Essays on Economic Challenges to Renewable Energy Integration

188 pagesAs awareness regarding the adverse climate and health impacts of fossil-based energy sources grows around the world, so does the need for rigorous evaluation of possible interventions aimed at promoting the use of renewable energy alternatives. The introduction of renewable resources often creates unforeseen tensions because they differ from the fossil-based energy sources they replace either in physical composition (as in the case of biofuels) or due to the nature and timing of their production (as in the case of renewable electricity sources). In this dissertation, I use numerical simulation methods and experiments to study two such challenges in detail—blending constraints for biofuels in transportation and contracts aiming to address solar-induced peaks in electricity demand. The analyses developed here aim to inform regulatory decision making by quantifying the potential challenges and highlighting previously undocumented effects of renewable energy integration. This dissertation consists of three essays. The first two chapters study the market effects and incidence of a physical constraint on biofuel blending; the so called “ethanol blend-wall”. The existence of this constraint substantially affects the chosen compliance channels and hence welfare implications of the Renewable Fuel Standards (RFS) which mandate the use of biofuels in transportation in the US. The third chapter provides experimental evidence for the existence of a “control premium” (an intrinsic preference for retaining control over a decision right above and beyond its instrumental value) in a context relevant to solar electricity integration: due to the timing of solar production, an increasing share of solar generation exacerbates demand peaks in the early evening relative to demand during the surrounding hours. Peak demand creates the need for costly short-term generation capacity which is often associated with higher marginal costs and increased emissions. One demand-side tool to address these peaks are Direct Load Control (DLC) contracts which strive to reduce or shift peak electricity demand by compensating consumers for granting utilities the right to turn off certain appliances remotely in times of tight supply. However, I experimentally show that the compensation which consumers require to adopt this type of contract exceeds the value of the usage benefits they forgo due to an intrinsic preference to retain control. The first chapter, “Demystifying RINs: A Partial Equilibrium Model of U.S. Biofuels Markets,” co-authored with David Just, examines the available compliance channels under the RFS and highlights how their relative use depends on the prevailing mandate requirements. As market pressures increase due to rising total renewable mandates in the presence of binding ethanol infrastructure constraints, the simulation results provide evidence for two important compliance channels not usually emphasized in the literature: overage from nested mandate categories and a contraction of the market for low-ethanol blend fuels such as E10 in order to reduce the overall compliance base. In fact, I show that the overall markets for motor gasoline and diesel fuel may contract in order to accommodate the mandates. In addition, the paper studies the price formation of the main mandate compliance instrument, so called Renwable Identification Numbers (RINs), and points out important inconsistencies in the usual practice of equating the price of RINs to the gap between ethanol supply and demand evaluated at the mandate level. The second chapter, “Who Will Pay for Increasing Biofuel Mandates? Incidence of the Renewable Fuel Standard Given a Binding Blend Wall,” coauthored with David Just and Harry de Gorter, extends this analysis to study the resulting welfare implications. This analysis fills an important gap in the literature by explicitly taking the nested mandate structure and joint compliance into account. We show that these two regulatory features effectively create a dual link between gasoline and diesel markets with the result that the cost of increasing biofuel mandates given a binding ethanol blend wall falls disproportionately on diesel fuel consumers. This result is likely to have significant general equilibrium ramifications through indirect channels such as inflation since the main consumers of diesel fuel in the U.S. are trucks and trains. Overall, these two chapters provide important insights into the market and welfare consequences of the ethanol blend wall which has important implications for the future implementation of the RFS. The third chapter, “Taking a Load Off: Experimental Evidence of Preferences for Control with an Application to Residential Electricity Demand,” uses a novel experimental design to show that intrinsic preferences for control can significantly impact the rewards required to encourage consumers to participate in DLC-style contracts. My findings relate to earlier work outside of the energy domain showing that individuals value retaining control over payoffs or delegation rights above instrumental value. This paper makes important contributions to both the behavioral economics literature and the literature on the cost and effectiveness of demand response programs. First, I provide evidence for the existence of a control premium in a novel experimental setting that speaks directly to the energy context. More broadly, my findings apply to instances of interruptible service or non-price rationing in which the reliability of service differs between consumers depending on their contract choices, such as the quality of alternative WIFI options in a hotel. Unlike existing research on the acceptability of DLC contracts, this result is based on incentive-compatible decisions in a controlled laboratory environment. Second, I replicate earlier findings regarding the sensitivity of control premia to stake size. Third, I extend the literature by testing whether control premia respond to probabilities: while existing research focuses on one-shot delegation settings, I allow the probability of losing control to vary within subject. Lastly, I explore whether individuals exhibit an endowment effect with respect to control, i.e. whether increasing the probability of losing control triggers a stronger emotional response than regaining a commensurate amount of control. I find that participants, on average, exhibit a control premium of 9-32%, and are sensitive to both the stakes and probability of losing control