TABLE OF CONTENTS

1. Introduction––––––––––––––––––––––––––––––––––––––––––––––––––––––– 5
2. Energy sector economic and legal analysis–––––––––––––––––––––––––––––––6
3. Targets and challenges of energy turnaroung–––––––––––––––––––––––––––––8
4. Economic analysis of energy efficiency–––––––––––––––––––––––––––––––––9
5. Transforming the energy sector–––––––––––––––––––––––––––––––––––––––12
6. The future of our energy system–––––––––––––––––––––––––––––––––––––––15
7. Energy cost effective!–––––––––––––––––––––––––––––––––––––––––––––––21
8. Inference–––––––––––––––––––––––––––––––––––––––––––––––––––––––––29
9. Bibliography––––––––––––––––––––––––––––––––––––––––––––––––––––––30

1
 RESEARCH METHODOLOGY

This project is purely Doctrinal and based on primary and secondary sources such as websites,
books, journals and internet sources. The referencing style followed in this project is BLUE
BOOK 19th Edition's format of citation. This Research process deals with collecting and
analyzing information to answer questions. The Research is purely descriptive in its boundaries
of the topic

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 Acknowledgement

I would sincerely like to put forward my heartfelt appreciation to our respected Economics
professor, Abhishek Sinha sir for giving me this golden opportunity to take up this project
regarding “Economic And Legal Analysis Of Energy Sector”. I have tried my best to collect
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information about the project in various possible ways to depict clear picture about the given
project topic.

ECONOMICS RESEARCH PROPOSAL

INTRODUCTION:

The energy sector is a category of stocks that relate to producing or supplying

energy. This sector includes companies involved in the exploration and
development of oil or gas reserves, oil and gas drilling and refining, or integrated
power utility companies including renewable energy and coal. The energy sector is
a large and all encompassing way to describe what is a complex and inter-related
network of companies that are directly and indirectly involved in the production
and distribution of energy needed to power the economy and facilitate the means of
production and transportation. Performance in the sector is largely driven by the
supply and demand for worldwide energy. Oil and gas producers will do very well
during times of high oil and gas prices, but will earn less when the value of the
commodity drops. Oil refiners, on the other hand, benefit from the falling cost of
feedstock to produce petroleum products like gasoline when crude oil prices drop.
Furthermore, this sector is sensitive to political events, which historically have
driven changes in the price of the oil. Some of the largest companies in the U.S.
energy sector include Exxon Mobil and Chevron, both of which are large
international integrated oil companies. Duke Energy Corporation is one of
America's largest electricity providers as measured by number of customers and
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Peabody Energy is America's largest coal producer measured by tons of output. All
these companies are part of what is commonly known as the energy sector. There
are a number of energy related exchange traded funds (ETFs) that afford retail
investor exposure to the sector. Investors can vary which part of the value chain
where they want exposure with any number of funds. For example, the SPDR S&P
Oil & Gas Exploration & Production ETF (XOP) gives investors exposure to the
upstream oil and gas exploration companies while the VanEck Vectors Coal ETF
(KOL) gives investors access to the coal industry. Investors wanting access to
alternative energy can invest in the Guggenheim Solar ETF (TAN). There are
many different ways for investors to gain exposure to the energy sector, depending
on their preferences and specific views about the growth and earnings prospects
across the value chain. The energy sector is bigger and more diversified than just
the oil and gas industry. Many investors feel renewable and alternative energy
sources will be important in the future as the popularity of electric cars grows.
Traditional hydrocarbon producers seem to be falling out of favor for the time
being.

RESEARCH QUESTION:

What is the “ENERGY SECTOR” and what are its economic and legal aspects?

SCOPE:

Energy Sector in India and the world, and investment opportunities in Energy
Sector.

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ENERGY SECTOR ECONOMIC ANALYSIS

People’s well-being, industrial competitiveness and the overall functioning of

society are dependent on safe, secure, sustainable and affordable energy. The
energy sector, covering extraction, production and distribution directly employs in
the EU about 1.6 million people and generates an added €250 billion to the
economy, corresponding to 4% of value added of the non-financial EU business
economy.
In the framework of the EU Sustainable Development Strategy, the European
Commission has developed energy security of supply and climate change policies
and adopted a number of regulatory measures aiming at introducing low-carbon
innovative technologies, which will ultimately impact the market structure of the
sector. The EU has also endorsed ambitious greenhouse gas (GHG) emission
reduction targets and accompanying targets for the decarbonisation of the energy
sectors.
In this complex policy context, the JRC supports relevant Commission services in
designing policies to meet those targets. This is done through the analysis of a wide
range of impacts of various policy options and of the most appropriate pathways to
achieve the energy and climate change objectives in an economically efficient
manner. To this end, the JRC develops, maintains, updates and applies a
6
quantitative toolset consisting of models of distinct scopes and levels of details,
which are then exploited in impact analysis for the European Commission1.

Targets and Challenges of the Energy Turnaround

The energy turnaround can be linked to trade‐offs between the targets of the energy
policy target triangle. The restructuring of energy supply is taking place against
the background of the classical energy policy triangle, which encompasses the
goals of environmental compatibility, supply security and economic viability.
Existing trade‐offs between energy policy targets can be moderated in the course
of the energy policy turnaround, but will partly become greater, as the discussion
over economic viability and supply security clearly shows.

In the policy debate the primarily climate‐policy motivated energy turnaround is

often overloaded with a series of additional “targets” partly of an instrumental
nature.
Although the original target of the energy turnaround lies in the
decarburiza‐ tion of the energy supply without resorting to nuclear power, in the
policy discussion it is often linked to other goals such as increases in employment
and exports. This overloading with targets limits the scope for negotiating energy
policy and jeopardizes cost efficiency. The targets generally, and in this report,

1
https://ec.europa.eu/jrc/en/research-topic/energy-sector-economic-analysis

7
described as expansion targets for renewable energies do not represent tar‐ gets in a
classical sense of the term, but instruments and are thus merely a means to an end2.

Economic analysis of energy efficiency

Saving energy is at the top of political agendas in many regions across the world.
The European Union (EU) has set itself the ambitious target of reducing primary
energy demand by 20% in 2020 as compared with a “no policy” scenario. From an
economic point of view, the motivation behind energy-saving commitments is to
address the multiple market failures that lead to an excessive use of energy. First
and foremost, using energy generates local and global pollutants, the effects of
which are not internalized in the price paid by consumers. Second, the social cost
of energy security (e.g. deterioration in the terms of trade, security expenditures
associated with energy imports) is not internalized in the domestic price of energy
in many countries. Third, despite European directives, energy is not yet
systematically priced at its competitive level by utilities in the EU.

Energy efficiency is the most consensual option to meet energy saving targets.
Many engineering studies (for instance Mc Kinsey & Co. (2009), to name only the
most impactful) have shown that it is the most cost-effective way to save energy
and carbon dioxide emissions, the pollutant that attracts most public attention. For
this reason, energy efficiency is frequently coined the “first fuel” in recent
publications by the International Energy Agency (IEA) or the European Council

2 https://www.cesifo-group.de/dms/ifodoc/docs/about/.../proj-eur-energie-sum-e.pdf

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for an Energy Efficient Economy (ECEEE), that is, one that is widely available and
at a low cost and does not face intermittency or storage challenges like most
carbon-free renewable energy sources. As a consequence, numerous policies are
being implemented to meet energy saving targets. For example, according to the
MURE database, around 550 energy efficiency policies have been or are currently
implemented in the EU, targeting households, transports, industry and the
commercial sector.
Despite the abundance of energy efficiency financing facilities being implemented
across Europe, surprisingly little is known of the economic efficiency of these
policies3.

Why the energy sector is key to India’s growth

While all eyes have been on China and its incredible economic growth in recent
years, India has been quietly catching up. Just recently, Apple CEO Tim Cook
described the country’s potential as “incredibly exciting”, and it’s a sentiment
shared by many. But if India is to live up to this potential, its growth is intertwined
with its energy sector.

Powering the Indian economy

India’s energy consumption has doubled since the year 2000 and is expected to
more than double by 2040, which will account for one-fourth of global increase in
that same period. Per capita electricity consumption in the country is less than that
of Africa’s and one-tenth of America’s levels. In fact, even though India is the
third largest market in terms of gross electricity generation, it still has almost 250
million people without access to power. Rectifying this situation will be critical to
ensure India’s economy grows five-fold by 2040 and that policies such as ‘Make in

3
http://www.lse.ac.uk/GranthamInstitute/research/economic-analysis-of-energy-efficiency/

9
India’ , ‘Skill India’ and ‘Digital India’ are a success. Energy and electricity
growth will therefore become crucial for powering the country’s future.

Building momentum

India’s government is aware of the magnitude of this challenge, and in 2014

announced a huge focus on transforming the energy sector. Only a couple of years
after this announcement, there is already evidence to suggest progress is being
made: domestic coal production is up, the country’s renewable targets have
increased, there’s been a big push for energy efficiency, for example by increasing
the use of LED lighting, and financial restructuring programmes have been
launched4.

The UDAY programme, which was recently launched, could be a game-changer

for the country as it is aimed at revitalizing and returning the buying power of the
weakest link in the electricity supply chain: the state electricity boards (SEBs).
This could result in these SEBs buying 15,000 MW of unsold power in the system
today and also providing electricity to 250 million people who do not have access
to electricity. The scheme will help the SEBs to bridge the existing latent demand
of consumers and the unsold capacity of power developers5.

The Future Of Renewables

Renewable energy will also play a huge part in India’s economic growth. If India is
to reach the target of 40% renewables by 2040, $120-130 billion dollars will be
required for the implementation of its renewable energy target of 175 GW by 2022.
The magnitude of the task can be gauged by taking a look at India’s entire
infrastructure sector debt, which is around $190 billion. India needs to go beyond
its restricted financing mechanism and look at more prudent options such as bonds,
capital markets and investment trusts or securitized loans.

Reforms that matter

Infrastructure debt funds and other tools specifically aimed at attracting finance for
low-carbon projects and high efficiency technologies, loans for a longer tenure,
and attempts to carve out renewable energy as a separate and priority sector are
some of the key measures that will help the country ramp up its capacity. Many
lenders, specifically non-financial banking companies, are still not providing long-
4
https://www.weforum.org/agenda/2016/03/why-the-energy-sector-is-key-to-india-s-growth/
5
https://www.weforum.org/agenda/2016/03/why-the-energy-sector-is-key-to-india-s-growth/

10
term loans, and tenure is restricted to 12-15 years for the renewable energy sector.
Institutions under the Ministry of Power should provide longer tenure loans of up
to 25 years, matching the asset life and power sale agreement, to make more
projects financially viable at lower tariffs and make the sector attractive for
investments.

The Modi Government’s reform push in the Indian energy sector will undoubtedly
be the catalyst for the country to become one of the fastest growing economies
globally. Electrification will ensure a brighter future for India.

Transforming The Energy Sector

You don’t have to be working in the energy sector to have noticed there are some
big changes under way. Over the past year, global conditions have continued to
challenge the sector.

The year has seen significant changes in energy prices and production – oil and gas
producers are cutting costs and are estimated to have deferred close to $400 billion
in capital expenditure. We’ve also witnessed an economic slowdown in emerging
economies, along with geopolitical change and instability, which effectively
reshuffled energy supply and demand.

At the same time, and in spite of low oil, gas and coal prices, clean energy
investments hit a record high of close to $330 billion in 2015, nearly six times
higher than in 2004, with around one-third of it in China. The COP21 agreement
could provide further impetus to growth in clean energy, as governments are
implementing policies to deliver on commitments.

But in the same way that we can’t predict the future of climate change by looking
at the weather outside, we can’t assess the energy transformation by observing only
current events. Energy markets are volatile, as history has shown.

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To make sense of these and other transformations, for the past four years, the
Forum’s Energy Architecture Performance Index has benchmarked the energy
systems of individual nations.

This year’s benchmark of 126 countries focuses in particular on energy security

and access to energy, areas which have undergone a great deal of change. The
report identifies the following three trends as key for this year:

1. The transition towards more renewable energy and diversified supplies is

creating opportunities and challenges for the security of the global energy
infrastructure. As renewables are now part of the energy portfolio and are rapidly
gaining market share, they bring along benefits such as energy mix diversification,
with distributed generation growing at a fast pace worldwide and its installed
capacity expected to more than double in the next decade. At the same time, as the
energy generation portfolio transitions and diversifies further, new challenges are
emerging, which require changes to the electric utility business model and
regulatory policies to ensure secure and reliable supply.

2. Digital disruption is creating new opportunities – but also threats. On the

one hand, technology is instrumental for realizing intelligent grids and
interconnected assets; on the other hand, it introduces new threats such as the
possibility of cyber attacks. The increasing interconnectivity and proximity of
energy systems means that conflicts can have ripple effects on energy markets and
prices. New technologies, such as batteries and grid-embedded generation, are
making the cyber security of grid systems more vulnerable. Global inexperience in
handling large-scale cyber attacks, combined with the greater capabilities of state
and non-state actors, has increased the likelihood that future wars and attacks will
have a larger cyber component.

3. The rebalancing of energy supply and demand is leading to a new global

energy security order. Recent drops in oil prices have led to a significant shift in
wealth from net oil exporters to oil importers. At the same time, the development
of unconventional sources of oil and gas, as well as the recent economic slowdown
in emerging markets such as China and India, have contributed to price
readjustments against the backdrop of a general shift in energy supply patterns.
Geopolitical shifts, the new distribution of powers and energy trade flows will

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create challenges and opportunities for energy security in the new energy
architecture6.

So which countries are already managing to turn these challenges into

opportunities? The chart below shows the 10 countries that got the best score
in the area of energy security and access for 2016.

It is worth mentioning that only two countries out of the 10 in the list are energy
exporters (Norway and Canada). All the other countries managed to make it into
the top 10 even though they depend on outside supplies to fulfill their energy
needs. This was possible thanks to their stable geopolitical situation and by a
varied energy sources mix made up of both domestic supply and diversified
imports.

But being a leader in energy security today does not mean this competitive
advantage will carry through to the future. Tomorrow’s winners will be those who
successfully manage two key transitions: from a technology standpoint, their
operators must be able to benefit from digital innovation while at the same time
building up a solid defence to cyber attacks. From a legal framework standpoint,
their structures will have the necessary flexibility to adapt to an ever-changing
environment.
6
https://www.weforum.org/agenda/2016/03/3-trends-transforming-the-energy-sector/

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Tomorrow’s challenge for the energy sector will be to achieve effective
collaboration between all stakeholders involved, for the world to meet its future
energy needs in a sustainable way7.

The Future Of Our Energy System

When we plug an appliance into a wall socket, or fill our cars with petrol, we
probably don’t stop to reflect on the remarkable changes in energy technology over
the past century that have made this possible. Energy in the coming decades will
look very different. But how?

The concept of the “energy triangle” is now well known. One side of the triangle:
the energy system must deliver access to safe, secure and reliable energy. Another
side: the price must be affordable. The final side: the environmental impact should
be sustainable. A modern energy system must deliver on all the three dimensions.

The energy system that evolved during the last century has largely achieved its
primary goal of enabling substantial economic growth. However, the triangle is out
of balance for different reasons in different places. For about two billion people,
access to progressive energy solutions is still not available. In several geographies
across the globe, affordability is still an unresolved issue. And in most countries
the environmental impact is beyond what we can sustain, especially as world
population heads towards a projected nine billion people.

The effort we are now putting into developing energy technologies is typically
directed at least as much at reducing environmental impact as improving
affordability and access. Renewables and electric vehicles, in particular, offer an
opportunity to strengthen the third side of the triangle.

However, in thinking holistically about how we want our future energy system to
look, we need to look beyond the energy triangle at another set of three critical
considerations.

First, what will be the social impact of future changes in the energy sector?

Part of this question is related to affordability. New technologies for distributed

energy generation – along with new financial models to reduce the risks of

7
https://www.weforum.org/agenda/2016/03/3-trends-transforming-the-energy-sector/

14
investing in them – could finally bring cheaper, cleaner energy within the reach of
everyone on the planet.

The changing nature of jobs in the energy sector will also bring about social
transformations. As with many sectors, we can expect automation to put some
people out of work.

But higher-skilled jobs should also be created – for example, in programming and
operating more intelligent energy systems. These new jobs should also offer better
health and safety: remotely supervising robots as they perform dangerous tasks that
were previously done by humans.

The location of jobs in the energy sector is changing. This reflects changes within
specific sectors – for example, as the balance of oil production becomes more
spread out around the world, jobs are being created beyond traditional regions.
Meanwhile, deployment of renewable forms of energy is enabling local job
creation in the many geographies where the new installations are being built and
maintained.

It will also reflect the battle for competitive advantage in emerging sectors. China
has already established a lead on solar production, and the race is on to become the
global leader in battery technology that will enable grids to make more use of
renewables.

Alongside global shifts in job creation will come the second critical consideration
– differing financial impacts around the globe.

Initiatives like Saudi Vision 2030 reflect how oil-producing countries have
recently appreciated the urgency of reducing their budget dependency on energy
revenues. The trend towards there being more sources of energy in more places
around the world looks likely to continue.

It is not only governments of energy-producing countries that will have to rethink

their budgets, though. Some OECD countries bring in more tax revenue by taxing
sales of petrol at the pump than OPEC countries make from producing the petrol.
As electric vehicles take over from petrol-powered cars, these governments will
need to adapt.

Finally, future changes in the energy sector will be inextricably bound up with
broader advances in the Fourth Industrial Revolution – the convergence of rapidly-
advancing technologies that are blurring the lines between the physical, digital and
15
biological spheres, from automation to artificial intelligence, from big data to
biotech.

Bringing reliable, affordable energy to poorer and more remote regions is a

necessary step towards closing the digital divide – which, in turn, will offer
opportunities for those regions to leapfrog to the newest, digital-enabled
technologies.

The opposite is also true – the rolling out of new technologies to poorer areas will
be needed to achieve 100% coverage of reliable, affordable energy.

The future energy system should therefore become a key enabler of a society
conducive to inclusive and equitable economic and social growth.

Much depends on what policies are pursued by China and India.

Currently, about two-thirds of power in China still comes from coal. If the big
emerging markets prioritize coal power for future development, they will address
two sides of the energy triangle – affordability and access – but at the expense of
environmental sustainability.

In India, key questions the country is addressing include what role will private-
public collaboration play at the national and international level, the desired
destination of this energy transition - starting from the key elements of universal
energy access and reliability of supply – and how to manage the costs and
opportunities of the transition as outlined above.

Cleaner technologies will become more competitive the more they are embraced
by the biggest, fastest-growing energy markets, as recent falls in solar costs have
demonstrated.

As the Fourth Industrial Revolution creates faster change and more risks and
opportunities, the future of the energy system is more open than ever before to
being shaped. That will require farseeing collaborations between the public and
private sectors.

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The energy revolution that's still waiting to happen

Cutting global emissions by half by 2050 calls on the full deployment of existing
energy efficient potential. Despite energy efficient technologies’ proven track
record as a cost-effective mean to reduce energy consumption and related
emissions, its full potential is yet to be tapped.
The investment gap is a key element in explaining the remaining potential.

Public money is increasing - but more is still needed from the private sector.
Today, an average of around $130 billion has been invested in energy efficiency
improvement yearly, equivalent to 15% of fossil fuel investment, or one fifth of
power sector investment. The International Energy Agency (IEA) estimates that to
achieve the below 2-degree scenario, energy efficiency (EE) investments need to
reach $560 billion/year over the next 15 years, an increase of over four times the
current level.

Higher private investments are needed to bridge the gap. The United Nations
Framework Convention on Climate Change (UNFCCC) shows that 86% of those
investments need to be private.

In 2016, low interest rates prevailed in mature economies, at close to zero. Money
is available and cheap, with Bain & Company projecting that the volume of total
financial assets will be 10 times larger than the value of global GDP growth to
2020. Concurrently, an increasing number of private financial players are willing
and stringently committing to greening their finance. Yet, the EE gap is still
unfilled. Why?

Private investments are still hindered by the enduring (if unfounded) risk
perception of energy efficiency projects. Contrary to traditional investments, EE
gains are intangible in nature (they don’t come with incremental physical
production) and difficult to measure. The uncertainties surrounding EE savings,
reinforced by the absence of an internationally recognized monitoring protocol,
17
result in a perception that EE operational risks are high. Energy efficient
technologies are often assumed to be unreliable; with a concomitant risk of not
transforming into adequate return cash flows. This results in much higher
transaction costs.

Making the transition to a low-carbon world

In the coming 15 years, 3 billion additional people will join the middle class.
Today, around 2 billion people still lack access to reliable electricity. Our
challenge in the next 40 years is to provide energy services for close to 5 billion
additional people, building a system that delivers 100GJ per capita to more than 9
billion people, while cutting our emissions by half. This entails a sharp decrease in
our carbon intensity and an efficiency improvement by a factor of three.

It's time for action. Projects are not happening at the necessary scale or pace.
Cities, for instance, soon host to more than 70% of the world population, have a
significant potential for increased savings. While smart city projects are on the rise
worldwide, their development remains at the planning phase and viable business
models for easy scaling up are still to be found. Execution challenges pile up and
have led for instance to the push back of Masdar City completion from 2016 to
2030. Similar hurdles also plague China’s ambition to build 154 smart cities,
where several newly created eco-cities are abandoned by developers before
completion.

Buildings, where half of world’s electricity is consumed, are among the most
inefficient infrastructures, with 80% untapped EE potential. The IEA estimates that
buildings energy performance per square meter needs to improve from a rate of
1.5% per year in the past decade to at least 2.5% per year over the next decade to
2025. Solutions exist to get us there. Building control systems can deliver 30%
energy savings by combining comprehensive automation, control, and monitoring
of energy use, with a payback of less than 3 years. Similarly, in other sectors,
deploying available technologies by bridging market barriers, could unlock the
79% unrealized efficiency potential in infrastructure, and the 58% potential of
Industries.

The digitization of the economy and the advancement of smart grid technologies,
such as intelligent metering, automated analytics, demand response, enable
customers to produce, consume, store and sell within a dynamic electricity system.

Customers are at the center of the New Energy World transformation. Yet in our
current energy system, less than one third of total generation reaches end-users.
18
The rest is scattered along the energy value chain in production and T&D losses.
Lagging behind in this transition will be detrimental to individuals and the planet,
by giving citizens less choice on how, what, and when they consume energy.

What can be done?

Scaling up of risk sharing instruments. Previous experiences with risk mitigation

instruments have been very successful. The case of the International Finance
Corporation (IFC)’s risk-sharing facility and programs come to mind with
Commercializing Energy Efficiency Finance (CEEF): a programme that provides
guarantees to EE investments in Eastern Europe. IFC guarantees up to 50% of the
loss from loan defaults, a risk-sharing arrangement that encourages commercial
banks to lend. Local banks select projects and design their credit facilities. The IFC
has also been active in China under a similar mechanism. From 2006 to 2009, the
China Utility Based Energy Efficiency Finance Program (CHUEE) provided USD
512 billion in loans to 78 companies without a default loss.

The European Union should be commended for building on such success and
launching the European Fund for Strategic Investments (EFSI), jointly with the
European Investment Bank (EIB) and the EU Commission. Such initiative
provides a EUR 16bn guarantee from the EU budget and EUR 5 billion of EIB’s
own capital, and encourages higher risk projects in Europe. This scheme has
recently loaned EUR 100 million to Energies POSIT’IF, a public-private company
that aims to make condominium buildings in Paris region more energy efficient.
The loan and risk guarantee enables the provision of financing to owners and
resulted in the tripling of apartments expected to undergo renovation in the coming
year.

Additional work is still needed to analyze the best combination of financial

and other instruments (such as training, education, capacity building or
awareness building) for reducing high levels of perceived risk. The European Bank
for Reconstruction and Development (EBRD) is working closely with local
financial institutions and technical partners to transfer international best practice
skills, supporting the origination of technically feasible investment opportunities.

To unlock private investments, policy-makers need to rise up and provide

adequate policy signals. Risk-sharing instruments should be scaled up and
deployed. Subsidies and other market failures insulating customers from the true
price of energy should be corrected; including the internalization of climate change
19
externalities. The establishment of a platform for continuous public-private
dialogue would facilitate alignment of stakeholders involved in enabling and
accelerating this transition: financiers; industries; policy makers; citizens.
Leveraging existing institutions and initiatives that facilitate international public-
private exchanges, data and resource sharing on these issues, is urgently needed.

20
This is how we can keep energy cost effective

Unlike most other goods, electricity cannot be cost-effectively stored even for
short periods. Supply must always meet demand, or you have blackouts. In
addition, electricity demand is highly variable and inelastic (Ito 2014). As a result,
electricity markets clear mostly on the supply side, with production ramping up
and down to meet demand (Borenstein 2000, Griffin and Puller 2005).
Consequently, electricity prices vary dramatically, often by a factor of ten or more
in a single day.

These features of electricity markets are well known, yet most analyses of energy
efficiency policies ignore this variation. For example, when the US Department of
Energy considers new energy efficiency standards, it focuses on total energy
savings, without regard to when they occur. With a few notable exceptions, both
policymakers and academics have given little attention to how the value of energy
efficiency depends on when savings occur.

In new paper, we demonstrate the importance of accounting for timing

(Boomhower and Davis 2017). Our study uses hourly smart meter data from more
than 5,000 participants generated by a rebate programme for energy-efficient air
conditioners in southern California. We measure the change in electricity
consumption after installation, and show that savings tend to occur during July and
August, and between 3pm and 9pm.

When does this investment save electricity?

Figure 1 shows large differences in electricity savings across seasons and hours.
During July and August there are large energy savings, particularly between 3pm
and 9pm. During non-summer months, savings are much smaller — less than 0.05
kilowatt hours saved on average per hour.

Figure 1 Electricity savings by hour of day

21
We compare our estimated time profile with ex ante engineering estimates. The
two sets of estimates are similar, with several interesting differences. Most
importantly, the econometric estimates indicate peak savings between 6pm and
7pm, compared to between 4pm and 5pm in the engineering estimates. This seems
like a small difference, but it has important implications for electricity markets
given growing concern about meeting electricity demand during the early evening,
when the sun sets and solar generation plunges.

When is crunch time in electricity markets?

Figure 2 shows the value of electricity by hour of day in California for February
and for August. It shows wholesale electricity prices, and the payments that
generators receive to make sure they are available when demand is high (Bushnell
2005, Cramton and Stoft 2005, Joskow and Tirole 2007, Allcott 2013). The data

22
series in each panel show different methods for allocating resource adequacy
contract prices to high load hours. For example, 'Top hour' assigns the entire
capacity value to the highest load hour in each month.

Figure 2 Wholesale electricity prices and capacity values

Whichever approach we choose, summer afternoons are crunch time in California

electricity markets. Depending on approach, electricity during summer afternoons

23
is worth 5, 10, or even 20 times as much as during off-peak hours. This is not
unique to California. We bring in data from Texas’ ERCOT market and five other
regional markets to show that, while the exact timing of peak differs, all US
markets were characterised by wild swings across hours and seasons (Callaway et
al. 2015).

Energy savings and the value of electricity

There was a strong positive correlation between energy savings and the value of
electricity. Air conditioning investments yielded their largest electricity savings
during summer afternoons which were peak periods for electricity markets. Figure
3 shows the correlation. Each marker corresponds to an hour-of-day by month-of-
year pair (for example, 1pm to 2pm during November).

Figure 3 Correlation between savings and prices, by season

24
During the summer, there is a strong positive correlation (r = 0.69) between
savings and energy prices. The summer months include many more high-price
realizations than the winter months, and air conditioning tends to deliver
significant savings during these periods. There are essentially zero electricity
savings in all hours during the winter, so there is little correlation between savings
and prices during winter months.

Overall, we estimate that accounting for timing increased the value of air
conditioner investments by 50% relative to a naive calculation that ignores timing.
Including capacity payments is important in this calculation. Most of the value of
electricity in ultra-peak hours is captured by forward capacity payments to
generators to guarantee their availability.

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Our analysis suggests that air conditioner investments will be even more valuable
as the way electricity is generated shifts towards renewables. Increased solar
generation makes electricity less scarce during the middle of the day, but more
valuable after the sun sets (CAISO 2013). The price peak is likely to move into the
late afternoon and early evening, when energy savings from residential air
conditioners are largest. We conduct an informal sensitivity analysis using price
and load forecast data from Denholm et al. (2015) and find that by 2024 air
conditioning investments in California could be 75% more valuable than an
investment with a flat savings profile.

Energy efficiency investments

Finally we compare air conditioning to a much larger set of energy-efficiency

investments, both residential and non-residential. There is a wide range of value.
Residential air conditioning has the highest timing premium in most markets.
Commercial and industrial heat pumps, chillers, and air conditioners have a 20-
30% timing premium, reflecting the relatively high value of electricity during the
day.

On the other hand, refrigerators and freezer investments have timing premiums
near zero, because savings from these investments are only weakly correlated with
electricity prices. Lighting also does poorly, with timing premiums of 8%
(residential) and 10% (commercial and industrial). LEDs save electricity mostly
during the winter and at night, when electricity tends to be less valuable.

Timing matters

Hotel rooms, airline seats, restaurant meals, and many other goods are more
valuable during particular times of the year and hours of the day. The same applies
to electricity. If anything, it is even more variable. Our research shows that
accounting for timing significantly impacts the value of energy-efficiency
investments. In particular, air conditioner investments are more valuable than other
types of investments, because they deliver savings during periods when electricity
is most valuable.

We hope to move the energy efficiency discussion away from total savings and
toward total value. This would require more rigorous ex post analysis of energy
savings based on market data. It would also require integrating savings estimates

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with market measures to rebalance the energy efficiency portfolio toward
investments that save energy in more valuable hours.

This work also highlights the power of smart-meter data. The econometric analysis
for residential air conditioning would have been impossible just a few years ago,
but today more than 40% of US residential electricity customers have smart
meters, up from less than 2% in 2007. This flood of new data can help to create
smarter, more evidence-based energy policies.

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 INFERENCE

Energy is the source of life in this fast growing physical world. We have been
depending on fossil fuels for our energy needs for centuries, this lead to their
depletion slowly. The fossil fuels have been polluting the atmosphere. Better late
than never we’ve realised our mistake of draining our fossil fuels, and started our
search for new renewable clean energy sources. Energy is not only costly but also
limited. Pushing towards usage of renewable energy is a path breaking step. Our
country supports this in a large scale. We have installed many solar stations,
diverting from electricity to solar power. MNC’s like Solar City, Tesla are
changing the world’s view of using energy. These Elon Musk lead companies have
widely invested in renewable energy. These companies are inspired from Nikola
Tesla’s ideology. Tesla discovered electromagnetism, a clean energy source.
Conspiring theories suggest that Nikola Tesla’s discoveries have frightened the
then petroleum companies who were on the verge of losing their profits if this
clean energy comes into the market. In the current scenario people are investing in
renewable energy for R & D. This puts us in the right path in our journey through
our energy driven world.

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 BIBLIOGRAPHY

https://www.weforum.org/search?query=Conclusion+on+Energy+sector

http://www.lse.ac.uk/GranthamInstitute/research/economic-analysis-of-energy-
efficiency/

http://ec.europa.eu/competition/publications/cpn/2007_1_55.pdf

Journals: World Economic Forum

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