1. Background and Scope of the Analysis

On July 31, 2003, Sen. Byron L. Dorgan, a member of the Senate Committee on Energy and Natural Resources requested the Energy Information Administration (EIA) to perform a quantitative analysis of the energy consumption and oil savings that would result from the Senate and House energy bills.¹ Specifically, EIA was requested to analyze the legislative text in H.R.6 as specified in the House (H.R.6.EH) and Senate (H.R.6.EAS), referred to as the House bill and Senate bill, respectively. In a separate request from Senator Dorgan’s staff, EIA was asked to quantify the impacts of specific proposed energy amendments.²

This report includes an analysis of selected provisions that have, in EIA’s estimation, significant potential to affect energy consumption and supply. Proposed legislation in the following areas are addressed in this paper:

• Energy demand reductions in the end-use demand sectors, including policy options that have the potential to significantly reduce petroleum consumption;
• Increased ethanol content of motor gasoline and the elimination of methyl tertiary butyl ether (MTBE);
• Tax credits for alternative vehicle fuels;
• Tax credits for nonconventional fuels production;
• Opening the Arctic National Wildlife Refuge to crude oil production;
• Assistance for constructing the Alaska Natural Gas Pipeline;
• Clean coal incentives;
• Renewable portfolio standard for the electricity industry; and
• Biodiesel credits.

Because of the need to provide a response that the Conference Committee could use in their deliberations, EIA concluded that it did not have sufficient time or resources to perform an extensive quantitative analysis of all of the provisions of the two bills and proposed amendments. Instead, EIA drew from previous studies of related proposed Congressional energy legislation it had analyzed over the past two years to provide an estimate of the magnitude of the impacts of the major provisions in these two bills and related amendments. Some additional provisions not previously analyzed are also covered, though mostly qualitatively.

The Reference Case projections have changed somewhat over the past two years to reflect new information.³ However, since policy analysis necessarily focuses on the changes that might result from proposed legislation relative to a Reference Case, use of the change from the Reference Case is likely, in most cases, to remain a good proxy for the change that might occur due to the policy. An exception may be natural gas markets, where recent data have indicated that EIA’s past supply and price projections may be optimistic. In that area, either a high natural gas price case is included, or it is noted where major changes might be expected. The provisions modeled in these analyses do not always correspond exactly to the text in the current bills. These differences are noted, and the direction of impact is stated. Where other legislation is involved, it is cited as appropriate.

Methodology and Uncertainties

The majority of the analysis in this report is based on results of the National Energy Modeling System (NEMS).⁴ NEMS, like all models, is a simplified representation of reality. Projections are highly 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 (including severe weather, technological breakthroughs, and geo-political disruptions), 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 desirable ways to analyze complex policies because they ensure consistency in the accounting and represent the interrelationships, imperfectly, but often well enough to provide insight into the magnitude of the impact.

EIA’s projections are not statements of what will happen but what might happen, given known technologies, current technology and demographic trends. Because EIA’s Reference Cases are based on current laws and regulations, they provide a policy-neutral starting point that can be used to analyze energy policy initiatives. EIA does not propose, advocate, or speculate on future legislative or regulatory changes within its Reference Cases--rather, laws and regulations are assumed to remain as currently enacted or in force; however, the impacts of scheduled regulatory changes, when clearly defined, are reflected.

Representation of Individual Versus Integrated Results

Because the provisions were analyzed individually, the potential interactions among the various provisions are not included. Thus,

• The combined impact of the individual policies cannot be determined by simply adding the individual policy impacts together. For example, a provision establishing a renewable portfolio standard (RPS) for electricity production and one that establishes a biodiesel program for transportation fuels both increase the use of biomass. The simultaneous enactment of the two provisions would likely increase biomass costs because of the competition for land and other needed resources. Therefore, the estimated fossil energy displaced could be lower than the sum of the two individual policy impacts because of the higher resource costs for biomass.
• Some policies may interact to increase the overall impact. For example, when two separate policies increase demand and, consequently, production of an advanced technology, the reductions in manufacturing costs expected from increased production are likely to be accelerated, making the technology even more attractive in later years. The total adoption of the advanced technology could be greater than the sum of the parts.

Stated another way, the impact of enactment of multiple simultaneous policies tends to be non-linear, sometimes less than the sum of the individual policies while at other times greater than the sum of the individual policies.

Analysis of Research and Development (R&D) Provisions

The Senate and House bills contain numerous sections authorizing increased R&D, including programs aimed at improving the efficiency of energy consumption devices, reducing the cost and improving the performance of renewable, fossil, and nuclear energy production technologies, together with programs to enhance consumer safety, environmental quality, and support basic science research programs. Some of these programs are new while others are extensions or expansions of existing programs.

The linkage between enactment of new authorizations for R&D programs and the additional amounts of funding provided in the appropriations process is highly uncertain. Moreover, even after actual impacts on funding are determined, it is difficult to relate funding directly to specific improvements in the characteristics, benefits, and availability of energy technologies. Therefore, analysis in this report does not attempt to assess the overall impact of the proposed R&D authorizations in the bills. EIA has previously qualitatively analyzed numerous R&D provisions that provide for increased R&D efforts.⁵ In general, increased R&D would be expected to lead to technological advances, but it is impossible to determine which programs would or would not be successful or how successful they might be.

It is also difficult to determine if the programs would lead to advances beyond those already incorporated in the Reference Cases used for the quantitative analyses in this report. NEMS incorporates improvements in technology cost and performance over time in all sectors of the U.S. energy economy. These improvements are meant to capture the impacts of technology improvement trends seen in historical data and those expected to occur because of current levels of R&D. For example, the residential and commercial submodules assume improvements in the cost and performance of new lighting, heating, air conditioning, and office equipment over the next 20 years. Similarly, the fuel supply and conversion submodules incorporate improvements in drilling, mining, refining, and electricity generation technologies. These improvements cannot be directly attributed to Federal or private R&D. It is possible that the programs called for in the Senate and House bills could lead to greater improvements than are projected in the Reference Cases used for the analyses, but their impact is unknown because the magnitude of the relationship between Federal R&D expenditures and technological improvements is unknown.

In addition to the difficulty in quantifying the potential impact of any individual R&D program, estimating the combined impact of a wide array of programs is even more difficult. Though it is possible that several programs may produce synergistic results, the opposite conclusion is more likely because, when analyzed together some programs may have smaller combined impacts than analysis of each individual program might suggest.⁶ The R&D provisions of the Senate and House bills are broadly distributed across sectors and fuels so that if all technologies supported by the bills were to improve their cost and performance at a similar rate, the market penetration of those technologies would likely remain similar.

Finally, public sector R&D programs may mitigate certain market failures and still remain ineffective against other market barriers. Market failures addressed directly by Federal R&D investment include under investment in basic research in the private sector and consumers’ lack of information. However, market barriers also pose a secondary and equally large challenge to the penetration of new technologies. Consumers may be fully aware of potential cost savings from a more-efficient technology but still prefer other characteristics of the less-efficient technology. The current trend for larger, more powerful personal vehicles is just one example of consumers’ apparent preference for product attributes that compete with energy efficiency.⁷ Other barriers to the penetration of new technologies include uncertainty as to the reliability, performance, and costs of new equipment; uncertainty about the availability of next-generation technology, which may be of even higher quality; and apprehension about the adequacy of the infrastructure required to support and maintain the technology. R&D expenditures are generally not effective against these types of market barriers.

While recognizing the success of past and current research, development, and deployment programs, it is difficult to establish a quantitative relationship between levels of funding and specific improvements in the characteristics, availability, and adoption of energy technologies. Even if such a relationship could be established, by its nature, R&D is highly uncertain. Seemingly plausible avenues of research may not achieve success, though genuine breakthroughs remain possible. Consequently, only a qualitative discussion of R&D provisions is provided in this document.

Structure of the Report

This report includes four additional chapters with the major provisions of the Senate and House bills addressed by market segment. Chapter 2 includes a discussion of the provisions that impact end-use energy demand in the buildings, industrial, and transportation sectors. This chapter also includes a discussion of options to reduce U.S. petroleum consumption as a way to reduce imports by one million barrels per day, an amendment proposed by Senator Landrieu. Chapter 3 examines those provisions that would impact oil and natural gas exploration, production, refining, and transmission. Chapter 4 looks at provisions impacting electric power supply. The renewable fuel standard and biodiesel provisions are discussed in Chapter 5. The original request letter and a follow-up e-mail from Senator Dorgan’s staff are included in Appendix A.

Notes and Sources