EIA Releases Study on Proposed Clean Air Standard

The Energy Information Administration (EIA) just released another study on a Clean Energy Standard proposed by Senator Bingaman,[i] the Chairman of the Senate Committee on Energy and Natural Resources. The result is the same as before—a “Clean Energy Standard” drives up the cost of electricity.[ii]  A Clean Energy Standard is a mandate that a specified share of electricity be generated from qualified energy resources. This EIA study evaluated the Clean Energy Standard Act of 2012[iii]; while EIA’s earlier study evaluated a previous version of the bill. Due to the Clean Energy Standard, average national electricity prices in 2035 are 18 percent higher than in the corresponding reference case in 2035 due to the building of higher cost nuclear and non-hydroelectric renewable units to mainly replace coal-fired units forced to retire because of the standard.

The Clean Energy Standard (CES) of 2012

Senator Bingaman’s proposal requires 24 percent of electricity generation in 2015 to be from qualified “clean” sources of energy increasing to 84 percent in 2035 and remaining constant thereafter. The bill uses a byzantine description of what is “clean” energy. For example, all existing and new wind, solar, geothermal, municipal solid waste, and landfill gas electric generating plants get full credit. Also, all hydroelectric and nuclear plants or additions to existing plants placed in service after 1991 get full credit (apparently plants placed in service before 1991 are not considered “clean”).

Generation from hydroelectric and nuclear units operating before 1992, while not receiving any credit are also not required to purchase credits to cover the generation they produce as non-qualifying fossil fuel plants must do. Coal and natural gas plants receive partial credits based on their carbon intensity, that is, the amount of carbon dioxide emitted per unit of generation.

Biomass generators are assumed in the EIA study to be carbon-neutral and receive full credit. However, the bill specifies that the carbon intensity of biomass will be based on a required study undertaken by the National Academy of Sciences. Also qualifying for credits based on their carbon intensity are combined heat and power units that have a system efficiency greater than 50 percent.

Small electricity sellers with sales of 2,000,000 megawatt-hours or less in 2015 are exempt, but that ceiling declines linearly to 1,000,000 megawatt-hours by 2025 and later. Electricity retailers may comply by paying 3 cents per kilowatt-hour in 2015, increasing by 5 percent per year, inflation-adjusted. Clean energy credits can be traded among electricity retailers.

The Impact of the Standard

Generation. As expected, EIA estimates that under Senator Bingaman’s CES, coal-fired generation decreases significantly compared to a reference case without the clean energy standard. Under the CES, coal-fired generation is replaced by nuclear, natural gas, and non-hydroelectric renewable technologies. EIA estimates that the CES reduces coal-fired generation 25 percent below the reference case level in 2025 and 54 percent below in 2035. Natural gas-fired generation is 13 percent above reference case levels in 2020 but is only 8 percent higher by 2035 because EIA estimates that new renewable and nuclear capacity will coming on line. Nuclear generation is 16 percent above reference case levels in 2025 and 62 percent higher in 2035, with about 80 new plants being built, 70 more than in the reference case.  Nuclear capacity is needed to satisfy base-load demand for electricity to replace 97 gigawatts of retired coal-fired capacity, 33 gigawatts more than in the reference case.

Non-hydroelectric renewable generation increases by 42 percent over reference case levels in 2025 and by 34 percent in 2035. Wind and biomass technology show the largest increases. Solar generation under the clean energy standard increases in the residential and commercial sectors by 71 percent over the reference case in 2035, but there is a corresponding drop of solar photovoltaics in the electric generating sector of 68 percent compared to the reference case in 2035, with the shift taking place mostly in California due to timing and market dynamics.

 Note: BCES 12 denotes the results under the Clean Energy Standard

Electricity Prices. Average national electricity prices are 18 percent higher in 2035 than in the reference case with the difference in prices increasing over time as compliance moves from using more natural gas and biomass at existing facilities and towards requiring investment in new combined cycle, renewable, and nuclear capacity. Prices vary regionally by exempt versus non-exempt electricity providers, the state regulatory structure, and regulator discretion, which determines how credit revenues and expenditures are implemented in retail electricity prices. By 2030, depending on the region, providers covered by the Clean Energy Standard pay from 3 percent to 30 percent more than providers exempt from the Standard in the same region.

Electricity Price Comparison between EIA’s Reference Case and Clean Energy Standard Case

 Source: Energy Information Administration, Analysis of Clean Energy Act 2012, May 2, 2012, http://www.eia.gov/analysis/requests/bces12/

Carbon Dioxide Emissions. Carbon dioxide emissions from electric generating plants are 20 percent lower than the reference case in 2025 and 44 percent lower in 2035, resulting in total carbon dioxide emissions from energy being 8 percent lower than the reference case in 2025 and 18 percent lower in 2035.Total energy-related carbon dioxide emissions in 2035 are about 20 percent lower than those in 2005.

Uncertainty in Nuclear Generation. There is much uncertainty associated with the amount of nuclear generation required under the bill. If nuclear generation were excluded from the suite of potential technologies, more natural gas-fired generation and more non-hydroelectric renewable generation would be required. The additional natural-gas fired generation results in more carbon dioxide emissions than if nuclear generation were used to comply. Electricity prices and compliance costs are also higher.

Conclusion

Any time policy deviates from what the market intends, prices are higher for consumers. It is no different for a Clean Energy Standard than for any other policy in this regard.  The United States has vast coal resources, more than any other country in the world. A Clean Energy standard would have those resources remain in the ground and ask other sources to pick up the 20 percent of U.S. energy currently supplied by coal.