coal investment a wise choice?

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Los Angeles Times, Op-Ed
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Frank Wolak
Frank Wolak
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The variability of solar and wind generation increases transmission network operating costs associated with maintaining system stability. These ancillary services costs are likely to increase as a share of total energy costs in regions with ambitious renewable energy targets. We examine how ecient deployment of intermittent renewable generation capacity across locations depends on the costs of balancing real-time system demand and supply. We then show how locational marginal network taris can be designed to implement the ecient outcome for intermittent renewable generation unit location decisions. We demonstrate the practical applicability of this approach by applying our theory to obtain quantitative results for the California electricity market.

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Program on Energy and Sustainable Development
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Thomas Tangeras
Thomas Tangeras
Frank Wolak
Frank Wolak
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Daily city-level expenditures and prices are used to estimate the price responsiveness of gasoline demand in the United States. Using a frequency of purchase model that explicitly acknowledges the distinction between gasoline demand and gasoline expenditures, the price elasticity of demand is consistently found to be an order of magnitude larger than estimates from recent studies using more aggregated data. Estimating demand using higher levels of spatial and temporal aggregation is shown to produce increasingly inelastic estimates. A decomposition is then developed and implemented to understand the relative importance of several different factors in explaining this result.

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American Economic Journal
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Laurence Levin
Matthew S. Lewis
Frank Wolak
Frank Wolak
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This paper formulates and estimates a household-level, billing-cycle water demand model under increasing block prices that accounts for the impact of monthly weather variation, the amount of vegetation on the household’s property, and customer-level heterogeneity in demand due to household demographics. The model utilizes US Census data on the distribution of household demographics in the utility’s service territory to recover the impact of these factors on water demand. An index of the amount of vegetation on the household’s property is obtained from NASA satellite data. The household-level demand models are used to compute the distribution of utility-level water demand and revenues for any possible price schedule. Knowledge of the structure of customer-level demand can be used by the utility to design nonlinear pricing plans that achieve competing revenue or water conservation goals, which is crucial for water utilities to manage increasingly uncertain water availability yet still remain financially viable. Knowledge of how these demands differ across customers based on observable household characteristics can allow the utility to reduce the utility-wide revenue or sales risk it faces for any pricing plan. Knowledge of how the structure of demand varies across customers can be used to design personalized (based on observable household demographic characteristics) increasing block price schedules to further reduce the risk the utility faces on a system-wide basis. For the utilities considered, knowledge of the customer-level demographics that predict demand differences across households reduces the uncertainty in the utility’s system-wide revenues from 70 to 96 percent. Further reductions in the uncertainty in the utility’s system-wide revenues in the, range of 5 to 15 percent, are possible by re-designing the utility’s nonlinear price schedules to minimize the revenue risk it faces given the distribution of household-level demand in its service territory.

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National Bureau of Economic Research
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Frank Wolak
Frank Wolak
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Hourly plant-level wind and solar generation output and real-time price data for one year from the California ISO control area is used to estimate the vector of means and the contemporaneous covariance matrix of hourly output and revenues across all wind and solar locations in the state. Annual hourly output and annual hourly revenues mean/standard deviation efficient frontiers for wind and solar resource locations are computed from this information. For both efficient frontiers, economically meaningful differences between portfolios on the efficient frontier and the actual wind and solar generation capacity mix are found. The relative difference is significantly larger for aggregate hourly output relative to aggregate hourly revenues, consistent with expected profit-maximizing unilateral entry decisions by renewable resource owners. Most of the hourly output and hourly revenue risk-reducing benefits from the optimal choice of locational generation capacities is captured by a small number of wind resource locations, with the addition of a small number of solar resource locations only slightly increasing the set of feasible portfolio mean and standard deviation combinations. Measures of non-diversifiable wind and solar energy and revenue risk are computed using the actual market portfolio and the risk-adjusted expected hourly output or hourly revenue maximizing portfolios.

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National Bureau of Economic Research
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Frank Wolak
Frank Wolak
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Charging full requirements customers for distribution network services using the traditional cents per kilowatt-hour (KWh) price creates economic incentives for consumers to invest in distributed generation technologies, such as rooftop solar photovoltaics, despite the fact that marginal cost of grid-supplied electricity is lower. This paper first assesses the economic efficiency properties of this approach to transmission and distribution network pricing and whether current approach to distribution network pricing implies that full-requirement customers cross-subsidize distributed solar customers. Using data on quarterly residential distribution network prices and distributed solar installations from California’s three largest investor-owned utilities I find that larger amounts of distributed solar capacity and more geographically concentrated solar capacity predict higher distribution network prices and average distribution network costs. This result continues to hold even after controlling for average distribution network costs for the utility, Using these econometric model estimates, I find that 2/3 of the increase in residential distribution network prices for each of the three utilities between 2003 and 2016 can attributed to the growth distributed solar capacity. The paper then investigates the extent of the legal obligation that distributed solar generation customers have to pay for sunk costs of investments in the transmission and distribution networks. The paper closes with a description of an alternative approach to distribution network pricing that is likely to increase the economic signals for efficient electricity consumption and the incentive for cost effective installation of distributed solar generation capacity.

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Working Papers
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National Bureau of Economic Research
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Frank Wolak
Frank Wolak
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Economists traditionally argue that forward commodity markets allow more efficient risk-sharing and information aggregation. However, there is little empirical evidence that commodity markets provide economic benefits to producers and consumers of the commodity. This paper demonstrates that the introduction of financial trading to California’s electricity market on February 1st, 2011 improved price discovery and lowered production costs. Specifically, we document that the average, standard deviation and maximum of the differences between day-ahead and real-time electricity prices across California fell after 2/1/2011. Moreover, variable input costs (input energy) per MWh fell by 3% (4%) in high demand hours after 2/1/2011.

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Working Papers
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Program on Energy and Sustainable Development
Authors
Akshaya Jha
Akshaya Jha
Frank Wolak
Frank Wolak
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