Introducing Johannes Pfeifenberger - Inducing Economics into Electricity

bridges vol. 28, December 2010 / News from the Network: Austrian Researchers Abroad

By Florian Schadauer

 
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Johannes Pfeifenberger



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In the years 2000/01, energy was prominently in the US spotlight due to the blackouts and price hikes of the California power crisis. The world around Silicon Valley turned upside down, as the wholesale price of electricity quadrupled. Business and private households alike felt the pressure of an emptying wallet due to their energy demands. Media attention and political tensions were a given.
 
In situations like these, experts are asked to explain complex problems in simple sentences. Hardly anybody could be more knowledgeable than Johannes Pfeifenberger, an Austrian expert on energy issues, who has been working in the US for more than twenty years. Since 1991, he has been with The Brattle Group, a consulting company with special expertise in economic, financial, and regulatory issues, headquartered in Cambridge, Massachusetts. He now serves as a principal of the firm, and as the head of Brattle's energy practice.

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Liberalization: Friend or foe


Many attributed the California crisis to the preceding market liberalizations in the electric power sector during the 1990s1. The public mainly blamed the crisis on bad deregulation. For Pfeifenberger, however, it was more than just liberalization that triggered the energy crisis of 2000. At that time California's economy was growing significantly. The energy demand was seven percent higher than in 1999 but no additional capacity could be provided, not even by neighboring states. Pfeifenberger describes how a variety of factors came together to create the crisis.  "In 2000 you had the combination of low hydro conditions and very hot weather, [and] you had prices go up. ... Within a 12-month period, people spent about 10 billion dollars more on power than they thought they would," Pfeifenberger explains. In a nutshell, California's example showed the challenges to electric power in the US: transmission, dated infrastructure, and security of capacity. It also highlighted the need for sensitivity and expertise, which regulators need to possess to make effective policy. All in all, it was a mixed bag of problems.

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Electricity restructuring was in a cautious pause during the 2000s2
 


There was not necessarily a connection between electricity price increases and liberalization. As Pfeifenberger points out, the states that liberalized their markets were mainly those that depended on natural gas for energy production. As the price of natural gas was rising between 2003 and 2008, the price of electricity for the end-consumers rose accordingly. He notes that "the gas price increased but coal remained stable. And since many coal states did not liberalize their electricity markets, the public perception about liberalization became somewhat biased."


"Components and tools" of an engineer's career


Shaped by a technical high school in Salzburg, Pfeifenberger studied electrical engineering at the University of Technology in Vienna, Austria. His path had already been influenced as a child, when his uncle regularly took him to his workplace at a German engineering multinational. Understanding the economic constraints under which technical developments can be implemented (if at all) in the real world is crucial if an engineer is to actually make his ideas happen, and this became a strong driver of Pfeifenberger's wish to become more involved with economic questions.

Strongly influenced by American textbooks, and by the advice of his professors, he enrolled in a Master's program in energy economics at Brandeis University in Massachusetts, in the US. The school had just started the program and had scholarships available for incoming students. The decision felt right instantly. "Learning was much faster at the US graduate school level. It is a big difference culturally, and I enjoyed that tremendously," Pfeifenberger notes.

From Massachusetts, Pfeifenberger crossed the Pacific to study for a semester in Tokyo, Japan. "There were many subtleties in the way people interacted, which were quite impressive, but overall I found Japan not all that different," explains Pfeifenberger about his time there. In business, "the importance of seniority, the importance of hierarchy" made Japan at that time more similar to Europe than to the US, where superiors are more willing to "give you as much responsibility as one can handle" he notes.

Going into consultancy rather than pursuing an academic career was a very conscious decision, since the applied aspect of knowledge was always more fascinating to Pfeifenberger than pure academics. After more than twenty years Pfeifenberger still enjoys and feels challenged by his job with The Brattle Group.  He notes "I have become familiar with many aspects of the energy industry by working with a variety of clients around the world. I truly learn something new in every project I undertake."


We all are the laboratory


For Pfeifenberger's work in the US energy market, the sheer size and diversity of the market is, in itself, quite an advantage. The states are all quite different from each other, so regional markets are like small laboratories for testing market strategies and making comparisons. In terms of energy efficiency, there is a vast difference between the coasts and some more central states. To give an example, Texas is the most competitive retail market in North America , with a high number of residential and industrial energy customers who switched their provider due to market restructuring4. But on the other hand, "Texas is so resource endowed, that in some ways it looks more like Russia from a resource-production perspective," Pfeifenberger explains.

A key question in the American energy market is the role of transmission. To increase transmission capacity is a major focus of the US Federal Energy Regulation Commission (FERC)5. This is a real challenge and an important one, as "without transmission being regulated in a meaningful way, you can't really create competitive power markets," Pfeifenberger's experience indicates. But in reality, Pfeifenberger notes that "federal regulators can't just require transmission to be built without the state politicians and the state regulators supporting that. Ultimately, customers in each individual state are the ones paying for the transmission systems." For the economy as a whole, savings through competition were around US$13 billion in 2009, according to the US Federal Energy Regulatory Commission. So finding a compromise can pay off for everybody.


From A to B


Transmission improvement is also of crucial importance for further integration of renewable energy6,7. Pfeifenberger gives an example: "Even in the relatively small area of New England, there is limited transmission capacity. At the same time, there would be a lot of demand for renewable energy in southern New England and the Boston area. But people and politicians have been debating during the last few years over who should be paying for those transmission lines," says Pfeifenberger. It should be a win-win situation, with Maine getting the jobs and Massachusetts getting the green energy, he explains. The problem, however, he notes, lies in the fact that "electricity is mostly regulated at the state level but the wholesale market and the transition system are regulated at the federal level."

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Transmission in the west, the eastern regions, and Texas8

 
While expanding and improving transmission lines would not cure every woe of the US electricity supply, it would provide a range of benefits, including the increase of competition and the integration of renewable energy sources as well, according to Pfeifenberger.


The technology gap


In the future, Pfeifenberger sees technological advances ahead. But as an engineer, he concludes that "The reason why it is so hard to integrate renewable energy these days is that the available [renewable] technology is more expensive." As an economist, he quickly mentions the flip side of the problem: "Now there are some subtleties here one can't forget. That is, that some conventional energy resources have received a lot of subsidies or still do." And they don't have to pay for externalities: the problems like emissions that they impose on the society. "It is really the different rules that work to the disadvantage of renewable energy," Pfeifenberger notes.

This might change in the US over the next twenty years or so, he believes, as technology will become cheaper. Pfeifenberger will experience this future hands-on, as he is "pretty much settled down" in Massachusetts. Although there are things he will always miss about Austria, like the food and beer and, most importantly, members of his family, the advantages of the US' open business culture and his private network will keep Pfeifenberger in the new world for a while longer - and there are still plenty of people here in need of some good advice.

***

This article is based on an interview conducted by the author, Florian Schadauer, with Johannes Pfeifenberger, a consultant for The Brattle Group.



References:


1. Sioshansi, F. "California's dysfunctional electricity market: policy lessons on market restructuring." Energy Policy 29, no. 9 (2001): 735-42.

2. Department of Energy.  "Status of Electricity Restructuring by State." US Energy Information Administration. <http://www.eia.doe.gov/cneaf/electricity/page/restructuring/restructure_elect.html> (accessed October 2, 2010).

3. Sioshansi, F. "Electricity market reform: What has the experience taught us thus far?" Utilities Policy 14 (2006): 63-75.

4. Adib, P., and J. Zarinkau. "ERCOT market." In International Experience in Restructured Electricity Markets: What Works, What Does Not, and Why? edited by F. Sioshansi and W. Pfaffenberger. Amsterdam: Elsevier, 2006.

5. Federal Energy Regulatory Commission. "Annual Report 2008." Washington, DC: FERC, 2008.
<http://www.ferc.gov/about/strat-docs/fy09-an-rpt.pdf> (accessed August 15, 2010).
 
6. North American Electric Reliability Corporation. "2008 Long-Term Reliability Assessment." Princeton, NJ: NERC, 2008.  < http://www.nerc.com/news_pr.php?npr=186> (accessed September 5, 2010).

7. Price, J., and A. Sheffrin. "Adapting California's energy markets to growth in renewable resources." IEEE PES General Meeting (2010): 1-8.
 
8. North American Electric Reliability Corporation. "Annual Report 2001." Princeton, NJ: NERC, 2001.
<http://www.nerc.com/files/2001-Annual-Report.pdf > (accessed September 5, 2010).



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