1. Background
This report was prepared by the Energy Information
Administration (EIA), in response to an April 24, 2006, request from Senator
Norm Coleman (Appendix A). Senator
Coleman requested that EIA assess the impacts of a clean energy portfolio
standard (CEPS). This proposal, the text of which is provided as Appendix B,
would require retail electric suppliers to account for an increasing fraction
of incremental sales growth with zero-carbon emission energy resources through
2030. The maximum share required from
qualifying resources in any year is set to 10 percent of sales in the previous
year.
Proposal
Summary
The proposal requires that a specified percentage of annual
incremental sales be supplied by carbon-free technologies. The baseline electricity sales for the CEPS
program are the average of annual sales for each retail electric supplier over
the 2005 to 2007 period. Eligible
technologies include generation from existing and new nonhydro renewables
(including biomass co-firing), landfill gas, new hydroelectric facilities, new
nuclear facilities, fuel cells, and integrated coal gasification combined-cycle
plants with carbon sequestration. Small
retail electric suppliers with less than 500,000 megawatthours of sales
(representing about 270 billion kilowatthours, or 7 percent of sales in 2005)
are excluded from the requirement. The
specified annual percentages of incremental sales over the 2005-2007 baseline
that must come from qualifying sources are as follows:
2010 – 2014 10 percent
2015 – 2019 20 percent
2020 – 2024 40 percent
2025 – 2030 60 percent
However, the maximum required share of qualifying resources
in a given year is limited to 10 percent of each retail supplier’s sales in the
prior year. Electric suppliers may
comply either through owning or purchasing eligible generation, by purchasing
credits from other qualifying generation sources at prevailing market prices,
or by purchasing credits from the government at an inflation adjusted credit
cost cap currently valued at 2 cents per kilowatthour. Qualifying resources generated on Indian
Lands are worth two compliance credits for every kilowatthour of actual
generation. The Secretary of Energy may
also grant a waiver to retail suppliers in states with a finding of excessive
compliance costs to end users. Electric suppliers are not required to hold
credits after 2030.
Implementation
Issues
Not all of the provisions of the proposed CEPS can be
represented in EIA’s National Energy Modeling System (NEMS). For example, the proposal requires the
Secretary of Energy (Secretary) to establish rules and procedures for
implementing and enforcing the requirements. This will require the development of a system to establish unique sales
baselines, monitor sales growth year-to-year, estimate the required level of
qualifying generation, and ensure compliance for each retail supplier in the
country. The required qualifying sales
shares will differ for each supplier because of differences in their sales
growth year to year. Special procedures will be required for determining the
appropriate baselines and incremental sales growth for suppliers that are
created, merged, divested, or that end operations after the program starts. Given the recent history of companies
frequently entering and leaving the retail electricity marketplace, this
process could require significant effort.
The proposal allows generation qualifying under a State
renewable or clean energy portfolio standard to qualify under the Federal
requirement (that is, both requirements may be satisfied with the same
generation credit). These credits,
however, may only be used by the same company (or an affiliated company) claiming
them at the State level. It is not
clear that credits required by a State program in excess of the Federal
requirement could be traded to suppliers in other States without State CEPS
requirements or with lower CEPS requirements, except where common ownership
structures exist. In addition, State-issued
compliance credits qualify for the Federal program as long as the generation
meets the State-established criteria. Thus, generation that might not otherwise be allowable under the Federal
clean energy definition, such as hydro generation from existing plants, may
qualify if it meets State requirements and is used for State compliance. Some State programs allow hydroelectric
generation from existing plants, frequently limited to small plants or plants
meeting certain technical requirements.
The proposal also allows electric suppliers to borrow clean
energy credits against future compliance. Specifically, the Secretary may allow retail suppliers to borrow excess
future compliance credits with submission of a plan to ensure compliance with both
current and future targets up to 6 years into the future. The Secretary has discretion to extend the 6-year
borrowing limit where the plan specifies new nuclear generation as the proposed
compliance option.
Model
Application
To model the potential impacts of the policy several
simplifying assumptions were made. First, EIA converted the incremental target into an annual national
sales share target. Because individual supplier
sales are not modeled, the share target was calculated for aggregate electricity
sales. It was assumed that the
aggregate sales of electric suppliers with fewer than 500,000 megawatthours in
annual sales would remain at the 2004 level of 270 billion kilowatthours of
total sales through 2030. Based on this
assumption, the following table indicates the share of total national sales by
all suppliers required each year from eligible generation.
Calculated shares are based on the lesser of the
legislatively-specified share of projected incremental growth over baseline
sales or 10 percent of projected total (not incremental) prior year sales from
the Annual Energy Outlook 20061 Incremental
hydro-electric generation is assumed to be zero.
This methodology assumes that all suppliers covered by the
program grow at the same average annual rate each year. However, actual data show that this is
unlikely to occur, and with many electric suppliers’ sales not growing at all,
the shares estimated likely overstate the requirement. Data reported for 2000 through 2004 show
that there was great diversity in sales growth among electric suppliers over
this period. Some companies just
entering the retail market showed very rapid growth, while others showed rapid
sales declines. Overall, entities
accounting for nearly 30 percent of sales in 2004 showed negative sales growth
between 2000 and 2004. Over longer time
periods, the number of retailer suppliers with little or no sales growth is
likely to be smaller, but there are likely to be a significant number of
companies whose sales do not grow or grow very slowly. If the electricity
market continues to become increasingly competitive, there could be rapid up
and down movements in the sales of any particular supplier. As a result, the national required share of
qualifying generation would not likely reach the 9.3 percent share shown in
Table 1 since some suppliers would not be required to participate for lack of
sales growth.
This analysis does not address the potential impacts of
issuing double credits for qualifying resources developed on Indian lands. If such resources are developed, the amount
of qualifying generation stimulated by the CEPS will be lower. This report also does not represent the
potential development of ocean energy technologies or the potential that some
technologies would qualify for the program because they meet existing State
program requirements.
This report, like other EIA analyses of clean energy and
environmental policy proposals, focuses on the impacts of those proposals on
energy choices made by consumers in all sectors and the implications of those
decisions for the economy. This focus
is consistent with EIA’s statutory mission and expertise. The study does not account for any possible
health or environmental benefits that might be associated with curtailing
greenhouse gas emissions.
NEMS, like all models, is a simplified representation of
reality. Projections are dependent on
the data, methodologies, model structure, and assumptions used to develop
them. Many of the events that shape
energy markets, including severe weather, technological breakthroughs, and geopolitical
developments, are subject to considerable uncertainty. Moreover, future developments in
technologies, demographics, and resources cannot be foreseen with
certainty. Nevertheless,
well-formulated models are useful in analyzing complex policies, because they
ensure consistency in accounting and represent key interrelationships, albeit
imperfectly, to provide insights.
EIA’s projections are not statements of what will happen,
but what might happen, given technological and demographic trends and current
policies and regulations. EIA’s
reference case is based on current laws and regulations. Thus, 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 generally assumed
to remain as currently enacted or in force (including sunset or expiration
provisions); however, the impacts of scheduled regulatory changes, when clearly
defined, are reflected.
1Energy Information Administration, Annual Energy Outlook 2006, DOE/EIA-0383(2006) (Washington, DC, February 2006). Web site www.eia.doe.gov/oiaf/aeo/index.html.
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