4. Alternative Cases

Chapter 2 described some of the analytic issues and uncertainties associated with an analysis of the proposed Policy—national implementation of a 25-percent RPS and a 25 percent RFS by 2025. Chapter 3 summarized EIA’s analysis of the expected consequences of the Policy, using a Reference Case based on assumptions close to those of the AEO2007 reference case. This chapter describes analyses estimating the likely impacts of the same Policy in alternative cases, based on different assumptions about key uncertainties in the Reference Case.

Assessment of the consequences of any potential policy or proposed legislation requires the selection of a reference case against which impacts are to be measured; however, the reference case chosen will inevitably include a variety of uncertainties, including most importantly the future path of national economic growth, energy prices, and the
development and adoption of new technologies. Any change in reference case assumptions about the specific resolution of such uncertainties in a projection represents, in effect, a potential alternative reference case or “view of the world.” For example, the high and low economic growth cases and the high and low price cases in AEO2007 represent such potential alternative reference cases or outlooks.

For this analysis, EIA chose three groups of key uncertainties to be examined, first by changing assumptions from those in the Reference Case—creating three “alternative reference cases”—and then by adding the policy assumptions to each of the alternative cases.³⁰ The resulting six cases, which were summarized briefly in Chapter 1 (see Table 1), are as follows:³¹

• High Price Case: The High Price Case, modified from the AEO2007 high price case to incorporate the same changes in assumptions that were made in the Reference Case for this study, uses more pessimistic assumptions for worldwide crude oil and natural gas resources. In this alternative reference case, world light, sweet crude oil prices in 2030 are about 70 percent higher than projected in the Reference Case.
• High Price Policy Case: Combines the High Price Case with model changes required to meet the Policy assumptions.
• Low-Cost Ethanol Imports Case: This alternative reference case incorporates the same changes in assumptions that were made in the Reference Case for this study but replaces the Reference Case ethanol import supply curves with more optimistic supply curves.³²
  
• Low-Cost Ethanol Imports Policy Case: Combines the Low-Cost Ethanol Imports Case with the Policy assumptions.
• High Renewable Technology Case: This alternative reference case, which is also referred to as the High Technology Case, incorporates the same changes in assumptions that were made in the Reference Case for this study and in addition uses assumptions for advanced renewable generation technologies and cellulosic ethanol production from the AEO2007 high renewables case, and a much larger biomass supply (see Appendix B, Figure B1).
• High Technology Policy Case: Combines the High Technology Case with the Policy assumptions

Measuring and Interpreting the Relative Impacts of the Policy

In this chapter, each of the three alternative reference cases has an associated policy case. Each alternative reference case (without the Policy assumptions) represents an alternative outlook for the U.S. energy economy, which in turn ultimately determines the magnitude of the energy and economic costs when the proposed Policy is added to it. In comparing the impacts of the Policy on the alternative reference cases, the appropriate comparison is between the paired reference and associated policy cases because they represent the same basic outlook for everything except the Policy. Comparisons between one reference case and the policy case for a different reference case with the Policy imposed are generally inappropriate. For example, comparison of gasoline prices in the Reference Case described in Chapter 3 with gasoline prices in the High Price Policy Case would be inappropriate because it would overstate the costs of the Policy. Similarly, comparison of gasoline prices in the Reference Case with gasoline prices in the High Technology Policy Case would also understate the costs of the Policy, unless there is a strong basis for claiming that the more favorable technology menu in the High Technology Policy Case is available only as a direct result of the Policy.

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Electricity Sector Impacts

In the three alternative reference cases presented in this chapter, renewable energy is more competitive than in the main Reference Case, because the assumptions in the alternative cases either lower the cost of renewable energy or raise the cost of fossil energy. Low-cost ethanol imports or more rapid progress in the development and adoption of renewable technologies would lower the cost of renewable energy; higher oil and natural gas prices would raise the prices of the fossil fuels that compete with renewables. In each of the corresponding policy cases, the projections for RPS credit prices and the impacts on electricity prices are lower than those in the main Policy Case (Table 10). In the Low-Cost Ethanol Imports Policy Case, the availability of low-cost ethanol imports reduces the use of domestic biomass by U.S. ethanol producers and makes more biomass available to power producers. In the High Price Policy Case, higher oil and natural gas prices reduce the incremental costs of increasing renewable fuel use in power generation, thus reducing the cost of complying with the 25-percent RPS. Similarly, in the High Technology Policy Case, more rapid improvement in the cost and performance of new renewable technologies makes those technologies more economically attractive and lowers RPS compliance costs.

RPS Credit Prices

In the main Policy Case, the RPS credit price rises sharply between 2020 and 2025 as the required renewable generation share grows to the 25-percent target (Figure 20). The RPS credit price in the Policy Case peaks at about 4.8 cents per kilowatthour in 2025 and then generally hovers between 3.8 and 4.6 cents per kilowatthour thereafter. The same general pattern is seen in the alternative policy cases, but the RPS credit prices tend to peak at a lower level in 2025 and then fall after 2025:

• In the Low-Cost Ethanol Imports Policy Case, the RPS credit price peaks at 4.3 cents per kilowatthour in 2025, then falls to a level of 2.5 to 3.0 cents per kilowatthour from 2025 to 2030. U.S. ethanol producers use less biomass in this case because of the lower-cost ethanol imports. The resulting increased availability of lower-cost biomass to power producers reduces their need for more expensive renewables after 2025.
• In the High Price Policy Case, the RPS credit price peaks at 4.6 cents per kilowatthour in 2025 and then generally hovers between 3.2 and 3.5 cents per kilowatthour between 2025 and 2030. The higher oil and natural gas prices after 2025 in the High Price Case (compared to the Reference Case) reduce the credit price that is needed to stimulate renewable technology options for complying with the 25-percent RPS.
• In the High Technology Policy case, RPS credit prices are much lower than in the Policy Case, peaking at 3.4 cents per kilowatthour in 2025 and falling to 1.3 cents per kilowatthour in 2030. More rapid improvement in renewable generation technologies, particularly the biomass generation technology, is the key factor leading to the lower RPS credit prices in this case. In fact, generation from biomass combustion in dedicated plants in the High Technology Case, without the 25-percent RPS requirement, is more than three times the projected level in the Reference Case in 2025, making the additional requirements in the High Technology Policy Case less difficult to meet.

Electricity Prices

The projected increases in electricity prices between the three alternative reference cases and their corresponding policy cases are generally smaller than the increase between the main Reference Case and the Policy Case (Figure 21). In the Policy Case, electricity prices reach 8.3 cents per kilowatthour in 2025, 0.3 cents per kilowatthour (3.3 percent) higher than in the Reference Case; and in 2030, the price difference between the Reference Case and the Policy Case grows to 0.5 cents per kilowatthour (6.2 percent). In the Low-Cost Ethanol Imports Policy Case, electricity prices are also 0.3 cents per kilowatthour (3.5 percent) higher in 2025 than in the Low-Cost Ethanol Imports Case, but the difference does not change by much after 2025. In the High Price Policy Case, electricity prices are 0.2 cents per kilowatthour (2.9 percent) higher than in the High Price Case in 2025 and 0.4 cents per kilowatthour (4.8 percent) higher in 2030.

The importance of assumptions about technological progress is illustrated by their impact on electricity prices in the High Technology Policy Case: electricity prices in the High Technology Policy Case are only 0.1 cent per kilowatthour higher than prices in the High Technology Case in 2025, and there is virtually no difference in electricity prices between the two cases in 2030. In the High Technology Policy Case, new renewable technologies, particularly biomass, are competitive with nonrenewable generating technologies.

Electricity Generation by Fuel

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Renewable generation in the alternative policy cases is generally similar to that in the main Policy Case (Figure 22). In all the alternative policy cases, there are very large increases in biomass and wind generation and smaller increases in geothermal and conventional hydroelectric generation, relative to the corresponding reference cases. The competition between biomass and wind to supply the generation needed to comply with the 25-percent RPS does vary slightly among the alternative policy cases. In the Low-Cost Ethanol Imports Policy Case, where lower cost biomass is available to the power sector, there are larger increases in biomass electricity generation than are projected in the main Policy Case relative to the Reference Case.

Transportation Sector Impacts

Demand for transportation services is responsive to changes in fuel prices; however, the projected impacts on travel and fuel economy in the policy cases relative to their respective reference cases are minimal, because there are only minor fuel price changes between the reference cases and the associated policy cases. Transportation fuel prices vary the least between the High Price Case and High Price Policy Case and between the High Technology Case and the High Technology Policy Case (Table 11). As a result, travel demand and fuel economy show only marginal impacts, and the change in total transportation energy consumption in 2025 varies by only about 0.5 percent, across the paired reference and policy cases.

Because renewable fuels are more competitive in the High Price Case and the High Technology Case than in the Reference Case, the RFS credit price is highest in the Policy Case (Table 12). Consequently, in the Policy Case, gasoline prices in 2025 are 13 percent higher and diesel prices are 22 percent higher than projected in the Reference Case, whereas in the High Price Policy Case gasoline and diesel prices in 2025 are 5 percent and 10 percent higher, respectively, than in the High Price Case, and in the High Technology Case gasoline and diesel prices in 2025 are 7 percent and 12 percent higher, respectively, than projected in the High Technology Case. Unlike gasoline and diesel fuel prices, E85 prices are lower in the policy cases than in the corresponding reference cases, because revenues from the credits are assumed to be used to reduce the cost of ethanol production.

Because the Policy Case has the highest RFS credit prices and the largest relative increases in fuel prices, it also has the largest increase in transportation energy expenditures. Compared with the Reference Case, transportation energy expenditures in 2025 are $68 billion (about 12 percent) higher in the Policy Case. Compared with the High Price Case, transportation energy expenditures in 2025 are $43.1 billion (about 6 percent) higher in the High Price Policy Case. And compared with the High Technology Case, transportation energy expenditures in 2025 are $35 billion (about 6 percent) higher in the High Technology Policy Case. From 2009 to 2025, cumulative undiscounted transportation energy expenditures by consumers are $266 billion higher in the Policy Case than in the Reference Case, $151 billion higher in the High Price Policy Case than in the High Price Case, and $132 billion higher in the High Technology Policy Case than in the High Technology Case—again illustrating that the starting point (reference case) and the pace of technological progress can have significant impacts in determining the projected effects of policy changes on energy expenditures.

Primary Energy Consumption

Differences in primary energy consumption between the respective reference and policy cases are similar across the cases (Figure 23). The largest difference is between the High Technology Case and the High Technology Policy Case, where industrial sector use of biofuels heat and co-products in 2030 is 4.8 quadrillion Btu higher in the High Technology Policy Case than in the High Technology Case because of the lower costs and higher availability of biomass supplies compared to the other reference and policy cases.

Primary energy consumption in 2025 increases in all the policy cases relative to their respective reference cases, by between 3.0 and 4.5 quadrillion Btu, because coal- and natural-gas-fired generating capacity is replaced by renewable capacity to meet the policy mandates.³³ With the large buildup of renewable generation capacity, more efficient generation technologies using natural gas and coal are not added, and the average efficiency of all fossil-fired generation is reduced. On the other hand, industrial natural gas consumption increases as more ethanol production facilities begin operating.

Fuel Supplies

Fuel supply projections from the Reference Case, High Price Case, and High Technology Case are summarized and compared with projections from the corresponding policy cases in Table 12 (for liquid fuels) and Table 13 (for renewable fuels). As noted earlier, the starting point (assumptions) for each case matters greatly. That is, the assumptions for the different reference cases, without the policy requirements, determine the magnitude of the energy and economic impacts when the policy requirements are added.

For example, if the price of fossil fuels rose rapidly to three times the Reference Case levels, and the potential for building new U.S. nuclear capacity were significantly limited, the incremental cost of the policy through 2030, all else being equal, would be negligible, because renewable generating technologies would probably be economical without any additional incentives. On the other hand, if fossil fuel prices fell to less than $20 per barrel and wellhead natural gas prices to $2.00 per thousand cubic feet, all else being equal, the incremental cost of the policy would be considerably higher than projected in the Policy Case for this analysis.

World oil prices and U.S. natural gas prices, the rate of improvement in renewable generation and cellulosic ethanol technologies, and the availability and prices of domestic biomass and imported ethanol are key determinants of the cost of implementing the 25percent RPS and RFS policy in this analysis. The High Price Case represents an alternative view of the future with significantly higher world oil and domestic natural gas prices. The High Technology Case represents a view that incorporates the Reference Case assumptions in all areas except renewable technology development, the availability of low-cost biomass supplies, and the rate of technological progress in developing cellulosic ethanol technology.

High Price Policy Case

Price increases in High Price Policy Case (relative to the High Price Case) are smaller than the price increases between the Reference Case and the Policy Case, because the price of liquid petroleum products in the High Price Case is higher than those in the Reference Case and closer to the prices of the renewable fuels that replace them. As such, the shift to alternative motor transport fuels in the High Price Policy Case results in a smaller price increase relative to the High Price Case than is seen in the Policy Case relative to the Reference Case.

Figure Data

By themselves, the assumptions of the High Price Case induce an additional 2.9 billion gallons per year (32 percent) of corn ethanol production, even as the total demand for liquid fuels falls from 48.1 to 44.3 quadrillion Btu (-7.9 percent) (Figure 24). However, the product prices in the High Price Case are not high enough by themselves to induce the building of cellulosic ethanol production facilities. Consumer energy expenditures in the High Price Case are $224 billion (18 percent) above those in the Reference Case in 2025, whereas in the Policy Case consumer expenditures are only 7 percent above those in the Reference Case. In addition, the increase in consumer energy expenditures in the High Price Policy Case relative to the High Price Case in 2025, $53 billion, is 35 percent smaller than the increase in the Policy Case relative to the Reference Case (again, showing that the starting point matters).

In the High Price Policy case, renewable fuels are more competitive with petroleum fuels than projected in the Policy Case, and the RFS credit price in 2025 is 33 percent lower: $1.46 per gallon compared with $2.18 per gallon (2005 dollars). The 4-percent increase in consumer energy expenditures in 2025 in the High Price Policy Case relative to the High Price Case, to $1,513 billion, is also smaller than the 6.6-percent increase in the Policy Case relative to the Reference Case. As the price of domestically produced renewable liquids moves closer to the price of petroleum liquids, the import share of liquids declines from 60 percent in the Reference Case to 50 percent in the High Price Case and to 4 percent in the High Price Policy Case.

Because the 25-percent RFS requirement is met at a lower overall level of demand for motor fuels in the High Price Policy Case than in the Policy Case, both corn ethanol production and cellulosic ethanol production are lower, while ethanol imports are essentially the same in the two cases. Corn ethanol production increases by 16.5 billion gallons and cellulosic ethanol increases by 27.8 billion gallons in 2025 between the Reference and Policy Case. When the Policy is applied to the High Price Case, corn ethanol production increases by 12.2 billion gallons, and cellulosic ethanol production increases by 24.4 billion gallons. Comparing the relative changes between the Policy Case and the High Price Policy Case, the reduction in corn ethanol production is much smaller than the reduction in cellulosic ethanol production due to the difference in the cost structures of corn and cellulosic ethanol plants. That is, comparing the Policy Case to the High Price Policy Case, corn ethanol production is 5.8 percent (1.4 billion gallons) lower in 2025, and cellulosic ethanol production is 12 percent (3.4 billion gallons) lower. For the new technology of cellulosic ethanol plants, cumulative learning effects lower the capital costs as more capacity is built.

Corn prices in the High Price Case, at $3.27 per bushel in 2025, are 9 percent higher than projected in the Reference Case, and 33 percent (1.1 billion bushels) more corn is used for ethanol production. In the High Price Policy Case, however, the amount of corn used for ethanol production is 4.6 percent (0.4 billion bushels) less than in the Policy Case. At the production levels projected in the analysis cases for this study, increases in the demand for corn used in ethanol production are met, for the most part, not by the planting and harvesting of more acres but by changes in net imports and consumer demand. As a result, the percentage of the total U.S. corn crop consumed for ethanol production is somewhat lower in the High Price Policy Case (61 percent) than in the Policy Case (64 percent).

High Technology Policy Case

In the High Technology Case, the price of renewable liquid fuels in the transportation sector is lower than projected in the Reference Cases, because technological advances are assumed to reduce the cost of building cellulosic ethanol production facilities and the cost of the biomass supply to those facilities. The net cost of biofuel production in the High
Technology Case is reduced sufficiently to make biofuels (such as cellulosic ethanol) competitive with conventional motor transport fuels without new policy mandates. As a result, cellulosic ethanol production in 2025 increases from 250 million gallons per year in the Reference Case and High Price Case to 4 billion gallons per year in the High Technology Case. In the High Technology Policy Case, however, the RFS credit price, which represents a “cross subsidy” for all qualified motor transport fuels, is still needed to achieve the Policy requirement (Table 13).

In the High Technology Policy Case, the increase in cellulosic ethanol production leads to lower corn ethanol production, lower corn prices, and lower energy expenditures by consumers for motor fuels than in the Policy Case. Cellulosic ethanol production is projected to total 38 billion gallons in 2025 in the High Technology Policy Case. As a result, corn ethanol production in 2025 is 26 percent lower in the High Technology Policy Case, at 18.9 billion gallons, than the 25.5 billion gallons projected in the Policy Case; corn prices are 32 percent lower at $4.43 per bushel (2005 dollars); and corn imports are nearly eliminated.

On the other hand, the increase in demand for biomass to be used in cellulosic ethanol plants and electric power plants in the High Technology Policy Case is substantial. From a level of less than 30 million tons supplied in 2005, the High Technology Policy Case projects total U.S. demand for biomass in 2025 at 698 million tons, or 30 percent higher than in the Policy Case. That would represent a substantial percentage of the total biomass estimated to be available for use, raising concerns about the feasibility of achieving the levels of supply that would be needed.

Total energy expenditures by consumers in the High Technology Policy Case in 2025 are projected to total $1,269 billion, 3.6 percent below the Policy Case projection and only 3 percent above the Reference Case projection. Said another way, total energy expenditures by consumers in the High Technology Policy Case in 2025 are $48 billion (3.6 percent) less than in the Policy Case and only $33 billion (2.7 percent) more than in the Reference Case.

Low-Cost Ethanol Imports Policy Case

In the Low-Cost Ethanol Imports Case, ethanol imports in 2025 are projected at 3.4 billion gallons—not much more than the 3.3 billion gallons projected in the Reference Case. In the Low-Cost Ethanol Imports Policy Case, however, imports of ethanol from Brazil total 20.7 billion gallons in 2025, an increase of 170 percent from the 7.7 billion gallons projected in the Policy Case.

Like the High Price Policy Case, the Low-Cost Ethanol Imports Policy Case predominantly affects demand for cellulosic ethanol in comparison with the Policy Case. Cellulosic ethanol production in 2025 falls from 28 billion gallons in the Policy Case to 19.2 billion gallons in the Low-Cost Ethanol Imports Policy Case (a 32-percent decrease), whereas corn ethanol production falls from 25.5 billion gallons to 22.4 billion gallons (12 percent), because lower demand for corn reduces corn prices, making corn-based ethanol more competitive with cellulosic ethanol.

Given the level of corn ethanol displaced, the Low-Cost Ethanol Imports Policy Case results in a smaller reduction in corn prices and a smaller reduction in RFS credit prices relative to the Policy Case than are projected in the other alternative policy cases examined. For example, the 2025 price of corn in the Low-Cost Ethanol Imports Policy Case, at $5.57 per bushel in 2005 dollars, is 9 percent lower than projected in the High Price Policy Case and 26 percent higher than projected in the High Technology Policy Case. The RFS credit price of $1.83 per gallon in 2005 dollars in 2025 in the Low-Cost Ethanol Imports Policy Case is 25 percent above the RFS credit price in the High Price Policy Case and 37 percent above that in the High Technology Policy Case.

In summary, although the Low-Cost Ethanol Imports Policy Case reduces RFS credit prices by 16 percent and corn prices by 14 percent relative to the Policy Case projections, the savings achieved are not as great as those in the other alternative policy cases examined in this study.

Economic Impacts

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In the High Technology Policy Case, accelerated progress in the development and improvement of renewable generation and cellulosic ethanol technologies and greater availability of relatively low-cost domestic biomass supplies make the policy easier to achieve than in the Policy Case. Similarly, in the Low-Cost Ethanol Imports Policy Case, the policy is easier to achieve because large volumes of ethanol imports are available at relatively low cost. In both cases, RPS and RFS credit prices are lower than projected in the Policy Case, ultimately mitigating the cost of the Policy to consumers and its impacts on the U.S. economy. The cost of the Policy is lower in the alternative policy cases, because renewable fuels are already more competitive with traditional fossil fuels in the corresponding alternative reference cases, according to the scenario definitions.

In the High Price Policy Case, the economic impacts of imposing the Policy on the High Price Case, which assumes higher fossil fuel energy prices than in the Reference Case, are smaller than the impacts in the High Technology Policy Case and Low-Cost Ethanol Imports Policy Case, which are based on alternative reference cases with lower energy prices. With higher prices for liquid fuels and natural gas: (a) the aggregate price of energy is higher; (b) GDP and consumption are lower; (c) the demand for energy, specifically for electricity and liquids, is lower; and (d) the proportion of renewable fuels used is higher in both the electric power and motor transportation sectors.

When fossil fuel prices are higher, renewable generation and biofuels are more competitive in a greater number of situations, and so a relatively smaller economic incentive is needed to achieve the necessary market penetration. Consequently, when the RPS and RFS policy requirements are added to the High Price Case, the negative impacts on key energy and economic indicators in the High Price Policy Case are smaller than those in the Policy Case relative to the Reference Case. The result is a pattern of lower RPS and RFS credit prices, smaller increases in electricity prices, and smaller increases in motor transportation fuel prices. Therefore, the projected losses in real GDP, consumption, and industrial output are smaller.

Key energy sector results illustrating the projected effects of implementing the Policy in the Reference Case and in the High Price and High Technology alternative reference cases are summarized in Table 15. In the High Price Policy Case, consumer energy prices rise steadily through 2025, to almost 6 percent above prices in the High Price Case—roughly one-half of the percentage increase projected in the Policy Case relative to the Reference Case (Figures 25 and 26). Overall, the CPI for All Urban consumer prices is as much as 2.5 percent higher in the High Price Policy Case than in the High Price Case (Table 14). The percentage increases in energy prices projected in the High Technology Policy Case relative to those in the High Technology Case are even smaller, averaging only 2 percent in 2025. Smaller price changes mean smaller impacts on real GDP, consumption, and industrial production as compared with the impacts in the High Price Policy Case relative to the High Price Case.

Relative to the High Price Case, discounted GDP losses in the High Price Policy Case total $165 billion (less than 0.1 percent)—equal to slightly more than one-half the impact on GDP in the Policy Case relative to the Reference Case (Figure 27). In other words, because price changes from the High Price Case to the High Price Policy Case are smaller than those from the Reference Case to the Policy Case, the impacts on national consumption and GDP are smaller. After 2025, when energy prices peak, both real GDP and consumption begin to return to baseline levels. In the High Technology Policy Case, GDP losses in 2025 relative to projected GDP in the High Technology Case are comparable to, but smaller than, those in the High Price Policy Case (relative to the High Price Case), illustrating the beneficial effect of faster-than-expected technological progress.

Cumulative discounted consumer expenditures from 2005 to 2025 in the High Price Policy Case are only $35 billion (0.02 percent) lower than projected in the High Price Case (Figure 28). As is typically the case for GDP, consumption declines generally grow over time as energy prices continue to rise in the High Price Policy Case relative to the High Price Case; however, as the increase in energy prices subsides, the consumption declines also slow, and eventually they are reversed. On an undiscounted basis, the declines in GDP and consumption from the High Price Case to the High Price Policy Case are much larger.³⁷

Notes