Addendum to Analysis of a 10-percent Renewable Portfolio Standard

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In May 2003, the Energy Information Administration released the report Analysis of a 10-percent Renewable Portfolio Standard which presents analysis carried out pursuant to a request by Senator Jeff Bingaman, ranking minority member of the Senate Committee on Energy and Natural Resources. Subsequently, Senator Bingaman requested that EIA analyze a modified RPS proposal¹. This addendum summarizes the results of this additional analysis.

For this additional analysis, EIA used the same assumptions as the aforementioned report, except to assume that the 1.5 cent per kilowatt-hour price cap on renewable energy credits be adjusted annually for inflation. The lack of inflation adjustment for the credit price cap in the program considered in our earlier analysis contributes to its targets for renewable generation not being met after 2015. By 2025, the last year for which we provide projections, non-hydro electric renewable generation achieves 5.6 percent of all U.S. electricity sales in that analysis. In this analysis with a real 1.5 cent per kilowatt-hour cap, the level of non-hydroelectric renewable generation is significantly higher, at 6.5 percent, as shown by the attached results in Table A1.

Compared to the RPS program previously reported, adjusting the cap for inflation spurs additional generation for wind and co-firing technologies, and also supports new generation from geothermal and landfill gas sources.

Capacity, Generation, Resource Cost and Emissions Impacts

Figures A1 and A2 compare generation and capacity results among the Reference case, the RPS case in the earlier report, and the RPS case with the real (inflation-adjusted) cost adjustment in the credit cap price. With inflation adjustment, wind and biomass co-firing capture additional market share, with modest additional gains from geothermal and landfill gas.

Through 2025, the additional cost of compliance in the electricity sector with the inflation-adjusted cap results in higher cumulative resource costs of $4.9 billion compared to $3.6 billion with no inflation adjustment. Some allowances are purchased from the government in the early years, but this mechanism of compliance does not become significant until after 2020 with the inflation adjusted cap (Figure A3). Additional compliance costs would occur between 2025 and 2030, after which utilities would no longer be required to hold credits. However, these additional costs are incurred beyond the forecast horizon of NEMS.

Reductions of carbon dioxide emissions increase slightly with the real 1.5 cent per kilowatt-hour price cap for the RPS, as shown in Figure A4. As in the earlier analysis, sulfur dioxide emissions are unchanged from the Reference case, but with somewhat lower compliance costs ($88 per ton with inflation adjustment compared to $105 per ton for the earlier RPS case or $110 per ton in the Reference case). Adjusting the price cap for inflation has little impact on nitrogen oxide emissions or compliance costs.

Price and Expenditure Impacts

Compared to the Reference case, price impacts in electricity markets are effectively the same with or without an inflation-adjusted price cap (Figure A5). With an inflation-adjusted cap, total residential expenditures on electricity in 2025 increase by $680 million; total commercial sector electricity expenditures in 2025 increase by $660 million, (0.5 percent); and total industrial sector electricity expenditures increase by $460 million (0.7 percent).

Natural gas prices with the inflation-adjusted price cap are similar to the prices without the inflation adjustment, and they are 1.5 percent below the reference case in 2025. Wellhead natural gas prices in the Reference case are $3.95 per thousand cubic feet in 2025 (year 2001 dollars), and $3.89 per thousand cubic feet for the RPS with or without the inflation adjusted price cap.

In 2025, the total residential natural gas bill is projected to be $420 million (0.8 percent) lower with the inflation-adjusted cap RPS than in the Reference case. For the commercial and industrial sectors the bills in 2025 are, respectively, $230 million (0.7 percent) and $410 million (0.6 percent) lower with the inflation-adjusted cap RPS than in the Reference case.