Executive Summary

This report responds to a request from Senator Byron L. Dorgan, asking the Energy Information Administration (EIA) to undertake a quantitative analysis of a variety of energy efficiency policies using assumptions provided by the Alliance to Save Energy (ASE). EIA screened a broad range of potential policies and provided preliminary estimates of their energy market impacts. Based on this information, two multi-policy cases were identified as the subject for more detailed analysis.

The analysis was conducted using the National Energy Modeling System (NEMS) of EIA, incorporating the data and assumptions from the reference case of the Annual Energy Outlook 2005 (AEO2005).¹ 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.

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.²
• 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 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 an Energy Efficiency Performance Standard (EEPS) for natural gas and electricity suppliers in five States 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 growth reduction target of 0.5 percent per year.

EIA simulated some of the policies, including most of the tax incentives, appliance standards, and building code policies, based on the effective changes in cost resulting from the tax incentives or the changes in efficiency mandated by the regulations. However, the voluntary programs and energy efficiency performance standards could not be explicitly modeled within NEMS. These policies reflect efficiency targets to be achieved without regard to how the goals are met. Because of the generic nature of these policies, it was not possible to model them in detail or to evaluate their feasibility or costs. For these policies, this report uses assumptions regarding the degree of compliance and energy savings achieved that were provided to EIA as a part of the request for this study. EIA has no basis for taking a position
on whether such programs would actually achieve the specified outcomes or whether they would be cost-effective.

Summary of Results

Energy Consumption. Compared to the reference case of the AEO2005, total projected energy consumption in 2025 is reduced by 3.9 quadrillion Btu (2.9 percent) in Case 1 and by 9.3 quadrillion Btu (7.0 percent) in Case 2. The energy reductions under both policy cases increase over time, as the policies are generally phased-in or are targeted to achieve a steady reduction in energy growth. Also, policies that call for improvements in the efficiency of new equipment and vehicles will impact the market slowly because of gradual equipment turnover. As a result, projected policy impacts on total energy consumption in 2015 are roughly half the 2025 impacts in both policy cases.

Energy Reductions by Fuel Type. The 2025 energy reduction in Case 1 consists of petroleum (2.4 quadrillion Btu, or a 4.5-percent reduction), followed by coal (1.0 quadrillion Btu, or 3.4 percent), and natural gas (0.5 quadrillion Btu, or 1.6 percent). In Case 2, projected coal use is reduced by 12.7 percent compared to the reference case in 2025, natural gas by 7.9 percent, and petroleum by 4.8 percent.

Energy Reductions by Sector. About half of the Case 1 reductions in energy use in 2025 occur in the transportation sector as a result of the more stringent CAFE testing policy, which requires manufacturers to increase the average fuel economy of new light-duty vehicles. In Case 2, the energy savings are more evenly split across the four end-use sectors.

The Case 2 energy savings in 2025 attributed to electricity generation account for just over half the total reductions. These savings occur primarily as a result of the national-level EEPS policy for electricity and the electricity sector voluntary agreement policy.

Sales of electricity in 2025 are 2.4 percent less in Case 1 than in the AEO2005 reference case, while power sector energy use falls by 1.6 percent. Because the reduced electricity demand also reduces the need for new, more efficient generating capacity, the average efficiency of electricity generation in Case 1 is less than in the AEO2005 reference case. As a result, the reductions in energy use for generation are less than proportional to the reductions in
electricity demand.

Import Dependence. The net import share of oil consumption falls from 68.4 percent in 2025 in the reference case to 67.3 percent in both multi-policy cases. The Case 2 polices, which result in a substantial reduction in natural gas consumption in 2025 (7.9 percent) compared to the reference case, also reduce dependence on imported natural gas in 2025 from 28.2 percent in the reference case to 26.1 percent in Case 2.

Prices. Given the absence of information regarding the implementation of key policies included in the two integrated policy suites, EIA was not able to reliably estimate impacts on delivered energy prices and energy expenditures. For example, based on experience, it would be reasonable to expect that programs used to meet demand-reduction obligations placed on electricity and gas suppliers subject to an EEPS would be financed through surcharges on consumer bills. However, estimates of the cost of demand reduction in past programs vary widely, and there is no clear basis for using a particular estimate to represent the unspecified programs that might be pursued. While demand reduction itself tends to lower retail energy prices, the cost of programs used to reduce demand in these policy suites could partially, fully, or more than fully offset this effect.

Macroeconomic Impacts. The macroeconomic impacts from the policies are uncertain, because the implementation costs are not fully reflected in the modeling of energy prices. Therefore, the cumulative losses from the policies on the demand side of the economy, as measured by actual gross domestic product (GDP), could not be quantified. Such losses would arise from the adjustment and relocation costs associated with changing energy consumption as the economy adjusts to a longer-run equilibrium path. However, some indication of the macroeconomic impact of the policies can be inferred from the effect of reduced energy use on the supply potential of the economy, as measured by potential GDP.³ The productivity of the economy is reduced as the mix of energy, labor, and capital stock adjusts to the new policies. Based on productivity losses alone, the estimated cumulative loss in potential GDP for Case 1 is $445 billion, which represents 0.14 percent of total potential GDP over the entire 2006 to 2025 period. For Case 2, the cumulative loss is $864 billion and represents a loss of 0.27 percent of potential output over the entire period. These losses in potential GDP would be mitigated if implementation of the proposed policies resulted in a reduction in delivered energy prices.

Carbon Dioxide Emissions. Overall carbon dioxide emissions in 2025 are reduced by 282 million metric tons (3.5 percent) in Case 1, relative to the AEO2005 reference case, and by 671 million metric tons (8.3 percent) in Case 2.

Contribution of Individual Policies

Table ES1 summarizes the effects of the individual policies on energy consumption relative to the AEO2005 reference case.

As indicated previously, the energy reductions for the voluntary programs and EEPS policies reflect assumptions provided to EIA as part of the request for this study. The EEPS for natural gas and electricity suppliers alone provides 63 percent (5.9 quadrillion Btu) of the total energy savings of 9.3 quadrillion Btu in Case 2 in 2025. The smaller five-State EEPS programs included in Case 1 account for about 22 percent of the projected Case 1 energy savings of 3.9 quadrillion Btu in 2025.

The CAFE reform policy, included in both multi-policy cases, accounts for 50 percent of the energy savings projected for 2025 in Case 1 and 21 percent of the Case 2 savings in 2025.

The policies having the least cumulative impact on energy consumption are the tax incentives (tax credits for new and existing homes, residential and commercial tax credits for efficient equipment and building shells, and an investment tax credit for small combined heat and power plants). Together, these policies, which have a greater impact early in the projection period when the incentives are in effect, reduce projected energy consumption in 2010 by 0.04 quadrillion Btu (less than 0.1 percent) compared to the reference case.

CAFE Test Reform. The CAFE test reform policy has the following impacts, which are virtually identical in Case 1 and Case 2:

• Compared to the AEO2005 reference case, the increased light-duty vehicle fuel economy projected in Case 1 reduces transportation petroleum consumption by 3.3 percent (1.1 quadrillion Btu) in 2015 and by 5.0 percent (1.9 quadrillion Btu) in 2025.
• In Case 1, light-duty vehicle travel in 2025 increases by 2.2 percent (91 billion miles annually) compared to the AEO2005 reference case, because increased vehicle fuel economy reduces the cost of driving.
• The increased penetration of advanced technologies required to meet the more stringent CAFE test procedures increases the average price of a new light-duty vehicle in Case 1 compared to the AEO2005 reference case. In 2015, the average price of a new car is $530 higher and the average price of a new light truck is $620 higher (2003 dollars). In 2025, the average incremental price increase for cars is $400 and for light trucks is $480.
• As a result of increased new vehicle prices, projected sales of new light-duty vehicles decrease relative to the AEO2005 reference case. In 2015, new light-duty vehicle sales decrease by 2.5 percent (470,000 vehicles), with 61 percent of that reduction attributed to a decrease in sales of light trucks. In 2025, new light-duty vehicle sales decrease by 2.2 percent (460,000 vehicles), with the decrease in new light truck sales accounting for 67 percent of the total reduction.

Notes

Executive Summary Table