Econ 3391

Prof. Richard L. Sweeney

(print this presentation)

Energy is important

  • US spends almost $1 trillion on energy each year

  • Moreover, energy is essential for modern life

  • Integral for economic development too

  • Therefore, sense in which it is going only going to become more important over time

One goal of this course is to simply provide an introduction to these important markets

Main energy use categories


Home energy use


Keeping prices down is important


At the same time, energy markets need to be regulated

Two classic economic justifications for regulation:

  1. Market power

  2. Externalities from energy production/ consumption

These are textbook market failures:

All economists agree regulation can increase welfare

Many energy markets are imperfectly competitive

Certain aspects appear to be natural monopolies


Last four decades characterized by deregulation

  • Historically prices were set by the government

  • By 1970's, regulatory inefficiency was increasingly apparent

    • Nuclear power plants coming in way over cost
    • Gasoline and natural gas shortages common
  • Electric power deregulation

    • PURPA (1970s)
    • Wholesale markets (1990's)
  • Natural gas wellhead prices deregulated (1978 - 1985)

  • Oil price controls removed (1981)

Deregulated markets do not always perform well


Source: Bushnell, Mansur and Saravia (2008)

How much regulation is optimal?

  • What are the costs of imperfect competition in energy markets?

    • Want to know what will happen to prices, jobs, innovation, etc.
    • Can we quantify the gains or deregulation?
  • Which segments of energy markets shouldn't be deregulated?

  • Which markets / firms should be broken up more?

Energy production and consumption also associated with many social costs


BP Oil Spill, Gulf of Mexico, 2010

Many of these costs are externalities

An externality exists when the consumption or production choices of one person or firm enter the utility or production function of another entity without that entity's permission or compensation.

From a social perspective, negative externalities will be oversupplied by the market.

In this context, economists universally agree that regulation correcting this market failure can improve welfare.

Local air pollution is currently the most costly externality


Good evidence that it increases mortality and morbidity rates, reduces property values, and even impacts test scores or worker productivity

Going forward the biggest challenge is climate change


Global combined land and ocean surface temperature anomalies relative to the average from 1986 to 2005. (IPCC 2014)

Trend concurrent with dramatic increase in CO2


Well known physical relationship

Humans are causing it; energy is the main driver


Things are going to get a lot worse if we don't act


Current CO2 equiv. concentrations \approx450 ppm

Recent IPCC report predicts dire consequences

Good News: Basic outline of a solution is well known

  • Reduce / reverse rate of deforestation

  • Change industrial production processes (example: cement production)

  • Switch essentially all energy use to electric power

    • heating
    • transportation (!)
  • Decarbonize electricity production as fast as possible

    • shut down coal plants [carbon capture and storage]
    • switch to wind and (mainly) solar
  • Increase energy efficiency of durables (ACs, water heaters, etc)

We're making progress, but not fast enough


Wind and solar now at parity in many locations


2020 US LCOE ($/MWh), from BNEF

Challenge #1: Timing and Intermittency


Challenge #2: Renewables low energy-density

  • Apple recently built a 20MW solar farm in data
  • Takes up 100 acres
  • Typical coal plant 10-20 times more output...

How should we alter energy systems to meet our environmental goals?

  • How much will it cost to make our energy system ``greener''?

    • How much higher will energy prices be?
    • What infrastructure investments do we need?
  • How should the we meet our CO2 targets?

    • renewable energy? innovation? efficiency?
    • Should we focus on the short or long run?

Answer to these questions depends largely on what happens to hydrocarbon and transportation markets

US currently undergoing an oil and gas boom


Source: Forbes

Gas production in the US had been flat for decades


Hydraulic fracturing also involves many negative externalities


Cheap oil also affecting transportation markets

How beneficial are EVs?

Exciting and important time to study energy

We'll take an economic approach to answering these questions

  • Need to understand context
    • some unique features complicate standard prescriptions
    • we'll review important institutional details
  • Use economic theory
    • understanding (and harnessing) incentives is essential for efficient regulation
    • must think on the margin!

Theory and engineering are important, but many policy questions are empirical

  • Use modern, rigorous empirical methods
    • Emphasis on causality
    • what can be said with the available data?
  • Study recent, rigorous, policy-relevant empirical literature
    • Emphasize methods employed (and how they relate to the policy question) as well as results
  • Use what you've learned to identify and answer your own energy policy question

Course logistics

  • Slides will be hosted on my website:

  • syllabus

  • Group "A" in person next Tuesday. Will send out groups and seats tomorrow.

  • First required reading due. Remember to submit a short response.