Introduction

On December 20, 2001, Sen. Frank Murkowski, the Ranking Minority Member of the Senate Committee on Energy and Natural Resources requested an analysis of selected portions of Senate Bill 1766 (S. 1766, the Energy Policy Act of 2002) and House Bill H.R. 4 (the Securing America’s Future Energy Act of 2001)¹. On February 6, 2002, Sen. Murkowski provided specific information on the provisions of S. 1766 that were to be analyzed, as well as, guidance on additional analysis.²  In response, the Energy Information Administration (EIA) has prepared a series of analyses showing the impacts of each of the selected provisions of the bills on energy supply, demand, and prices, macroeconomic variables where relevant, import dependence, and emissions. The analysis provided is based on the Annual Energy Outlook 2002³ (AEO2002) midterm forecasts of energy supply, demand and prices through 2020.

Because of the rapid delivery requested by Sen. Murkowski, each requested component of the Senate and House bills was analyzed separately, that is, without analyzing the interactions among the various provisions. Because of the approach taken:

• The combined impact of the individual policies cannot be determined by simply summing the individual policy impacts.  For example, a provision establishing a renewable portfolio standard (RPS) for electricity production, and one that establishes a bio-diesel program for transportation fuels, each increases the use of biomass. The simultaneous enactment of the two provisions would be likely to increase biomass costs because of the competition for land and other needed resources. The estimated fossil energy displaced will therefore be lower than the sum of the two individual policy impacts because of the higher resource costs. Stated another way, the impacts of multiple simultaneous policies are non-linear.

• Some policies will interact to increase the overall response while others may interact to mitigate the impacts of each other. For example, when two separate policies increase demand and, consequently, production of an advanced technology, the reductions in manufacturing costs expected from increased production are likely to be accelerated, making the technology even more attractive in later years. The total adoption of the advanced technology in this case could be greater than the sum of the parts.

In addition, the following should also be noted:

• Computation of expected benefits and costs of equipment installed at the end of the forecast horizon (e.g., 2020) requires estimates of costs and prices for a number of years beyond this period. Since EIA does not project costs, prices or benefits past 2020, the estimates of the benefits after 2020 must be assumed for equipment installed by 2020. For example, analyzing consumer product standards for air conditioners through 2020 requires an estimate of the savings through 2036, because of the expected operating life of the new equipment that is projected to be installed. AEO2002, however, only produces projections through 2020. For the remaining years from 2021 to 2036, we have assumed the savings remain constant at 2020 levels.  Such estimates of savings are highly uncertain and could be higher or lower than this estimate.

• Some aspects of the bills cannot be modeled because they lack specificity.  For example, several provisions of the bill require the Department of Energy (DOE) to evaluate the desirability of setting standards for stand-by power and other electronic devices.  Because the legislation does not state what the standards will be, EIA cannot quantitatively analyze them.

EIA’s projections are not statements of what will happen but what might happen, given known technologies, current technology and demographic trends, and current laws and regulations. Thus, the AEO2002 provides a policy-neutral reference case that can be used to analyze energy policy initiatives, as has been done in each of these studies. EIA does not propose, advocate or speculate on future legislative or regulatory changes. Laws and regulations are assumed to remain as currently enacted or in force in the reference case; however, the impacts of emerging regulatory changes, when clearly defined, are reflected.

Models are simplified representations of reality. Projections are highly dependent on the data, methodologies, model structure and assumptions used to develop them. Because many of the events that shape energy markets are random and cannot be anticipated (including severe weather, technological breakthroughs, and geo-political disruptions), energy market projections are subject to uncertainty.  Further, future developments in technologies, demographics and resources cannot be foreseen with any degree of certainty. These uncertainties are addressed through analysis of alternative cases in the AEO2002.

This study addresses the renewable portfolio standard provision of S. 1766.  At Senator Murkowski’s request it also includes an analysis of the impacts of a renewable portfolio standard patterned after the one called for in S. 1766, but where the required share is based on a 20 percent RPS by 2020 rather than the 10 percent RPS called for in S. 1766. This analysis does not incorporate any other provisions of S. 1766, such as new appliance efficiency standards or new car fuel efficiency standards.

Notes