Hidden Costs of Energy Unpriced Consequences of Energy Production and Use (2010) / Chapter Skim
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6 Infrastructure and Security
6 Infrastructure and Security
Pages 309-336
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From page 309... ...
In particular, we consider disruption externalities in the electricity-transmission grid, the vulnerability of energy facilities to accidents and possible attack, the external costs of oil consumption, supply security considerations, and national security externalities. Where possible, we quantify the externalities that we identify.
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. The optimal price to internalize this externality would include this marginal damage (unless the costs of implementing such a pricing scheme exceed the benefits)
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From page 311... ...
The most striking observation from Table 6-2 is that smaller commercial businesses are most vulnerable to outages and power-quality disturbances, especially the latter. Assuming for the purpose of discussion that the estimates of average damage per kWh consumed are over-estimates of these damages in the commercial and industrial sectors by, say, an order of SAIFI is the System Average Interruption Frequency Index -- the average number of interruptions a customer experiences in a year.
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312 TABLE 6-2 Estimates of the Average Cost of Outagesa,b Source Estimate of Cost of Outages per kWh Method Used for Estimate Lawton et Averages over all U.S. regions (costs vary by region)
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Commercial Power $2,800-$9,100 $0.038- Thus, the estimates of average cost per kWh are significantly over quality $0.13 estimated for the larger establishments. Outages $1,200-$2,300 $0.016 $0.03 Industrial Power $9,400-$25,000 $0.0069 quality $0.018 Outages $4,800-$8,500 $0.0036 $0.0062 NOTE: Estimates for the residential sector have probably been under-estimated, and for the commercial and industrial sectors, they have probably been over-estimated.
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From page 314... ...
As previously noted, these numbers measure average damages per kWh consumed rather than marginal damages. Not all damages are congestion-related network-disruption damages.
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From page 315... ...
costs. The transition toward more competitive power markets has resulted in declining reserve capacity because producers are striving to minimize their costs; this situation reflects the lack of adequate incentives to improve power reliability. Social costs exceed private costs to the extent that disruption affects customers in other regions, and out-of-region impacts are not taken into account by system operators. Reserve capacity is the amount of generating capacity in excess of capacity required for electricity needs at any time.
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From page 316... ...
This is an example where technological innovation can reduce or eliminate externalities. FACILITY VULNERABILITY TO ACCIDENTS AND ATTACKS The United States has over 1.5 million miles of oil and gas pipelines, 104 operating nuclear plants, 9 liquefied natural gas (LNG)
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. In this context, the apparent risk of accidental injury, death, or property damage is small.
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For example, the report provides estimates of the size of a pool fire from different sizes of holes of a tanker breach, the size of the pool, the distance of thermal hazards, and the burn time. This information could be combined with data on population density and on monetary damages of death, injury, and property loss to quantify this externality at least for specific locations.
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Oil is stored in a variety of facilities where spills are possible. A number of highly publicized oil spills have occurred in the previous two decades that have increased the public's awareness of the ecological harm and other damages that such spills can cause.
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estimated average damages but assumed they were a proxy for marginal damages. A convex damage function using average damages underestimates marginal damages.
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Even if marginal damages were four times the average damages due to convexity in the damage function, the marginal damages would only be raised to 6 cents per barrel of oil.
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highly volatile liquid releases of five barrels or more or other liquid releases of 50 barrels or more, or (4) liquid releases resulting in an unintentional fire or explosion (BTS 2009)
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, there are several potential external costs associated with the potential for a nuclear accident. Unlike the situation with other potential damages associated with nuclear technologies, these possibilities are distinctive in that two well-studied accidents have already occurred (Three Mile Island and Chernobyl)
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The Price-Anderson Act regulates and establishes insurance pools and limits liability for the nuclear industry. The act, enacted in 1957 and revised in the Energy Policy Act of 2005, requires all commercial nuclear power plants to carry liability insurance in the amount of $300 million.11 In the event of an accident that creates losses in excess of $300 million, each commercially active reactor is to be assessed an amount up to $95.8 million (payable over several years with annual payments capped at $15 million)
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From page 325... ...
but is likely to underestimate the total externality, as it excludes the expected value of damages exceeding $300 million per incident. EXTERNAL COSTS OF OIL CONSUMPTION The United States is a large consumer of oil.
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Rising oil prices, however, offset the declining physical intensity; thus, the value of oil consumption in GDP is projected to remain at about 2% (although down from its anomalous level of 3.6% in 2007 and the sharp run-up in prices that year)
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The literature on monopsony power takes as its point of departure the observation that the United States is a large consumer of oil. As such, any policy to reduce domestic oil demand reduces the world oil price and benefits the United States through lower prices on the remaining oil it imports.
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From page 328... ...
Such a "beggar thy neighbor" policy has been justified on the grounds that OPEC is artificially inflating world oil prices at the expense of consuming nations and that the exercise of monopsony power is a countervailing policy. Disruption costs have also been identified as a cost that is not incorporated into the price of oil.
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From page 329... ...
noted that the exercise of monopsony power is an example of a pecuniary externality designed to shift wealth from one nation to another.17 They pointed out that the existence of market power on the part of energy producers complicates the analysis slightly. For one thing, market power leads to the creation of rents that transfer wealth from energy-consuming to energy-producing countries.
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The literature on the oil premium and the oil disruption component focuses on measuring the relationship between incremental oil consumption and its effect on disruptions to economic activity. We believe that oil disruption costs are not an externality.
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The committee discusses these issues in this section. Energy and Foreign Policy Considerations High oil prices provide a source of revenue for countries with foreign policies at odds with the United States (for example, Iran and Venezuela)
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One could argue, for example, that high oil prices through the latter half of 2008 rendered economic sanctions on Iran for its nuclear activities ineffective.22 Dependence on foreign energy sources may constrain U.S. foreign policy.
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reported that analysts generally do not include this cost in any exercise to measure an oil premium for two reasons. First, it is difficult to disentangle military spending for such political goals as reducing terrorism or providing support for Israel from spending to protect oil supply routes.
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Nuclear Regulatory Commission. During the cold war, the Nuclear Regulatory Commission developed plans to protect sites from "enemies of the United States" based on "designbased threat" scenarios contained in a series of classified documents, but not until after 9/11 did the reference point change to consider nuclear waste as potential materials for harm -- probably one of the reasons for legislative progress since that time, most notably the Energy Policy Act of 2005 (EPACT)
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From page 335... ...
Certainly, the net upgrade of security requirements brought about by EPACT and other post-9/11 Nuclear Regulatory Commission changes has internalized some of the costs. However, because taxpayers presumably bear some of the costs in the event of a high-cost security incident (through an implicit commitment to compensate victims of the event through government relief)
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We also find that sharp and unexpected increases in oil prices adversely affect the U.S. economy.
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