Rebate Case 1 (Unconstrained)

Rebate Case 1 limits the rebate on individual units of renewable energy equipment to 25 percent of the unit's cost or $3,000, whichever is less. Total funds available for rebates are not constrained.

In EIA's projections from 2005 to 2010, the major increase in renewable energy equipment due to Section 206 rebates is in GHPs. Whereas geothermal heat pump use almost doubles over this time period in the Reference Case, the Section 206 rebates increase residential geothermal heat pump energy consumption six-fold to 16.4 trillion Btu (Table 2a), or 0.1 percent of delivered residential energy consumption.

For solar hot water heating and PV, EIA's Reference Case projects residential energy consumption expanding 23 percent to 30.4 trillion Btu in 2010. Section 206 rebates are forecast to increase residential energy consumption from solar PVs by 0.4 trillion Btu in 2010, with almost no change to solar hot water heating.

Residential wood space heating energy consumption rises through 2006, then declines through 2010 in both the Reference Case and Rebate Case 1. The decline beyond 2006 is due mainly to increased home "shell"^[4] energy efficiency. Wood energy consumption is affected, to a lesser extent, by population shifts to the South/ Southwest, where wood is little used as a heating fuel.

Under Rebate Case 1, wood space heating energy consumption follows a similar pattern to that in the Reference Case, but at slightly higher levels; an additional 2.4 trillion Btu of wood energy is added in 2010. The relatively large number of GHPs and small number of wood stoves and PV installations expected to be spurred by the rebates are the result of two factors. First, GHPs with the Section 206 rebate are expected to be less expensive than competing technologies in several Census Divisions. The Residential Demand Module chooses technologies based on the capital cost of the unit and the operating costs of the unit for a single year. Overall unit cost is determined by weighting the capital and operating costs. These weights vary by the efficiency of each technology and are set such that a 15- percent discount rate is achieved. A geothermal heat pump is very efficient and inexpensive to operate but has a high capital cost, compared to other technologies, e.g., natural gas. Once the GHP capital cost is lowered by the rebate, it picks up market share-though the share is still very small compared with total residential energy demand.

Second, the projected population shift to the South/Southwest favors GHPs because they perform relatively well in those climate conditions. On the other hand, as mentioned previously, there is little wood used for space heating in these regions. PV installations have high capital and low operating costs like GHPs, but the capital costs per unit of energy output are much higher. So even a $3,000 rebate doesn't make PV installations competitive.

In analyzing the financial consequences of the rebates, it is important to note that rebates apply to the total number of units sold in a given year, including both units forecast to be purchased in the Reference Case and incremental units purchased in Rebate Case 1. As a result, only a portion of the rebates goes to the incremental units purchased in Rebate Case 1. Residential energy consumption under Reference Case and Rebate Case 1 assumptions is shown in Table 2a. The inventory of renewable energy equipment is shown for those cases in Table 3a, while rebates and annual sales of new units by renewable energy source and use are presented in Table 4a.

Using the total number of new units purchased for a given year, rebates peak at $480 million in 2006, when tax credits in addition to the rebates are also in effect for GHPs and solar (Table 4a).^[5] This level is well in excess of the $150 million authorized for that year. By 2010, Section 206 rebates are down to about $400 million, with almost 70 percent going to GHPs. This outlay results in an additional 13.9 trillion Btu of renewable energy and offsets small amounts of distillate, liquefied petroleum gas, and natural gas (Table 2a). This represents just over 0.1 percent of forecast residential sector energy demand. Clearly, if model results are representative and rebates were scaled back to EPACT 2005-authorized limits, the impact on energy consumption of Section 206, which is small without funding limits, would be even smaller. This situation is examined in Rebate Case 2 below.

Rebate Case 2 (Constrained)

Rebate Case 2 assumes that total rebate expenditures are constrained to levels authorized in Section 206: $150 million in FY 2006 and 2007, rising to $250 million by 2009 (Table 4b). Although every effort was made to adhere to the individual unit rebate mandates of Section 206, some exceptions were made, as noted below, in order to cap total rebates.

The impact of curtailing total expenditures is greatest on GHPs. The total number of GHPs expected to be in use for 2006 under Rebate Case 2 is 207 thousand, one-third lower compared with the inventory in Rebate Case 1 (Table 3b). The drop is even greater by 2010, 40 percent. Still, the 490 thousand units forecast for 2010 represent a 75-percent increase over the number of GHPs forecast to be in use in the Reference Case (278 thousand).

The principal reason for the lower number of GHPs in this case is that in order to limit program outlays to authorized levels, the GHP rebate in 2010 was reduced from $2,352 in Rebate Case 1 to $1,410 in Rebate Case 2 (Table 4b). The number of solar hot water heaters and wood stoves purchased does not change much when total expenditures are constrained. However, solar PV installations do appear to increase noticeably compared to Rebate Case 1 by 2009. The number of residential solar PV installations increases by 10 percent for 2009 and 13 percent for 2010. However, this change is largely a result of the fact that, in attempting to ensure that total program funds were not exceeded, the GHP limit was reduced to the point that total projected outlays were actually slightly less than authorized. It was then assumed that the remaining rebates would yield additional purchases of PV units, the next most likely technology to be chosen.

The effect of Rebate Case 2 on energy use is similar to its effect on the number of units sold. In Rebate Case 2, Section 206-authorized rebate limits call forth an additional 7.4 trillion Btu of renewable energy consumption by 2010, compared with the Reference Case (Table 2b). Over half, 4.4 trillion Btu, comes from GHPs. Energy from wood space heating and solar sources is essentially unchanged.

Even though Rebate Case 2 constrains total expenditures, it may still forecast more residential renewable energy usage than would likely occur in practice under Section 206. The reason is that by assuming an average individual unit rebate for GHPs ($810 for 2006), more units would be sold than if the full average GHP rebate ($2,278 for 2006 under Rebate Case 1) were actually provided to each purchaser but with a limited number due to the caps on appropriations. A rough approximation to this "first come, first served" approach may be obtained by reducing the total rebates for GHPs in Rebate Case 1 to a level such that the Section 206 funding constraints are adhered to, leaving the total rebates for all other technologies unchanged. Using this approach, Section 206 authorized funds for 2006 and 2007 are insufficient to provide rebates for all GHP units sold in the Reference Case. For 2008 through 2010, Section 206 funds would support paying the rebate to all units sold in the Reference Case and some of the units sold in the rebate cases. Adhering to total funding limits and providing full unit funding would result in no additional energy consumption from GHPs as a result of the rebate for 2006 and 2007. For 2008 through 2010, only a modest amount of additional energy from GHPs above Reference Case levels would be provided, as a result of the rebate under a "first come first served" approach.