Program on Energy and Sustainable Development (PESD) Director Frank Wolak, Associate DIrector Mark Thurber, and doctoral candidate Trevor Davis led an Electricity Market Simulation Workshop as part of the 2018 Western Electricity Market Forum September 20-21 in Boise, Idaho.  The audience was comprised of regulators and regulatory staff as well as policy makers representing states from across the western U.S.

The workshop used the PESD-developed Energy Market Game to explore timely questions about how electricity markets with a high share of renewable resources might function. “The Energy Market Game allows people of diverse backgrounds to understand market dynamics,” Thurber explained. “It can help policy makers and regulators set up incentives for market participants which naturally align with desired outcomes.”

The PESD team ran games with two contrasting policy approaches aimed at ensuring resource adequacy, with workshop participants playing the role of generating companies (“gencos”). In a high-renewable world, the specific resource adequacy concern is that thermal power plants won’t run enough to be profitable, and gencos therefore won’t build or keep enough thermal power plants to back up renewables when wind and sun aren’t available.

In the first game scenario, capacity markets were used to spur gencos to build enough gas-fired power plants to meet demand. Capacity markets straight-out pay gencos for holding generation capacity. They are used in a number of real-world electricity markets, but the games suggested they may not result in the cheapest power for consumers.

PESD Director Frank Wolak helps a workshop participant set up an Energy Market Game scenario.

PESD Director Frank Wolak helps a workshop participant set up an Energy Market Game scenario.
Photo Credit:  Maury Galbraith, Western Energy Board

In the second game scenario, forward contracts for electricity created the incentive for gencos to build power plants. If a genco doesn’t produce enough electricity to cover its forward contract, it risks having to buy the shortfall out of the spot market at high prices. Forward contracts therefore encourage gencos not only to build adequate generation capacity, but also to bid that capacity into the market at competitive prices. As this second game scenario showed, that can mean cheaper power for consumers.

On August 13th, 2015, Professor Wolak was interviewed along with Monica Padilla and Ted Ko by KALW, a public radio station in San Francisco. The particular topic of interest for the hour-long segment was CCAs (Community Choice Aggregation), which provide an alternative way for communities to receive electricity other than the commonplace utilities. Although the CCA bill came out in 2002, there are only three remaining CCAs today. 

In a recent article by Sarah Tory, Professor Frank Wolak states that in the near term consumers should not expect a rise in electricity bills. This fear of soaring electricity costs comes from the decreased generation of Hoover Dam due to the low water levels of Lake Mead. However, Professor Wolak says that utilities frequently buy "future" contracts, which limits their ability to raise prices. Professor Wolak also states that, because of the mix of renewable resources in the West, other energy sources may help to alleviate the strain on the system from the loss of hydropower.

Professor Frank Wolak was recently interviewed by Julian Spector of CityLab regarding the use of nuclear energy in a zero-carbon grid. According to Professor Wolak, "It makes very little economic sense to phase [nuclear energy] out, particularly given how successful the U.S. nuclear industry has been over the past 30 years". Professor Wolak also points out that American nuclear generators are safer than ever while still boasting an impressive capacity factor.

Scholars, policymakers and business leaders from Japan and the United States recently gathered at Stanford to analyze energy innovation and build new bilateral endeavors.

“With rapid economic growth in emerging countries, world energy consumption has been and will be increasing, everyone has been wondering if there are enough energy resources for this growth," said Hideichi Okada, a former vice minister for International Affairs at Japan's Ministry of Economy, Trade and Industry.

Panelists weigh in on the changing energy picture in the U.S. and Japan.

Okada said Japan and the U.S. share concerns about world geopolitical change in energy supply and demand, and nuclear policy. Okada is at Stanford as the Sasakawa Peace Fellow at the Walter H. Shorenstein Asia-Pacific Research Center (Shorenstein APARC) this year.

Okada's remarks came during the the New Channels Dialogue, a two-day conference organized by the Japan Program at Shorenstein APARC and the Sasakawa Peace Foundation. It is the first of three annual conferences aimed to stimulate debate on 21st century problems faced by both nations. 

“In the aftermath of the disaster at Fukushima, Japan has reinvigorated its search for cutting-edge technologies and alternative sources of energy,” said Yuji Takagi, president of the Sasakawa Peace Foundation. In parallel, the U.S. has increased its production of shale gas as a viable alternative of natural gas.

Confluence of national interest and demand, and shared historical connections between the U.S. and Japan, suggest an ideal environment for further partnerships between the two countries.

“We have entered an especially important period in bilateral relations between the Asia-Pacific [and the U.S.] – it is undergoing such rapid change and technology is transforming. In this context, I believe the U.S.-Japan relationship will only become more important,” Takagi said.

Experts and Stanford scholars discuss electricity systems in California and Japan.

Okada cited the joint U.S.-Japan wind power project in Hawaii as an example of recent cooperation. Last December, Maui became the site of a multi-year renewable energy project between the American and Japanese governments.

Other panelists offered different perspectives on energy opportunities from across sectors, included among them were Julia Nesheiwat, the State Department’s Deputy Assistant Secretary at the Bureau of Energy Resources; Hirofumi Takinami, a member of the Japan’s House of Councilors and former visiting fellow at Shorenstein APARC; Thomas Starrs, SunPower vice president; Nobuo Tanaka, former IEA Executive Director; and Frank Wolak, Stanford economics professor and director of the Program on Energy and Sustainable Development.

Topics discussed included:

• Energy constraints experienced by Japan since the Fukushima nuclear disaster, and challenges facing Japan’s electricity industry liberalization.
• Regional implications of China’s rise as a major energy consumer and producer.
• Geopolitical and trade balance effects on the United States and Japan resulting from the shale gas revolution transforming the U.S. into a major energy producer.
• Broad impacts to the energy industry caused by geopolitics and financial instability.
• Lessons learned from California’s experience with electricity industry liberalization.
• Multilateral partnerships for energy technology and innovation.

The second day of the conference was a closed session in which candid, in-depth discussions were held. Participants also went on a site visit to Bloom Energy led by principal cofounder and chief executive officer K.R. Sridhar.

The New Channels Dialogue highlighted energy imperatives and created a network of exchange anticipated to continue beyond the conference. A report that encompasses major points and policy recommendations will be published in the forthcoming months. 

We write to invite you to an international conference on “Regional Carbon Policies” that PESD is hosting at Stanford University on Thursday, December 5^th. With efforts to expand international carbon markets beyond Europe’s trading scheme seemingly stalled, various countries and subnational jurisdictions have taken unilateral action on climate policy. Switzerland, the Canadian provinces of Québec and British Columbia, California, the member states of the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States, and New Zealand have all moved forward on carbon markets or taxes. Asian countries including Japan, India, South Korea, and China are also in the process of implementing carbon policies.
 
Linking regional efforts to create a single larger carbon market has the potential to increase the impact and reduce the cost of climate mitigation. With this in mind, our conference brings together academics, government policymakers, and market participants to share the best available academic and practical knowledge about how to make regional carbon policies work. We specifically seek to: 1) identify common implementation challenges facing regional climate policies around the world, 2) formulate a “best practice” market design that can serve as a starting point for a country or region contemplating a GHG emissions allowance market, and 3) identify the policy pathways most likely to foster rapid and successful integration of regional carbon efforts. An additional goal of the meeting is to identify key market rules and integration protocols that can be tested as part of a new research project at Stanford that uses structured “games” to simulate cap and trade markets.

We hope you will join us for this unique event.

Click here for the conference agenda and to register
                                                                                       
Frank A. Wolak                                       Mark C. Thurber
Director, PESD                                          Associate Director, PESD
wolak@stanford.edu                              mthurber@stanford.edu

With the advent of the "shale gas revolution," the United States has undergone a full-scale natural gas boom. Driven by fracking and horizontal drilling, the United States will likely overtake Russia as the world's largest producer of natural gas by 2015, according to the International Energy Agency.

Now, as estimates of available reserves continue to go up and prices drop to less than $3 per million BTU, talk is turning to exporting natural gas – potentially a serious moneymaker, with countries like Singapore facing per million BTU prices around $16.

As a Stanford economics professor and director of the Program on Energy and Sustainable Development at the university's Freeman Spogli Institute for International Studies, Frank Wolak understands the urge to export.

"But there's a significant risk here that I don't think people are necessarily factoring in," he said.

As he explained in a recent policy brief for the Stanford Institute for Economic Policy Research, investing in natural gas export facilities "is a bet against what U.S. firms excel in – developing and commercializing new technologies and products."

Ghost facilities

Along the coasts of Texas and Louisiana, the early 2000s saw the construction of a number of liquefied natural gas (LNG) receiving terminals, intended to meet a predicted increase in natural gas imports.

"Those facilities are now sitting vacant," Wolak said, "because the price of natural gas in the United States has fallen so much." Many are converting themselves into export facilities.

He thinks moving immediately to export runs the risk of repeating this scenario in reverse. It takes time to site, permit, construct and bring an LNG export facility online. In the meantime, American entrepreneurs will be looking to apply technologies like fracking and horizontal drilling elsewhere.

"It's hard to see why this technology can't be exported to the rest of the world," said Wolak.

If that happens, a U.S. export facility could be finished only to find a few new shale gas revolutions in other parts of the globe overturning its intended markets.

Cooking with gas

What does Wolak recommend the United States do with its embarrassment of domestic natural gas riches? Use it at home.

There is no major technological barrier to using natural gas in the transportation sector – our heaviest user of oil. Vehicles that burn compressed natural gas (CNG) are already in common use, particularly in Asia and South America.

Wolak noted that the use of compressed natural gas makes the most sense in a vehicle fleet that drives a well-defined circuit, such as urban buses or taxis. Vehicles that use the denser liquid natural gas are better suited for heavy-duty use, such as regional long-haul truckers. The compressed natural gas refueling infrastructure could expand once these routes were established.

Home filling stations for personal vehicles are another option – household compressors that work with existing home natural gas connections are, in fact, already on the market. The devices are currently priced out of the range of most consumers, but these home filling stations could become a viable option as natural gas becomes a more popular fuel choice.

Wolak also noted that natural gas is currently replacing coal in the production of electricity, a trend that is likely to continue given current conditions in the global coal market and natural gas's relative environmental benefits. Natural gas generation facilities, he pointed out, produce only a third to a half of the greenhouse gas emissions per megawatt hour as coal-fired facilities, and are now cheaper per BTU.

"All I need is heat energy," Wolak said. "Whatever source of energy is cheapest is ultimately what I'm going to use."

Max McClure is a writer for the Stanford News Service.