1. Background

In a letter on September 29, 2004,¹ Senator Byron L. Dorgan requested that the Energy Information Administration (EIA) conduct a quantitative analysis of a broad set of energy efficiency policies that have evolved from his staff’s work with the Alliance to Save Energy (ASE). Senator Dorgan asked EIA to meet with his staff to obtain details on the policies to be analyzed and the assumptions to be made in the analysis. In the letter, EIA was asked to examine the energy and economic impacts of the policies and to identify those policies with the potential to significantly reduce the dependence of the United States on imported energy and reduce emissions. EIA used the National Energy Modeling System (NEMS)² to represent the policies, with the results of the Annual Energy Outlook 2005 (AEO2005)³ used as a
policy-neutral reference case.

An initial list of approximately 50 candidate policies and variations was provided to EIA. EIA was able to represent many of the policies in NEMS and completed 30 preliminary, partial NEMS runs to evaluate the policies individually. In most of the runs, only the portion of NEMS representing the sector affected by the policy was used. While such partial runs
provide some insight into first-order impacts, they do not include all the price and macroeconomic feedbacks that would occur in a full, integrated NEMS run. Based on this preliminary screening, two multi-policy cases were identified as the subject for more detailed analysis. The reference case assumes that all current laws and regulations remain as enacted, with no additional policy changes other than those assumed in this analysis. The policies included in the two multi-policy cases are as follows.

Case 1 includes:

• Tax credits from 2006 to 2010 for builders of new homes and owners of existing homes for the adoption of building upgrades and the installation of new equipment and appliances meeting certain efficiency criteria.⁴
• Upgraded efficiency standards for residential furnaces and furnace fans in 2011, for torchiere lamps in 2007, for ceiling fan light kits in 2009, and for manufactured homes in 2007.
• Tax credits for commercial building owners for new heating and cooling equipment installed between 2006 and 2010 and that meets certain efficiency criteria.
• Upgraded commercial efficiency standards for pre-rinse spray valves in 2008 and for air conditioners, reach-in refrigerators, and distribution transformers in 2010.
• Tax credits for small combined heat and power systems (less than 15 megawatts generating capacity) installed between 2006 and 2008.
• A voluntary agreement policy to achieve an industrial energy intensity reduction of 2.5 percent annually from 2006 to 2016, with assumed participation by 10 percent of the sector.
• Reform of the current Corporate Average Fuel Economy (CAFE) test procedures to eliminate a 20-percent shortfall between tested fuel economy values and those achieved during actual on-road driving, to be phased-in between 2008 and 2012.
• Implementation of a five-State Energy Efficiency Performance Standard (EEPS) for natural gas and electricity suppliers to reduce growth in their customers’ energy use by 0.75 percent per year from 2009 to 2025. The natural gas and electricity suppliers in five “average States” would be required to implement or sponsor efficiency programs to achieve verifiable energy savings in the residential, commercial, and industrial sectors.

In addition to the policies in Case 1, Case 2 includes:

• Revisions to residential building codes in 2009, 2012, and 2015 and to commercial building codes in 2007, 2010, and 2013 to improve energy efficiency.
• A voluntary agreement program in the electric and natural gas industries to increase their energy efficiency from 2006 to 2016. The energy intensity reduction goals are 5 percent for electricity, applied to fossil- and biomass-fueled plants, and 5 percent for natural gas, applied to 25 percent of pipeline fuel and lease and plant fuel.
• The EEPS for natural gas and electricity suppliers would be implemented nationally, with an annual reduction target of 0.5 percent per year.

The treatments of these policies in NEMS fall into two categories: (1) policies represented explicitly by the specific end use or equipment class affected and (2) policies included in the projections with assumed impacts to meet aggregate targets. For policies in the first category, including the tax incentives, appliance standards, building codes, and CAFE testing reform, the impacts were estimated in NEMS by simulating the market response to the specific changes in costs and regulations or to per-unit equipment savings. The other policies, including the EEPS and the three voluntary agreement programs, reflect aggregate fuel- or sector-level efficiency targets to be achieved without regard to how the goals are met. Because of the generic nature of such policies, it was not possible to represent them in detail or to evaluate their feasibility or costs. The policy goals specified in the analysis request were assumed to be met, and the associated reductions in energy use were reflected in the analysis.⁵

The remainder of this section discusses the policies that were considered in the analysis, beginning with the policies whose assumed impacts were provided to EIA as part of the request for the study, followed by a section on those specific policies that were represented explicitly by end use or equipment.

Policies Represented Using Assumed Impacts Provided to EIA in the Study Request

This section discusses the assumptions for and impacts of the general policies that were represented broadly in NEMS to meet aggregate targets. The policies include the EEPS and three voluntary programs.

Energy Efficiency Performance Standards

The EEPS⁶ establishes State- or national-level targets for reducing the growth of electricity and natural gas consumption. Fuel suppliers would be required to implement programs to promote energy savings and to document the program impacts. The policies establish procedures for retail energy suppliers to follow in measuring, verifying, and reporting energy savings. Examples of methods to achieve the savings include appliance rebate programs, information programs, energy audits or other technical assistance programs, and financial incentives. Some governing body, such as a State utility commission, would be required to verify the reported savings and enforce the policy. EEPS policies have been proposed along with Public Benefits Funds to pay for the efficiency measures through surcharges added to consumers’ fuel bills.⁷

Two versions of the policy were considered. In the first, five “average States” were assumed to adopt the policy with a targeted reduction in growth rates of electricity and natural gas demand growth of 0.75 percent per year beginning in 2009. In the second version, the EEPS policies were assumed to be national in scope,⁸ with a growth rate reduction target of 0.5 percent per year.

The AEO2005 reference case was used as the baseline from which the assumed growth rate reductions were taken. The policies were assumed to apply equally across the residential, commercial, and industrial sectors. Natural gas use in the electric power sector was excluded. The transportation sector, which consumes only a small amount of electricity and natural gas, was also assumed to be exempt. Because the five States were not specified, the five-State policy was assumed to reflect a goal achieved by one-tenth of the country (5 of 50 States), with the reductions distributed across Census divisions in proportion to regional consumption. The reduction in the average annual growth rate, from a no-action base year of 2008 through 2025, was translated into an average annual reduction in energy demand, beginning in 2009, and then shared to sectors in proportion to projected sectoral demands.

It was not possible to simulate behavioral or economic aspects of the policy in NEMS. Instead, the energy reduction targets were assumed to occur and the annualized deductions were subtracted from the model’s estimated energy demand in each projection year. No attempt was made to estimate the cost of the programs, and no markups to delivered prices were added, as might occur through a Public Benefits Fund surcharge. As a result, the representation of these policies in NEMS was by assumption and was not meant to reflect any judgment about the reasonableness or likelihood of the targets being achieved.

Electricity and Natural Gas Voluntary Agreements

Two voluntary policies would require the Federal Government to enter into agreements with the electric power and natural gas industries to improve their energy efficiency. The target for the electricity industry is to reduce primary energy intensity (energy consumption per unit of output) by 5 percent from a no-action base year of 2006 through 2016. The policy would apply to fossil- and biomass-fueled power plants (excluding other renewable sources and nuclear power), with intensity reductions of about 0.5 percent per year beginning in 2007.

In the AEO2005 reference case, the energy intensity of fossil and biomass plants is projected to decline by 3.2 percent from 2006 to 2016. Although the heat rates (or energy intensity) for existing plants were assumed to be constant in the reference case, an overall intensity decline is projected as new, more efficient plants replace or supplement the use of existing plants. To simulate the effect of the policy, heat rates of existing fossil and biomass plants were assumed to decline by 3 percent from 2006 to 2016 and remain constant thereafter, resulting in an overall intensity decline of about 5 percent from 2006 to 2016.

In the natural gas industry, the voluntary agreements would target energy intensity in two activities: (1) pipeline energy use per unit of natural gas delivered and (2) lease and plant fuel used per unit of dry natural gas production. The policy goals are to reduce the intensity measures cumulatively by 5 percent below the baseline from 2006 to 2016, with 25 percent of the suppliers agreeing to the target. In aggregate, the industry was assumed to achieve a reduction in these activities of 1.25 percent (the 5-percent target applied to 25 percent of the industry).

In the AEO2005 reference case, pipeline fuel use is estimated on the basis of pipeline flows and fuel use factors that vary by transit route but are assumed to be constant over time. The cumulative projected decline in pipeline fuel intensity from 2006 to 2016 is 10 percent in the reference case because of changing distribution patterns. To reflect the efficiency policy, fuel use factors were assumed to decline by 1.25 percent cumulatively from 2006 to 2016.

Lease and plant fuel use is estimated on the basis of assumed factors that are multiplied by dry gas production. Lease and plant fuel intensity is projected to remain constant in the AEO2005 reference case. To reflect the policy, the factors were assumed to decline by 1.25 percent cumulatively from 2006 to 2016. The electricity and natural gas industries would incur costs to achieve the energy reduction goals of these voluntary programs; however, no attempt to estimate such costs was made, and the delivered prices of electricity and natural gas do not include any markups to reflect those additional costs.

Industrial Voluntary Agreements

The industrial voluntary agreements policy requires the U.S. Department of Energy (DOE) and the U.S. Environmental Protection Agency (EPA) to enter into agreements with industrial entities based on a goal to reduce energy intensity⁹ by 2.5 percent per year from a no-action base year of 2006 to 2016, with reductions starting in 2007. In the AEO2005 reference case, industrial delivered energy intensity is projected to fall by 1.4 percent per year between 2006 and 2016. Therefore, on average, entities agreeing to achieve an incremental reduction in energy intensity of 1.1 percent per year would meet the 2.5-percent-per-year objective of the voluntary program.

By ASE assumption, entities representing 10 percent of U.S. energy consumption and 10 percent of industrial output would agree to participate and would, on average, achieve an incremental energy intensity reduction of 1.1 percent per year. The 10-percent participation rate, together with the further assumption that the participants’ energy intensity would
improve at the average rate for all industry in the baseline scenario, implies that the program would achieve an overall incremental reduction in energy intensity of 0.11 percent per year (10-percent participation multiplied by an average 1.1-percent-per-year reduction). Therefore, with the voluntary agreements, overall energy intensity is assumed to decline by 1.5 percent per year between 2006 and 2016, compared with 1.4 percent per year over that period in the reference case.

To represent the policy in NEMS, the energy technology adoption assumptions in the model were modified such that an incremental energy intensity reduction of 0.11 percent per year would occur over the 2006 to 2016 period. After 2016, the technology adoption parameters in the model were assumed to revert to the reference case values. Therefore, program savings are largely sustained, but do not increase, after 2016. Also, the approach to modeling the voluntary programs caused the assumed incremental impacts to be included when the policy was combined with other policies that independently reduce energy consumption.

For each of the programs outlined above, Table 1 presents estimates of the absolute change in energy use that would occur if the assumed program targets were realized. These calculations were made separately for each program relative to the reference case projections in AEO2005 and do not include feedbacks that would occur in an integrated analysis.

Policies Represented Explicitly by End Use

Policy to Reform Corporate Average Fuel Economy Test Procedures

The policy examined in this analysis would require a revision in the current CAFE test procedures, with the procedures phased in from 2008 to 2012. By 2012, manufacturers would have to develop vehicles that provide a 20-percent increase in fuel economy to comply with the more stringent fuel economy test procedures. Initial revisions to the test procedure, to be implemented in 2008, would require a 4-percent increase in fuel economy. An additional 4 percent improvement in fuel economy would be required in each following year until 2012. The policy was included in both multi-policy cases considered in this analysis. The policy was modeled by increasing the fuel economy standards that manufacturers would have to meet, constraining the model’s simulation of technology adoption by manufacturers and the vehicle choices available to consumers.

Upgraded Residential and Commercial Appliance Efficiency Standards

The policy calls for new and increased efficiency standards for three appliances in the residential sector and four in the commercial sector. The standards, included in both multipolicy cases in this analysis, were modeled by restricting the available appliances and equipment to those meeting the new standards beginning in the effective year of the policy, or by including the assumed energy savings as indicated. The changes and assumptions pertaining to the residential appliance standards are as follows:

• Furnaces and Furnace Fans: The current standard requires a 78 Annual Fuel Utilization Efficiency (AFUE) for furnaces. The proposed standard, effective in 2011, would require an 81 AFUE in southern climates, a 90 AFUE in northern climates,¹⁰ and a 20-percent improvement in furnace fan efficiency.
• Torchiere Lamps: The proposed standard would be 190 watts per bulb, effective in 2007.
• Ceiling Fan Light Kits: The proposed standard would require light kits in ceiling fans to be sold with compact fluorescent bulbs, effective in 2009. The standard is assumed to save 123 kilowatthours per unit and apply to an assumed 14 million units sold per year.

The changes and assumptions for proposed commercial sector appliances and equipment standards are as follows:

• Air Conditioners, Air-Cooled: The current standard is an Energy Efficiency Ratio (EER) of 8.9 for systems with a capacity of 65 to 135 thousand Btu per hour (kBtu/hr). The proposed standard, effective in 2010, is dependent on the capacity and heating system type. An EER standard of 11.2 or 11.0 (11.2 applies to electric or no heat; 11.0 applies to all other heating types) is applicable to 65 to 135 kBtu/hr unitary air conditioners. An 11.0/10.8 EER standard applies to 65 to 135 kBtu/hr heat pumps. An 11.0 to 10.8 EER standard applies to 135 to 240 kBtu/hr unitary air conditioners. A 10.6 to 10.4 EER standard applies to 135 to 240 kBtu/hr heat pumps.
• Reach-in Refrigerators: The proposed standard, effective in 2010, calls for a 26-percent efficiency improvement for solid-door, reach-in refrigerators and a 39-percent improvement for glass/transparent door refrigerators, relative to 1999 models.
• Pre-rinse Spray Valves: The proposed standard would limit flow to 1.6 gallons per minute, effective in 2008, and is assumed to save 336 therms per year per unit.
• Distribution Transformers: The proposed standard, effective in 2010, is based on recommendations from the Appliance Standards Awareness Project. Low-voltage dry-type distribution transformers are assumed to save 22 kilowatthours per year, and mediumvoltage dry-type distribution transformers are assumed to save 25 kilowatthours per year.

Tax Incentives

Several proposed tax incentive policies, included in both multi-policy cases considered in this analysis, were modeled by reducing costs to the owner or builder to reflect the tax credits over the applicable period. Generally, the tax policies evaluated are based on one of two recent legislative initiatives: H.R. 6, the House Conference Bill, or S.2311, the Efficient Energy through Certified Technologies and Electricity Reliability (EFFECTER) Act of 2004. The tax credit policies included are as follows:

• New Homes, 2006-2008: Based on EFFECTER, the builder receives a tax credit of $1,000 for homes that are 30 percent more energy efficient than the 2004 International Energy Conservation Code (IECC)¹¹ and $2,000 for homes 50 percent better than the IECC.
• Existing Homes, 2006-2008: Based on H.R. 6, the maximum homeowner tax credit is $2,000 to cover up to 20 percent of the cost of upgrades to building envelopes to meet the IECC.
• Residential Equipment, 2006-2010: Based on EFFECTER, homeowners receive tax credits of $50 for “Tier 1” appliances and $150 for “Tier 2” appliances.12 The credits apply from 2006 to 2007 for Tier 1 appliances and from 2006 to 2010 for Tier 2 appliances.
• Commercial Equipment, 2006-2010: Based on EFFECTER, businesses receive a tax
  deduction of $150 or $450 for “Tier 1” equipment and $900 for “Tier 2” equipment.¹² The credits apply from 2006 to 2007 for Tier 1 appliances and from 2006 to 2010 for Tier 2 appliances.
• Combined Heat and Power, 2006-2008: Based on H.R. 6, a 10-percent tax credit is provided to businesses for systems with up to 15 megawatts of electric generating capacity and total system efficiency of 60 percent.

Building Codes

States were assumed to adopt several upgrades to building code policies for the residential and commercial sectors. The residential policies apply to either manufactured homes as regulated by the U.S. Department of Housing and Urban Development (HUD) or all other homes (non-HUD homes), based on future upgrades to the IECC. The commercial policies are based on improvements to shell components and lighting systems in future updates to Standard 90.1 issued by the American Society of Heating, Refrigerating and Air-Conditioning Engineers, Inc. (ASHRAE). The HUD policies are included in both multi-policy cases, while the other residential and commercial building code policies are included in Case 2 only.

The specific assumptions about the policies are as follows:

• HUD Homes: Beginning in 2007, a savings in heating and cooling of 9 percent is assumed in the South Atlantic and West South Central Census divisions, 4 percent in the East South Central, Mountain, and Pacific divisions, and 6 percent in the New England, Middle Atlantic, East North Central, and West North Central divisions.
• Non-HUD Homes: States are assumed to adopt updates to the IECC in 2009, 2012, and 2015. The modeling assumes that the policy leads to savings in heating and cooling of 5 percent in 2009, an additional 7.5 percent in 2012, and an additional 7.5 percent in 2015.
• Commercial Building Codes: States are assumed to adopt updates to ASHRAE 90.1 in 2007, 2010, and 2013. The modeling assumes that the savings from the 2007 update are included in the reference case; assumes a maximum lighting power density (watts per square foot) that varies by building type in 2010, as specified by the ASE; and assumes additional savings in heating and cooling of 7.5 percent in 2010 and again in 2013.

Table 2 summarizes the policies considered in the analysis, indicating how they were combined in the multi-policy cases and whether they were modeled explicitly or represented with assumed impacts.

Methodology and Uncertainties

The projections in this report are model simulations. NEMS, like all models, is a simplified representation of reality. Projections are dependent on the data, methodologies, model structure, and assumptions used to develop them. Because many of the events that shape energy markets are random and cannot be anticipated (included severe weather, technological breakthroughs, and geopolitical developments), energy market projections are subject to uncertainty. Furthermore, future developments in technologies, demographics, and resources cannot be foreseen with certainty. Nevertheless, well-formulated models are useful in analyzing complex policies, because they ensure consistency in accounting and represent key interrelationships, albeit imperfectly, but often well enough to provide insights.

The projections in the reference case used in this report are from the AEO2005. The projections are not statements of what will happen but 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. Thus, they provide a policy-neutral starting point that can be used to analyze policy initiatives. EIA does not propose, advocate, or speculate on future legislative and regulatory changes within the reference case. Laws and regulations are generally assumed to remain as currently enacted or in force (including sunset or expiration provisions); however, the impacts of scheduled regulatory changes, when clearly defined, are reflected.

Finally, the costs of the policies and their impacts on expenditures are not fully represented in the modeling. EIA was not able to reliably estimate impacts of the policy cases on delivered retail energy prices and energy expenditures. As a result, the macroeconomic implications of these policies are not fully reflected in the analysis. While the macroeconomic impact on potential gross domestic product (GDP) can be modeled primarily on the basis of changes in energy consumption induced by the policies, the transitional impacts on actual GDP from unmeasured expenditures implied by these policies are not reflected.

Notes

Background Tables