Reliance on the market to make adjustments to changes in supply and demand, disruptions, and surges in energy prices underpins U.S. energy policy. When markets are open and transparent, the system works well as producers, investors, and consumers adjust to market changes – but efficient markets depend on accurate and timely data. Unfortunately, the U.S. Energy Information Administration (EIA) has not been able to keep pace with rapidly changing markets, new players, new fuels, and growing demand.

Many of the nation’s foremost energy economists recently concluded, “A major multi-year effort to review and update all areas within the Energy Information Administration (EIA) is essential to the future success of energy markets and well-informed public policy decision-making.” To adequately produce timely data and objective analyses on energy supply, demand, and price, the EIA needs an annual budget closer to $125 million adjusted for inflation for multiple years.

Section 805 of the Energy Independence and Security Act requires the Administrator of the Energy Information Administration to evaluate the resources for both personnel and funding that EIA needs and “establish a five-year plan to enhance the quality and scope of the data collection necessary to ensure the scope, accuracy, and timeliness of the information needed for efficient functioning of energy markets and related financial operations.” The report is due by the end of 2008. The legislation also required EIA to consult with states and other users about the timeliness and quality of state-level data available to policy makers, as Congress requires EIA to collect and provide this information that states rely on both to guide their policy making as well as to respond during emergencies.

During the heating season, EIA provides state-level heating fuel price data on a bi-weekly basis.

The Northeast-Midwest Institute is highlighting how improvements to energy models can better inform policy analysis and discussions. Through peer-reviewed articles and meetings, the Institute engages policy analysts and policy makers, as well as economists, in discussions about how energy modeling can better highlight opportunities for policy innovations.

Policy makers need quality models if they are to effectively grapple with energy security, air pollution, and an array of related issues. They must address these critical topics while appreciating the complex interactions among them. They need to better understand how energy markets are likely to respond to policy changes.

Unfortunately, current models tend to support the status quo. They assume that existing market arrangements are functioning effectively, and that resources are efficiently employed. They often focus only on prices, failing to account for the security, reliability, and environmental implications of energy options. They usually do not appreciate the range of possible outcomes that could result from policy innovations. Most modelers also fail to recognize the potential for technological progress, and don’t sufficiently understand the reactions of individuals and organizations to policy and market changes. Moreover, most models do not take advantage of the enormous advances in computer capacity that would allow for more sophisticated calculations.

Modelers, appropriately, are cautious. They adjust their assumptions and approaches only when the evidence for change is overwhelming. Economists advocating reform, as a result, have made progress, but only on the margins. Not sufficiently involved in those discussions, ironically, are the very policy makers and policy analysts who rely on models to inform discussions and debates. Those key players have numerous needs that modelers are not addressing effectively. Policy makers, for instance, want to know the potential market penetration of distributed electricity generators under current and revised national environmental and energy policies. They desire to understand how output-based standards would alter air pollution from power plants. They want to appreciate how net metering and other policy innovations would affect the decisions of individuals and organizational consumers.

The Northeast-Midwest Institute is helping policy analysts and policy makers clarify the questions and assumptions that they need models to address. The Institute is sparking discussions among key players and economists over how modelers can provide improved information and data that better inform energy policy debates. The Institute also tries to highlight the shortcomings of existing models and to have policy makers suggest improvements that would meet their needs and clarify the opportunities for policy innovations.