2. Energy Market Impacts of a Clean Energy Portfolio Standard

The imposition of the proposed CEPS leads to increased reliance on qualifying renewable and nuclear generation.  However, because 60 percent of the required qualifying generation needed in 2030 is achieved in the reference case, projected shifts in fuel use are not dramatic.  The increase in nuclear and renewable generation stimulated by the CEPS is offset by lower coal and natural gas generation.  While the CEPS does lead to slightly higher resource costs for electricity producers, the clean energy credit price is projected to remain below the credit price cap and the impacts on consumer electricity prices are small. 

Generation and Capacity

The proposed CEPS results in changes to the fuels used for electricity generation and the generation capacity added to meet growth in the electricity demand.  To comply with the CEPS, approximately 500 billion kilowatthours of generation from qualifying sources is needed in 2030.  In the reference case, about 300 billion kilowatthours of generation from qualifying resources is projected in 2030, so an additional 200 billion kilowatthours are needed for CEPS compliance.

Figure Data

Figure Data

While coal generation still increases under the CEPS, annual generation in 2030 is projected to be 3,206 billion kilowatthours compared to 3,381 billion kilowatthours in the reference case (Figure 1 and Table 2).  Both of these values are well above the 1,977 billion kilowatthours of electricity generated from coal in 2004.  However, the coal generation in the CEPS case is 5.2 percent lower by 2030 than in the reference case. 

Total coal generating capacity is about 20 gigawatts (GW) lower in 2030 in the CEPS case than in the reference case.   In the reference case forecast, coal capacity is expected to rise from 310 GW in 2004 to 457 GW in 2030.  With the CEPS legislation, coal capacity grows more slowly, achieving 437 GW at the end of the forecast period.  This is 4.4 percent less capacity than that of the reference case.  No integrated gasification combined-cycle plants with carbon sequestration are added under the legislation.  Nuclear and renewable facilities have lower costs than advanced coal with sequestration and are therefore used to meet the legislative requirements.  

Renewable generation grows more quickly under the CEPS case than in the reference case.  Total annual generation from renewable sources in 2030, including hydropower, reaches 592 billion kilowatthours in the CEPS case, compared to 560 billion kilowatthours in the reference case (Figure 2).  This represents a 5.7-percent increase in renewable generation over the reference case level in 2030, and a 64-percent increase over the 2004 generation level of 360 billion kilowatthours.  As in the reference case, nearly all of the renewable generation growth in the CEPS case can be attributed to increases in wind and biomass generation.  Annual wind generation, which was 14.2 billion kilowatthours in 2004, grows to 65 billion kilowatthours by 2030 in the reference case and to 90 billion kilowatthours in the CEPS case.  

Biomass generation is also projected to be stimulated by the CEPS, but the increase comes from greater co-firing of biomass with coal rather than the addition of new dedicated biomass plants.  The amount of dedicated biomass capacity added in the CEPS case is actually lower than in the reference case.  This occurs because the CEPS credit improves the economics of using biomass to displace some coal use in existing coal plants, leading to higher biomass prices.  This makes the addition of dedicated biomass plants less economically attractive.  By 2030, total biomass generation is projected to be 117.8 billion kilowatthours, 14.9 billion kilowatthours greater than in the reference case. 

Total wind capacity by 2030 increases from 7 GW in 2004 to 27 GW in the CEPS case, 7 GW greater than the 20 GW level reached in the reference case.    The CEPS also raised municipal solid waste and landfill gas generation capacity above that of the reference case.  While showing overall growth, the 2030 capacity levels of both geothermal and dedicated biomass were lower than the 2030 capacity in the reference case CEPS geothermal capacity was approximately 1 GW less than that of the reference in 2030, while dedicated biomass was lower by 2 GW when compared to the reference case.      

Figure Data

The CEPS is projected to increase nuclear generation (Figure 3).  In fact, new nuclear power plants account for the majority of the difference in generation from qualifying resources between the CEPS and reference cases.  In the CEPS case, nuclear generation grows to 1,033 billion kilowatthours in 2030.  This is a 31-percent increase over 2004 levels, and 18.7 percent greater than the generation projected for the reference case.  In the reference case, nuclear capacity is projected to increase by 9 GW between 2004 and 2030.  This increase includes 3 GW of capacity up-rates at existing plants and 6 GW of new plant capacity.  In the CEPS case, 26 GW of new nuclear capacity are added. 

Overall, the cost and price impacts of the CEPS are small.  In fact, through 2019, there is no incremental cost because enough qualifying resources are built in the reference case to meet the CEPS targets. In 2020, CEPS credits are projected to begin trading at just below 1 cent (2004 dollars) per kilowatthour.  Over the next few years, the credit price hovers just above 1 cent per kilowatt before declining to between 0.3 and 0.5 cents per kilowatthour in the last 5 years of the projections.  The credit prices fall over time because rising coal and natural gas prices make it less expensive to stimulate increased generation from qualifying resources.  The costs of the qualifying resources are also expected to decline as they penetrate the market and the technology matures.

Figure Data

The CEPS does lead to higher costs for power producers.  From 2006 to 2030, the CEPS has a cumulative total cost to the electric power sector, relative to the reference case, of about $1.2 billion (less than 0.1 percent of reference case industry costs)². Power sector costs include all expenditures made by the industry to non-industry entities.  These include such costs as material and labor for plant construction and operation, fuel, and taxes. Costs for the purchase of compliance credits are internal transfer payments within the industry (that is, one power company paying a second power company to compensate them for the second company’s above-market costs for clean energy generation).  Credits purchased from the government would be considered costs to the electric power sector, but no government-supplied credits are projected to be necessary to meet the requirements of the program. The primary changes to industry costs include nearly $9 billion in higher capital and fixed annual expenditures for nuclear, wind, and biomass generating facilities from 2006 through 2030.  However, these increased capital costs are largely, but not entirely, offset by $7.8 billion in reduced cumulative fuel and variable operating costs.

Because impacts on power industry costs are projected to be small with respect to the reference case, consumer electricity prices and bills do not significantly change.  By 2030, average retail electricity prices in the CEPS case are nearly equal to those in the reference case.  Compared with the reference case, cumulative residential expenditures on electricity from 2006 through 2030 are $480 million (0.03 percent) higher.

The reduced use of coal and natural gas in the CEPS case lowers carbon dioxide (CO₂) emissions in the later years of the projections (Figure 4).  Within the electric power sector, annual CO₂ emissions are 136 million metric tons (4.1 percent) lower in the CEPS case than in the reference case in 2030.  Despite this change, electricity sector CO₂ emissions in 2030 are still 38.4 percent higher than the 2004 level in the CEPS case.  Emissions of sulfur dioxide, nitrogen oxides, and mercury are largely unchanged by the CEPS policy.  These emissions are subject to national or regional cap-and-trade regulations under the recently enacted Clean Air Interstate Rule (CAIR) and Clean Air Mercury Rule (CAMR).

²All dollars in this report are 2004 dollars, cumulative calculations are discounted at 7 percent to 2006 and span 2006 through 2030.