Introduction

This report presents the major assumptions of the National Energy Modeling System (NEMS) used to generate the projections in the Annual Energy Outlook 2012 [1] (AEO2012), including general features of the model structure, assumptions concerning energy markets, and the key input data and parameters that are the most significant in formulating the model results. Detailed documentation of the modeling system is available in a series of documentation reports [2].

The National Energy Modeling System

The projections in AEO2012 are generated using the NEMS, developed and maintained by the Office of Energy Analysis (OEA) of the U.S. Energy Information Administration (EIA). In addition to its use in developing the Annual Energy Outlook (AEO) projections, NEMS is also used to complete analytical studies for the U.S. Congress, the Executive Office of the President, other offices within the U.S. Department of Energy (DOE), and other Federal agencies. NEMS is also used by other nongovernment groups, such as the Electric Power Research Institute, Duke University, Georgia Institute of Technology, and OnLocation, Incorporated. In addition, the AEO projections are used by analysts and planners in other government agencies and nongovernment organizations.

The projections in NEMS are developed with the use of a market-based approach, subject to regulations and standards. For each fuel and consuming sector, NEMS balances energy supply and demand, accounting for economic competition among the various energy fuels and sources. The time horizon of NEMS is approximately 25 years, extending to 2035, the period in which the structure of the economy and the nature of energy markets are sufficiently understood that it is possible to represent considerable structural and regional detail. Because of the diverse nature of energy supply, demand, and conversion in the United States, NEMS supports regional modeling and analysis in order to represent the regional differences in energy markets, to provide policy impacts at the regional level, and to portray transportation flows. To represent regional differences in energy markets, the component modules of NEMS function at the regional level: the nine Census divisions for the end-use demand modules; production regions specific to oil, natural gas, and coal supply and distribution; 22 regions and subregions of the North American Electric Reliability Corporation for electricity; and the five Petroleum Administration for Defense Districts (PADDs) for refineries. Maps illustrating the regional formats used in each module are included in this report. Only selected regional results are presented in AEO2012, which predominant focuses on the national results. Complete regional and detailed results are available on the EIA Analyses and Projections Home Page (www.eia.gov/analysis/).

NEMS is organized and implemented as a modular system (Figure 1). The modules represent each of the fuel supply markets, conversion sectors, and end-use consumption sectors of the energy system. The modular design also permits the use of the methodology and level of detail most appropriate for each energy sector. NEMS executes each of the component modules to solve for prices of energy delivered to end users and the quantities consumed, by product, region, and sector. The delivered fuel prices encompass all the activities necessary to produce, import, and transport fuels to end users. The information flows also include other data on such areas as economic activity, domestic production, and international petroleum supply. NEMS calls each supply, conversion, and end-use demand module in sequence until the delivered prices of energy and the quantities demanded have converged within tolerance, thus achieving an economic equilibrium of supply and demand in the consuming sectors. A solution is reached annually through the projection horizon. Other variables, such as petroleum product imports, crude oil imports, and several macroeconomic indicators, also are evaluated for convergence. Each NEMS component represents the impacts and costs of legislation and environmental regulations that affect that sector. NEMS accounts for all combustion-related carbon dioxide (CO₂) emissions, as well as emissions of sulfur dioxide (SO₂), nitrogen oxides (NOx), and mercury from the electricity generation sector.

The integrating module of NEMS controls the execution of each of the component modules. To facilitate modularity, the components do not pass information to each other directly but communicate through a central data storage location. This modular design provides the capability to execute modules individually, thus allowing decentralized development of the system and independent analysis and testing of individual modules. This modularity allows use of the methodology and level of detail most appropriate for each energy sector. NEMS solves by calling each supply, conversion, and end-use demand module in sequence until the delivered prices of energy and the quantities demanded have converged within tolerance, thus achieving an economic equilibrium of supply and demand in the consuming sectors. Solution is reached annually through the projection horizon. Other variables are also evaluated for convergence such as petroleum product imports, crude oil imports, and several macroeconomic indicators.

The version of NEMS used for AEO2012 generally represents current legislation and environmental regulations, including recent government actions, for which implementing regulations were available as of December 31, 2011, such as: the Mercury and Air Toxics Standards (MATS) [3] issued by the U.S. Environmental Protection Agency (EPA) in December 2011; the Cross-State Air Pollution Rule (CSAPR) [4] as finalized by the EPA in July 2011; the new fuel efficiency standards for medium- and heavy-duty vehicles (HDVs) published by the EPA and the National Highway Traffic Safety Administration (NHTSA) in September 2011 [5]; California's cap-and-trade program authorized by Assembly Bill (AB) 32, the Global Warming Solutions Act of 2006 [6]; the EPA policy memo regarding compliance of surface coal mining operations in Appalachia [7], issued on July 21, 2011; and the American Recovery and Reinvestment Act (ARRA) [8], which was enacted in mid-February 2009.

The potential impacts of proposed Federal and State legislation, regulations, or standards—or of sections of legislation that have been enacted but require funds or implementing regulations that have not been provided or specified—are not reflected in NEMS. However, many pending provisions are examined in alternative cases included in AEO2012 or in other analyses completed by EIA. A list of the specific Federal and selected State legislation and regulations included in the AEO, including how they are incorporated, is provided in Appendix A.

For each fuel and consuming sector, NEMS balances the energy supply and demand, accounting for the economic competition between the various energy fuels and sources. NEMS is organized and implemented as a modular system (Figure 1).

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Figure 1. National Energy Modeling System

Footnotes

[1] Energy Information Administration, Annual Energy Outlook 2012 (AEO2012), DOE/EIA-0383(2012), (Washington, DC, June 2012).
[2] NEMS documentation reports are available on the EIA Homepage (www.eia.gov/analysis/model-documentation.cfm).
[3] U.S. Environmental Protection Agency, "Mercury and Air Toxics Standards," website www.epa.gov/mats.
[4] U.S. Environmental Protection Agency, "Cross-State Air Pollution Rule (CSAPR)," website epa.gov/airtransport. CSAPR was scheduled to begin on January 1, 2012; however, the U.S. Court of Appeals for the D.C. Circuit issued a stay delaying implementation while it addresses legal challenges to the rule that have been raised by several power companies and States. CSAPR is included in AEO2012 despite the stay, because the Court of Appeals had not made a final ruling at the time AEO2012 was published.
[5] U.S. Environmental Protection Agency and National Highway Traffic Safety Administration, "Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Medium- and Heavy-Duty Engines and Vehicles; Final Rule," Federal Register, Vol. 76, No. 179 (September 15, 2011), pp. 57106-57513, website www.gpo.gov/fdsys/pkg/FR-2011-09-15/html/2011-20740.htm.
[6] California Air Resources Board (ARB), "California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms," Article 5 95800 to 96023, website www.arb.ca.gov/cc/capandtrade/capandtrade.htm.
[7] U.S. Environmental Protection Agency, "July 21, 2011 Final Memorandum: Improving EPA Review of Appalachian Surface Coal Mining Operations Under the Clean Water Act, National Environmental Polic Act, and the Environmental Justice Executive Order," website water.epa.gov/lawsregs/guidance/wetlands/mining.cfm.
[8] For the complete text of the American Recovery and Reinvestment Act of 2009, see website www.gpo.gov/fdsys/pkg/PLAW-111pub15/html/PLAW-111pub15.htm.