Guest Post by Willis Eschenbach
I will take as my departure point the following rather depressing chart from the US Energy Information Agency (EIA). It shows the rise in US electricity prices since 2001:
Figure 1. Increase in energy costs for the industrial, commercial, and residential sectors, along with the average, from the EIA. SOURCE
That is a 50% increase in electricity costs in about a decade, and as you can see, we’re getting shafted. Now, it may be that the advent of “SmartMeters” is responsible for the decoupling of the different types of rates in 2009. I say that because residential has continued to increase post 2009, while commercial and industrial have stayed about level. But that’s just a guess, and coupled or not, prices are way up.
I got to thinking about that, and about the difference in the price of electricity from state to state, as shown in below in Figure 2. I wondered how much of the state-to-state differences in prices was due to the different mixes of fuel.
So I went and got the data, and as usual, there are some surprises in the mix.
Figure 2. State by state electricity pricing, 2010. SOURCE
To understand the relationship of price to fuel mix, I used the data from the same source as Figure 1, the EIA (I downloaded “All Tables” from the top section of that link, which simplifies the process). They have individual tables which contain state-by-state information on the various fuel sources used to generate electricity. They divide these up as Coal, Petroleum Liquids, Petroleum Coke, Natural Gas, Other Gas, Nuclear, Hydroelectric Conventional, Other Renewable Sources, Hydroelectric Pumped Storage, and Other Sources. “Other Renewable Sources” in turn is broken down into Wind, Biomass, Geothermal, and Solar.
So after looking at all of those various fuel sources for electric generation, it turns out that you can actually get a fairly good handle on the state-by-state price using just four of those variables, and that the rest of them make little difference to the result.
Figure 3. Estimated state prices compared with actual prices, with the percentages of coal, hydro, nuclear, and biomass being the variables used to estimate state prices.
So what is the relationship between pricing and fuel? Here’s how Figure 3 was calculated.
You start with the average price, 13.25 cents per kWh. Then, you subtract five cents times the percentage of coal in the state’s mix.This drops the price by up to 4.6 cents, because as you might expect, coal plants are inexpensive. So if for example half your state’s power is from coal, on average that reduces the electricity price by 2.5 cents.
Next, you subtract five cents times the percentage of hydroelectric in the mix. Again, that reduces the average price, this time by up to 4.5 cents … hydro is cheap power as well.
So those two, coal and hydro, reduce the cost of electricity. Then you add three cents times the percentage of nuclear, which increases the price by up to 2.1 cents.
Finally, we have the other variable that increases the price, biofuel. Biofuel seems to be pretty deadly to a state’s electrical mix. It increases the cost of electricity by up to 5.3 cents per kWh, and is calculated by adding 34 cents times the percentage of biofuel.
The rest of the variables, wind and natural gas and all of the others, have only a very small effect on the state-by-state price. I suspect that the effect of natural gas in the mix will strengthen as the price drops and more plants are built … but for now, those are the variables that actually make a difference—coal and hydro drop the price, and nuclear and biomass increase the price.
Conclusions? … if you want cheap electricity, go with coal and hydro. And if you get desperate enough for renewables that you start messing with biomass and burning wood to make electricity? Well, you’re in deep trouble … and sadly, California, where I live, is a leader in that regard.
Which in part is why electrical prices here in California are through the roof. We have a draconian renewables target (33% renewables by 2020!!), and in a fit of chronic stupidity the lunatics in charge of the asylum decided NOT to count hydroelectric as a renewable. So we’re burning wood for electricity, and if the madness continues we’ll likely have to burn the furniture as well … and as a result of the 33% renewables target, plus the madness of denying that hydroelectric power is renewable, California ends up a “red state” in Figure 2, and my electric bill keeps rising.
That’s your electricity report on this fine morning, US Independence Day.
My best to everyone,
w.
[UPDATE] In the comments someone asked about the correlation between a state’s voting habits and its energy prices. I actually had started in that direction, and prepared a graph, but then I decided to make the post about the fuel rather than about the politics. However, since someone asked … read’m and weep …
[UPDATE 2] USA Today sez …
WASHINGTON — As President Obama pushes an aggressive national climate-change plan, his administration’s non-profit advocacy arm is becoming active in clean-energy drives across the country.
Organizing for Action also has formed a partnership that steers its volunteers to purchase wind and solar power from a single company with ties to liberal groups.
“While we are doing all of this work to advance the president’s agenda in Congress, we also want to do everything we can locally to help switch to clean energy,” said Ivan Frishberg, Organizing for Action’s climate-change manager.
Organizing for Action, for instance, will recommend that its volunteers and activists who want to purchase renewable energy for their homes and businesses consider signing up with Ethical Electric, a firm that currently sells wind power in four Mid-Atlantic states and the District of Columbia and bills itself as a socially responsible energy supplier. It also has licenses that will allow it to expand to New York, Massachusetts, Illinois and Ohio.
…
Meredith McGehee, who examines government ethics at the Campaign Legal Center watchdog group, questions whether it’s appropriate for an organization so closely linked to a sitting president to develop ties with one business.
“You can say that developing clean energy is great, but do competitors feel the weight of the presidency being used to undermine their business model?” she said. “It raises questions about the ethical propriety of the use of the president’s bully pulpit.”
Putting all the money in your friends’ pockets raises ethical questions? Who knew?
So … as usual, the friends of Obama make bank, and everyone else says “How come the US government is favoring the President’s friends?”
Well of course your 95c is an abomination. But I was going by your average California price, which you said was 14–24c. Neither did I take into account the exchange rate, but it’s not that different right now.
KR, I came across this little gem at the website (http://tinyurl.com/cueeunz) you provided concerning a discussion of externalized costs:
‘There are inevitable uncertainties and inaccuracies in the externality calculations, both in the original data and in the assumptions we made to combine them. However, the resulting numbers represent our best estimate– far better than assuming that externalities are in all cases 0.’
Maybe it’s just me, but I think those two sentences state the sordid game. First: The ‘uncertainties’ are ‘inevitable.’ Another-words, they’re guaranteed. Second: Apparently when any uncertainty problem in the original data is perhaps not quite so uncertain one still contends with ‘inaccuracies.’ Third: The ‘uncertainties’ and ‘inaccuracies’ are not just present in the final calculations, no, they’re present in the ‘original data.’ An uncertain and inaccurate (Am I using those words a lot?) calculation from uncertain and inaccurate original data. Well, of course! Fourth: Now we get to ‘assumptions’ which is inevitable (this time my descriptive word) since that must be the outcome from uncertainties and inaccuracies. Oh, and it’s all ‘combined.’ Fifth: ‘However, the resulting numbers represent our best estimate-‘ Ok, where to begin? Well, the only interpretation I can get is that the authors are saying, ‘We know we really had no genuine stats to work with, so we made assumptions, so all we could really end up with was an estimate, but c’mon, it was our “best estimate.” Don’t good intentions mean something? We’re good people. Sixth and finally: ‘…far better than assuming that externalities are in all cases 0.’ Why is that better? Better for their cause?
Do they conduct their real lives and finances this way? Sorry, it’s not better than 0. In fact this research is 0. And, don’t dare let us base policy on this kind of crap.
Philip bradley asked why nuclear increases electric rates.
Nuclear is expensive compared to coal and isnt widely deployed. comparatively coal is 5c/kwhr and nuclear runs about 10c/kwhr for levelized costs, deregulation would improve this value to about 8.4c/kwhr according to an MIT study but it is still more expensive than coal, nat gas hydro and geothermal. It is substantially cheaper than solar and comparable to wind but is far more reliable. If cheap power is your goal aim for coal hydro and nat gas, if people want to argue emissions free nuclear is your go to.
Fluidic reactors are alot cheaper but they are also heavily restricted through both R&D and regulatory burdens. but that is another matter all together.
Anthony I believe an exponential fit for your politics vs power costs would be a better fit. It may also make me cry more heartily.
geran says:
July 4, 2013 at 3:27 pm
No, the only thing I did wrong is not read what I wrote carefully enough. As in TX “because” vs. “became”. Sometimes the fingers type by habit rather than what I actually wanted to say, or more likely autocorrect.
So Dude, in your great wisdom, what do you disagree with? Yes, I failed to provide refs, but I’ve did the work years ago, based on the EIA where Willis got his information. The problem with CA is it tries to make everyone live with laboratory-scale solutions that don’t actually work on the scale we need them to work. Did you not know about the 35 MW limit for big hydro? It’s easy to snipe, but what have you actually contributed, O wise one?
And I’d rather be me than you, the Hosee.
Ha! More lack of editing. Oh well, I have better things to do (peristalsis active now) than worry about people like geran picking on typos as if they have real meaning.
Information for those interested
Energy mix on UK grid:
http://www.gridwatch.templar.co.uk
Why renewables cant actually work:
http://www.templar.co.uk/downloads/Renewable%20Energy%20Limitations.pdf
The damage already done in Germany:
http://www.templar.co.uk/downloads/2012_01_09_EIKE_Germa_energy_turnaround_english.pdf
You want a real axis of cost?
Plot electricity prices against how much government MEDDLING there is.
The post modern view of government is that its primary use is as a lobby-able legislative entity that can create profit and stamp on your competitors by regulating an otherwise free market.
Willis: Suppose your formula resulted in estimated prices that were exactly 10-fold the actual prices. The points on your graphs would lie exactly on a line (slope 10, R2 = 1), but the differences in energy production costs used in your formula would be absurdly large.
Suppose your formula resulted in estimated prices that were exactly one-tenth the actual prices. The points on your graphs would lie exactly on a line (slope 0.1, R2 = 1), but the differences in energy production costs used in your formula would be absurdly small.
Suppose the actual price were the same in every state. Again the points on your graph would all lie exactly on a line (vertical in this case), but your formula would be adsurd.
Suppose every estimated price were exactly $1.00/kWh higher than the actual price ….
The only line on your plot that can tell readers how well your formula predicts actual prices is a line of unit slope that goes through the origin – not the least squares fit you show.
It is possible to do multiple linear regressions so as to obtain confidence intervals for each coefficient. When you tell readers that coal is $0.05/kWh cheaper than average, readers need to know whether this is $0.05 +/- $0,01 or $0.05 +/- $0.10. How reliably does your analysis tell us that coal is cheaper?
Theo Goodwin says:
July 4, 2013 at 5:54 pm
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Thanks, you are right to shed a tear.
There is a huge north south divide in the UK. Probably 85% or more of the wealth of the country is situated in the South East. It is an area wider than London (London like most capitals has a wide range of wealth, and there are many poor areas).
The UK has been anti wealth creation for generations, perhaps with the exception of the Thatcher era. It is a country of high taxation, huge state intervention and payments, and poorly delivered public services. The government has for generations been inept.
The current energy policy is a case in hand. The lunacy of this policy has been set out many times on this blog. The goal of government is good management. Its task as far as energy is concerned is twofold. First to ensure reliable, stable and abundant supply of energy that meets the needs of the citizen and of industry. Second, this reliable and abundant supply of energy is to be delivered at the cheapest price possible.
Unfortunately, in the UK, we have the very opposite goals. Government policy is hell bent on making energy as expensive as possible (and thereby cutting consumption). As a by product, it is making the energy supply unreliable and intermittent. This is leading to industrial uncompetiveness (putting jobs at risk) and forcing people in to fuel poverty (leading in extreme cases to a greatly increased winter mortality rate in the old and vulnerable). It is inflicting much missery on an already depressed nation.
This may seem like a niggle, but energy prices and energy costs are not the same. The price may be treated by the user as a cost of living. But the price can be higher or lower than factor costs.
Is that the point of the blog that in some states like California the price of electricity is higher than the factor costs? (Factor cost = Land + Labor + Capital.)
I accept Willis’s conclusion that state governments can and do distort electricity prices by poor policy choices, but his methodology makes no sense either as financial cost analysis or economic analysis.
For a start, electricity prices are regulated by state commissions. The IRS allows Investors in some states to pay reduce tax on dividends because the regulator does not allow a fair return on capital. Part of the dividend is treated as a return on capital, the assumption being that the state is forcing the utility to dis-invest. For example, depreciation allowance is too low for assets to be replaced.
As for California, anyone who knows the history of the power industry in California knows that state policies were determined by apes, hyenas and people the gods had made mad.
richard verney says: July 4, 2013 at 5:40 pm
The simple answer is to not chop down the forest and/or to manage regeneration of the natural forest and one would enjoy all the CO2 sequestration that having forested land gives.
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Not true Richard, forests do NOT sequestrate CO2. Let’s look at the life-cycle of a forest tree.
Grows for many years.
Burned in forest fire.
CO2 in Atmosphere.
Grows for many years.
Dies, falls, and is consumed by fungi and bugs.
CO2 in Atmosphere.
Grows for many years.
Harvested and used as building material.
House eventually demolished and wood burned or rots away.
CO2 in Atmosphere.
Grows for many years.
Harvested for bio-fuel in Drax power station.
CO2 in Atmosphere.
Growing forests is NOT a form of CO2 sequestration. I did try to take companies offering such a service to court, but my attempt was thwarted by officialdom.
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What has happened to Anthony Watt’s Solar roof and electric buggy?
Why are so many of you denying the viability of “renewables” when life itself is… and has worked well for a billion years?
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Leo, your comment on Gov’t meddling is spot on!
If I roofed my house with panels today, the price per watt of a good quality electric solar panel is approx $0.6. When contractors see easy grant money the price easily triples. More so when the actual electricity generated is paid for at top dollar too!
Sadly, your pdf’s hold no truck with me. My Solar hot water heating system has more than doubled its pay back date from a £500 outlay. Other forms of energy “creation” are cost-plus.
Silver Ralph.
Make your mind up, lol.
Growing trees is sequestration of C02. Nobody argues with that.
Burning or letting them rot away is the opposite word —- restoration! 😉
Wood fires are considered to be “carbon neutral” so no “carbon tax” is imposed. But wait, there’s more!
.
Mankind has cut tree’s down like Billy-Ho over the past 6~8K years But places like central America have been subsumed under forest where massive civilisations once lived.
So, cutting down the Amazon is restoration who’s fires create acid rain over the sea and the Sahel (Southern Sahara) naturally returning to its former loveliness from extra C02 is sequestration.
A rather large driver of price is the amount or lack of regulation per state.
http://www.ftc.gov/bcp/workshops/energymarkets/background/slocum_dereg.pdf
California did it badly and is at the mercy of power generators/delivery system. Power is essential for a high standard of living and should never have been deregulated. Power at cost plus a reasonable profit is how it should be and the genie needs to be put back in the bottle. Giving bankers and businessmen a free hand with something so essential was a disastrous idea.
http://www.ratical.org/ratville/dereg/10myths.html
Willis, re your graph on price and percentage votes, I think the distribution is more likely a polynomial in this case. After 50%, energy prices jump up markedly. Please send this to influential Republican congressmen and senators.
Willis. I’m not sure why entirely, but your methodology doesn’t seem to be giving you very good answers. For example, Vermont has high electricity rates, but the price paid to the suppliers — e.g. Vermont Yankee nuclear, Hydro Quebec and local sources — is about 6 cents a kw/hr The remaining 8 cents is distribution cost. Why so much? I’m not sure. Dispersed population. High grid maintenance costs due to heavy Winter snows, Summer thunderstorms, and an awful lot of big trees with inadequate root systems growing in shallow soil in proximity to power lines?
Would we be better off with coal? Environmental concerns aside, and ignoring some high ash content anthracite coal in Rhode Island that was never very aggressively exploited even in the 19th century, the nearest sources of coal are 600-800 kilometers away. The coal might be cheap, the cost of transporting it isn’t. California has a similar situation BTW
Burning wood? Vermont actually has a 50mw wood powered electric facility (google Burlington Electric — McNeil). It’s one of the few in the world. The economics look OK (5 cents a kw/hr), but not spectacular, and it goes through a prodigious amount of wood. (The operator has said that it would have made more sense to locate it near the primary sources of wood instead of near the customers). One suspects that it mostly works because Vermont has very few people and a lot of trees. There are no serious proposals that I’m aware of to build 12 more such plants to replace Vermont Yankee which the local enviroenthusiasts are determined to close. (In fairness, even though I support nuclear power in general, I don’t think the current owner of Vermont Yankee ought to be operating nuclear power plants … or much of anything else).
But I digress. Look man, I’m pleased to see you digging into energy costs, and I’m confident that eventually you’ll do a first rate job. But I don’t think you’re getting good answers yet. Why not take the obvious route and simply total the costs of raw material production, generation, transportation, distribution, amortized infrastructure costs, etc? Some of those (e.g. the true cost of decomissioning power plants) are a bit hazy and somewhat suspect. But most of the murky stuff probably is deferred costs not included in your analysis either.
Willis Eschenbach says:
July 4, 2013 at 5:06 pm
(chart of energy price vs. Obama votes)
Willis, this graph is the key to the current pricing policy: It’s crystal clear that, the higher the energy price in a state is, the more people vote for Obama. Raise the energy prices = raise the voters’ approval for Obama – simple, isn’t it?
Tom J – What that analysis (using the same EIA data source that Willis has used) shows is that without any external costs whatsoever moving to coal power does not drop prices, and moving away from coal does not raise prices. With any realistic accounting for externals, coal becomes one of the most expensive future options.
Of course, there _are_ external costs – the US government has spent $44B on black lung benefits since the 70’s, for just one example. And according to Willis there may be some external benefits (although being from a coal mining and coal burning region, I can’t think of anything except West Virginia employment figures). A static look at current prices without considering externals both +/-, without considering the costs of future electrical supplies, let alone without considering all possible sources as in the opening post, is not a very useful analysis.
To Philip Bradley:
You asked why nuclear increased the cost. The answer is 2-fold: green idiocy
driving fear, and Jimmy Carter.
With respect to green idiocy driving fear, nuclear is so wildly over-regulated
that this adds significant cost. To take a single example, in the U.S.A.,
a nuclear power plant needs sixty-three separate permits
before it can even break ground! Surely, there must be a way to adequately
regulate the industry with some more rational process, that might require,
oh, 4 or 5 such permits?
The second reason is that previous U.S. president, Jimmy Carter,
decreed that nuclear fuel not be reprocessed. This was driven by
fears about nuclear proliferation, etc. France, for example, derives
approx. 77% of their electricity from nuclear, aggressively reprocesses
fuel, and their total radioactive waste storage is one large building.
The U.S., on the contrary, doesn’t reprocess, and the large overhead
for storing radiation waste discourages new plants.
Actually, the U.S. Federal government started a plant for
processing radioactive wastes, but it has not been finished.
It’s also, like many government projects, wildly over initial
budget. To add insult to injury, the Obama administration
has announced they will scale back plans to do commercial-
scale reprocessing to a “scientific scale”.
Willis,
Thank you so much for that. I have said a couple times that wind doesn’t really affect the price of electricity that much, and according to your results the average price in the US is basically equal to the price of wind and natural gas based electricity. That is, swapping natural gas generated electricity for wind doesn’t change the price paid at all.
While there are plenty of evidence based objections to wind, I hope that people stop claiming absurd things about its price since you showed it doesn’t make a difference.
HydroQuebec’s “dam them all” policy is not that demonized by the greens (who have other priorities), but rather by the First Nations peoples who get forcibly relocated to make way for the reservoirs. They get a few jobs in return, but they seem to prefer to keep their lands.
Andyj says: July 5, 2013 at 4:09 am
Make your mind up, lol.
Growing trees is sequestration of C02. Nobody argues with that.
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If I buy a tree to offset my air-travel, as you can do in the UK, the CO2 fixed within that tree will be back in the atmosphere within 50 years or so. That is not sequestration for the CO2 burned in aviation fuel, becaue someone in 50 years time will be saying that burning the tree was ‘carbon neutral’. You cannot count the tree twice in these calculations.
.
I’m not party to nut cases who think trees are anything but “carbon neutral” – unless buried & fossilised.Trees grow while nicking the C out of C02 then get burned, releasing it.. That’s “carbon neutral”.
My electric car is one. Nissan talks of my economy as “saving trees” which is a nonsense because no new C02 starves them.
To Chad:
You’re being a bit short-sighted when you claim “wind doesn’t affect the
price of electricity that much”. That may be true in a narrow sense, as
far as the rate-payer is concerned. However, the wind energy industry
is VERY heavily subsidized. So we all pay through higher taxes. If
wind energy weren’t heavily subsidized, no electricity utility would use it.
Wind subsidies are not just the 2.2 cents per kilowatt-hour that was supposed
to be temporary in 1992, but which is still being paid. . No, there are a whole
array of them. In 2011, the estimated amount of all non-hydro renewable
energy production in the U.S. was 909,000 barrels of oil equivalent per day.
The Congressional Budget Office (CBO) put out figures on this. According
to the CBO, tax preferences (subsidies) for renewable-electricity production
totaled $1.4 billion in 2011. The vast majority of that money went to the wind-energy
sector. (Note that the $1.4 billion does not include any of the $3.25 billion in tax-free
grants that were given to the wind-energy sector by the Treasury Department under
section 1603 of the American Recovery and Reinvestment Act between 2009 and 2011.)
Using that CBO data, we find that the tax preferences for wind energy total
$1,540 per barrel of oil equivalent per day.
Oil and gas also get heavily subsidized, as does nuclear. But the amount
is quite a bit less. Oil/gas get about 8.2% of the subsidies that wind does.
Nuclear gets subsidized 6.5 times less than wind.
Without being kept afloat on a sea of taxpayer bucks, wind energy
would sink like a rock.
Chris R.
Nuclear is 100% subsidised for construction. Non-subsidised in use, 100% subsidised for de-commissioning which removes all viability as an energy source. It’s only pay-backs are anti-flutter counterweights, DU tipped munitions and atomic bombs.. All bought and paid for by the taxpayer.
.
Wind on the other hand, is subsidised by the Gov’t to private firms who get extra tax money for every KWH they produce. Which is silly.
ATM here in the UK were are producing 1.07 GW from wind with over 4 thousand turbines. At the cost of the end users electric bill they are making £380/hour each.
You may not like them but you’re a fool not to invest in them. 😉
geran says:
July 4, 2013 at 3:27 pm
No, the only thing I did wrong is not read what I wrote carefully enough. As in TX “because” vs. “became”. Sometimes the fingers type by habit rather than what I actually wanted to say, or more likely autocorrect.
>>>>>>
Hoser, please forgive me. I was only trying to be funny. I did not object to what you said. My comment was wrong if it offended you in anyway.
To Andyj:
Don’t argue with me, argue with the CBO. Their figures were what I used.
Chris & Willis… About who pays for what and the total generation and end user costs ….. Keeping it very simple; speaking of the UK.
You don’t need “a body”, “NGO” or any vested interest to find out.
Don K says:
July 5, 2013 at 4:54 am
Don K, my attempt was what I call a “most-for-least” analysis. I wanted to find the smallest number of factors that would allow me to get a rough handle on the prices. I found two, actually—the fuel mix, and the votes for Obama.
Now, you’re totally right that adding more factors would increase the accuracy of the analysis. But in these types of analyses, I’m not looking to increase the number of variables, but decrease them.
There is great value in your type of analysis as well, where you try to get the most accurate answer. For that you need to include many variables—intrastate distances, amount of snowfall, cost of fuels, there’s lots.
But mine is the other type of analysis, looking to get the most bang for my variable buck …
Best regards,
w.