THE BEST THINGS FOR THE BEST ENERGY–CLIMATE BILL

Evaluating Renewable Portfolio Standards and Carbon Cap Scenarios in the U.S. Electric Sector
Lori Bird, Caroline Chapman, Jeff Logan, Jenny Sumner, and Walter Short, May 2010 (National Renewable Energy Laboratory)

THE POINT
There is not now any smart money betting that Congress will produce a substantive energy and climate bill in this term. Health insurance reform left gapping holes in the fabric of Congressional cooperation and the Gulf oil spill has not left a moment to repair them.

Though the nation is almost unanimous in its backing of New Energy and largely in favor of action on climate change, the Congress and the enthusiasts polarized. Between the Old Energy advocates who don’t even seem willing to talk about climate change and the climate change activists who don’t want to talk about the kind of compromise that might bring around some moderate conservatives, there really isn’t even much to talk about.

Each side has its champions and there are several bills with measured compromises that very few support. The economic benefits lost to this inaction is deeply troubling but the only reason there is any hope of legislation getting through the Senate is that Senators are so full of themselves. They could conceivably remain oblivious to the administration’s struggles with the mess in the Gulf, the mess in Afghanistan, the mess in the economic recovery and the many small messes of each passing moment and pass something.

But even if the Senate does squeeze out some legislation, its bill would likely be irreconcilable with a very different House bill passed in the very different and now distant past of the summer of 2009.

It’s a wonderful moment in which to pause and wonder what an ideal energy-climate bill could be. Evaluating Renewable Portfolio Standards and Carbon Cap Scenarios in the U.S. Electric Sector, from market and policy impact analysts at the National Renewable Energy Laboratory (NREL) does some of that.

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An ideal energy bill would certainly include a national Renewable Electricity Standard (RES) – known in the more wonkish NREL circles by its previous name of Renewable Portfolio Standard (RPS). An RES would require the nation’s regulated utilities to obtain a specific portion of their power from New Energy sources by a specific date. The big RES questions are: How much New Energy? And by what date?

An ideal climate bill would include a hard cap on greenhouse gas emissions (GhGs). The questions that come with a GhG cap are: How much of a reduction how soon? And what is the best and fairest method to implement and achieve the cap?

The study looks at impacts from a cap similar to that in the House legislation (H.R. 2454, a.k.a. the Waxman-Markey bill) and lower and higher caps. It looks at impacts of RESs requiring utilities to get 15%, 20%, and 25% of their power from New Energy by 2020 with variations on the implementation schedule running to 2030. It models variations in the mix of energies, the amount of GhGs and the price of electricity to see how they affect the impacts of the policies.

The study’s caps and RES requirements are more stringent than would likely emerge from Congressional legislation which, necessarily, must be the result of compromise. The numbers might be the same but legislation would likely exempt some utilities or allow efficiency to substitute for New Energy.

Like Waxman-Markey, the study’s base cap would cut U.S. GhGs 17% from the 2005 level by 2020, and 42% by 2030. It also follows Waxman-Markey by including an allowance market in which capped emitters could buy and sell emissions allowances to meet their caps, as well as offsets and the banking of allowances.

The study considers a “low cap” (that allows 20% more GhGs than Waxman-Markey) and a “high cap” (20% more restrictive than Waxman-Markey) and it assesses the issues and impacts of implementing a Cap&Trade system and an RES simultaneously. It draws its conclusions for this section partially from experience in the Regional Greenhouse Gas Initiative (RGGI) and the European Union’s Emissions Trading Scheme (ETS).

The study’s key finding: A GhG cap and an RES can compliment one another. The first cuts GhGs and the second drives the growth of New Energy. Both actually do a lot of both and both are more effective when implemented in conjunction with policies driving Energy Efficiency (EE).

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THE DETAILS
The study’s 6 key findings:

(1) A GhG cap and an RES can compliment one another. One cuts GhGs and one drives the growth of New Energy. Both do both and both are more effective when implemented in conjunction with policies driving Energy Efficiency (EE).

(2) Because a cap forces the elimination of coal, it creates more New Energy than an RES but it results in higher electricity prices. A cap alone would achieve 19% non-hydro New Energy in 2020 and 40% in 2030. Adding Energy Efficiency (EE) requirements, non-hydro New Energy would be 16% in 2020 and 38% in 2030, but with lower electricity price increases. The electricity price with EE in 2020 would be 4% lower than with a cap alone. (Note: EE measures may have other, uncalculated costs.)

(3) A 25% RES cuts emissions as much as the base cap in the near term with a similar electricity price. It is even more effective, with comparable electricity price controls, when EE is included. It does not, however, guarantee emissions reductions over the long term and could fail to cut GhGs if electricity demand rises sharply.

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(4) An RES plus a cap will likely cut emissions more in the short term. With EE, they add much New Energy and effectively cut GhGs in the 2015-to-2020 period. By 2030, the cap alone would grow more New Energy.

(5) With an RES and a cap, electricity prices do not “substantially” increase. Even with a more demanding RES, the electricity price is predicted to be lower than the baseline reference case in the 2025-to-2030 period. A cap, a 25% RES and EE would produce an electricity price 2% below baseline reference case in 2030.

(6) The emissions allowance price imposed in a Cap&Trade system is lower when there is also an RES and EE requirements. This is because compliance costs go to the 3 measures instead of just the Cap&Trade system. The allowance price is lowest for the highest (25%) RES.

The analysis uses the National Renewable Energy Laboratory (NREL) Regional Energy Deployment System (ReEDS) model that simulates the least-cost expansion of U.S. electricity generation capacity and transmission.

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The Waxman-Markey bill, (American Clean Energy and Security Act of 2009 H.R. 2454), passed by the House in June 2009, has a Cap&Trade system and an RES.

Some Senate proposals include an RES and/or a Cap&Trade system or some other version of a cap: (1) The Bingaman bill, S. 1462, contains a national RES provision. (2) The Kerry-Lieberman bill has a limited Cap&Trade system. (3) The Graham proposal has a clean energy standard (CES) that is like a national combined EE and RES (CERES), but includes nuclear, “clean” coal, and newly retired “dirty” power plants in its clean electricity target calculation. (4) The Cantwell-Collins CLEAR Act would cap emissions and rebate the revenues directly.

29 states and the District of Columbia hav RESs.

The Regional Greenhouse Gas Initiative (RGGI) established a Cap&Trade system in 10 northeastern and mid-Atlantic states and aims to cut emissions from the power sector 10% below the 2009 level by 2018. The Western Climate Initiative (WCI) and the Midwest Greenhouse Gas Reduction Accord – both with Cap&Trade systems – are being developed.

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The NREL analysis includes an assessment of various kinds of caps, various RESs, of combining them, and of overlapping renewable energy certificate (REC) programs and carbon markets. The RGGI and the European Union’s Emissions Trading Scheme (ETS) experiences are also evaluated.

A reference case is compared with 4 scenarios: (1) a cap alone, (2) a 15% RES, (3) a 25% RES, and a 15% RES with a cap. The amount of New Energy in 2020 and 2030 is calculated for each. No Energy Efficiency (EE) is assumed in the reference and cap alone scenarios so the cap alone is estimated to produce the most New Energy. This is because it forces the elimination of coal.

The long term: Adding a cap to a 15% RES creates more than twice as much New Energy capacity in 2030 as the RES alone. The biggest part of this New Energy would come from wind. CSP, geothermal, and biopower make significant contributions. A 15% RES without a cap does not change the 2030 energy mix much from the reference case. The 25% RES creates more New Energy, but not as much as when a cap is added.

The short term: In 2020, a 25% RES creates more New Energy (864 TWh ) than any cap
Scenario (cap-only: 800 TWh; cap + 15% RES: 594 TWh). The cap-only scenario creates more New Energy than the cap + 15% RES because there is no EE included so total energy demand is higher. With EE, both create about the same amount of New Energy. A cap-only creates ~20% (100 TWh) more New Energy than a 15% RES only.

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An RES cuts natural gas use but sustains more coal than with a cap. Adding a 15% RES and EE to a cap uses 2-to-5% more coal because overall energy use is reduced, allowing coal use to continue while emissions fall.

The best policy to cut coal is the cap. In the reference case, coal is ~50% of the energy mix. With a cap + a 15% RES, coal is ~25% of the energy mix in 2030. Part of this is because “clean” coal cannot become part of the energy mix in 2030 because it is too costly. In 2020, the cap shifts the energy mix from coal to natural gas. By 2030, the cap has the same amount of natural gas and more New Energy.

For the same reasons, the cap cuts the most GhGs, especially in the longer (2030) term. The cap is estimated to cut GhGs ~50% in 2030. RESs with EE match the cap-only emissions cuts in 2020. But the RESs do not provide a price signal that influences longer-term technology choices and investment decisions and so are less effective at emissions-cutting in the longer (2030) term.

Neither a cap nor an RES causes a substantial increase in the electricity price. The investment in New Energy and Energy Efficiency technologies have high capital costs but fuel costs and demand are reduced. The cap-only and the cap + 15% RES cause higher electricity prices (though they also bring the highest GhG cuts).

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A cap + 15% RES increases the electricity price 7% in 2030. The cap-only increases the price 9% in 2030. EE lowers the electricity price. Adding EE to the cap-only brings the 9% to 7%. With any RES, the electricity price is less than the baseline reference price when it is assumed that EE is included.

The cap used in the study is the Waxman-Markey standard of cutting emissions 17% below the 2005 level by 2020 and 42% below it by 2030. The low emissions cap scenario evaluated in the study had 20% less aggressive GhG cuts than Waxman-Markey and the high emissions cap had 20% more aggressive GhG cuts than Waxman-Markey. The findings clearly showed that the cap has a stronger impact on New Energy capacity, especially in the shorter (2020) term, than the RESs.

Although there is little real world experience to verify it, the analysts’ modeling suggests the cap and the RES reinforce one another’s impact. The RES drives New Energy growth and thereby cuts emissions. The cap limits emissions and thereby drives New Energy and Energy Efficiency growth. Both would result in dramatic energy security, environmental and economic benefits.

The best examples of a Cap&Trade system operating in conjunction with an RES are (1) the European Union’s ETS and (2) the Regional Greenhouse Gas Initiative.

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QUOTES
- The 6 key findings of the NREL study about emissions caps and Renewable Electricity Standards: “ [1] A carbon emissions cap and an RPS can be complementary policies. [2] A base cap alone drives significant renewable generation but at higher electricity prices than scenarios that include load reduction from energy efficiency. [3] A 25% RPS results in similar emissions levels as the base cap in the near term at similar electricity price. The adoption of a 25% RPS along with efficiency, [4] Renewable portfolio standards combined with emissions caps could drive renewable energy generation beyond that achieved by emissions caps, particularly in the near term. [5] Combining an RPS with a base cap does not lead to substantially greater electricity prices, [6] The addition of an RPS and efficiency to a base cap results in a reduction in carbon dioxide (CO2) allowance prices… “