Chapter 16 Energy Security Part B An ounce

Chapter 16 Energy Security Part B An ounce

Chapter 16 Energy Security Part B An ounce of prevention is worth a pound of cure ~Benjamin Franklin (1735) Peter Schwarz Professor of Economics, Belk College of Business and Associate, Energy Production and Infrastructure Center (EPIC) UNC Charlotte Outline Introduction Definition of Energy Security History of Oil Security Since 1973 Current Issues in Primary Energy Security Electricity and Energy Security Costs and Benefits of Energy Security

of 16 2 Current Issues in Primary Energy Security (1) Falling energy prices and lower imports reduce security concerns in the U.S. Increased exporting of oil and LNG Diminishing subsidies for renewables given their declining costs Fewer incentives to interfere with markets based on energy security considerations Resistance to fracking in the EU has resulted in dependence on Russia Government owns all mineral rights in the EU (unlike the U.S.) More cautious about environmental consequences Russia has threatened to cut off supplies of natural gas to countries that support Ukraine, where Russia seeks to increase influence of 16

3 Current Issues in Primary Energy Security (2): Climate Change Increased extreme weather events Damage facilities or call for redesign Nuclear power plants after Fukushima Increased temperature Increases demand for energy and the cost of interruption Increased drought Severe threat to hydroelectric power Zambia has prospered through ample access to hydropower Nearly 100% of power comes from hydro Severe drought currently threatens the future of the resource (Onishi, 2016) Experiencing frequent interruptions in electricity supply of 16

4 Current Issues in Primary Energy Security (3): Nuclear Energy Nuclear proliferation is a key energy security concern Much consternation over Irans nuclear power plans due to a fear that they are enriching uranium for weapons Spent nuclear fuel may be stolen and used for weapons Cases where some spent fuel could not be fully accounted for U.S. banned reprocessing in the 70s over security concerns Nuclear catastrophes are often due to accidents but could be used as future terrorist targets Increasing the level of protection to safeguard from these kinds of attacks increases the already high cost of nuclear power Nuclear waste is still an issue even when we ignore security considerations of 16

5 Current Issues in Primary Energy Security (4): Infrastructure Aging pipelines subject to leaks, fires, and spills Seemingly mundane instances could cause energy security issues 2003 Northeast U.S. blackout began with a tree bringing down a transmission line, causing a series of cascading failures Terrorists present a different set of challenges Critical Infrastructure Protection (CIP), Ferrell et al. (2004) Protection of infrastructures, including energy, critical to national security View from space of the blackout that caused nearly 50 million people

to lose power on August of 16 14, 2003 Source: NOAA/DMSP. 6 Current Issues in Primary Energy Security (5): Infrastructure (2) - Oil and Natural Gas Oil facilities are prone to attack during conflicts Iraqi scorched-earth policy Pipelines and refineries vulnerable to terrorist attacks and accidents Fires and leaks in southern California Aliso Canyon leak forced thousands to relocate Terrorist attacks on oil storage facilities in Libya Control of block key shipping channels could be an issue Iran has threatened to close the Straits of Hormuz to Persian Gulf oil shipments if countries did not support its policies The Strait of Malacca that separates Malaysia and Indonesia is often subject to

piracy and terrorism of 16 7 Current Issues(6)/Infrastructure(3):Nuclear Energy Faces greater security requirements than other energy sources Nuclear Regulatory Agency (NRC) inspects nuclear facilities in the U.S. Firms pay into a fund to develop a permanent waste facility, but funds do not cover security risks Biggest risk is to nuclear reactors After 9/11, containment buildings are tested to withstand airplane attacks

Simulations may not reveal actual repercussions of a collision An explosion in reactor 4 of the Fukushima nuclear facility in Japan of 16 8 Electricity and Energy Security (1) Many safeguards are in place to prevent accidents, outages, and deliberate acts of damage Examination of the blackout in 2003 led to establishing manadory rather than voluntary reliability standards The North American Electric Reliability Corporation (NERC) was formed to oversee reliability standards There are ongoing efforts to upgrade the century-old electric grid New smart-grid technology that gives real time information Increased cooperation between regions

of 16 9 Electricity and Energy Security (2): Grid Modernization The smart grid will use digital technology to provide real-time data on electric system usage Most common deployment will allow two-way transfer of electricity Would present opportunity for cyber attacks or hackers Could manipulate services to consumers or otherwise disrupt the system Microgrids are separate from the main grid Powered by distributed generation (DG) small-scale power such as rooftop solar (RTS), batteries, or local generators such as combined heat and power (CHP) natural gas generators Connected with the transmission system but have the capability to operate independently Require extensive battery storage to be truly independent

Microgrids are most important for hospitals, the military, and universities with critical needs of 16 10 Costs and Benefits of Energy Security (1): Oil Price Shocks Greene (2010) puts the total impact of OPEC on the U.S. economy in 2008 at $500 billion $330 billion is transfer from consumers to producers, not a loss $150 billion in losses due to dislocation of responding to sudden price changes (approximately 1% of U.S. GDP) Oil price shocks have a diminishing effect on economies In the decades since the initial shock, countries have reduced their energy intensities, reducing vulnerability to future shocks Considering energy security as an externality (against Metcalfs recommendation)

Would add $0.10 per gallon of gasoline to the optimal Pigou tax Raises $0.83 per gallon estimate from Parry and Small (2005) to $0.93 of 16 11 Costs and Benefits of Energy Security (2): Strategic Petroleum Reserve (SPR) Started in 1975 with reserves buried in underground salt domes along the Gulf Coast Maintained by the DOE Capacity of 714 million barrels Has only been used three times IEA members released a total of 60 million barrels in 2011 Considine (2006) finds that build-ups or drawdowns of the U.S. SPR have negligible effects on the world price of oil For it to work, amounts would need to be much larger

There have been some proposals to increase capacity, but the U.S. seems to be headed in the opposite direction of 16 12 Costs and Benefits of Energy Security (3): Military Costs Delucchi and Murphy (2007) estimate the hidden externality costs of military expenditures in the production of oil Focus on how much the U.S. would reduce military spending if U.S. highway transportation did not use oil Arrive at $0.03-$0.15 per gallon Brown and Huntington (2013) estimate the oil security premium from the externality of price instability Estimate the loss in GDP due to the cost of imported oil as compared to the use of domestic oil Using 2009 prices the security premium is about 5.5% If gas sells for $2/gallon when oil is $40, the premium for imported oil adds about $0.23

of 16 13 Costs and Benefits of Energy Security (4): Electricity Outage Costs Price Value of Lost Load (VoLL) is an estimate of the cost of unsupplied electricity VoLL on a per kWh basis is the average value per kWh based on forgone consumer surplus if an outage were to occur Demand Supply Consumer

Surplus (CS) Market Price We expect it to greatly exceed the price given an inelastic demand curve Electricity Consumption (EC) of 16 Quantity 14 Costs and Benefits of Energy Security (5): Outage Costs: Cont. Praktiknjo, Hhnel, and Erdmann (2011) use a macro approach that gives estimates for residential, commercial, and industrial customers

Considers the probability of different household activities (cooking, using computer, watching TV, etc.) Also uses the value of time as a function of wage rate For commercial and industrial customer the loss is the monetary value of forgone production Estimates are 15.7 Euro/kWh for residential, 2.5 Euro/kWh for industrial, and 6.06 Euro/kWh for commercial customers Shows that outages may hurt residential customers more than others There is also heterogeneity within sectors Hospitals may have a high VoLL if they have no alternative source of energy Alternatively, many hospitals do have alternative energy sources and may therefore have a low VoLL of 16 15 Costs and Benefits of Energy Security (6): Smart Grid The current electric grid does not meet the needs of a restructured electricity industry where there are opportunities for competition Also does not provide for two-way transfers of renewable energy

Smart grids can meet these needs as well as supply energy security by reducing the number and duration of outages Electric Power Research Institute (2011) CBA Benefits of $600 billion vs. $120-$170 billion in costs Joskow (2012) suggested that EPRI used too high of a VoLL However, $5-$10 per kWh does not seem out of line with the previous slides estimates of 16 16

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