This paper presents the major assumptions of the National Energy Modeling System (NEMS) used to generate the projections in the Annual Energy Outlook 19991 (AEO99), including general features of the model structure, assumptions concerning energy markets, and the key input data and parameters that are most significant in formulating the model results. Detailed documentation of the modeling system is available in a series of documentation reports.2 A synopsis of NEMS, the model components, and the interrelationships of the modules is presented in The National Energy Modeling System: An Overview.3
The National Energy Modeling System
The projections in the AEO99 were produced with the National Energy Modeling System. NEMS is developed and maintained by the Office of Integrated Analysis and Forecasting of the Energy Information Administration (EIA) to provide projections of domestic energy-economy markets in the midterm time period and perform policy analyses requested by decisionmakers and analysts in the U.S. Congress, the Department of Energys Office of Policy and International Affairs, other DOE offices, and other government agencies.
The time horizon of NEMS is approximately 20 years, the midterm period in which the structure of the economy and the nature of energy markets are sufficiently understood that it is possible to represent considerable structural and regional detail. Because of the diverse nature of energy supply, demand, and conversion in the United States, NEMS supports regional modeling and analysis in order to represent the regional differences in energy markets, to provide policy impacts at the regional level, and to portray transportation flows. The level of regional detail for the end-use demand modules is the nine Census divisions. Other regional structures include production and consumption regions specific to oil, gas, and coal supply and distribution, the North American Electric Reliability Council regions and subregions for electricity, and aggregations of the Petroleum Administration for Defense Districts (PADD) for refineries. Only national results are presented in the AEO99, with the regional and other detailed results available on the EIA CD-ROM and EIA Home Page. (http://www.eia.gov/oiaf/forecasting/aeo99/homepage.html)
For each fuel and consuming sector, NEMS balances the energy supply and demand, accounting for the economic competition between the various energy fuels and sources. NEMS is organized and implemented as a modular system (Figure 1). The modules represent each of the fuel supply markets, conversion sectors, and end-use consumption sectors of the energy system. NEMS also includes macroeconomic and international modules. The primary flows of information among each of these modules are the delivered prices of energy to the end user and the quantities consumed by product, region, and sector. The delivered prices of fuel encompass all the activities necessary to produce, import, and transport fuels to the end user. The information flows also include other data such as economic activity, domestic production activity, and international petroleum supply availability.
The integrating module of NEMS controls the execution of each of the component modules. To facilitate modularity, the components do not pass information to each other directly but communicate through a central data storage location. This modular design provides the capability to execute modules individually, thus allowing decentralized development of the system and independent analysis and testing of individual modules. This modularity allows use of the methodology and level of detail most appropriate for each energy sector. NEMS solves by calling each supply, conversion, and end-use demand module in sequence until the delivered prices of energy and the quantities demanded have converged within tolerance, thus achieving an economic equilibrium of supply and demand in the consuming sectors. Solution is reached annually through the midterm horizon. Other variables are also evaluated for convergence such as petroleum product imports, crude oil imports, and several macroeconomic indicators.
Each NEMS component also represents the impact and cost of legislation and environmental regulations that affect that sector. NEMS reflects all current legislation and environmental regulations, such as the Clean Air Act Amendments of 1990 (CAAA90), the ozone transport rule (OTR), and the costs of compliance with other regulations. NEMS also includes an analysis of the impacts of the provisions of the Climate Change Action Plan (CCAP), which are separately described under each module.
The component modules of NEMS represent the individual supply, demand, and conversion sectors of domestic energy markets and also include international and macroeconomic modules. In general, the modules interact through values representing the prices of energy delivered to the consuming sectors and the quantities of end-use energy consumption. This section provides brief summaries of each of the modules.
Macroeconomic Activity Module
The Macroeconomic Activity Module provides a set of essential macroeconomic drivers to the energy modules, and a macroeconomic feedback mechanism within NEMS. Key macroeconomic variables include gross domestic product (GDP), interest rates, disposable income, and employment. Industrial drivers are calculated for thirty-five industrial sectors. This module is a kernel regression representation of the DRI/McGraw-Hill (DRI) U.S. Macroeconomic Model of the U.S. Economy.
International Energy Module
The International Module represents the world oil markets, calculating the average world oil price and computing supply curves for five categories of imported crude oil for the Petroleum Market Module (PMM) of NEMS, in response to changes in U.S. import requirements. International petroleum product supply curves, including curves for oxygenates, are also calculated.
Household Expenditures Module
The Household Expenditures Module provides estimates of average household direct expenditures for energy used in the home and in private motor vehicle transportation. The forecasts of expenditures reflect the projections from NEMS for the residential and transportation sectors. The projected household energy expenditures incorporate the changes in residential energy prices and motor gasoline price determined in NEMS, as well as the changes in the efficiency of energy use for residential end-uses and in light-duty vehicle fuel efficiency. Average expenditures estimates are provided for households by income group and Census division.
Residential and Commercial Demand Modules
The Residential Demand Module forecasts consumption of residential sector energy by housing type and end use, subject to delivered energy prices, availability of renewable sources of energy, and housing starts. The Commercial Demand Module forecasts consumption of commercial sector energy by building types and nonbuilding uses of energy and by category of end use, subject to delivered prices of energy, availability of renewable sources of energy, and macroeconomic variables representing interest rates and floorspace construction. Both modules estimate the equipment stock for the major end-use services, incorporating assessments of advanced technologies, including representations of renewable energy technologies, and analyses of both building shell and appliance standards.
Industrial Demand Module
The Industrial Demand Module forecasts the consumption of energy for heat and power and for feedstocks and raw materials in each of sixteen industry groups subject to the delivered prices of energy and macroeconomic variables representing employment and the value of output for each industry. The industries are classified into three groupsenergy intensive, nonenergy intensive, and nonmanufacturing. Of the eight energy-intensive industries, seven are modeled in the Industrial Demand Module with components for boiler/steam/cogeneration (BSC), buildings, and process/assembly (PA) use of energy. A representation of cogeneration and a recycling component are also included. The use of energy for petroleum refining is modeled in the Petroleum Market Module, and the projected consumption is included in the industrial totals.
Transportation Demand Module
The Transportation Demand Module forecasts consumption of transportation sector fuels, including petroleum products, electricity, methanol, ethanol, compressed natural gas, and hydrogen by transportation mode, vehicle vintage, and size class, subject to delivered prices of energy fuels and macroeconomic variables representing disposable personal income, GDP, population, interest rates, and the value of output for industries in the freight sector. Fleet vehicles are represented separately to allow analysis of the CAAA90 and other legislative proposals, and the module includes a component to explicitly assess the penetration of alternative-fuel vehicles.
Electricity Market Module
The Electricity Market Module (EMM) represents generation, transmission, and pricing of electricity, subject to delivered prices for coal, petroleum products, and natural gas, costs of generation by centralized renewables, macroeconomic variables for costs of capital and domestic investment, and electricity load shapes and demand. There are three primary submodulescapacity planning, fuel dispatching, finance and pricing. Nonutility generation and transmission and trade are represented in the planning and dispatching submodules. The levelized fuel cost of uranium fuel for nuclear generation is directly incorporated into the EMM. All CAAA90 and OTR compliance options are explicitly represented in the capacity expansion and dispatch decisions. Both new generating technologies and renewable technologies compete directly in these decisions.
Renewable Fuels Module
The Renewable Fuels Module includes submodules that provide explicit representation of the supply of biomass (including wood and energy crops), municipal solid waste (including landfill gas), wind energy, solar thermal electric and photovoltaic energy, and geothermal energy. It contains natural resource supply estimates and provides costs and performance criteria to the EMM. The EMM represents market penetration of renewable technologies used for centralized electricity generation.
Oil and Gas Supply Module
The Oil and Gas Supply Module represents domestic crude oil (including lease condensate), natural gas liquids, and natural gas supply within an integrated framework that captures the interrelationships among the various sources of supplyonshore, offshore, and Alaskausing both conventional and nonconventional techniques, including enhanced oil recovery and unconventional gas recovery from tight gas formations, shale, and coalbeds. This framework analyzes cash flow and profitability to compute investment and drilling in each of the supply sources, subject to the prices for crude oil and natural gas, the domestic recoverable resource base, and technology. Oil and gas production functions are computed at a level of twelve supply regions, including three offshore and three Alaskan regions. This module also represents foreign sources of natural gas, including pipeline imports and exports with Canada and Mexico, and liquefied natural gas imports and exports. Crude oil production quantities are input to the Petroleum Market Module in NEMS for conversion and blending into refined petroleum products. The supply curves for natural gas are input to the Natural Gas Transmission and Distribution Module for use in determining prices and quantities.
Natural Gas Transmission and Distribution Module
The Natural Gas Transmission and Distribution Module represents the transmission, distribution, and pricing of natural gas, subject to end-use demand for natural gas, the supply of domestic natural gas, and the availability of natural gas traded on the international market, on a seasonal basis. The module tracks the flow of natural gas in an aggregate, domestic pipeline network, connecting the domestic and foreign supply sources with twelve demand regions. This capability allows the analysis of impacts of interregional constraints in the interstate natural gas pipeline network and the identification of pipeline and storage capacity expansion requirements. The key components of pipeline and distributor tariffs are included in the pricing algorithms.
Petroleum Market Module
The Petroleum Market Module forecasts prices of petroleum products, crude oil and product import activity, and domestic refinery operations, including fuel consumption, subject to the demand for petroleum products, availability and price of imported petroleum, and domestic production of crude oil, natural gas liquids, and alcohol fuels. The module represents refining activities in three regions. The first region includes Petroleum Administration for Defense District (PADD) I, the second includes PADDs II, III, IV, and the third includes PADD V. The module uses the same crude oil types as the International Energy Module. It explicitly models the requirements of the CAAA90 and the costs of new automotive fuels, such as oxygenated and reformulated gasoline, and includes oxygenate production and blending for reformulated gasoline. Costs include capacity expansion for refinery processing units. End-use prices are based on the marginal costs of production, plus markups representing product distribution costs, State and Federal taxes, and environmental costs. State taxes are assumed to increase with inflation. On the other hand, Federal taxes are assumed to remain constant at nominal 1997 levels, not increasing with inflation.
Coal Market Module
The Coal Market Module represents mining, transportation, and pricing of coal, subject to the end-use demand for coal differentiated by physical characteristics, such as the heat and sulfur content. The coal supply curves include a response to mine production, labor productivity, and factor input costs. Twelve coal types are represented, differentiated by thermal grade, sulfur content, and mining process. Production and distribution are computed for eleven supply and thirteen demand regions, using imputed coal transportation costs and trends in factor input costs. The Coal Market Module also forecasts the requirements for U.S. coal exports and imports. The international coal market component of the module computes trade in four types of coal for twenty import and sixteen export regions. Both the domestic and international coal markets are represented in a linear program.
Cases for the Annual Energy Outlook 1999
The AEO99 presents five cases which differ from each other due to fundamental assumptions concerning the domestic economy and world oil market conditions. Three alternative assumptions are specified for each of these two factors, with the reference case using the midlevel assumption for each.
In addition to these five cases, additional cases presented in Table 1 explore the impacts of changing key assumptions in individual sectors. [Table 1. Summary of AEO99 Cases]
Many of the side cases were designed to examine the impacts of varying key assumptions for individual modules or a subset of the NEMS modules, and thus the full market consequences, such as the consumption or price impacts, are not captured. In a fully integrated run, the impacts would tend to narrow the range of the differences from the reference case. For example, the best available technology side case in the residential demand assumed that all future equipment purchases are made from a selection of the most efficient technologies available in a particular year. In a fully integrated NEMS run, the lower resulting fuel consumption would have the effect of lowering slightly the market prices of those fuels with the concomitant impact of increasing economic growth, thus stimulating some additional consumption. As another example, the higher electricity demand side case results in higher electricity prices. If the end-use demand modules were executed in a full run, the demand for electricity would be reduced slightly as a result of the higher prices and resulting lower economic growth, thus moderating somewhat the input assumptions. The results of these cases should be considered the maximum range of the impacts that could occur with the assumptions defined for the case.
All projections are based on Federal, State, and local laws and regulations in effect on July 1, 1998, including the additional fuels taxes in the Omnibus Budget Reconciliation Act of 1993, the CAAA90, the Energy Policy Act of 1992, the Outer Continental Shelf Deep Water Royalty Relief Act of 1995, and the Tax Payer Relief Act of 1997. Pending legislation and sections of existing legislation for which funds have not been appropriated are not reflected in these forecasts.
The projections include analysis of the provisions of the CCAP developed in 1993, which consists of forty-four actions to achieve carbon stabilization in the United States by 2000, relative to 1990. Thirteen of the actions not related to the combustion of energy fuels or to carbon dioxide and are not incorporated in the analysis. Since funding for many of the CCAP programs has been curtailed in budget negotiations, their full impact is not reflected in these projections. In addition, since some of the energy savings associated with CCAP programs are already in the baseline, the full projected impacts were reduced.
Carbon emissions from energy use are dependent on the carbon content of the fuel and the fraction of the fuel consumed in combustion. The product of the carbon content at full combustion and the combustion fraction yields an adjusted carbon emission factor for each fuel. The emissions factors are expressed in millions of metric tons of carbon emitted per quadrillion Btu of energy use, or equivalently, in kilograms of carbon per million Btu. The adjusted emissions factors are multiplied by energy consumption to arrive at the carbon emissions projections.
For fuel uses of energy, the combustion fractions are assumed to be 0.99 for liquid fuels and 0.995 for gaseous fuels. The carbon in nonfuel use of energy, such as for asphalt and petrochemical feedstocks, is assumed to be sequestered in the product and not released to the atmosphere. For energy categories that are mixes of fuel and nonfuel uses, the combustion fractions are based on the proportion of fuel use. Any carbon emitted by renewable sources is considered balanced by the carbon sequestration that occurred in its creation. Therefore, following convention, net emissions of carbon from renewable sources is taken as zero, and no emission coefficient is reported. Renewable fuels include hydroelectric power, biomass, photovoltaic, geothermal, ethanol, and wind energy.
Table 2 presents the carbon coefficients at full combustion, the combustion fractions, and the adjusted carbon emission factors used for AEO99. [Table 2. Carbon Emission Factors]
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