Resolving Mismatches inEnergy Decision Making

International Atomic Energy AgencyScientific Forum at the General Conference 200915-16 September 2009

Richard R. CirilloDirector, Decision and Information Sciences DivisionArgonne National LaboratoryArgonne, IL 60439USAphone: 630-252-5629email: cirillor@anl.gov

mailto:cirillor@anl.gov

Energy Decision Makers Are Regularly Confronted With Complex and Difficult Choices

• Energy policies• Energy projects• Supply technologies• End use technologies• Energy efficiency• Environmental protection• Energy security• International agreements

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Energy Decisions Are Difficult

• The energy system is:– Complex– Dynamic– Uncertain

• Energy decisions have:– Significant implications– Long lead times– Long lasting effects

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It is important to understand how decisions are made and how they can be made more effectively

Energy Decision Makers Rely on Information Provided by Energy Analysts

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Good analysis can help in making good decisions

Output

Input

Output

Input

Trend Analysis

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Optimization Equilibrium Analysis

Good Analysis and Good Decisions Need to Recognize “Bounded Rationality”

• Decision Makers, no matter how smart or well-intentioned, are forced to make choices with:– Limited, incomplete, sometimes unreliable information– Limited ability to process large amounts of information– Limited time to make a choice

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(a) Herbert SimonNobel Prize in Economics

• Decision Makers, in general, are not “optimizers” but rather “satisficers”(a). Their decisions are:

– Suboptimal– Satisfactory or “good enough”

• The ability to adapt and adjust is an important part of good decision making

Look Back

Good Decisions Need to Be Built on Good Data and Analysis

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Look Sideways

Look Ahead

Energy Decision Makers

DECISION

Learn from past experience

Anticipate the future

Take a systems view

DECISION MAKING EXAMPLE: U.S. Natural-Gas-Fired Power Plant Construction Had a Substantial Peak, Then It Leveled Off

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1990 1995 2000 2005 2010

Capacity Additions

(GW)

Factors That Affected Decisions in the 1999/2000 Period

• Looking Back– Increasing load– Limited capacity additions– Declining capacity reserve

margins– Low natural gas prices

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0100200300400500600700 Capacity

Reserve Margin

(%)

Summer Peak Load (GW)

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(US$/1000 cu ft)

• Looking Ahead– Short construction time for

natural gas units– Rapid payback on

investment– Electricity deregulation

beginning

Some Things Were Not ForeseenIncreased Demand Caused Natural Gas Prices to Rise

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Natural Gas Price(US$/

1000 cu ft)

Many units were idled for a number of years

DECISION MAKING EXAMPLE: Reduce Transportation Oil Demand and CO2 Emissions

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Gasoline Consumption (106 bbl/day)

Looking Back

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Gasoline Price

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• Low gasoline prices

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Vehicle Miles Travelled (1012)

Registered Vehicles (106)

• Increased driving

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1980 1985 1990 1995 2000 2005

• Vehicle mix changes

New Vehicle Sales

Option: Set Efficiency Standards – The Impact Is Affected by Vehicle Mix and Turnover Rates

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Vehicle Efficiency (miles per

gallon)

New Car Standards

New Light Truck Standards

Actual Fleet Average

Note: New vehicle standards are to be set at 35 mpg by 2020

Option: Develop Alternative Fuels – Ethanol Production Capacity Has Been Growing Rapidly

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1999 2001 2003 2005 2007 2009

Ethanol Production

Capacity(billion gallonsper year)

Look Sideways: Corn Is Part of a Larger System That Affects Demand and Price

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Animal Feed

Food

Export

Ethanol

Higher Corn Prices, Lower Oil Prices Have Led toIdled Capacity, Bankruptcies

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1999 2001 2003 2005 2007 2009

Ethanol Production

Capacity(billion gallonsper year)

Idled Production

Capacity

Research is underway on cellulosic ethanol production, which does not use corn

Option: Develop Advanced Vehicle Technology – Plug-In Hybrids Electric Vehicles Are Gaining Attention

• Range of 40 miles (67 km) on a single battery charge• Range with battery and gasoline engine is 300 miles (484 km)• Planned availability in 2010• Cost – not yet determined• Announced efficiency – equivalent of 230 miles per gallon

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© GeneralMotors

Look Sideways: Plug-In Hybrid Electric Vehicles Will Affect the Power Grid and Electricity Prices

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Plug-In Hybrid Electric Vehicles could:• Level the night-time load• Increase daytime peak loads• Raise prices• Raise or lower CO2 emissions

Hourly electricity prices with plug-in

hybrid vehicles

Source: Argonne National Laboratory

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RetailGasoline

Price(US$/gallon)

Taxes

Pre-tax

Option: Implement Gasoline Taxes

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Source: US Energy Information Agency (August 2009)

Look Sideways: Impact of tax increases on the economy

DECISION MAKING EXAMPLE: Nuclear Power Plant Construction Had Peaks, Then It Stopped

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Looking Back at Nuclear Power

• Issues affecting expansion decisions– Accidents – Public Opposition– High Capital Cost– Waste Management– Proliferation Concerns

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Three Mile Island Chernobyl

Decisions were made by private utilities not to pursue new nuclear

Looking Ahead at Nuclear Power

• Short term – issues remain– Financing– Waste management– Proliferation concerns

• Long term – issues foreseen– Profitability– Climate change

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Decisions on the future of nuclear in the U.S have not yet been made

“Exelon on Thursday said its first quarter earnings rose 23 percent, driven by increased output at its nuclear operations and higher rates.” ABC News (April 2009)

“As [the U.S.] Congress debates whether to limit carbon-dioxide emissions … the nuclear-power industry is poised to reap a multibillion-dollar windfall if restrictions take effect.” Wall Street Journal (May 2008)

Ways To Improve Energy Decision Making

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1. Recognize that the energy system has no simple solutions, only choices.

2. Look Back – Learn from past experience.

3. Look Ahead – Evaluate the future, but don’t be near-sighted.

4. Look Sideways – Treat energy decisions as systems decisions.

“For every complex problem there is a solution that is simple, neat – and wrong.” Henry Louis Mencken, essayist

“Those who refuse to study history are condemned to repeat it.” George Santayana, philosopher

“Prediction is very difficult, especially about the future.” Niels Bohr, physicist

“Every thing affects everything else in one way or another, not always predictably.” John A. Woods, organization consultant

Ways To Improve Energy Decision Making

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5. Make energy decisions that are adaptable and adjustable.

6. Don’t let the “optimum” get in the way of the “good enough”.

7. Make good decisions using good data and analysis.

“Insanity is doing the same thing over and over again and expecting different results.”Albert Einstein, physicist

“The perfect is the enemy of the good.” Voltaire, philosopher

“It isn’t what we don’t know that gives us trouble, it’s what we know that isn’t so.” Will Rogers, humorist

Ways To Improve Energy Decision Making

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1. Recognize that the energy system has no simple solutions, only choices.

2. Look Back – Learn from past experience.

3. Look Ahead – Evaluate the future, but don’t be near-sighted or far-sighted.

4. Look Sideways – Treat energy decisions as systems decisions.

5. Make energy decisions that are adaptable and adjustable.

6. Don’t let the “optimum” get in the way of the “good enough”.

7. Make good decisions using good data and analysis.