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Annual Energy Outlook 2012

Release Date: June 25, 2012   |  Next Early Release Date: December 5, 2012  |   Report Number: DOE/EIA-0383(2012)

Issues in Focus

Introduction

The "Issues in focus" section of the Annual Energy Outlook (AEO) provides an in-depth discussion on topics of special interest, including significant changes in assumptions and recent developments in technologies for energy production and consumption. Detailed quantitative results are available in Appendix D. The first topic updates a discussion included in the Annual Energy Outlook 2011 (AEO2011) that compared the results of two cases with different assumptions about the future course of existing energy policies. One case assumes the elimination of sunset provisions in existing energy policies; that is, the policies are assumed not to sunset as they would under current law. The other case assumes the extension or expansion of a selected group of existing policies—corporate average fuel economy (CAFE) standards, appliance standards, and production tax credits (PTCs)—in addition to the elimination of sunset provisions.

Other topics discussed in this section as identified by subsection number include (2) oil price and production trends in the Annual Energy Outlook 2012 (AEO2012); (3) potential efficiency improvements and their impacts on end-use energy demand; (4) energy impacts of proposed CAFE standards for light-duty vehicles (LDVs), model years (MYs) 2017 to 2025; (5) impacts of a breakthrough in battery vehicle technology; (6) heavy-duty (HD) natural gas vehicles (NGVs); (7) changing structure of the refining industry; (8) changing environment for fuel use in electricity generation; (9) nuclear power in AEO2012; (10) potential impact of minimum pipeline throughput constraints on Alaska North Slope oil production; (11) U.S. crude oil and natural gas resource uncertainty; and (12) evolving Marcellus shale gas resource estimates.

The topics explored in this section represent current and emerging issues in energy markets; but many of the topics discussed in AEOs published in recent years also remain relevant today. Table 5 provides a list of titles from the 2011, 2010, and 2009 AEOs that are likely to be of interest to today's readers—excluding topics that are updated in AEO2012. The articles listed in Table 5 can be found on the U.S. Energy Information Administration (EIA) website.

1. No Sunset and Extended Policies cases

Background

The AEO2012 Reference case is best described as a "current laws and regulations" case, because it generally assumes that existing laws and regulations will remain unchanged throughout the projection period, unless the legislation establishing them sets a sunset date or specifies how they will change. The Reference case often serves as a starting point for the analysis of proposed legislative or regulatory changes. While the definition of the Reference case is relatively straightforward, there may be considerable interest in a variety of alternative cases that reflect the updating or extension of current laws and regulations. In that regard, areas of particular interest include:

  • Laws or regulations that have a history of being extended beyond their legislated sunset dates. Examples include the various tax credits for renewable fuels and technologies, which have been extended with or without modifications several times since their initial implementation.
  • Laws or regulations that call for the periodic updating of initial specifications. Examples include appliance efficiency standards issued by the U.S. Department of Energy (DOE), and CAFE and greenhouse gas (GHG) emissions standards for vehicles issued by the National Highway Traffic Safety Administration (NHTSA) and the U.S. Environmental Protection Agency (EPA).
  • Laws or regulations that allow or require the appropriate regulatory agency to issue new or revised regulations under certain conditions. Examples include the numerous provisions of the Clean Air Act that require the EPA to issue or revise regulations if it finds that an environmental quality target is not being met.

To provide some insight into the sensitivity of results to scenarios in which existing tax credits do not sunset, two alternative cases are discussed in this section. No attempt is made to cover the full range of possible uncertainties in these areas, and readers should not view the cases discussed as EIA projections of how laws or regulations might or should be changed.

Analysis cases

The two cases prepared—the No Sunset and Extended Policies cases—incorporate all the assumptions from the AEO2012

Reference case, except as identified below. Changes from the Reference case assumptions in these cases include the following.

No Sunset case
  • Extension through 2035 of the PTC for cellulosic biofuels of up to $1.01 per gallon (set to expire at the end of 2012).
  • Extension of tax credits for renewable energy sources in the utility, industrial, and buildings sectors or for energy-efficient equipment in the buildings sector, including:
  • The PTC of 2.2 cents per kilowatthour or the 30-percent investment tax credit (ITC) available for wind, geothermal, biomass, hydroelectric, and landfill gas resources, currently set to expire at the end of 2012 for wind and 2013 for the other eligible resources, are assumed to be extended indefinitely.
  • For solar power investment, a 30-percent ITC that is scheduled to revert to a 10-percent credit in 2016 is, instead, assumed to be extended indefinitely at 30 percent.
  • In the buildings sector, tax credits for the purchase of energy-efficient equipment, including photovoltaics (PV) in new houses, are assumed to be extended indefinitely, as opposed to ending in 2011 or 2016 as prescribed by current law. The business ITCs for commercial-sector generation technologies and geothermal heat pumps are assumed to be extended indefinitely, as opposed to expiring in 2016; and the business ITC for solar systems is assumed to remain at 30 percent instead of reverting to 10 percent.
  • In the industrial sector, the ITC for combined heat and power (CHP) that ends in 2016 in the AEO2012 Reference case is assumed to be preserved through 2035, the end of the projection period.
Extended Policies case

The Extended Policies case includes additional updates in Federal equipment efficiency standards that were not considered in the Reference case or No Sunset case. Residential end-use technologies subject to updated standards are not eligible for tax credits in addition to the standards. Also, the PTC for cellulosic biofuels beyond 2012 is not included because the renewable fuel standard (RFS) program that is already included in the AEO2012 Reference case tends to be the binding driver of cellulosic biofuels use. Other than these exceptions, the Extended Policies case adopts the same assumptions as the No Sunset case, plus the following:

  • Federal equipment efficiency standards are updated at periodic intervals, consistent with the provisions in the existing law, with the levels based on ENERGY STAR specifications, or Federal Energy Management Program (FEMP) purchasing guidelines for Federal agencies. Standards are also introduced for products that are not currently subject to Federal efficiency standards.
  • Updated Federal residential and commercial building energy codes reach 30-percent improvement in 2020 relative to the 2006 International Energy Conservation Code in the residential sector and the American Society of Heating, Refrigerating and Air-Conditioning Engineers Building Energy Code 90.1-2004 in the commercial sector. Two subsequent rounds in 2023 and 2026 each add an assumed 5-percent incremental improvement to building energy codes.

    The equipment standards and building codes assumed for the Extended Policies case are meant to illustrate the potential effects of these policies on energy consumption for buildings. No cost-benefit analysis or evaluation of impacts on consumer welfare was completed in developing the assumptions. Likewise, no technical feasibility analysis was conducted, although standards were not allowed to exceed "maximum technologically feasible" levels described in DOE's technical support documents.
  • The AEO2012 Reference, No Sunset, and Extended Policies cases include both the attribute-based CAFE standards for LDVs for MY 2011 and the joint attribute-based CAFE and vehicle GHG emissions standards for MY 2012 to MY 2016. However, the Reference and No Sunset cases assume that LDV CAFE standards increase to 35 miles per gallon (mpg) by MY 2020, as called for in the Energy Independence and Security Act of 2007 (EISA2007), and that the CAFE standards are then held constant in subsequent model years, although the fuel economy of new LDVs continues to rise modestly over time.

    The Extended Policies case modifies the assumption in the Reference and No Sunset cases by assuming the incorporation of the proposed CAFE standards recently announced by the EPA and NHTSA for MY 2017 through MY 2025, which call for an annual average increase in fuel economy for new LDVs of 3.9 percent. After 2025, CAFE standards are assumed to increase at an average annual rate of 1.5 percent through 2035.

  • In the industrial sector, the ITC for CHP is extended to cover all system sizes (limited to only capacities between 25 and 50 megawatts in the Reference case), which may include multiple units. Also, the ITC is modified to increase the eligible CHP unit cap from 15 megawatts to 25 megawatts. These extensions are consistent with previously proposed or pending legislation.

Analysis results

The changes made to Reference case assumptions in the No Sunset and Extended Policies cases generally lead to lower estimates for overall energy consumption, increased use of renewable fuels, particularly for electricity generation, and reduced energyrelated emissions of carbon dioxide (CO2). Because the Extended Policies case includes most of the assumptions in the No Sunset case but adds others, the impacts in the Extended Policies case tend to be greater than those in the No Sunset case. Although these cases show lower energy prices—because the tax credits and end-use efficiency standards lead to lower energy demand and reduce the cost of renewable fuels—consumers spend more on appliances that are more efficient in order to comply with the tighter appliance standards, and the Government receives lower tax revenues as consumers and businesses take advantage of the tax credits.

Energy consumption


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Total energy consumption in the No Sunset case is close to the level in the Reference case (Figure 11). Improvements in energy efficiency lead to reduced consumption in this case, but somewhat lower energy prices lead to higher relative consumption, offsetting some of the impact of the improved efficiency.

Total energy consumption growth in the Extended Policies case is markedly below the Reference case projection. In 2035, total energy consumption in the Extended Policies case is nearly 6 percent below its projected level in the Reference case.

Buildings energy consumption

The No Sunset case extends tax credits for residential and commercial renewable energy systems and for the purchase of energyefficient residential equipment. The Extended Policies case builds on the No Sunset case by assuming updated Federal equipment efficiency standards and new standards for some products that are not currently subject to standards. For residential end-use technologies subject to standards, updated standards are assumed to replace any extension of incentives from the No Sunset case. Federal residential and commercial building energy codes are also improved as described above. Renewable distributed generation (DG) technologies (PV systems and wind turbines) provide much of the buildings-related energy savings in the No Sunset case. Extended tax credits in the No Sunset case spur increased adoption of renewable DG systems, leading to 110 billion kilowatthours of onsite electricity generation in 2035—more than four times the amount of onsite electricity generated in 2035 in the Reference case. Similar adoption of renewable DG takes place in the Extended Policies case. With the additional efficiency gains from assumed future standards and more stringent building codes, delivered energy consumption for buildings in 2035 is 6.8 percent (1.5 quadrillion Btu) lower in the Extended Policies case than in the Reference case, a reduction nearly five times as large as the 1.4-percent (0.3 quadrillion Btu) reduction in the No Sunset case.

Electricity use shows the largest reduction relative to the Reference case, with buildings electricity consumption 2.4 percent and 8.2 percent lower, respectively, in the No Sunset and Extended Policies cases in 2035. Space heating and cooling are affected by both assumed standards and building codes, leading to significant savings in energy consumption for heating and cooling in the Extended Policies case. In 2035, energy use for space heating in buildings is 6.9 percent lower, and energy use for space cooling is 17.3 percent lower, in the Extended Policies case than in the Reference case. In addition to improved standards and codes, extended tax credits for PV prompt increased adoption, offsetting some of the purchased electricity for cooling. New standards for televisions and for personal computers (PCs) and related equipment in the Extended Policies case lead to savings of 20.6 percent and 18.2 percent, respectively, in residential electricity use by this equipment in 2035 relative to the Reference case. Residential and commercial natural gas use declines from 8.3 quadrillion Btu in 2010 to 7.9 quadrillion Btu in 2035 in the Extended Policies case, representing a 6.2-percent reduction from the Reference case in 2035.

Industrial energy consumption

The Extended Policies case modifies the Reference case by extending the existing industrial CHP ITC through the end of the projection period, expanding it to include all industrial CHP system sizes, and raising the maximum credit that can be claimed from 15 megawatts of installed capacity to 25 megawatts. These assumptions are based on the current proposals in H.R. 2750 and H.R. 2784 of the 112th Congress. The changes result in 2.7 gigawatts of additional industrial CHP capacity over the Reference case level in 2035. Natural gas consumption in the industrial sector (excluding refining) increases from 7.3 quadrillion Btu in the Reference case to 7.4 quadrillion Btu in the Extended Policies case, a 1.6-percent rise. Electricity purchases are nearly unchanged in the Extended Policies case, as additional demand for electricity relative to the Reference case is fulfilled almost exclusively by increased generation from CHP.

Transportation energy consumption

The Extended Policies case modifies the Reference case and No Sunset case by assuming the incorporation of the CAFE standards recently proposed by the EPA and NHTSA for MY 2017 through 2025, which call for a 3.9-percent annual average increase in fuel economy for new LDVs, with CAFE standards applicable after 2025 assumed to increase at an average annual rate of 1.5 percent through 2035. Sales of vehicles that do not rely solely on a gasoline internal combustion engine for both motive and accessory power (including those that use diesel, alternative fuels, and/or hybrid electric systems) play a substantial role in meeting the higher fuel economy standards, growing to almost 80 percent of new LDV sales in 2035, compared with about 35 percent in the Reference case.


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LDV energy consumption declines in the Extended Policies case, from 16.6 quadrillion Btu (8.9 million barrels per day) in 2010 to 12.9 quadrillion Btu (7.3 million barrels per day) in 2035, about a 20-percent reduction from the Reference case in 2035. Petroleum and other liquids fuels consumption in the transportation sector declines in the Extended Policies case, from 13.8 million barrels per day in 2010 to 12.7 million barrels per day in 2035, compared to an increase in the Reference case to 14.4 million barrels per day (Figure 12).

Renewable electricity generation


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The extension of tax credits for renewables through 2035 would, over the long run, lead to more rapid growth in renewable generation than in the Reference case. When the renewable tax credits are extended without extending energy efficiency standards, as is assumed in the No Sunset case, there is a significant increase in renewable generation in 2035 relative to the Reference case (Figure 13). Extending both renewable tax credits and energy efficiency standards (Extended Policies case) results in more modest growth in renewable generation, because renewable generation in the near term is a significant source of new generation to meet load growth, and enhanced energy efficiency standards tend to reduce overall electricity consumption and the need for new generation resources.

In the No Sunset and Extended Policies cases, renewable generation more than doubles from 2010 to 2035, as compared with a 77-percent increase in the Reference case. In 2035, the share of total electricity generation accounted for by renewables is between 19 and 20 percent in both the No Sunset and Extended Policies cases, as compared with 15 percent in the Reference case.


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In all three cases, the most rapid growth in renewable capacity occurs in the very near term, largely as the result of projects already under construction or planned. After that, the growth slows through 2020 before picking up again. Some of the current surge of renewable capacity additions is occurring in anticipation of the expiration of Federal incentives within the next year (for wind) or two (for other renewable fuels except solar). Results from the No Sunset and Extended Policies cases indicate that, given sufficient lead time, a long-term extension of these expiring provisions could result in the postponement of some near-term activity to better match projected patterns of load growth. With slow growth in electricity demand and the addition of capacity stimulated renewable resources already have been developed, leaving only less favorable sites that may require significant investment in transmission as well as other additional infrastructure costs. Starting around 2020, significant new sources of renewable generation also appear on the market as a result of cogeneration at biorefineries built primarily to produce renewable liquid fuels to meet the Federal RFS, where combustion of waste products to produce electricity is an economically attractive option.

Between 2020 and 2025, renewable generation in the No Sunset and Extended Policies cases starts to increase more rapidly than in the Reference case, and, as a result, generation from nuclear and fossil fuels is reduced from the levels in the Reference case. Natural gas represents the largest source of displaced generation. In 2035, electricity generation from natural gas is 11 percent lower in the No Sunset case and 15 percent lower in the Extended Policies case than in the Reference case (Figure 14).

Energy-related CO2 emissions

In the No Sunset and Extended Policies cases, lower overall energy demand leads to lower levels of energy-related CO2 emissions than in the Reference case. The Extended Policies case shows much larger emissions reductions than the No Sunset and Reference cases, due in part to the inclusion of tighter LDV fuel economy standards for MY 2017 through MY 2035. From 2010 to 2035, energy-related CO2 emissions are reduced by a cumulative total of 4.3 billion metric tons (a 3.0-percent reduction over the period) in the Extended Policies case from the Reference case projection, as compared with 0.9 billion metric tons (a 0.6-percent reduction over the period) in the No Sunset case (Figure 15). The increase in fuel economy standards assumed for new LDVs in the Extended Policies case is responsible for more than 40 percent of the total reduction in CO2 emissions in 2035 in comparison with the Reference case. The balance of the reduction in CO2 emissions is a result of greater improvement in appliance efficiencies and increased penetration of renewable electricity generation.


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The majority of the emissions reductions in the No Sunset case result from increases in renewable electricity generation. Consistent with current EIA conventions and EPA practice, emissions associated with the combustion of biomass for electricity generation are not counted, because they are assumed to be balanced by carbon uptake when the feedstock is grown. A small reduction in transportation sector emissions in the No Sunset case is counterbalanced by an increase in emissions from refineries during the production of synthetic fuels that receive tax credits. Relatively small incremental reductions in emissions are attributable to renewables in the Extended Policies case, mainly because electricity demand is lower than in the Reference case, reducing the consumption of all fuels used for generation, including biomass.

In the residential sector, in both the No Sunset and Extended Policies cases, water heating, space cooling, and space heating together account for most of the emissions reductions from Reference case levels. In the commercial sector, only the Extended Policies case projects substantial reductions of emissions in those categories. In the industrial sector, the Extended Policies case projects reduced emissions as a result of decreases in electricity purchases and petroleum use that are partially offset by increased reliance on natural gas—for example, increased use of natural gas fired industrial CHP.

Energy prices and tax credit payments


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With lower levels of overall energy use and more consumption of renewable fuels in the No Sunset and Extended Policies cases, energy prices are lower than in the Reference case. In 2035, natural gas wellhead prices are $0.44 per thousand cubic feet (6.6 percent) and $0.82 per thousand cubic feet (12.3 percent) lower in the No Sunset and Extended Policies cases, respectively, than in the Reference case (Figure 16), and electricity prices are about 2 percent and 5 percent lower than in the Reference case (Figure 17).


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The reductions in energy consumption and CO2 emissions in the Extended Policies case are accompanied by higher equipment costs for consumers and revenue reductions for the U.S. Government. From 2012 to 2035, residential and commercial consumers spend, on average, an additional $19 billion per year (in 2010 dollars) for newly purchased end-use equipment, distributed generation systems, and residential building shell improvements in the Extended Policies case as compared with the Reference case. On the other hand, they save an average of $22 billion per year on energy purchases.

Tax credits paid to consumers in the buildings sector (or, from the Government's perspective, reduced revenue) in the No Sunset case average $5 billion (real 2010 dollars) more per year than in the Reference case, which assumes that existing tax credits expire as currently scheduled, mostly by 2016.

The largest response to Federal tax incentives for new renewable generation is seen in the No Sunset case, with extension of the PTC and the 30-percent ITC resulting in annual average reductions in Government tax revenues of approximately $2.5 billion from 2011 to 2035, as compared with $520 million per year in the Reference case. Additional reductions in Government tax revenue in the No Sunset case result from extensions of the cellulosic biofuels PTC. These reductions increase rapidly from $52 million in 2013 to $7.2 billion (2010 dollars) in 2035 (a cumulative total of $75.1 billion) in comparison with the Reference case.

2. Oil price and production trends in AEO2012

The oil price in AEO2012 is defined as the average price of light, low-sulfur crude oil delivered in Cushing, Oklahoma, which is similar to the price for light, sweet crude oil, West Texas Intermediate (WTI), traded on the New York Mercantile Exchange. AEO2012 also includes a projection of the U.S. annual average refiners' acquisition cost of imported crude oil, which is more representative of the average cost of all crude oils used by domestic refiners. Currently there is a price differential between WTI and similar-quality marker crude oils delivered to international ports via tanker (e.g., Brent and Louisiana Light Sweet crudes). The AEO2012 Reference case assumes that the large discrepancy will fade over time, as construction of more adequate pipeline capacity between Cushing and the Gulf of Mexico eases transportation of crude oil supplies to and from U.S. refineries.

Oil prices are influenced by a number of factors, including some that have mainly short-term impacts. Other factors, such as the Organization of the Petroleum Exporting Countries (OPEC) production decisions and expectations about future world demand for petroleum and other liquids, affect prices in the longer term. Supply and demand in the world oil market are balanced through responses to price movements, and the factors underlying supply and demand expectations are both numerous and complex. The key factors determining long-term supply, demand, and prices for petroleum and other liquids can be summarized in four broad categories: the economics of non-OPEC supply, OPEC investment and production decisions, the economics of other liquids supply, and world demand for petroleum and other liquids.

AEO2012 includes projections of future supply and demand for "petroleum and other liquids." The term "petroleum" refers to crude oil (including tight oil from shale [also referred to as shale oil], chalk, and other low-permeability formations), lease condensate, natural gas plant liquids, and refinery gain. The term "other liquids" refers to biofuels, bitumen (oil sands), coal-to-liquids (CTL), biomass-to-liquids (BTL), gas-to-liquids (GTL), extra-heavy oils (technically petroleum but grouped in "other liquids" in this report), and oil shale [41].

Reference case

The global oil market projections in the AEO2012 Reference case are based on the assumption that current practices, politics, and levels of access will continue in the near to mid-term. The Reference case assumes that continued robust economic growth in the non-Organization for Economic Cooperative Development (OECD) nations, including China and India, will more than offset slower growth projected for many OECD nations. In the Reference case, non-OECD petroleum and other liquids consumption is about 21 million barrels per day higher in 2035 than it was in 2010, but OECD consumption grows by less than 2 million barrels per day over the same period. Total world consumption of petroleum and other liquids grows to 106 million barrels per day in 2030 and 110 million barrels per day in 2035.


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The Reference case also assumes that limitations on access to resources in many areas restrain the growth of non-OPEC petroleum liquids production over the projection period, and that OPEC production maintains a relatively constant share of total world petroleum and other liquids supply—between 40 and 42 percent. With those constraining factors, satisfying the growing world demand for petroleum and other liquids in coming decades requires production from higher-cost resources, particularly for non-OPEC producers with technically challenging supply projects. In the Reference case, the increased cost of non-OPEC supplies, a constant OPEC market share, and easing of Cushing WTI infrastructure constraints combine to support average increases in real oil prices of about 5 percent per year from 2010 to 2020 and about 1 percent per year from 2020 to 2035. In 2035, the average real price of crude oil in the Reference case is $145 per barrel in 2010 dollars (Figure 18). The rapid increase in the near term is based on the assumption that the WTI price will return to parity with Brent by 2016 as current constraints on pipeline capacity between Cushing and the Gulf of Mexico are eliminated.


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Increases in non-OPEC production of petroleum and other liquids in the Reference case come primarily from high-cost petroleum liquids projects in areas with inconsistent or unreliable fiscal or political regimes and from increasingly expensive other liquids projects that are made economical by rising oil prices and advances in production technology (Figure 19). Bitumen production in Canada and biofuels production mostly from the United States and Brazil are the most important components of the world's incremental supply of other liquids from 2010 to 2035 in the Reference case.

Low Oil Price case

In the Low Oil Price case, non-OECD economic growth is lower than in the Reference case, leading to slower growth in demand for petroleum and other liquids. Lower demand, combined with greater access to and production of petroleum liquids resources, results in sustained lower oil prices. In particular, the Low Oil Price case focuses on demand in non-OECD countries, where uncertainty about future growth is much higher than in the mature economies of the OECD. The Low Oil Price case assumes that oil prices fall steadily after 2011 to about $58 per barrel in 2017, then rise slowly to $62 per barrel in 2035. Growth in world demand for petroleum and other liquids is slowed by lower gross domestic product (GDP) growth in the non-OECD countries than is projected in the Reference case. Average annual GDP growth in the non-OECD nations is assumed to be 1.5 percentage points lower than in the Reference case, increasing by only 3.5 percent per year from 2010 to 2035. As a result, non-OECD demand for petroleum and other liquids in 2035 is 7 million barrels per day lower than in the Reference case, and total world consumption in 2035 is 2 million barrels per day lower, at 107 million barrels per day.

In the Low Oil Price case, the market power of OPEC producers is weakened, and they lose the ability to control prices and limit production. As a result, the OPEC market share of world petroleum and other liquids production is 46 percent in 2035, as compared with 40 to 42 percent in the Reference case. Despite lower prices, non-OPEC levels of petroleum liquids production are maintained until about 2020, as projects currently underway or planned are completed and begin production. After 2020, non-OPEC petroleum liquids production declines as existing fields are depleted and not fully replaced by production from new fields and higher cost enhanced recovery technologies.

The Low Oil Price case assumes that technologies for producing biofuels, bitumen, CTL, BTL, GTL and extra-heavy oils achieve much lower costs than in the Reference case. As a result, production of those liquids increases to 16 million barrels per day in 2035 despite significantly lower oil prices.

High Oil Price case

In the High Oil Price case, the assumption of high demand for petroleum and other liquids in the non-OECD nations, combined with more constrained supply availability, results in higher oil prices than in the Reference case. Oil prices ramp up quickly to $186 per barrel (2010 dollars) in 2017 and continue rising slowly thereafter, to about $200 per barrel in 2035. The higher prices result from higher demand for petroleum and other liquid fuels in the non-OECD nations, resulting from the assumption of higher economic growth than in the Reference case. Specifically, GDP growth rates for China and India in 2012 are 1.0 percentage point higher than in the Reference case, and 0.3 percentage point higher in 2035. For most other non-OECD regions, GDP growth rates average about 0.5 percentage point above the Reference case in 2012. For the OECD regions, where prices rather than a higher economic growth rate are the main factor affecting demand, consumption of petroleum and other liquids remains fairly flat over the projection.

On the supply side, OPEC countries are assumed to reduce their market share somewhat, to less than 41 percent through 2035. Non-OPEC petroleum liquids resources outside the United States are assumed to be less accessible and/or more costly to produce than in the Reference case, and higher prices make other liquids supply more attractive. In 2035, other liquids production totals 17 million barrels per day in the High Oil Price case, about 4 million barrels per day above the Reference case level, and other liquids account for 15 percent of the total supply of petroleum and other liquids.

3. Potential efficiency improvements and their impacts on end-use energy demand

In 2010, the residential and commercial buildings sectors used 20.4 quadrillion Btu of delivered energy, or 28 percent of total U.S. energy consumption. The residential sector accounted for 57 percent of that energy use and the commercial sector 43 percent. In the AEO2012 Reference case, delivered energy for buildings increases by a total of 9 percent, to 22.2 quadrillion Btu in 2035, which is modest relative to the rate of increase in the number of buildings and their occupants. In contrast, the U.S. population increases by 25 percent, commercial floorspace increases by 27 percent, and the number of households increases by 28 percent. Accordingly, energy use in the buildings sector on a per-capita basis declines in the projection. The decline of buildings energy use per capita in past years has been attributable in part to improvements in the efficiencies of appliances and building shells, and efficiency improvements continue to play a key role in projections of buildings energy consumption.

Existing policies, such as Federal appliance standards, along with evolving State policies, and market forces, are drivers of energy efficiency in the United States. A number of recent changes in the broader context of the U.S. energy system that affect energy prices, such as advances in shale gas extraction and the economic slowdown, also have the potential to affect the dynamics of energy efficiency improvement in the U.S. buildings sector. Although these influences are important, technology improvement remains a critical factor for energy use in the buildings sector. The emphasis for this analysis is on fundamental factors, particularly technology factors, that affect energy efficiency, rather than on potential policy or regulatory options.


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Three alternative cases in AEO2012 illustrate the impacts of different assumptions for rates of technology improvement on delivered energy use in the residential and commercial sectors (Figure 20). These cases are in addition to the Extended Policies and No Sunset cases discussed earlier, and they are intended to provide a broader perspective on changes in demand-side technologies. In the High Demand Technology case, high-efficiency technologies are assumed to penetrate end-use markets at lower consumer hurdle rates, with related assumptions in the transportation and industrial sectors. In the Best Available Demand Technology case, new equipment purchases are limited to the most efficient versions of technologies available in the residential and commercial buildings sectors regardless of cost. In the 2011 Demand Technology case, future equipment purchases are limited to the options available in 2011 ("frozen technology"), and 2011 building codes remain unchanged through 2035. Like the High Demand and Best Available Demand Technology cases, the 2011 Demand Technology case includes all current Federal standards.

Without the benefits of technology improvement, buildings energy use in the 2011 Demand Technology case grows to 23.4 quadrillion Btu in 2035, as compared with 22.2 quadrillion Btu in the Reference case. In the High Demand Technology case, energy delivered to the buildings sectors only reaches about 20 quadrillion Btu for any year in the projection period, and in the Buildings Best Available Demand Technology case it declines to 17.9 quadrillion Btu in 2026 before rising slightly to 18.1 quadrillion Btu in 2035.

Background

The residential and commercial sectors together are referred to as the "buildings sector." The cases discussed here are not policy-driven scenarios but rather "what-if" cases used to illustrate the impacts of alternative technology penetration trajectories on buildings sector energy use. In a general sense, this approach can be understood as reflecting uncertainty about technological progress itself, or uncertainty about consumer behavior, in that the market response to a new technology is uncertain. This type of uncertainty is being studied through market research, behavioral economics, and related disciplines that examine how purchasers perceive options, differentiate products, and react to information over time. By varying technology progress across the full range of end uses, the integrated demand cases provide estimates of potential changes in energy savings that, in reality, are likely to be less uniform and more specific to certain end uses, technologies, and consumer groups. Specific assumptions for each of the cases are summarized in Tables 6 and 7.

Results for the residential sector

To emphasize that efficiency is persistent and its effects accumulate over time, energy use is discussed in terms of cumulative reductions (2011-2035) relative to a case with no future advances in technology after 2011. An extensive range of residential equipment is covered by Federal efficiency standards, and the continuing effects of those standards contribute to the cumulative reduction in delivered energy use of 12.3 quadrillion Btu through 2035 in the Reference case relative to the 2011 Demand Technology case. Electricity and natural gas account for more than 85 percent of the difference, each showing a cumulative reduction greater than 5 quadrillion Btu over the period. Energy use for space heating shows the most improvement in the Reference case, affected by improvements in building shells and heating equipment (Figure 21). Televisions and PCs and related equipment use 1.9 quadrillion Btu less energy over the projection period, as devices with energy-saving features continue to penetrate the market, and laptops continue to gain market share over desktop PCs.


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Cumulative savings in residential energy use from 2011 to 2035 total 31.6 quadrillion Btu in the High Demand Technology case and 56.2 quadrillion Btu in the Best Available Demand Technology case in comparison with the 2011 Demand Technology case. Electricity accounts for the largest share of the reductions in the High Demand Technology case (49 percent) and the Best Available Demand Technology case (51 percent). In addition to adopting more optimistic assumptions in the High Demand Technology and Best Available Demand Technology cases for end-use equipment, residential PV and wind technologies are assumed to have greater cost declines than in the Reference case, contributing to reductions in purchased electricity. In 2035, residential PV and wind systems produce 23 billion kilowatthours more electricity in the Best Available Demand Technology case than in the 2011 Demand Technology case.

In the High Demand Technology and Best Available Demand Technology cases, energy use for residential space heating again shows the most improvement relative to the 2011 Demand Technology case. Large kitchen and laundry appliances claim a small share of the reductions, as Federal standards limit increases in energy consumption for those uses even in the 2011 Demand Technology case. Light-emitting diodes (LED) lighting provide the potential for further savings in the High and Best Available Demand Technology cases beyond the reductions realized as a result of the EISA2007 (Public Law 110-140) lighting standards.

Results for the commercial sector


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Like the residential sector, analysis results for the commercial sector are discussed here in terms of cumulative reductions relative to the 2011 Demand Technology case, in order to illustrate the effect of efficiency improvements over the period from 2011 to 2035. Buildings in the commercial sector are less homogeneous than those in the residential sector, in terms of both form and function. Although many commercial products are subject to Federal efficiency standards, FEMP guidelines, and ENERGY STAR specifications, coverage is not as comprehensive as in the residential sector. Still, those initiatives and the ensuing efficiency improvements contribute to a cumulative reduction in commercial delivered energy use of 4.1 quadrillion Btu in the Reference case relative to the 2011 Demand Technology case (Figure 22). Virtually all of the reduction is in purchased electricity. Increased adoption of DG and CHP accounts for 0.4 quadrillion Btu (115 billion kilowatthours) of the cumulative reduction in purchased electricity in the Reference case. Commercial natural gas use is actually slightly higher in the Reference case because of the increased penetration of CHP. Office-related computer equipment sees the most significant end-use energy savings relative to the 2011 Demand Technology case, primarily because laptop computers gain market share from desktop computers.

Commercial heating, ventilation and cooling account for almost 50 percent of the 17.1 quadrillion Btu in cumulative energy savings in the High Demand Technology case relative to the 2011 Demand Technology case. The more optimistic assumptions for enduse equipment in the High Demand Technology case offset the additional energy consumed as a result of greater adoption of CHP, resulting in a cumulative reduction in natural gas consumption of 0.9 quadrillion Btu. The increase in distributed and CHP generation contributes 0.8 quadrillion Btu (231 billion kilowatthours) to the cumulative reduction in purchased electricity use.

Technologies such as LED lighting result in almost as much improvement as space heating and ventilation in the Best Available Demand Technology case relative to the 2011 Demand Technology case. Significant reductions are seen for all enduse services, with a cumulative reduction in energy consumption of 24.6 quadrillion Btu. Even when consumers choose the most efficient type of each end-use technology, the more optimistic assumptions regarding technology learning for advanced CHP technologies result in more natural gas use in the Best Available Demand Technology case relative to the 2011 Demand Technology case.

In comparison to a case that restricts future equipment to the efficiencies available in 2011, the alternative cases show the potential for reductions in energy consumption from the adoption of more energy-efficient technologies. In the Reference case, technology improvement reduces residential energy consumption by 12.3 quadrillion Btu—equivalent to 4.1 percent of total residential energy use—from 2011 to 2035 in comparison with the 2011 Demand Technology case. In the commercial sector, energy consumption is reduced by 4.1 quadrillion Btu—equivalent to 1.7 percent of total commercial energy use—over the same period. With greater technology improvement in the High Demand Technology case, cumulative energy savings from 2011 to 2035 rise by an additional 6.4 percent and 5.5 percent in the residential and commercial sectors, respectively. In the Best Available Demand Technology case, the cumulative reductions in energy consumption grow by an additional 8.2 percent and 3.1 percent in the residential and commercial sectors, respectively. In the Reference case, a cumulative total of 16.4 quadrillion Btu of energy consumption is avoided over the projection period relative to the 2011 Demand Technology case. That reduction is roughly equivalent to 80 percent of the energy that the buildings sectors consumed in 2010. In the Best Available Demand Technology case, cumulative energy consumption is reduced by an additional 64.3 quadrillion Btu from 2011 to 2035.

4. Energy impacts of proposed CAFE standards for light-duty vehicles, model years 2017 to 2025

In response to environmental, economic, and energy security concerns, EPA and NHTSA in December 2011 jointly issued a proposed rule covering GHG emissions and CAFE standards for passenger cars and light-duty trucks in MY 2017 through MY 2025 [42]. EPA and NHTSA expect to announce a final rule in the second half of 2012. In this section, EIA uses the National Energy Modeling System (NEMS), which has been updated since last year but, due to the timing of the modeling process, does not incorporate all information from the pending rulemaking process, to assess potential energy impacts of the regulatory proposal.

EPA is proposing GHG emissions standards that will reach a fleetwide LDV average of 163 grams CO2 per mile (54.5 mpg equivalent) in MY 2025, or 49.6 mpg for the CAFE-only portion (Table 8). Passenger car standards are made more stringent by reducing the average annual CO2 emissions allowed by 5 percent per year from MY 2016 through MY 2025. Average annual CO2 emissions from light-duty trucks are reduced by 3.5 percent per year from MY 2016 through MY 2021, with larger average reductions for smaller lightduty trucks and smaller average reductions for larger lightduty trucks. For MY 2021 through MY 2025, light-duty trucks would be required to achieve a 5-percent average annual reduction rate. In this section, EIA assumes that the reductions in GHG emissions required under EPA standards exceed the reductions required under the NHTSA CAFE standards and are achieved through changes other than those that would provide further improvement in fuel economy as tested for compliance with the NHTSA standards.

NHTSA has proposed CAFE standards for LDVs that will reach a fleetwide average of 49.6 mpg in MY 2025, based on the projected inclusion of reductions in GHG emissions that are achieved by means other than improvements in fuel economy. CAFE standards are proposed for MY 2017 through MY 2021, and conditionally for MY 2022 through MY 2025. The proposed standards for passenger cars increase by 4.1 percent per year for MY 2017 through MY 2021 and 4.3 percent for MY 2022 through MY 2025. For light-duty trucks, the CAFE standards would increase by 2.9 percent per year for MY 2017 through MY 2021, with greater improvement required for smaller light-duty trucks and somewhat smaller improvement required for larger light-duty trucks. For MY 2022 through MY 2025, CAFE standards for all light-duty trucks would increase by 4.7 percent per year. Although there are complex dynamics in play among the CAFE standards and other policies, including those related to biofuels [43] and other gasoline alternatives, CAFE standards are the single most powerful regulatory mechanism affecting energy use in the U.S. transportation sector.

AEO2012 includes a CAFE Standards case that incorporates the proposed NHTSA fuel economy standards for MY 2017 through MY 2025. Fuel economy and GHG emissions standards for MY 2011 through MY 2016 have been promulgated already as final rules and are represented in the AEO2012 Reference case. Further, the Reference case assumes that CAFE standards rise slightly to meet the requirement that LDVs reach 35 mpg by 2020 mandated in EISA2007.

As modeled by EIA, compliance with the more stringent fuel economy standards in the CAFE Standards case leads to a change in the vehicle sales mix. Vehicles that use electric power stored in batteries, or use a combination of a liquid fuel (including gasoline) and electric power stored in batteries for motive and/or accessory power—such as hybrid electric vehicles (HEVs) or plug-in hybrid electric vehicles (PHEVs)—or that use liquid fuels other than gasoline, such as diesel or E85, play a larger role than in the Reference case. The CAFE Standards case also projects a significant improvement in the fuel economy of traditional vehicles with gasoline internal combustion engines with and without micro hybrid technologies. In the analysis, vehicles that combine gasoline internal combustion engines with micro hybrid systems are projected to have the largest increase in sales relative to the Reference
case (Figure 23 and Table 9).


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Gasoline-only vehicles retain the single largest share of new vehicle sales in 2025. In order to meet increased fuel economy requirements, the average fuel economy of gasoline vehicles, including micro hybrids, is raised by the introduction of new fuelefficient technologies and improved vehicle designs. The fuel economy of gasoline-only passenger cars, including micro hybrids, increases from 32 mpg in 2010 to 51 mpg in 2025 in the CAFE Standards case, compared with 38 mpg in 2025 in the Reference case. The fuel economy of gasoline-powered light-duty trucks, including micro hybrids, rises similarly, from 24 mpg in 2010 to 37 mpg in 2025 in the CAFE Standards case, compared with 31 mpg in 2025 in the Reference case.

As vehicle attributes, such as horsepower and weight, change in response to the more stringent fuel economy standards, some consumers switch from passenger cars to light trucks. Light-duty trucks account for 39 percent of new LDV sales in 2025 in the CAFE Standards case, higher than their 37 percent share in 2025 in the Reference case but still much lower than their 2005 share of more than 50 percent. In 2025, new passenger cars average 56 mpg and light-duty trucks average 40 mpg in the CAFE Standards case, compared with 41 mpg and 31 mpg, respectively, in the Reference case. Although more stringent standards stimulate sales of vehicles with higher fuel economy, it takes time for new vehicles to penetrate the vehicle fleet in numbers that are sufficiently large to affect the average fuel economy of the entire U.S. LDV stock. Currently there are about 230 million LDVs on the road in the United States, projected to increase to 276 million in 2035. As a consequence of the gradual scrapping of older vehicles and the introduction of new, more fuel-efficient models, the average on-road fuel economy of the LDV stock, representing the fuel economy realized by all vehicles in use, increases from around 20 mpg in 2010 to 22 mpg in 2016, 27.5 mpg in 2025, and 34.5 mpg in 2035, as compared with 28 mpg in 2035 in the Reference case (Figure 24).


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More stringent fuel economy standards lead to reductions in total energy consumption. Total cumulative delivered energy consumption by LDVs from 2017 to 2035 is 8 percent lower in the CAFE Standards case than in the Reference case. LDV delivered energy consumption is 6 percent lower in 2025 in the CAFE Standards case than in the Reference case and 17 percent lower in 2035. Total consumption of petroleum and other liquids in the transportation sector is 0.5 million barrels per day lower in 2025 and 1.4 million barrels per day lower in 2035 in the CAFE Standards case than in the Reference case (Figure 25). The existing standards are modestly exceeded in the Reference case. If the standards are just met, the reduction in liquids consumption is 0.5 million barrels per day in 2025 and 1.6 million barrels per day in 2035 in the CAFE Standards case relative to the Reference case.
The reductions in total delivered energy use and liquid fuel consumption become more pronounced later in the projection, as more of the total vehicle stock consists of vehicles with higher fuel economy.


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The more stringent regulatory standards in the CAFE Standards case change the composition of the vehicle fleet by fuel type and shift the mix of fuels consumed. Nevertheless, motor gasoline, including gasoline blended with up to 15 percent ethanol (used in vehicles manufactured in MY 2001 and after), remains the predominant fuel by far for LDVs in the CAFE Standards case, accounting for 84 percent of LDV delivered energy consumption in 2035—only slightly less than its 86-percent share in 2035 in the Reference case.

Total motor gasoline demand for LDVs is 19 percent lower in the CAFE Standards case in 2035 than in the Reference case, and lower demand for motor gasoline reduces the amount of ethanol used in E10 and E15 gasoline blends. As a consequence, more E85 fuel is sold to meet the RFS. E85 accounts for 10 percent of delivered energy consumption by LDVs in 2035, compared with 8 percent in the Reference case. Diesel fuel accounts for 5 percent of LDV delivered energy consumption in 2035, similar to its share in the Reference case. Electricity use by LDVs grows in the CAFE Standards case but still makes up less than 1 percent of LDV delivered energy demand in 2035.


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Reductions in LDV delivered energy consumption reduce GHG emissions from the transportation sector. From 2017 and 2035, cumulative CO2 emissions from transportation are 357 million metric tons (mmt) lower in the CAFE Standards case compared to the Reference case, a reduction of 5 percent. Transportation GHG emissions decline from 1,876 mmt in 2010 to 1,759 mmt in 2025 and to 1,690 mmt in 2035, reductions of 4 percent and 10 percent from the Reference case, respectively (Figure 26).

5. Impacts of a breakthrough in battery vehicle technology

The transportation sector's dependence on petroleum-based fuels has prompted significant efforts to develop technology and alternative fuel options that address associated economic, environmental, and energy security concerns. Electric drivetrain vehicles, including HEVs, PHEVs, and plug-in electric vehicles (EVs), are particularly well suited to meet those objectives, because they reduce petroleum consumption by improving vehicle fuel economy and, in the case of PHEVs and EVs, substitute electric power for gasoline use (see Table 10 for a descriptive list of electric drivetrain technologies).

AEO2012 includes a High Technology Battery case that examines the potential impacts of significant breakthroughs in battery electric vehicle technology on vehicle sales, energy demand, and CO2 emissions. Breakthroughs may include a dramatic reduction in the cost of battery and nonbattery systems, success in addressing overheating and life-cycle concerns, as well as the introduction of battery-powered electric vehicles in several additional vehicle size classes. A brief summary of the results of the High Technology Battery case follows a discussion of the current market for battery electric vehicles.

Sales of light-duty HEVs, introduced in the United States more than a decade ago, peaked at about 350,000 new sales in 2007 and have maintained a roughly 3-percent share of total LDV sales through 2011. PHEVs were introduced in the United States at the end of 2010 with the production of the Chevy Volt, a PHEV-40 (PHEV with a 40-mile range). Although manufacturer plans call for increased production of PHEVs, sales in the first full year were under 10,000 units [44]. EVs were first introduced in the early 1900s, and manufacturers again made EVs available in the 1990s but with a focus on niche markets. The Nissan Leaf, an EV-100 (EV with a 100-mile range) introduced around the same time as the Chevy Volt, has sparked interest in the wider commercial prospects for EVs; however, sales in 2011 remained below 10,000 units.

The individual decision to purchase a vehicle is influenced by many factors, including style, performance, comfort, environmental values, expected use, refueling capability, and expectations of future fuel prices. In general, one of the single most important factors consumers consider when deciding to purchase a vehicle is cost. Specifically, they generally are more willing to purchase new vehicle technologies, such as battery electric systems, instead of conventional gasoline internal combustion engines (ICEs) if the economic benefit over a period of ownership is greater than the initial price of the vehicle. Additional costs and benefits—such as refueling time or difficulty of refueling, increased or decreased maintenance, and resale value—also may enter into vehicle choice decisions. Further, consumers may be unwilling to spend more to purchase a vehicle, even if it accrues fuel cost savings beyond the initial cost over a relatively short period, because they are unfamiliar with the new technology or alternative fuel.

Battery electric vehicles offer an economic benefit to consumers over conventional gasoline ICEs in terms of significant fuel cost savings from both increased fuel economy for HEVs and PHEVs and the displacement of gasoline with electricity for PHEVs and EVs. Currently available battery electric vehicles such as the Toyota Prius (HEV), Chevy Volt (PHEV), and Nissan Leaf (EV) achieve much higher fuel economy (mpg) and, with the higher efficiency of electric motors, higher gasoline-equivalent mpg in electric mode, providing consumers with lower fueling costs. The Toyota Prius achieves an EPA-estimated 39 to 53 mpg, depending on trim and driving test cycle. The Chevy Volt achieves 35 to 40 mpg in charge-sustaining mode [45] and 93 to 95 mpg equivalent in charge-depleting mode. The Nissan Leaf achieves 99 mpg equivalent. In comparison, the Toyota Corolla, a passenger car generally similar to the Prius, achieves 26 to 34 mpg; the Chevy Cruze, a passenger car in the compact car size class similar to the Volt, achieves 25 to 42 mpg; and the Nissan Versa, a subcompact passenger car similar to the Leaf [46], achieves 24 to 34 mpg.

The inclusion of advanced battery technology that increases fuel economy and, in the case of PHEVs and EVs, displaces gasoline with electricity increases the initial cost of the vehicle to the consumer. The Toyota Prius has a manufacturer's suggested retail price (MSRP) between $24,000 and $29,500 (compared with $16,130 to $17,990 for the Toyota Corolla); the Chevy Volt has an MSRP between $39,145 and $42,085 (compared with $16,800 to $23,190 for the Chevy Cruze); and the Nissan Leaf has an MSRP between $35,200 and $37,250 (compared with $14,480 to $18,490 for the Nissan Versa) [47]. Based on these MSRPs, the current incremental consumer purchase cost of a battery electric vehicle relative to a comparable conventional gasoline vehicle is around $7,000 for an HEV and $20,000 for a PHEV or EV, before accounting for Federal and State tax incentives.

Although consumers may value high-cost battery electric vehicles for a variety of reasons, it is unlikely that they can achieve wide-scale market penetration while their additional purchase costs remain significantly higher than the present value of future fuel savings. Currently, the discounted fuel savings achieved, assuming five years of ownership with future fuel savings discounted at 7 percent, are significantly less than the incremental purchase cost of the vehicles (Table 11). This result is true even if gasoline is $6.00 per gallon. This calculation does not take into account any difference in maintenance cost or refueling infrastructure.


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Recognizing the potential of HEVs, PHEVs, and EVs to reduce U.S. petroleum consumption and save consumers refueling costs, efforts are underway at both the public and private levels to address several of the barriers to wide-scale adoption of battery electric vehicle technology. Paramount among the barriers are reducing the cost of battery electric vehicles by lowering battery and nonbattery system costs and solving battery life-cycle and overheating limitations that will allow battery storage to downsize while maintaining a given driving range. For example, battery and nonbattery systems costs could be reduced by improving the manufacturing process, changing battery chemistry, or improving the electric motor. Solving battery life-cycle and overheating concerns would allow battery capacity to be downsized, which would improve the depth of discharge and make the battery less expensive. In addition, public and private efforts to address other obstacles to wider adoption of plug-in battery vehicles are underway, including the development of public charging infrastructure.


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The AEO2012 High Technology Battery case examines the potential impacts of battery technology breakthroughs by assuming the attainment of program goals established by DOE's Office of Energy Efficiency and Renewable Energy (EERE) for high-energy battery storage cost, maximum depth of discharge, and cost of a nonbattery traction drive system for 2015 and 2030 (Figures 27 and 28) [48]. EERE's program goals represent significant breakthroughs in battery and nonbattery systems, in terms of costs and life-cycle and safety concerns, in comparison with current electric vehicle technologies. Further, with breakthroughs in battery electric vehicle technology, more vehicle size classes are assumed to be available for passenger cars and light-duty trucks.


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Reduced costs for battery and nonbattery systems in the High Technology Battery case lead to significantly lower HEV, PHEV, and EV costs to the consumer (Figures 29 and 30). The Reference case already projects a much lower real price to consumers for battery electric vehicles in 2035 relative to 2010 as a result of cost reductions for battery and nonbattery systems. Those declines are furthered in the High Technology Battery case. The prices of HEVs and PHEVs with a 10-mile range decline by an additional $1,500, or 5 percent, in 2035 in the High Technology Battery case relative to the Reference case. For PHEVs with a 40-mile range the relative decline is $3,500, or 11 percent, in 2035. For EVs with 100-mile (EV100) and 200-mile (EV200) ranges the relative declines are $3,600 and $13,300, or 13 percent and 30 percent, respectively, in 2035 relative to the Reference case.


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Lower vehicle prices lead to greater penetration of battery electric vehicle sales in the High Technology Battery case than projected in the Reference case. Battery electric vehicles, excluding mild hybrids, grow from 3 percent of new LDV sales in 2013 to 24 percent in 2035, compared with 8 percent in 2035 in the Reference case (Figure 31). Due to the still prohibitive incremental cost, EV200 vehicles do not achieve noticeable market penetration.


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Plug-in vehicles, including both PHEVs and EVs, show the largest growth in sales in the High Technology Battery case, resulting from the relatively larger incremental reduction in vehicle costs. Plug-in vehicle sales grow to just over 13 percent of new vehicle sales in 2035, compared with 3 percent in 2035 in the Reference case, with EV sales growing to 8 percent of new LDV sales in 2035, compared with 2 percent in 2035 in the Reference case. Virtually all sales of plug-in vehicles are EVs with a 100-mile range, given the prohibitive cost, even in 2035, of batteries for EVs with a 200-mile range. PHEVs grow to just under 6 percent of total sales, compared with 2 percent in 2035 in the Reference case. Most PHEV sales are vehicles with a 10-mile all-electric range.

Although plug-in vehicle sales increase substantially in the High Technology Battery case, that growth is tempered by the lack of widespread high-speed recharging infrastructure. In the absence of such public infrastructure, consumers must rely almost entirely on recharging at home. According to data from the 2009 Residential Energy Consumption Survey, 49 percent of households that own vehicles park within 20 feet of an electrical outlet [49]. A widespread publicly available infrastructure was not considered as part of the High Technology Battery case, which limits the maximum market potential of PHEVs and EVs.

HEV sales, including an ICE powered by either diesel fuel or gasoline, increase in the High Technology Battery case from 3 percent of sales in 2013 to 11 percent in 2035, compared with 5 percent in 2035 in the Reference case. Although the cost declines for HEVs are modest relative to those for other battery electric vehicle types, HEVs benefit from being unconstrained by the lack of recharging infrastructure.

Increased sales of battery electric vehicles in the High Technology Battery case lead to their gradual penetration throughout the LDV fleet. In 2035, HEVs represent 9 percent of the 276 million LDV stock, as compared with 4 percent in the Reference case. EVs and PHEVs each account for about 5 percent of the LDV stock in the High Technology Battery case in 2035, compared with 1 percent each in the Reference case.


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The penetration of battery electric vehicles with relatively higher fuel economy and efficient electric motors reduces total energy use by LDVs from 15.6 quadrillion Btu in 2013 to 14.8 quadrillion Btu in 2035 in the High Technology Battery case, compared with 15.5 quadrillion Btu in 2035 in the Reference case (Figure 32). LDV liquid fuel use declines to 14.6 quadrillion Btu in 2035 in the High Technology Battery case, and their electricity use increases to 0.2 quadrillion Btu—as compared with 15.4 quadrillion Btu of liquid fuel consumption and essentially no electricity consumption in 2035 in the Reference case. The reduction in liquid fuel consumption in the High Technology Battery case lowers U.S. net imports of petroleum from 8.5 million barrels per day in 2013 to 6.9 million barrels per day in 2035, compared with 7.2 million barrels per day in 2035 in the Reference case.


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The reduction in total energy consumption by LDVs and displacement of petroleum and other liquid fuels with electricity decreases LDV energy-related CO2-equivalent emissions from 1,030 million metric tons in 2013 to 935 million metric tons in 2035 in the High Technology Battery case, which represents a 2-percent decrease from 958 million metric tons in 2035 in the Reference case (Figure 33). CO2 and other GHG emissions from the electric power consumed by PHEVs and EVs is treated as representative of the national electricity grid and not regionalized. Ultimately, the CO2 and other GHG emissions of plug-in vehicles will depend on the fuel used in generating electricity.

The High Technology Battery case assumes a breakthrough in the costs of batteries and nonbattery systems for battery electric vehicles. Yet, despite the assumed dramatic decline in battery and nonbattery system costs, battery electric vehicles still face obstacles to wide-scale market penetration.

First, prices for battery electric vehicles remain above those for conventional gasoline counterparts, even with the assumption of technology breakthroughs throughout the projection period. The decline in sales prices relative to those for conventional vehicles may be enough to justify purchases by consumers who drive more frequently, consider relatively longer payback periods, or would purchase a more expensive but environmentally cleaner vehicle for a moderate additional cost. However, relatively more expensive battery electric vehicles may not pay back the higher purchase cost over the ownership period for a significant population of consumers.

In addition, EVs face the added constraint of plug-in infrastructure availability. Currently, there are about 8,000 public locations in the United States with at least one outlet for vehicle recharging, about 2,000 of which are in California [50]. In comparison, there are some 150,000 gasoline refueling stations available for public use. Without the construction of a much larger recharging network, consumers will have to rely on residential recharging, which is available for only around 40 percent of U.S. dwellings.

Further, recharging times differ dramatically depending on the voltage of the outlet. Typical 120-volt outlets can take up to 20 hours for a full EV battery to recharge; a 240-volt outlet can reduce the recharging time to about 7 hours [51]. Quick-recharging 480-volt outlets are under consideration for 30-minute "ultra-quick" recharges, but they may raise concerns related to safety and residential or commercial building codes. Even with ultra-quick recharging, EVs still would require substantially longer times for refueling than are required for ICE vehicles using liquid fuels. Given the concerns about availability and duration of recharging, the obstacle of severe range limitation, which does not affect PHEVs or HEVs, may inhibit the adoption of EVs by consumers.

Finally, another obstacle to wide-scale adoption of battery electric vehicles and other types of alternative-fuel vehicles is the increase in fuel economy for conventional gasoline vehicles and other types of AFVs resulting from higher fuel economy standards for LDVs. Final standards for LDV fuel economy currently are in place through MY 2016, and new CAFE standards proposed for MY 2017 through MY 2025 would increase combined LDV fuel economy to 49.6 mpg (56.0 mpg for passenger cars and 40.3 mpg for light-duty trucks) [52]. While the standards themselves may promote the adoption of battery electric vehicles, they also could considerably change the economic payback of electric drivetrain vehicles by decreasing consumer refueling costs for conventional vehicles, thus lowering the fuel savings of electric drivetrain vehicles and making the upfront incremental cost more prohibitive. The potential impact of CAFE standards on other vehicle attributes, costs, and fuel savings adds to the complexity of this dynamic.

6. Heavy-duty natural gas vehicles

Environmental and energy security concerns, together with recent optimism about natural gas supply and recent lower natural gas prices, have led to significant interest in the potential for fueling heavy-duty vehicles (HDVs) with natural gas produced domestically. Key market uncertainties with regard to natural gas as a fuel for HDVs include fuel and infrastructure issues (such as the build-out process for refueling stations and whether there will be sufficient demand for refueling to cover the required capital outlays, and retail pricing and taxes for liquefied natural gas [LNG] and compressed natural gas [CNG] fuels); and vehicle issues (including incremental costs for HDVs fueled by natural gas, availability of fueling infrastructure, cost-effectiveness in view of average vehicle usage, vehicle residual value, vehicle weight, and vehicle refueling time).

Current state of the market

At present, HDVs in the United States are fueled almost exclusively by petroleum-based diesel fuel [53]. In 2010, use of petroleum-based diesel fuel by HDVs accounted for 17 percent (2.2 million barrels per day) of total petroleum consumption in the transportation sector (12.8 million barrels per day) and 12 percent of the U.S. total for all sectors (18.3 million barrels per day). Consumption of petroleum-based diesel fuel by HDVs increases to 2.3 million barrels per day in 2035 in the AEO2012 Reference case, accounting for 19 percent of total petroleum consumption in the transportation sector (12.1 million barrels per day) and 14 percent of the U.S. total for all sectors (17.2 million barrels per day).

Historically, natural gas has played a negligible role as a highway transportation fuel in the United States. In 2010, there were fewer than 40,000 total natural gas HDVs on the road, or 0.4 percent of the total HDV stock of nearly 9 million vehicles. Sales of new HDVs fueled by natural gas peaked at about 8,000 in 2003, and fewer than 1,000 were sold in 2010 out of a total of more 360,000 HDVs sold. With relatively few vehicles on the road, natural gas accounted for 0.3 percent of total energy used by HDVs in 2010.

As of May 2012, there were 1,047 CNG fueling stations and 53 LNG fueling stations in the United States, with 53 percent of the CNG stations and 57 percent of the LNG stations being privately owned and not open to the public [54]. Further, the stations were not evenly distributed across the United States, with 22 percent (227) of the CNG stations and 68 percent (36) of the LNG stations located in California. In comparison, nationwide, there were more than 157,000 stations selling motor gasoline in 2010 [55].


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Developments in natural gas and petroleum markets in recent years have led to significant price disparities between the two fuels and sparked renewed interest in natural gas as a transportation fuel. Led by technological breakthroughs in the production of natural gas from shale formations, domestic production of dry natural gas increased by about 14 percent from 2008 to 2011. In the AEO2012 Reference case, U.S. natural gas production (including supplemental gas) increases from 21.6 trillion cubic feet in 2010 to 28.0 trillion cubic feet in 2035. Further, although the world market for oil and petroleum products is highly integrated, with prices set in the global marketplace, natural gas markets are less integrated, with significant price differences across regions of the world. With the recent growth in U.S. natural gas production, domestic natural gas prices in 2012 are significantly lower than crude oil prices on an energy-equivalent basis (Figure 34).

Fuel and infrastructure issues

Even when it appears that an emerging technology can be profitable with significant market penetration, achieving significant penetration can be difficult and, potentially, unattainable. Refueling stations for NGVs are unlikely to be built without some assurance that there will be sufficient numbers of NGVs to be refueled, soon enough to allow for recovery of the capital investment within a reasonable period of time. In terms of estimating the prices that will be charged for NGV fuels beyond the cost of the dry natural gas itself, and the issue of expected utilization rates, there are additional uncertainties related to capital and operating costs, taxes, and the potential of prices being set on the basis of the prices of competing fuels.

Basic fuel issues

Diesel fuel falls into the category of distillate fuels, which have constituted more than 25 percent of U.S. refinery output in recent years. The cost of diesel fuel is linked closely to the value of crude oil inputs for the refining process. In 2011, the spot price of Gulf Coast ultra-low sulfur diesel fuel averaged $2.97 per gallon. The wholesale diesel price reflects crude oil costs, as well as the difference between the wholesale price at the refinery gate and the cost of crude oil input, commonly referred to as the "crack spread," which reflects the costs and profits of refineries.

Beyond the wholesale price, the pump price of diesel fuel reflects distribution costs, Federal, State, and local fuel taxes, retailing costs, and profits. For diesel fuel, with an average energy content of 138,690 Btu per gallon, the 2011 national average retail price of $3.84 per gallon is equivalent to about $27.80 per million Btu.

Although early models of NGVs sometimes were less fuel-efficient than comparable diesel-fueled vehicles, current technologies allow for natural gas to be used as efficiently as diesel in HDV applications. Therefore, comparisons between natural gas and diesel fueling costs can be based on the price of energy-equivalent volumes of fuel. For this analysis, the cost and price of natural gas fuels are expressed in terms of diesel gallon equivalent (dge). For example, with an energy content of approximately 84,820 Btu per gallon, 1 gallon of LNG is equivalent in energy terms to 0.612 gallons of diesel fuel.

Fuel costs for LNG and CNG vehicles depend on the cost of natural gas used to produce the fuels, the cost of the liquefaction or compression process (including profits), the cost of moving fuel from production to refueling sites (if applicable), taxes, and retailing costs. Costs can vary with the scale of operations, but the significant disparity between current natural gas and crude oil prices suggests that the cost of CNG and LNG fuels in dge terms could be significantly below the price of diesel fuel.

There are different wholesale natural gas prices and capital costs associated with CNG and LNG stations. CNG retail stations, which typically have connections to the pipeline distribution network and thus require compression equipment and special refueling pumps, are likely to pay prices for natural gas that are similar to those paid by commercial facilities. For LNG stations, insulated LNG storage tanks and special refueling pumps are needed. LNG typically would be delivered from a liquefaction facility that, depending on its scale, would pay a natural gas price similar to the prices paid by electric power plants. The costs of liquefying and transporting the fuel to the retail station would ultimately be included in the retail price.

In a competitive market, retail fuel prices should reflect costs, including input, processing, distribution, and retailing costs, normal profit margins for processors, distributors, and retailers, and taxes. For example, the market for diesel fuel, which is produced by a large number of foreign and domestic refiners and is sold through numerous distributors and retail outlets, generally is considered to be a competitive market, in which retail prices follow costs.

CNG and LNG markets, at least in their initial stages, may not be as competitive as diesel fuel markets. For example, at public refueling stations, LNG and CNG currently sell at prices significantly higher than would be suggested by a long-term analysis of cost-based pricing. According to DOE's April 2012 "Clean Cities Alternative Fuel Price Report," the average nationwide nominal retail price for LNG was $3.05 per dge, and the average for CNG was $2.32 per dge [56].

If the use of LNG and/or CNG to fuel HDVs starts to grow, it is likely to take some time before fuel production and refueling infrastructure become sufficiently widespread for competition among fuel providers alone to assure that fuel prices are more closely linked to cost-based levels. However, even without many fuel providers, operators of an LNG and/or CNG vehicle fleet may be in a position to negotiate cost-based fuel prices with refueling station operators seeking to lock in demand for their initial investments in refueling infrastructure. Such arrangements provide an alternative to reliance on centrally fueled fleets as a means of circumventing the problem of how to introduce NGVs and natural gas refueling infrastructures concurrently.

Build-out process for refueling stations

It is not clear how NGVs and an expanded natural gas refueling infrastructure ultimately will evolve. One view is that a "hub-and-spoke" model for refueling infrastructure will expand sufficiently in multiple areas for a point-to-point system to take hold eventually. The "hubs" in the model would include the local refueling infrastructure, currently in place primarily to support local fleets. The "spokes" would ensure that refueling infrastructure is in place on the main transportation corridors connecting the hubs.

Several regional efforts are in place to encourage such "hub-and-spoke" growth for NGV refueling facilities. They include the Texas Clean Transportation Triangle [57], a strategic plan for CNG and LNG refueling stations between Dallas, San Antonio, and Houston; and the Interstate Clean Transportation Corridor [58], which aims to provide LNG fueling stations between such major western cities as Los Angeles, Las Vegas, Phoenix, Reno, Salt Lake City, and San Francisco. There also is a plan for a Pennsylvania Clean Transportation Corridor [59], which would provide CNG and LNG fueling stations between Pittsburgh, Harrisburg, Scranton, and Philadelphia.

In several corridors, Federal and State incentives are subsidizing both the construction of refueling stations and the production of heavy-duty LNG vehicles [60], in an effort to ensure that both demand and supply will be in place concurrently. A major question is whether gaps between isolated targeted markets can be bridged to provide a nationwide refueling structure that will allow heavy-duty NGVs to travel almost anywhere.

Sufficiency of demand for refueling to cover capital outlay

The cost of providing refueling services for NGVs depends on a number of factors and is distinctly different for CNG and LNG vehicles. Investment decisions are likely to be based on levels of demand. NGV refueling capability can be added at an existing facility or at a separate dedicated facility (which would require an additional investment). The costs depend in part on the number of fueling hoses added. LNG stations in particular benefit from higher volumes, but they also require significant additional land to accommodate storage tank(s), and they must satisfy special safety requirements —both of which add costs that can vary significantly from place to place. One added cost in operating an LNG station is the need for safety suits and specialized training for station attendants who dispense the fuel.

LNG typically is delivered to refueling stations via tanker truck from a separate liquefaction facility, the proximity of which is a major factor in the cost and frequency of deliveries. Any significant expansion of LNG refueling capacity also will require expanded liquefaction capacity, which currently is not sufficiently dispersed throughout the country to support a nationwide LNG refueling infrastructure. Although there are several dedicated large-scale natural gas liquefaction facilities in the United States, primarily in the West, there are smaller liquefaction plants and LNG storage tanks currently in use for meeting peakshaving needs of utilities and pipelines during times of high demand. There are more than 100 such facilities in the United States, with a combined liquefaction capacity of more than 6 billion cubic feet per day. The majority are concentrated in the Northeast and Southeast [61].

Retail prices and taxes for LNG and CNG fuels

Even if the costs are fully known, retail prices for CNG and LNG transportation fuels remain uncertain, given questions about whether dispensers would charge higher prices in order to recover costs more rapidly if the facility were underutilized or would set prices to be competitive with the price of diesel. Prices charged at private stations for fleet vehicles presumably would be based on cost. With the number of refueling stations limited, competition between retailers is likely to be limited, at least initially. However, NGV refueling stations presumably would want to provide sufficient economic incentive in terms of the competitiveness of fuel prices to encourage more purchases of NGVs. NGV fuel is taxed at State and Federal levels. Currently, on a Federal level, CNG is taxed at the same rate as gasoline on an energy-equivalent basis ($0.18 per gasoline gallon equivalent, or $0.21 per dge). However, LNG is taxed at a higher effective rate than diesel fuel, because it is taxed volumetrically at $0.24 per LNG gallon equivalent ($0.40 per dge) rather than on the basis of energy content [62]. State taxes vary, averaging $0.15 per dge for CNG and $0.24 per dge for LNG.

Vehicle Issues

Incremental vehicle cost

NGVs have significant incremental costs relative to their diesel-powered counterparts because of the need for pressurization and insulation of CNG or LNG tanks and the lower energy content of natural gas as a fuel. Total incremental costs relative to diesel HDVs range from about $9,750 to $36,000 for Class 3 trucks (GVWR 10,001 to 14,000 pounds), $34,150 to $69,250 for Class 4 to 6 trucks (GVWR 14,001 to 26,000 pounds), and $49,000 to $86,125 for Class 7 and 8 trucks (GVWR greater than 26,001 pounds). The incremental costs of heavy-duty NGVs depend in large part on the volume of the vehicle's CNG or LNG storage tank, which can be sized to match its typical daily driving range. Non-storage-tank incremental costs average about $2,000 for Class 3 vehicles, $20,000 for Class 4 to 6 vehicles, and $30,000 for Class 7 to 8 vehicles [63]. Fuel storage costs are about $350 per gallon diesel equivalent for CNG, with the incremental cost for Class 3 CNG vehicle storage tanks ranging between about $8,000 and $30,000; and about $475 per gallon diesel equivalent for LNG, with the incremental cost for Class 4 to 8 LNG vehicle storage tanks ranging between about $14,000 and $52,000. Natural gas fuel storage technology is relatively mature, leaving only modest opportunity for cost reductions.

Availability of fueling infrastructure

The absence of widespread public refueling infrastructure can impose a serious constraint on heavy-duty NGV purchases. Owners who typically refuel vehicles at a private central location do not face an absolute constraint based on infrastructure, however, and heavy-duty NGVs currently in operation have tended to be purchased by fleet operators who refuel consistently at a specific central location or in areas where their vehicles routinely operate on dedicated routes.

Cost-effectiveness with average vehicle usage

In order to take advantage of potential fuel cost savings from switching to NGVs, owners must operate the vehicles enough to pay back the higher incremental cost in a reasonable period of time. The payback period varies with miles driven and is shorter for trucks that are used more intensively. Payback periods for the upfront incremental costs of NGVs are greater than 5 years for Class 3 vehicles unless they are driven at least 20,000 to 40,000 miles per year, and for Class 7 and 8 vehicles unless they are driven at least 60,000 to 80,000 miles per year. Shorter payback periods, 3 years or less, may reflect typical owner expectations more accurately [64], but they require much more intensive use: around 60,000 to 80,000 miles annually for Class 3 vehicles and more than 100,000 miles annually for Class 7 and 8 vehicles. For example, for a Class 7 or 8 compression ignition NGV with average fuel economy of 6 miles per gallon (which has a similar fuel economy compared to a diesel counterpart) and an incremental cost of $80,000, the payback period would be just over 3 years if the vehicle were driven 100,000 miles per year, assuming a diesel fuel price of $4.00 per gallon and an LNG fuel price of $2.50 per gallon. If the same Class 7 or 8 vehicle were driven 40,000 miles per year, the payback period would be about 8 years. Further, without a widely available infrastructure, heavy-duty NGVs tend to be considered by centrally refueled fleets, which may have less mileage-intensive vehicle use.


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According to the Department of Transportation's Vehicle Inventory and Use Survey [65], last completed in 2002, a large segment of the HDV market simply does not drive enough to justify the purchase of an NGV (Figure 35). Around 30 percent of Class 3 vehicles and 75 percent of Class 7 and 8 vehicles are not driven enough to reach the 5-year payback threshold mentioned above. This is a significant portion of the market that would require either more favorable fuel economics or lower vehicle costs before the purchase of an NGV could be justified.

Other market uncertainties

Other factors may also affect market acceptance of heavy-duty NGVs. First, the purchase decision could be affected by the considerable additional weight of CNG or LNG tanks. For owners who typically "weight-out" a vehicle (driving with a full payload), adding heavy CNG or LNG tanks necessitates a reduction in freight payload. The EPA and NHTSA have estimated that about onethird of Class 8 sleeper tractors routinely are "weighted-out" [66].

A diesel tractor with 200 gallons of tank capacity and a fuel economy of 6 miles per gallon can drive 1,200 miles on a single refueling. The same tractor would need up to 110 dge of LNG tank capacity, at a considerable weight penalty and an incremental cost of more than $80,000, to allow for a range of about 650 miles on a single refueling. Because owner/operators typically stop several times per day, the reduction in unrefueled maximum range would not require additional breaks for vehicles with large CNG or LNG tanks. However, CNG and LNG vehicles that do not opt for large tanks because of either weight or incremental cost considerations might have to refuel more frequently.

Finally, the owner perception of the balance of risk and reward for large capital investment is an uncertainty. Higher upfront capital costs can prove economically prohibitive for some potential owners. Even if the payback period for an investment in natural gas vehicles seemed acceptable, financing constraints or returns available on competing investment options could preclude the purchase. Additionally, the residual value of natural gas HDVs could, in theory, affect market uptake. With little natural gas refueling infrastructure in existence, the potential resale market is constrained to owners of centrally operated fleets. However, lease terms tend to limit the importance of this factor.

The complex set of factors influencing the potential for natural gas as a fuel for HDVs includes several areas for which policy mechanisms have been discussed. Most policy debates to date have considered the possibility of subsidies to reduce the incremental cost of natural gas vehicles (for example, in Senate and House versions of the New Alternative Transportation to Give Americans Solutions Act [67]) and Federal grant-based or other financial support for fueling station infrastructure. In addition, market hurdles related to consumer acceptance or payback periods might also be addressed through loan guarantees or related financial support policies, both for the vehicles and for the refueling infrastructure.

HD NGV Potential case results

The AEO2012 HD NGV Potential case examines issues associated with expanded use of heavy-duty NGVs, under an assumption that the refueling infrastructure exists to support such an expansion. The HD NGV Potential case differs from an earlier sensitivity case completed as part of the Annual Energy Outlook 2010, which focused on possible subsidies to expand the market potential for heavy-duty NGVs and limited its attention to vehicles operating within 200 miles of a central CNG refueling facility.

The AEO2012 HD NGV Potential case permits expansion of the HDV market to allow a gradual increase in the share of HDV owners who would consider purchasing an NGV if justified by the fuel economics over a payback distribution with a weighted average of 3 years. The gradual increase in the maximum natural gas market share reflects the fact that a national natural gas refueling program would require time to build out. The natural gas refueling infrastructure is expanded in the HD NGV Potential case simply by assumption; it is not clear how (or whether) specific barriers to natural gas refueling infrastructure investment can be overcome.

Incremental costs for NGVs in the HD NGV Potential case differ from those in the Reference case. In the HD NGV Potential case, incremental costs are determined by assuming a set cost for CNG or LNG engines plus a CNG or LNG tank cost based on the average amount of daily travel and vehicle size class. The HD NGV Potential case includes separate delivered CNG and LNG fuel prices for fleet and nonfleet operators. Added per-unit charges to recover infrastructure are set and held constant in real terms throughout the projection period, based on the assumptions that refueling stations would be utilized at a sufficiently high rate to warrant the capital investment, and that the prices charged for the fuel would be cost-based (i.e., station operators would not set prices on the basis of prices for competing fuels). Motor fuels taxes are assumed to remain at their current levels in nominal terms, maintaining the higher energy-equivalent tax on LNG relative to diesel fuel.


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In defining CNG and LNG prices for the HD NGV Potential case, EIA examined current motor fuel taxes and any charges added to the commodity price of dry natural gas sold at private central refueling stations (fleets) and at retail stations where actual data were available. Accordingly, an HDV Reference case was developed from the AEO2012 Reference case, by including the updated fleet and retail CNG and LNG prices, to provide a consistent basis for comparison with the HD NGV Potential case (Figure 36). The HDV Reference case assumes that Class 3 through 6 vehicles use CNG, obtained from either fleet operators (using fleet prices) or nonfleet operators (using retail prices), and that Class 7 and 8 vehicles, both fleet and nonfleet, use LNG.


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Sales of heavy-duty NGVs rise dramatically in the HD NGV Potential case, based on the national availability of refueling infrastructure and expanded market potential (Figure 37). Sales of new heavy-duty NGVs increase from 860 in 2010 (0.2 percent of total new HDV sales) to about 275,000 in 2035 (34 percent of total new vehicle sales), as compared with 26,000 in the HDV Reference case (3 percent of total new HDV sales). New heavy-duty NGVs gradually claim a more significant share of the vehicle stock, from 0.4 percent in 2010 to 21.8 percent (2,750,000 vehicles) in 2035, as compared with 2.4 percent (300,000 vehicles) in 2035 in the HDV Reference case.


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As a result of the large projected increase in sales of new heavy-duty NGVs, natural gas demand in the HDV sector rises from about 0.01 trillion cubic feet in 2010 to 1.8 trillion cubic feet in 2035 in the HD NGV Potential case, as compared with 0.1 trillion cubic feet in the HDV Reference case (Figure 38). The natural gas share of total energy use by HDVs grows from 0.2 percent in 2010 to 32 percent in 2035 in the HD NGV Potential case, compared with 1.6 percent in the HDV Reference case.

Roughly speaking, about 1 trillion cubic feet of natural gas consumed per year replaces 0.5 million barrels per day of petroleum and other liquids. Thus, natural gas consumption by HDVs in the HD NGV Potential case displaces about 850,000 barrels per day of petroleum and other liquids consumption in 2035 (Figure 39). Without a major impact on world oil prices, which is not expected to result from the gradual but significant adoption of natural gas as a fuel for U.S. HDVs, nearly all the reduction in petroleum and other liquids use by U.S. HDVs would be reflected by a decline in imports.


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In the HD NGV Potential case, projected total U.S. natural gas consumption in 2035 is 1.4 trillion cubic feet (5 percent) higher than in the Reference case, as the increase in natural gas use by vehicles is partially offset by lower consumption in other sectors, in response to higher natural gas prices (Figure 40). The electric power and industrial sectors account for the bulk of the consumption offsets, as their 2035 natural gas use is, respectively, 0.3 trillion cubic feet (3.1 percent) and 0.2 trillion cubic feet (2.7 percent) lower than in the Reference case.

In 2035, U.S. domestic natural gas production in the HD NGV Potential case is 1.1 trillion cubic feet (3.9 percent) higher than in the HDV Reference case. The higher level of natural gas production needed to support the growth in HDV fuel use results in a 10-percent increase in natural gas prices—$0.76 per million Btu (2010 dollars)—at the Henry Hub in 2035 in comparison with the HDV Reference case. Percentage increases in delivered natural gas prices to other sectors, which include transmission and distribution costs that are not affected by higher prices to producers, are smaller, with delivered natural gas prices increasing by 4.9 percent in the residential sector, 5.9 percent in the commercial sector, 8.9 percent in the industrial sector, and 7.9 percent in the electricity generation sector in comparison with the HDV Reference case in 2035.


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7. Changing structure of the refining industry

Petroleum-based liquid fuels represent the largest source of U.S. energy consumption, accounting for about 37 percent of total energy consumption in 2010. The mix and composition of liquids, however, have changed in recent years in response to changes in regulations and other factors, and the structure of the liquid fuels production industry has changed in response [68]. The changes in the industry require that analytical tools used for market analysis of the liquid fuels produced by the industry also be reevaluated.

In recognition of the fundamental changes in the liquid fuels production industry, EIA is developing a new Liquid Fuels Market Module (LFMM), which it intends to use in place of the existing Petroleum Market Module (PMM) to produce the Annual Energy Outlook 2013. The LFMM will allow EIA to address more adequately the current and anticipated domestic and international market environments, to analyze the implications of emerging technologies and fuel alternatives, and to evaluate the impact of complex emerging energy-related policy, legislative, and regulatory issues. Some results from an early simulation of the LFMM, the LFMM case, are provided here.

The landscape for both production and consumption of liquid fuels in the United States continues to evolve, leading to changes in the mix of liquid fuel feedstocks, with greater emphasis on renewable fuels. The liquid fuels markets are not homogeneous; regional differences have become more pronounced. Furthermore, U.S. policymakers are paying more attention to evolving markets for liquid fuels and the potential for improving the efficiency of liquid fuels consumption, reducing GHG emissions associated with the production and consumption of liquid fuels, and improving the Nation's energy security by reducing reliance on imports. Major industry changes and their implications are discussed below.

New feedstocks and technologies

Over the past 25 years, the U.S. liquid fuels production industry has changed from being based primarily on domestic petroleum to using a variety of feedstocks and finished products from sources around the world. Regulatory and policy changes have resulted in the use of feedstocks other than crude oil, such as natural gas and renewable biomass, and could lead to the use of other feedstocks (such as coal) in the coming years. These changes have resulted in a transition from a relatively straightforward supply chain relying on crude oil and finished products to an increasingly complex system, which must be reflected in models to produce valid projections.

The term "liquid fuels production industry" refers to all the participants in the production and delivery of liquid fuels, from production of feedstocks to delivery of both liquid and non-liquid end-use products to customers. It includes participants in the more traditional petroleum refining sector, relying on crude oil as a primary feedstock; in the nonpetroleum fossil fuel sector, using natural gas and coal to produce liquid fuels; and in the biofuel sector, using biomass to produce biofuels such as ethanol and biodiesel. The complexity of the industry supply chain is inadequately described by nomenclature predicated on specific feedstocks (e.g., crude oil), processes (e.g. refinery hydrotreating), or end-use products (e.g., diesel fuel and gasoline), which fail to capture the significant economic implications of non-liquid-fuel products for the industry.

The components of the U.S. liquid fuels production industry—including petroleum, nonpetroleum fossil fuel, and biofuel sectors—are shown in Figure 41, along with examples illustrating processes and products. Figure 41 also highlights the differences between the new expanded "liquid fuels production industry," which the entire figure represents, and the less extensive "petroleum and other liquids industry," the components of which are highlighted in red.


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Nonpetroleum feedstocks are used in many new and emerging technologies, such as fermentation, enzymatic conversion, GTL, CTL, biomass-to-liquids, and algae-based biofuels. The new technologies provide valuable non-liquid-fuel co-products—such as chemical feedstocks, distiller's grains, and vegetable oils—that significantly affect the economics of liquid fuels production. The emergence of renewable biofuels has led to the introduction of midstream components such as ethanol and biodiesel, which are blended with petroleum products such as gasoline and diesel fuel during the final stages of the supply chain at refineries, blending sites, or retail pumps. The increase in biofuel production has led to new distribution channels and infrastructure investments and recognition of new production regions, such as the high concentration of ethanol producers in the Midwest. The new LFMM will include the entire liquid fuels production industry, providing greater flexibility for integrating new technologies and their associated products into the liquid fuels supply chain, better reflecting the industry's evolution.

In AEO2012, the "petroleum and other liquids" category includes the petroleum sector and those non-petroleum-based liquid products shaded in red in Figure 41, such as ethanol and biodiesel, which are blended with petroleum products to make enduse liquid fuels. Because this approach treats nonpetroleum products as exogenously produced feedstocks, the petroleum and other liquids concept used in AEO2012 does not explicitly link the industrial processes that yield nonpetroleum liquid fuels (nor their feedstocks, nonpetroleum fossil fuels and biomass) with liquids production. The more inclusive definition of the liquid fuels production industry illustrated in Figure 41 is necessary to capture and model the full range of product flows and economic drivers of decisionmaking by firms involved in this complex industry.

Nonpetroleum feedstocks do not exist in traditional liquid form, and they require a different analytical approach for analysis of their conversion to liquid fuels. Traditional volumetric measures, such as process gain, are not applicable to an analysis of the liquids produced from nonpetroleum feedstocks. It is more appropriate to use the fundamental principles of mass and energy balance to evaluate process performance, market penetration, and supply/demand dynamics when the uses of nonpetroleum feedstocks are being examined. This approach allows for comparison among the different sectors of the liquid fuels production industry. Figure 42 provides an overview of the liquid fuels production industry on a mass basis.


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The variety and changing dynamics of nonpetroleum feedstocks and the resulting end-use products also are illustrated in Figure 42. In recent history, biomass has taken significant market share from petroleum feedstocks, correlated with shifts in product yields—a trend that is expected to continue in the future, along with further diversification into nonpetroleum fossil feedstocks. In 2000, nearly all liquid fuels were derived from petroleum. Since then, however, the share of petroleum has dropped while the shares of biomass and other fossil fuels have increased. In 2011, the combined biomass and other fossil fuels share of feedstocks was almost 18 percent, measured on a mass basis. In the LFMM case, the biomass share of feedstock consumption increases to 30 percent in 2035, and the petroleum share falls to about 57 percent. The biomass share of end-use products increases only to 10 percent in 2035, reflecting differences in conversion efficiencies between petroleum and nonpetroleum feedstocks, as highlighted by the growing but still small nonpetroleum content of gasoline and distillates.

Changes in crude oil types

Economic growth in the developing countries over the past decade has increased global demand for crude oil. Over the same period, new technologies for recovering crude oil, changes in the yields of existing crude oil fields, and a global increase in exploration have expanded the number and variety of crude oil types. The United States currently imports more than 100 different types of crude oil from around the world, including a growing number from Canada and Mexico, with a wide range of API gravities (between 10.4 and 64.6) and sulfur content (between 0.02 and 5.5 percent). Consequently, it is difficult to group them according to the categories used in the existing NEMS PMM. A new and more comprehensive representation of the numerous crude types is required, as well as flexibility to add new sources.

The United States increasingly is using crude oil extracted from oil sands and oil shale, as well as other nontraditional petroleum sources that require additional processing. The new sources have led to shifts in crude oil flows and changes in the distribution network. The increased variety and regional availability of certain crude types has created new market dynamics and pricing relationships that are difficult to capture using existing methods, especially considering the rapid emergence of "tight oil" production, which, to date, has been substantially different in quality from the crude oil previously expected to be available to U.S. refineries. For example, light sweet crude oil sourced from the Bakken shale formation in North Dakota has been sold to refiners on the Gulf Coast in recent years at a substantial discount relative to heavier imported crudes, because of limitations in the delivery infrastructure.

The growing number of sources, changes in characteristics of crudes, and shifting price relationships in crude oil markets require an updated representation of different crude types in NEMS. The model also needs an updated and more dynamic representation of the crude oil distribution network in order to provide better estimates of changes in crude oil flows and potential new regional sources in the future.

Regional updates

The Petroleum Administration for Defense Districts (PADD), which were developed by the Department of Defense during World War II, have been traditionally used as the regional framework for analyzing liquid fuels production. Because the topology and configuration of the liquid fuels market have changed significantly, and new feedstocks have emerged from regions that are subsets of PADDs, the regional definitions for processing liquid fuels need to be redefined. Toward this end, EIA has redefined the refining regions on the basis of market potential and availability of feedstocks. The redefined regions will be further divided as market conditions change. The new regional configuration of the NEMS LFMM will use eight domestic regions and adds a new international region (Figure 43).


Each new refining region has unique characteristics. PADD 1 has been left unchanged in the new configuration, but can be further divided based on recent and possible future refinery closures and shifts in imports from Europe. PADD 2 was subdivided into the Great Lakes and Inland regions due to the concentrated production of biofuels and access to Canadian crudes. PADD 3 was divided into the Gulf Coast and Inland regions due to the inability of the interior refineries to handle heavy sour crude. PADD 4 was left unchanged. California was separated from the rest of PADD 5 due to the State's unique gasoline and diesel specifications and regulatory policies. A new international region was added comprising Maritime Canada and the Caribbean.

The modified regional refinery format will allow EIA's analyses to more accurately capture regional refinery trends and potential regional regulatory policies that affect the liquid fuels market. For example, California often enacts its own regulatory policies earlier than the rest of its PADD region, and its individual actions could not be represented accurately in the PADD framework. As a further example, recent refinery closures and other developments on the East Coast evidence the need for a dynamic and flexible representation of the refinery regions that supply the U.S. market.

Changing product markets

Crude oil is still the most important and valuable feedstock for the liquid fuels production industry. More than 650 refineries, located in more than 116 countries, have the capacity to refine 86 million barrels of crude oil per day. In the past, most of the complex refineries that could transform a wide variety of crudes into numerous different products to meet demand were located in the United States. Now, however, complex refineries are becoming more common in Europe and the developing countries of Asia and Latin America, and the products from export-focused merchant refineries in those countries have the potential to compete with U.S. products. An example is the regular export of surplus gasoline from refiners in Europe to the Northeast United States.

Traditional measures of profitability, such as the 3-2-1 crack spread, require modification in NEMS in view of the changing market for liquid fuels. The calculation of margins requires consideration of multiple feedstocks and multiple products produced in refineries, biorefineries, and production facilities for nonpetroleum fuels. Operators in the liquid fuels production industry are faced with a choice of investing in facilities and modifying their configurations to meet changing market demand, or exchanging domestic feedstocks and products with merchant refineries in a global market. For example, increased U.S. efficiency standards for LDVs have reduced demand for gasoline and increased demand for diesel fuel, which has led to more gasoline exports and more investment to increase diesel output from domestic refineries.

EIA's new LFMM representation of the liquid fuels production industry will need to account for global competition for both crude oil and end-use products. As refineries around the world become larger and more complex, smaller refineries may not be able to compete with imports produced at low margins. Therefore, it is necessary to have a more robust and dynamic representation of the liquid fuel producers, as well as additional flexibility to adjust inputs, refinery configurations, and crude and product demands as the industry evolves.

Regulations and policies

It is important for EIA's models to represent existing laws and regulations accurately, in addition to being flexible enough to model proposed laws and regulations. One of the most important regulations currently affecting the U.S. liquid fuels industry is the RFS, which not only has increased production and use of renewable fuels, but also has changed how fuels are distributed and consumed both here and abroad. The RFS mandates the use of biofuels that are consumed primarily as blends with traditional petroleum products, such as gasoline and diesel fuel (Figure 44). Because of their chemical properties, ethanol, biodiesel, and other first-generation biofuels generally require their own distribution networks or investments in new infrastructure. In addition, because they are produced outside traditional petroleum refineries, the new products are added at different points in the supply chain, either at blending terminals or at retail sites via blender pumps. Modeling those changes requires an update to the traditional PADD regional format used to represent the liquid fuels market, as well as an update to the transportation network that distributes the fuels.


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The RFS also requires consideration of many new technologies and increases the complexity of decisionmaking in the liquid fuels production industry. Fuel volumes by product are mandated by the RFS. For each year, regulated parties must make the decision to either buy the available renewable fuels in proportion to their RFS requirements or purchase the necessary credits. For example, the cellulosic biofuel credit price is set as the greater of $0.25 cents per gallon or $3.00 per gallon minus the wholesale gasoline price, both based on 2008 real dollars. The RFS also contains a general waiver based on technical, economic, or environmental feasibility that the EPA Administrator has discretionary authority to acton on to reduce the mandates for advanced and total biofuels.

In addition, use of biofuels has broader implications for the global market, in terms of both feedstocks and the fuels themselves. A good example is ethanol. Its primary feedstocks are corn and sugar, both of which are global commodities in high demand as food sources as well as biofuel feedstocks. U.S. ethanol producers compete globally in other countries, such as Brazil, that have their own renewable fuels mandates.

Finally, coproducts from biofuels production have a significant influence on their economics. For example, the value of the dried distillers grains coproduct from corn ethanol production, which can be sold to the agricultural sector, can offset up to one-third of the purchase cost for the corn feedstock. Thus, the economics of biofuels production are complex, and they require a model that accounts for numerous investment decisions, feedstock markets, and global interactions. The RFS adds to the liquids fuels market a number of fuel technologies, midstream products and coproducts, evolving regional production and distribution networks, and complex domestic and global market interactions.

The U.S. liquid fuels market has evolved substantially over the past 20 years in terms of available fuel types, production regions, global market dynamics, and regulations and policies. The transition has resulted in a liquid fuels market that uses both petroleum and nonpetroleum-based inputs, distributes them around the country by a variety of methods, and makes investment decisions based on both economic and regulatory factors. The changes are significant enough to make the framework and metrics used in traditional refinery models no longer adaptable or robust enough for proper modeling of the transformed liquid fuels market. EIA currently is in the process of updating its framework to allow better representation of the transformed industry.

8. Changing environment for fuel use in electricity generation

Introduction

The AEO2012 Reference case shows considerable change in the mix of generating technologies over the next 25 years. Coal remains the dominant source of electricity generation in the Reference case, with a 38-percent share of total generation in 2035, but that is down from shares of 45 percent in 2010 and nearly 50 percent in 2005. The decrease in coal's share of total generation is offset primarily by increases in the shares of natural gas and renewables. Key factors contributing to the shift away from coal are sustained low natural gas prices, higher coal prices, slow growth in electricity demand, and the implementation of Mercury and Air Toxics Standards (MATS) [69] and Cross-State Air Pollution Rule (CSAPR) [70]. These factors influence how existing plants are used, which plants are retired, and what types of new plants are built.

Fuel prices and dispatch of power plants

The price of fuel is a major component of a power plant's variable operating costs [71]. The fuel-related variable cost of generating electricity is a function of the fuel price and the efficiency of the plant's conversion of the fuel into electricity, also referred to as the heat rate. Although natural gas prices declined dramatically in the second half of 2011 and the first half of 2012, coal-fired power plants have generally had the advantage of lower fuel prices and the disadvantage of higher heat rates in comparison to combined-cycle plants fueled by natural gas.

Power plants are dispatched primarily on the basis of their variable costs of operation. Plants with the lowest operating costs generally operate continuously. Plants with higher variable costs are brought on line sequentially as demand for generation increases. Because fuel prices influence variable costs, changes in fuel prices can affect the choice of plants dispatched. For instance, if the price of natural gas decreases, the variable costs for combined-cycle plants may fall below those for competing coal-fired plants, and, as a result, the combined-cycle plant may be dispatched before the coal-fired plant. Coal and natural gas plants can vary their outputs on the basis of fuel prices, but there are some cases in which plants may cycle off completely until they can be operated economically. In order to examine the overall impacts of changes in projected fuel price trends on the electric power sector, AEO2012 includes alternative cases that assume higher and lower prices for natural gas and coal.

Demand for electricity

Electricity demand determines how much generating capacity is needed. When demand increases, plants with higher operating costs are brought into service, increasing average operating costs and, as a result, average electricity prices. Higher prices, in turn, provide economic incentives for the construction of new capacity. Conversely, when demand declines, plants with higher operating costs are taken off line or run at lower intensities, and the economic incentives for new plant construction are reduced. If a plant is not profitable, the owner may decide to retire it.

Mercury and Air Toxics Standards and Cross-State Air Pollution Rule

Both MATS and CSAPR are included in the AEO2012 Reference case [72]. Both rules have significant implications for the U.S. generating fleet, especially coal-fired power plants. MATS requires all U.S. coal- and oil-fired power plants with capacities greater than 25 megawatts to meet emission limits consistent with the average performance of the top 12 percent of existing units—known as the maximum achievable control technology. MATS applies to three pollutants: mercury, hydrogen chloride (HCl), and fine particulate matter (PM2.5). HCl and PM2.5 are intended to serve as surrogate pollutants for acid gases and nonmercury metals, respectively. CSAPR is a cap-and-trade program that sets caps on sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions from all fossil-fueled plants greater than 25 megawatts in 28 States in most of the eastern half of the United States. CSAPR is scheduled to begin in 2012, although implementation was delayed by a court-issued stay at the time this article was completed [73]. See also "Cross-State Air Pollution Rule" in the "Legislation and regulations" section of this report.

Although the two rules differ in their makeup and the pollutants covered, the technologies that can be used to meet their requirements are not mutually exclusive. For instance, in order to meet the MATS acid gas standard, it is assumed that coal-fired plants without appropriate existing controls will need to install either flue-gas desulfurization (FGD) or dry sorbent injection (DSI) systems, which also reduce SO2 emissions. Therefore, by complying with the MATS standards for acid gases, plants will lower overall SO2 emissions, facilitating compliance with CSAPR.

AEO2012 assumes that all coal-fired power plants will be required to reduce mercury emissions to 90 percent below their precontrol levels in order to comply with MATS. The AEO2012 NEMS explicitly models mercury emissions from power plants. Reductions in mercury emissions can be achieved with a combination of FGDs and selective catalytic reduction, which is primarily used to reduce SO2 and NOx emissions, or by installing activated carbon injection (ACI) systems. FGD systems may be effective in reducing mercury emissions from bituminous coal (due to its chemical makeup), but ACI systems may be necessary to remove mercury emissions from plants burning subbituminous and lignite coal.

NEMS does not explicitly model emissions of acid gases or toxic metals other than mercury. In order to represent the MATS limits for those emissions, AEO2012 assumes that plants must install either FGD or DSI systems to meet the acid gas standard and, in the absence of a scrubber, a full fabric filter to meet the MATS standard for nonmercury metals. AEO2012 assumes that the appropriate control technologies will be installed by 2015 in order to meet the MATS requirements.

DSI and wet and dry FGD systems are technologies that will allow plants to meet the MATS standards for acid gases. As of 2010, 43 percent of U.S. generating capacity already had FGDs installed [74]. For a number of the remaining, uncontrolled plants, operators will need to assess the effectiveness of installing FGD or DSI systems to comply with MATS. There are economic and engineering tradeoffs between the two technologies. FGD systems require significant upfront investment but have relatively low operating costs. DSI systems generally do not require significant capital expenses but may use significant quantities of sorbent to operate effectively, which increases their operating costs. Waste disposal for DSI also may be a significant variable cost, whereas the waste products from FGD systems can be sold as feedstock for industrial processes.

The EPA set an April 2015 compliance deadline for MATS, but the rule allows State environmental permitting agencies to extend the deadline by a year. Beyond 2016, the EPA stated that it will handle noncompliant units that need to operate for reliability purposes on a case-by-case basis [75]. AEO2012 assumes that all plants will comply with MATS by the beginning of 2015.

Economics of plant retirements

The decision to retire a power plant is an economic one. Plant owners must determine whether a plant's future operations will be profitable. Environmental regulations, low natural gas prices, higher coal prices, and future demand for electricity all are key factors in the decision. Coal plants without FGD systems and with high heat rates, high delivered coal costs, and strong competition from neighboring natural gas plants in regions with slow growth in electricity demand may be especially prone to retirement.

Greenhouse gas policy in AEO2012

Uncertainty about possible future regulation of GHG emissions will continue to influence investment decisions in the power sector. Despite a lack of Congressional action, many utilities include simulations with a future CO2 emissions price when evaluating long-term investment decisions. A carbon price would increase the cost of generation for all fossil fuel plants, but the largest impact would be on coal-fired plants. Thus, plant owners could be reluctant to retrofit existing coal plants to control for non-GHG pollutants, given the possibility that GHG regulations might be enacted in the near future. This uncertainty may influence the assumptions plant owners make about the economic lives of particular facilities.

In the Reference case, the costs of environmental retrofits are assumed to be recovered over a 20-year period. Two alternative cases assume that the costs would be recovered over 5 years, reflecting concern that future laws or regulations aimed at limiting GHG emissions will have significant negative effects on the economics of investing in existing coal plants.

AEO2012 also includes two alternative cases that assume enactment of an explicit GHG control policy. In each case, a CO2 price is applied across all sectors starting in 2013 and increased at a 5-percent annual real rate through 2035. The price starts at $25 per metric ton in the GHG25 case and $15 per metric ton in the GHG15 case. The CO2 price is applied across sectors and has a significant impact on the cost of generating electricity from fossil fuels, particularly coal.

Alternative cases


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In order to illustrate the impacts of the various influences on the electric power sector, AEO2012 includes several alternative cases that include varying assumptions about fuel prices, electricity demand, and the cost recovery period for environmental control equipment investments:

  • The Reference 05 case assumes that the cost recovery period for investments in new environmental controls is reduced from 20 years to 5 years.
  • The Low Estimated Ultimate Recovery (EUR) case assumes that the EUR per tight oil or shale gas well is 50 percent lower than in the Reference case, increasing the per-unit cost of developing the resource and, ultimately, the price of natural gas used at power plants (Figure 45).
  • The High EUR case assumes that the EUR per tight oil or shale gas well is 50 percent higher than in the Reference case, decreasing the per-unit cost of developing the resource and the price of natural gas for power plants.
  • The Low Gas Price 05 case combines the more optimistic assumptions about future volumes of shale gas production from the High EUR case with a 5-year recovery period for investments in new environmental controls.
  • The High Coal Cost case assumes lower mining productivity and higher costs for labor, mine equipment, and coal transportation, which ultimately result in higher coal prices for electric power plants.
  • The Low Coal Cost case assumes higher mining productivity and lower costs for labor, mine equipment, and coal transportation, which ultimately result in lower coal prices for electric power plants.
  • The Low Economic Growth case assumes lower growth rates for population and labor productivity, higher interest rates, and lower growth in industrial output, which ultimately reduce demand for electricity (Figure 46), which is reflected in electricity sales, relative to the Reference case.

  • figure data

  • The High Economic Growth case assumes higher growth rates for population and labor productivity. With higher productivity gains and employment growth, inflation and interest rates are lower than in the Reference case, and, consequently, economic output grows at a higher rate, ultimately increasing demand for electricity, which is reflected in electricity sales, relative to the Reference case.
  • In the GHG15 case, the CO2 price is set at $15 per metric ton in 2013 and increases at a real annual rate of 5 percent per year over the projection period. Price is set to target the same reduction in CO2 emissions as in the AEO2011 GHG Price Economywide case.
  • In the GHG25 case, the CO2 price is set at $25 per metric ton in 2013 and increases at a real annual rate of 5 percent per year over the projection period. Price is set to target the same dollar amount as in the AEO2011 GHG Price Economywide case.

Analysis results

Coal-fired plant retirements


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Significant amounts of coal-fired generating capacity are retired in all the alternative cases considered (Figure 47). (For a map of the electricity regions projected, see Appendix F.) In the Reference 05 case, 63 gigawatts of coal-fired capacity is retired through 2035, 28 percent higher than in the Reference case. In the High EUR case, 55 gigawatts of coal-fired capacity is retired, as lower wholesale electricity prices and competition from natural gas combined-cycle units makes the operation of some coal plants uneconomical. In the Low Economic Growth case, 69 gigawatts of coal-fired capacity is retired, because lower demand for electricity reduces the need for new capacity and makes investments in older plants unattractive.

The High Economic Growth case results in fewer retirements, as existing coal-fired capacity is needed to meet growing electricity demand, and higher economic growth pushes up natural gas prices. In the Low Coal Cost case, the lower relative coal prices increase the profit margins for coal-fired power plants, making it more likely that investments in retrofit equipment will be recouped over the life of the plants.

Coal-fired capacity retirements are concentrated in two North American Electric Reliability Corporation (NERC) regions: the SERC Reliability Corporation (SERC) region, which covers the Southeast region, and the Reliability First Corporation (RFC), which includes most of the Mid-Atlantic and Ohio Valley region [76]. Many coal-fired plants in those regions are sensitive to the factors that influence retirement decisions, as discussed above. In the SERC and RFC regions, which in 2010 accounted for 65 percent of U.S. coal-fired generating capacity, 43 percent of the coal-fired plants do not have FGD units installed. Coal plants in the RFC and SERC regions are fueled primarily by bituminous coal, generally the coal with the highest cost. Projected demand for electricity in the early years of the Reference case is low nationwide and, especially, in the RFC region, where demand in 2015 is slightly lower than in 2010. In both the GHG15 and GHG25 cases, even larger amounts of coal-fired capacity are retired by 2035 than in the non-GHG policy cases.

Generation by fuel
Coal

In all cases, generation from coal is lower in 2020 than in 2010. Higher coal prices, relatively low natural gas prices, retirements of coal-fired capacity, and slow growth in electricity demand are responsible for the decrease. Generation from coal is lower than in the Reference case in the Reference 05, High EUR, Low Gas Price 05, High Coal Cost, and Low Economic Growth cases as a result of additional retirements of coal-fired capacity, lower natural gas prices, higher coal prices, or lower electricity demand. In cases where the opposite assumptions are incorporated, coal-fired generation is higher.

Generation from coal begins to recover after 2020, as electricity demand and natural gas prices start to rise. The strongest increases in coal-fired electricity generation occur in the Low EUR, Low Coal Cost, and High Economic Growth cases. When lower natural gas prices, lower economic growth, and/or higher coal prices are assumed, coal-fired generation still increases after 2020 but at a slower rate. In all cases, utilization of existing coal-fired power plants increases, because there is no significant growth in new coal-fired capacity. In the most optimistic case, the High Economic Growth case, only 3.3 gigawatts of new coal-fired capacity is added from 2017 to 2035 [77].

Despite a declining share of the generation mix, coal still has the highest share of total electricity generation in 2035 in all non-GHG or High TRR cases. However, it never again reaches the 2010 share of 45 percent, even in the Low EUR case (where it reaches 40 percent in 2035). Conversely, the coal share of total generation in 2035 is 34 percent in the Low Gas Price 05 case. The lower coal share is offset by increased generation from natural gas, which grows significantly in all the cases. The natural gas share of total generation almost equals that of coal in the Low Gas Price 05 case. In the GHG15 and GHG25 cases, coal-fired generation drops to 16 percent and 4 percent, respectively, of the total generation mix in 2035, and in both cases generation from coal declines significantly as the explicit price on CO2 emissions increases costs. In the GHG15 and GHG25 cases, decreases in coal-fired generation are offset by a mix of natural gas, nuclear, and renewable generation.

Natural gas


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In the AEO2012 Reference case, electricity generation from natural gas in 2020 is 13 percent above the 2010 level, despite an increase of only 5 percent in overall electricity generation. Low natural gas prices result in greater utilization of existing combinedcycle plants as well as the addition of 16 gigawatts of natural gas combined-cycle capacity from 2010 to 2020. The same trends are amplifed in cases with lower natural gas prices and more coal-fired capacity retirements and muted in cases with higher natural gas prices and fewer coal-fired capacity retirements. Generation from combustion turbines does not change significantly across the cases, demonstrating that changes in the relative economics of coal and natural gas affect primarily the dispatch of combined-cycle plants to meet base and intermediate load requirements, not combustion turbines to meet peak load requirements.


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In the Reference case, 58 gigawatts of natural gas combinedcycle capacity is added from 2020 to 2035, causing an increase in generation from natural gas during the period (Figures 48 and 49). In the Low EUR and Low Coal Cost cases, growth in natural gas combined-cycle capacity is slower. Although generation from natural gas increases overall with the addition of new capacity, utilization of existing combined cycle plants drops slightly as higher natural gas prices reduce the frequency at which combined-cycle plants are dispatched.

In the GHG15 and GHG25 cases, electricity generation from natural gas exceeds generation from coal in 2020. Natural gas has one-half the CO2 emissions of coal, and at relatively low CO2 prices, natural gas generation is seen as an attractive alternative to coal. However, as CO2 prices rise over the projection period, the increasing cost of generating electricity with natural gas causes the growth in natural gas generation to slow. In the GHG25 case, natural gas combined-cycle plants with CCS play a role in CO2 mitigation, with 34 gigawatts of natural gas combined-cycle capacity added between 2022 and 2035.

Nuclear

Generation from nuclear power plants does not change significantly from Reference case levels in any of the non-GHG cases, due to the high cost of new nuclear plant construction relative to natural gas and renewables. In the GHG15 and GHG25 cases, nuclear power plants become more competitive with fossil plants, because they do not emit CO2 and are needed to replace coal-fired capacity that is retired due to the cost of CO2 emissions. In the GHG15 and GHG25 cases, generation from nuclear power is 57 percent and 121 percent higher, respectively, in 2035 than in 2010.

Renewables

Generation from renewable energy sources grows by 77 percent from 2010 to 2035 in the Reference case. Most of the growth in renewable electricity generation is a result of State RPS requirements, Federal tax credits, and—in the case of biomass—the availability of low-cost feedstocks. The change in renewable generation over the 2010-2035 period varies from a 102-percent increase in the High Economic Growth case to a 62-percent increase in the Low Economic Growth case. The largest growth in renewable generation is projected in the GHG15 and GHG25 cases, where renewable generation increases by about 150 percent from 2010 and 2035 in both cases. A price on CO2 emissions makes generation from renewables more competitive with fossil plants without CCS.

Installations of retrofit equipment


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As discussed above, it is assumed that all coal-fired plants must have either FGD or DSI systems installed by 2015 to comply with environmental regulations. Because retirement is the only other option, cases with more retirements have fewer retrofits and vice versa (Figure 50). In the Reference 05 and Low Gas Price 05 cases, the relative cost of FGD units is higher because of the short payback period, making DSI a relatively more attractive option.

Emissions

SO2 emissions are significantly below 2010 levels in 2015 in all cases, as a result of coal-fired capacity retirements and the installation of pollution control equipment to comply with MATS. AEO2012 assumes that a DSI system, combined with a fabric filter, will remove 70 percent of a coal plant's SO2 emissions, and an FGD unit 95 percent. As a result of the requirement for FGD or DSI systems, all coal plants larger than 25 megawatts that did not have FGD units installed in 2010 significantly reduce their SO2 emissions after 2015 by installing control equipment. In all cases, coal-fired generation is down overall, which also contributes to the decline in emissions. SO2 emissions increase after 2020 in all non-GHG cases, as coal-fired generation increases with rising natural gas prices. Because DSI and FGD retrofits do not remove all the SO2 from coal-fired power plant emissions, increases in coal-fired generation result in higher SO2 emissions, although they are still much lower than comparable 2010 levels. Also, the level of SO2 reduction is proportional to the amount of coal-fired generation, and therefore the cases with the highest projected levels of coal-fired generation also project the highest levels of SO2 emissions.

The projections for mercury emissions are similar. After a sharp drop in 2015, mercury emissions begin to rise slowly as coal-fired generation increases in all non-GHG cases. However, mercury emissions in 2035 still are significantly below 2010 levels, as the requirement for a 90-percent reduction in uncontrolled emissions of mercury remains binding throughout the projection.

NOx emissions are not directly affected by MATS, but both annual and seasonal cap-and-trade programs are included in CSAPR. Emissions reductions relative to 2010 levels are small throughout the projection period in most cases, mainly because compliance with CSAPR NOx regulations is required in only 26 States, and 2010 emissions levels already were close to the cap.

CO2 emissions from the electric power sector fall slightly in cases that project declines in coal use, but the largest reductions occur in the GHG15 and GHG25 cases. In the GHG15 case, CO2 emissions from the electric power sector are 46 percent below 2010 levels in 2035, and in the GHG25 case they are 76 percent below 2010 levels.

Electricity prices

Real electricity prices in 2035 are 3 percent above the 2010 level in the Reference case. The increase is relatively modest because natural gas prices increase slowly, and several alternatives for complying with the environmental regulations are available. When lower natural gas prices are assumed, real electricity prices decline relative to the Reference case. Both the GHG15 and GHG25 cases assume that costs for CO2 emission allowances are passed through directly to customers. Therefore, average electricity prices in the GHG15 and GHG25 cases in 2035 are 25 percent and 33 percent higher, respectively, than in the Reference case. The GHG15 and GHG25 cases do not include any of the rebates to electricity consumers included in some other GHG policy proposals, which would reduce the impact on electricity prices.

9. Nuclear power in AEO2012

In the AEO2012 Reference case, electricity generation from nuclear power in 2035 is 10 percent above the 2010 total. The nuclear share of overall generation, however, declines from 20 percent in 2010 to 18 percent in 2035, reflecting increased shares for natural gas and renewables.

In the Reference case, 15.8 gigawatts of new nuclear capacity is added from 2010 through 2035, including both new builds (a total of 8.5 gigawatts) and power uprates at operating nuclear power plants (7.3 gigawatts). A total of 6.1 gigawatts of nuclear capacity is retired in the Reference case, with most of the retirements coming after 2030. However, given the current uncertainty about likely lifetimes of nuclear plants now in operation and the potential for new builds, AEO2012 includes several alternative cases to examine the impacts of different assumptions about future nuclear power plant uprates and operating lifetimes.

Uprates

Power plant uprates involve projects that are intended to increase the licensed capacity of existing nuclear power plants and permit those plants to generate more electricity. The U.S. Nuclear Regulatory Commission (NRC) must approve all uprate projects before they are undertaken and verify that the reactors will be able to operate safely at higher levels of output. Power plant uprates can increase plant capacity by 1 to 20 percent, depending on the size and type of the uprate project. Capital expenditures may be small (e.g., installing a more accurate sensor) or significant (e.g., replacing key plant components, such as turbines).

In developing projections for nuclear power, EIA relies on both reported data and estimates. Reported data come from Form EIA-860 [78], which requires all nuclear power plant owners to report any plans for building new plants or making major modifications to existing plants (such as uprates) over the next 10 years. In 2010, operators reported that they intended to complete uprate projects sometime during the next 10 years, which together would add a total of 0.8 gigawatts of new capacity. In addition to the reported plans for capacity uprates, EIA assumed that additional power uprates over the period from 2011 to 2035 would add another 6.5 gigawatts of capacity, based on interactions with EIA stakeholders with significant experience in implementing power plant uprates.

New builds

Building a new nuclear power plant is a tremendously complex project that can take many years to complete. Specialized highwage workers, expensive materials and components, and engineering and construction expertise are required, and only a select group of firms worldwide can provide them. In the current economic environment of low natural gas prices and flat demand for electricity, the overall market conditions for new nuclear power plants are challenging.

Nuclear power plants are among the most expensive options for new generating capacity available today [79]. In the AEO2012 Reference case, the overnight capital costs associated with building a nuclear power plant planned in 2012 are assumed to be $5,335 per kilowatt of capacity, which translates to $11.7 billion for a dual-unit 2,200-megawatt power plant. The overnight costs do not include additional costs such as financing, interest carried forward, and peripheral infrastructure updates [80]. Despite the cost, however, deployment of new nuclear capacity supports the long-term resource plans of many utilities, by allowing fuel diversification and providing a hedge in the future against potential GHG emissions regulations or natural gas prices that are higher than expected.

Incentive programs exist to encourage the construction of new reactors in the United States. At the Federal level, the Energy Policy Act of 2005 (EPACT05) established a loan guarantee program for new nuclear plants completed and in operation by 2020 [81]. A total of $18.5 billion is available, of which $8.3 billion has been conditionally committed to the construction of Southern Company's Vogtle Units 3 and 4 [82]. EPACT05 also provides a PTC of $18 per megawatthour for electricity produced during the first 8 years of operation for a new nuclear plant [83]. New nuclear plants must be operational by 2021 to be eligible for the PTC, and the credit is limited to the first 6 gigawatts of new nuclear plant capacity. In addition to Federal incentives, several States provide favorable regulatory environments for new nuclear plants by allowing plant owners to recover their investments through retail electricity rates.

Several utilities are moving forward with plans to deploy new nuclear power plants in the United States. The Reference case reflects those plans by including 6.8 gigawatts of new nuclear capacity over the projection period. As reported on Form EIA-860, 5.5 gigawatts of new capacity (Vogtle Units 3 and 4, Summer Units 2 and 3, and Watts Bar Unit 2) are expected to be operational by 2020 [84]. The Reference case also includes 1.3 gigawatts associated with the construction of Bellefonte Unit 1, which the Tennessee Valley Authority reflects in its Integrated Resource Plan [85].

In addition to reported plans for new nuclear power plants, 1.8 gigawatts of unplanned capacity is built in the later years of the Reference case. Higher natural gas prices, recovering demand for electricity, and the need to make up for the loss of a limited amount of nuclear capacity all play a role in the additional builds.

Long-term operation of the existing nuclear power fleet

The NRC has the authority to issue initial operating licenses for commercial nuclear power plants for a period of 40 years. As of December 31, 2011, there were 7 reactors that received their initial full power operating licenses over 40 years ago. Among this set of reactors, Oyster Creek Unit 1 was the first reactor to operate for over 40 years, after receiving its initial full power operating license in August 1969. Oyster Creek Unit 1 was followed by Dresden Units 2 and 3, H.B. Robinson Unit 2, Monticello, Point Beach 1, and R.E. Ginna. The decision to apply for an operating license renewal is made by nuclear power plant owners, typically based on economics and the ability to meet NRC requirements. As of January 2012, the NRC had granted license renewals to 71 of the 104 operating reactors in the United States, allowing them to operate for a total of 60 years [86]. Currently, the NRC is reviewing license renewal applications for 15 reactors and expects to receive applications from another 14 reactors between 2012 and 2016 [87].

NRC regulations do not limit the number of license renewals a nuclear power plant may be granted. The nuclear power industry is preparing applications for license renewals that would allow continued operation beyond 60 years. The first application seeking approval to operate for 80 years is tentatively scheduled to be submitted by 2013. Some aging nuclear plants may, however, pose a variety of issues that could lead to decisions not to apply for a second license renewal, such as high operation and maintenance costs or the need for large capital expenditures to meet NRC requirements. Industry research on long-term reactor operations and aging management is focused on identifying challenges that aging facilities might encounter and formulating potential approaches to meet those challenges [88]. Typical challenges involve materials degradation, safety margins, and assessing the integrity of concrete structures. In the Reference case, 6.1 gigawatts of nuclear power plant capacity is retired by 2035, based on uncertainty related to issues associated with long-term operations and aging management [89].

It should be noted that although the Oyster Creek Generating Station in Lacey Township, New Jersey, received a license renewal and could operate until 2029, the plant's owner has reported to EIA that it will be retired in 2019, after 50 years of operation. The AEO2012 Reference case includes this reported early retirement. Also, given the evolving nature of the NRC's regulatory response to the accident at Japan's Fukushima Daiichi nuclear power plant in March 2011, the Reference case does not include retirements directly related to the accident (for example, retirements prompted by potential new NRC regulatory requirements for safety retrofits).

Sensitivity cases


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The AEO2012 Low Nuclear case assumes that only the planned nuclear plant uprates already reported to EIA will be completed. Uprates that are currently under review or expected to be submitted to the NRC are not included. The Low Nuclear case also assumes that all nuclear power plants will be retired after 60 years of operation, resulting in a 30.9-gigawatt reduction in U.S. nuclear power capacity from 2010 to 2035. Figure 51 shows nuclear capacity retirements in the Low Nuclear case by NERC region. It should be noted that after the retirement of Oyster Creek in 2019, the next nuclear plant retirement occurs in 2029 in the Low Nuclear case. No new nuclear plants are built in the Low Nuclear case beyond the 6.8 gigawatts already planned.

In the High Nuclear case, in addition to plants already under construction, plants with active license applications at the NRC are constructed, provided that they have a tentatively scheduled mandatory hearing before the NRC or Atomic Safety and Licensing Board and deploy a currently certified design for the nuclear steam supply system, such as the AP1000. With this assumption, an additional 6.2 gigawatts of new nuclear capacity is added relative to the Reference case. The High Nuclear case also assumes that all existing nuclear power plants will receive their second license renewals and will operate through 2035. Uprates in the High Nuclear case are consistent with those in the Reference case. The only retirement included in the High Nuclear case is the announced early retirement of Oyster Creek in 2019.

Results

In the Reference case, 8.5 gigawatts of new nuclear power plant capacity is added from 2010 to 2035, including the 6.8 gigawatts reported to EIA (referred to as "planned") and 1.8 gigawatts built endogenously in NEMS (referred to as "unplanned"). Unplanned capacity is added starting in 2030 in response to rising natural gas prices, which make new nuclear power plants a more competitive option for new electric capacity. In the High Nuclear case, planned capacity additions are almost double those in the Reference case, but unplanned additions are lower. The price of natural gas delivered to the power sector in the High Nuclear case is lower than in the Reference case, making the economics of nuclear power plants slightly less attractive. The additional planned capacity in the High Nuclear case also reduces the need for new unplanned capacity. No unplanned capacity is added in the Low Nuclear case.

Nuclear power generation in 2035 reflects the differences in capacity that occur in the nuclear cases. In the High Nuclear case, nuclear generation in 2035 is 10 percent higher than in the Reference case, and the nuclear share of total generation is 20 percent, as compared with 18 percent in the Reference case. The increase in nuclear capacity in the High Nuclear case contributes to an increase in total electricity generation, in spite of lower levels of generation from natural gas (4 percent lower than in the Reference case in 2035) and coal and renewables (less than 1 percent lower for each fuel).

In the Low Nuclear case, generation from nuclear power in 2035 is 30 percent lower than in the Reference case, due to the loss of 30.9 gigawatts of nuclear capacity that is retired after 60 years of operation. As a result, the nuclear share of total generation is reduced to 13 percent. The loss of generation is made up primarily by increased generation from natural gas (12 percent higher than in the Reference case in 2035), coal (1 percent higher), and renewables (3 percent higher).

Real average electricity prices in 2035 are 1 percent lower in the High Nuclear case than in the Reference case, as slightly less natural gas capacity is dispatched, lowering the marginal price of electricity. In the Low Nuclear case, average electricity prices in 2035 are 5 percent higher than in the Reference case as a result of the retirement of a significant amount of nuclear capacity, which has relatively low operating costs, and its replacement with natural gas capacity, which has higher fuel costs that are passed through to consumers in retail electricity prices. With all nuclear power plants being retired after 60 years of operation in the Low Nuclear case, an additional 12 gigawatts of nuclear capacity would be shut down between 2035 and 2040.

The impacts of nuclear plant retirements on retail electricity prices in the Low Nuclear case are more apparent in regions with relatively large amounts of nuclear capacity. For example, electricity prices in the Low Nuclear case are 7 percent higher than in the Reference case for the NERC MRO Region, and 6 percent higher in the Northeast, Mid-Atlantic, and Southeast regions. Even in regions where no nuclear capacity is retired, there are small increases in electricity prices relative to the Reference case, because higher demand for natural gas in regions with nuclear plant retirements affect prices nationwide.

The Reference case projections for CO2 emissions also are affected by changes in assumptions about nuclear plant lifetimes. In the Low Nuclear case, CO2 emissions from the electric power sector in 2035 are 3 percent higher than in the Reference case as a result of switching from nuclear generation to natural gas and coal, both which produce more CO2 emissions. In the High Nuclear case, CO2 emissions from the power sector are slightly (1 percent) lower than in the Reference case. Table 12 summarizes key results from the AEO2012 Reference, High Nuclear, and Low Nuclear cases.

10. Potential impact of minimum pipeline throughput constraints on Alaska North Slope oil production

Introduction

Alaska's North Slope oil production has been declining since 1988, when average annual production peaked at 2.0 million barrels per day. In 2010, about 600,000 barrels per day of oil was produced on the North Slope. Although new North Slope oil fields have started production since 1988, the decline of North Slope production has resulted largely from depletion of the North Slope's two largest fields, Prudhoe Bay and Kuparuk River. Recently, Alyeska Pipeline Service Company (Alyeska), the operator of the Trans-Alaska Pipeline System (TAPS), stated that oil pipeline transportation problems could begin when throughput falls below 550,000 barrels per day and become increasingly severe with further declines [90].

Alyeska estimates that TAPS operational problems could become considerable when throughput falls below 350,000 barrels per day. The decline of both North Slope oil production and TAPS throughput raises the possibility that North Slope oil production might be shut down, with the existing oil fields plugged and abandoned sometime before 2035. That possibility is discussed here, as well as alternatives that could prolong the life of North Slope oil fields and TAPS beyond 2035.

Background

Declining TAPS throughput

TAPS is an 800-mile crude oil pipeline that transports North Slope oil production south to the Alyeska marine terminal in Valdez, Alaska. The crude oil is then transported by tankers to West Coast refineries. TAPS currently is the only means for transporting North Slope crude oil to refineries and the petroleum consumption markets they serve.

From 2004 through 2006, Alyeska reconfigured and refurbished TAPS, spending about $400 million to $500 million [91] both to reduce operating expenses and to permit TAPS to operate at lower flow rates, with a potential minimum mechanical throughput rate thought to be about 200,000 barrels per day at that time [92]. As North Slope oil production has declined, however, concern about TAPS operation under low flow conditions has grown [93]. In August 2008, Alyeska initiated its Low Flow Impact Study, which was released on June 15, 2011 [94].

The Alyeska study identified the following potential problems that might occur as TAPS throughput declines from the current production levels:

  • Water dropout from the crude oil, which could cause pipeline corrosion
  • Ice formation in the pipe if the oil temperature drops below freezing
  • Wax precipitation and deposition
  • Soil heaving.

Other potential operational issues at low flow rates include sludge dropout, reduced ability to remove wax, reduction in pipeline leak detection efficiency, pipeline shutdown and restart, and the running of pipeline pigs that both clean the pipeline and check its integrity.

Although TAPS low flow problems could begin at volumes around 550,000 barrels per day in the absence of any mitigation, their severity is expected to increase as throughput declines further. As the types and severity of problems multiply, the investment required to mitigate these is expected to increase significantly. Because of the many and diverse operational problems expected to occur at throughput volumes below 350,000 barrels per day, considerable investment could be required to keep the pipeline operational below that threshold. The Alyeska study does not provide any estimates of what it might cost to keep the pipeline operational below either 550,000 or 350,000 barrels per day. Currently, Alyeska is conducting tests and analyses to determine the likely efficacy and costs of different remedies.

Mitigating the decline of North Slope oil production

Although much of the public focus has been on the operational capability of TAPS at low flow rates, the more fundamental issue is declining oil production. The TAPS low flow issue would be alleviated most readily by discovery and production of large new sources of oil on the North Slope. Potential sources of significant North Slope oil production are located offshore in the Chukchi and Beaufort Seas and onshore in shale and heavy oil deposits. The Arctic National Wildlife Refuge (ANWR) is also estimated to hold approximately 10.4 billion barrels of technically recoverable oil resources, but Federal oil and gas leasing in ANWR currently is prohibited [95]. Another potential source of new TAPS volumes would be the conversion of North Slope natural gas resources to either methanol or Fischer-Tropsch petroleum products that could be transported to market via TAPS. Finally, in the absence of new North Slope petroleum supplies, alternative crude oil transportation facilities could be developed, such as a new small diameter pipeline running parallel to the TAPS route [96] or a new offshore oil terminal for North Slope production.

Which of these potential low-flow solutions (or combination thereof) may ultimately come to fruition is impossible to determine at this time. Moreover, each solution comes with its own unique set of costs, risks, and lead times. Not only does each solution entail its own set of risks, there is also a significant risk that production from existing North Slope fields might decline much faster than anticipated and/or that the cost of operating those fields might escalate much faster than expected. Under those circumstances, there is a risk that any solution(s) could be both too little and too late, because the North Slope oil fields would be shut down before a TAPS solution could be implemented.

How quickly TAPS flows will decline, the types of low flow problems that might develop, and the degree of mitigation required depend on the success or failure of current offshore and onshore oil exploration and development programs and the quality of the oil produced. For example, low-viscosity oil is less problematic to TAPS operations than heavy, viscous oil. Because the future success of North Slope oil exploration and development is unknown, it is prudent to consider the circumstances under which North Slope oil production might cease altogether, causing a shutdown of the TAPS pipeline.

Aside from the question of what it might cost to keep TAPS operating at lower flow rates, an additional question is what it might cost to keep the existing North Slope oil fields producing. Even if the continued operation of TAPS were not in question, each North Slope oil field's production will eventually decline to a point at which it is no longer economical to keep the field operating. Oil and gas fields typically are shut down and abandoned when operating and maintenance costs exceed production revenues. At that point, wells are plugged and abandoned, surface equipment is removed, and the land is remediated to meet State and Federal requirements.

Although the cost structure of North Slope field production as production declines is unknown, production generally can be sustained profitably at lower production rates when oil prices are higher. Similarly, the economic feasibility of mitigating the problems arising from TAPS low flow rates improves when oil prices are higher. Consequently, revenues generated by North Slope oil production will play a pivotal role in determining the continued economic viability of existing North Slope oil fields, the development of new oil fields, the continued operation of TAPS at lower flow rates, and the potential development of new transportation facilities.

Several basic strategies have been employed to mitigate declining oil production and revenues from existing oil fields. First, the field operator can drill in-fill wells into those portions of the reservoir where oil cannot flow to existing production wells. Second, the operator can use enhanced oil recovery (EOR) that involves injecting steam or gases (along with water) to reduce viscosity and increase oil volumes as an aid to moving oil to the production wells. Currently, methane and natural gas liquids are being reinjected with water into many North Slope oil fields to achieve this outcome, which is referred to as "miscible hydrocarbon" EOR [97].

Drilling in-fill and EOR injection wells requires investments that are paid for through "maintenance" capital expenditures [98]. Both activities provide diminishing returns over time, as less oil typically is recovered with each new in-fill or EOR well, causing the cost per barrel of oil recovered to rise over time. Table 13 shows the number of in-fill and gas/water injection wells completed in 2010 at the three largest North Slope oil fields.

The diminishing returns from new in-fill and EOR wells is demonstrated in recent remarks by a ConocoPhillips official who noted that approximately $630 million was to be spent on maintenance capital expenditures in 2011, compared with about $240 million in 2001 [99]. In 2001 and 2010, ConocoPhillips provided 37.4 percent and 39.1 percent, respectively, of total North Slope oil production [100]. Using those percentages to scale up ConocoPhillips maintenance capital expenditures so that they represent total capital expenditures for North Slope maintenance, then total North Slope maintenance costs can be estimated at about $640 million in 2001 and $1.6 billion in 2011—a 150-percent increase over a period in which total North Slope oil production declined from 931,000 barrels per day to 562,000 barrels per day. If maintenance capital expenditures increased at the same rate (150 percent) over the next 10 years, they could be as high as $4 billion in 2021.

Another method for extending oil production is to produce increasing amounts of water relative to oil [101]. As oil is produced from a reservoir, water typically enters the formation, causing the water-to-oil ratio to increase exponentially over time as oil production volumes decline [102]. Because the cost per barrel for handling and reinjecting reservoir water typically is relatively constant, the operating cost per barrel of oil produced increases exponentially over time.

Shutdown and abandonment assumptions

According to the Alyeska study, a TAPS throughput of about 350,000 barrels per day appears to be the threshold at which significant investment would be required to permit lower TAPS throughput. AEO2012 adopts the 350,000 barrel per day figure as the threshold for either making significant investments in TAPS or the alternatives, or shutting down and decommissioning TAPS and the North Slope oil fields [103].

In the AEO2012 analysis, the shutdown and decommissioning of TAPS and the North Slope oil fields are also conditional on whether North Slope wellhead oil production revenues fall below a specific level. The appropriate revenue threshold is uncertain, because there is little or no information available to the public on operating and maintenance costs for existing oil fields, how those costs have grown historically as production has declined, or how they might grow in the future. Similarly, there are no public data available on what it might cost to keep TAPS operating as throughput declines [104]. Given the lack of public information, this analysis endeavors to determine both future North Slope production revenues in alternative oil price cases and an order-ofmagnitude estimate of wellhead production costs.

AEO2012 assumes that, in order for the North Slope fields to be shut down, plugged, and abandoned, two conditions would need to be met simultaneously: TAPS throughput at or below 350,000 barrels per day and total North Slope oil production revenues at or below $5 billion per year. It is also assumed that if those two conditions were met, TAPS would be decommissioned and dismantled, and North Slope oil exploration and production activities would cease [105].

The $5 billion threshold for North Slope oil production revenue used in AEO2012 is not intended to be conclusive regarding the conditions under which the North Slope oil fields and TAPS would remain in operation. As noted earlier, in-fill and EOR well drilling requirements could escalate to about $4 billion per year by 2021 [106]. Moreover, with the State of Alaska royalty rate currently at about 18.5 percent [107], a $5 billion revenue level would equate to almost $1 billion in royalties.

Also, an order of magnitude estimate of operating costs can be made by examining what oil companies report for their annual production expenses. For example, ExxonMobil reported a range of regional production costs per barrel of oil equivalent (excluding taxes) of $6.17 to $20.07 per barrel in 2010, with the U.S. average production cost being $10.67 per barrel [108]. At 350,000 barrels per day, a North Slope operating expense of $10 to $20 per barrel would equate to $1.28 to $2.56 billion per year in annual operating expenses. Of course, production costs could well exceed $20 per barrel as North Slope oil production declines.

Although the $5 billion North Slope revenue figure is not conclusive with regard to the actual annual costs faced by North Slope field operators in the future, it is a reasonable estimate in light of the sum of current maintenance capital expenditures ($1.6 billion), estimated operating expenses at 350,000 barrels per day ($1.28 to $2.56 billion), and a royalty cost of about $1 billion. As discussed below, the oil production revenue threshold serves to either advance or delay the date when TAPS and North Slope oil production would be shut down.

The final assumption is that a complete shutdown of North Slope oil production would occur in the year in which both the throughput and revenue criteria are satisfied. In reality, the actual shutdown of North Slope oil production might be extended over a number of years and could begin either before or after the year in which the criteria employed by North Slope producers are met.

Projections


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A shutdown of North Slope oil production before 2035 is projected only in the Low Oil Price case, which shows both TAPS throughput and North Slope oil revenues falling below the 350,000 barrels per day and $5 billion per year thresholds, respectively, in 2026 (Figures 52 and 53). In both the Reference and High Oil Price cases, oil prices are sufficiently high both to stimulate the development of new North Slope oil fields, especially offshore, and to provide sufficient oil production revenues to keep the North Slope producing oil through 2035.


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Figure 53 shows the projected North Slope oil production revenue stream over time in the three price cases, with North Slope oil production continuing even after production volume and revenue requirements are no longer met in the Low Oil Price case. Thus, if the minimum North Slope revenue requirement were $7.5 billion, a shutdown of North Slope production could occur as soon as 2020, but only in the Low Oil Price case.

There is considerable uncertainty about the long-term viability of North Slope oil production and continued operation of TAPS through 2035. The two most important determinants of their future viability are the wellhead oil price that North Slope producers receive and the availability and cost of developing new North Slope oil resources. Those two factors will determine whether new oil fields are developed, whether existing oil fields remain sufficiently profitable to continue operating, and whether the investments required to keep TAPS operating at flow rates below 350,000 barrels per day are economically feasible.

The AEO2012 Low and High Oil Price cases suggest that North Slope oil production will remain viable across a wide range of oil prices. Only in the Low Oil Price case are North Slope wellhead oil revenues sufficiently low to cause a shutdown of North Slope oil production. If the Low Oil Price case represents a low-probability outer boundary for future oil prices, then the likely future outcome is that North Slope oil production will continue until at least 2035, if not longer.

11. U.S. crude oil and natural gas resource uncertainty

A common measure of the long-term viability of U.S. domestic crude oil and natural gas as an energy source is the remaining technically recoverable resource (TRR). Estimates of TRR are highly uncertain, however, particularly in emerging plays where few wells have been drilled. Early estimates tend to vary and shift significantly over time as new geological information is gained through additional drilling, as long-term productivity is clarified for existing wells, and as the productivity of new wells increases with technology improvements and better management practices. TRR estimates used by EIA for each AEO are based on the latest available well production data and on information from other Federal and State governmental agencies, industry, and academia.

The remaining TRR consist of "proved reserves" and "unproved resources." Proved reserves of crude oil and natural gas are the estimated volumes expected to be produced, with reasonable certainty, under existing economic and operating conditions [109]. Proved reserves are also company financial assets reported to investors, as determined by U.S. Securities and Exchange Commission regulations. Unproved resources are additional volumes estimated to be technically recoverable without consideration of economics or operating conditions, based on the application of current technology [110]. As wells are drilled and field equipment is installed, unproved resources become proved reserves and, ultimately, production.

AEO estimates of TRR for shale gas and tight oil [111] have changed significantly in recent years (Table 14) [112]. In particular, the estimates of shale gas TRRs have changed significantly since the AEO2011 was published, based on new well performance data and United States Geological Survey (USGS) resource assessments. For example, in the past year the USGS has released resource assessments for five basins: Appalachian (Marcellus only), Arkoma, Texas-Louisiana-Mississippi Salt, Western Gulf, and Anadarko [113]. The shale gas and tight oil formations in those five basins were the primary focus of EIA's resource revisions for AEO2012. In 2002, the USGS estimated Marcellus TRR at 1.9 trillion cubic feet; in 2011, the updated USGS estimate for Marcellus was 84 trillion cubic feet (see the following article for more discussion). For the four other basins, shale gas and tight oil TRR had not been assessed previously. The USGS has not published an assessment of the Utica play in the Appalachian Basin.

The remainder of this discussion describes how estimates of remaining U.S. unproved technically recoverable resources of shale gas and tight oil are developed for AEO, and how uncertainty in those estimates could affect U.S. crude oil and natural gas markets in the future.

The remaining unproved TRR for a continuous-type shale gas or tight oil area is the product of (1) land area, (2) well spacing (wells per square mile), (3) percentage of area untested, (4) percentage of area with potential, and (5) EUR per well [114]. The USGS periodically publishes shale gas resource assessments that are used as a guide for selection of key parameters in the calculation of the TRR used in the AEO. The USGS seeks to assess the recoverability of shale gas and tight oil based on the wells drilled and technologies deployed at the time of the assessment.

The AEO TRRs incorporate current drilling, completion, and recovery techniques, requiring adjustments to the USGS estimates, as well as the inclusion of shale gas and tight oil resources not yet assessed by USGS. When USGS assessments and underlying data become publicly available, the USGS assumptions for land area, well spacing, and percentage of area with potential typically are used by EIA to develop the AEO TRR estimates. EIA may revise the well spacing assumptions in future AEOs to reflect evolving drilling practices. If well production data are available, EIA analyzes the decline curve of producing wells to calculate the expected EUR per well from future drilling.

Of the five basins recently assessed by the USGS, underlying details have been published only for the Marcellus shale play in the Appalachian basin. AEO2012 assumptions for the other shale plays are based on geologic surveys provided from State agencies (if available), analysis of available production data, and analogs from current producing plays with similar geologic properties (Table 15). For AEO2012, only eight plays are included in the tight oil category (Table 16). Additional tight oil resources are expected to be included in the tight oil category in future AEOs as more work is completed in identifying currently producing reservoirs that may be categorized as tight formations, and as new tight oil plays are identified and incorporated.

A key assumption in evaluating the expected profitability of drilling a well is the EUR of the well. EURs vary widely not only across plays but also within a single play. To capture the economics of developing each play, the unproved resources for each play within each basin are divided into subplays—first across States (if applicable), and then into three productivity categories: best, average, and below average. Although the average EUR per well for a play may not change by much from one AEO to the next, the range of well performance encompassed by representative EURs can change substantially (Table 17).

For every AEO, the EUR for each subplay is determined by fitting a hyperbolic decline curve to the latest production history, so that changes in average well performance can be captured. Annual reevaluations are particularly important for shale gas and tight oil formations that have undergone rapid development. For example, because there has been a dramatic change from drilling vertical wells to drilling horizontal wells in most tight oil and shale gas plays since 2003, EURs for those plays based on vertical well performance are less useful for estimating production from future drilling, given that most new wells are expected to be primarily horizontal.


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In addition, the shape of the annual well production profiles associated with the EUR varies substantially across the plays (Figure 54). For example, in the Marcellus, Fayetteville, and Woodford shale gas plays, nearly 65 percent of the well EUR is produced in the first 4 years. In contrast, in the Haynesville and Eagle Ford plays, 95 percent and 82 percent, respectively, of the well EUR is produced in the first four years. For a given EUR level, increased "front loading" of the production profile improves well economics, but it also implies an increased need for additional drilling to maintain production levels.

At the beginning of a shale play's development, high initial well production rates result in significant production growth as drilling activity in the play increases. The length of time over which the rapid growth can be sustained depends on the size of the technically recoverable resource in each play, the rate at which drilling activity increases, and the extent of the play's "sweet spot" area [115]. In the longer term, production growth tapers off as high initial production rates of new wells in "sweet spots" are offset by declining rates of existing wells, and as drilling activity moves into less-productive areas. As a result, in the later stages of a play's resource development, maintaining a stable production rate requires a significant increase in drilling.

The amount of drilling that occurs each year depends on company budgets and finances and the economics of drilling, completing, and operating a well—determined largely by wellhead prices for oil and natural gas in the area. For example, current high crude oil prices and low natural gas prices are directing drilling toward those plays or portions of plays with a high concentration of liquids (crude oil, condensates, and natural gas plant liquids). Clearly, not all the wells that would be needed to develop each play fully can be drilled in one year—for example, more than 630,000 new wells would be needed to bring total U.S. shale gas and tight oil resources into production. In 2010, roughly 37,500 total oil and natural gas wells were drilled in the United States. It takes time and money to evaluate, develop, and produce hydrocarbon resources.

Although changes in the overall TRR estimates are important, the economics of developing the TRR and the timing of the development determine the projections for production of domestic crude oil and natural gas. TRR adjustments that affect resources which are not economical to develop during the projection period do not affect the AEO projections. Thus, significant variation in the overall TRR does not always result in significant changes in projected production.

EUR sensitivity cases and results

Estimated ultimate recovery per well is a key component in estimates of both technically recoverable resources and economically recoverable resources of tight oil and shale gas. The EUR for future wells is highly uncertain, depending on the application of new and/or improved technologies as well as the geology of the formation where the wells will be drilled. EUR assumptions typically have more impact on projected production than do any of the other parameters used to develop TRR estimates. For AEO2012, two cases were created to examine the impacts of higher and lower TRR for tight oil and shale gas by varying the assumed EUR per well.

These High and Low EUR cases are not intended to represent a confidence interval for the resource base, but rather to illustrate how different EUR assumptions can affect projections of domestic production, prices, and consumption. To emphasize this point, an additional case was developed that combines a change in the assumed well spacing for all shale gas and tight oil plays with the EUR assumptions in the High EUR case. Well spacing is also highly uncertain, depending on the application of new and/or improved technologies as well as the geology of the formation where the well is being drilled. In the AEO2012 Reference case, the well spacing for shale gas and tight oil drilling ranges from 2 to 12 wells per square mile.

Low EUR case. In the Low EUR case, the EUR per tight oil or shale gas well is assumed to be 50 percent lower than in the Reference case, increasing the per-unit cost of developing the resource. The total unproved tight oil TRR is decreased to 17 billion barrels, and the shale gas TRR is decreased to 241 trillion cubic feet, as compared with 33 billion barrels of tight oil and 482 trillion cubic feet of shale gas in the Reference case.

High EUR case. In the HIGH EUR case, the EUR per tight oil or shale gas well is assumed to be 50 percent higher than in the Reference case, decreasing the per-unit cost of developing the resource. The total unproved tight oil TRR is increased to 50 billion barrels and the shale gas TRR is increased to 723 trillion cubic feet.

High TRR case. In the High TRR case, the well spacing for all tight oil and shale gas plays is assumed to be 8 wells per square mile (i.e., each well has an average drainage area of 80 acres), and the EUR per tight oil or shale gas well is assumed to be 50 percent higher than in the Reference case. In addition, the total unproved tight oil TRR is increased to 89 billion barrels and the shale gas TRR is increased to 1,091 trillion cubic feet, more than twice the TRRs for tight oil and shale gas wells in the Reference case.

The effects of the changes in assumptions in the three cases on supply, demand, and prices for oil and for natural gas are significantly different in magnitude, because the domestic oil and natural gas markets are distinctly different markets. Consequently, the following discussion focuses first on how the U.S. oil market is affected in the three sensitivity cases, followed by a separate discussion of how the U.S. natural gas market is affected in the three cases.

Crude oil and natural gas liquid impacts

The primary impact of the Low EUR, High EUR, and High TRR cases with respect to oil production is a change in production of tight oil and natural gas plant liquids (NGPL) (Table 18). NGPL production is discussed in conjunction with tight oil production, because significant volumes of NGPL are produced from tight oil and shale gas formations. Thus, changing the EURs directly affects NGPL production. Relative to the Reference case, tight oil production increases more slowly in the Low EUR case and more rapidly in the High EUR and High TRR cases. On average, tight oil production from 2020 to 2035 is approximately 450,000 barrels per day lower in the Low EUR case, 410,000 barrels per day higher in the High EUR case, and 1.3 million barrels per day higher in the High TRR case than in the Reference case (Figure 55). NGPL production in 2035 is more than 350,000 barrels per day lower in the Low EUR case than in the Reference case, nearly 320,000 barrels per day higher in the High EUR case, and 1.0 million barrels per day higher in the High TRR case.


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Tight oil production is highest in the High TRR case, which assumes both higher EUR per well and generally lower drainage area per well than in the Reference case. In the High TRR case, tight oil production increases from roughly 400,000 barrels per day in 2010 to nearly 2.8 million barrels per day in 2035, with the Bakken formation accounting for most of the increase. The TRR estimate for the Bakken is more than 7 times higher in the High TRR case than in the Reference case—39.3 billion barrels compared to 5.4 billion barrels—which supports a continued dramatic production increase through 2015 and a longer plateau at a much higher production level through 2035 than in the Reference case. Bakken crude oil production (excluding NGPLs) increases from roughly 270,000 barrels per day in 2010 to nearly 800,000 barrels per day in 2015 before reaching over 1 million barrels per day in 2021 and remaining at that level through 2035 in the High TRR case, compared with peak tight oil production of roughly 530,000 barrels per day in the Reference case. Cumulative crude oil production from the Bakken from 2010 to 2035 is roughly 8.5 billion barrels in the High TRR case, compared with 4.3 billion barrels in the Reference case.

Every incremental barrel of domestic crude oil production displaces approximately one barrel of imports, because U.S. consumption of liquid fuels varies little across the cases. Consequently, the projected share of net petroleum imports in total U.S. liquid fuel consumption in 2035 varies considerably across the EUR and TRR cases, from 41 percent in the Low EUR case to 24 percent in the High TRR case, as compared with 36 percent in the Reference case. However, additional downstream infrastructure may be required to process the high levels of NGPL production in the High EUR and High TRR cases.

Changes in domestic oil production have only a modest impact on domestic crude oil and petroleum product prices, because any change in domestic oil production is diluted by the much larger world oil market. The United States produced 5.5 million barrels per day, or 7 percent of total world crude oil production of 73.9 million barrels per day in 2010 and is projected generally to maintain that share of world crude oil production through 2035 in the Reference case.

Natural gas impacts

The EUR and TRR cases show more significant impacts on U.S. natural gas supply, consumption, and prices than that projected for crude oil and petroleum products for two reasons (Table 19). First, the U.S. natural gas market constitutes the largest regional submarket within the relatively self-contained North American natural gas market. Second, in the Reference case, shale gas production accounts for 49 percent of total U.S. natural gas production in 2035, while tight oil production accounts for only 14 percent of total U.S. crude oil and NGPL production and 1 percent of world crude oil production. As a result, changes in shale gas production have a commensurately larger impact on North American natural gas prices than tight oil production has on world oil prices.


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The projections for domestic shale gas production are highly sensitive to the assumed EUR per well. In 2035, total shale gas production varies from 9.7 trillion cubic feet in the Low EUR case to 16.0 trillion cubic feet in the High EUR case and 20.5 trillion cubic feet in the High TRR case, as compared with 13.6 trillion cubic feet in the Reference case (Figure 56). Because shale gas production accounts for such a large proportion of total natural gas production in 2035, the large changes in shale gas production result in commensurately large swings in total U.S. natural gas production. In 2035, total U.S. natural gas production ranges from 26.1 trillion cubic feet in the Low EUR case to 34.1 trillion cubic feet in the High TRR case, a difference of 8.0 trillion cubic feet production between the two cases.

In comparison with the Reference case, per-unit production costs are nearly double in the Low EUR case and about one-half in the High EUR case. In the Low EUR case, the Henry Hub natural gas price of $8.26 per million Btu in 2035 (2010 dollars) is $0.89 per million Btu higher than the Reference case price of $7.37 per million Btu. In the High EUR case, the 2035 Henry Hub natural gas price of $5.99 per million Btu is $1.38 per million Btu lower than the Reference case price. In the High TRR case, the 2035 Henry Hub natural gas price of $4.25 per million Btu is $3.12 per million Btu less than the Reference case price.

The natural gas prices projected in the Low EUR case are sufficiently high to enable completion of an Alaska gas pipeline, with operations beginning in 2031. Because an Alaska gas pipeline would make up for some of the reduction in Lower 48 shale gas production, differences between the Reference and Low EUR case projections for natural gas production, prices, and consumption in 2035 are somewhat less than would otherwise be expected.

The 2035 price spread of $4.01 per million Btu across the cases is reflected in the projected levels of U.S. natural gas consumption. Higher natural gas prices in the Low EUR case reduce total natural gas consumption to 25.0 trillion cubic feet in 2035, compared with 26.6 trillion cubic feet in the Reference case; and lower natural gas prices in the High EUR and High TRR cases increase consumption in 2035 to 28.4 trillion cubic feet and 31.9 trillion cubic feet, respectively.

The variation in total U.S. natural gas consumption between the High EUR and High TRR cases is reflected to some degree in each end-use category. The electric power sector shows the greatest sensitivity to natural gas prices, with natural gas use for electricity generation being more responsive to changes in fuel prices than is consumption in the other sectors, because much of the electric power sector's fuel consumption is determined by the dispatching of existing generation units based on the operating cost of each unit, which in turn is determined largely by the costs of competing fuels—especially coal and natural gas. Natural gas consumption in the electric power sector in 2035 totals 7.7 trillion cubic feet in the Low EUR case, compared with 9.0 trillion cubic feet in the Reference case, 10.1 trillion cubic feet in the High EUR case, and 12.6 trillion cubic feet in the High TRR case.

In the end-use consumption sectors, opportunities to switch fuels generally are limited to when a new facility is built or when a facility's existing equipment is retired and replaced. Collectively, for all the end-use sectors, natural gas consumption in 2035 varies by only about 1.9 trillion cubic feet across the cases, from 17.3 trillion cubic feet in the Low EUR case to 19.2 trillion cubic feet in the High TRR case, as compared with 17.7 trillion cubic feet in the Reference case.

In 2035, the United States is projected to be a net exporter of natural gas in all the cases. The projected volumes of net exports vary, with lower natural gas prices resulting in higher net exports. However, the High TRR, High EUR, and Low EUR cases assume that U.S. gross exports of LNG remain constant at 0.9 trillion cubic feet from 2020 through 2035, because of the inherent complexities and uncertainties of projecting foreign natural gas production, consumption, and trade. It is likely, however, that actual levels of net LNG exports would be affected by changes in U.S. prices, which in turn, would dampen the extent of the price difference across the resource cases.

The variation in levels of net U.S. natural gas exports shown in Table 20 reflects the impact of domestic natural gas prices on natural gas pipeline imports and exports. Generally, lower natural gas prices, as in the High TRR case, result in lower natural gas imports from Canada and higher natural gas exports to Mexico. In 2035, net natural gas exports from the United States vary from 1.2 trillion cubic feet in the Low EUR case to 2.4 trillion cubic feet in the High TRR case, as compared with 1.4 trillion cubic feet in the Reference case.

The sensitivity cases in this discussion are not intended to provide a confidence interval for estimates of recoverable resources of domestic tight oil and shale gas but rather to illustrate the significance of key assumptions underlying the tight oil and shale gas TRRs used in AEO2012. TRR estimates are highly uncertain and can be expected to change in subsequent AEOs as additional information is gained through continued exploration, development, and production.

12. Evolving Marcellus shale gas resource estimates

As discussed in the preceding article, estimates of crude oil and natural gas TRR are uncertain. Estimates of the Marcellus shale TRR, which have received considerable attention over the past year, are no exception. TRR estimates are likely to continue evolving as drilling continues and more information becomes publicly available. The Marcellus shale gas play covers more than 100,000 square miles in parts of eight States, but most of the drilling to date has been in two areas of northeast Pennsylvania and southwest Pennsylvania/northern West Virginia. Until 2010, the State of Pennsylvania had maintained a 5-year embargo on the release of well-level production data, which severely limited the publicly available information about Marcellus well production. Now Pennsylvania provides well production data on a cumulative basis—annually for the years before 2010 and semi-annually starting in the second half of 2010. Even with more data available, however, it is still a challenge to estimate TRR for the Marcellus play.


In 2002, the USGS estimated that 0.8 trillion cubic feet to 3.7 trillion cubic feet of technically recoverable shale gas resources existed in the Marcellus, with a mean estimate of 1.9 trillion cubic feet [116]. At that time, most of the well production data available were for vertical wells drilled in West Virginia. Since 2003, technological improvements have led to more-productive and less-costly wells. The newer horizontal wells have higher EURs [117] than the older vertical wells. In 2011, the USGS released an updated assessment for the Marcellus resource, with a mean estimate of 84 trillion cubic feet of undiscovered TRR (ranging from 43 trillion cubic feet to 144 trillion cubic feet) [118]. For its 2011 assessment, the USGS evaluated well production data from Pennsylvania and West Virginia that were available in early 2011 and determined that the data were "not sufficient for the construction of individual well Estimated Ultimate Recovery distributions" [119]. Instead, the USGS chose analogs from other U.S. shale gas plays to determine the EUR distributions for its three Marcellus assessment units—Foldbelt, Interior, and Western Margin (Figure 57).

Estimates of the TRR for U.S. shale gas are updated each year for the AEO. For AEO2011, an independent consultant was hired to estimate the Marcellus TRR as the available USGS TRR estimate issued in 2003 was clearly too low, since cumulative production from the Marcellus shale was on a path to exceed it within a year or two. For AEO2012, EIA adopted the 2011 USGS estimates of the Marcellus assessment areas, well spacing, and percent of area with potential. However, EIA examines available well production data each year to estimate shale EURs for use in the AEO (Table 20).

The revised Marcellus EUR for AEO2012 is close to the EUR used in AEO2011 but nearly 70 percent higher than the EUR used in the 2011 USGS assessment. The Interior Assessment Unit EURs developed by EIA reflects the current practice of horizontal drilling and well production data through June 2011 for Pennsylvania and West Virginia [120]. Because there has been very little, if any, drilling in the Western Margin and Foldbelt Assessment Units, the USGS EURs were used for the States in those areas. The resulting AEO2012 estimate for the Marcellus TRR is 67 percent lower than the AEO2011 estimate, primarily as a result of increased well spacing (132 acres per well vs.80 acres per well) and a lower percentage of area with potential (18 percent vs. 34 percent) (Table 21).

The estimation of Marcellus shale gas resources is highly uncertain, given both the short production history of current producing wells and the concentration of most producing wells in two small areas, Northeast Pennsylvania and Southwest Pennsylvania/Northern West NC Virginia. The Marcellus EURs are expected to change as additional data are released and the methodology for developing EURs is refined. Also, as more wells are drilled over a broader area, and as operators optimize well spacing to account for evolving drilling practices, the assumption for average well spacing may be revised. Although the Marcellus shale resource estimate will be updated for every AEO, revisions will not necessarily have a significant impact on projected natural gas production, consumption, and prices.

Endnotes for Issues in focus

41 Oil shale liquids, derived from heating kerogen, are distinct from shale oil and also from tight oil, which is classified by EIA as crude oil. Oil shale is not expected to be produced in significant quantities in the United States before 2035.

42 U.S. Environmental Protection Agency and National Highway Transportation Safety Administration, "2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards; Proposed Rule," Federal Register, Vol. 76, No. 231 (Washington, DC: December 1, 2011).

43 The EISA2007 RFS requirement for increasing volumes of biofuels results in a significant number of FFVs in both the Reference case and the CAFE case.

44 S. Bianco, "Chevy Volt Has Best Month Ever, But Nissan Leaf Still Wins 2011 Plug-in Sales Contest," autobloggreen.

45 Battery electric vehicle charge-depleting mode occurs when the vehicle relies on battery power for operation. Chargesustaining mode occurs when battery electric power is coupled with power provided by the internal combustion engine. Vehicles can be designed to operate on a blended mode that uses both charge-depleting and charge-sustaining modes while in operation, depending on the drive cycle.

46 Toyota, "Toyota Cars, Trucks, SUVs, and Accessories," website www.toyota.com; Nissan USA, "Nissan Cars, Trucks, Crossovers, & SUVs," website www.nissanusa.com; and Chevrolet, "2012 Cars, SUVs, Trucks, Crossovers & Vans," website www.chevy.com. Note: Miles per gallon equivalent, as listed by automotive manufacturers, is derived by the U.S. Environmental Protection Agency, www.fueleconomy.gov.

47Toyota, "Toyota Cars, Trucks, SUVs, and Accessories," website www.toyota.com; Nissan USA, "Nissan Cars, Trucks, Crossovers, & SUVs," website www.nissanusa.com; and Chevrolet, "2012 Cars, SUVs, Trucks, Crossovers & Vans," website www.chevy.com. Note: Miles per gallon equivalent, as listed by automotive manufacturers, is derived by the U.S. Environmental Protection Agency, www.fueleconomy.gov.

48 U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, "Vehicle Technologies Program."

49 U.S. Energy Information Administration, "Residential Energy Consumption Survey (RECS), 2009 RECS Survey Data."

50 U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, "Alternative Fuels & Advanced Vehicles Data Center."

51 Indiana University, School of Public and Environmental Affairs, "Plug-in Electric Vehicles: A Practical Plan for Progress."

52 U.S. Environmental Protection Agency and National Highway Transportation Safety Administration, "2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards; Proposed Rule," Federal Register, Vol. 76, No. 231 (Washington, DC: December 1, 2011).

53 For this analysis, heavy-duty vehicles include trucks with a Gross Vehicle Weight Rating of 10,001 pounds and higher, corresponding to Gross Vehicle Weight Rating classes 3 through 8 vehicles.

54 U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, "Alternative Fueling Station Database Custom Query" (Washington, DC: June 3, 2010). Accessed June 30, 2012.

55 National Petroleum News, Market Facts 2011.

56 U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, Clean Cities Alternative Fuel Price Report (Washington, DC: April, 2012).

57 The Texas Clean Transportation Triangle is supported by Texas State Senate Bill 20, which provides vehicle rebates and fueling grants. See West, Williams, House Research Organization, "Bill Analysis: SB 20" (Austin, TX: May 21, 2011).

58 The Interstate Clean Transportation Corridor was developed in 1996. The corridor is now partially established with LNG truck refueling infrastructure in California and to Reno, Las Vegas, and Phoenix. See Gladstein, Neandross & Associates, "Interstate Clean Transportation Corridor" (Santa Monica, CA: February 2, 2012), website ictc.gladstein.org.

59 The Pennsylvania Clean Transportation Corridor was proposed in a report, "A Road Map to a Natural Gas Vehicle Future" (Canonsburg, PA: April 5, 2011), sponsored by the Marcellus Shale Coalition.

60 The American Recovery and Reinvestment Act has provided more than $300 million toward cost-sharing projects related to alternative fuels. U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, "American Recovery and Reinvestment Act Project Awards" (Washington, DC: September 7, 2011).

61 For a map of U.S. LNG peak shaving, see U.S. Energy Information Administration, "U.S. LNG Peaking Shaving and Import Facilities, 2008" (Washington, DC: December, 2008).

62 The LNG Excise Tax Equalization Act of 2012, proposed in the U.S. House of Representatives, would require the tax treatment of LNG and diesel fuel to be equivalent on the basis of heat content. See Civic Impulse, LLC, "H.R. 3832: LNG Excise Tax Equalization Act of 2012" (Washington, DC: May 29, 2012).

63 Developed from e-mail correspondence with Graham Williams, 4/11/12.

64 U.S. Environmental Protection Agency and National Highway Transportation Safety Administration, "Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Medium- and Heavy-Duty Engines and Vehicles," Federal Register Vol. 76, No. 179 (Washington, DC: September 15, 2011).

65 U.S. Census Bureau, "Vehicle Inventory and Use Survey (VIUS) (discontinued after 2002)" (Washington, DC: May 29, 2012).

66 U.S. Environmental Protection Agency and National Highway Transportation Safety Administration, "Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Medium- and Heavy-Duty Engines and Vehicles," Federal Register Vol. 76, No. 179 (Washington, DC: September 15, 2011).

67 For information on the New Alternative Transportation to Give Americans Solutions Act of 2012, see Civic Impulse, LLC, "H.R. 1380: New Alternative Transportation to Give Americans Solutions Act of 2011" (Washington, DC: May 29, 2012).

68 The liquid fuels production industry includes all participants involved in the production of liquid fuels: producers of feedstocks, petroleum- and nonpetroleum-based refined products and blendstocks, and liquid and non-liquid end-use products.

69 U.S. Environmental Protection Agency, "Mercury and Air Toxics Standards" (Washington, DC: March 27, 2012).

70 U.S. Environmental Protection Agency, "Cross-State Air Pollution Rule (CSAPR)" (May 25, 2012).

71 Other components of variable cost include emissions control technology, waste disposal, and emissions allowance credits.

72 The AEO2012 Early Release Reference case was prepared before the final MATS rule was issued and, therefore, did not include MATS.

73 United States Court of Appeals for the District of Columbia Circuit, "EME Homer City Generation, L.P., v. Environmental Protection Agency" (Washington, DC: December 30, 2011).

74 U.S. Energy Information Administration, Electric Power Annual 2010 (Washington, DC, November 2011), Table 3.10, "Number and Capacity of Existing Fossil-Fuel team-Electric Generators with Environmental Equipment, 1991 through 2010." U.S. Environmental Protection Agency, Office of Enforcement and Compliance Assurance, "The Environmental Protection Agency's Enforcement Response Policy for Use of Clean Air Act Section 113(a) Administrative Orders in Relation to Electric Reliability and the Mercury and Air Toxics Standard" (Washington, DC: December 16, 011).

75 U.S. Environmental Protection Agency, Office of Enforcement and Compliance Assurance, "The Environmental Protection Agency's Enforcement Response Policy for Use of Clean Air Act Section 113(a) Administrative Orders in Relation to Electric Reliability and the Mercury and Air Toxics Standard" (Washington, DC: December 16, 2011) .

76 See Appendix F for a map of the EMM regions.

77 The EPA is proposing that new fossil-fuel-fired power plants begin meeting an output-based standard of 1,000 pounds CO2 per megawatthour. See U.S. Environmental Protection Agency, "Carbon Pollution Standard for New Power Plants" (Washington, DC: May 23, 2012). Existing coal plants without CCS will not be able to meet that standard, and the proposed rule does not apply to plants already under construction. The EPA proposal is not included in AEO2012.

78 U.S. Energy Information Administration, Form EIA-860, "Annual Electric Generator Report" (Washington, DC: November 30, 2011).

79 U.S. Energy Information Administration, "Levelized Cost of New Generation Resources in the Annual Energy Outlook 2012" (Washington, DC: March 2012).

80 U.S. Energy Information Administration, "Assumptions to AEO2012" (Washington, DC: June 2012), website www.eia.gov/forecasts/aeo/assumptions.

81 U.S. Government Printing Office, "Energy Policy Act of 2005, Public Law 109-58, Title XVII—Incentives for Innovative Technologies" (Washington, DC: August 8, 2005).

82 U.S. Department of Energy, Loan Programs Office, "Loan Guarantee Program: Georgia Power Company" (Washington, DC: June 4, 2012).

83 U.S. Government Printing Office, "Energy Policy Act of 2005, Public Law 109-58, Title XVII—Incentives for Innovative Technologies, paras. 638, 988, and 1306" (Washington, DC, August 2005).

84 U.S. Energy Information Administration, Form EIA-860, "Annual Electric Generator Report."

85 Tennessee Valley Authority, "Integrated Resource Plan" (Knoxville, TN: March 2011).

86 U.S. Nuclear Regulatory Commission, "Status of License Renewal Applications and Industry Activities: Completed Applications" (Washington, DC: May 22, 2012).

87 U.S. Nuclear Regulatory Commission, "Status of License Renewal Applications and Industry Activities: Completed Applications" (Washington, DC: May 22, 2012).

88Electric Power Research Institute, "Long-Term Operations (QA)" (Palo Alto, CA: June 4, 2012).

89 International Forum for Reactor Aging Management (IFRAM), "Inaugural Meeting of the International Forum for Reactor Aging Management (IFRAM)" (Colorado Springs, CO: August 5, 2011).

90 Alyeska Pipeline Service Company, "Low Flow Impact Study, Final Report" (Anchorage, AL: June 15, 2011).

91 Tim Bradner, "Alyeska Invests in New Methods to Extend Pipeline Life," Alaska Journal of Commerce (June 1, 2009).

92 U.S. Department of Energy, National Energy Technology Laboratory, "Alaska North Slope Oil and Gas – A Promising Future or an Area in Decline? (Addendum Report)," DOE/NETL-2009/1385 (Washington, DC: April 8, 2009), pp. 1-4 and 1-5. 93. Alan Bailey, "TAPS transitioning to a low flow future," Petroleum News, Vol. 14, No. 29 (Anchorage, AK: July 19, 2009), subscription website.

93 Alan Bailey, "TAPS transitioning to a low flow future," Petroleum News, Vol. 14, No. 29 (Anchorage, AK: July 19, 2009), subscription website.

94 Alyeska Pipeline Service Company, "Low Flow Impact Study, Final Report" (Anchorage, AL: June 15, 2011).

95 U.S. Department of the Interior, U.S. Geological Survey, "The Oil and Gas Resource Potential of the Arctic National Wildlife Refuge 1002 Area, Alaska, Open File Report 98-34" (Washington, DC: May 1998); U.S. Geological Survey, "Arctic National Wildlife Refuge, 1002 Area, Petroleum Assessment, 1998, Including Economic Analysis, USGS Fact Sheet FS-028-01" (Washington, DC: April 2001); and David W. Houseknecht and Kenneth J. Bird, "Oil and Gas Resources of the Arctic Alaska Petroleum Province," U.S. Geological Survey Professional Paper 1732–A (Washington, DC: October 31, 2006).

96 In 2004, BP commissioned a study that examined the possibility of building a 20-inch pipeline to Fairbanks and using the Alaska railroad to transport the oil to Valdez, at an estimated cost of about $3 billion. Source: Alan Bailey, "A TAPS bottom line," Petroleum News, Volume 17, Number 3 (Anchorage, AK: January 15, 2012).

97The most common miscible gas EOR technique is to alternate the injection of gas and water, referred to as water-alternating-gas or WAG. Source: Oil and Gas Journal, "Special Report: EOR/Heavy Oil Survey: 2010 worldwide EOR survey", Volume 108, Issue 14, published April 19, 2010.

98 Capital expenditures can be split into two categories—maintenance and development—with development expenditures allocated to the development of new fields that have not yet reached peak production.

99 Source for 2011 CP capital expenditures—Petroleum News, "Eagle Ford Could Nudge Alaska for COP" (May 8, 2011); source for 2001 CP capital expenditures—Petroleum News, "Sunrise or Sunset for ConocoPhillips in Alaska?" (October 27, 2002); source for 2001 and 2011 CP split in capital expenditures—Petroleum News, "Johansen: Urgency Lacking on Throughput" (October 16, 2011).

100 These figures were derived from the CP ownership shares of the Colville River, Kuparuk River, and Prudhoe Bay field units and from the oil production reports of the Alaska Department of Natural Resources—Oil and Gas Division.

101 The volume of water produced relative to the volume of oil produced is referred to as the "water cut."

102 U.S. Geological Survey, Economics of Undiscovered Oil in Federal Lands on the National Petroleum Reserve—Alaska, by Emil Attanasi, Open-File Report 03-44 (January 2003), Figures A-2 (Alpine Field) and A-3 (Kuparuk Field).

103 In fact, these decisions would have to be made some time before the 350,000-barrel-per-day threshold is reached so they would be ready for implementation either prior to reaching the threshold or when that threshold is reached.

104 The owners of TAPS and operators of the North Slope fields might not know either at this junction what these future costs might be for both operating TAPS and the North Slope fields as volumes decline; at best they have estimates that might or might not turn out to be true.

105 The assumption that all North Slope exploration activity would cease with the decommissioning of TAPS might not be entirely realistic because some offshore oil fields might be economic to develop using floating production, storage, and offloading facilities (FPSO). This would be especially true in the Chukchi Sea, which has much less of an ice pack problem during the winter than the Beaufort Sea.

106 Maintenance capital expenditures could also decline if the field operators determined that drilling more wells was unprofitable.

107 Petroleum News, "Who Produces Crude Oil in Alaska?" Vol. 16, No. 43 (October 23, 2011).

108 ExxonMobil, 2010 Financial & Operating Review, Table entitled: "Oil and Gas Exploration and Production Earnings," p. 70.

109 See also EIA, "U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves," November 30, 2010.

110 The further delineation of unproved resources into inferred reserves and undiscovered resources is not applicable to continuous resources since the extent of the formation is geologically known. For continuous resources, the USGS undiscovered technically recoverable resources are comparable to the EIA unproved resources. The USGS methodology for assessing continuous petroleum resources is at pubs.usgs.gov/ds/547/downloads/DS547.pdf.

111 "Tight oil" refers to crude oil and condensates produced from low-permeability sandstone, carbonate, and shale formations.

112 See shale gas map for basin locations.

113 Appalachian; Arkoma; TX-LA-MS Salt and Western Gulf; Anadarko.

114 A well's estimated ultimate recovery (EUR) equals the cumulative production of that well over a 30-year productive life, using current technology without consideration of economic or operating conditions.

115 "Sweet spot" is an industry term for those select and limited areas within a shale or tight play where the well EURs are significantly greater than the rest of the play, sometimes as much as ten times greater than the lower production areas within a play.

116 USGS Fact Sheet FS-009-03.

117 A well's EUR equals the cumulative production of that well over a 30-year productive life, using current technology without consideration of economic or operating conditions.

118 USGS Fact Sheet 2011-3092.

119 USGS Open-File Report 2011-1298, page 2.

120 Well-level production from Pennsylvania is provided in two time intervals (annual and semi-annual). To estimate production on a comparable basis, well-level production is converted to an average daily rate by dividing gas quantity by gas production days. Because wells drilled before 2008 are vertical wells and do not reflect the technology currently being deployed, only wells drilled after 2007 are considered in the EUR evaluation. Well-level production for wells drilled in West Virginia is provided on a monthly basis.

Reference Case Tables
Table 1. Total Energy Supply, Disposition, and Price Summary XLS
Table 2. Energy Consumption by Sector and Source - United States XLS
Table 3. Energy Prices by Sector and Source - United States XLS
Table 4. Residential Sector Key Indicators and Consumption XLS
Table 5. Commercial Sector Key Indicators and Consumption XLS
Table 6. Industrial Sector Key Indicators and Consumption XLS
Table 7. Transportation Sector Key Indicators and Delivered Energy Consumption XLS
Table 8. Electricity Supply, Disposition, Prices, and Emissions XLS
Table 9. Electricity Generating Capacity XLS
Table 10. Electricity Trade XLS
Table 11. Liquid Fuels Supply and Disposition XLS
Table 12. Petroleum Product Prices XLS
Table 13. Natural Gas Supply, Disposition, and Prices XLS
Table 14. Oil and Gas Supply XLS
Table 15. Coal Supply, Disposition, and Prices XLS
Table 16. Renewable Energy Generating Capacity and Generation XLS
Table 17. Renewable Energy Consumption by Sector and Source XLS
Table 18. Energy-Related Carbon Dioxide Emissions by Sector and Source - United States XLS
Table 19. Energy-Related Carbon Dioxide Emissions by End Use XLS
Table 20. Macroeconomic Indicators XLS
Table 21. International Liquids Supply and Disposition Summary XLS