Market Forces

Mass Appeal: How can we make electrification more affordable and equitable?

This post is the fourth in a series dedicated to the future of the electricity sector and new scholarship supported by the Alfred P. Sloan Foundation. Each post is based on a discussion between select researchers and experts working on relevant policy. To learn more and join one of our upcoming conversations, visit the series website.

Distributed energy resources (DERs)—from rooftop solar to electric vehicles (EVs)—have amazing potential to reduce greenhouse gas emissions and help us reach our climate goals. Their widespread adoption, however, could also bring unprecedented stress to an already aging electric grid. Upgrading both local and system-wide electricity grids to support this change will require thoughtful planning to minimize costs and recover these equitably.

On our recent webinar funded by the Alfred P. Sloan Foundation, the panel delved into the growing adoption of DERs, the data needed to understand trends and provide more accurate forecasting for future investment, as well as the costs—and their allocation—of upgrading our electric system to accommodate this seismic shift. Moderated by Elizabeth B. Stein, Lead Counsel for Energy Transition at Environmental Defense Fund, the panel included Dr. Jim Bushnell, Professor of Economics at the University of California, Davis; Dr. Anamika Dubey, Assistant Professor of Electrical Engineering and Computer Science at Washington State University; Dr. Alan Jenn, Assistant Professional Researcher at the Institute of Transportation Studies at the University of California, Davis; and Michelle Rosier, the Economic Analysis Supervisor for the Minnesota Public Utilities Commission.

As California goes… Read More »

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Grid makeover: New research shows how the integration of renewables is exposing design flaws in energy markets and offers paths to improvement

This post is the third in a series dedicated to the future of the electricity sector and new scholarship supported by the Alfred P. Sloan Foundation. Each post is based on a discussion between select researchers and experts working on relevant policy. To learn more and join one of our upcoming conversations, visit the series website.

As energy providers around the country integrate a growing volume of wind, solar and batteries into their systems, researchers and regulators are seeing compelling evidence that markets may require design adjustments to address inefficiencies.

Our recent webinar, funded by the Alfred P. Sloan Foundation, examined how market designs can lead to clean energy outcomes—and potential unintended consequences like an increase in CO2 emissions.

Moderated by Sarah Ladin, an attorney at the Institute for Policy Integrity, the panel—which you can watch here—included Dr. Catherine Hausman, an associate Professor of Public Policy at the University of Michigan and a research associate at the National Bureau of Economics Research, Dr. Chiara Lo Prete, an Associate Professor of Energy Economics at the Pennsylvania State University and Valerie Teeter, the Deputy Director of the Office of Energy Market Regulation at the Federal Energy Regulatory Commission (FERC).

Ancillary services markets, renewables and their impact on generation

While most economists tend to examine wholesale energy markets, Dr. Hausman has researched ancillary service markets, which provide essential services for maintaining a secure and stable power system. One of these markets is the frequency regulation market, which is crucial for ensuring reliability. This market helps maintain the appropriate balance of supply and demand by paying generators to make small adjustments to their output. Dr. Hausman’s research explores the potential for ancillary service markets to interact with and affect the wholesale energy market.

Her research studied the PJM frequency regulation market in the northeastern United States from 2012-2014 to show how generators responded in the wholesale energy market. Her team discovered significant spillovers across markets, as generators adjusted both the amount of energy they generate as well as the fuel and technology type. For example, because the frequency regulation market requires generators to fluctuate their generation, some may need to increase their daily generation significantly in order to allow for the footroom needed to make these adjustments. These results suggest that the ancillary services markets interact directly with generation markets in ways that academic economists haven’t previously considered.

Renewables, batteries and climate change are leading to a rethinking of ancillary services, she argues. If system operators aren’t careful, the utilization of batteries to provide frequency regulation could lead to the unintended consequences of increasing CO2 emissions. For example, if a battery enters the frequency regulation market, this may reduce the need for a coal plant to participate in frequency regulation, resulting in an increase in coal-fired capacity in the wholesale market and, in turn, emissions. “In a world without the ideal carbon emissions regulation that we might hope for,” Dr. Hausman argued, “we need to be careful about the unintended consequences of our policies, especially around things like new technologies or changes to electricity markets.”

Managing the unpredictability of wind

Dr. Lo Prete’s research examined why the increasing penetration of wind in U.S. energy markets poses a unique challenge. Markets operated by Independent System Operators (ISOs) rely upon forecasts to schedule dispatch of both wind and non-wind resources one day ahead of time (with adjustments to dispatch happening in real time as demand and supply varies). While weather forecasts have improved dramatically, predictions for wind are not as precise, and any inaccuracy can impact other forms of energy, which need time to adjust their generation (for example, coal plants take 10-20 hours to reach 70% capacity).

If the wind does not blow as expected, “peaker” plants (dirty, inefficient fossil fuel-based generators that run only a few hours of the year) must ramp up quickly to meet demand. Conversely, if the wind blows unexpectedly hard, some non-wind generation units that had ramped up the day before in response to the forecast lose their spots in real time, leading them to burn fuel while sitting idle (units that have committed to turning on can’t easily turn back off, and then run at their minimum output level). “Once they’re committed, they can’t be de-committed,” Dr. Lo Prete explains.

Both these outcomes are inefficient and can increase the need for uplift payments, or out-of-market payments to generation or demand response resources that ensure generators are adequately compensated when they’re ordered to either produce or reduce power. Ensuring that forecasts are more accurate is one way in which these inefficiencies can be reduced.

She also found an interesting interaction between the wholesale and ancillary service markets that creates greater inefficiencies due to wind variability and inaccurate forecasting. Specifically, for baseload plants (including coal and natural gas combined cycle) that participate in both the energy and reserve markets, if the wind ends up blowing less than expected, these plants can shift capacity towards generating, thereby reducing their reserves. Because these plants are cheaper to operate than peaker plants, this reduces the market clearing bid below peaker plant marginal costs, thereby requiring more uplift. Dr. Lo Prete was surprised by this finding, and said she originally had not planned to incorporate both markets into her research. But her findings demonstrate the need for researchers to think about the system in a holistic manner, incorporating all market participation into their modeling efforts. She encouraged researchers in the audience to take this approach, stating that “it’s going to become more and more important to look at the combination of ancillary services with energy markets, and with other markets as well (such as capacity markets).”

FERC exploring market reform

Ms. Teeter noted that as the resource mix is changing, FERC (the agency that regulates transmission and wholesale markets) is exploring how market design in both the wholesale and ancillary service markets can address the need for greater operational flexibility. Given variable energy resources’ inability to ramp up or down generation on demand, the remaining generation needed to meet total load will need to be much more flexible in real time.

It is therefore critical that market rules do not create participation barriers for generators that can quickly ramp up or down. The Commission is exploring whether new market products can help compensate those generators able to meet this ramping need, as well as how market designs can better incentivize resources to reflect their operational flexibility in their price bids. Given that new resource types such as batteries have greater operational flexibility, the Commission is also examining whether market rules create any undue barriers that prevent these resources from providing this much-needed service.

Need for continued interaction between academics and policymakers

During a robust discussion among panelists, Dr. Hausman noted the critically important link between researchers and regulators. Because the grid is changing so quickly in the absence of a national climate policy on carbon emissions in electricity markets, researchers should be looking into unintended consequences and presenting their findings to agencies like FERC to find adequate solutions. “The market is not just going to automatically take care of itself,” she said.

Regulators rely upon this type of input for making informed decisions. Ms. Teeter described some recent technical conferences during which stakeholders, experts and academics discussed key issues related to changing system needs. Conferences like these, as well as the public docket, she noted, are ideal venues for academics to share some of their latest thinking on market issues and challenges that may exist.

“Commission staff appreciates the ability to dive into these issues and understand the technical thinking that’s been done and have that thinking inform their decisions,” Ms. Teeter notes. Research like that conducted by the other panelists can be useful to the commission and its staff as it examines whether energy and ancillary service market reforms are necessary to address changing system needs in the evolving electricity sector.



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People of color hit hardest by air pollution: EPA needs to consider this in benefit-cost assessments of policies

This blog was co-authored by Jeremy Proville, Director: Office of the Chief Economist, and Ananya Roy, Senior Health Scientist at EDF.

New analysis finds that prevalent methods of assessing impacts of air pollution underestimate pollution’s health impacts on people of color.

Everyone has the right to breathe clean air. Yet communities of color, falsely labeled as “hazardous” in the 1930s, experienced decades of depressed property values and higher siting of industrial facilities and highways, resulting in higher exposure to air pollution. Environmental racism like this causes unjust, unequal health harms.

Yet the issue of Environmental Justice and its impact on health extends beyond disparate exposure alone. Communities of color are exposed to higher levels of air pollution and are more vulnerable to that air pollution. Racist policies, institutional practices, and disenfranchisement have caused disinvestment in housing, transportation, economic opportunity, education, food, access to health care, and beyond in these communities. All of these overlapping inequities not only manifest in health disparities for these families, but also result in greater health impacts from pollution exposure. In fact, a recent study of 60 million Medicare beneficiaries found that older Black people are three times more likely to die from exposure to pollution than white people when exposed to the same levels of fine particle air pollution or soot.

The federal government usually assumes that air pollution exposes everyone to the same risk. Yet the risks are not the same. The disparate harm caused by pollution to Black and Hispanic communities cannot be ignored, and should be addressed directly in estimating the benefits and costs of pollution policies in order to ensure that everyone’s health and wellbeing is protected.

New research uncovers how pollution impacts have been underestimated

In a new journal article in Environmental Health Perspectives, EDF researchers and Carnegie Mellon University professor Nicholas Muller leverage this new understanding of racial/ethnic disparities in air pollution-caused mortality risks. The work seeks to understand the policy impacts of using race/ethnic-specific inputs rather than using data inputs that average the effects across all populations.

We find that using data inputs that average health response across race/ethnicity (effectively ignoring these real differences across groups) leads to:

  • An underestimate of the overall mortality impacts of air pollution to all populations by 9%
  • An undervaluation of the total costs of pollution across the country by $100 billion.

But this is even more damaging for Black families, as taking into account the larger impact of pollution on their health would increase their estimated pollution-caused burden by 150%.

This has real-world implications for cost-benefit analyses associated with air pollution improvement policies. For example, the Mercury Air Toxics Standard (MATS), a policy that helped reduce pollution from the electric sector, provided much larger benefits to Black people than previously understood: by not accounting for the fact that air pollution is more harmful to these communities, an assessment of the policy would underestimate MATS’ benefits to Black families by 60%.

Changing approaches at the federal level

In EPA’s Policy Assessment for the Reconsideration of the Particulate Matter National Ambient Air Quality Standards (PM NAAQS), the agency has used, for the first time, methods similar to our study to assess the distributional benefits of strengthening the standard.

The results indicate that, when considering both exposure and vulnerability differences across race/ethnicity, older Black people in 30 metropolitan areas bear 27% (13,600 premature deaths) of the mortality burden of PM2.5 at an annual PM2.5 standard of 12 µg/m3, despite making up only 13% of the total population. Strengthening the annual PM2.5 standard from 12 to 8 µg/m3 would result in 4,260 fewer air pollution-attributable premature deaths in Black communities (representing 31% of the total prevented PM2.5– mortality benefits).

Without this type of race/ethnicity-specific information on pollution vulnerability, the EPA would not have been able to accurately estimate the benefits to communities from lower pollution concentrations. This kind of assessment needs to become the rule rather than the exception.

Our data choices matter

Our findings have a very clear implication for policy: when thinking about air quality policy, government agencies should use the most up-to-date race/ethnicity-specific inputs to understand and reduce environmental injustices, especially in the context of estimating benefits and costs of policies. Being agnostic to existing differences in pollution impacts across race/ethnicity obscures the benefits we could achieve by improving our air quality – both for communities of color, but also for society as a whole.

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Capturing the health benefits of climate policy is critical.

Over the past 30 years, numerous scientific reports have highlighted the health impacts of climate change, starting with the first Intergovernmental Panel on Climate Change Report in 1990. The report included a short summary on heat stress, vector and water borne diseases and air pollution health effects like asthma and heart attacks.

Yet health impacts are not fully accounted for in cost of carbon estimates – presenting a missed opportunity. Public health researchers and economists should continue to work together to more fully capture the health value of policies that cut climate pollution.

Climate and health

The most recent National Climate Assessment, published in 2018, provides an extensive review of climate change effects on human health in U.S. regions. Public health impacts include:

  • changes in mortality and hospitalizations due to extreme weather events including heat waves, floods, and droughts.
  • changes in vector-, food-, and waterborne infectious diseases.
  • changes in chemical exposures via air, food and water.
  • stresses to mental health.

The World Health Organization (WHO) quantifies global health impacts of climate change, utilizing the burden of disease methodology to estimate mortality and disability-adjusted life years. Based on heat-related mortality, diarrheal disease, malnutrition and malaria, the most recent WHO assessment projected 250,000 additional deaths per year in 2030 – despite only quantifying a subset of health impacts from climate change.

The Lancet has also commissioned several series of articles and reports detailing the human health implications of climate change. After the Paris Agreement, the outlet initiated the Lancet Countdown, tracking the status of health effects from climate change through reporting on numerous indicators across impacts, exposures and vulnerabilities, as well as adaptation and mitigation actions. For example, the most recent Lancet report estimated a 53.7% increase in heat-related mortality over the last 20 years and an estimated 15% increase in climate suitability for transmission of dengue.

Health benefits largely absent

Benefit-cost analysis – typically managed by economists – is a cornerstone of U.S. regulatory analysis. The U.S. Government is required to use a monetized estimate of the net impacts of global climate change, referred to as the social cost of carbon (SCC), in regulatory rulemakings of greenhouse gas emissions. The current models used to estimate the SCC incorporate impacts to agriculture productivity, energy use, property damage and, within the health sector, an estimation of changes in cold and heat-related mortality.

Yet, while the research community continues to provide more detailed characterizations of climate change’s health effects, health researchers have been less involved in applying these findings to estimate the SCC. As a result, health is still not fully represented in the SCC.

Quantification of health benefits, like lives saved and hospitalizations avoided, can provide critical justification for and evidence of success of environmental policies. For example, the regulatory impact analysis of the Clean Power Plan included an estimation of health and other benefits from reduced greenhouse gas emissions using the SCC estimate, as well as expected health co-benefits via reduced air pollution.

Improving health benefits estimates

A 2017 National Academies of Science Engineering and Medicine report recommended two critical research needs for advancing the science behind the SCC estimate:

  1. Updating health damage modules to incorporate recent health literature.
  2. Improving delineation of the different effects of climate change across regions of the world – e.g., trying to determine the different health impacts expected in different areas.

Since the release of this report, several groups have been working to address these recommendations. For example, the Climate Impact Lab has developed an improved temperature-related mortality estimate that incorporates adaptation and delineates distributional effects across areas of the globe.

A recent analysis utilized WHO, Climate Impact Lab, and Lancet Countdown temperature-mortality functions to produce estimated mortality costs associated with climate change – suggesting a seven-fold increase in estimated monetary damages from previous estimates. In other words, adding in more specific health damage estimates increased the estimated cost of carbon pollution by seven times—from $37 to $258 per metric ton of carbon dioxide emitted.

Although climate change is a global phenomenon, the impacts are unequal and disproportionately burden underserved, low-income and marginalized communities. For example, the U.S. Environmental Protection Agency found that socially vulnerable populations are likely to experience the most severe harms from climate change. Evaluating distributional health effects of climate change at a finer geographical scale could help policymakers address inequities.

It’s critical for policymakers to have accurate information to weigh the benefits and costs of cutting carbon. With health researchers involved, benefit-cost analyses can more accurately capture the threat that climate change poses to people’s health – and the benefits that come with acting on climate.

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Farmers’ bottom lines at risk as growing conditions change

This blog was originally posted on EDF’s Growing Returns.

Iowa currently finds itself in a “Goldilocks climate,” with just the right measure and timing of humidity, rainfall and heat that help make the state a national leader in corn and soybean production. However, new research shows that climate change threatens to upset this balance.

Small shifts in rainfall and temperature can have considerable impacts on crops and farmer livelihoods. To better understand how these shifts could impact farmers, Environmental Defense Fund partnered with K·Coe Isom, an agricultural accounting and business advisory firm, to produce an in-depth report that quantifies the potential localized economic impacts from these shifts that Iowa corn and soy farmers could face as soon as the next 10 to 20 years.

Millions of dollars at stake in Iowa alone

Researchers found that farmers could see statewide gross farm revenues reduced by as much as $4.9 billion over the course of a decade — a loss of 3.6% of Iowa farm revenue from sales of corn, silage and soy.

Because with climate change agricultural prices are likely to rise, relative to without climate change, the impact to gross farm revenues from yield impacts will be offset to some degree by higher prices. Additional research is needed to understand how much agricultural regions like Iowa stand to offset yield losses through climate change-induced price increases.

With this caveat on unknown price increases, nearly every county in Iowa could experience decreases in gross farm revenues with losses of more than $50 million in almost half of the state’s counties in that same timeframe, and losses of more than $100 million in some western counties that are projected to experience higher yield reductions than the rest of the state.

Reductions in revenue would likely imply reductions in capital investment and off-farm spending. As a result, Iowa’s annual economic output could be reduced by between $367 million and $733 million, causing a statewide loss of 1,270 to 2,530 jobs, and reduce annual state revenue collections by $4 million to $8.3 million.

“A less desirable choice for the next generation”

The analysis drills down further by modeling how these crop yield impacts might affect a real representative family corn and soybean operation in central Iowa. The researchers obtained financial data for the farm, including harvest, sales and capital expenditure data, and modeled the impact of projected yield reductions on farm revenue over a five-year period (2014-2019).

When the anticipated crop yield declines from climate change were retroactively applied to the past five years, researchers found that the family farm would have lost between $50,000 and $90,000 in revenue per year, equaling a total potential loss of $360,000 over the five-year period.

As the farm owner observed, this reduction in revenue would have also made “returning to the farm a less desirable choice for the next generation,” and would have been “especially hard on those families newest to farming.”

Near-term solutions to avert economic loss

Much can be done to address climate change and minimize the financial impacts on farmers, and this report identifies a few ways federal, state and local governments can help mitigate emissions and help farmers further adapt to climate change.

Public funding and private sector programs can incentivize management practices that limit greenhouse gas emissions, improve soil health and build resilience in agriculture. For example, the federal crop insurance program could incorporate incentives for farmers that adopt practices that reduce crop yield risk.

Additionally, public funding could support the development of climate-resilient seed varieties, improvements to nutrient management and other climate adaptation strategies. Investing additional funding in Iowa’s public university systems to assist with the creation of practical, publicly available research could also help farmers put these strategies into practice.

Iowa’s farmers have adapted to changing farming conditions in the past, but climate change poses a more significant shift that requires a proactive response. Policymakers can help ensure farmers have the resources they need to withstand the growing risks posed by climate change and to protect the livelihoods and revenues that make Iowa a global agricultural leader.

For more information, download the full report.

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How can economics contribute to decarbonizing power markets?

Electricity system operators balance supply and demand precisely at every moment of every day through market design grounded in economic principles. As the share of variable renewable resources like wind and solar electricity on our electricity system increases, system operators, policy makers and energy market regulators are facing new questions on how to design the rules governing our electricity market to support decarbonization of our energy system.

Christopher Holt, PhD student in agricultural and resource economics at the University of Maryland, recently published an EDF Economics Discussion Paper, in which he reviews these new questions in wholesale electricity market design and identifies a number of areas where economic research can help inform decision-makers to facilitate decarbonization.

Chris wrote this paper during a summer pre-doc fellowship at EDF and Kristina Mohlin, who hosted Chris during the fellowship, recently chatted with him about his paper and his experience as a pre-doc fellow at EDF.

Kristina: What was your starting point for this pre-doc fellowship?

Chris: State and local leaders have been setting ambitious decarbonization targets. More recently, President Biden has pledged to make US electricity production free of carbon by 2035. My starting point was to try and understand how electricity market practitioners are working to change and refine the sophisticated set of rules governing wholesale markets, so that these targets can be met.

During my time at EDF, I spoke with industry representatives, policy makers, external economists, and other stakeholders at policy meetings, conferences, through video chats, and over countless cups of coffee. I also learned a lot by chatting with the highly talented folks internal to EDF. These conversations alerted me to many gaps in the applied economics literature, which I then described in the paper.

Kristina: One defining characteristic of electricity markets is that consumers do not respond to wholesale price fluctuations in real time. How can markets be designed to enable and encourage price-responsive demand?

Chris: California’s Demand Response Auction Mechanism (DRAM) is a promising example of how market design can reward innovation that encourages response to prices at the individual user level. This mechanism, still in its pilot form, allows companies to bring together demand across a group of electricity consumers, e.g. by coordinating power drawn from their appliances. The aggregator can then curtail demand when electricity is scarce at a minimal loss to consumers, who may be compensated for their agreement to participate. Wholesale market prices are kept low by way of the curtailed demand, benefitting all consumers of electricity (not just the participating ones). This is a “win-win”: lower prices for consumers and a profitable return for the aggregator. Importantly, this arrangement would not exist without the wholesale market design.

While the incentives are powerful, getting the design right is not easy. Projects like DRAM have a long way to go before they are approved for permanent integration into market operations—which is exactly why additional research is needed.

Kristina: Another key defining characteristic of electricity markets is that electricity is not storable. How will utility-scale storage affect market operations?

Chris: Yes, storage is not yet available at large scale, but this seems likely to change in the near future. The Federal Energy Regulatory Commission’s landmark Order 841 is intended to facilitate the participation of storage resources in energy markets. Some firms have already begun to complement variable renewable generation assets with large-scale battery technologies, and industry forecasts suggest major cost reductions for batteries in the near future. When storage technologies are deployed at scale, short-run market operations will require a new set of rules, which must be guided by economic research.

Kristina: Could you explain to our readers what this has to do with decarbonization?

Chris: Both price responsive demand and storage are closely tied to decarbonization because they allow consumers to buy electricity when it is cheap and clean rather than when it is expensive and carbon intensive (this is most apparent when there is a price on carbon). Electricity from wind and solar is essentially free once investment costs have been incurred and the plants have been built. Currently, when electricity is scarce, carbon-intensive peaker plants are needed to maintain reliability. These peaker plants, which are also relatively expensive to run, are increasingly needed to complement the variability of renewables, e.g. when the sun goes down in California, or the wind stops blowing in Texas. Unlocking price responsive demand and introducing storage capacity will reduce the need to rely on peakers.

Kristina: How will long-run investments be affected by increased participation of electric storage and price-responsive demand?

Chris: Changes to demand-side price response and the storability of electricity have crucial implications for how firms plan to invest in new generation assets and retire old plants. If consumers are able to pre-empt the high prices associated with peaker plants, why invest in peaker plants at all? Storage may bring benefits in helping to reduce emissions, but will firms be incentivized to invest in it? Regulators in New York, for example, have set considerable storage capacity targets. Experts suggest many ways to reach such targets and to ensure that more storage capacity indeed translates to decarbonization (carbon pricing is central among them).

The difficult task of guiding efficient long-run investment is further complicated when an electricity system spans political jurisdictions with differing policies. The simple fundamentals of electricity market economics are of value here, reminding us that proper pricing is often the key to efficiency—pricing that reflects resource scarcity, the value of quickly dispatchable resources and demand response, and the harm imposed by carbon pollution. Through my EDF pre-doc fellowship, I found that we need new research to connect these classic fundamentals to the new challenges associated with scaling up renewables.

Kristina: Finally, what would you like to tell other PhD students who have the opportunity to apply for an EDF pre-doc fellowship about your experience at EDF?

Chris: The pre-doc fellowship is a great way to focus in on the questions you might want to address in your dissertation. My job market paper was inspired in large part by my time at EDF. Having access to the network of experts that the fellowship offered was an ideal way to become more familiar with certain areas and overcome the steep learning curve associated with my field. EDF also values their alumni—I have continued to keep in touch with folks I met through the fellowship and attend EDF workshops. Overall, I would highly recommend the fellowship!

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