4. Electricity Supply

A. Renewable Portfolio Standard (Senate 264)

Both the House and Senate bills contain provisions to stimulate renewable fuel use in the electricity generation sector. Both bills extend the existing Production Tax Credit (PTC) for electric generation from certain renewable resources for three years and the Senate bill establishes a Renewable Portfolio Standard (RPS) and credit trading system that would apply to all retail electric suppliers beginning in 2005. The RPS in the Senate bill requires that a set percentage of the electricity provided by a retail supplier be generated from qualifying renewable sources.⁵⁰ The RPS percentages required in the Senate bill from 2005 through 2020 are shown in Table 15.

The Secretary of Energy is charged with establishing the RPS percentages to be used between 2020 and 2030 by January 1, 2015, but it must be at least 10 percent, so it is assumed that the program will continue through 2030 with at least a 10-percent requirement. The Secretary of Energy is also charged with establishing the renewable energy credit program no later than one year after enactment of the bill. The program would be charged with issuing credits, monitoring the sale or exchange of credits, and tracking credits. Credits would be issued to an electric supplier that generated electricity through the use of renewable energy. One credit would be issued for each kilowatthour of electric energy generated with renewables. However, the number of credits would vary to some extent depending on the location of generation (e.g., two credits per kilowatthour issued for generation on Indian lands) and type of renewables (e.g., two credits issued per kilowatthour for generation offsets). Credits could be sold and exchanged, but they could only be carried forward for a period of four years. Relatively small retail electricity suppliers, those with sales below one million megawatthours, do not have to hold credits, and the credit price is limited to 1.5 cents per kilowatthour.⁵¹

Impact of Renewable Portfolio Standard

EIA has not analyzed the specific provisions in Senate bill Section 264. However, EIA recently analyzed proposals for a 10-percent RPS that are similar. For example, in 2002, at the request of Senator Murkowski, EIA analyzed the RPS provision of Senate bill 517 from the 107 th Congress in a study, Impacts of a 10-Percent Renewable Portfolio Standard.⁵² In the spring of this year, EIA analyzed a similar RPS proposal at the request of Senator Bingaman in a study, Analysis of a 10-Percent Renewable Portfolio Standard,⁵³ with additional analyses of the same proposed legislation performed at the request of Senator Domenici.⁵⁴ The bill S.517, analyzed for Senator Murkowski, reflected an early draft of the current legislation, but there have been some changes since the report was released. The current legislation contains a 2030 sunset provision and a 1.5 cent per kilowatthour credit cost cap, while the version EIA analyzed for Senator Murkowski contained a 2020 sunset and a 3.0 cent credit cost cap. The proposal analyzed for Senator Bingaman also differs from the Senate bill in the size of the standard used to exempt small utilities from the requirement (less than one million megawatt hours of sales for the current legislation compared to four million megawatthours of sales analyzed with Senator Bingaman’s request). The schedule of required renewable generation also differs, although both set a 10-percent target by 2020, as shown in Table 16.

Both analyses reached similar conclusions, however, several key assumptions of the more recent analyses for Senators Bingaman and Domenici are closer to the final language passed in the Senate bill:

• The imposition of program sunset provisions, credit price caps (or penalty mechanisms that effectively function as price caps), and exemption of small utilities and certain types of renewable generation from program requirements results in legislatively specified targets not being met, especially in the latter years of the forecast. In the Addendum to Analysis of a 10-Percent RPS, part of the analyses conducted for Senator Bingaman and examining the provisions closest to those in the Senate bill, total renewable generation achieved by 2025 is 6.5 percent of U.S. sales, compared to the 8.8-percent effective target based on eligible renewable generation and non-exempt sales.⁵⁵

• The cost to the power industry of the program is small relative to overall industry revenue. In the Addendum report referenced above, the program would add $4.9 billion (2001 dollars, discounted at 7 percent), or about six-tenths of one percent, to cumulative net industry costs over the forecast horizon to 2025.⁵⁶
• The cost to consumers is small relative to total consumer expenditures on electricity. Consumer electricity expenditures in residential, commercial, and industrial categories, totaling $1.8 billion in 2025 (2001 dollars), are all well under 1 percent over Reference Case expenditures in the Addendum analysis (0.4 percent for residential, 0.5 percent for commercial, 0.4 percent for industrial).
• Reduced natural gas prices, which result from a decline in natural gas demand, provide savings to both the power industry and end-use consumers that partially offset higher electricity costs. Reduced fuel costs to the power industry are reflected in the net industry costs cited above. In the residential, commercial, and industrial sectors, natural gas expenditures are reduced by $1.1 billion in 2025 (0.5 percent for residential, 0.6 percent for commercial, and 0.4 percent for industrial).
• In the Addendum report, the incremental renewable capacity resulting from the RPS is primarily wind. By 2025, an additional 36 gigawatts of wind capacity generating 129 billion kilowatthours is added when compared with the Reference Case. Although no other renewable technology contributes to significant capacity expansion, biomass co-firing produces an additional 31 billion kilowatt-hour generation increment in 2025 over the Reference Case utilizing existing coal-fired capacity

The Supplement analysis conducted at the request of Senator Domenici considered the compliance cost of the RPS analyzed in the Addendum if all credits were purchased from the government for 1.5 cents per kilowatthour.  The cumulative cost over the life of the program (in 2001 dollars, using a 7-percent discount rate) would be $37 billion (1.1 percent of total industry revenue).  Since there would be no additional renewable generation if all compliance were achieved through purchase of government allowances, there would be no offsetting decrease in natural gas prices.  Furthermore, the total amount ($37 billion) would represent a net power industry outlay, rather than primarily an intra-industry transfer payment.  However, the EIA analysis indicates that there is significant potential for renewable generation with a credit value of less than 1.5 cents per kilowatthour.

B. Extension of Production Tax Incentive (House 41002, Senate 1901-1906)

The production tax credit (PTC), originally enacted as part of the 1992 Energy Policy Act (EPACT), has been extended twice, in 1999 and 2002, and is currently slated to expire December 31, 2003. It provides a 1.8 cent (2001 dollars) Federal tax credit for every kilowatthour of electricity generated during the first ten years of operation for plants using wind, closed loop (dedicated to energy production) biomass, or poultry waste (added to program in 1999) if they entered or will enter service between January 1, 1994 and December 31, 2003. To date, only new wind plants have taken advantage of the PTC.

Both the House and Senate bills extend the PTC three-years, covering facilities that are brought into service by December 31, 2006. The Senate bill also expands the coverage of the credit to cover landfill gas, geothermal, and solar, in addition to wind and biomass. However, it is very difficult to project the amount of U.S. capacity that will be built with or without a three-year extension of the PTC. Projects now under development may be affected by the extension of the PTC. Current information available to EIA indicates that of the 2,357 megawatts of currently planned wind capacity construction from 2004 through 2007, 1,535 megawatts are dependent on PTC extension. Such an extension may also stimulate additional wind projects that have not been publicly announced at this time. Recent experience with the expiration and short-term extension of the PTC suggests that this pattern leads to a substantial “lull” in construction shortly after the extension is authorized, with a substantial “crunch” of project announcements and construction activity in the final year before expiration.

C. Clean Coal Incentives (House 3117, Senate 2201-2221)

Both the House and Senate bills contain provisions providing power plant developers with an incentive to invest in new, innovative, clean coal technologies. The hope is that these incentives will lead to the early commercialization of these cleaner, more efficient technologies. The bills provide both investment tax credits and production tax incentives. For example, the House bill, Section 3117, provides a 10-percent investment tax credit for up to 7,500 megawatts of qualifying clean coal capacity. The tax credits are to be spread among various clean coal technologies that meet specified development timetables, efficiency, and emission removal targets.

Section 2211 of the Senate bill includes a similar program to the House bill with slightly different timetables and more stringent efficiency targets, and it limits the credit to a maximum of 4,000 megawatts of new qualifying clean coal capacity. Sections 2201 and 2221 of the Senate bill, also includes a production tax incentive for clean coal technologies that are applied to existing plants through retrofitting, repowering, or replacement. The incentive is limited to plants that are no larger than 300 megawatts and the maximum amount of capacity that can receive it is 4,000 megawatts. Eligible facilities will receive a 0.34 cent payment for each kilowatthour generated for the first ten-years of its operation after retrofitting. Therefore, under the Senate bill, incentives are limited to 8,000 megawatts (4,000 megawatts of new and 4,000 megawatts of existing capacity).

Impacts of Clean Coal Incentives

While a detailed analysis of each of these provisions was not made, rough estimates of the cost of the programs and the potential amount of new clean coal technology stimulated by these provisions can be developed and compared to the projected coal capacity additions in the Reference Case, a mid-term revision to AEO2003⁵⁷that was completed for the study, Analysis of S.485, the Clear Skies Act of 2003, and S.843, the Clean Air Planning Act of 2003.⁵⁸

If fully successful, at a maximum, the House bill could lead to 7,500 megawatts of new clean coal capacity, the limit under the House bill that can receive incentives, while the Senate bill could lead to 8,000 megawatts (4,000 megawatts of new capacity and 4,000 megawatts of retrofitted, refurbished and/or replaced capacity), the limit under the Senate bill that can receive incentives. Assuming that these new plants will generally cost between $1,000 and $1,500 per kilowatt (all dollars are shown in 2001 dollars) and using $1,250 as an average, over the life of the program, the investment tax credit provisions in the House bill would reduce tax revenue by $938 million, while those in the Senate bill would reduce them by $500 million. Assuming that plants stimulated by the production tax incentive in the Senate bill would operate at a 75-percent utilization rate, when fully implemented the annual payment could reach $89 million.

The total potential new clean coal technology stimulated by the bills, 7,500 to 8,000 megawatts (the limits of the House and Senate bills), is lower than the total new coal capacity projected in the Reference Case. In the Reference Case, nearly 77,000 megawatts of new coal capacity (17 percent of total new capacity) is projected between 2005 and 2025, with 8,000 megawatts on-line by 2010 and 20,000 megawatts on-line by 2015. Of the projected 77,000 megawatts in the Reference Case, roughly 4,000 megawatts are advanced clean coal technologies that are expected to come online after 2010. The House and Senate bills would likely accelerate the development of these advanced technologies and cause a small amount of the projected new conventional coal capacity to switch over to one of the advanced technologies. The overall new coal capacity would probably remain near the 77,000 megawatts projected without the bills.

Electricity Supply - Tables

Notes and Sources