2. End-Use Energy Demand

This chapter contains analysis of tax incentives, standards, voluntary programs, and other miscellaneous provisions in the House and Senate energy bills that affect the end-use demand sectors. Those provisions that affect the residential and commercial sectors are discussed together in the buildings section since many of the legislative proposals affect both sectors. Analysis of those provisions that primarily affect the industrial sector follows the buildings section. The numerous provisions that affect the transportation sector concludes the discussion of sector-specific legislative proposals. In addition, an analysis of the Landrieu amendment (S.871) to S.14 (the principal energy bill considered in the Senate during the first half of 2003) that requires the President to implement policies to reduce petroleum consumption by one million barrels per day below projected 2013 levels is provided at the end of this chapter.

A. Buildings

The major source of the discussion of the impact of the House and Senate energy bill provisions on energy consumption in the residential and commercial sectors is the report, Analysis of Efficiency Standards for Air Conditioners, Heat Pumps, and Other Products (S. 1766 Section 921-929, H.R.4 Section 124, 142, and 143).⁸ However, additional sources are used for portions of the following discussion. Those sources are indicated in the text. Except where noted, the Reference Case used for comparison in the buildings section was a mid-year revision to AEO2002.⁹

1. Tax Credit for Qualifying Residential Energy Efficient Property (House 41001, Senate 2103)

House Section 41001 provides a 15-percent tax credit for residential solar hot water heaters and solar photovoltaic equipment purchased between 2004 and 2006 (2008 for solar photovoltaic equipment), up to a maximum of $2,000.

In addition to the provisions in the House bill, the Senate bill (Section 2103) provides tax credits for fuel cells (30 percent), wind energy (30 percent), residential air-source and geothermal heat pumps ($250), central air conditioners ($250), natural gas furnaces ($250), heat pump water heaters ($75), and natural gas water heaters ($75) purchased from 2003 through 2007.

Impact of Tax Credit for Qualifying Residential Energy Efficient Property

The tax credits are applied to qualifying equipment as a reduction in the cost of the unit for the specified time period.

Under the provisions in the House bill, the tax credit yields negligible energy savings when compared to the Reference Case due to the high cost of solar equipment.

Under the Senate version of the bill, a projected 37 trillion Btu of delivered energy and 1 million metric tons carbon equivalent of carbon dioxide emissions are saved over the period when the credit is in effect due to increased purchases of energy-efficient equipment. This represents less than 0.1 percent of the energy consumed in the residential sector over the period. Through 2020, a projected 136 trillion Btu (4 million metric tons of carbon dioxide emissions) are saved by the purchase of energy-efficient equipment targeted by the tax credits and these benefits are expected to continue to accumulate over the life of the equipment.¹⁰ Given the short time horizon of the tax credit, it is not anticipated that any significant long-term market penetration increase for these products would persist beyond the period that the tax credit is offered. The Senate version of this provision is projected to save more energy than the House version, because of its application to more traditional appliances and wider coverage.

2. Tax Credit for Fuel Cell Power Plants (House 41003, Senate 2104)

The House provision (41003) provides a 10-percent tax credit for the purchase of stationary fuel cell power plants for businesses and individuals, up to $500 per half kilowatt of capacity. To qualify, the property must have an electric generation efficiency greater than 30 percent and be placed in service or the expenditures made during 2004 through 2006.

The Senate version (2104) provides the same incentive for businesses for stationary fuel cells for 2003 through 2007. The Senate version also provides a 10-percent tax credit of up to $200 per kilowatt of capacity for stationary microturbine power plants for systems placed in service during 2003 through 2006.

Impact of Tax Credit for Fuel Cells

The provision is expected to have negligible impact on residential and commercial delivered energy consumption and carbon dioxide emissions. A 10-percent fuel cell tax credit provision, analyzed using a 4-year effective period, is projected to result in the installation of 17 megawatts of additional fuel cell capacity by 2006, a 75 percent increase from Reference Case capacity. However, the savings in purchased electricity are offset by additional natural gas consumption in the sector. Implied residential and commercial carbon dioxide emissions (including emissions attributable to electricity purchases) are reduced by 0.02 million metric tons carbon equivalent (less than 0.01 percent), cumulatively, over the effective period. Although additional fuel cell installations are projected after the effective period, the increase in projected capacity relative to the Reference Case narrows to 6 percent by 2020. The provision in the House bill could be expected to have a slightly smaller impact than indicated in this analysis due to the shorter duration of the incentive. The provision in the Senate bill could be expected to have an impact similar to the analysis, with a slightly greater, but still negligible, effect on emissions due to the inclusion of a credit for microturbine systems.

3. Tax Credit for Energy Efficiency Improvements to Existing Homes (House 41004, Senate 2109)

Section 41004 of the House bill provides a 20-percent tax credit ($2000 maximum) for expenditures on building envelope components that meet the 2000 International Energy Conservation Code (IECC). The aggregate costs of the components must exceed $1000 and be certified by using specific software and/or relevant guidelines. Improvements must be initiated after December 31, 2003, and before January 1, 2007.

Section 2109 of the Senate amendment provides a 10-percent tax credit ($300 maximum) for expenditures on building envelope components that meet the 2000 IECC, or meet the Energy Star standard to reduce heating and cooling energy by 30 percent.

Impact of Tax Credit for Existing Homes

The NEMS residential module cannot analyze the economics of existing building envelope efficiency because of the lack of data regarding the installed efficiency of building shell characteristics in the housing stock. Therefore, it is not possible to accurately assess the energy impacts of this provision. However, knowledge of the average age of the heating and cooling equipment installed in the existing housing stock can provide some guidance in estimating potential energy savings.

In the House version of the bill, depending on the age and location of the house, the energy savings from meeting the IECC could vary greatly. The most inefficient homes could reduce their heating and cooling energy use substantially by replacing old building components (e.g., windows) with the most efficient available. Once these updates are made they are generally permanent as long as the home exists. Depending upon the number of upgraded homes, this provision has the potential for relatively large energy savings, when compared to the other buildings’ provisions in the House bill.

The impacts of the Senate version of the amendment are similar to the House bill, except that improvements to heating and cooling equipment are included, but the tax credit is smaller.

4. Business Tax Credit for Construction of New Energy Efficient Homes (House 41005, Senate 2101)

Section 41005 of the House bill provides a tax credit of up to $2,000 to builders who install energy-efficient heating and cooling appliances and building envelope components in new homes that improve energy efficiency by at least 30 percent more than the 2000 IECC. To qualify, one-third of the savings must be achieved through building envelope improvements and the home must pass the standards set forth by computer software approved by the Secretary of Energy or by other approved home energy rating systems. The home must be acquired before January 1, 2007.

Section 2101 of the Senate bill provides a tax credit of up to $1,250 to builders who construct homes that have projected annual heating and cooling costs that are at least 30 percent lower than dwellings constructed in compliance with the 2000 IECC and $2,000 to homes that are at least 50 percent more efficient than the 2000 IECC. To qualify, the home must pass the standards set forth by computer software approved by the Secretary of Energy or by other approved home energy rating systems. The home must be acquired before January 1, 2008.

Impact of Business Tax Credit

The NEMS residential module is not designed to analyze the impact of tax credits on homebuilders. All economic criteria in the module are specified at the consumer level. It is believed, however, that since the builders would get the tax credit, more homes would be built under this arrangement than had the tax credit been designated to the home purchaser. Although the NEMS residential module does not explicitly represent business tax credits, a short analysis of the potential impact of this provision is presented here.

The number of new homes (single family and mobile homes) built each year represents about 1.5 percent of the total existing housing stock in a given year. Heating and cooling represent about 55 percent of the delivered energy consumed in a household. Each house consumes on average about 105 million Btu of energy per year, implying that about 58 million Btu are consumed for heating and cooling in an average home. New homes, on average, use about 14 percent less energy for heating and cooling, or about 50 million Btu. Building a new home by following the specifications outlined in this proposal would achieve a 30 percent increase in efficiency and save about 15 million Btu of energy per year per home.

Since 1.6 million homes are built on average per year, if every new home were constructed to the House bill standards, roughly 24 trillion Btu per year would be saved compared to average new homes built today. This represents about 0.2 percent of delivered energy consumption to the residential sector in 2000. Through the end of the tax credit period (2007), 96 trillion Btu would be saved, which represents a permanent reduction in total energy consumption, which is not dependent on the continued existence of the tax credit. Because of the short time period allowed for the tax credit, it is not likely that any long-term market penetration increase will be sustained.

Given the higher tax credit in the House bill, relative to the Senate amendment, the House bill would be expected to save more energy, since more builders would adopt the measure with the higher tax credit. The $2,000 tax credit for homes 50 percent more efficient than the IECC is not expected to save much additional energy, relative to the House bill, because of the higher costs associated with meeting the larger energy savings.

5. Tax Credit for Combined Heat and Power (House 41006, Senate 2108)

The House provision (41006) provides a 10-percent tax credit for qualifying combined heat and power (CHP) property installed after December 31, 2003, and before January 1, 2007. Qualifying CHP property must have the following characteristics:

Capacity Greater than 50 KW

Efficiency Greater than 60 percent (70 percent if capacity greater than 50 MW)

Thermal At least 20 percent of useful output

Electricity At least 20 percent of useful output

In addition, if the CHP property had a tax depreciation life of 15 years or less (which is common to industrial facilities but not commercial property), the class life must be increased to 22 years if the credit is taken. The legislation specifies that support and distribution equipment are not included in the qualified property.

The Senate version (2108) basically repeats the House provisions. Systems that use back-pressure steam turbines or waste heat are not required to meet either the efficiency standard or the 20-20 thermal/electric standard. To qualify, the property must be placed in service after December 31, 2002 and before January 1, 2007.

Impact of Commercial CHP Tax Credit

Previous analysis indicates that the 10-percent tax credit results in a projected 56megawatt (5 percent) increase in commercial CHP capacity over the period when the tax credit is in effect, relative to the Reference Case.¹¹ This analysis used Reference Case assumptions from AEO2002.¹² Commercial delivered energy consumption and site-specific carbon dioxide emissions increase slightly due to increased fuel requirements for CHP. However, total emissions (including carbon dioxide emissions attributable to electricity purchases) are projected to decline slightly over the period. Projected commercial carbon dioxide emissions drop by a cumulative 0.19 million metric tons carbon equivalent (0.02 percent) over the period when the tax credit is in effect when compared to the Reference Case. By comparison, a new 300-megawatt natural gas power plant would emit approximately 0.16 million metric tons carbon equivalent annually. The analysis indicates that the provision results in a sustained 4-percent increase in projected commercial CHP capacity in 2020. Assuming the relative length of the effective period of the provisions would be maintained as stated in the Senate and House bills, the slightly shorter effective time period of the House provision would reduce the impact of the proposed credit relative to the analysis.

6. Tax Deduction for New Energy Efficient Commercial Buildings (House none, Senate 2105)

The Senate bill provides taxpayers with a tax deduction for energy-efficient commercial building property expenditures. The deduction amount is limited to $2.25 times the square footage of the building for which the expenditures are made. To qualify, energy-efficient property must be placed in service between 2003 and 2007 and demonstrate a 50-percent reduction in total annual energy and electric power costs for the commercial building with respect to lighting, heating, cooling, ventilation, and hot water supply systems. Energy and power cost savings are measured relative to a reference building meeting American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE) Standard 90.1-1999.

Impact of Commercial Building Tax Deduction

The quantitative effects of this provision cannot be estimated at this time because the methods for calculating energy and electricity consumption and costs and the procedures for determining compliance will be prescribed only after the legislation becomes law, if passed. Further, the NEMS commercial module does not allow for an economic analysis of energy efficiency at the building level. In addition to the indeterminate investment required to reduce energy and power costs 50 percent relative to the ASHRAE Standard, compliance certification by a third party will be required. The effectiveness of this provision also depends on the timeliness of developing calculation methods for determining compliance, the complexity of those methods, and training and proficiency tests for those who will perform compliance certification. Due to the limited duration of the provision and the issues stated above, only small to negligible energy savings and emissions reductions can be expected as a result of the provision.

7. Product Standards (House 11044, 11045, Senate 924, 928)

The energy bills provide for a number of energy efficiency standards and test procedures that could affect the buildings sector. The provisions of the House and Senate bills are the same. Section 11045 of the House bill and Section 928 of the Senate bill specify a standard level of 190 watts for torchieres manufactured on or after January 1, 2005.

The standardization of test procedures in Section 11044 of the House bill and Section 924 of the Senate bill does not directly lead to energy savings, but should facilitate the standards process. The efficiency levels of standards for ceiling fans, vending machines, unit heaters, and commercial refrigerators and freezers are not determined in Section 11045 of the House bill and Section 928 of the Senate bill, thus savings due to these standards cannot be quantified. The same is true for standby mode energy consumption.

Impact of Product Standards

The torchiere standard provision under Section 11045 of the House bill and Section 928 of the Senate bill lead to a 7-percent reduction (10 billion kilowatthours, which is equivalent to about seven 300-megawatt power plants) in residential lighting electricity use in 2020 relative to the Reference Case. The savings represents 0.6 percent of projected total residential electricity sales in 2020.

The impact of both energy bills’ requirement to meet the Version 2.0 Energy Star performance requirements for illuminated exit signs depends on the mix of light source technologies used in existing exit signs, the rate of sign replacement, and the rate of construction for new non-residential buildings. Exit signs can last longer than 25 years, slowing the rate of replacement and limiting the near-term effects of the proposed standard on energy consumption in existing buildings.

Distribution transformers are not explicitly represented in NEMS, precluding quantitative analysis of the energy bills’ requirement to meet the Class I Efficiency Levels for low voltage dry-type transformers specified by the National Electrical Manufacturers Association (NEMA) in 2005. The effects of minimum efficiency standards for low voltage dry-type transformers would be expected to accumulate gradually due to the slow rate of turnover in the stock of equipment in use. Distribution transformers have an estimated average useful life of 30 years; thus new construction, expansions, and major renovations are the primary reasons for transformer purchases. In addition, a significant market exists for used equipment, further delaying the introduction of new transformers into the equipment stock.

8. Federal Building Energy Programs (House 11001 – 11006, Senate 911 – 917, 919)

Section 11001 of the House bill adds conservation measures for congressional buildings. The sections dealing with energy use in Federal buildings in Sections 11002 - 11005 of the House bill essentially codify the purchasing mandates of Executive Order 13123, Greening the Government Through Efficient Energy Management, updating the base year to 2001 and updating mandated energy intensity reductions as specified in Table 1. Section 11006 provides a permanent extension of Energy Savings Performance Contracts.

The Senate bill (Sections 911 – 917) provides the same provisions as the House bill, except for an amendment regarding photovoltaics, with a base year of 2000 and target reductions in Table 1 to be reached two years sooner.

Impact of Federal Building Programs

The provision is expected to have negligible additional impact on commercial delivered energy consumption and carbon dioxide emissions relative to the Executive Order already in place. The Order already mandates that Federal agencies complete life cycle cost-effective projects, making maximum use of Energy Star and other energy-efficient products, alternative financing, sustainable design, and renewable energy technologies. The bill provisions turn those mandates into law. The addition of measures for congressional buildings and the permanent extension of Energy Savings Performance Contracts may add slightly to the expected energy savings.

9. Use of Photovoltaic Energy in Public Buildings (House 11011, Senate none)

The House agreed to an amendment resulting in Section 11011 establishing a photovoltaic energy commercialization program to install at least 150 megawatts cumulative in public buildings during the 2004 through 2008 time period. There was no corresponding provision in the Senate bill.

Impact of Use of Photovoltaics Energy in Public Buildings

This analysis used a mid-year revision to AEO2003 completed for the study, Analysis of S.139, the Climate Stewardship Act of 2003 as a Reference Case.¹³ The NEMS model was modified to include the photovoltaic capacity specified in the amendment to the House bill as commercial sector installations, distributed evenly over the 2004 through 2008 time period. This is equivalent to 1500 systems similar in size to the General Services Administration installation at the Suitland Federal Center in Maryland.

Additional photovoltaic installations due to the amendment reduce projected commercial delivered energy use 1.0 trillion Btu in 2008¹⁴ relative to the Reference Case, about 0.01 percent of commercial consumption (0.1 percent of 2001 Federal energy consumption). The cumulative reduction in projected commercial energy use over the effective period of the proposed program is 3.1 trillion Btu (0.01 percent) and projected commercial carbon dioxide emissions, including carbon dioxide emissions attributable to electricity purchases, are reduced by a cumulative 0.15 million metric tons carbon equivalent (0.01 percent). Through 2020, cumulative savings reach 19.4 trillion Btu (0.01 percent) and 0.95 million metric tons carbon equivalent of carbon dioxide emissions (0.02 percent) relative to Reference Case projections.

10. Low Income Home Energy Assistance Program and Weatherization Assistance (House 11021, Senate 901)

Section 11021 of the House bill provides $3.4 billion for the Low Income Home Energy Assistance Program (LIHEAP) in fiscal years 2004 to 2006 and weatherization assistance of $325 million in fiscal year 2004, $400 million in fiscal years 2005, and $500 million in fiscal year 2006. For comparison, the fiscal year 2004 budget request was $288.2 million for weatherization. Amendment 4 to the House bill provides an estimated $400 million per year to LIHEAP from the proceeds of the leases to drill in the Arctic National Wildlife Refuge.

Section 901 of the Senate bill is the same except that the funds are provided one year earlier.

Impact of LIHEAP and Weatherization Assistance

LIHEAP offsets expenditures for heating fuels. More assistance might increase energy consumption if low-income households have more money to spend on energy. (These programs are not modeled in NEMS.) The weatherization program estimates that each house costs $2,000 to weatherize for an annual energy savings of $300. Using these results, fiscal year 2004 would provide funding for an additional 18,400 homes and $5.5 million in energy bill savings.

11. Energy Efficient Appliance Rebate Programs (House 11023, Senate 905)

Section 11023 of the House bill provides $50 million in fiscal year 2004 to 2008 to States with Energy Star appliance rebate programs.

Section 905 of the Senate bill is similar to the House bill, except the fiscal years are 2003-2012 and the funding level is “sums as necessary.”

Impact of the Energy Efficient Appliance Rebate Programs

This provision is not modeled in NEMS due to the State level nature of the program. Since the Senate version covers more years, the potential for energy savings is greater.

12. Research and Development Related to Energy Efficiency (House 21101-21121, Senate 1211-1213)

Sections 21101-21121 of the House bill provides funding for various research and development projects such as the Next Generation Lighting Initiative and the National Building Performance Initiative.

Sections 1211-1213 of the Senate bill is essentially the same, but with more targeted funding levels for each program.

Impact of Research and Development Related to Energy Efficiency

As discussed in the Chapter 1, this analysis did not attempt to assess the overall impact of proposed R&D funding in the House and Senate energy bills. EIA has previously qualitatively analyzed numerous R&D provisions that provide for increased R&D efforts.¹⁵

B. Industrial

The industrial analysis includes tax credits for CHP, blending cements, and voluntary programs. The source of the industrial analysis on the impact of tax credits for CHP is an internal EIA analysis¹⁶ using AEO2002 as a Reference Case. The source of the discussion on voluntary programs is the report, Analysis of Efficiency Standards for Air Conditioners, Heat Pumps, and Other Products (S. 1766 Section 921-929, H.R.4 Section 124, 142, and 143).¹⁷ The Reference Case used for the voluntary programs discussion was a mid-year revision to AEO2002.

1. Tax Credit for Combined Heat and Power (House 41006, Senate 2108)

Section 41006 of the House bill provides a 10-percent tax credit for CHP system property placed in service after December 31, 2003, and before January 1, 2007.

Section 2108 of the Senate amendment also provides a 10-percent tax credit, but the qualifying property may be placed in service after December 31, 2002, and before January 1, 2007. The efficiency exception for back-pressure systems included in the House bill has been removed.

Assuming the relative length of the effective period of the provisions would be maintained as stated in the Senate and House bills, the slightly shorter effective time period of the House bill would reduce the impact of the proposed credit relative to the Senate bill. The back-pressure provision would have negligible impacts on the previous analysis.

Impact of Tax Credit for CHP

The 10-percent tax credit results in a projected 490-megawatt (1.9 percent) increase in industrial CHP capacity over the period when the tax credit is in effect, compared with the Reference Case. Carbon dioxide emissions directly attributable to the industrial sector increase slightly due to increased CHP fuel consumption. However, total industrial carbon dioxide emissions, which include carbon dioxide emissions attributable to electricity purchases, are projected to be slightly lower over the period due to higher efficiency of CHP relative to central station electricity generation and separate on-site steam generation. Projected industrial carbon dioxide emissions are reduced by a cumulative 0.42 million metric tons (0.02 percent) carbon equivalent over the effective period of the tax credit when compared with the Reference Case. These reductions will be sustained as long as the equipment remains in operation. No permanent impact from the temporary tax credit is anticipated.

2. Voluntary Industrial Programs (House 11007, Senate 921)

Both the House and Senate energy bills have provisions for voluntary agreements to improve industrial energy intensity by 2.5 percent per year.

Section 921 of the Senate bill and Section 11007 of the House bill require the Department of Energy to enter into voluntary agreements with industrial sector entities that consume significant amounts of energy to reduce their primary energy intensity. For these entities, the goal is to reduce primary energy intensity at an average rate of 2.5 percent per year over the period 2002 to 2012 (2004 to 2014 for the House bill). Entities participating in the program “shall be eligible to receive ... a grant or technical assistance as appropriate to assist in the achievement of those goals.” Energy intensity is defined as “primary energy consumed per unit of physical output in an industrial process.”

The proposed legislation does not specify the size of the potential grant or the nature of the technical assistance. However, Department of Energy programs have similar functions. Financial assistance is available in the Inventions and Innovations program and in the National Industrial Competitiveness through Energy, Environment, and Economics program. Technical assistance is available through the Industrial Assessment Centers program. It is not clear whether the proposed legislation is intended to change the participation requirements for these programs (e.g., pledge to reduce energy intensity by the specified amount) or change the firm size allowed to participate.

As written, the proposed legislation seems to specify that the primary energy intensity reduction must be measured for a process. However, process is not defined, nor is primary energy. Generally, primary energy is defined to include the losses incurred in generating electricity. Primary energy intensity can decline due to improvements in electricity generating efficiency irrespective of changes at the plant or process. Presumably, the intent of the proposed legislation is to exclude efficiency improvements by electricity suppliers when calculating intensity improvements by industrial sector entities.

Impact of Voluntary Industrial Programs

It is extremely difficult to quantify the impacts of voluntary programs. It is assumed that these impacts are captured in the baseline assumptions regarding energy intensity improvements. In the AEO2003 Reference Case projection, industrial primary energy intensity falls by 1.6 percent annually over the 2002-2012 period specified in the Senate bill. Industrial primary energy intensity fell by 1.6 percent annually over the 1978-2000 period. Thus, the 2.5-percent goal is almost 60 percent higher than the intensity decline rate in the Reference Case and in recent history. If the 2.5-percent goal were met for the industrial sector, primary energy consumption in at the end of the period would be 9 percent or 3.2 quadrillion Btu lower than in the AEO2003 Reference Case. The AEO2003 also includes a High Technology Case, which assumes earlier availability, lower costs, and higher efficiency for more advanced equipment. In the High Technology Case, industrial primary energy intensity is projected to fall 1.9 percent per year. If the 2.5-percent goal were achieved for the industrial sector in this case, primary energy consumption in 2012 would be 2.5 quadrillion Btu lower than projected in the AEO2003 High Technology Case.

In summary, the 2.5-percent goal is quite ambitious and not likely to be achieved for the industrial sector overall. Some individual plants or industrial sub-sectors may be able to meet that goal.

3. Other Industrial Provisions (House 11010, Senate 920)

Both bills have provisions (Section 11010 in the House and Section 920 in the Senate) intended to increase the amount of recovered mineral component in Federally-funded projects involving procurement of cement or concrete (i.e., blended cements). The provisions call for an initial study of barriers to greater use of blended cements, such as buildings codes and product standards. Implementation of the purchasing requirements is dependent on the results of the initial study. Blended cements have the potential to reduce energy consumption in cement production and concomitant carbon emissions.

Impact of Other Industrial Provisions

The impact of the other industrial provisions included in the House and Senate energy bills were not evaluated.

C. Transportation

A variety of legislative proposals have targeted the transportation sector. Although neither of the bills specifies higher CAFE standards, Senator Dorgan’s staff requested that an assessment of higher CAFE standards be included in this Service Report subsequent to receipt of the Request Letter. ¹⁸ In the past, several proposals to increase the corporate average fuel economy (CAFE) standards for cars and light trucks have been analyzed. The potential impact of these past CAFE analyses is discussed below followed by a discussion of the impacts of current proposed legislation that would affect Federal, State, and local vehicle fleets. Since fuel cell vehicles are frequently targeted in the legislative proposals, the potential impacts of these proposals are discussed next. Finally, a host of targeted demonstration or credit programs are discussed, even though none is likely to have a significant impact on transportation sector energy consumption.

1. Corporate Average Fuel Economy (House 18001-18002, Senate 801-803)

The Senate energy bill does not prescribe specific fuel economy standards for light duty vehicles. The bill requires the Department of Transportation (DOT) to develop a feasible increase in fuel economy standards for light-duty vehicles no later than two years after enactment. Feasibility criteria are outlined in Section 803 of the Senate bill. If DOT fails to make recommendations within the allotted time, Section 802 of the Senate bill allows Congress the ability to introduce new standards for light-duty vehicles. Section 804 of the Senate bill extends the current CAFE credit allowed for vehicles capable of using an alternative fuel through 2012. Section 811 exempts “pickup trucks” from fuel economy increases, keeping the standard at 20.7 miles per gallon (mpg). DOT will develop the criteria for the definition of a “pickup truck.”

The House bill has similar provisions (Sections 18001 and 18002) that require the evaluation of feasible fuel economy increases with proposed recommendations. The House version requires the study to be submitted within a year of the date of enactment and does not provide an exemption for pickup trucks.

Impact of CAFE

The current Senate and House bills do not provide specific fuel economy standards for light-duty vehicles, requiring instead that the issue be studied with action taken by Congress if recommendations to increase CAFE are not issued within a set period of time. Enactment of these provisions would not necessarily result in different standards than those that would be promulgated under existing law. In fact, even the direction of any impact of future standards is unclear.

EIA has previously analyzed fuel economy standards for light-duty vehicles as part of an evaluation of H.R.4 (the Securing America’s Future Energy Act of 2001), S.804 (the Automobile Fuel Economy Act of 2001), and S.517 (the Energy Policy Act of 2002)¹⁹ for Senator Murkowski using a mid-year revision to AEO2002 as the Reference Case.²⁰ The following discussion of CAFÉ, which is not directly relevant to the current House and Senate CAFÉ provisions, is based on that analysis. Five CAFE cases were developed as part of that analysis as follows:

1. H.R. 4 Section 201, specifying that light truck²¹ (8,500 pounds or less gross vehicle weight) CAFE standards are to increase to a level that would provide a cumulative 5 billion gallon reduction in gasoline use between 2004 and 2010;
2. A sensitivity case, specifying that new light vehicle (including cars) fuel economy increases 5 percent in 2005 and 10 percent in 2010, relative to the current standards (27.5 mpg for cars and 20.7 mpg for light trucks);
3. S. 804, specifying that light truck (10,000 pounds or less gross vehicle weight) fuel economy standards increase to 22.5 mpg in model years 2003 through 2004, 25 mpg in model years 2005 through 2007, and 27.5 mpg for model years 2008 and beyond;
4. An S.804 sensitivity case in which the introduction dates for advanced conventional technologies are moved forward three to four years and are analyzed for potential fuel economy gains relative the CAFE standards defined in S.804; and
5. S. 517, specifying that the combined average fuel economy of new light vehicles increases to 35 mpg by 2013. For cars, the standard increases from 27.5 mpg to 38.3 mpg and for light trucks (10,000 pounds or less gross vehicle weight), the standard increases from 20.7 mpg to 32 mpg.

These individual cases are referred to as H.R.4 Case, Sensitivity Case, S.804 Case, S.804 Advanced Date Case, and S.517 Case, respectively. The S.804 and S.517 proposals also included an important provision that expands the definition and coverage of CAFE standards from light trucks with a gross vehicle weight of 8,500 lbs or less to 10,000 lbs or less. The definition brings in the heavy light truck fleet, which has much poorer fuel efficiency than light trucks under the previous standards and definition.

For the H.R.4 Case, EIA calculated that the light truck CAFÉ standard would need to be increased to 21.5 mpg, 0.8 mpg above the standard that was in effect when the analysis was conducted, to meet the fuel savings goal. EIA had projected efficiency improvements in its Reference Case would have provided this savings even with no change in standards. Subsequent to this analysis, CAFÉ standards for light trucks were increased to 22.2 mpg through rulemaking under existing law. The detailed projections for the other four cases, from EIA’s earlier CAFÉ analysis are shown in Table 2.

2. Miscellaneous Federal, State, and Local Fleet Requirements

a. Hybrid Vehicle Requirements (House none, Senate 805)

Section 805 of the Senate bill requires that in 2005 and 2006 5 percent of the Federal fleet light truck purchases for all executive agencies not covered under section 303 of the Energy Policy Act of 1992 will be hybrid vehicles. After 2006, 10 percent of those vehicles will be hybrid light-duty trucks. The House bill does not set a requirement for the percentage of hybrid vehicles.

Impact of Hybrid Vehicle Requirement

Although the purchase of higher efficiency hybrid light trucks will reduce energy demand from Federal fleet vehicles, limited availability of these vehicles and the relatively small number of vehicles purchased will have little impact on total U.S. demand for highway fuels.

b. Alternative Fuel Requirement (House 15046, Senate 806)

Section 806 of the Senate bill and Section 15046 of the House bill require that by 2009 Federal fleet vehicles capable of using an alternative fuel will use 50-percent alternative fuel. By 2011 the percent of alternative fuel use for those vehicles increases to 75 percent. The House bill requires that all Federal fleet vehicles capable of using an alternative fuel use that alternative fuel. Both bills allow for waivers if the alternative fuel is not available, but the Senate version allows for no waivers after 2012. The House bill also allows for a waiver if the cost of the alternative fuel is unreasonable.

Impact of Alternative Fuel Requirement

Little, if any, additional impact on future transportation energy is expected. Estimated alternative fuel consumption by Federal agencies was 5.8 million gallons in 1999, which was 1.7 percent of total U.S. alternative fuel consumption of 339.3 million gallons. At the same time, Federal agencies accounted for about 276 million gallons of gasoline consumption, which amounts to 0.2 percent of total U.S. gasoline consumption. Overall, alternative fuels make up about 0.3 percent of the combined total of alternative fuels plus gasoline.

c. Allowing Some Electric Vehicles to Count Toward Alternative Vehicle Purchase Requirements (House 15011, Senate 818)

Section 818 of the Senate bill and Section 15011 of the House bill would amend the Energy Policy Act of 1992 to allow some electric vehicles that are not designed to be used on highways to count as alternative fuel vehicle purchase requirements for covered fleets.

Impact of Allowing Some Electric Vehicles to Count Toward Alternative Vehicle Purchase Requirements

This provision will have little impact on total highway energy use.

d. Fleet Alternative Fuel Vehicles Credits (House 15011 and 15012, Senate 819)

Section 819 of the Senate bill and Sections 15011 and 15012 of the House bill establishes fleet alternative fuel vehicle credits for the purchase of hybrid vehicles. Credit is based on vehicle inertia weight, efficiency improvement relative to a 2000 model year vehicle, the maximum power available from the battery, and vehicle size class.

Impact of Fleet Alternative Fuel Vehicles Credits

Although this will provide an incentive to purchase hybrid vehicles, little impact will be realized on total highway energy use.

e. Fuel Efficiency of the Federal Fleet of Automobiles (House none, Senate 821)

Section 821 of the Senate bill requires that the average fuel economy of new automobiles purchased for the Federal fleet after September 2003 be at least 1 mpg higher than the 1999 average.

Impact of Requirement that Fuel Economy of New Automobiles Increase

This provision will result in increased efficiency for light duty Federal fleet vehicles, but because Federal fleet vehicles account for less than 0.2 percent of total U.S. gasoline consumption this will have little impact on total gasoline consumption.

3. Fuel Cell Vehicles (House none, Senate 824)

Section. 824 of the Senate bill requires that that the Secretary of Energy develop a program to develop technologies that enable at least 100,000 hydrogen-fueled fuel cell vehicles to be available for sale in the United States by 2010 and at least 2.5 million of such vehicles to be available by 2020 and annually thereafter.

Impact of the Fuel Cell Provisions

Given the current state of development of fuel cell vehicles and hydrogen fueling infrastructure required for their use, it is unlikely this provision will be met. The success of this goal will depend on how and if serious obstacles will be overcome: reduction of the cost of fuel stack capital costs by over 95 percent (to about $30 per kilowatt); reduction of the costs to integrate the fuel cell electronics within the automotive drive train; economic sources of hydrogen production; the development of a hydrogen transportation infrastructure, including refueling stations; and safe storage of high-density hydrogen on the vehicle to allow for adequate driving range. EIA believes that these obstacles are insurmountable in the 2010 time frame, making the goals unachievable. If the obstacles could be overcome, reducing fuel cell vehicle costs to that of gasoline vehicles and developing the infrastructure in the time frame of S.824, then 1 million barrels of oil per day could be displaced by 2025.

4. Miscellaneous Provisions Affecting Transportation

a. Hybrids in HOV Lanes (House none, Senate 812)

Section 812 of the Senate bill allows States the ability to classify single occupancy hybrid vehicles as HOV capable. This provision would allow single passenger hybrid vehicles to use HOV lanes.

Impact of Allowing Hybrids in HOV Lanes

This provision probably would increase the incentive to purchase hybrid vehicles. However, allowing single passenger vehicles in HOV lanes may lead to additional congestion in the HOV lanes and longer commuting distances, which would lead to increased overall fuel consumption. Any additional congestion or miles driven will offset part of the higher fuel efficiency of hybrid vehicles. As a result, the impact on fuel consumption of the HOV exception cannot be quantified.

b. Tax Credits for Certain Vehicles (House 41011, Senate none)

Section 41011 of the House bill establishes an income tax credit for fuel cell vehicles based on vehicle weight class and efficiency improvement. The fuel cell vehicle tax credit ranges from $5,000 to $44,000. The House bill also establishes an income tax credit for advanced lean burn technology based on fuel economy improvement over a 2000 model year vehicle. The advanced lean burn tax credit ranges from $750 to $3,500.

Impact of Tax Credits for Certain Vehicles

This provision provides a financial incentive for purchasers of hybrid and fuel cell vehicles. Since interest and availability of these vehicles has been limited, the potential size of the market is expected to remain very small. Most likely, the credit will be applied to currently mandated purchases of these types of vehicles and will provide little stimulus to significantly increase production or sales. The overall impacts on emissions, oil imports, and energy expenditures are expected to be minimal.

5. Research, Development and Demonstration

While several legislative proposals would expand R&D efforts, as discussed earlier, it is not feasible to quantify the impacts of such programs.²²

Section 807 of the Senate bill expands current R&D activities for hybrid and fuel cell vehicles at the Department of Energy. The House bill does not specify any changes to these programs. Due to the uncertain success of R&D programs, it is difficult estimate the outcome of the program.

Section 808 of the Senate bill requires accelerated R&D toward the improvement of diesel combustion and after treatment technologies for use in achieving Tier II compliance. The House version is very similar in content. Due to the uncertain success of R&D programs, it is difficult to estimate the outcome of the program.

D. Development and Implementation of Measures to Reduce Total U.S. Petroleum Demand by One Million Barrels Per Day in 2013. (Senate Amendment 871 to S.14)

In June 2003, during its consideration of S.14, the Senate overwhelmingly adopted Amendment 871, proposed by Senator Landrieu and others. In part, the provision states that “the President shall develop and implement measures to conserve petroleum in end-uses throughout the economy of the United States sufficient to reduce total demand for petroleum in the United States by 1,000,000 barrels per day from the amount projected for calendar year 2013 in the Reference Case contained in the report of the Energy Information Administration entitled, ’Annual Energy Outlook 2003’.''

Prior to its August recess, the Senate set aside consideration of S.14 and passed comprehensive energy legislation with the same provisions as the Senate-passed bill from the prior Congress, which did not include the provisions of this amendment. Although this provision is therefore not a part of either the Senate- or House-passed bills in the present Congress, staff of Senator Dorgan’s office specifically requested that EIA address it as a part of this analysis.²³

EIA could not develop new analysis given the abbreviated time frame for this project, which was further compressed due to the acceleration of the conference process following the events of August 14, 2003. However, EIA is able to provide some information relevant to this provision. The AEO2003 outlook for oil demand and recent updates to that projection are discussed. Then, the impacts that might be expected to result from the enactment of other provisions being considered by the Conference are considered. Finally, some policy instruments potentially available under existing authorities to reduce oil demand are identified. The restriction to existing authorities is specified in the Landrieu amendment.

1. The AEO2003 Projection for Petroleum Demand

Table 3, taken from AEO2003,²⁴ illustrates that the transportation sector currently accounts for more than two thirds of all petroleum products used in the United States. Petroleum product use is projected to grow from 19.7 million barrels per day in 2001 to 24.4 million barrels per day in 2013. The share of all petroleum products used in the transportation sector is also expected to grow over this period, reaching 72 percent in 2013 (67 percent in 2001). The industrial sector is another significant user of petroleum products, both as an energy source and as a feedstock. Residential and commercial uses of petroleum products in 2001 averaged 1.2 million barrels per day in 2001, and were projected to decline both absolutely and as a share of total petroleum product usage in AEO2003. Finally, use of petroleum products by electric generators averaged 0.55 million barrels per day in 2001, a year of high natural gas prices. Generation use of oil is projected to fall by 60 percent or more from this level over the forecast horizon.

Subsequent to release of AEO2003, the National Highway Traffic Safety Administration (NHTSA) raised the CAFE standard for cars and light trucks for model years 2005 through 2007. Consistent with standard EIA practice requiring policy neutrality in baseline projections, the effects of this action on oil demand were not included in the AEO2003, since final regulatory action had not occurred when our projection was issued. However, a recent EIA service report, Analysis of S.139, the Climate Stewardship Act of 2003,²⁵ was prepared following this issuance of NHTSA’s final rule and includes a modified Reference Case that reflects its effect on oil demand. Table 4 summarizes this revised Reference Case. Petroleum demand in the transportation section in 2013 is projected to be 0.22 million barrels per day lower than in the AEO2003.

2. Effects of Other Analyzed Provisions on Oil Demand in 2013

Several provisions of the Senate- and House-passed versions could have the effect of reducing the projected level of oil demand in 2013. However, while significant demand reductions are always possible, there are few measures in either bill that would provide oil demand reductions with a reasonable degree of assurance. Measures falling into this category include:

• Renewable Fuels Standard with or without MTBE Ban (Chapter 5, Section A)
• Alternative Fuel Requirements for Federal Fleets (Chapter 3, Section A)
• Biodiesel Incentives (Chapter 5, Sections E)
• Tax Credits for Energy-Efficiency Retrofits (Chapter 2, Section A)

Of the provisions listed above, the Renewable Fuels Standard (RFS) mandating the use of 5 billion gallons of renewables in motor fuels by 2012 (Senate bill) or 2015 (House bill) would probably have the largest direct impacts on oil demand. For example, the AEO2003 projects 3.3 billion gallons of ethanol use in 2012. The extra ethanol (1.6 billion gallons per year) mandated under the RFS contains the energy content of 68,000 barrels of gasoline per day. However, since expanded ethanol use will be displacing natural gas-based additives as well as petroleum, and because extra RFS credits will be awarded for production of cellulosic ethanol, actual petroleum displacement at a constant demand level would probably be less than 68,000 barrels per day.

Fuel demand, however, is also likely to be affected, since increased gasoline prices as a result of an RFS with or without an MTBE ban (more of an increase in the former case) translate into lower demand. These issues were explored in a study EIA performed in 2002, Renewable Motor Fuel Production Capacity Under H.R.4.²⁶ That study used AEO2002 as a Reference Case.²⁷ The Reference Case includes consideration of the MTBE ban in the 17 States that have already passed laws banning it. When a total MTBE ban is imposed, as in the Senate Bill, petroleum consumption in 2013 is lower because consumers reduce consumption in response to the higher prices that result from the ban of MTBE (see Table 5). Note that this analysis also assumes that the existing tax benefits provided to ethanol are extended indefinitely. If ethanol’s tax benefits are not extended, the RFS will have a larger impact on gasoline prices, as discussed in Chapter 5 of this report, with further effects on demand.

Several other provisions in the Senate and House bills could also impact oil demand, but their effects are more speculative. Measures falling into this category include:

• Numerical Targets for Fuel Cell Vehicle Availability (Chapter 2, Section C.3)
• CAFE program provisions (Chapter 2, Section C.1)
• Voluntary Commitments for Faster Energy Intensity Reduction in Industry (Chapter 2, Section B.2)

While policies implemented pursuant to these provisions could affect oil use in transportation and industry, these provisions by themselves do not assure that such actions will be taken or that changes in oil use would occur. It is not readily apparent, for example, that enactment of the CAFE provisions of the House and Senate bills²⁸ would result in higher CAFE requirements than the continuation of existing law. It is beyond EIA’s mission to speculate on future policy decisions.

3. Examples of Policies to Reduce Oil Demand Under Existing Authorities.

The discussion in the two previous sections suggests that actions already taken, or those mandated under provisions included in the House and Senate bills, are themselves unlikely to provide the 1 million barrel per day reduction in projected oil demand by 2013 called for in Amendment 871.

While it is beyond EIA’s mission to speculate on future policy decisions, this section identifies several generic policies that might be included in a plan to reduce oil demand using existing authorities. The quantity of oil demand reduction available through these measures would depend on the specific parameters and timetables adopted if and when a particular policy is implemented.

a. Transportation

Available transportation sector policy options to help reduce U.S. petroleum consumption include revisions to CAFE standards, conversion of Federal fleets to alternative fuel sources, and Federal encouragement of pay-as-you-drive insurance arrangements that would reduce vehicle miles of travel by increasing consumers’ perceived cost of incremental travel. Other transportation policies could also be considered, including increased use of high occupancy vehicle lanes, road pricing, and mass transit subsidies. However, studies examining the travel and energy impacts of these policies are very localized, and do not reflect the impact that might occur on a national level due to differences in travel behavior or access to facilities. As a result, it would be extremely difficult to quantify the national energy impacts of such policies given currently available data.

Increase CAFE

CAFE increases beyond those already announced could reduce oil demand. However, CAFE increases could have differential effects on manufacturers, and increase the cost of new vehicles, leading to some reduction in new car sales and consequent macroeconomic effects. (See Chapter 2, Section C on impact of various CAFE provisions).

Convert All Existing Gasoline Consumption in the Federal Fleet to Natural Gas or other Fuels

The Federal fleet consumes relatively small amounts of gasoline. In 2001, the Federal fleet consumed 0.019 million barrels per day of petroleum. By 2013, it is expected that the Federal fleet would consume 0.014 million barrels per day of petroleum, which could be converted to other fuels.

Pay-As-You-Drive Insurance

Traditionally, vehicle insurance is sold on an “all you can drive” basis and is generally considered a fixed cost by drivers. Motorists do not usually perceive insurance cost varying with mileage. Pay-As-You-Drive insurance pricing converts fixed insurance payments to a variable cost with respect to usage rates. This gives motorists the opportunity to save money if they reduce personal vehicle travel. From a review of the literature, Pay-As-You-Drive insurance programs have been estimated to reduce personal vehicle travel by 2 to10 percent annually.²⁹ ,³⁰ The Federal Highway Administration is currently funding analysis of Pay-As-You-Drive programs to determine the impact on personal travel.³¹

b. Industrial Sector

Most petroleum consumed in the industrial sector is not easily reduced. Approximately half (4.3 quadrillion Btu) of industrial petroleum consumption is used as a feedstock or as a material in construction. An additional 25 percent of industrial petroleum consumption (2.3 quadrillion Btu) results from combustion of the refinery byproducts, still gas and petroleum coke (see Table 6).

Petroleum consumed as a boiler fuel in the industrial sector is also minimal, approximately 300 trillion Btu.

Options to reduce petroleum consumption in the industrial sector are limited. For example, there are ongoing research programs to reduce the feedstock requirements for chemical processes. Boiler efficiency standards were enacted with the Energy Policy Act of 1992. However, given the limited number of industrial boiler capacity additions, these standards would have minimal impact on petroleum energy consumption. AEO2003 included a case representing a more optimistic view of energy-related technology improvements. In that case, industrial petroleum consumption in 2013 was reduced from the Reference Case value of 10.3 quadrillion Btu to 10.1 quadrillion Btu (1.5 percent) in the High Technology Case.³²

c. Residential and Commercial Sectors

Higher Federal Efficiency Standards Issued for Oil and Gas Furnaces, Boilers, and Water Heaters and Increased Weatherization Project Support

Higher efficiency standards for oil-using furnaces, more stringent building codes, and increased weatherization efforts could all contribute to reductions in residential petroleum consumption. A similar approach could be applicable in the commercial sector.

However, residential and commercial demand accounts for a small and declining proportion of oil use, buildings and equipment turn over slowly, and many of the key decisions about building code stringency are made below the federal level.

These conditions limit available oil demand savings in these sectors.

d. Electricity Sector

Very little petroleum is consumed in the electricity sector. Since petroleum is typically the most expensive fuel, oil-fired plants tend to have relatively low utilization rates. Consequently, oil consumption in the electricity sector is minimized even in the Reference Case projections. In 2001, there were over 5,000 generating plants, but fewer than 900 plants generated at least one million kilowatthours of electricity from oil combustion. Electricity sector petroleum consumption is projected to be 200 thousand barrels per day (1.2 percent of total generation) in 2013.

End-Use Energy Demand - Tables

Notes and Sources