June 02, 2009
The Balancing Act: Climate Change, Energy Security and the U.S. Economy
Related Studies & Resources
Dear Business Leaders and Stakeholders:
On behalf of Business Roundtable’s Sustainable Growth Initiative, I am pleased to present — a thoughtful, forward-looking study designed to inform policymakers about the choices and consequences associated with addressing the risks of global climate change.
Business Roundtable believes that leadership on global climate change is not just a job for government. We believe the business community has a special obligation to step forward as well because of our central role in producing, distributing and consuming energy, and because of our role in building an environmentally and economically sustainable future through our contributions to the development and deployment of new, efficient, low-carbon technologies.
Consistent with this role, represents a vision for advancing America’s long-term economic, environmental and energy security interests through the development and deployment of advanced technologies. Leveraging the extensive technological, economic and policy expertise of Business Roundtable member companies, the study identifies key barriers to technology development and deployment, presents sensible policy recommendations for removing these barriers, and quantifies the potential economic and environmental impact of adopting those recommendations.
The study is the culmination of a year-long effort, and the economic and political environment has evolved rapidly since we began. The global community is now engulfed in a serious recession, investment has retrenched worldwide and a number of key industries are in a fragile state. Meanwhile, America has elected a new president, Congress has passed the largest stimulus package in the nation’s history, and energy and environmental legislation has moved to the top of the agenda. Although not all of these developments are fully reflected in the study, we believe that the central messages remain true. America’s long-term economic, environmental and energy security challenges remain unchanged. Forging solutions that simultaneously address all of these long-term challenges will be essential to placing the nation on a pathway toward truly sustainable growth. We believe that the development and deployment of advanced technologies holds the key.
Global climate change is an exceedingly complex issue, and there is a wide range of views about the balance of risks to society and the appropriate response by government. Business Roundtable membership reflects this diversity of opinion, and the Sustainable Growth Initiative has focused on finding points of consensus within the business community. The Balancing Act represents an ambitious effort to forge such a consensus. Although not all Roundtable members agree with every statement or each policy recommendation, we all agree with the central conclusion: that a balanced portfolio of advanced technologies will be critical to forging a climate change policy that is sustainable from an environmental, economic and energy security perspective.
America cannot afford narrow approaches to climate change that threaten to simply exchange one unsustainable pathway for another. The challenge is too great, the future too uncertain, the stakes too high. America needs a sustainable climate change policy that unleashes technological innovation; encourages new investment; and leverages domestic resources to bring our environmental, economic and energy security interests into balance.
Michael G. Morris
Chairman, President and CEO
American Electric Power Company, Inc.
Chairman, Sustainable Growth Initiative
According to leading scientists, there is increasing evidence that the Earth’s climate has been warming over the last century and that increases in temperature are affecting many global ecosystems. At the same time that warming has been occurring, greenhouse gas (GHG) concentrations in the atmosphere have increased due to rising worldwide GHG emissions. Major sources of these emissions include the combustion of fossil fuels, tropical deforestation and other land-use changes. Because the consequences of climate change for society and ecosystems are potentially serious and far-reaching, steps to address the risks of such climate change are prudent now, even while the science continues to evolve.1
Business Roundtable supports collective actions that will lead to the reduction of GHG emissions on a global basis with the goal of slowing increases in atmospheric concentrations and eventually stabilizing them at levels that will reduce the risks of climate change. While the Roundtable supports actions to address climate change, its members have a range of views and preferences about the policy tools that will best achieve this objective. Recognizing that legislation and regulation are currently under consideration, the Roundtable supports an open and constructive dialogue about the principles that should shape climate policy and the pros and cons of various strategies.2
Leadership in addressing climate change is not just a job for government. The business community has a special obligation to step forward because of its central role as a major producer, distributor and consumer of energy. The business community’s importance to forging an environmentally and economically sustainable future is heightened by its critical contributions to the development and deployment of new, efficient, low-carbon technologies.
Consistent with this role and the desire to contribute to an open and constructive dialogue, Business Roundtable undertook a collaborative effort among member companies to develop, evaluate and recommend technology-based solutions to meet the “sustainable growth challenge” — that is, the challenge of achieving large-scale reductions in GHG emissions while also maintaining robust economic growth and enhancing energy security. During a six-month process, experts from more than 30 Roundtable member companies regularly convened to evaluate the potential of various technologies; identify key barriers to realizing each technology’s full potential; develop recommendations for removing those barriers; and quantify the economic, environmental and energy impacts of implementing those recommendations.
The point of departure for this effort was an assessment of the nation’s key economic, environmental and security challenges. Based on this evaluation, Business Roundtable identified three strategies that are likely to form the foundation of a successful sustainable growth agenda:
(1) More efficiently consume electricity and heating fuels in homes and businesses;
(2) Leverage domestic resources to produce cost-effective, low-carbon electricity; and
(3) Modernize the transportation fleet and diversify the transportation fuel mix.
Business Roundtable then identified a portfolio of six “technology pathways” that are critical to implementing these strategies, as well as two “enabling pathways” that are essential to realizing the full potential of the entire portfolio. The six technology pathways include building efficiency improvements, renewable power generation, advanced nuclear power generation, carbon capture and storage, advanced vehicle technologies, and advanced biofuels — all of which demonstrate great promise as contributors to a more sustainable future. The two enabling pathways include grid modernization and enhanced domestic supply of oil and natural gas — the former being a technical prerequisite for implementing many efficiency and low-carbon electric power technologies, and the latter being vital to creating the stable economic conditions necessary to support large-scale investments in the nation’s energy system.
To determine the potential economic, environmental and energy impacts associated with Business Roundtable’s policy package, each pathway was rigorously evaluated by a team of Roundtable member company engineers, economists and public policy experts. Each team’s inputs were then modeled by the University of Maryland’s Inforum Modeling Project and Keybridge Research LLC. Modeling simulations were conducted with Inforum’s highly respected Long Term Interindustry Forecasting Tool (LIFT), a dynamic general equilibrium model of the U.S. economy that uses a unique bottom-up technique to simulate economic, environmental and energy impacts.
The modeling framework assumes that a carbon price is established in 2012 and compares simulations in which Business Roundtable’s recommendations for removing barriers to technology development and deployment are adopted to simulations in which they are not. In addition, each scenario is conducted under both “low” and “high” carbon price trajectory assumptions, which helps to bound the analysis and explore key sensitivities. Importantly, the study remains agnostic as to the type of instrument that is used to establish the carbon price (e.g., a cap-and-trade system or a carbon tax) and instead focuses on the larger policy, market and technological context into which the carbon pricing instrument might be inserted.
The purpose of the modeling exercise is to compare and evaluate policy recommendations that have the potential to reduce barriers to technology development and deployment and thereby improve outcomes for American households and businesses. The simulations are not forecasts of what Business Roundtable or its member companies believe will happen. Rather, they are illustrative scenarios of how carbon prices, technologies and policies may interact in the coming decades to influence key economic, environmental and energy variables.
The modeling results demonstrate that an approach that leverages a balanced portfolio of technologies, including all pathways identified above, combined with strong policy leadership that eliminates critical barriers to technology development and deployment, will dramatically increase the nation’s prospects for meeting the sustainable growth challenge.3 Furthermore, given the uncertainties associated with long-term technological progress and energy price trends, other pathways will likely be necessary to reach ambitious GHG reduction targets in an economically sustainable manner. These other pathways may include some that are readily available today (e.g., enhanced domestic production of natural gas coupled with increased natural gas utilization in the electric power industry), some that are currently under development (e.g., the application of advanced vehicle technologies to the heavy-duty vehicle fleet) and still others yet to be imagined.
In general, the modeling analysis finds that the imposition of a carbon price is likely to have a significant negative impact on the economy. In the short term, the imposition of a carbon price will likely result in significant dislocations throughout the economy that are likely to be borne unequally across regions and industries. Policymakers must endeavor to make this transition as smooth as possible. The modeling results also suggest, however, that a balanced portfolio of technologies coupled with strong policy leadership can mitigate the long-term economic costs associated with a sharp reduction of GHG emissions and help the nation reach a sustainable equilibrium.
Specifically, the study finds that:
◗ In the absence of policies that remove barriers to technology development and deployment, imposing a price on carbon is likely to result in significantly lower U.S. economic growth in coming decades.
In scenarios in which a carbon price is established but Business Roundtable’s policy recommendations are not adopted, real GDP declines by approximately 2 percent by 2050, while CO2 emissions are reduced by 19–44 percent.4 Furthermore, under such assumptions, efforts to mandate a higher level of GHG mitigation — either directly by establishing a more ambitious GHG emission cap or indirectly by imposing a more aggressive carbon tax — are likely to result in significantly lower rates of economic growth than those envisioned in this study.
◗ In contrast, a balanced portfolio of technologies coupled with policy leadership can significantly mitigate the negative effects on U.S. economic growth while achieving greater reductions in GHG emissions.
In scenarios in which a carbon price is established and Business Roundtable’s recommendations are adopted, real GDP declines by less than 1 percent by 2050, while CO2 emissions are reduced 45–62 percent. In short, the Roundtable’s policy recommendations for removing barriers to technology development and deployment are estimated to deliver almost twice the GHG mitigation at roughly half the economic cost.5
◗ A balanced portfolio approach is likely to be the only approach that has the potential to achieve the large-scale reductions in GHG emissions advocated by many policymakers.
In scenarios in which both a carbon price is established and Business Roundtable’s policies are adopted, CO2 emissions decrease by an average of 5.1 gigatons in 2050, an impressive reduction given that additional reductions are likely from activities not explicitly modeled in this analysis. Nevertheless, the fact that many policymakers support even more ambitious emissions targets suggests that a portfolio approach that leverages all six technology pathways (and others not examined in this study) is likely to be the only approach that has the potential to meet many policymakers’ goals. Ultimately, a strategy that relies on anything less than a balanced portfolio of technologies will likely require significantly higher carbon prices and incur substantially greater economic costs to achieve a given level of mitigation.
◗ A balanced portfolio of technologies combined with policy leadership can reduce energy consumption, diversify the transportation fuel supply mix and enhance energy security.
In scenarios in which both a carbon price is established and Business Roundtable’s recommendations are adopted, the electrification of the transportation sector combined with the deployment of hydrogen fuel cell vehicles, increased penetration of advanced biofuels and continued advancement in internal combustion engine technology reduces energy consumption and greatly diversifies the transportation fuel supply. At the same time, the analysis suggests that the increased deployment of some advanced vehicles is likely to enhance consumers’ capacity to alternate among fuels and respond to evolving market conditions. This combination of fuel supply diversity and fuel choice flexibility is likely to reduce the nation’s vulnerability to instability in any one energy market and improve the economy’s resiliency in the face of fuel price volatility.
◗ Policy leadership can provide relief to American households from the costs associated with reducing GHG emissions.
In scenarios in which a carbon price is established but Business Roundtable’s recommendations are not adopted, average annual household consumption — a common measure of household welfare — decreases by $800–1,500 (2008$) per year relative to the business-as-usual baseline, or 0.7–1.2 percent of average annual household consumption, over the 2010–50 period. This decrease represents the cost to U.S. households of transitioning to a low-carbon economy.
This study finds, however, that this cost can be cut in half through policy leadership that accelerates technology development and deployment. In this case, average annual household consumption is reduced by $400–800 (2008$) per year, or 0.3–0.7 percent of average annual household consumption over the 2010–50 period. In short, the cumulative benefits associated with Business Roundtable’s policy package could substantially reduce the transitional costs to American households.
◗ Policy instruments that are transparent, consistent and gradual will be more effective and are more likely to minimize the economic impact of climate change policies.
Model simulations conducted for this study indicate that, especially in the initial years of the policy, the imposition of a carbon price will result in significant dislocations within the economy. This is likely to reduce real GDP growth, household consumption and other indicators associated with economic welfare, particularly if the nation is expected to adapt abruptly to the carbon constraint. On the other hand, transparent and steady policy instruments introduced gradually and incrementally are likely to enable businesses, investors, workers and consumers to better prepare and take appropriate action to minimize costs.
◗ The economic and environmental impacts of U.S. climate change policies are highly dependent on the policies adopted by major trading partners.
This study assumes that America’s major trading partners adopt climate change policies that, on average, result in less substantial price increases than those experienced in the United States. Specifically, it is assumed that a policy-induced price increase of $1.00 for goods and services produced in the United States is matched by a price increase of $0.80 for goods and services produced by U.S. trading partners. This price increase differential reflects a loss in U.S. competitiveness that registers as a small but significant decrease in net exports, which reduces real GDP. If foreign prices were set to reflect even less reciprocal action by trading partners, the additional loss of U.S. competitiveness would likely further reduce GDP.
This underscores the importance of insuring that U.S. actions on climate change are both cost-effective and matched with credible commitments by other countries. Although not explicitly examined in this study, the loss of competitiveness that results from sharply asymmetric climate change policies could potentially shift production and investment to less regulated jurisdictions. In addition to the economic damages such a shift in production and investment would cause the U.S. economy, it could also result in so-called “emissions leakage” — an offsetting increase in emissions in other, less heavily regulated countries. Consequently, policymakers must remain sensitive to the prospect of emissions leakage in energy intensive and globally competitive industries and design policy frameworks that have the potential to level the carbon playing field for these uniquely challenged sectors.
◗ The economic costs required to achieve large-scale reductions in GHG emissions will not be shared equally by all industries or all regions.
It is important to note that the economic costs required to achieve large-scale reductions in GHG emissions will not be shared equally by all industries or all regions of the country. The current study focuses on the macroeconomic impacts of climate change policies, but the reported aggregate impacts mask the significant dislocation and adjustment process that would accompany any climate change policy and do not reveal the hardships and challenges that businesses, investors, workers and consumers in particular sectors of the economy will experience in adapting to a carbon-constrained world. Policymakers must endeavor to make this transition as smooth as possible.
The modeling results suggest that addressing the issue of climate change by either directly or indirectly placing a price on carbon is likely to place a significant strain on the U.S. economy. The results also suggest, however, that strong policy leadership can significantly mitigate these negative economic impacts by accelerating the development and deployment of advanced technologies. These technologies have the potential to cost-effectively reduce GHG emissions in the residential and commercial buildings, electric power, and transportation sectors of the economy, which are responsible for the bulk of GHG emissions. Meeting the sustainable growth challenge will not be easy, however, and policy leadership will require practical solutions, political compromise and bipartisan cooperation.
In addition, the results illustrate that there is no single technological solution to the sustainable growth challenge. Any policy that fails to leverage the full potential of a balanced portfolio of technologies is likely to either fail to achieve a desired level of emissions reductions or achieve a mandated level of emissions reductions by imposing unacceptable costs on the economy — thereby simply exchanging one unsustainable pathway for another.
The key lesson for policymakers is that any sustainable climate change policy must be based on a robust approach to technology development and deployment. Climate change policy must not only reflect current technological expectations but must also acknowledge the likelihood that some promising technologies may underperform expectations while other technologies that are less visible today may emerge as cost-effective solutions. Given the long-term nature of climate change policies and the uncertainties associated with technological progress, a balanced portfolio approach coupled with strong policy leadership is likely to be the only approach that can simultaneously and sustainably advance the nation’s economic, environmental and security objectives.
Introduction and Background
The Sustainable Growth Challenge
According to leading scientists, there is increasing evidence that the Earth’s climate has been warming over the last century and that increases in temperature are affecting many global ecosystems. At the same time that warming has been occurring, greenhouse gas (GHG) concentrations in the atmosphere have increased due to rising worldwide GHG emissions. Major sources of these emissions include the combustion of fossil fuels, tropical deforestation and other land-use changes. Because the consequences of climate change for society and ecosystems are potentially serious and far-reaching, steps to address the risks of such climate change are prudent now, even while the science continues to evolve.6
Business Roundtable supports collective actions that will lead to the reduction of GHG emissions on a global basis with the goal of slowing increases in atmospheric concentrations and eventually stabilizing them at levels that will reduce the risks of climate change. Given this ambitious but achievable goal, the global community’s challenge is to identify and implement strategies that have the potential to generate significant emissions reductions while also maintaining robust economic growth and enhancing security — that is, the sustainable growth challenge.7
While Business Roundtable supports actions to address climate change, its members have a range of views and preferences about the policy tools that will best achieve this objective. Recognizing that legislation and regulation are currently under consideration, the Roundtable supports an open and constructive dialogue about the principles that should shape climate policy and the pros and cons of various strategies.8
To contribute to that dialogue, Business Roundtable launched a collaborative effort among member companies to develop, evaluate and recommend sensible solutions to the sustainable growth challenge. Drawing on the extensive technical expertise of more than 30 member companies, this effort builds on the Roundtable’s comprehensive policy blueprint, More Diverse, More Domestic, More Efficient, and extends that framework to more explicitly encompass the economic, environmental and security challenges associated with addressing global climate change.
Since Business Roundtable began this study in mid-2008, Congress passed and President Obama signed into law the American Recovery and Reinvestment Act (ARRA) of 2009. ARRA contained funding and tax incentives for a variety of energy initiatives, particularly those related to energy efficiency, renewable power, advanced vehicle technology, worker training and grid modernization. Carbon capture and storage technologies also received funding in ARRA. As a result of Congress’ action, some of the Roundtable’s policy leadership recommendations contained in this study have been partially addressed. However, our economic modeling has demonstrated that it will take a portfolio of options, involving every sector of our economy, to meaningfully reduce GHG emissions in a cost-effective way. While some of these options, such as greater building efficiency and increased use of renewables, can make important contributions to meeting our energy and environmental goals, they are insufficient alone to sharply reduce GHG emissions or adequately diversify our sources of energy.
Accordingly, Congress and the administration have much more to do to develop a comprehensive energy and environmental policy. In particular, Business Roundtable’s recommendations regarding nuclear electricity generation, carbon capture and sequestration, expanded access to domestic fossil fuel resources, and developing policies to allow the construction of a national high-voltage transmission system to provide greater access to renewables must be addressed satisfactorily to materially reduce GHG emissions in an economically sustainable manner. In short, while the policy measures adopted in ARRA represent an important down payment and a step in the right direction, more will be required to facilitate a smooth and efficient transition to a low-carbon economy.
While traditional paradigms frequently place the pursuit of our economic, environmental and security interests in competition, Business Roundtable believes that innovative technologies, efficient markets and strong policy leadership have the capacity to transcend such limitations.9 Viewed through this lens, the sustainable growth challenge is reframed as the need to identify a portfolio of technologies with the greatest potential to simultaneously advance all three pillars of a sustainable growth agenda and leverage efficient markets and targeted policies to unlock their full potential.
In pursuit of this objective, policymakers have a wide range of instruments at their disposal. Many of the legislative frameworks under consideration in the U.S. Congress rely primarily on market-based mechanisms, such as carbon taxes or cap-and-trade programs. By establishing a price of carbon, market-based mechanisms seek to correct a ubiquitous market failure — the negative externality associated with GHG emissions — and send price signals to energy producers and consumers that encourage behavioral changes and technology innovation.
However, while economic theory and experience teach us that market prices are the most efficient mechanism for allocating scarce resources, reducing GHG emissions solely through the imposition of a carbon price poses a unique set of challenges. Virtually all advanced technologies suffer from noneconomic barriers that prevent them from reaching their full market potential, including technological barriers (e.g., underinvestment in basic and applied research), market barriers (e.g., split incentives) and institutional barriers (e.g., regulatory, legal and policy constraints). If left unabated, such barriers may hamper market efficiency, frustrate policies and drive up costs, regardless of the type of carbon pricing instrument chosen.
Business Roundtable believes that without efforts to remove or reduce barriers to technology deployment, unsustainably and unnecessarily high carbon prices would be required to significantly reduce GHG emissions — effectively exchanging one unsustainable pathway for another. Strong policy leadership that aggressively and systematically eliminates critical barriers to deployment, however, can unlock the full potential of a portfolio of key technologies that will allow the United States to reduce emissions in a shorter timeframe and at a lower cost while maintaining a robust economy and diversifying the nation’s energy sources. Anything less is, simply put, unsustainable.
About This Study
Business Roundtable believes that leadership in addressing the sustainable growth challenge is not just a job for government. The business community has a special obligation to step forward because of its central role in producing, distributing and consuming energy. Recognizing this obligation, the Roundtable merged its energy and environmental task forces to form the Sustainable Growth Initiative. Chaired by Mike Morris, CEO of American Electric Power, the Sustainable Growth Initiative was charged with uniting competing interests in the business community and forging a detailed policy roadmap that could simultaneously advance our nation’s economic, environmental and security objectives.
With this goal in mind, the Sustainable Growth Initiative launched an extensive collaborative effort to bring together leading energy technology producers, consumers and innovators to forge a comprehensive strategy for transitioning the United States to a low-carbon economy. During a six-month process, Business Roundtable regularly convened experts from member companies to evaluate the potential of various technology pathways; identify key barriers to achieving each technology’s full potential; develop recommendations for removing those barriers; and quantify the economic, environmental and energy impacts of implementing the recommendations via an economic modeling exercise.
The point of departure for this effort was an assessment of the nation’s key economic, environmental and security interests. Based on this evaluation, Business Roundtable identified three strategies of a sustainable growth agenda in which the policy approaches must be carefully assessed for their intended costs and benefits:
(1) More efficiently consume electricity and heating fuels in homes and businesses;
(2) Leverage domestic resources to produce cost-effective, low-carbon electricity; and
(3) Modernize the transportation fleet and diversify the transportation fuel mix.
Business Roundtable then identified six “technology pathways” that are critical to implementing these strategies and achieving sustainable growth:
(1) Building efficiency improvements;
(2) Renewable power generation;
(3) Advanced nuclear power generation;
(4) Carbon capture and storage;
(5) Advanced vehicle technologies; and
(6) Advanced biofuels.
Business Roundtable also identified two “enabling pathways” that are essential to realizing the full potential of the entire portfolio: grid modernization and enhanced domestic supply of oil and natural gas.
The six technology pathways and two enabling pathways examined in this study were chosen in part to expand upon the framework presented in the 2007 Business Roundtable report More Diverse, More Domestic, More Efficient. The six technology pathways also were chosen because they are among the most promising pathways needed to meet the sustainable growth challenge, although they are not the only pathways that will be needed.10 The two enabling pathways were chosen because they are essential to supporting a long-term shift to a low-carbon economy, with grid modernization being a technical prerequisite for implementing many efficiency and low-carbon electric power technologies, and enhanced domestic supplies being vital to creating the stable economic conditions necessary to support large-scale investments in the nation’s energy system.
To leverage the expertise of its member companies, Business Roundtable established eight technology working groups and charged each with evaluating the current status and future potential of a given technology; identifying the technical, market and institutional barriers associated with that technology; and developing policy recommendations to overcome those barriers and realize the technology’s full potential. In addition, each working group was presented with a range of policy assumptions and asked to develop detailed scenarios and quantify characteristics (e.g., cost, deployment, GHG emissions) associated with each technology pathway. These scenarios were then modeled to evaluate the economic, environmental and energy impacts.
The economic modeling component of the study was conducted by the University of Maryland’s Inforum Modeling Project and Keybridge Research LLC. Modeling simulations were performed using Inforum’s highly respected Long-term Interindustry Forecasting Tool (LIFT) — a dynamic general equilibrium model of the U.S. economy that uses a unique “bottom-up” technique to simulate economic, environmental and energy impacts. These simulations were conducted under a range of carbon price and public policy scenarios that were developed through an extensive collaborative process between the technology working groups and the modeling team.
For each scenario, the technology working groups were charged with developing detailed “technology templates” to serve as primary inputs to the model. Estimates for technology cost, performance and penetration were developed through the combination of expert judgments of engineers, economists and public policy experts from Business Roundtable member companies and well-respected public sources. The Inforum-Keybridge modeling team then integrated these technology templates into the LIFT model individually to simulate the economic, environmental and energy impacts associated with each pathway. The templates were then collectively integrated as input to the model to simulate the impacts associated with pursuing a comprehensive portfolio of strategies. This process culminated in detailed simulation results for more than 30 scenarios — yielding a wealth of quantitative data and analysis that should serve as a valuable resource for business leaders and policymakers.
This study is divided into two sections. The first section, consisting of Chapters 2–9, offers qualitative assessments of the six technology pathways and the two enabling pathways discussed above. The second section of the study includes Chapters 10, 11 and 12. Chapter 10 describes the modeling framework. Chapter 11 discusses the modeling inputs that were provided by the technology working groups. Chapter 12 presents the modeling results of implementing a balanced portfolio of technologies and offers key findings.
Residential and Commercial Building Efficiency
Often characterized as the “first fuel,” energy efficiency is unique in its potential to substantially advance all three pillars of a sustainable growth strategy. Energy efficiency can improve our economy by increasing productivity, competitiveness and consumer purchasing power; it can improve our environment by decreasing greenhouse gas (GHG) emissions intensity and the nation’s carbon footprint; and it can improve our security by decreasing overall energy demand and reducing the nation’s overall exposure to energy price volatility.
Although opportunities to improve energy efficiency exist throughout the economy, evidence suggests that a concentration of attractive opportunities exists in the residential and commercial buildings sectors. For example, a 2007 McKinsey & Company report highlighted the potential for low-cost GHG abatement via improvements in energy efficiency in new and existing buildings.11 In fact, many energy efficiency improvements in the residential and commercial sectors offer negative costs — that is, the estimated net present value of savings in energy costs over the lifetime of the project exceed the investment costs. In such instances, the deployment of energy efficient technology can both curb GHG emissions and boost economic growth.12
Despite the potential for net savings, many opportunities to improve energy efficiency in the residential and commercial buildings sectors remain untapped. Decisionmakers in these sectors are frequently presented with misaligned and muted incentives that prevent or discourage cost-effective technology choices. In some instances, for example, the individual choosing the energy technology (e.g., the homebuilder) is not the individual who will bear the ongoing costs of operating that technology (e.g., the homeowner). In other instances, consumers may not be able to afford the initial investment in energy efficient technology, despite the prospect of relatively short payback periods and long-term net savings. Consumers also may simply lack the information or awareness required to evaluate, compare and choose among technologies with various energy efficiency profiles.
Targeted public policies have the potential to properly align and clarify natural incentives. By removing critical barriers to technology deployment in the residential and commercial buildings sectors, strong policy leadership can unlock the full potential of the building efficiency pathway — thereby mitigating the adverse economic impact of climate change regulation, reducing the nation’s GHG emissions and enhancing its security.
Technology Pathway Overview
The importance of improving energy efficiency in the commercial and residential buildings sectors is underscored by their dominant and pervasive influence on the U.S. energy equation:
- U.S. commercial and residential buildings are responsible for about 39 percent of the nation’s primary energy use.13
- Approximately 20 percent of the nation’s natural gas and 72 percent of the nation’s electricity are consumed in commercial and residential buildings.14
- Commercial building electricity consumption is the fastest growing sector, and by 2030 it is expected to surpass the residential sector as the leading source of electricity demand.15
Nearly three-fourths of all energy consumed within residential and commercial buildings is directed to six end-use activities: space heating (20 percent), lighting (18 percent), space cooling (13 percent), electronics/computers (10 percent), water heating (10 percent) and refrigeration (6 percent).16 Improving energy efficiency in these areas requires actions on four fronts: (1) increasing the energy efficiency of appliances; (2) increasing the energy efficiency of new and existing structures; (3) streamlining energy intensive activities through greater use of information and communication technology; and (4) reducing enduser energy use through conservation, time-of-use metering, education and awareness.
Some individual strategies and technologies can be cost-effectively implemented in most buildings over a relatively short period, including replacing incandescent light bulbs with more efficient bulbs or enhancing building standards for new buildings. Other strategies, such as installing more or better insulation in existing structures, may not be cost-effective in some buildings until other major renovations are undertaken. Those strategies may take much longer to fully implement.
Importantly, technologies to make residential and commercial buildings significantly more energy efficient are available now. Weatherization; insulation; energy efficient windows; and more efficient appliances, lighting, and heating, ventilating and air conditioning (HVAC), can all be applied to existing buildings today. For new construction, “zero energy” and “near-zero energy” residential and commercial buildings are achievable through the integration of innovative design and efficient materials, appliances and HVAC operating systems. While continued development of new building efficiency technology is essential, accelerating the deployment of available technologies is critical to reducing GHG emissions in a cost-effective manner in the near term and placing the United States on a trajectory toward sustainable growth in the long term.
Technology Pathway Barriers
Despite readily available, cost-effective technology that can be bought off-the-shelf today, significant barriers often prevent energy efficiency investments:
Also known as “split incentives,” principal-agent barriers limit homebuilders’ and commercial developers’ motivation to invest in energy efficiency for new buildings because they do not pay the ongoing energy bills. For instance, homebuilders and building owners who pass through utility costs to renters want to minimize first sale cost, whereas added efficiency investments at the front end usually benefit the homebuyer, apartment renter or commercial lessee only over the longer term. The principal-agent barrier affects half or more of the energy use in the most common residential and commercial end-use markets.17
Transaction Cost Barriers
Transaction cost barriers affect individual consumers and small business decisionmakers faced with potentially dozens of small efficiency investment options. Collectively, these opportunities could result in substantial savings. Individually, however, such opportunities may be too small to justify the in-depth analysis or research required to take advantage of them. In a June 2008 report, the National Governors Association identified the transaction cost barrier as one of the more significant barriers.18
Customer barriers can arise when individuals and small businesses lack information on energy savings opportunities, awareness of how energy efficiency programs make investments easier or funding to invest in energy efficiency. Also, in some instances, there is a reluctance to deviate from the regional norms based on climate, available materials and skills. Further, new energy efficient materials can be seen as risky until the builder gains experience with them, as new materials require additional time to train workers.19
Some public policies can disincentivize utility support and utility investment in energy efficiency. For example, while demand reduction investments may be significantly cheaper than building new generating capacity or purchasing new supplies of electricity or natural gas, energy efficiency projects may be disincentivized by state and utility resource planning processes that do not consider efficiency and demand reduction a resource.20 Investments in distributed generation and cogeneration technologies also may be disincentivized by existing policies.
Summary of Technology Pathway Barriers
Even though investments in energy efficiency can often be characterized as high return and low risk, various barriers hinder efforts to maximize potential efficiency benefits. Technology, however, is not one of these barriers. Energy efficiency is one of the few resources available that can reduce GHG emissions in a cost-effective manner without significant technology improvements. Simply put, energy efficiency technologies have not penetrated the market to the extent possible because of market and policy barriers. While the federal government has created programs to address many of these barriers, more needs to be done at the local, state and national levels to increase awareness of these technologies and provide incentives for their implementation.
The U.S. federal government establishes energy efficiency standards for most major appliances, including refrigerators, hot water heaters, dishwashers, washers, dryers, air conditioners, furnaces and ovens. Pursuant to law, the U.S. Department of Energy (DOE) is required to set appliance efficiency standards at levels that achieve the maximum improvement in energy efficiency that is technologically feasible and economically justified. The Energy Independence and Security Act of 2007 (EISA) updated certain standards, established timelines for the promulgation of standards for certain products, and now requires periodic review and updating of existing standards when appropriate.
In addition to its standards-setting responsibilities, the federal government promotes energy efficient residential and commercial appliances, electronics, office equipment and other equipment through the ENERGY STAR program, introduced in 1992. The ENERGY STAR program, funded by DOE and the Environmental Protection Agency (EPA), evaluates various products and rates them based on their energy efficiency. This has been an important mechanism for making energy efficiency increasingly marketable and accelerating the deployment of energy efficient equipment. In 2004 alone, DOE estimates that ENERGY STAR appliances saved enough energy to power 24 million homes.21
Nevertheless, many consumers do not buy energy efficient appliances or update their older appliances. Appliance distributors often bundle energy efficiency features with other special and expensive features, causing some consumers to choose lower initial cost appliances without realizing the long-term efficiency savings they are foregoing. Furthermore, customers frequently lack the time necessary to conduct proper research before purchasing a replacement appliance — resulting in “panic purchases” of appliances that are initially cheaper but less energy efficient.
Building Design and Envelopes
Currently, the U.S. building stock is estimated at 330 billion square feet.22 Between now and 2035, it is estimated that 52 billion square feet of U.S. building stock will be demolished, 150 billion square feet will be remodeled and another 150 billion square feet will be newly constructed.23 Consequently, strengthened building codes for new and remodeled buildings can have a major long-term effect on energy usage. In particular, building codes can be effective in overcoming the principal-agent problem.
Building codes are set at the state and local level, although national standards-setting organizations, such as International Energy Conservation Code (for residential buildings), American Society of Heating, Refrigeration and Air-Conditioning Engineers (ASHRAE, for commercial buildings) and equipment manufacturer trade associations, play an important role in their development. In addition to mandatory building codes, many states and localities use voluntary programs that go beyond codes, including the EPA’s ENERGY STAR program, DOE’s Building America program, the Green Building Initiative’s Green Globes program, the National Association of Home Builders’ NAHBGreen program and the U.S. Green Building Council’s Leadership in Energy and Environmental Design program.24
While building codes have become more stringent in recent years and appliances have become more efficient, the increasing size of U.S. homes, additions to commercial floor space and the proliferation of electronics within homes and commercial facilities have tended to offset energy savings from newer homes and appliances. Also, while energy usage per square foot is much lower in new buildings, the existing stock of structures and appliances turns over slowly. For example, about three-quarters of homes are more than 15 years old.25 Accordingly, policies focused solely on strengthening new building codes, although necessary, will miss substantial savings opportunities. Policies also are needed to encourage existing homeowners and commercial building owners to make cost-effective energy efficiency investments when retrofitting existing structures.
Information and Communication Technologies
Information and communication technologies (ICT) play a critical role in reducing energy waste throughout the economy. For example, advances in teleworking and teleconferencing can reduce the number of people traveling to work and business meetings. As e-commerce and e-billing costs decline and the number of people shopping and paying bills online increases, there will be lower transportation costs and less paper used. As ICT technologies become more integral to the products and services people use, the energy savings continue to grow.
There are several ways to improve ICT productivity gains. First, reducing the energy needed to design, manufacture and distribute the ICT equipment to consumers would improve energy productivity. Second, there must be an increase in the operating efficiency of ICT technologies once they are installed. The Climate Savers Computing Initiative believes that desktop computers waste nearly half the power delivered to them, and the industry has since committed to a 50 percent reduction in the power consumption of computers by 2010.26 Finally, ICT technologies could have an enormous impact on the efficiency of electricity transmission and use by facilitating smart grid technologies such as time-of-use metering, as discussed at greater length in Chapter 6.
Summary of Policy Considerations
Business Roundtable members believe that federal guidance and policies are in place to make a significant contribution to improving energy efficiency in residential and commercial buildings. Appliance efficiency standards, the ENERGY STAR labeling program, new lighting efficiency requirements, federal energy efficiency initiatives and favorable tax policies for efficiency investments will all make a significant contribution to meeting building efficiency potential. Initiatives contained in EISA require state regulators to consider mandating that utilities employ integrated resource planning and establish rates for supply-side resources that put energy efficiency expenditures on par with utility investments — thereby helping to resolve existing policy barriers. Diligent leadership at the state and local levels, however, will be essential to ensure that these policies are fully implemented.
Many experts believe that improved performance levels can realistically achieve energy use reductions of more than 50 percent per square foot by 2050 for new buildings and more than 35 percent per square foot for existing buildings. To encourage these changes, however, strong policy leadership is needed on multiple fronts. Building codes and efficiency standards, whether at the regional or national level, must be enforced and strengthened to drive and reward efficiency. Policies resulting in greater government incentives and private-sector investment are imperative to promoting the deployment of energy efficient appliances. Additionally, policies assisting market “aggregators” may be required to overcome the transaction cost barrier and more efficiently harness individually minor, but collectively significant, savings opportunities. Furthermore, policies that address the need for consumer education and provide assistance with the upfront costs of newer, better technology also will be critical, while homebuyers and mortgage providers must be encouraged to focus on the long-term costs of occupancy rather than the initial costs of purchase. Finally, many efficiency technologies can be implemented in a more cost-effective way in new buildings than in existing buildings. Accordingly, many technology adoption incentives and policy changes will need to differentiate between new builds and retrofits.
- Congress should provide full and stable funding for energy efficiency programs authorized in the Energy Policy Act of 2005 and EISA. These acts contain a plethora of energy efficiency programs, ranging from updated appliance efficiency standards, green building research and demonstration, new lighting requirements, federal building efficiency standards, and authorization for a variety of research programs.
- Lenders and builders are encouraged to promote “green mortgages,” which recognize the lower monthly expenses associated with energy efficient homes and provide consumers with a greater awareness that improved efficiency can provide long-term financial savings.
- States and local governments should consider requiring that a home energy audit be done on homes offered for sale and that audit results be disclosed to prospective homebuyers.
- State regulatory authorities should adopt policies to make the delivery of energy efficiency a core part of utilities’ businesses, including adoption of policies that put energy efficiency on an equal footing with energy supply.
- State and local governments should continuously update and enforce modern building codes, including standards that will potentially accommodate future energy efficiency devices (e.g., time-of-use metering, occupancy controls, etc.).
- All levels of government should continue to educate consumers regarding the difference between one-time, out-of-pocket and lifetime costs of various efficiency investments.
- Business Roundtable members and others are encouraged to be active participants in the National Action Plan’s process and proceedings and in other energy efficiency efforts being led by conservation and efficiency organizations, standards-setting organizations, and trade associations focusing on efficiency.
Successfully transitioning the United States to a low-carbon economy will require measures to improve both the demand and supply sides of the U.S. energy equation. Improvements in energy efficiency can dramatically reduce electricity demand and curb greenhouse gas (GHG) emissions. However, new sources of electricity supply will still be necessary to meet the needs of a growing economy and to replace older plants as they approach the end of their useful lives. Satisfying these needs in a sustainable manner will require the deployment of advanced power generation technologies that leverage the nation’s domestic resources to produce low-cost, low-carbon electricity.
Accelerating the deployment of renewable power technologies will be particularly important to the goal of decarbonizing the U.S. electric power mix. Many regions of the United States are endowed with excellent renewable resources, including abundant supplies of wind, solar, biomass, geothermal and other sources. Efficiently integrating these resources into the U.S. electricity supply is a key component of a sustainable growth agenda. With virtually zero fuel costs or GHG emissions, renewable power can be an attractive source of affordable and clean electricity, especially in the context of volatile fossil fuel prices and potential carbon restrictions. Equally important, renewable power technologies can simultaneously leverage the nation’s domestic resources and diversify its energy mix — thereby enhancing U.S. economic and national security.
Technology Pathway Overview
Wind power holds significant promise as a cost competitive and environmentally friendly source of energy. Recent technological advances — including taller towers, larger turbines and lighter weight materials — are rapidly increasing economies of scale and improving the competitiveness of wind power in locations with suboptimal conditions. In locations with optimal resources, wind power is already a commercially viable and economically competitive technology. Nevertheless, in most instances, production tax credits (PTCs) and other financial incentives are still necessary to keep wind power competitive with the lowest cost alternatives.
Investment in the deployment of wind power has increased rapidly in recent years. Over the past eight years, for example, cumulative wind capacity in the United States has grown an average of 27 percent per year.27 In 2007 alone, more than 5,000 megawatts (MW) of new capacity were added and $9 billion invested, almost twice the amount installed in 2006.28 As of September 2008, the United States is the world’s leader in wind-generated power with more than 20,000 MW of installed capacity.29
Despite these promising developments, wind power currently represents a small fraction of the U.S. electric power market. Total installed wind capacity generated slightly more than 1 percent of U.S. net electricity in 2008.30 Estimates suggest, however, that wind power has the potential to make a substantial contribution to the U.S. electric power mix in future decades. For example, the U.S. Department of Energy (DOE) estimates that, under favorable policy conditions and with large investments, it is possible for the United States to produce as much as 20 percent of its electricity with wind by 2030.31
Solar-generated electricity also is a rapidly expanding sector. There are two primary methods of solar power electricity generation:
- Photovoltaic (PV) technologies use purified silicon or thin film modules to convert sunlight directly into electrical energy. Although still relatively expensive, PV power generation is well suited for niche applications (e.g., traffic lights) and remote off-grid systems. Large-scale PV systems also are being deployed for commercial buildings, factories and the electric grid in the United States and Europe.
- Concentrated solar power (CSP) technologies convert the energy from concentrated solar rays into heat, which is used to produce steam that drives conventional steam power cycles. Prior to the production of steam, some of the thermal energy can be temporarily stored for future use, addressing the inherent issue of solar power intermittency. This unique characteristic of CSP technology makes it easier and more efficient to integrate into existing electrical grids and thereby provide solar-powered electricity on a commercial scale.
PV is the fastest growing type of alternative energy in the United States, with installed grid-tied generating capacity increasing by nearly 60 percent in 2008.32 Installations are projected to continue to expand, boosted by falling costs of panels and by an investment tax credit (ITC) of 30 percent for residential, commercial and utility applications. CSP is second only to wind as the fastest growing utility-scale renewable energy market, with up to $20 billion in expected investment over the next five years.33 Between 2007 and 2008, solar electricity generation increased by 221 gigawatt hours (GWh), bringing cumulative solar electricity generation to 833 GWh, accounting for .02 percent of total U.S. electric power generation.34
Biomass-generated electricity is attractive in its ability to harness the otherwise untapped energy potential of large amounts of biodegradable waste materials produced by different industries. Electricity from biomass can be generated by one of four technologies: (1) combustion, (2) co-firing, (3) gasification and (4) anaerobic digestion. Co-firing, a process that substitutes biomass stock for fossil fuels in existing coal-fired power plants, is currently the most economical technology with the shortest pay-off period on investment. Biomass gasification technology holds the greatest long-term potential for efficient biomass-based electricity generation.
Biomass electricity generation is currently used by the forest industry and utility sector. In fact, the U.S. pulp and paper industry is one of the nation’s leading users of biomass fuels — meeting 60 percent of its power needs through the use of renewable biomass for self-generation.35 Including all energy applications, biomass represented about 3 percent of the nation’s energy supply in 2007.36 Of that, more than 55 billion kilowatt hours (kWh) of electricity was generated from biomass, approximately 1.3 percent of total electricity generated.37
Geothermal and Other Renewable Power Sources
Geothermal energy relies on clean and sustainable heat from the Earth. Resources of geothermal energy range from the shallow ground to hot water and hot rock found a few miles beneath the Earth’s surface. Wells are drilled into underground reservoirs to tap steam and extremely hot water, which drive turbines and associated electrical generators. Enhanced geothermal systems are engineered hydrothermal reservoirs created to commercially exploit the Earth’s naturally occurring heat. Unlike solar and wind resources, geothermal energy resources are continuously available. Currently, the installed domestic capacity of geothermal power plants is approximately 3,000 MW in five western states. Wave and tidal power and additional hydro resources are other potential sources of renewable electricity generation.
Technology Pathway Barriers
The majority of wind and solar resources in the United States remain untapped and will continue to be so until the significant barriers preventing these resources from reaching their full potential are removed. For instance, optimal wind and solar resources are often located in remote areas, far from urban load centers. Unfortunately, the nation’s electric transmission system was not designed to transmit large quantities of electricity from remote areas rich in wind and solar resources to urban centers. Building new transmission capacity, however, poses difficult siting and cost allocation issues, and the intermittent nature of wind and solar generation might make it more difficult to economically justify the building of new, high-voltage transmission capacity solely for renewable energy. Finally, although conventional wind power is well advanced, additional technological progress in the areas of solar, offshore wind and energy storage will be necessary if renewable power is to become sufficiently cost-effective to play a large-scale role in producing the nation’s energy.
While fossil fuel resources are not uniformly distributed over geographic regions, they can often be transported over large distances at a relatively modest cost — enabling generating plants to be located close to load centers.38 Optimal wind and solar resources are not transportable and, for the most part, are located far from load centers. The only way to deliver those wind and solar resources to load centers is by transmitting the electricity that they produce over long distances. The existing transmission system, however, was built to deliver locally or regionally produced electricity over relatively short distances. Also, the existing transmission system frequently faces capacity constraints. Investments in new transmission technologies will therefore be essential to transport wind- and solar-generated electricity from resource-rich locations to the centers of heaviest demand, a necessary step before wind and solar power can become economically competitive on a large scale.
The grid investments required to realize the full potential of wind and solar power are likely to be significant. For instance, American Electric Power and the American Wind Energy Association recently collaborated on a study analyzing transmission needs associated with allowing wind energy to supply 20 percent of the nation’s electricity needs by 2030. According to the study, approximately 19,000 miles of extra-high-voltage (765 kilovolt [kV]) lines would provide a robust interstate overlay grid to accomplish this goal at a cost of about $60 billion in today’s dollars.39 To put this into perspective, current estimates suggest that the utility industry will invest about $31.5 billion in transmission facilities from 2007 to 2010.10
In addition to purely geographic and logistical issues associated with upgrading the nation’s transmission system, balkanized planning processes, fragmented siting authority and the issue of cost allocation are other significant barriers to accommodating renewable power as a viable source of energy.41 These issues are discussed further in Chapter 6.
Further compounding the transmission capacity issue is the fact that wind and solar technologies are intermittent generators of electricity. This intermittency can complicate resource planning, lead to grid instability, and reduce the overall reliability and potential penetration of wind and solar resources. As a result, wind and solar power investments often need to be accompanied by investments in backup capacity or energy storage technologies that can provide electricity during times of poor sunlight or low wind. Backup electricity is often supplied by natural gas-fired power plants that have relatively low capital costs and that can be turned on and off more efficiently than most other types of power generation. It is unlikely that renewable power will successfully penetrate the electric power market on a large scale if it must rely on expensive backup capacity.42
A robust transmission system would support renewable power development by pooling renewable resources over larger geographic areas, facilitating the transmission of electricity surpluses in a region where the sun is shining or the wind is blowing to regions where the sun is not shining or the wind is not blowing. The more robust the grid, the less intermittent overall wind power production will be.
While it is unlikely that the wind will stop blowing in many places across a large geographic area at once, wind is often at its peak potential at night, when electricity demand is lowest. This means that wind power is not as valuable as it could be if it were deployed during peak times. Solar energy, on the contrary, is often available at system peaks but is unavailable at night or in the early morning. Without the ability to store electricity and better align the timing of renewable power supply with electricity demand, capturing many of the best solar and wind resources, even with a greatly improved transmission system, still may not be economical.
New technologies, however, offer the potential to store renewable generated electricity when it is not needed and dispatch it when it is. For example, molten salt is a new proposed technology to store energy from CSP. The first commercial facility to install it, a 50 MW plant with seven hours of storage, is being constructed in Spain.43 In Alabama, PV plants have been operating reliably using compressed-air energy storage.44 The compressed-air storage technology still uses natural gas as a supplementary fuel, but the turbines consume 60 percent less natural gas than if they were fueled by natural gas alone.45 Improved weather forecasting also can assist with managing the variability of wind and solar generation.
The intermittency of wind and solar power is not a significant barrier at the low penetration rates that have been experienced in most parts of the United States. However, overcoming the intermittency barrier with an enhanced transmission system, improving energy storage technologies and developing efficient backup power sources will become far more important if wind and solar power grow to represent much larger fractions of overall electricity production capacity.
Even after the barriers associated with transmission and intermittency are addressed, renewable technologies may still be generally uncompetitive with lowest cost alternatives in the absence of a carbon price. Installed capacity prices for wind and solar, while falling, are still above those for coal and natural gas. DOE’s Energy Information Administration (EIA) estimates that capital costs for utility deployment are the lowest for natural gas combined cycle facilities at approximately $700 to $1,000 per kilowatt (kW) of installed capacity. Wind facilities are estimated to cost almost $2,000 per kW of installed capacity, similar to the costs of some coal-fired power facilities.46 The costs for offshore wind installations are nearly twice as high.47 While wind power, unlike fossil fuel-fired plants, has low operating costs and no fuel costs, its total cost per unit of electricity generated is usually higher because wind plants do not operate at full capacity due to wind speed variance. Fossil-fuel-powered plants, on the other hand, can operate at their full capacity 80 to 90 percent of the time. Higher capital costs and similarly low rates of capacity utilization currently make solar power generation even more expensive.
Significant material cost increases have been an issue for the wind energy sector, with turbine prices increasing by $400 per kW of installed capacity between 2002 and 2006, though recent declines in commodity prices may bring some relief.48 Continued research and investment in the area of turbine design technology is needed to increase the efficiency and lower the costs of wind farms. Additional research and development (R&D) is still particularly needed to improve wind energy capture at low wind speeds and to optimize offshore wind harvesting, where there is substantial potential but also formidable challenges related to the sometimes harsh operating conditions. Past technological breakthroughs that have helped defray costs include larger turbines at higher hub heights, lighter materials and improved design.
With respect to solar power technologies, CSP currently costs approximately twice as much as wind power. PV is more expensive still, with silicon components particularly costly, though PV systems do have lower operating and maintenance costs than CSP and can be deployed on a more modular basis.49 The use of PV-generated electricity makes economic sense in some remote locations without access to a larger grid. Without subsidies, however, current setup and operating costs are too high for widespread deployment. While some estimates predict that invested capital can be recovered in fewer than 10 years with utility and government incentives, the large initial capital investment required to set up PV and CSP power generation remains a significant economic barrier to the widespread deployment of solar energy technology. Technological advancements, including “thin film,” nano and concentrating PV technologies, have the potential to significantly cut the per-kW costs of solar power by lowering manufacturing and equipment costs or increasing efficiency.50 If costs decline enough, solar power could become competitive in places such as California, which has both strong solar resources and high electricity prices.
The U.S. wind energy sector has benefited from more than 16 years of policies encouraging investment in wind power. The Energy Policy Act of 1992 created a PTC that gave power producers 1.5 cents, adjusted for inflation, for every kWh of electricity produced from wind during the first 10 years of production.51 Accounting for inflation, the PTC is currently equal to 2 cents per kWh.52 The wind industry has grown rapidly in response to the PTC, as well as increasing concerns about climate change, rising fossil fuel prices and the existence of renewable portfolio standards in about half of the states. Due in large part to state and federal incentives, average wind power prices have been consistently at or below the low end of the wholesale power price range.53
Further work at the policy and technological levels is needed to sustain progress in wind technology. In May 2008, DOE released a report entitled 20% Wind Energy by 2030: Increasing Wind Energy’s Contribution to U.S. Electricity Supply, which examined the challenges, impacts and potential environmental effects associated with a 20 percent wind energy scenario. To meet 20 percent of expected electricity demand in 2030, U.S. wind power capacity would have to account for more than 300 gigawatts (GW), an increase of around 290 GW within 22 years. DOE estimates that achieving the 20 percent scenario would result in cumulative GHG emissions reductions of more than 7,600 million metric tons of CO2 by 2030, avoiding 825 million metric tons annually by 2030.
Technological developments could lower production costs further, and DOE estimates that up to 600 GW of wind resources could be made available for 6 to 10 cents per kWh.54 The potential benefits of wind power, as outlined in the 20 percent scenario, make it a promising approach for meeting a portion of the growing demand for electricity in a sustainable manner.
As with the wind industry, growth in the solar industry has been spurred by financial incentives provided by government policy. Under the Energy Policy Act of 2005, the ITC for solar energy provides a 10 percent credit for businesses and a 30 percent credit for residential property owners who install solar-powered hot water or PV electricity generation systems.55 Policy support at the state level also has ramped up, with 22 state programs offering direct incentives for solar PV and a task force initiated by the governors of western states that is exploring prime sites for new solar-thermal power plants. The energy potential of these sites is estimated to be roughly 200 GW — equivalent to 20 percent of America’s existing electricity generation capacity.
Globally, solar PV represented just 620 MW of total installations in 2003; however, that number is estimated to have reached nearly 3,000 MW in 2008.56 This growth is projected to continue at a similar rate if policies promoting the wide-scale production of solar technology components and the development of more efficient technologies continue. Increased demand and investment, as well as technology improvements coupled with proactive policies, have the potential to drive down generation costs and help solar power become a viable and efficient alternative energy.
Biomass has the potential to be an important fuel source in regions with few other renewable energy options. In 2005, DOE and the U.S. Department of Agriculture concluded that there are approximately 1.3 billion dry tons of biomass potential on both agricultural and forest land. However, funding for further investigation is required to better ascertain the costs of collecting and transporting available biomass on a large scale.57 Policymakers must monitor the impacts of biofuels on food production, forest resources and GHG emissions, while seeking to minimize negative impacts on food supplies, forest sustainability and the existing industries that rely on a sustainable supply of these feedstocks.
Geothermal and Other Renewable Power Technologies
Geothermal and other renewable power technologies have received less attention than wind, solar and biomass technologies. Collectively, these technologies can provide significant amounts of electricity and GHG emissions reductions from the utility sector. Installed domestic capacity of geothermal power plants is nearly 3,000 MW, and industry associations predict that generating capacity in the United States will double over the next five years, driven in large part by state and federal incentives. DOE estimates that there are vast amounts of heat at depths from 3 to 10 kilometers and concluded that geothermal energy could provide 100,000 MW of electricity or more in 50 years by using enhanced geothermal system technologies. Federal support for R&D and early deployment of geothermal, wave, small hydro and other promising renewable technologies should continue.
Summary of Policy Considerations
Policy leadership has played an important role in the development and deployment of renewable power technologies during the past two decades. In particular, financial incentives for wind and solar investments have been critical to supporting these industries during their infancy and have allowed each to realize greater economies of scale. While existing policies provide a firm foundation for future growth in renewable power, several barriers must be removed to unlock the full potential of the renewable power pathway.
A carbon price will assist with making renewable technologies more competitive in the long run, but strong policy leadership is necessary to accelerate the deployment of these technologies in the short and medium terms.
Some experts believe that wind and solar power can each achieve market penetration of 15 to 20 percent of total power generation by 2050 with the assistance of aggressive policy leadership. Modernizing the nation’s transmission system and smoothing the intermittency problem with cost-effective storage technologies will be important enabling forces for the widespread deployment of renewable technologies. Multiyear commitments to financial incentives also will be necessary to provide the predictability needed to overcome economic barriers in the short and medium terms while technological advances and learning effects drive down costs. The goal should be to make renewable power technologies economically self-sustaining so that government support can be phased out as quickly as possible.
- Increase federal R&D support for electric storage technologies, solar PV, CSP, wave, tidal, geothermal, small hydro, biomass and offshore wind technologies.
- Demonstrate policy leadership at the federal level with respect to cost allocation, planning and siting of transmission needed to incorporate wind and solar resources into the grid.
- Make the biomass PTC available to industrial co-generators, not just to generators selling electricity to an unaffiliated third party.
- Continue to support and fund the existing PTC for wind facilities.
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