Coal, Renewables

EIA releases modeled impact of 2003 energy bill draft

The full report can be found at

Feb. 20, 2004 — The Energy Information Administration (EIA) has released a model of some of the impacts of the Conference Energy Bill of 2003, also known as the Energy Policy Act of 2003.

EIA created this report following the Feb. 2 the request of Senator John Sununu.

EIA’s newly released report summarizes EIA’s analysis of the CEB provisions that can be modeled using the National Energy Modeling System (NEMS) and have the potential to affect energy consumption, supply, prices, and imports.

The report, which EIA is careful to point out is not the official position of the U.S. Department of Energy or the Administration, makes projections in the Reference Case which are statements of what might happen, given the assumptions and methodologies used.

The Reference Case projections are business-as-usual trend forecasts, given known technology, technological and demographic trends, and current laws and regulations.

The following CEB provisions were analyzed:
• Alaska Natural Gas Transportation System (ANGTS) construction incentives (loan
guarantee, treatment plant tax credit)
• Offshore royalty relief
• Section 29 tax credits for unconventional natural gas production
• Renewable fuels standard (RFS)
• Methyl tertiary butyl ether (MTBE) ban
• Removal of oxygenate requirement for reformulated gasoline
• Production tax credit (PTC) for advanced nuclear plants
• Advanced coal generation technology incentives
• PTC extension for renewable generation
• Residential initiatives, including weatherization
• Commercial initiatives, including energy conservation product standards
• Investment tax credit for combined heat and power
• Continuation of tax credit for alternative-fueled vehicles

CEB provisions not analyzed

Provisions of the CEB that are not analyzed include: (a) provisions that could not be analyzed using NEMS, including those addressing electric reliability; (b) provisions that provide authorizations, but do not provide actual funding; (c) provisions that provide authority to set standards or targets in some future date, but do not specify the standard or target; and (d) provisions that are not significant to the market as a whole or are not quantifiable.

Provisions that are not addressed for one or more of the above reasons could also have potentially significant impacts on U.S. energy markets. The results and findings in this report apply specifically to the provisions that were modeled.

Summary Results of the Modeled Provisions of the CEB

The impacts of the CEB provisions analyzed are estimated by comparing the results of a simulation with all of the provisions that can be modeled with NEMS to the Reference Case of the Annual Energy Outlook 2004 (AEO2004).

The impact on total primary energy consumption is small. The maximum annual difference from the Reference Case level of primary energy consumption is no more than 0.4 quadrillion British thermal units (Btu) or 0.3 percent.

From 2004 through 2020, primary energy consumption is virtually identical to the Reference Case level. After 2020, annual consumption is projected to be slightly lower than the Reference Case (by at most 0.4 quadrillion Btu). On a fuel-specific basis, changes to production, consumption, imports, and prices are negligible.

Carbon dioxide emissions are lower in the CEB Case than in the Reference Case in all years as the mix of fuels changes. In 2025, carbon dioxide emissions are 96 million metric tons (1.2 percent) lower in the CEB Case than in the Reference Case.

The following is a summary of the impacts by provision:
ANGTS construction incentives (loan guarantee, treatment plant tax credit). These provisions reduce the price necessary to trigger the construction of the pipeline by $0.15 per thousand cubic feet (mcf) and advance the in-service date by 1 year to 2017 relative to the Reference Case.

Offshore royalty relief. This provision grants royalty relief for natural gas production from wells drilled to 15,000 feet or deeper on leases issued before January 1, 2001, in the shallow waters (less than 200 meters) of the Gulf of Mexico. Between 2004 and 2008, this provision increases offshore deep gas production in shallow water but total offshore production does not increase during this period because lower natural gas prices relative to the Reference Case that result from other CEB provisions slows the development of deepwater resources in those years.

Section 29 tax credits for unconventional natural gas production. Section 1345 of the CEB provides a credit of $3 per barrel equivalent in 2002 dollars for qualified production from nonconventional gas sources and extends tax credits to 2006 for qualified existing wells placed in service between 1980 and 1992 and eligible through 2002.

The provision also modifies Section 29 by providing tax credits for gas production from new nonconventional gas wells placed in service by 2006 for a period of 4 years prior to 2010.

The provision increases profitability and drilling for nonconventional fuels, thereby increasing gas reserve additions and production while moderating prices through 2009.

RFS, MTBE ban, and removal of oxygenate requirement. The renewable fuels provision requires 3.1 billion gallons of renewable fuel use in the transportation sector in 2005, increasing to 5 billion gallons by 2012. In 2013 and beyond, the share of renewable fuel is to remain proportional to the 2012 share of gasoline sold in the Nation thereafter.

The use of MTBE would be prohibited by the CEB nationwide starting in 2015 and the oxygen content requirement for reformulated gasoline (RFG) eliminated starting in 2005. The provision raises ethanol consumption by 1.81 billion gallons in 2015 and 1.96 billion gallons in 2025. In 2015, average gasoline prices relative to the reference case are 3 cents per gallon higher and average reformulated gasoline prices are 8.1 cents per gallon higher than in the Reference Case.

About one-third of these price increases is due to the termination of the ethanol tax credit in 2011. Gasoline consumption is projected to be between 10,000 barrels per day and 70,000 barrels per day lower in the 2010 to 2025 period, largely because of the higher prices resulting from the RFS and the MTBE ban. Petroleum imports are reduced between 50,000 barrels per day (0.3 percent) and 230,000 barrels per day (1.2 percent) between 2015 and 2025 because of the lower demand (from higher gasoline prices) and increased use of ethanol.

PTC for advanced nuclear plants. This provision provides a 1.8-cent-per-kilowatthour tax credit, unadjusted for inflation, for electricity production from up to 6 gigawatts of new nuclear facilities. The provision makes it economic to construct 6 gigawatts of advanced nuclear capacity, but further expansion is uneconomic despite the capital cost reductions projected from their construction.

Advanced coal generation technology incentives. This provision provides an investment tax credit (ITC) for up to 6 gigawatts of advanced clean coal power plants, 3 gigawatts of advanced integrated gasification combined cycle plants (IGCC), and 3 gigawatts of advanced pulverized coal plants.

The incentive accelerates the construction of IGCC plants by reducing their capital costs and causes an additional 22 gigawatts of IGCC to be built above the Reference Case level.

The ITC for pulverized coal does not increase the construction of pulverized coal plants relative to the Reference Case (in which over 100 gigawatts are expected to be constructed) because lower natural gas prices, the PTC for nuclear, the ITC for IGCC, and the PTC for advanced renewable generation all act to reduce the role of pulverized coal below the Reference Case level.

PTC extension for renewable generation. The CEB extends eligibility for the 1.8-cent per- kilowatthour, 10-year payment period PTC for wind and “closed-loop” biomass facilities to plants coming online from January 1, 2004, to December 31, 2006.

It also expands the program to include renewable electricity generated from geothermal, solar, “open-loop” biomass, municipal solid waste, and landfill gas resources but limits the PTC payment period for these technologies to a maximum of 5 years and limits payments for the open-loop biomass, municipal solid waste, and landfill gas resources to 1.2 cents per kilowatthour.

Existing plants that co-fire with biomass fuel can claim the credit. Generation from biomass co-firing is 76 billion kilowatthours higher than in the Reference Case in 2008, but rapidly declines to less then 4 billion kilowatthours above the Reference Case level when the tax credit expires.

Generation from wind systems in 2010 is also projected to be about 27 billion kilowatthours higher, largely as a result of accelerating the wind capacity additions that would have occurred later in the forecast. By 2025, wind generation in the CEB is only 7.2 billion kilowatthours higher due mainly to the added nuclear capacity and the expiration of the renewable PTC.

Residential initiatives, including weatherization. These provisions provide incentives for solar, wind, and fuel cells, a new standard for torchiere lighting (limiting lighting to 190-watt bulbs), tax credits for energy-efficient existing and new homes, and increased funding for weatherization programs.

Only the torchiere standard has a direct and measurable effect on residential energy demand, projected to save 5 billion kilowatthours in 2010 (2 percent of residential lighting) and 8 billion kilowatthours in 2025 (3 percent of lighting). Weatherization funding and tax credits for existing homes, solar, wind and fuel cells are not large enough to measurably affect the Reference Case.

Tax credits for efficient new homes increase the number of energy-efficient homes by 16 percent over the Reference Case for the period 2004 to 2006. Because of the provisions modeled in the CEB, consumption, prices, and expenditures are lower in the CEB Case than the Reference Case.

Commercial initiatives, including energy conservation product standards. These provisions set new appliance standards for illuminated signs and traffic signals, provide $50 million per year over 5 years to commercialize photovoltaic generation, and provide a 20-percent business ITC for fuel cells, up to $500 per 0.5 kilowatt of capacity, for new capacity added between 2004 through 2006.

The commercial standards are projected to reduce electricity consumption by over 4 billion kilowatthours in 2015 and over 5 billion kilowatthours in 2025. The photovoltaic program is projected to add 50 megawatts of PV capacity by 2008 (a 26-percent increase).

This capacity is expected to generate about 110 million kilowatthours annually. Since fuel cell systems would have to be operational by 2006 to receive the credit and installed systems costs in the commercial sector are over $5000 per kilowatt, adoption of the fuel cell technology is limited largely to Reference Case levels.

Investment tax credit for combined heat and power. Section 1306 of the CEB expands the current 10-percent business ITC for solar power generation equipment to include high-efficiency CHP systems smaller then 15 megawatts.

The tax credit creates an incentive to add CHP capacity and induces 98 additional megawatts (a 0.4-percent increase in installed capacity) of qualifying CHP capacity to be built in the period 2004 to 2006. Between 2004 and 2006, 290 megawatts of qualified capacity are added and would receive the ITC.

Continuation of tax credit for alternate fueled vehicles. Section 1318 provides tax credits for the purchase of lean-burn technology, hybrid, electric, and fuel cell vehicles. The value of the credit is based on vehicle type (hybrid, fuel cell, etc.), vehicle size (gross vehicle weight rating), efficiency improvement compared to a 2002 model year vehicle, and life-time fuel savings.

This provision increases electric vehicle sales by a total of 460 vehicles during the period between 2004 and 2012, from a cumulative total of 60,914 vehicles to 61,374 vehicles. There are no significant impacts on future sales of hybrid or fuel cell vehicles since most of those vehicle sales are due to the zero-emission vehicle program.

One thing that cannot be modeled using EIA’s system is the impact of incremental R&D investments on technological change, because the relationship between any specific R&D investment and the expected technological change cannot be statistically determined.

For that information, the industry may just have see what happens in the years following passage of this massive energy bill.