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.

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. 

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.

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.