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Economic Currents

Keep up to date with the latest UHERO news.

UHERO 101.10: The Confusing World of PV

This UHERO 101 intends to clarify some of the rate and policy aspects of PV in Hawai‘i, and explores the two opposite driving forces of PV adoption.

PV is an attractive investment in Hawai‘i where electricity rates are almost four times the national average. Rising electricity prices and falling system costs have largely driven the installation trend, with installations roughly doubling annually since 2007. Moreover, residential PV is quite cost-effective because it’s installation costs are up to 65% subsidized. In addition, there is ongoing support of PV in the form of Net Energy Metering (NEM). NEM gives households retail rate for their unused PV generation, rather than the wholesale rates paid for other sources of energy. As such, what many do not realize is that distributed PV can actually raise electricity rates rather than lower them. While PV customers benefit from providing their own energy and selling excess electricity back to the grid, non-PV customers are consequently likely to pay relatively more. Also, although PV certainly reduces the use of fossil fuels, it is not necessarily proportionately. Since PV is an intermittent source of energy, the utility also has to run spinning reserves to ensure reliable electricity at any given time.

To add to the confusing world of PV, Hawaiian Electric Industries recently modified its policy— both the primary metric used to determine circuit saturation and the process of connecting to the utility’s power grid. Prior to September 2013, distributed PV generation was limited to 15% of peak load on each circuit that, if exceeded, required the NEM applicant to pay for an interconnection requirements study (IRS). However this limit was not enforced for smaller systems under 10 kW (i.e. residential systems). However, now the metric of daytime minimum load (DML) is used to determine circuit saturation. The policy does not distinguish between small and large systems, and requires that written consent be obtained from the utility prior to installation.1  The details are summarized as follows:

     1.    Circuits below 75% of DML are not subject to an IRS or circuit upgrades. These projects should receive notice to proceed within 35 business days.
     2.    Circuits that fall between 75-99% of DML are not subject to an IRS but may require circuit upgrades. Depending on whether a supplemental review is required in addition to the initial technical review, these projects may receive a response anywhere from 35 to 85 business days.
     3.    Circuits beyond 100% of DML may require an IRS and circuit upgrades. Completing an IRS study may take up to an additional 165 calendar days on top of the initial and supplemental review.

As a result, on one hand, the policy change has slowed down solar installations, due to circuit upgrades. For projects above 75% of DML, customers have to first wait to hear whether a circuit upgrade is necessary and then, if deemed necessary, another several months for conducting the circuit upgrade. In addition to the long waiting period, potential customers face extra costs for circuit upgrades, which are allocated on a prorated basis and divided according to the size of the systems to be installed.

At the same time, the policy change provides further motivation for those customers who have been considering a PV system and whose homes are on circuits below 75% of DML, to join the race to install PV.2 

* If you are thinking of installing PV, as an initial circuit availability check, enter your address here: http://www.heco.com/portal/site/heco/lvmsearch 

 


Source: HECO

 

-- Sherilyn Wee and Makena Coffman

 

1In the past, submitting the NEM agreement was often the last paperwork step of the installation process. Applying for the City and County building permit was usually the first step, and now is applied for only after receiving approval to interconnect. Building permit approval takes about 20 business days.

2Previous state legislative discussions on reducing or phasing out the renewable energy investment tax credits have already commenced the “race” to install PV.


Catch Shares and Implications for Hawai’i's Fishing Industry

In light of declining global fish stocks, an immediate and important concern becomes the management of our fishery resources, both to protect the delicate ecosystems that they are a part of, and to ensure their viability as an economic and food resource for generations.

A controversial new method to manage fisheries is to assign “catch shares”. That is, grant fishermen or firms the right to land a certain amount of fish in any given year. From an economic perspective, assigning these rights (often referred to as individual transferrable quotas ITQs) has two potential benefits. First, because these ‘rights’ are transferrable, individuals and firms who value these rights the most have the ability to obtain them, by purchasing them from those who value them less. Second, having a long-term right to catch a certain share of the total catch may make share holders more willing to accept short-term reductions in catch in order to reap the benefits of recovered populations in the future.

Problems naturally arise when assigning these catch shares or ITQs. For one, we are commoditizing the rights to fish in the ocean. Second, there is a thorny issue in determining exactly how and to whom the catch shares should be allocated. Getting this process correct is absolutely critical to the success of implementing catch shares as a viable solution to our overfishing woes.

We have conducted research on catch share allocations around the globe, and our findings will soon be published in Marine Policy. We investigate how fishing rights were assigned in nearly every fishery in the world and have collected this information in a freely accessible database. Learning from others' successes and failures in assigning catch shares will be critical to designing and implementing a system that works for Hawai’i.



These findings should be informative for policy makers. 54% of fisheries who implement catch shares do it on the basis of historical catch, that is, how much fish you have caught in the past. A full 91% use some sort of historical catch in their calculation methods, incorporating vessel-based rules (the size of your boat determines your allocation), auctions, and equal sharing. Interestingly, auctions – which most economists would argue to be the best method for allocating public resources – have failed to gain traction as a viable method of allocating catch shares. Just 3% of fisheries use this method, and many that have tried (Estonia, Russia, New Zealand, Chile) have either switched to different methods in the face of protest, or abandoned auctions as a mechanism in other fishery allocations.

Especially important to Hawai’i is the effect of any potential allocation system on native Hawaiian rights to their land and resources. The findings show that New Zealand first allocates 20% of their fish to their native Māori population before distributing the rest. Careful consideration must be taken to ensure that all possible stakeholders, whether they be multinational conglomerates, small local businesses or native populations, be adequately involved in the process and benefit from rights to quota-based fishing.

As Hawai’i continues to find sustainable ways to continue its fishing operations, we must be cognizant of the benefits and risks of all of our options. In understanding how catch shares have been allocated before, we can learn a lot about how they might best serve Hawai’i, if at all, in the future.

-- John Lynham and Chaning Jang*

 

*Chaning Jang is a PhD Student at UH Manoa. He assisted John Lynham in this research and in writing this blog.

READ THE WORKING PAPER

 

 


The Role of Impatience in Sustainable Growth

Sustaining economic growth requires appropriate husbandry of our natural capital resources (e.g. fish, trees, freshwater, and coral).  But how much conservation is optimal? According to proponents of "strong sustainability," natural capital should never be depleted. This is inconsistent with maximizing economic welfare however. In less developed economies, for example, depleting natural capital may be the best way for an economy to accumulate the produced capital (e.g. buildings, transportation infrastructure, and machinery) that is needed to increase the productivity of labor.

Depending on current resource stocks, optimal economic growth may require either drawing down or building up natural capital to its optimal steady state level. For non-renewable resources such as oil, this often means substituting more abundant resources (e.g. clean coal) and eventually transitioning to renewable resources such as solar energy.

In addition to balancing the uses of natural and produced capital, sustainable growth requires intergenerational equity. Simply put, this is the principle of non-discrimination against future generations. By adding the non-discrimination requirement to the problem of welfare maximization in an economy whose production is dependent upon both produced and natural capital, we get conditions for optimal and sustainable growth. As it turns out, the conditions are familiar to economists, albeit from different parts of economics. From growth theory, we have the Ramsey (1928) requirement that produced capital should be accumulated in each period until its marginal product falls to a multiple of the growth rate of consumption. In the long run, as consumption approaches its golden rule level, the target marginal product goes to zero. The same condition applies to natural capital. And from resource economics we have the extended Hotelling (1931) condition that the resource should be depleted (or accumulated) in each period until net marginal benefit of that resource -- typically the resource price minus its extraction or harvesting cost -- is equal to the marginal opportunity cost of harvest that is imposed on future generations.

This formulation contains a paradox however. If individuals are impatient, i.e. they prefer consumption now to equal consumption later, how can society impose the condition of intergenerational neutrality, i.e. require that consumption in different periods be weighted equally? This would seem to violate the condition of consumer sovereignty, i.e. the requirement that social welfare and justice should be based on individual preferences (as well as social weightings thereof). We resolve this paradox with a model of overlapping generations. This allows us to consider a representation of social justice that eschews intergenerational discrimination, while simultaneously allowing individuals to be impatient regarding their own welfare. The surprising result is that while individual impatience matters for the lifetime consumption plan of the individual, it does not matter for aggregate consumption. Optimal and sustainable growth in the aggregate is therefore still governed by the Ramsey and extended Hotelling conditions.

What does optimal and sustainable growth imply for the evaluation of environmental projects? In particular, the present values of global programs to mitigate global warming depend crucially on the project discount rate. Does intergenerational justice require that the project discount rate be zero? It does not. From principles first established by Irving Fisher around the turn of the 19th century, the project discount rate depends on the productivity of capital as well as the social rate of impatience. Even if individuals were not impatient, the inherent productivity of capital would still result in a positive interest rate. Nonetheless, intergenerational equity may indeed imply that the appropriate discount rate is small, especially if global warming and the rate of technological improvement limit growth in the very long run. Indeed Sir Nicolas Stern has suggested a rate of only 1.4% for discounting the benefits of climate mitigation.

What are the implications of intergenerational equity for the deficit and the national debt? From the Ramsey condition, deficits and debt are consistent with sustainable growth but only so long as they finance investments with positive present values. Since future generations don't vote in current elections, debt may be a politically-expedient device to transfer resources from the future to the present, even when doing so reduces the welfare of future generations more than it increases the welfare of current voters. Economists can stand against this and other perversions of democracy by rendering the intergenerational consequences of social profligacy more transparent.

-- Lee Endress, James Roumasset, and Christopher Wada

References

Endress, L., Pongkijvorasin, S., Roumasset, J., Wada, C.A., 2013. “Intergenerational Equity with Individual Impatience in a Model of Optimal and Sustainable Growth.” Resource and Energy Economics (forthcoming).

Endress, L., Zhou, T., Roumasset, J., 2005. “Sustainable growth with environmental spillovers.” Journal of Economic Behavior and Organization 58(4), 527-547.

Hotelling, H., 1931. “The economics of exhaustible resources.” The Journal of Political Economy 39, 137-175.

Ramsey, F.P., 1928. “A mathematical theory of saving.” Economic Journal 38(152), 543-559.

READ THE WORKING PAPER

 

Note: This research extends earlier work by Endress et al. (2005) and is forthcoming in the peer-reviewed journal, Resource and Energy Economics (Endress et al., 2013). For more applications of economic principles to natural resource and environmental management problems, visit UHERO’s Project Environment (link to: http://www.uhero.hawaii.edu/45/project-environment).


Hawaii's Energy Future

Last week's Asia Pacific Clean Energy Conference has focused the spotlight on Hawaii's energy future. Governor Abercrombie opened the conference with a strong commitment to installing an undersea cable between Oahu and Maui. The Blue Planet foundation unveiled their "Energy Report Card" during a keynote address by Henk Rogers. Meanwhile, recent coverage by NPR discussed switching to natural gas as an alternative to Hawaii's oil dependence. 

The Hawaii Clean Energy Initiative set the vision for the state to move toward renewable and cleaner sources of energy. There are numerous pathways and decision on the best pathway is fraught with debate.

The Governor's comments juxtaposed to strong resistance to the undersea cable suggests that there needs to be on-going discussion of what energy portfolios will likely emerge in separated versus linked islands scenarios - including environmental and economic impacts.

Moreover, there is also concern over the high cost of energy. As many renewable sources are still relatively costly (or difficult to locate) there is also consideration of switching to natural gas as a "bridge fuel." The future price of liquefied natural gas is uncertain and, while it is cleaner burning than oil, there is concern that its full environmental impact is not necessarily an improvement over the status quo.

In addition, environmental groups such as Blue Planet in their "energy report card" bring up concerns about the lack of guiding policy for the transportation sector. Policies that complement transportation as well as electricity have a place in the discussion as well.

UHERO's ongoing research is looking at ways to cost-effectively achieve GHG reduction and meet the state's clean energy goals.

---Makena Coffman


The Water-Energy-Food Nexus

The water-energy-food nexus is one of the most important and fundamental global environmental issues facing the world today. The US Geological Survey estimates that the United States used 201 billion gallons per day (bgd) of freshwater for thermoelectric power generation and 128 bgd for irrigation in the year 2005. Combined, energy generation and irrigation accounted for roughly 80% of all water withdrawals over that period. At the same time, energy is a key input for the production of freshwater. A 2006 study prepared for the California Energy Commission estimated that the electricity required to process one million gallons of water in a typical urban water system ranges from 4,000 kWh per million gallons in Northern California to 12,700 kWh in Southern California, and water-related energy use comprised over 19% of total energy use in the state. Although the wide range in values suggests that water-related energy use depends on a variety of location-specific factors, the interconnectedness of the resources is clear.

As demand for each of the resources grows, examining tradeoffs will become especially important. For example, biofuels may be developing into a viable alternative to petroleum, but the implications for water resources will be considerable. The UHERO Project Environment team will be working with the Research Institute for Humanity and Nature to develop a framework capable of quantifying such tradeoffs. The project will focus heavily on coastal regions in the Asia-Pacific “Ring of Fire”. For more on economic approaches to water and energy management, visit UHERO’s Project Environment.

---Christopher Wada


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