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Frank Felder and Alexander Glaser, Topics in Energy Engineering, Economics, and Policy Course Outline, 34:970:670:01 (Rutgers) and MSE 527/MAE 537/WWS 586g (Princeton), Spring 2011 January 23, 2011

Topics in Energy Engineering, Economics, and Policy

Frank Felder and Alexander Glaser Thursdays, 9:30­11:45 a.m., starting February 3 in Doolittle A102 (Rutgers) and Wallace 001 (Princeton)

Frank Felder, PhD Edward J. Bloustein School of Planning and Public Policy Rutgers University Office 249 33 Livingston Ave New Brunswick, NJ 08901 Web: www.policy.rutgers.edu/ceeep Voice: +17329325680 ext. 670 [email protected] Alexander Glaser, PhD Department of Mechanical and Aerospace Engineering and Woodrow Wilson School of Public and International Affairs Princeton University Engineering Quadrangle D434 Olden Street Princeton, NJ 08544 Web: nuclearfutures.princeton.edu Voice: +16092585692 [email protected]

Course Description This course explores indepth several important energy topics that integrate engineering, economics, and policy. It is designed for doctoral students in the natural sciences, engineering, and social sciences that have been exposed to a wide range of energy topics, perhaps as part of a National Science Foundation Integrative Graduate Education and Research Traineeship Program (IGERT), and are interested in investigating further some of those topics. After reviewing important analytical tools used in engineering, economic and policy evaluations, the course covers the engineering, economics and policy of the electric power grid and global energy integrated energy assessment modeling. Students will engage in computer modeling to understand and explore future global energy and environmental problems. Course Texts Required: · F. Felder, Indepth Introduction to Electricity Markets, World Scientific. Draft text will be provided to students. · W. Nordhaus, A Question of Balance: Weighing the Options on Global Warming Policies, Yale University Press, New Haven, CT, 2008. Available for download at nordhaus.econ.yale.edu/Balance_2nd_proofs.pdf 1

Frank Felder and Alexander Glaser, Topics in Energy Engineering, Economics, and Policy Course Outline, 34:970:670:01 (Rutgers) and MSE 527/MAE 537/WWS 586g (Princeton), Spring 2011 January 23, 2011

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Recommended: · R. de Neufville, Applied Systems Analysis: Engineering Planning and Technology Management, McGrawHill, 1990. Supporting texts (in addition to other references noted below): · D. Kirschen and G. Strbac, Fundamentals of Power System Economics, Wiley, 2004. Eaccess (Princeton): site.ebrary.com/lib/princeton/docDetail.action?docID=10113950 · W. Li, Risk Assessment of Power Systems: Models, Methods, and Applications, Wiley, 2005.

Eaccess (Princeton): site.ebrary.com/lib/princeton/docDetail.action?docID=10114114

R. Dellink, GAMS for EnvironmentalEconomic Modelling, Reader, Wageningen University, April 2009. Available for download at www.enr.wur.nl/UK/gams/

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Eaccess and download: www.knovel.com/knovel2/Toc.jsp?BookID=2107

N. Rau, Optimization Principles: Practical Applications to the Operation and Markets of the Electric Power Industry, Wiley, 2003.

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Additional readings will be provided throughout the semester.

F. Schweppe, M. Caramanis, R. Tabors, and R. Bohn, Spot Pricing of Electricity, Kluwer Academic Press, 1988. Recommended readings on the GAMS system: R. E. Rosenthal, A GAMS Tutorial, Chapter 2 in the GAMS User's Guide. Available for download at www.gams.com/dd/docs/bigdocs/GAMSUsersGuide.pdf

Websites · Harvard Electricity Policy Group: www.hks.harvard.edu/hepg · GAMS for Environmental Economic Modelling: www.enr.wur.nl/UK/gams · Energy Modeling Forum: emf.stanford.edu Grading · 30% weekly problem sets · 20% take home midterm, due March 31, 2011 · 35% final paper, due May 9, 2011 (15­20 pages)

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Frank Felder and Alexander Glaser, Topics in Energy Engineering, Economics, and Policy Course Outline, 34:970:670:01 (Rutgers) and MSE 527/MAE 537/WWS 586g (Princeton), Spring 2011 January 23, 2011

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15% class participation including presentation of draft final paper

Course Schedule Week 1 (February 3): Motivation and Overview: Integrating Energy Engineering, Economics, and Policy Instructors: Felder and Glaser Our first session will give an overview of the course. The first part takes a bottomup approach to energy issues and introduces various analytical tools to analyze hard energy and environmental problems with a focus on the electric power system (Felder). The second part of this course follows a topdown analysis emphasizing integrated assessment models, which are used to develop energy scenarios and to analyze the economic impacts of climate change. This overview session will also include a brief introduction to the General Algebraic Modeling System (GAMS), a programming environment that can help solve many problems in this field (Glaser). Readings: · W. Hogan, Electricity Wholesale Market Design in a Low Carbon Future, Draft, January 23, 2010. Available at ww.hks.harvard.edu/fs/whogan/Hogan_Market_Design_012310.pdf · F. Felder and R. Haut, "Balancing Alternatives and Avoiding False Dichotomies to Make Informed U.S. Electricity Policy", Policy Sciences, 41, 2008, pp. 165­180. · World Energy Outlook 2010, Executive Summary, International Energy Agency, Paris, November 2010. Available at www.worldenergyoutlook.org/docs/weo2010/WEO2010_ES_English.pdf · America's Energy Future, Overview and Summary, Technology and Transformation, 2010. · W. Nordhaus, A Question of Balance, Chapter 1, pp. 1­29. Recommended further reading: · Summary for Policymakers of Climate Change 2007: The Physical Science Basis, Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, 2007. Available at www.ipcc.ch/pdf/assessmentreport/ar4/wg1/ar4wg1spm.pdf

Available at www.nap.edu/napcgi/report.cgi?record_id=12943&type=pdfxsum

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Frank Felder and Alexander Glaser, Topics in Energy Engineering, Economics, and Policy Course Outline, 34:970:670:01 (Rutgers) and MSE 527/MAE 537/WWS 586g (Princeton), Spring 2011 January 23, 2011

Week 2 (February 10): Engineering Economics Instructor: Felder This week covers the basics of engineering economics, which is the study of the time value of money and its implications to capital investments and other projects, and will also present these ideas in a financial and business context. It will then apply the concepts developed to calculating the costs of different electricity generation technologies as the first step in analyzing and comparing them. We will also cover the limitations of this approach to motivate the use of optimization and welfare economics to examine further the comparison of generation and other technologies. a. Time value of money: discount rate, present value, future value, internal rate of return, and net present value b. Weighted average cost of capital and the capital asset pricing model c. Different electricity generation technologies (hydroelectric, nuclear, coal, combined cycle, combustion turbine, cogeneration/combined heat and power, wind, solar, biomass, fuel cells) and their cost structures (capital, fuel, operations and maintenance, environmental emissions) d. Levelized cost of electricity and sensitivity analysis Readings: · J. Watts, Jr. and R. Chapman, Engineering Economics.

Available at www.fire.nist.gov/bfrlpubs/build02/PDF/b02155.pdf

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Week 3 (February 17): Introduction to Optimization Theory Instructor: Felder Optimization theory is a powerful tool to investigate solutions to problems within and outside the energy arena. This week introduces various types of optimizations problems focusing on their formulation although some discussion of solution techniques will be included. Unconstrained vs. constrained and deterministic vs. 4

or see any basic textbook on engineering economics, e.g., R. de Neufville, Chapters 11 and 13 R. Brealey and S. Myers, Principles of Corporate Finance, 4th Edition, McGraw Hill, 1991, pp. 407­408 and pp. 465­477 J. Deutch and R. Lester, pp. 57­61. It is recommended to flip through the entire text to understand different energy technologies.

Frank Felder and Alexander Glaser, Topics in Energy Engineering, Economics, and Policy Course Outline, 34:970:670:01 (Rutgers) and MSE 527/MAE 537/WWS 586g (Princeton), Spring 2011 January 23, 2011

stochastic optimization problems will be discussed. Specific topics include Lagrange multipliers, linear programming, and nonlinear programming. Readings: R. de Neufville, Chapters 4, 5, 6, and 8 Week 4 (February 24): Microeconomic Theory Instructor: Felder This week develops the key microeconomic concepts that are needed to analyze the electric power grid as well as many other energy related problems. We start with production by introducing the production cost function, learning curve and economies of scale. Then the social welfare maximization problem is discussed along with the strengths and weaknesses of using markets as a means to use efficiently society's resources. a. Production cost function: capital, labor and fuel costs (e.g., CobbDouglas function) b. Learning curve and economies of scale c. Marginal analysis d. Social welfare analysis/ (supply and demand analysis and producer and consumer welfare) e. Efficient markets and sources of inefficiency (externalities, public goods, asymmetric information, market power) f. Role of economic incentives Readings: · R. de Neufville, Chapters 2 Any good introductory textbook on microeconomics should suffice, e.g.: · R. Pindyck and D. Rubinfield, Microeconomics, 2nd Edition, Macmillian, 1992, Chapters 1, 2, 6, 7, and 8 Week 5 (March 3): Applying Economic Theory to Electric Power Systems Instructor: Felder This week begins the integration and application of the engineering and economic tools that we have been developing to the electric power system. First, how large 5

Frank Felder and Alexander Glaser, Topics in Energy Engineering, Economics, and Policy Course Outline, 34:970:670:01 (Rutgers) and MSE 527/MAE 537/WWS 586g (Princeton), Spring 2011 January 23, 2011

scale electric power systems are designed and operated is presented. Then three optimization problems starting with the shortest timescale to the longest along with comparisons between marketbased approaches and regulated ones to their solution are discussed. a. Engineering of electric power systems b. The dispatch problem c. The unit commitment problem d. Generation and transmission expansion planning e. Comparison of market versus regulated approaches to addressing these three problems Readings: F. Felder, InDepth Introduction to Electricity Markets, Chapters 1­4 (provided by instructor) Week 6 (March 10): Electricity Markets: Merits and Demerits Instructor: Felder It has only been over the last twenty years that the electric power industry has replaced much but not all of its regulated structure with electricity markets. This week compares the strengths and weaknesses of imperfect markets with imperfect regulation given society's objectives of an efficient, reliable and equitable power system. a. Costofservice regulation vs. electricity markets b. Market power c. Environmental externalities d. Demand response e. Transmission congestion f. Equity Reading: Pindyck and Rubinfeld, Chapters 9, 10, and 18 F. Felder, Examining Electricity Price Suppression, mimeo, 2011 (provided by instructor) 6

Frank Felder and Alexander Glaser, Topics in Energy Engineering, Economics, and Policy Course Outline, 34:970:670:01 (Rutgers) and MSE 527/MAE 537/WWS 586g (Princeton), Spring 2011 January 23, 2011

See also: P. Joskow and R. Schmalensee, Markets for Power, MIT Press, 1988 SPING BREAK MARCH 17 TAKEHOME MIDTERM DUE MARCH 31 Week 7 (March 24): Electricity Markets: Reliability Analysis Instructor: Felder Up until now, we have considered the electric power system primarily as a deterministic system, not accounting for random events. In particular, we must examine how to determine and manage the reliability of the grid. In this week, we develop some of the analytical approaches to reliability analysis and discuss the impact electricity markets have on reliability. a. Loss of Load Probability (LOLP) b. One time in ten years reliability requirement c. Markov chains and Monte Carlo analysis d. Independent and dependent failures e. Markets for reliability and their analytical relationships to other marketlike mechanisms f. The implication of electricity markets on reliability Readings: · F. Felder, "Incorporating Resource Dynamics to Determine Generation Adequacy Levels in Restructured Bulk Power Systems," KIEE International Transactions on Power Engineering, Vol. 4A, No. 2, June 2004, pp. 100­105 · F. Felder, " `An Island of Technicality in a Sea of Discretion': A Critique of Existing Electric Power Systems Reliability Analysis and Policy," The Electricity Journal, Volume 14, Number 3, April 2001 · A. Jaffe and F. Felder, "Should Electricity Markets Have A Capacity Requirement: If So, How Should It Be Priced?," The Electricity Journal, December 1996 TAKEHOME MIDTERM DUE MARCH 31 7

Frank Felder and Alexander Glaser, Topics in Energy Engineering, Economics, and Policy Course Outline, 34:970:670:01 (Rutgers) and MSE 527/MAE 537/WWS 586g (Princeton), Spring 2011 January 23, 2011

Week 8 (March 31): Integrated Assessment Models: Introduction and the DICE Model Instructor: Glaser Integrated assessment models (IAM) use the tools of economic and mathematical modeling to analyze the economic impacts of climate change and to determine the effectiveness of energy policies in mitigating this challenge. Basic models link aggregate (global) economic growth with simple climate dynamics; more extensive models consider separate regions of the world and explicitly include different fossil and nonfossil energy sources. IAM are used to answer questions like: How sharply do carbon emissions have to be reduced to achieve a specified target? What is the best time profile for these reductions? How high does the price of carbon have to be to achieve a certain emissionreduction target? What is the optimum energy portfolio to achieve this target? And, ultimately: What is the best policy to mitigate climate change? This week, we will introduce and discuss in more detail the elements of the Dynamic Integrated Climate and Economy (DICE) model, which has been developed by William Nordhaus at Yale University. We will use this model to run a series of businessasusual and carbonstabilization scenarios to explore some of the issues that are relevant to the climate and energypolicy debate today. Readings: · E. A. Parson and K. FisherVanden, "Integrated Assessment Models of Global Climate Change," Annual Review of Energy and the Environment, 22, 1997, pp. 589­628. · W. Nordhaus, A Question of Balance, Chapters 2­5, pp. 30­115. · L. Clarke, J. Edmonds, V. Krey, R. Richels, S. Rose, M. Tavoni, "International Climate Policy Architectures: Overview of the EMF 22 International Scenarios, Energy Economics, 31, Supplement 2, December 2009, Pages S64­ S81. Week 9 (April 7): Special Topics in Modeling the Future of Energy and Climate Change, Part I Instructor: Glaser Based on selected results obtained with DICE and other integrated assessment models (IAM), we will examine special topics relevant to assessments of energyuse and climate change. In this first part, we will critically review the assumptions about economic growth, energy demand, and energy resources, which together determine many aspects of energy scenarios. We will also explore the particular roles that energy technologies and technological change play in this regard. One particular aspect of the discussion will be the relevance of backstop technologies in IAM. 8

Frank Felder and Alexander Glaser, Topics in Energy Engineering, Economics, and Policy Course Outline, 34:970:670:01 (Rutgers) and MSE 527/MAE 537/WWS 586g (Princeton), Spring 2011 January 23, 2011

Readings: · Executive and Technical Summaries of Scenarios of Greenhouse Gas Emissions and Atmospheric Concentrations, SubReport 2.1A, U.S. Climate Change Science Program and the Subcommittee on Global Change Research, Department of Energy, Washington, DC, 2007. www.climatescience.gov/Library/sap/sap21/finalreport/sap21afinalall.pdf · Richard G. Richels and Geoffrey J. Blanford, "The Value of Technological Advance in Decarbonizing the U.S. Economy," Energy Economics, 30 (6), November 2008, Pages 2930­2946. · FURTHER READINGS TO BE ADDED Week 10 (April 14): Special Topics in Modeling the Future of Energy and Climate Change, Part II Instructor: Glaser In the second part of the specialtopics section, we will examine broader questions relevant to energy scenarios, the broader energy debate, and the development of effective energy policies. Among the issues are the choice of discount rate and the question of intergenerational equity, decisionmaking under uncertainty, and the balance between damage mitigation and adaptation including, for example, the possibility of geoengineering. We will also discuss the limits of predicting energy futures, which could ultimately be determined to a large extent by tipping points and "blackswan" events. Readings: · W. Nordhaus, A Question of Balance, Chapter 9, pp. 165­191. · FURTHER READINGS TO BE ADDED · T. M. Lenton, H. Held, E. Kriegler, J. W. Hall, W. Lucht, S. Rahmstorf, and H. J. Schellnhuber, "Tipping Elements in the Earth's Climate System," Proceedings of the National Academy of Sciences, 105 (6), 12 February 2008, pp. 1786­ 1793. · R. H. Socolow and M. R. English, "Living Ethically in a Greenhouse," Chapter 8 in D. G. Arnold (ed.), Ethics of Global Climate Change, Cambridge University Press, 2011.

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Frank Felder and Alexander Glaser, Topics in Energy Engineering, Economics, and Policy Course Outline, 34:970:670:01 (Rutgers) and MSE 527/MAE 537/WWS 586g (Princeton), Spring 2011 January 23, 2011

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Further (advanced) readings: · W. Nordhaus, Economic Aspects of Global Warming in a PostCopenhagen Environment, Proceedings of the National Academy of Sciences, 107 (26), 29 June 2010, pp. 11721­11726. · M. L. Weitzman, "A Review of the The Stern Review on the Economics of Climate Change," Journal of Economic Literature, 45 (3), September 2007. ·

Eaccess: pubs.aeaweb.org/doi/pdfplus/10.1257/jel.45.3.703 Also available at www.economics.harvard.edu/faculty/weitzman/files/JELSternReport.pdf

S. Chakravarty, A. Chikkatur, H. de Coninck, S. Pacala, R. Socolow, and M. Tavoni, Sharing Global CO2 Emission Reductions Among One Billion High Emitters, Proceedings of the National Academy of Sciences, 106 (29), 21 July 2009, pp. 11884­11888. F. Felder, C. Andrews, and S. Hulkower, "Global Energy Futures and Their Economic and Environmental Implications," in Energy Sustainability and the Environment: Technology, incentives, behavior, Fereidoon P. Sioshansi (ed.), Elsevier Press, forthcoming (provided by instructors).

G. Heal, "The Economics of Climate Change: A PostStern Perspective, Climatic Change, 96 (3), 2009, pp. 275­297.

Weeks 11­12 (April 21 and 28): Course Wrapup and Student Presentations Instructors: All TBD. FINAL PAPER DUE MAY 9

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