EPACT2005 was signed into law by President Bush on August 8, 2005, and became Public Law 109-058 [9]. A number of provisions from EPACT2005 were included in the AEO2006 projections [10]. Many others were not considered in AEO2006—particularly, those that require funding appropriations or further specification by Federal agencies or Congress before implementation. 

A number of the EPACT2005 provisions not included in AEO2006 could affect the projections. In the preparation of AEO2007 their status was reviewed, and where possible, additional provisions were included in the projections; however, AEO2007 still excludes those EPACT2005 provisions whose impacts are highly uncertain or that address a level of detail beyond that modeled in NEMS. Furthermore, EIA does not try to anticipate policy responses to the many studies required by EPACT2005 nor predict the impacts of research and development (R&D) funding authorizations included in the bill. 

The following summary examines the status of EPACT2005 provisions that initially could not be included in AEO2006 but potentially could be modeled in NEMS. It focuses on provisions that are newly included in AEO2007, as well as those that might be added in future AEOs. The discussion below does not provide a complete summary of all the sections of EPACT2005. More extensive summaries are available from other sources [11]. 

End-Use Demand Provisions

This section summarizes provisions of EPACT2005 that affect the end-use demand sectors. 

Buildings

EPACT2005 includes provisions with the potential to affect energy demand in the residential and commercial buildings sector. Many are included in Title I, “Energy Efficiency.” Others can be found in the renewable energy, R&D, and tax titles. Most of the provisions that have been funded or for which implementing regulations have been put in place since the publication of AEO2006, cannot be modeled in NEMS. The status of those provisions that could potentially be included in NEMS is summarized below. 

Section 122 of Title I, “Weatherization Assistance,” authorizes $600 million to weatherize low-income households. The weatherization program, in existence since 1976, uses Federal funds to increase the energy efficiency of low-income houses. In fiscal year (FY) 2006, funding for this program was $242 million. FY 2007 funding proposed by the U.S. House of Representatives is set at $250 million. The increase in funding could allow up to 3,200 more homes to be weatherized in FY 2007 than in FY 2006. The AEO2007 reference case includes increases in energy efficiency in existing building envelopes to account for programs such as weatherization. At current funding levels, roughly 100,000 homes are weatherized each year. The impact of this section is considered in AEO2007. 

Section 204 of Title II, “Use of Photovoltaic Energy in Public Buildings,” authorizes funds for the establishment of a photovoltaic (PV) energy commercialization program to procure, install, and evaluate PV solar electric systems in public buildings. No funding has been appropriated to date for this measure. It is not included in AEO2007. 

Section 206 of Title II, “Renewable Energy Security,” authorizes funds for the establishment of rebates for the purchase of renewable energy systems, including PV, ground-source heat pumps, and solar water heaters. This program was to be in place starting in calendar year 2006 and last through 2010; however, no funding has been appropriated for the measure to date, and it is not included in AEO2007. 

Section 783 of Title VII, “Federal Procurement of Stationary, Portable, and Micro Fuel Cells,” authorizes funds for Federal procurement of stationary, portable, and micro fuel cells. No funding has been appropriated for the measure to date, and it is not considered in AEO2007. 

Industrial

EPACT2005 includes few provisions that would specifically affect industrial sector energy demand. Provisions in the R&D titles that may affect industrial energy consumption over the long term are not included in AEO2007. 

Section 108 requires that federally funded projects involving cement or concrete increase the amount of recovered mineral component (e.g., fly ash or blast furnace slag) used in the cement. Such use of mineral components is a standard industry practice, and increasing the amount could reduce both the quantity of energy used for cement clinker production and the level of process-related CO₂ emissions. The proportion of mineral component is not specified in the legislation but is to be determined by Federal procurement rules; however, as of mid-September 2006 the rules had not been promulgated. Section 108 also requires that the energy-saving impact of the rules be assessed by the EPA, in cooperation with the U.S. Department of Energy (DOE) and Department of Transportation (DOT), within 30 months of enactment. Because regulations have not been promulgated, this section is not considered in AEO2007. When the regulations are promulgated, their estimated impacts could be modeled in NEMS. 

Section 1321 provides for the extension of tax credits for producers of coke or coke gas, effective for tax years beginning after December 31, 2005. Otherwise, the status of Section 1321 is unchanged. Because the bulk of the credits will go to plants already operating or under construction, there is likely to be little impact on coke plant capacity. Consequently, the provision is expected to have no impact on the AEO2007 projections. 

Coal Gasification Provisions

This section provides updates to the funding and implementation status of key tax incentive provisions in Title XIII of EPACT2005 related to coal gasification that were not addressed in AEO2006. 

Section 1307 creates an investment tax credit program for qualifying advanced clean coal projects, funded at $1.3 billion. The section also includes an additional $350 million for qualifying gasification projects. The gasification credit for any taxable year is equal to 20 percent of the basis of any equipment to be used in the gasification process that is placed in service during the year as part of a gasification project that has been certified by DOE as eligible for the credit. The amount eligible for credit is limited to $650 million per project. Only domestic projects that employ domestic gasification applications are eligible. Applicants must, among other criteria, satisfy certain financial requirements, prove that a market exists for the project’s products, and demonstrate competency in the development and operation of the project. Credits are not allowed for gasification projects receiving credits under the program for advanced coal projects. A certificate of eligibility is valid for 10 fiscal years, beginning on October 1, 2005. 

In February 2006, the IRS issued guidance for the Section 1307 program. Certifications are to be issued and credits allocated to projects in annual allocation rounds. The first round of submissions began on February 21, 2005, and closed on October 2, 2006. Overall, the period for submission of applications is to run for 3 years, starting on February 21, 2006. As of August 2006, 49 applications had been received, 27 of which fell under the gasification technology program and were for CTL plants in 17 States. The 27 projects are valued at $30 billion and request tax credits of $2.7 billion. Selection of projects to receive the credits is scheduled for the end of November 2006. 

Credits will be allocated first to projects that have CO₂ capture capability, use renewable fuel, or have project teams with experience that demonstrates successful operation of the gasification technology. If the requested allocations exceed $350 million, the credits will be allocated to the projects that provide the highest ratio of synthetic gas supplied to the requested allocation of credits. Any remaining credits will be applied to non-priority projects that provide the highest amount of nameplate capacity. If funds remain in the program, additional rounds will be conducted in 2007 and 2008. The $1.3 billion in tax credits for the advanced clean coal program was accounted for in AEO2006 in the NEMS Electricity Market Module. CTL projects are eligible for the gasification credits, because gasification is the first step in the CTL process; however, because the level of interest in coal gasification projects was not known at the time, the gasification program credits were not included in AEO2006. Given the extent of interest in the program to date, they are included in the Petroleum Market Module for AEO2007. 

Oil and Natural Gas Provisions

This section provides updates to the funding and implementation status of key oil and natural gas provisions of EPACT2005 that were not addressed in AEO2006. Most of the oil and natural gas provisions in EPACT2005 are included in Title III, “Oil and Gas.” Others, covering R&D, are included in Title IX. 

The Federal Energy Regulatory Commission (FERC) was authorized by Section 312 to allow natural gas storage facilities to charge market-based rates if it was believed that they would not exert market power. On June 15, 2006, FERC finalized rules implementing the provisions that would allow an applicant for interstate natural gas storage facilities to request authority to charge market-based rates even if a lack of market power had not been demonstrated. The rules are intended to mitigate natural gas price volatility by encouraging the development of new natural gas storage capacity. They apply in circumstances where market-based rates are in the public interest and necessary to encourage the construction of storage capacity and to ensure that customers are adequately protected, even in circumstances where market power may not have been demonstrated. In previous AEOs, storage rates were allowed to vary from regulation-based rates, depending on market conditions. 

In compliance with Section 354, DOE established a competitive program to provide grants for cost-shared projects to enhance oil and natural gas recovery through CO₂ injection, while at the same time sequestering CO₂ produced from the combustion of fossil fuels in power plants and large industrial processes. Reports issued by DOE indicate that an additional 89 billion barrels of oil could be recovered in the United States through CO₂ injection. Under the program, grants of up to $3 million will be provided to each project selected. On September 6, 2006, DOE announced the selection of the first project to receive one of the grants, a project sponsored by the University of Alabama-Birmingham to implement a demonstration project in the Citronelle oilfield in Mobile County, AL. The total project cost is estimated at $6 million, with DOE’s maximum share at just under $3 million. Estimates indicate that an additional 64 million barrels of oil could be recovered from the Citronelle field by this technique. 

The implementation of Section 354 was not included in previous AEOs, because NEMS does not represent project-level activities and because of the considerable uncertainty surrounding the eventual scope of the program. For AEO2007, however, additional oil resources have been added to account for increased use of CO₂-enhanced oil recovery technology. 

Section 311 clarified the role of FERC as the final decisionmaking body on any issues concerning onshore facilities that export, import, or process LNG. On October 7, 2005, FERC established mandatory procedures requiring prospective applicants for LNG terminals, related jurisdictional pipelines, and other related natural gas facilities to begin the Commission’s pre-filing review process at least 6 months before filing an application to site and/or construct such a facility. The procedures, which also apply to applications for modifications of existing or authorized LNG terminals, are designed to encourage applicants to cooperate with State and local officials. 

In March 2005 and June 2006, FERC and DOE, in cooperation with DOT and the U.S. Department of Homeland Security, conducted three public forums on LNG designed to promote public education and encourage cooperation between State and Federal officials in areas where LNG terminals are being considered for construction. They were held in Boston, MA; Astoria, OR; and Los Angeles, CA. An additional forum is planned for Houston, TX, in the 4th quarter of 2006, fully satisfying the Section 317 requirement that a minimum of three such forums be held. Although this provision is not explicitly represented in the AEO2007 NEMS, the model includes an assumption that there are no major regulatory impediments to the siting of new LNG facilities. 

Section 301 authorized DOE to increase the capacity of the Strategic Petroleum Reserve (SPR) to 1 billion barrels from its current capacity of 727 million barrels. DOE has announced plans to add additional storage capacity to its SPR storage sites in Big Hill, TX; Bayou Choctaw, LA; West Hackberry, LA; and one new site in Richton, MS. DOE filed a draft site selection Environmental Impact Statement with the EPA on May 19, 2006, for the selection of a new site, and comments have been received. In order for the additional storage capacity to be authorized, constructed, and ultimately filled, further actions by Congress and the Executive Branch will be required; therefore, it is not considered in AEO2007. 

Section 369 requires DOE to initiate a process for the leasing of Federal lands for research on oil shale, tar sands, and other unconventional fuels. Several industry research proposals were evaluated, and on January 17, 2006, the U.S. Department of the Interior’s Bureau of Land Management announced the selection of six applicants for oil shale leases to receive further consideration. Because the lease applications are still under consideration, this provision is not accounted for in AEO2007. 

Coal Provisions

This section provides updates to the funding and implementation status of provisions in EPACT2005 that will affect coal supply and prices but were not addressed in AEO2006. Many of the provisions can be found in Titles IV and XIII of EPACT2005. 

A number of coal-related provisions that were authorized by EPACT2005 but not included in AEO2006 continue to be excluded from AEO2007. They include four loan guarantee or cost-sharing programs. Section 411 authorized a loan guarantee for a coal project in the Upper Great Plains, which must employ both renewable and advanced IGCC technologies. A loan guarantee for the Clean Coal Project in Healy, AK, authorized by Section 412, also is excluded from AEO2007. In Section 413, EPACT2005 authorized a cost-sharing program in support of a high-altitude (at least 4,000 feet) Western IGCC Demonstration Project. Finally, a loan guarantee for an IGCC plant located in a deregulated region was authorized by Section 414. 

These provisions have spurred some activity and interest. For instance, Xcel Energy, which has proposed building a facility in Colorado with 300 to 350 megawatts of generating capacity, is a potential applicant for the Western IGCC Demonstration Project. On August 7, 2006, DOE released its plans to form a program office with functions that include the drafting of application guidelines for the various loan programs. It will also be charged with the task of awarding the loan guarantees. Although NEMS has the capability to represent these coal provisions, Congress had not appropriated funds for the provisions as of September 1, 2006, and they are not considered in AEO2007. 

Nuclear Energy Provisions

EPACT2005 includes numerous provisions that address nuclear power generation. This section provides  updates to the funding and implementation status of nuclear power generation provisions in EPACT2005 that were not addressed in AEO2006. 

Section 1306 of Title 13 extends the PTC of 1.8 cents per kilowatthour (not adjusted for inflation) to any nuclear power plant with a “new” design that has a construction start date before January 1, 2014, and enters commercial operation by January 1, 2021. Under this program, the owner of the eligible plant can reduce its tax liability by up to 1.8 cents for each kilowatthour of plant output. For the purposes of this law, construction begins when a utility “that has applied for or been granted a combined operating license . . . initiates the pouring of safety-related concrete for the reactor building.” The IRS published an initial set of guidelines for the program in May 2006 and eventually will publish a set of formal rules that will become part of the Tax Code. In EPACT2005, the per-kilowatthour tax credit was indexed to the rate of inflation; however, the indexing provision was eliminated in the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). Consequently, the credit would be constant in nominal dollars over time. Because the earliest date at which the first new nuclear unit eligible for the tax credit could become operational is about 2015, the “de-indexing” of the credit has the effect of reducing its real value by about 25 to 30 percent. 

There are at least three limitations on the amount of tax credits a utility can receive. First, tax credits in any given year are limited to a maximum of $125 per kilowatt ($125 million for a 1,000-megawatt unit). Second, the tax credit can be applied only in the first 8 years of a plant’s operation. Third, the credit is limited to a maximum of 6 gigawatts of new nuclear capacity nationally. If the total capacity qualifying for the tax credit exceeds 6 gigawatts, the amount of the credit per kilowatthour will be reduced proportionally. AEO2007 assumes that up to 9 gigawatts of new capacity will receive the Title 13 PTC at 1.2 cents per kilowatthour. (AEO2006 assumed that 6 gigawatts would receive the full 1.8 cents per kilowatthour.) AEO2007 also assumes that participating utilities will be able to take all the tax credits in each of the first 8 years of their qualifying units’ operation. 

Title 17 of EPACT2005 allows the Government to guarantee loans used to construct new energy technologies “that reduce or avoid greenhouse gases,” including new nuclear power plants. The Secretary of Energy can guarantee a loan of up to 80 percent of the project’s cost; however, DOE will not guarantee more than 80 percent of the total debt. Thus, if a utility decided to fund a project with 80 percent debt and 20 percent equity, DOE would only guarantee up to 64 percent of the project’s total cost. Such loan guarantees would affect the economics of nuclear power, because they would reduce the effective interest rates on the debt and allow utilities to use much more debt financing. 

The Secretary of Energy will choose the projects that will receive the loan guarantees. The factors to be considered in the selection of projects include: 

• A relatively low probability of failure 
• The extent to which the project avoids, reduces, or sequesters air pollutants or emissions of greenhouse gases 
• The extent to which the project will advance the goals of the President’s Advanced Energy Initiative 
• The extent to which the technology is ready to be employed commercially in the United States and can yield a commercially viable product. 

Because of the lack of appropriating legislation, this program is not included in AEO2007.

Notes and Sources

Contact: Paul Holtberg
Phone: 202-586-1284
E-mail: paul.holtberg@eia.doe.gov