Executive Summary

This report was prepared at the request of Senator Byron L. Dorgan, a member of the Senate Committee on Energy and Natural Resources, to support the deliberations of the Senate and House energy bill conferees on H.R.6.EAS and H.R.6.EH. Senator Dorgan requested the Energy Information Administration (EIA) to perform a quantitative analysis of the energy savings and import reductions that would result from the Senate and House energy bills.

In order to provide this report in time for the conference committee review, EIA could not provide a complete analysis of all of the various provisions in each bill. This report primarily summarizes the findings in previous EIA analyses of earlier legislation with similar provisions. The lack of analysis on some provisions should not be interpreted as reflecting any EIA judgment regarding their relative importance or potential impact.

The earlier analyses discussed in this report were completed in 2002 and 2003, and some are based on energy market data from late 2001. Consequently, the analyses presented here are indicative of the direction and magnitude of the impacts of the proposed legislation, but they do not necessarily reflect the impacts that would result from new analyses of current legislative provisions based on the most recent available data and new long-run projections that are now being developed for release in November. For example, natural gas markets have recently faced concerns regarding the adequacy of natural gas supplies to the lower-48 market, with record low levels of working gas in storage at the end of the 2002-2003 winter season, and wellhead prices that, while declining, remain far above those typical of experience over the past decade. If these trends continue and change the longer-term view of natural gas prices, some of the effects of the proposed bills could be quite different than those presented here.

Because this report draws on earlier analyses, a variety of different Reference Cases reflecting the Annual Energy Outlook 2002, the Annual Energy Outlook 2003, or mid-year updates to those reports, are used as the jumping-off point for the analysis of specific provisions. Some of these previous analyses assume that new provisions were enacted in 2002 or early in 2003, in some cases resulting in reported impacts for those years that would not occur if the provisions were enacted now. Generally, the pattern and size of impacts, rather than their timing, will be of primary interest to users of this report. Users may also want to focus on differences in estimates with and without the modeled provisions rather than on the absolute levels of energy market prices or quantities in either the Reference or policy cases.

Even without the time limitation for this report, it would be extremely difficult to provide a detailed quantitative analysis of all the provisions of the bills. Some of the provisions address very small segments of energy markets, where detailed data are not available. Also, the energy model used for this analysis, the National Energy Modeling System, does not necessarily segment markets to the level of detail required for some of the provisions. For example, the bills provide a business tax credit for builders of energy-efficient homes, but the model does not distinguish consumer choice between builders and homeowners. The bills also include some provisions that are not completely specified, such as new equipment standards that are called for but no efficiency levels provided. In addition, some provisions call for voluntary initiatives and for additional funding for research and development (R&D) efforts, for which detailed quantitative analysis of market impacts is very difficult.

The provisions covered in this report were analyzed separately. Combined, certain provisions could have synergistic or offsetting impacts. One example is that efforts to increase energy efficiency reduce the future growth in electricity demand, thus creating a smaller market for more advanced or renewable generation technologies. As a result, the impacts are not necessarily additive.

Although additional provisions of the bills are discussed in the report, a summary of those provisions that have the greatest impact follows.

End-Use Energy Demand

Buildings

Tax Credit for Qualifying Residential Energy-Efficient Property (House 41001, Senate 2103). Tax credits for residential energy-efficient property in the Senate bill are projected to save 37 trillion British thermal units (Btu) of delivered energy through 2007 relative to the Reference Case, less than 0.1 percent of projected residential energy use over the period. Negligible energy savings are projected due to the House bill because the comparable House provision limits residential tax credits to solar water heaters and photovoltaic equipment.

Tax Credit for Energy-Efficiency Improvements in Existing Homes (House 41004, Senate 2109). The impact of tax credits for expenditures on building envelope improvements in existing homes will vary depending on the age and location of the home. However, in inefficient homes these tax credits could reduce heating and cooling energy use substantially by replacing old building components (e.g. windows) with the most efficient available. While data limitations make it impossible to develop a detailed estimate of the impact of the tax credit, this provision has the potential for relatively large energy savings when compared to other provisions. It is expected that the House version of the provision would result in greater energy savings since the Senate tax credit is smaller, a 10-percent credit with a $300 maximum compared to a 20-percent credit with a $2,000 maximum, even though the Senate version allows credits for heating and cooling equipment, in addition to building components.

Business Tax Credit for Construction of New Energy Efficient-Homes (House 41005, Senate 2101). A tax credit for builders who install energy-efficient heating and cooling appliances and building envelope components in new homes is likely to lead to a greater number of homes being built meeting these specifications than would a tax credit offered to home purchasers. Building a new home following the specifications in the provision could achieve a 30-percent increase in efficiency and save about 15 million Btu of energy per year per home. If all homes built in a given year met the specifications outlined in the House bill, these homes would save an aggregate of approximately 24 trillion Btu annually relative to an alternative that maintains efficiency at the current average level for new homes built today. Annual energy savings would continue to grow as additional efficient homes are added to the housing stock during the time period of the tax credit. However, given the short time period allowed for the tax credit, it is not likely that any long-term “market transformation effect,” or the continued construction of more efficient homes after the tax credits expire, would occur. The House provision is expected to save more energy then the Senate provision, given its higher tax credit.

Tax Credit for Combined Heat and Power (House 41006, Senate 2108). A 10-percent tax credit included in the bills for commercial combined heat and power (CHP) property could result in a projected 56-megawatt (MW) increase in CHP capacity over the 2003 to 2006 period specified in the Senate bill, compared to total commercial CHP capacity of 1,158 MW in 2006 in the Reference Case. CHP fuel requirements result in a slight increase in projected site-specific energy delivered energy consumption, while carbon dioxide emissions attributable to the commercial sector are projected to decline slightly compared to the Reference Case. The shorter effective time period of the House provision is expected to reduce the impact of the proposed credit.

Product Standards (House 11044, 11045, Senate 924, 928). A proposed 190-watt standard for torchieres included in the bills for energy-efficiency standards and test procedures could save 10 billion kilowatthours in annual residential electricity use in 2020 relative to the Reference Case. The savings represent 0.6 percent of total residential electricity sales in 2020. Additional standards for other equipment are specified, but the efficiency levels are not provided in the bills.

Use of Photovoltaic Energy in Public Buildings (House 11011, Senate none). A House amendment establishing a photovoltaic energy commercialization program to install at least 150 MW in public buildings during the 2004 to 2008 time period is projected to reduce commercial delivered energy use by 1.0 trillion Btu in 2008 relative to the Reference Case, about 0.1 percent of 2001 Federal energy consumption. Through 2020, cumulative savings reach 19.4 trillion Btu relative to Reference Case projections.

Industrial

Tax Credit for Combined Heat and Power (House 41006, Senate 2108). A 10-percent tax credit included in the provisions for qualifying CHP facilities is projected to increase industrial CHP capacity by 490 MW, compared with total industrial capacity of 26.1 gigawatts in the Reference Case in 2006. Total industrial sector carbon dioxide emissions, including emissions attributable to electricity purchases, are reduced by 0.4 million metric tons carbon equivalent over the 2003 to 2006 period due to the higher efficiency of CHP relative to central station electricity generation.

Transportation

Corporate Average Fuel Economy Standards (House 18001-18002, Senate 801-803) . The current House and Senate bills do not specify an increase to the current corporate average fuel economy (CAFE) standards, although both request analyses that would determine a feasible increase to the current standards. It is not readily apparent that enactment of either provision would result in the adoption of more stringent CAFE standards than those that would occur in the absence of revisions to existing law. Chapter 2 provides a discussion of the energy and economic impacts associated with previous analyses of proposed CAFE standards.

Oil and Gas Supply

Nonconventional Fuels (House 43005, Senate 2310). The House bill provides a credit of $3 per barrel on a Btu equivalent basis, or 50 cents per thousand cubic feet (mcf), inflation-adjusted, for the first 4 years of natural gas production prior to 2010 for new wells placed in service through 2006 and for existing wells drilled between 1980 and 1992 from Devonian shales, coal seams, and tight formations. Compared to the Reference Case, this credit would increase cumulative natural gas production by 1.4 trillion cubic feet (tcf), or 2.9 percent, and decrease cumulative net imports by 0.6 tcf, or 1.5 percent, from 2003 to 2010. On average, wellhead prices are projected to be 7 cents per mcf, or 2.8 percent, lower than in the Reference Case from 2003 to 2010. The Senate-proposed credit, which is limited to only new wells and provides a credit period of only 3 years, would have less impact on both production and prices. This analysis was based upon prevailing market conditions in late 2001. Since that time, natural gas prices have been significantly higher. If the higher prices continue, the effects of the proposed credits could be less because the credit is reduced if the sale price exceeds $4.04 per mcf (2002 dollars).

Drilling in the Arctic National Wildlife Refuge (House 30401-30412, Senate none). Based on the mean reserve scenario provided by the United States Geological Survey (USGS), opening the Coastal Plain area of the Arctic National Wildlife Refuge (ANWR) to crude oil production is projected to increase oil production by 0.8 million barrels per day in 2020, compared to 5.6 million barrels per day in the Reference Case. This results in an equivalent decrease in U.S. oil imports, reducing the dependence on imported oil from 62 percent to 60 percent in 2020. The projected production from ANWR represents about 0.7 percent of projected world oil production in 2020.

Alaska Natural Gas Pipeline (House none, Senate 710 and 2503). The early introduction of an Alaska natural gas pipeline in 2013, rather than 2020, due to tax incentives in the Senate-passed bill (H.R.6.EAS) is expected to reduce lower-48 cumulative production over the 2013 to 2025 time period by 6.0 tcf (2.0 percent) and cumulative net imports by 3.3 tcf (3.8 percent). The early introduction of the pipeline results in a 25 cents per mcf reduction in the average lower-48 wellhead price in 2015. As a result of generally lower prices, consumers are expected to save 19.7 billion (2001 dollars) over the same period, while consuming 1.8 additional tcf of natural gas (a 0.4-percent increase). However, at the same time, revenues to lower 48 producers are expected to decline by 48 billion (2001 dollars), resulting in reduced Federal royalty receipts. Based on projected annual average lower-48 wellhead prices, the tax credit in the Senate-passed bill is not expected to take affect. However, actual Treasury impacts of the tax credit will depend on monthly natural gas prices at the AECO-C hub, which are expected to continue to be volatile in the future, as they have in the past. Additional indirect Federal budget impacts may also result from relative increases in the level of economic activity and tax revenue collections from the pipeline project itself and economic benefits to gas consumers that may be reflected in increased economic activity as a result of increased gas consumption and lower prices. Under alternative assumptions regarding future natural gas prices or the time needed to carry out the project, the pipeline might enter service earlier than 2020 without incentives or later than 2013 with them.

Alternative Motor Vehicle Fuels Credit (House none, Senate 2004). The Senate provision for a retail sales credit for alternative motor fuels through 2006 would raise the share of fuel consumed by the alternative fuel vehicles by 0.07 percentage points in 2006, about 5 thousand barrels per day oil equivalent. Currently, the alternative fuels covered in the bill amount to less than 0.3 percent of total fuel consumption in the transportation sector. Consumption of compressed natural gas would increase by 7 percent, liquefied petroleum gas by 59 percent, and E85, a mixture of 85-percent ethanol and 15-percent gasoline, by 28 percent in 2006.

Electricity Supply

Renewable Portfolio Standard (House none, Senate 264) . The Senate bill establishes a renewable portfolio standard (RPS) and credit trading system, increasing the percent of electricity generated from qualifying renewable resources to 10 percent by 2019. Both bills extend the current production tax credit for certain renewable generation. It is expected that between 32 and 38 gigawatts of additional renewable capacity above the amount in the Reference Case will be built through 2020, mostly wind and biomass, depending on whether the 1.5-cent-per-kilowatthour credit is indexed to inflation or not. In the Reference Case, 14 gigawatts of renewable capacity are added through 2020. The RPS causes a small increase in electricity prices and industry costs, which is partially offset by reduced natural gas prices for all consumers. In 2025, the RPS increases total end-use expenditures for electricity and natural gas by two-tenths of 1 percent.

Clean Coal Incentives (House 3117, Senate Title XXII, 2201-2221). As natural gas prices rise overtime, EIA expects new coal-fired plants to become more economical over time. Approximately 77,000 megawatts of new coal capacity is projected to be built between 2001 and 2025, including 4,000 megawatts of advanced coal technologies, which is 1 percent of the total generation capacity added in that time. The investment tax credits and production tax incentives for clean coal technologies in the House and Senate bills could accelerate the development of some of the expected new plants and cause some developers to chose advanced technologies rather than conventional technologies. If fully successful, the House bill could result in as much as 7,500 megawatts of new clean coal capacity, which is the limit on the capacity receiving the tax credit. 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 receiving the credit in the Senate bill.

Ethanol, Biodiesel, and Renewable Fuels

Renewable Fuels Standards and Elimination of MTBE (House 17101-17104, Senate 820, 833, and 834). A renewable fuels standard (RFS) of 5 billion gallons with a nation-wide phase-out of methyl tertiary butyl ether (MTBE), as required by the Senate bill, would result in a larger price impact on gasoline than an RFS alone, as required by the House bill. Under the Senate bill, for example, the average price of reformulated gasoline (RFG) would increase by about 3.6 cents per gallon relative to the case with the current ban on MTBE in 17 States by 2004. Under the House bill, the average RFG price would increase by about 1 cent per gallon. The national average price of gasoline, including all grades, would show a smaller impact from the RFS, less than 1 cent per gallon under the Senate bill and less than 0.5 cents per gallon under the House bill since the ethanol can be used in conventional gasoline in this case. Fuel demand is also likely to be affected, since increased gasoline prices translate into lower demand. By 2013, total petroleum products demand is expected to be about 40,000 barrels per day less under the Senate bill, but not much less under the House bill. All of the price and demand impacts cited above assume the indefinite continuation of ethanol tax credits, presently set to expire in 2007. Without such an extension, national average gasoline prices would be 1 to 1.5 cents per gallon higher under an RFS.

Biodiesel Incentives (House none, Senate 2008). The Senate-proposed excise tax exemption for soybean and yellow grease biodiesel, in conjunction with the Department of Agriculture’s Commodity Credit Corporation grants, is expected to result in an increase in biodiesel production for the fiscal years 2004 to 2006. Currently, 60 to 80 million gallons of dedicated annual capacity exists, but another 200 million gallons of capacity, which could produce biodiesel, is used for other purposes. Much of this capacity could be converted to biodiesel given the incentives. These incentives are expected to increase biodiesel production to about 120 million gallons in 2004, compared to 33 million gallons without the incentives. However, because these programs are temporary, these increases are not likely to be sustainable.