Executive Summary

This report responds to requests from Chairman Edward Markey, for an analysis of a 25-percent Federal renewable electricity standard (RES).  The RES proposal analyzed in this report is included in the discussion draft of broader legislation, the American Clean Energy and Security Act (ACESA) of 2009, issued on the Energy and Commerce Committee website at the end of March 2009.¹  The two request letters and the relevant section of the ACESA discussion draft are provided as Appendices A, B, and C of this report.  

While Chairman Markey’s original letter asked that sensitivities with alternative greenhouse gas policies be prepared, his subsequent letter released the Energy Information Administration (EIA) from that requirement.  Consequently, the analysis presented here does not consider the interactions of the RES provisions contained in ACESA with other key provisions of that legislation, although the report does include some qualitative discussion of how the RES might interact with other key provisions in ACESA.     

The analysis presented in this report starts from an updated version of the Annual Energy Outlook 2009 reference case that reflects the projected impacts of the American Recovery and Reinvestment Act (ARRA), enacted in February 2009, and revised economic assumptions.  ARRA has a significant impact on the projected growth of renewable energy over the next 5 years, so it is important to account for its enactment in considering the projected impacts of an RES requirement.  The development of the updated reference case is described in a recent EIA report An Updated Annual Energy Outlook 2009 Reference Case Reflecting Provisions of the American Recovery and Reinvestment Act and Recent Changes in the Economic Outlook.²  As noted in that report, EIA intends to use this updated baseline in its analyses of proposed changes in laws and regulations, including the RES analysis presented in this report.  Therefore, the term “reference case” in this report means the updated reference case presented in the aforementioned report.   

The RES program in the ACESA discussion draft includes provisions that may allow credits for qualified State energy efficiency programs to satisfy up to 20 percent of the RES requirement, but the availability of these credits is tied to implementation of the energy efficiency resource standard (EERS) program that is also included in ACESA.  As the baselines for and details of the yet-to-be-established EERS program are unknown, the extent to which States would have access to efficiency credits for purposes of the RES is not clear.  In order to assess how different outcomes might affect the projected impacts of the RES, EIA analyzed two RES policy cases.  The RES with Full Efficiency Credits (RESFEC) case assumes that the maximum level of efficiency credits, up to one-fifth of the credits in the target in any given year, are claimed.  This is reflected as a 20-percent reduction in the effective target for eligible renewable generation.  The RES with No Efficiency Credits (RESNEC) case assumes that States cannot qualify for, or elect not to use, efficiency credits.  

Key findings include:

• While the nominal target sales share for renewables eligible for the RES is 25 percent in 2025, exempting the small retailers lowers the effective target to 22 percent of total electricity sales.  The effective target is lowered further to 21 percent when the generation from hydroelectric power and municipal solid waste is removed from the sales baseline.  If States are able to, and elect to, take full advantage of the energy efficiency credits for compliance, the effective share of renewables required could drop to approximately 17 percent of total electricity sales.

• Power sellers will turn to a mix of renewable fuels to comply with the RES.  In absolute terms, the key fuels are projected to be biomass and wind, but other renewable fuels including solar and geothermal are also projected to grow significantly in percentage terms.

• Most of the projected increase in wind generation is due to existing State renewable portfolio standard programs and the passage of ARRA.  This occurs in both the reference case and the RES cases.  Total wind generation in the two RES cases is projected to increase from 32 billion kilowatthours in 2007 to between 208 billion kilowatthours and 249 billion kilowatthours in 2030.  Total biomass generation increases from 39 billion kilowatthours in 2007 to between 438 billion kilowatthours and 577 billion kilowatthours in 2030 in the two RES cases. The renewable provisions of ARRA do not have as large an impact on biomass as on wind, because the production subsidies provided for the co-firing of biomass are smaller and because new dedicated biomass plants generally take longer to develop than would be required to meet the deadline to qualify for production subsidies under ARRA.

• The higher renewable generation stimulated by the Federal RES leads to lower coal and natural gas generation.  In the two RES cases, coal generation ranges between 182 billion kilowatthours (8 percent) and 257 billion kilowatthours (11 percent) below the reference case level.  Similarly, natural gas generation in the two RES cases in 2030 is between 55 billion kilowatthours (6 percent) and 150 billion kilowatthours (15 percent) below the level projected in the reference case.

• Given the amount of eligible renewable generation projected in the reference case, the RES is not expected to affect national average electricity prices until after 2020.  As the required RES share increases to its maximum value in 2025, the value of RES credits increases, and impacts on national average electricity prices become evident.  The peak effect on national average electricity prices, 2.7 percent in the RESFEC case and 2.9 percent in the RESNEC case, occurs as the required renewable share ramps up more rapidly than the demand for electricity is growing.  In the later years of the projections, the impact on national average electricity prices is smaller, as the impact of the RES requirement on the cost of coal and natural gas, fuels whose use is reduced by added renewables, is increasingly reflected in electricity prices.  By 2030, electricity prices are projected to be little changed from the reference case in both RES cases, with 2030 prices less than 1 percent higher than in the reference case.

• Electricity price impacts vary from region to region, with renewable–resource-rich regions like the northern Great Plains States and the northwest States potentially seeing prices decline from reference case levels, while other regions see price increases ranging from 1 percent to 6 percent above reference case levels between 2025 and 2030.

• Because of the level of renewables projected in the reference case, renewable credits have no value before 2020.  After 2020, they rise to the 5-cent-per-kilowatthour cap in 2024 as the renewable requirement grows more rapidly than electricity sales.  In the last few years of the projections, they begin to fall as electricity demand and fossil fuel prices continue to grow.

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• The increased use of renewables stimulated by the RES leads to lower electricity sector carbon dioxide emissions.  Electricity sector carbon dioxide emissions in 2030 are between 196 million metric tons (7 percent) and 307 million metric tons (12 percent) below the reference case level in the two RES cases.

• EIA’s modeling of the RES in the ACESA discussion draft was a standalone analysis that did not consider interactions with other key programs in the ACESA discussion draft.  While EIA cannot develop an integrated analysis until there are clearer insights into how some of the other ACESA programs would actually be implemented, interactions among the elements of ACESA could be significant.

• In previous analyses of economy-wide policies to limit or reduce emissions of greenhouse gases, EIA has generally found that a cap-and-trade program for greenhouse gases leads to significant growth in the use of renewable energy for electricity generation, which becomes more attractive when the cost of using fossil fuels goes up.  Where there are multiple targets that can be satisfied with the same energy resources and projects, the target that sets the upper limit on the use of the resource will generally absorb all of the incremental costs from that resource, making compliance with the non-binding goal appear to be costless.  To the extent that the proposed cap and trade program induces more renewable resources than required by the concurrent RES proposal, one might expect a reduction in apparent RES compliance costs, since those costs would already be reflected in the value of carbon dioxide allowances.

• The potential interactions of an RES policy with other policy instruments such as an EERS or a cap–and-trade program for limiting or reducing greenhouse gas emissions could also impact the findings.  If the EERS and other energy efficiency policies are successful in leading to falling demand for electricity, reducing the need for capacity additions of any kind, it could be very difficult to stimulate utilities to invest in new renewable capacity.  While previous EIA analyses have found that increased investment in renewables would be attractive under a greenhouse gas emission reduction policy, successful development of competing “clean” technologies such as nuclear and fossil plants with carbon capture and storage equipment could hamper renewable development.

• Numerous uncertainties exist in this analysis.  Key unknowns include:

• Future fuel and technology costs are highly uncertain.  Lower-than-expected fossil fuel prices would make it more difficult to stimulate investments in renewables, while higher fossil fuel prices would have the opposite impact. With regard to technology costs, this analysis generally assumes that technology costs and performance will improve as technologies penetrate the market, but insurmountable hurdles could arise.

• With respect to biomass co-firing at existing coal plants, powerplant operators may be reluctant to make the necessary investments if they believe they may have to retire or reduce the utilization of their plants under a greenhouse gas emission reduction policy.

• For wind, solar, and biomass technologies, the level of development called for with the proposed RES may require developers or grid operators to pay to build or upgrade long transmission lines from the remote areas with ample wind resources to the areas with significant electricity demand.

Notes