1. Background and Scope of the Analysis

This report was prepared in response to a May 2, 2005, letter from Chairman Pete Domenici and Ranking Member Jeff Bingaman requesting that the Energy Information Administration (EIA) perform an assessment of the energy supply, consumption, import, price, and macroeconomic impacts of H.R. 6, the Energy Policy Act of 2005, as passed by the U.S. House of Representatives on April 21, 2005 (H.R. 6 EH).²

This report focuses on those provisions that can be modeled using EIA’s National Energy Modeling System (NEMS),³ and, in EIA’s estimation, have the potential to affect energy supply, consumption, prices, and imports. The impacts of the H.R. 6 EH provisions analyzed are estimated by comparing the results of a simulation with all of the provisions that can be modeled with NEMS to an updated reference case based on the Annual Energy Outlook 2005 (AEO2005).

Major Provisions of H.R. 6 EH Included in the Analysis

• The following provisions of H.R. 6 EH were included in the modeling analysis:
• Onshore and offshore deep royalty relief
• Opening of the Arctic National Wildlife Refuge to drilling
• Renewable fuels standard (RFS)
• Methyl tertiary butyl ether (MTBE) ban and transition assistance
• Removal of oxygenate requirement for reformulated gasoline (RFG)
• Cellulose ethanol conversion assistance
• Weatherization assistance
• Torchiere, exit sign, distribution transformer, and traffic signal standards
• Public building photovoltaics
• Tax credits for residential and business fuel cells and residential solar systems
• Tax credit for efficiency improvements to existing homes
• Rebates for renewable energy systems in homes and small businesses.

H.R. 6 EH Provisions Not Included in the Analysis

Provisions of H.R. 6 EH that are not analyzed in this report generally fall into one of four categories:

• Provisions that cannot be assessed using NEMS and/or those that can only be assessed using proprietary data. For example, NEMS does not explicitly represent electric system reliability, so it cannot be used to quantify the benefits, arguably substantial, of adopting mandatory reliability rules. Other provisions that fall into this category include: standard market design provisions, State and local programs, actions that increase natural gas market transparency, development of strategies in the Department of Housing and Urban Development, training, United States-Israel cooperation, centers for excellence in research, treatment of nuclear threats, and international technology collaboration.
• Provisions that provide authorizations, but do not provide funding. EIA is not able to project the level of future appropriations, and the extent to which such appropriations might be offset by reductions in funding provided under existing authorizations. The bill authorizes several research and development programs, grants, voluntary programs, demonstration projects, loan guarantees for development of Indian Tribal energy resources, and filling the Strategic Petroleum Reserve.
• Provisions that provide authority to set standards or establish specific targets at some future date. EIA has no basis for speculating on what levels will ultimately be set. Examples of these provisions include establishment of test procedures for several products such as standby power and ceiling fans, grants to States that allow for rebates towards the purchase of energy efficient products, advanced buildings testbeds, and “encouragement” of Department of Energy and Federal Energy Regulatory Commission actions.
• Provisions that either are not significant to the market as a whole or are not quantifiable. Examples include implementing executive orders, forthcoming recommendations of the Set America Free Act, assessment studies, Federal purchase requirements, reimbursements for analyses, project coordination, changes to Federal land permitting practices, expedited environmental and judicial reviews, pilot programs, and cooperative agreements.

Provisions that are not addressed for one or more of the above reasons could have potentially significant impacts on U.S. energy markets. The results and findings of this report apply specifically to those provisions that were modeled.

Uncertainties

The analysis in this report is mainly based on results of NEMS. 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 valuable tools to analyze complex policies because they ensure consistency in the accounting and represent key interrelationships to provide useful insights.

EIA’s projections are not statements of what will happen but what might happen, given technology and demographic trends. Because EIA’s reference case is based on current laws and regulations, it provides 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 case. 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.

Changes to the AEO2005 Reference Case

Minor modifications were made to the AEO2005 reference case for this analysis. These changes were made to add the capability to address provisions of H.R. 6 EH that could not be analyzed using the original AEO2005 version of NEMS, or to update key assumptions relevant to this analysis. These changes are described below.

Two small modifications were made to the representation of unconventional natural gas recovery. First, the timing of historical unconventional natural gas production volumes at the play⁴ level was corrected. (It was discovered that they were off by a year). Second, a correction was made to the estimation of success rates for some unconventional gas plays. These modifications slightly change the reference case from the published values for the AEO2005. Unconventional natural gas production in 2025 is about 30 billion cubic feet lower in the H.R. 6 EH reference case than in the AEO2005 reference case.

The ethanol supply model was updated from the version used in AEO2005. The changes included updates to the costs of new plants, the costs of corn, transportation costs, and expanding the supply of ethanol available to meet the requirements of H.R. 6 EH. The capital cost for a corn-fed, 40-million-gallon-per-year dry mill was increased from $40 million to $60 million (2004 dollars), and the recovery period for owners was shortened from 20 years to 10 years. Nominal prices for corn from the USDA Agricultural Baseline Projections to 2013 were converted to real prices for use in this analysis. A farm-to-ethanol plant transportation charge amounting to 5.5 cents per gallon of ethanol (2004 cents) was included. The corn supply curve was extended and refined to allow for the possibility of corn ethanol production of up to 10 billion gallons per year and refined, to estimate costs more accurately. Decisions regarding the operation of existing corn ethanol plants excluded consideration of capital costs.

Adjustments were also made to the assumptions for new cellulose-based ethanol plants. The capital cost for a 50-million-gallon-per-year cellulose ethanol plant was increased from $225 million to $294 million. The cellulose ethanol supply curves were restructured to allow incorporation of the proposed subsidies. H.R. 6 EH provides $100 million in 2005, $250 million in 2006, and $400 million in 2007 (nominal dollars). It was assumed that these grants would completely fund construction of two cellulose ethanol plants and partially fund construction of a third.

Two changes were also made to the representation of MTBE. In order to better represent transition assistance, MTBE and isooctane units were allowed to exist simultaneously. MTBE costs were raised by about $7 to $9 per barrel to better calibrate to actual industry costs.

Several updates were also made to the residential module to improve forecast accuracy. These changes include expanding the technology database to allow for regional variation in cost and efficiency of new technologies, improving the detailed stock-accounting averaging for the efficiency of new construction, and updates to the clothes washer data to better account for the 2007 Federal efficiency standard. The net effect of all these changes is a reduction in residential delivered energy of 0.3 percent (40 trillion Btu) in 2025.

Notes