Energy Outlook

[Luke_Wilbur]

ARRA Provisions in the National Energy Modeling System

 

Weatherization, Assisted Housing, and Energy Efficiency and Conservation Block Grants

 

ARRA allocates a total of $9.45 billion to weatherize and/or increase the energy efficiency of low-income housing and assist local governments in implementing energy efficiency programs. In NEMS, this increase in funding results in the weatherization of about three million homes over the next 2 years. Energy savings estimates for the increased investment in weatherization for heating and cooling are based on Oak Ridge National Laboratory’s analysis of the impacts of weatherization programs and their persistence for 20 years. The regional impact of the increase in funding is based on the Department of Energy’s State allocation formula.4

 

State Energy Program

 

ARRA allocates $3.1 billion for States to implement or enhance energy efficiency programs. While the money can be spent on a variety of programs, the ARRA specifically mentions the adoption of building codes, specifically the International Energy Conservation Code (IECC) 2009. To account for the impact of this funding in NEMS, it is assumed that States will adopt and enforce the IECC 2006 code by 2011, while adopting and enforcing the IECC 2009 code by 2018. Likewise, States are assumed to adopt and enforce the ASHRAE 90.1-2007 standard by 2018 for non-residential construction. States and local governments are also assumed to use lower hurdle rates (specifically the 10-year Treasury bill rate) when purchasing energy-using equipment for government-owned facilities during years when ARRA funding is available.

 

Plug-in Hybrid and Electric Vehicle Tax Credits

 

ARRA contains several changes to the plug-in hybrid electric vehicle (PHEV) tax credit originally included in the Energy Improvement and Extension Act of 2008 that have been included in the updated reference case. For example, ARRA allows a $2,500 tax credit for the purchase of qualified PHEVs with a battery capacity of at least 4 kilowatthours. Starting at a battery capacity of 5 kilowatthours, PHEVs earn an additional $417 per kilowatthour battery credit up to a maximum of $5,000. The maximum total PHEV credit that can be earned is capped at $7,500 per vehicle. The PHEV tax credit eligibility and phase-out are specific to an individual vehicle manufacturer. The credits are phased out once cumulative sales of qualified vehicles reach 200,000 vehicles. The phase-out period begins two calendar quarters after the first date in which a manufacturer’s sales reach the cumulative sales maximum after December 31, 2009. The credit is reduced to 50 percent of the total value for the first two calendar quarters of the phase-out period and then to 25 percent for the third and forth calendar quarters before being phased out entirely thereafter. The credit applies to vehicles with a gross vehicle weight rating of less than 14,000 pounds.

 

AARA also allows a tax credit of 10 percent against the cost of a qualified plug-in allelectric vehicle with a battery capacity of at least 4 kilowatthours. This credit is subject to the same phase-out schedule as PHEVs.

 

Updated Tax Credits for Renewables

 

Prior to the passage of ARRA, the production tax credit (PTC) for certain renewable technologies was to expire on January 1, 2010. ARRA extended this date to January 1, 2013, for wind and January 1, 2014, for all other eligible renewable resources. In addition, ARRA allows companies to choose an investment tax credit (ITC) of 30 percent in lieu of the PTC and allows for a grant in lieu of this credit to be funded by the U.S. Treasury. Under most circumstances for most technologies, the full PTC would appear to be more valuable than the 30 percent ITC; however, the difference is often small. A recent report from the National Renewable Energy Laboratory5 suggests that qualitative factors, such as the lack of partners with sufficient tax liability, may cause companies to favor the ITC grant option in the current economic environment. As a result, in this analysis it has been assumed that eligible renewable technologies will select the ITC grant option.

 

Loan Guarantees for Renewables, Biofuels, and Transmission Projects

 

ARRA provides $6 billion to pay the cost of guarantees for loans authorized by the Energy Policy Act of 2005. The purpose of these loan guarantees is to stimulate the deployment of conventional renewable and transmission technologies and innovative biofuels technologies. However, to qualify eligible projects must be under construction by September 30, 2011, meaning that longer-term projects that are not already progressing are unlikely to be able to qualify. The face value of the loans that may be guaranteed by this appropriation will depend on the subsidy costs assigned to the projects that are eventually selected. For example, if the average subsidy cost were 10 percent of the face value of the loans, the $6 billion appropriated would support loan guarantees on $60 billion worth of debt financing. This provision has been represented by lowering the cost of financing by 2 percentage points for all eligible renewable projects brought on by 2015. The 2015 date, 4 years after the September 30, 2011, start of construction cutoff date, was chosen to allow for the construction period associated with most renewable generating technologies.

 

A different approach was taken to represent the possible impacts on innovative biofuel projects. It was assumed that the availability of loan guarantees would allow certain identified projects to be built that would otherwise not proceed under the current financial climate facing the industry. In the AEO2009 reference case, with assumptions developed prior to the current economic downturn, domestic cellulosic ethanol production was projected to reach 150 million gallons in 2012. However, a review of projects proceeding towards construction, suggests that, without assistance, only about 74 million gallons of domestic cellulosic ethanol production capacity will be built by 2012, because financing for these developers has become extremely difficult to obtain and some projects have been canceled. With the loan guarantees arising from the stimulus package, it is assumed that the 2012 production rises back to about 110 to 170 million gallons, with additional capacity additions occurring under the same financing structure as in AEO2009.

 

Support for CCS

 

ARRA provides $3.4 billion for additional research and development on fossil energy technologies. A portion of this funding is expected to be used to fund projects under the Clean Coal Power Initiative program, focusing on projects that capture and sequester greenhouse gases. To reflect the impact of this provision, the updated reference case assumes that an additional 1 gigawatt of coal capacity with CCS will be stimulated by 2017.

 

Smart Grid Expenditures

 

ARRA provides $4.5 billion for smart grid demonstration projects. While somewhat difficult to define, smart grid technologies generally include a wide array of measurement, communications, and control equipment employed throughout the transmission and distribution system that will enable real-time monitoring of the production, flow, and use of power from generator to consumer. Among other things once deployed, these smart grid technologies are expected to enable more efficient use of the transmission and distribution grid, lower line losses, facilitate greater use of renewables, and provide information to utilities and their customers that will lead to greater investment in energy efficiency and reduced peak load demands. The funds provided will not fund a widespread implementation of smart grid technologies. In July 20046 the Electric Power Research Institute (EPRI) estimated that full deployment would cost $165 billion. However, successful deployment of several demonstration projects could stimulate more rapid investment than would otherwise occur.

 

Several changes were made throughout the NEMS to represent the impacts of the smart grid funding provided in ARRA. In the electricity module, it was assumed that line losses would fall slightly, peak loads would fall as customers shifted their usage patterns, and customers would be more responsive to pricing signals. In a 2008 report, EPRI7 estimated that smart grid technologies could reduce line losses in 2030 by between 3.5 and 28.0 billion kilowatthours.8 Historically, line losses, expressed as the percentage of electricity lost, have been falling for many years as utilities make investments to replace aging or failing equipment. This trend was incorporated in the AEO2009 reference case, which assumed that line losses would fall from roughly 6.9 percent in 2008 to 5.7 percent in 2030. In the updated reference case, it is assumed that the Federal expenditures on smart grid technologies will stimulate further efforts to lower losses, reducing them by an additional 10 to15 billion kilowatthours, roughly one-third the maximum EPRI estimate.

 

In the same EPRI report, it was also estimated that smart grid technologies had the potential to reduce peak demand by 5 percent in 2030 through the increased deployment of demand response programs. In the updated reference case, it is assumed that the Federal expenditures on smart grid technologies will stimulate efforts that reduce peak demand in 2030 by 1 percent from what they otherwise would be. Load is shifted to offpeak hours, so net energy consumed remains largely constant.

 

It was also assumed that increased investment in smart grid technologies, particularly smart meters on buildings and homes, would make consumers more responsive to electricity price changes. To represent this, the price elasticity of demand for residential and commercial electricity was increased for certain uses.

Edited April 27, 2009 by Luke_Wilbur