EIA Report Confirms Clean Power Plan Is Affordable And Effective, but Overstates the Cost of the Best Compliance Options -- Efficiency and Renewables Can do More at Lower Costs
The Department of Energy's Energy Information Administration (EIA) has assessed the EPA's proposed Clean Power Plan, and concludes that the Plan can achieve large carbon pollution reductions with very small impacts on electricity and natural gas prices. It is the latest in a lengthy list of studies reaching similar conclusions. However, EIA's report very likely overstates the costs of the Plan due to the use of flawed assumptions about the costs of energy efficiency and renewable energy investments.
Another key fact, noted by EIA, is that its report does not look at the net benefits to Americans from implementing the Clean Power Plan. EIA looks only at the compliance costs for the Plan and does not attempt to estimate the large benefits from the pollution cuts that the Plan will achieve. EPA and others have estimated the net health and climate protection benefits from the Plan will amount to between $49 and 84 billion in 2030.
The EIA's key findings on the projected impacts of the Clean Power Plan are broadly constructive:
- The Clean Power Plan as proposed can reduce carbon pollution by 34% below 2005 levels in 2030;
- Renewable energy technologies will be important for compliance with the standards;
- Changes expected under the CPP are generally minor extensions of business-as-usual trends;
- The impact on the overall economy will be minimal.
But EIA's assumed high costs for energy efficiency and renewable energy resources are contradicted by real-world experience and the findings of other expert groups:
- Contrary to what EIA assumes, demand-side energy efficiency is cost-effective and will drive greater emissions reductions while lowering the cost of compliance, reducing electricity bills, and triggering economic growth;
- In reality, the capital costs of wind and solar are substantially less than the EIA estimates, and as a result, EIA overstates the total costs of implementing the program.
Let's first review the key findings, and then examine the flaws in more detail.
THE EIA'S KEY FINDINGS ON THE PROJECTED IMPACTS OF THE CLEAN POWER PLAN ARE BROADLY POSITIVE.
1. The Clean Power Plan proposal will reduce carbon pollution by 34% below 2005 levels in 2030.
EIA finds that total electric power sector CO2 emissions in the CPP proposal case are 25% below 2005 levels in 2020 and about 34% below 2005 levels in 2030. This is consistent with (and even a little larger than) the EPA's projected 30% reduction below 2005 levels in 2030.
EIA projects slightly higher electricity rates than EPA during the compliance period, indicating that EIA relies on overly conservative assumptions about the potential and costs of lower-cost options such as demand-side energy efficiency and renewable technologies. As a consequence, EIA's CPP scenario exaggerates compliance costs.
With up to date assumptions on the costs of clean energy generating technologies and maximizing energy efficiency investments, NRDC found that the Clean Power Plan could achieve CO2 reductions of 36% below 2005 in 2020 and up to 44% below 2005 in 2030. While the EIA's emissions outcome is similar to what was projected in the Agency's initial proposal, it is clear that EIA's assumptions, particularly for the costs of energy efficiency and renewable energy technologies, fail to reflect the current potential for lower compliance costs and deeper emissions reductions. Lawrence Berkeley National Laboratory (LBNL) provides up to date estimates for the costs of energy efficiency programs while a number of sources including National Renewable Energy Laboratory (NREL), banking company Lazard, Ltd., the American Wind Energy Association (AWEA), and the Solar Energy Industries Association (SEIA), and Bloomberg New Energy Finance (BNEF) contain data reflecting the downward trend in renewables costs.
The EPA's analysis of the Clean Power Plan proposal cited EIA's AEO2013 as the basis for assumptions about renewables. The EPA has pledged to the Senate Environment and Public Works Committee that it will account for updated renewables cost data in its final Clean Power Plan. Although EIA has improved its estimates somewhat between AEO2013 and AEO2015, their estimates still do not keep up with current industry data and expectations, as we illustrate later.
1. Renewable energy sources will be important for complying with the standards.
In keeping with a long tradition of EIA's proven underestimations of the potential for renewable energy resources, the assumptions in AEO2015 severely underestimate renewables growth and also greatly overestimate renewable costs. We will discuss this in more detail below.
Even so, wind and solar generation feature heavily in the compliance generation mix in EIA's analysis, particularly in the later years of the compliance period. The share of total wind and solar generation in the CPP case grows to 15% in 2030 from 7% in the business-as-usual case. EIA projects that most of the increase in wind electricity generation occurs between 2020-2025 as regions shift the composition of their fleets to achieve the interim performance goals. The EIA's CPP case also projects substantial additions of solar generating capacity during the compliance period. Solar generation in EIA's CPP case in 2030 totals 148 TWh, double EIA's estimates of business-as-usual levels.
2. Changes in electricity rates and natural gas prices under the CPP differ only in minor respects from business-as-usual trends.
The EIA's CPP case shows only a minor change in the much larger electricity and gas market changes that are already happening in the business-as-usual case. For example, EIA projects an average residential rate increase of 11% over 2013 rates in the business-as-usual case and an incremental increase on top of the business-as-usual case of 4% in the CPP case. The impact on residential bills, however, will be even smaller due to the savings produced by energy efficiency. In the case of Henry Hub natural gas prices, the Base Policy Case shows a 3% increase over the business-as-usual, with gas prices increasing about 53% between 2013 and 2030 in AEO2015. These projections suggest that we are already on track towards many of the market changes expected with the proposed Clean Power Plan.
3. The impact on the overall economy will be minimal.
This analysis projects that the US economy grows dramatically in both the BAU and CPP cases, with growth in the CPP case being delayed by only a few weeks over a twenty-year period. The EIA explains that this is a result of higher energy prices and greater investment in low- and zero-carbon generation for compliance with the CPP. We believe EIA's analysis overstates even this very small impact. The EIA's flawed approach to assumptions for renewable energy generation and energy efficiency produces this result, and as we explain below, correcting these assumptions could lead to the opposite conclusion - compliance with low-cost energy efficiency and renewable energy can lead to positive overall benefits for the economy. In addition, NRDC has shown that even if electricity prices (wholesale rates) increase with a carbon pollution standard in place, focusing on the most cost-effective resources like energy efficiency and renewables will drive down total spending on energy bills.
EIA concedes that "the level of GDP in the CPP. . . [case] is almost indistinguishable from that projected in the AEO2015 Reference case that serves as [the] baseline." The figure below, taken from EIA, illustrates how negligible the impact really is. We focus on the CPP case in this discussion, but it is clear that the CPPEXT (Policy Extension) case, which extends the CO2 targets to 2040 in order to achieve a 45% reduction in emissions, leads to an equivalent negligible macroeconomic outcome.
Additionally, with the CPP in place, US GDP in 2030 expands by 52% over 2013, reaching $23.886 trillion dollars in 2030, from a level of $15.710 trillion in 2013. By comparison, absent the CPP, EIA projects that GDP would be about one-tenth of one percent (0.12%) higher in 2030. In other words, with the CPP rule implemented, over the next fifteen years the US economy will grow dramatically, reaching the same GDP as the no-rule case, only 15 days later. Of course, this minimal impact on GDP does not factor in the value of numerous net economic benefits of pollution reductions, including fewer deaths, fewer incidences of respiratory illnesses including bronchitis and asthma, and fewer sick days, which the EPA valued at $49 - 84 billion in 2030.
THE EIA ANALYSIS ALSO HAS SOME KEY FLAWS THAT DISTORT ITS CONCLUSIONS.
1. Demand-side energy efficiency is cost-effective and will drive greater emissions reductions while lowering the cost of compliance and electricity bills while triggering economic growth.
EIA incorporates an incomplete assessment of energy efficiency savings in its analysis. It takes an even more limiting approach than the EPA did. As NRDC discussed at length in its technical comments, the EPA's assumption that states could gradually increase their investments in energy efficiency programs to 1.5% percent of sales was a modest approach that excluded savings from many sources beyond utility programs, including appliance standards, building codes and enhancements to transmission and distribution lines. The EPA's methodology delivered 424 TWh of savings from demand-side energy efficiency in 2030. NRDC's analysis shows up to 600 TWh of energy efficiency in 2030. By comparison, the EIA's projection of the energy efficiency savings achieved by 2030 in the CPP case totaled only 81 TWh.
EIA also presents some particularly counterintuitive results with respect to energy efficiency that contradict virtually every other study performed on the CPP: it found that compliance without energy efficiency was less costly to customers than compliance with energy efficiency. EIA's assumed costs of energy efficiency program costs are so high that electric system costs are higher in the CPP case compared with the case with no efficiency. We find this outcome dubious as even studies designed to attack the proposed standard find that incorporating energy efficiency into the compliance mix diffuses the implementation costs of the CPP. A recent C2ES review of several studies (from all across the political spectrum) on carbon pollution standards found that the main consistent theme was: "in general, the studies highlight the key role that energy efficiency programs can play in minimizing cost impacts to consumers and to power companies." Not only would energy efficiency minimize the costs of CPP compliance, PJM's recent "Economic Analysis of the EPA Clean Power Plan Proposal" shows that it can also ease the transition and provide more flexibility to existing fossil plants.
On closer inspection, EIA's flawed implementation of energy efficiency appears to explain its perverse conclusions. EIA appears to assume that reductions in total electricity demand from energy efficiency savings only marginally reduce expenditures on building new power plants elsewhere in the sector. In NRDC's and other studies, investing in energy efficiency programs lowers the costs of compliance of the program because the costs are offset by larger savings on capital and operating and maintenance costs that are foregone in favor of the efficiency investment. That does not appear to be the case here. In EIA's high energy efficiency case, increasing investments in energy efficiency programs three-fold in 2030 compared with the CPP case reduces spending on new generating capacity by only 12%, and saves only an additional 27% in fuel and non-fuel operating costs. EIA's assumed costs of energy efficiency program costs are so high relative to other supply-side resources that even the limited amount of savings in the CPP case increases electric system costs. The incremental savings in the CPPEEHI case increases electric system costs even further. Energy efficiency programs would be expected to generate savings instead of expenditures, and are cost-effective because of the avoided capital and operating costs for new and existing plants. With a more defensible approach to including energy efficiency as a compliance pathway, EIA's would have found that energy efficiency lowers costs to the industry, lowers electricity prices and drives economic growth.
2. In reality, the capital costs of wind and solar are substantially less than the EIA estimates, and as a result, EIA overstates the total costs of implementing the program.
The EIA's analysis shows that compliance with the Clean Power Plan could drive significant growth in renewable generation. However, the analysis overestimates the costs of building wind and solar installations, driving up the total costs of implementing the Clean Power Plan. EIA has a long history of taking overly conservative views on the costs of renewable technologies, and it continues to do so here. The unfortunate consequence is that the AEO2015 Reference case severely underestimates renewables growth. The figure below is one example of EIA's historical (in)accuracy in forecasting renewable growth. Actual growth, represented by the black solid line, and planned projects represented by the green dotted line, commandingly outpace each of EIA's annual projections.
Comparing AEO2015 Reference case projections to other current views on renewable energy growth also demonstrate the EIA's static outlook on a dynamically growing industry. While AEO2015 projects 22 GW of additional wind capacity by 2030, there is already nearly 13 GW of wind power under construction and an additional 5 GW of wind projects that have been contracted, according to AWEA. Similarly, AEO2015 projects 19 GW of additional total solar capacity (including distributed capacity) between now and 2030, while SEIA and Greentech Media project nearly 50 GW of additional capacity by 2020. The following table compares EIA's capital cost estimates for building new solar and wind to independent estimates from Lazard and the Department of Energy's Wind Vision report, demonstrating AEO2015's consistently elevated assumptions.
1Converted to $/kWdc based on an assumed 0.8 derate factor.
2 Calculated an average of Lazard's fixed tilt and single-axis tracking estimates, since EIA does not specify the project type. Lazard's 2017 estimate is for a single-axis tracking system.
3 Simple average of all five cost class estimates.
EIA's analysis dramatically overstates the costs to the electric power sector of complying with the proposed standards because of its overly conservative estimates of how much it costs to build renewables. We believe that if it were redo its analysis with more updated cost assumptions, it would find that the Clean Power Plan would drive more wind and solar generation earlier, and that these solutions would make compliance even more cost-effective. And as is the case for energy efficiency, relying more on zero-carbon generation could ease the transition for existing power plants.
Despite its limitations, driven by out-of-date and erroneous assumptions about energy efficiency and renewable resources, EIA's analysis of the proposed Clean Power Plan confirms that large reductions in carbon pollution from the U.S. power sector are achievable with small impacts on energy costs for consumers. And it will be favorable for Americans' well-being as well as their pocketbooks. When the program's benefits are considered, the proposal will improve health and reduce costs.
We finish with the observation that the EPA is expected to finalize the Clean Power Plan in just a couple of months, and as EIA acknowledges, is expected to make modifications from the proposal to address the extensive range of comments it received from industry, environmental groups and other interested stakeholders. While some of the themes highlighted in the EIA analysis are informative, it is important to keep in mind that many of its assumptions and observations may be obsolete.