Executive Summary

This report responds to a request from Senator Coleman (MN) to analyze a proposed clean energy portfolio standard (CEPS).  The proposal, a copy of which is provided in Appendix B, requires electricity suppliers to increase their share of electricity sales that is generated using clean energy resources, including: nonhydropower renewable resources, new hydroelectric or nuclear resources, fuel cells, and fossil-fired plants that capture and sequester carbon dioxide emissions.¹  Electricity suppliers may also comply by purchasing tradable clean energy generation credits from other sellers or by buying credits from the Federal government at a price of 2.5 cents per kilowatthour (2005 dollars, with inflation adjustment).  Suppliers are not required to hold credits in excess of their total incremental sales growth from their baseline levels, which is the average of their sales from 2008 to 2011.  Electricity suppliers with fewer than 500,000 megawatthours of sales are exempt from these requirements.  Suppliers can also accumulate credits from eligible generation in the five years before program enactment, which they may use freely throughout the subsequent periods.  This analysis is based on the reference case from the Annual Energy Outlook 2006 and is a follow-up to an earlier analysis of a clean energy portfolio standard prepared in June 2006.², ³

The key findings include:

• Beginning in 2015, the first year of mandatory program compliance, the proposal spurs the development of clean energy resources well above reference case levels.  By 2030, projected renewable energy generation is nearly double the level in the reference case and nuclear generation is 27 percent greater (Table ES-1) than in the reference case.

• Early credits earned during the 5 years preceding 2015 can be used throughout the 2015 to 2030 period, but they are expected to be most heavily used between 2020 and 2025 when the program targets increase sharply. 

During the first phase of the CEPS, from 2015 through 2019, credit prices range from 0.4 to 1.0 cent per kilowatthour.  During the second phase of the program, from 2020 to 2024, credit prices rise, but stay below 2.0 cents per kilowatthour.  During the third phase of the program, 2025 and beyond, credit prices temporarily hit the 2.5-cents-per-kilowatthour price cap when the required share first increases to 20 percent; however, as fossil fuel prices increase and new nuclear and renewable facilities are built, credit prices fall.

• Biological sequestration programs supply 10 percent of the credit requirements – the maximum share permitted – in all years.  While there is uncertainty about the potential of such projects and their ability to sequester carbon, the 1,000 clean energy credits they earn for each metric ton sequestered make them economically attractive.

• Almost 76 percent of generation eligible for credits in 2030 is from nonhydropower renewable technologies (669 billion kilowatthours of the required 883 billion kilowatthours).  Most of this is from biomass, both dedicated and co-fired, (366 billion kilowatthours) and wind (210 billion kilowatthours) generation.

• New nuclear plants, which receive one-half credit per kilowatthour of generation, account for 291 billion kilowatthours of eligible generation. 

• Additional compliance generation comes from geothermal technologies (60 billion kilowatthours), with lesser amounts from landfill gas and solar technologies. 

• From 2006 to 2030, the CEPS has a cumulative total cost to the electric power sector of approximately $7.8 billion (all prices and costs are in 2004 dollars and cumulative calculations are discounted at 7 percent to 2006).  This is less than 0.5 percent of the cumulative discounted industry costs in the reference case.  This estimation includes $22 billion in higher capital and fixed operations and maintenance expenditures that are partially offset by $14 billion in lower fuel costs. 

• Compared to reference case figures, cumulative residential expenditures on electricity from 2006 through 2030 are $4.7 billion (0.3 percent) higher. 

• Average end-use electricity prices increase with the proposal requirements, but the impact is small and it varies over time.  The largest increases are in 2020 through 2022 and in 2029, when annual electricity prices are slightly more than 1 percent (nearly 0.1 cent) above reference case levels.  However, by 2030 end-use electricity prices are only 0.02 cents (0.3 percent) higher.     

• In 2030, electricity sector carbon dioxide emissions are 14.7 percent lower in the CEPS case than in the reference case, but still 23.1 percent higher than 2004 levels.  Between 2006 and 2030, total cumulative U.S. electricity sector carbon dioxide emissions are 4,162 metric tons lower (5.8 percent) than in the reference case.

Table ES1. Key CEPS Analysis Results, 2020, 2025 and 2030