1. Background

This service report was prepared by the Energy Information Administration (EIA), in response to a May 9, 2007, request from Senator Jeff Bingaman for an analysis of a Federal renewable portfolio standard (RPS). The request letter and the RPS proposal are provided as appendices A and B to this report. An RPS is a policy that requires covered electricity retailers to supply a specified share of total electricity sales from qualifying renewable energy resources. As of the end of 2006, 23 States and the District of Columbia had enacted an RPS or similar renewable energy requirement. The Federal RPS analyzed here would apply to electricity retailers on a nationwide basis, establishing a target level for the market share of qualifying renewable resources that grows over time until a final target level of 15 percent is reached in 2020.

Proposal Summary

To stimulate an increase in the use of renewable resources to generate electricity, an RPS requires that a specified share of the power sold must come from qualifying renewable facilities. Companies that generate power from qualifying renewable facilities are issued credits that they can hold for their own use or sell to others. To meet the RPS requirement, each covered electricity seller must generate their own qualifying renewable power or purchase renewable energy credits from others. For example, a supplier with 100 billion kilowatthours of retail electricity sales in a year with a 15-percent RPS requirement would have to generate or purchase credits representing a combined total of 15 billion kilowatthours of qualifying renewable power in that year. In a competitive market, the price of renewable energy credits should rise to the level needed to stimulate power plant developers to bring on the amount of qualifying renewable capacity needed to meet the RPS requirement while allowing the market to determine the most economical renewable compliance options to develop.

The RPS program analyzed in this report has the following characteristics:

• The program begins in 2010 with the required renewable share starting at 3.75 percent and growing to 7.5 percent in 2013, 11.25 percent in 2017, and finally to 15 percent in 2020. The program sunsets in 2030.

• Power sellers with retail sales of at least 4 billion kilowatthours (4,000,000 megawatthours) are covered. Entities with retail sales below this level are exempt.

• Generation from existing hydroelectric and municipal solid waste (MSW) facilities are not included in the base electricity sales, but also do not earn compliance credits.

• The amount of qualifying renewable generation required each year is calculated by multiplying the generation base (total electricity retail sales minus existing hydroelectric and MSW generation and sales by or to exempt small retailers) by the required share.

• Qualifying renewable facilities include all new and existing nonhydroelectric renewable generation facilities¹, including co-firing modifications to existing coal plants that are placed in service on or after the enactment date of the legislation. Qualifying fuels include incremental hydropower², geothermal, solar, wind, ocean, landfill gas, and certain biomass and municipal solid waste feedstocks.

• Generation from distributed renewable generation resources (customer-sited facilities such as roof-top photovoltaics) earns three credits for every kilowatthour of generation.

• The market value of credits used for compliance is capped at 1.9 cents per kilowatthour³, adjusted annually for inflation. Power sellers may purchase an unlimited number of compliance credits from the government at this “safety-valve” credit value, allowing them to meet their program obligations without providing additional renewable generation.

Methodology

The projections and quantitative analysis in this report were prepared using the National Energy Modeling System (NEMS). NEMS is a computer-based, energy-economic model of the U.S. energy system. NEMS projects production, imports, conversion, consumption, and prices of energy through 2030, subject to assumptions about macroeconomic and financial factors, world energy markets, resource availability and costs, behavioral and technological choice criteria, cost and performance characteristics of energy technologies, and demographics. Using econometric, heuristic, and linear programming techniques, NEMS consists of 13 submodules that represent the demand (residential, commercial, industrial, and transportation sectors), supply (coal, renewables, oil and natural gas supply, natural gas transmission and distribution, and international oil), and conversion (refinery and electricity sectors) of energy, together with a macroeconomic module that links energy prices to economic activity. An integrating module controls the flow of information among the submodules, from which it receives the supply, price, and quantity demanded for each fuel until convergence is achieved.

The Electricity Market Module (EMM) within NEMS simulates the capacity planning and retirement, operating, and pricing decisions that occur in U.S. electricity markets. It operates at a 13-region level. Based on the cost and performance of 27 different generating technologies, the costs of fuels, and constraints on emissions, the EMM chooses the most economical approach for meeting consumer demand for electricity. As new technologies penetrate the market in NEMS, their costs are assumed to decline to reflect the expected impact of technological learning. During each year of the analysis period, the EMM evaluates the need for new generating capacity to meet consumer needs reliably or to replace existing electric power plants that are no longer economical. The cost of building new capacity is weighed against the costs of continuing to operate existing plants and consumers’ willingness to pay for reliable service.

As shown in Table 1, the target shares for qualifying renewable resources used in NEMS analysis differ from the annual RPS shares specified in the proposal because the NEMS shares are adjusted to account for the exclusion of utilities with sales fewer than 4 billion kilowatthours (4,000,000 megawatthours) and the exclusion of existing hydroelectric and MSW generation from sales when applying the RPS share.

More than 20 States currently have some form of renewable energy requirement or target. However, these programs vary substantially from State to State, with significant differences in target levels, qualifying technologies, enforcement mechanisms, and exemptions from compliance. Because of the substantial uncertainty in evaluating the potential effectiveness of the various enforcement mechanisms and because of the inherent uncertainty associated with the many discretionary aspects of waiver and exemption policies in some States, the reference case of the Annual Energy Outlook 2007 (AEO2007) does not account for renewable generation growth resulting from these programs. As this analysis is based on the AEO2007 reference case, it also does not account for the potential impact of these State-level programs.

Although State-level RPS programs are not included in the AEO2007 reference case, EIA has previously analyzed the impact of full compliance with State RPS requirements. Taking account limitations on State budgetary support for such programs, where applicable, that analysis concluded that State-level RPS programs could result in an additional 62 billion kilowatthours of renewable generation by 2030 based on current Federal law and policy, a 30-percent increase over the reference case, or about 10 percent of the total renewable requirement of this proposal.⁴ The proposed Federal RPS analyzed in this report would generally allow otherwise qualified generation used to satisfy a State RPS program to also satisfy the Federal requirement. The double-counting and credit transfer provisions of the Federal proposal imply that the State programs would not increase the aggregate national renewable target. However, the existence of additional
revenue sources at the State level may somewhat reduce the incremental cost of complying with the Federal target and could affect overall generation-backed compliance levels in the later forecast years.

Notes