U.S. EIA releases analysis of proposed renewable portfolio standard


June 9, 2003 — The Energy Information Administration has released an analysis of a 10-percent renewable portfolio standard at the request of U.S. Senator Jeff Bingaman, ranking minority member of the Senate Committee on Energy and Natural Resources.

Bingaman requested the analysis because such a program was proposed to be added to energy legislation currently pending before the Senate.

With his request Sen. Bingaman provided specific information on the program to be analyzed. This analysis was prepared in response to his request and projects the impact of the proposed program on energy supply, demand, prices, and emissions.

The analysis is based on the Annual Energy Outlook 2003 (AEO2003) projections of energy supply, demand, and prices through 2025, as updated in May 2003. The AEO2003 provides a policy-neutral reference case that is used to analyze energy policy initiatives.

EIA emphasized that it was not proposing, advocating or speculating on future legislative or regulatory changes. Laws and regulations are assumed to remain as currently enacted or in force in the reference case; however, the impacts of emerging regulatory changes, when clearly defined, are reflected.

Key aspects of the program specified by Sen. Bingaman include:

“- Extension of the renewable energy production tax credit (PTC) for generation from eligible facilities entering service by December 31, 2006, but no longer indexed to inflation.

“- Implementation of an RPS with incremental increases in required renewable generation reaching 10 percent of most sales by 2020 (effectively 8.8 percent of all sales).

“- Exemption of small utilities, those generating less than 4,000 billion kilowatthours per year, from holding renewable energy credits, plus exemption of all generation from existing hydroelectric and other renewables from the requirement.

“- Only renewable facilities commissioned after the enactment of the legislation qualify to produce renewable energy credits.

“- The allowance price for renewable energy credits is capped at 1.5 cents per kilowatt-hour, with no indexing for inflation.

Background

To stimulate an increase in the use of renewable resources to generate electricity, several bills or amendments in Congress call for the establishment of a renewable portfolio standard (RPS) for all electricity retail suppliers.

A typical RPS requires that a share of the power sold in the United States must come from qualifying renewable facilities. Companies who generate power from qualifying renewable facilities will be issued credits that they can hold for their own use or sell to others.

To meet the RPS requirement, each individual electricity seller must hold credits – issued to their own qualifying renewable facilities or purchased from others – equal to the share required in each year.

For example, a supplier with 100 billion kilowatt-hours of retail electricity sales in a year with a 5-percent RPS requirement would have to hold 5 billion kilowatthours of credits.

In a competitive market, the price of renewable 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. Thus, the RPS provides a subsidy to renewables to make them competitive with other resource options.

However, it allows the market to determine the most economical renewable options to develop to comply. The RPS program analyzed in this report has the following characteristics:

“- The program begins in 2004 with the required renewable share growing from 2.5 percent of retail electricity sales in 2008 through 2011, 5 percent in 2012 through 2015, 7.5 percent in 2016 through 2019, to 10 percent in 2020 through 2030. The requirement to hold renewable energy credits expires December 31, 2030.

“- Power sellers with retail sales of at least 4,000 gigawatt-hours per year (4 billion kilowatt-hours) are required to hold credits. Small utilities with retail sales below this level are exempt.

“- Generation from renewable resources, including hydroelectric, is not included in the generation base from which the required amount of new renewables is calculated.

“- The amount of qualifying renewable generation required each year is calculated by multiplying the generation base (total electricity retail sales minus renewable generation and small utility sales) by the required share.

“- Qualifying renewable facilities include all new renewable generation facilities, including cofiring modifications to existing coal plants, that are placed in service on or after the enactment date of the legislation. Qualifying fuels include hydroelectric, geothermal, solar, wind, ocean, landfill gas, and certain biomass and municipal solid waste feedstocks. Renewable facilities in service prior to the enactment of the law do not receive RPS credits.

“- The cost of the credit is capped at 1.5 cents per kilowatt-hour, in nominal dollars.

“- The renewable production tax credit (PTC) is extended from the current expiration date of December 31, 2003 to December 31, 2006. Eligibility for the credit is also expanded to other renewable energy technologies such as geothermal, solar, and municipal sludge.

New biomass cofiring at existing coal plants is eligible for PTC credits at a reduced rate (1.0 cents per kilowatt-hour) for a reduced period (5 years). Unlike the current PTC, which is indexed to inflation, the PTC analyzed in this paper remains constant in nominal dollars.

Analysis Summary

The key results of this analysis are:

“- Although the proposed legislation indicates a 10 percent target, small utilities are exempt from holding renewable energy credits and all renewable generation is excluded from the generation base required to hold RPS credits. If targets are achieved, total renewable energy, excluding existing hydroelectric generation, would account for 8.8 percent of electricity sales by 2020.

“- Under Reference case assumptions, the 8.8-percent target is not projected to be met because of the declining real value of the 1.5-cent per kilowatt-hour credit cap and the sunsetting of the program in 2030. As the end of the program approaches (December 31, 2030), electricity suppliers are projected to purchase credits from the Federal government rather than invest in additional renewables that would only be subsidized by the program for a few years. The level achieved of total renewable generation by 2025 is projected to be 5.6 percent of all U.S. sales, with maximum renewable share of generation achieved in 2019 at 6.2 percent.

“- This RPS requirement would lead to greater generation from wind and biomass resources. Conversely, the imposition of the RPS would lead to lower generation from natural gas and coal facilities.

“- The retail electricity price impacts of the RPS are projected to be small because the price impact of buying renewable credits and building the required renewables is projected to be relatively small when compared with total electricity costs; also higher renewable costs are somewhat offset by lower natural gas prices that result from reduced natural gas use.

“- Because of reduced demand for natural gas by the electric power industry, natural gas prices to all users decline slightly with the RPS. Wellhead natural gas prices by 2025 are 1.5 percent lower with the RPS than in the Reference case.

“- Compared with the Reference case, total residential expenditures on electricity in 2025 are $540 million higher (year 2001 dollars) due to the RPS. Total residential expenditures on natural gas are lower by $290 million (year 2001 dollars) with the RPS compared to the Reference case.

“- The total cost of electricity to the end-use sectors (residential, commercial, industrial, and transportation) in 2025 increases from $351.9 billion in the Reference case to $353.4 billion in the RPS case, an increase of 0.4 percent. For natural gas, total end-use expenditures in 2025 decline from $136.0 billion to $135.2 billion, a decrease of 0.6 percent. Combined total end-use expenditures are 0.1 percent higher in 2025 due to the RPS.

“- The net increase in cumulative net-present-value resource costs to the electric power industry from 2003 to 2025 with the RPS when compared to the Reference case sum to $3.6 billion (year 2001 dollars), an increase of less than 1 percent.

“- The total value of the credits received by qualifying renewable generators in 2025 is projected to be approximately $2.5 billion. The higher costs of renewables covered by the RPS are mostly subsidized by payments from nonrenewable facilities. In 2025, payments to the Federal government to purchase renewable credits total to $1.15 billion.

The entire report is available for review a(in PDF format) at http://www.eia.doe.gov/oiaf/servicerpt/rps2/pdf/sroiaf(2003)01.pdf.

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