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Originally Processed With FOIA(s):
FOIA Number:
1998-0004-F[2]; 2011-1613-F[1]
S
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This is not a textual record. This is used as an
administrative marker by the George Bush Presidential
Library Staff.
Record Group/Collection:
George H.W. Bush Presidential Records
Collection/Office of Origin:
Chief of Staff, White House Office of
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Sununu, John, Files
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Issues Files
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National Energy Strategy (1 of 2) 1991 [1]
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15
25
1
6
A Process for Finalizing the
National Energy Strategy
OF
UNITED THRIMENT STATES OF ENERGY.
Admiral James D. Watkins
Secretary of Energy
Third EPC Principals Meeting
December 12, 1990
OF STATES UNITED AMERICA DEPA
OF ENERGY
Secretary of Energy
Admiral James D. Watkins
DRAFT
DEC 12 1990
Third EPC Principals Meeting
December 12, 1990
Readiness to present NES package to the President
Two issues remain from last EPC Principals Meeting:
-
Strategy paper
Enhanced R&D
Strategy paper describes an integrated, balanced NES
package
2
NES package includes:
DRAFT
All consensus options
DEC 12 1990
Some "High-Leverage" non-consensus options:
-
Alternative fuels
- Enhanced R&D
- CAFE
NES package responds to:
President's NES Charter
Situation in Persian Gulf
Need to provide leadership in the face of Congressional
activity
Legislative requirement for National Energy Policy Plan by
April 1, 1991
3
NES Package -- Package B
Consists of the 37 Consensus Options
DRAFT:
Plus the Following
DEC 12 1990
SUPPLY MEASURES
DEMAND-SIDE MEASURES
ENHANCED R&D PACKAGE
Renewable Energy
IRP & Tax Free Treatment
Oil and Gas Recovery
Production Incentive
of Utility Rebates
Technologies
Hydro Regulatory Reform
Stimulate Mass Transit/Ride
Biofuels Technologies
Sharing
NPR Leasing
Electric Vehicles
Set CAFE Standard
Energy Impact Analysis
after Reform CAFE Law
Vehicle Propulsion
for Environ. Rulemaking
(assumes 35 MPG in 2000)
High Speed Rail and
Oil Pipeline Deregulation
Equipment Standards or
Magnetic Levitation
Labeling
Nuclear Waste
Aeronautics and Aviation
Management Alternative
Building Energy Efficiency
Technologies
Fund for Federal Efficiency
Intelligent Vehicle/Highway
ALT. FUELS PACKAGE
Investments
Systems
Remove CAFE Incentive
Telecommuting
Cap for Alternative Fuel
Vehicles
Efficient Industrial
Technologies
Alt. Fuel Vehicle Fleets
(including Federal Fleet)
Basic Research
Use of Non-Petroleum
Motor Fuels Blends (10%
by 2005)
Asterisk (*) indicates High-Leverage non-consensus options detailed in the following charts. The
Enhanced R&D package is the product of an EPC Working Group made up of EPC-staff, OMB,
Treasury, CEA, DOE, USDA, Commerce, NASA, DOT, OSTP, and Defense.
4
DEC 12 1 1990
Reduced Oil Use in the Economy
DRAFT
"Package B"
(Barrels per Day / Million $GNP)
5
4
3
Efficiency Gains
in the Current
Policy Case
2
Japan, 1989
Current Policy Base
"Package B"
1
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
5
DRAFT
DEC 12 1990
"High-Leverage" Non-Consensus Items
(Energy Security -- Oil)
Supply-Side Measures
Cost/Barrel*
Year 2000
Year 2010
Alternative Fuels
$2 to $7
700 mB/D
2,200 mB/D
Package ($0.76 billion,
over 5-years)
Enhanced R&D ($1.2
$1 to $10
1,700 - 2,000 mB/D
2,500 - 3,000 mB/D
billion, over 5-years --
DOE only)
Demand-Side Measures
Set CAFE Standard
- $10
200 mB/D (35 MPG assumed)
600 mB/D
after reform
to + $20
Stimulate Mass
$1 to $5
120 mB/D
100 mB/D
Transit & Ridesharing
*
Discounted to present value. CAFE range depends upon methodology regarding net economic benefits.
Enhanced R&D range reflects uncertainty of R&D success. FY-91 level of Federal support (all agencies)
for NES-related R&D is $0.4 billion.
6
DRAFT
DEC 12 1990
CONSENSUS OPTIONS
Option
#
Option
2
Allow Access to OCS Consistent with President's 1990 Decisions
3
Allow Access to ANWR
4
Alaskan North Slope Development
5
Gas Pipeline Construction without Federal Certification
6
Gas Pipeline - Coordinated NEPA Review
7
Deregulate Pipeline Sales Rates
8
Reform Pipeline Rate Design
9
Improve Pipeline Transportation
10
Eliminate DOE Import/Export Regulation
11
Reform CAFE Law
12
Accelerate Scrappage of Older Cars
16
Low Income Home Efficiency
24
Stimulate Oil and Gas Production Outside Persian Gulf
26
PUHCA Reform - Greater Competition
27
Transmission Access for Wholesalers
30
Facilitate Expansion of Nuclear Power
31
Nuclear Waste - Comprehensive Solution
33
Encourage Clean Coal in Electric Utilities
35
Municipal Solid Waste to Energy
36
Reform PURPA - Remove Size Cap
37
Reform PURPA - Relax Co-firing Limits
41
Mortgage Financing Incentives
43
Improve the Efficiency for Public Housing
44
Reducing Environmental Impacts of Energy Systems
45
Global Climate Change - Integrate NES
47
Added Global Climate Change Research
48
Reduce Delays in Siting and Permitting
50
Emissions Trading for Environmental Compliance
51
Modified New Source Applicability
52
Encourage Waste Minimization in Industry
53
Dual Regulation of Radionuclides
54
Re-align Federal R&D Priorities
55
DOE Basic Research Capabilities
56
Leverage NES-Related R&D Resources
57
Reform the National Technology Transfer Service
58
Spur the Export of Energy Technologies
59
Math/Science Education Initiative
DEC 12 1990
Impact on Oil Imports
DRAFT
"Package B"
Imports as Percent of U.S. Consumption
90
Current Policy Base
80
-NAT. GAS
70
Impact of
Consensus Options
60
Impact of
Enhanced R&D
50
40
Impact of
Alternative Fuels
30
20
10
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
7
DRAFT
DEC 12 1990,
"High-Leverage" Non-Consensus Items
(Electricity)
Supply-Side Measures
Cost/Kwhr.*
Year 2000
Year 2010
Renewable Energy
0.2 to 0.7
45% increase in renewable
38% increase
Production Incentive
cents
electric production
($2.6 billion, over 5-
years)
Demand-Side Measures
IRP and Tax Free
0.1 to 0.3
1.1 Quads of electricity saved
2.3 Quads
Treatment of Utility
cents
Rebates ($0.46 billion,
over 5-years)
*
Discounted to present value.
8
DEC 12 1990
Fuel Inputs to Electricity Generation
DRAFT
"Package B"
Fuel Consumed for Electric Gen. (Quads)
70
Current Policy Base
60
A
Efficiency
Gains
B
50
40
Package B
30
Conventional
Electric Supply
20
Increased
Renewables
10
Renewables
Current Policy Base
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
A
Integrated Resource Planning
B
Building Efficiency and Equipment Standards, and other
misc. non-consensus options
9
DRAFT
DEC 12, 1990
Package B Enhances
Environmental Quality
Reduces S0x by 30% from projected levels in 2030
Reduces N0x by 25%
Reduces VOC (volatile organic compounds) by 10%
Slows growth in U.S. C02 emissions significantly
Cuts projected increase in U.S. C02 emissions by 60%
Reduces U.S. share of global C02 emissions from 23% to 14%
10
DEC 12 1990
Carbon Dioxide Emissions
DRAFT
"Package B"
Million Metric Tons/Year
3
Current Policy Base
2.5
2
1.5
Package B
1
(with uncertainty band)
0.5
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
11
DRAFT
PACKAGE B PROVIDES
DEC 12 1990
Credible balance between:
- Supply and demand-side measures
(ANWR/OCS/Reg. Reform - held hostage)
- Conventional and alternative energy development
- Short-term and long-term strategic responses
Significantly reduced vulnerability by 2000 -- even greater reductions in the
longer-term
Growth-oriented approach:
- Takes advantage of U.S. intellectual and physical resources
- Builds on President Bush's regulatory reform and alternative fuels
initiatives
Opportunity for President to break stalemate on energy, just as he did on
Clean Air
Solid domestic support for the President's Gulf policy
12
DRAFT,
DEC 12 1990
Back-Up
Information
DRAFT
DEC 12 1990
CONSENSUS OPTIONS
Option
#
Option
2
Allow Access to OCS Consistent with President's 1990 Decisions
3
Allow Access to ANWR
4
Alaskan North Slope Development
5
Gas Pipeline Construction without Federal Certification
6
Gas Pipeline - Coordinated NEPA Review
7
Deregulate Pipeline Sales Rates
8
Reform Pipeline Rate Design
9
Improve Pipeline Transportation
10
Eliminate DOE Import/Export Regulation
11
Reform CAFE Law
12
Accelerate Scrappage of Older Cars
16
Low Income Home Efficiency
24
Stimulate Oil and Gas Production Outside Persian Gulf
26
PUHCA Reform - Greater Competition
27
Transmission Access for Wholesalers
30
Facilitate Expansion of Nuclear Power
31
Nuclear Waste - Comprehensive Solution
33
Encourage Clean Coal in Electric Utilities
35
Municipal Solid Waste to Energy
36
Reform PURPA - Remove Size Cap
37
Reform PURPA - Relax Co-firing Limits
41
Mortgage Financing Incentives
43
Improve the Efficiency for Public Housing
44
Reducing Environmental Impacts of Energy Systems
45
Global Climate Change - Integrate NES
47
Added Global Climate Change Research
48
Reduce Delays in Siting and Permitting
50
Emissions Trading for Environmental Compliance
51
Modified New Source Applicability
52
Encourage Waste Minimization in Industry
53
Dual Regulation of Radionuclides
54
Re-align Federal R&D Priorities
55
DOE Basic Research Capabilities
56
Leverage NES-Related R&D Resources
57
Reform the National Technology Transfer Service
58
Spur the Export of Energy Technologies
59
Math/Science Education Initiative
U.S. Oil Consumption and Production
No Action vs Low GNP, VMT,&
No Change in Efficiency Loss(20%)
Million Barrels Per Day
25
12/10/90
No Action Reference
20
16:03
Consumption
Low GNP, VMT. No Change in Efficiency Loss
15
Production
DOE -PE-1
10
5
0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
003
New soulds of oil as natural
gas such as the doviet Union
offshore gas supplies, Veit-
ham, oftshou Korea
EPC
Rosswelt Rm
land
11:00 am
%51
THE WHITE HOUSE
WASHINGTON
December 10, 1990
MEMORANDUM FOR ECONOMIC POLICY COUNCIL
OW
FROM:
OLIN L. WETHINGTON, EXECUTIVE SECRETARY
SUBJECT:
NATIONAL ENERGY STRATEGY
EPC MEETING, WEDNESDAY, DECEMBER 12, 1990,
THE ROOSEVELT ROOM, 11:00 A.M.
The Economic Policy Council will meet on Wednesday, December 12,
1990 at 11:00 a.m. in the Roosevelt Room to continue
consideration of the National Energy Strategy.
The enclosed documents have been prepared for discussion at the
meeting:
o
An overall NES strategy paper prepared by DOE. This
paper seeks to integrate goals for the NES with a set
of policy options from the package developed
interagency. The DOE paper also summarizes the
aggregate effects of this set of options. Attached to
this strategy paper are three Appendices:
Appendix I:
A list of interagency consensus options;
Appendix II:
A list of significant options without
full interagency agreement; and
Appendix III: A list of miscellaneous options for
subsequent subcabinet resolution.
o
Addendum A on alternative fuels options. The previously
distributed alternative fuels options have been refined
and consolidated into the enclosed package.
o
Addendum B on an enhanced research and development
options package, which was prepared in response to the
EPC's request at the November 28 meeting. This package
describes a set of potential high payoff R&D
priorities, as well as a set of alternative mechanisms
for enhanced government support of these priorities.
The R&D package is specifically directed at the
transportation-oil link and does not purport to cover
other energy-related R&D matters.
o
Addendum c on other significant nonconsensus options.
This addendum provides the text of the options listed
in Appendix II of the strategy paper (with the excep-
tion of those included in Addendum papers A and B).
- 2 -
The Wednesday EPC meeting will review the attached strategy paper
and provide an opportunity to discuss the merits of the options
contained in Addendum papers A, B, and C noted above.
Due to the sensitive nature of these materials, this package
should be closely held.
Attachments
Document No.
CA
THE WHITE HOUSE OFFICE OF CABINET AFFAIRS
STAFFING MEMORANDUM
Date: DECEMBER 12, 1990
Due by:
Subject: EPC - NATIONAL ENERGY STRATEGY
From:
OLIN WETHINGTON, EXECUTIVE SECRETARY
Action
FYI
Action
FYI
ALL CABINET MEMBERS
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Vice President
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COMMENTS:
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Class.
and Type
01. Paper
National Energy Strategy (66 pp.)
12/09/90
P/5
Collection:
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Open on Expiration of PRA
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National Energy Strategy (1 of 2) 1991 [1]
Date Closed:
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A National Strategy: Setting The Course On Energy
Introduction:
As recent events have demonstrated, energy is closely linked to
economic prosperity at home and abroad. The market oriented
energy policies of the 1980s have substantially improved the
ability of the U.S. economy to withstand disruptions in world oil
markets. Oil import costs as a percentage of GNP fell from 2.8
percent in 1980 to 1.0 percent in 1989. Nevertheless, the U.S.,
as the largest oil consumer in the world, remains vulnerable to
world oil market disruptions. In addition, the drive to enhance
global environmental quality places new pressures on energy
production, distribution and consumption.
Recognizing that energy policy should not be shaped by crises,
the President directed the development of a National Energy
Strategy (NES) in July 1989. As he requested, the NES balances
our increasing need for energy at reasonable prices, our
commitment to a cleaner and safer environment, our determination
to foster economic growth, and our goal to reduce our
vulnerability and that of our friends and allies on potentially
unreliable energy supplies. The NES continues the successful
policy of market reliance, recognizing, however, that all energy
markets are influenced by political or regulatory interventions
designed to achieve other objectives, often in the areas of
environmental quality and National security.
The NES, developed in concert with the American people, charts a
course for reduced vulnerability to oil disruptions, a more
efficient and technologically diverse electricity sector, an
unconstrained natural gas industry, enhanced environmental
quality, and availability of ample supplies of reasonably priced
energy to fuel a growing economy. It has been shaped by
consideration of the role that petroleum plays in the security of
the U.S. and other nations; by the influence that regulation in
the electricity sector exerts on technology choices, economic
efficiency and environmental quality; and by the promise of
science and technology. Goals are established by the NES, and
the means to achieve them, in energy security, electricity,
science and technology and the environment.
THE WHITE HOUSE
WASHINGTON
Chart P- 5
Note B16 decline
in 1977-85 period
That's what prices
can do.
2
ENERGY SECURITY:
The goal of the NES is to reduce our vulnerability to oil
market disruptions. Measures to achieve this goal include:
O
Securing and maintaining unrestricted flows of oil
from all major producing regions
O
Reducing the importance of oil use in the U.S.
economy by using oil more efficiently and
replacing it with other fuels
O
Developing and maintaining contingency mechanisms,
including international strategic oil reserves and
stocks, and "excess" world production capacity
Reducing underlying tensions that threaten major
world oil producing regions, via foreign policy
mechanisms
O
Diversifying the sources of supply outside the
Persian Gulf into producing regions such as the
U.S. (OCS, ANWR), the Western Hemisphere, Europe
and Asia
The United States uses oil to transport people and goods (62%),
in buildings (8%), in industry (25%) and to generate electricity
(5%). The availability of world oil supplies for the foreseeable
future will be substantially influenced by a limited number of
producers holding both large reserves and excess production
capacity.
Sixty-five percent of the world's known oil reserves lie in the
Gulf region, where oil can be produced at lowest cost. Recent
events have once again illustrated the risks inherent in reliance
on a key energy source that is found in greatest abundance in
this historically unstable area of the world.
Moreover, oil imports play a substantial role in the U.S. balance
of trade. The U.S. trade deficit for the third quarter of 1990
was $30.7 billion, driven in part by higher oil prices. In the
past four years, oil's share of total imports has more than
doubled, from 23 percent in 1986 to 52 percent in the first nine
months of 1990.
Between August 1 and December 1, 1990, U.S. consumers paid
$21 billion more to oil producers ($8 billion to foreign
3
producers) than would have been the case without the Iraqi
crisis. Worldwide, $83 billion were transferred from oil
consumers to oil producers in the same period.
Under a policy of market reliance, and given existing Federal/
State barriers to new exploration and development, U.S. imports
of oil are forecast to rise from 42% of domestic consumption in
1989 to 62%, or about 11 mmB/D in 2000, and to nearly 70% in
2010. The U.S. oil and gas import bill is forecast to rise by
between $25 an $30 billion (in 1989 real dollars) in 2000, and by
about $90 billion in 2010. Gulf producers will supply an
estimated 30% of the world's oil in 2000.
The United States could, at great economic cost, slow this trend
by instituting a series of policy measures aimed at radically
curtailing oil imports. These measures would include an oil
import fee; large taxes on gasoline, subsidies for the production
of liquid fuels from coal, shale and gas; rapid introduction of
alternative transportation fuels; and sharply higher fuel
efficiency standards that would force auto makers and consumers
to choose smaller cars. The combined impact of these measures
would be to reduce oil imports dramatically or substantially
depending on the level, type, and phase-in of subsidy or
taxation. But the result would be unacceptable GNP losses and
unemployment increases. Moreover, these policies would not
shield the U.S. economy from future oil market disruptions.
Energy independence is neither an achievable or a useful goal.
First, the U.S. is concurrently a large producer and consumer of
oil, so that whatever the direction of international oil price
fluctuations, some part of our economy is negatively affected.
Second, an increase in the world price of oil, brought about by
any event, anywhere, would raise the price of U.S. oil, and the
price of oil to our allies and trading partners, regardless of
the degree of import dependence. In 1979, for example, Great
Britain, which was almost totally self-sufficient in oil,
suffered the same oil price shock as other Western nations.
Japan, which was (and is) totally dependent on foreign oil
experienced virtually no economic downturn.
Oil use in the U.S. economy, measured as the ratio of barrels per
day of oil used per $1 million of annual GNP, has been
substantially reduced over the last 30 years (from 4.5 to about
3.1). Japan, however, uses about 1.2 barrels per day per $1
million of annual GNP.
4
There are many reasons for this disparity. Some are structural
and can never be changed. For example, Americans travel greater
distances because of the large land area, and because development
patterns have induced more dispersed settlement. Japan is
roughly the size of California, but has a population about half
the size of the U.S. Reflecting geography and development
patterns, the U.S. has 5.1 times as many highway miles as Japan.
Other aspects of U.S. oil consumption lend themselves to improved
efficiency and fuel diversity, which can be brought about by
policy changes and application of new or improved technology for
private and public transportation. Policies and R&D need to
address U.S. energy consumption patterns which are shaped, for
example, by the fact that nearly 90% of American passenger travel
is by private vehicle, compared to less than 45% in Japan.
Taking the above supply and demand factors into account, real
improvement in U.S. energy security requires efforts on two
fronts: (1) support the environmentally responsible development
of oil production capacity around the world, including the U.S.,
and increase strategic reserves; and (2) reduce the use of oil in
the U.S. economy through increased efficiency and fuel switching,
and by broader use of alternative fuels to decrease the
transportation sector's near total reliance on petroleum.
A.
Specific measures to increase strategic reserves and
production capacity around the world, including U.S.
production:
1.
Improve the investment climate in nations such as the
Soviet Union to encourage the necessary foreign
investment to rehabilitate and expand the hydrocarbon
industry; stimulate exploration and production in
promising developing countries; and increase capacity
in all Western Hemisphere producing Nations.
(Option 24)
2.
Substantially increase the level of worldwide strategic
reserves by the year 2000; review the conditions under
which these reserves would be used so as to affect the
expectations of oil market participants and maximize
the deterrent value of the reserves. Expansion of the
U.S. strategic reserve would be funded, at least in
part, by leasing the Naval Petroleum Reserve and using
the proceeds to acquire SPR stocks. (Option 23)
5
3.
Development of ANWR, Alaska's North Slope, and areas of
the OCS unrestricted by Presidential decision, under
strict environmental safeguards. (Options 2, 3, and 4)
4.
Expanded Aggressive research and development for
enhanced oil recovery; deregulation of oil pipelines.
(Options 60 and 25)
B.
Specific measures to reduce the use of oil in the U.S.
economy through higher efficiency and fuel switching, and
by broader use of alternative fuels to decrease the
transportation sector's near total reliance on petroleum.
1.
Set CAFE standards at cost effective, safe, and
technically achievable levels provided the Corporate
Average Fuel Economy (CAFE) law is reformed to
eliminate discriminatory treatment of, and criminal
penalties for domestic manufacturers. (Options 11 and
11a)
2.
Establish Federal/State incentives to scrap old cars
and remove tax disincentives to mass transit and ride
sharing. (Options 12 and 14)
3.
Remove cap on fuel efficiency incentives to
manufacturers of alternative fuel vehicles by amending
the Alternative Motor Fuels Act of 1988; expand
alternative fuel use in all commercial light and heavy
duty vehicle fleets, including Federal fleets; and
increase non-petroleum content of fuels sold in the
U.S. (New Alternative Fuels Package - Addendum A)
4.
Enhance research and development of auto efficiency
technology and develop new technology for intra and
inter city movement of people and goods. (Option 60)
5.
Reform natural gas pipeline construction regulations
and pipeline rate design; deregulate pipeline sales
rates; improve non-discriminatory access to pipeline
transportation; and eliminate DOE import/export
regulation. (Options 5 through 9)
Taken together, these measures will reduce oil imports to 45% of
U.S. consumption in 2000, and 40% of U.S. consumption in 2010.
Domestic oil production will increase by 1.7 mmB/D above levels
projected for 2000, largely due to enhanced oil recovery,
6
triggered by new investments in Federal R&D. Domestic production
will increase by 3.3 to 5.3 mmB/D above projected 2010 levels,
due primarily to EOR (2.5 mmB/D), increase OCS (0.4 - 1.3
mmB/D)¹, and ANWR (0.4 - 1.5 mmB/D)¹.
U.S. oil consumption will decrease by 1.2 mmB/D in 2000, largely
due to displacement of oil by gas in electric utilities and by
reduction in electricity demand (0.5 mmB/D); and alternative
fuels (0.7 mmB/D). In 2010, oil consumption will decrease by 2.7
mmB/D, due mainly to increased penetration of alternative fuels
in combination with higher fuel efficiency (2.2 mmB/D), increase
national gas use and reduction in electricity demand (0.5 mmB/D)
Natural gas consumption will increase by 1 tcf in 2000 and by 1.1
tcf in 2010.
The projected cost of oil imports is reduced by about $30 billion
('89 real dollars) in 2000, due to reduced oil import levels and
an assumed oil price of $27.90/barrel. In 2010, the projected
cost of oil imports is reduced by about $80 to $110 billion ('89
real dollars) due to reduced import levels and an assumed oil
price of $37.20/barrel.
Under the Low Economic Growth Case projections, the net changes
in oil production and consumption are similar. Oil imports are
reduced by 2.9 mmB/D in 2000 and 6 to 8 mmB/D in 2010. Changes
in the cost of oil imports and vehicle efficiency are also
similar.
ELECTRICITY
The goals of the NES are to provide more reliable, lower
cost service to consumers, increase efficiency in the
electricity sector and foster fuel and technology diversity,
including renewable energy technologies, in electricity
generation and end use.
In 1970, electricity accounted for 24% of primary energy
consumption. This figure is expected to rise to 36% in 1990 and
to 42% in 2010. Because our economy is becoming increasingly
electrified, the technologies and systems used to produce and
deliver electricity must be efficient, reliable and protective of
the environment.
1
Range represents mean conditional to 5% probability case
and currently envisioned Interior Department leasing schedule.
7
The Nation presently has about 700 gigawatts (GW) of installed
electric generating capacity. It is estimated that, under
conservative assumptions, a minimum of 200 GWs of new capacity
will be required to meet demand in the next 20 years.
The electric utility industry is one of the most highly regulated
sectors of the U.S. economy. Thus, what capacity will be built,
by whom, with what technology/fuels, and with what environmental
consequences, will to a large degree depend on the Federal/State
regulatory regime that governs investment decisions in
electricity supply and demand.
Statutory and regulatory provisions impede construction of new
hydroelectric capacity or expansion of capacity at existing dams.
The State-Federal impasse on construction of a high-level nuclear
waste repository, an impossibly cumbersome nuclear licensing
process, and the loss of public confidence in our ability to
manage the technology, have contributed to halting the
development of new nuclear capacity to a halt.
New coal technologies offer substantial efficiency and emissions
reduction benefits, but excessively risk-averse regulators and
utilities will make it difficult for these new technologies to
enter the marketplace, especially given the requirements of the
Clean Air Act Amendments of 1990. Use of wind, solar,
geothermal, and biomass technologies, though promising for the
longer term, is constrained to varying degrees by location,
economics, or technical limitations that will not be fully
overcome before 2000. Siting new generating facilities of any
kind has become all but impossible in some parts of the country.
On the supply side, competition among wholesale electricity
producers, on a regional or inter-regional scale, was not
considered feasible when PUHCA was passed. Since the enactment
in 1978 of PURPA, limited competition has emerged, but under
PUHCA some of the most able potential competitors cannot
participate, a result seemingly at odds with the public interest
in reliable supplies of electricity at the lowest reasonable
cost.
On the demand side, wide-ranging experimentation is taking place
at State and local levels to increase efficiency and reduce
consumption. Key factors that influence demand choices include
technology, efficiency standards, prices, regulatory policy, tax
policy, and consumer behavior. For each of these elements an
opportunity exists for Federal and State governments to achieve
progress through constructive partnerships.
8
Integrated Resources Planning (IRP) (also known as "Least Cost
Utility Planning") is the process increasingly used by public
utility commissions to determine the relative cost-effectiveness
and desirability of new investments in electricity supply
additions and demand reductions. Although the development of
this process has been supported by the Federal government, its
adoption by Federally-owned power producers and marketers has
been limited. Moreover, Federal tax policy currently impedes the
achievement of efficiency improvements from utility investments
in demand side management.
Successful implementation of measures proposed in the National
Energy Strategy will free electric utility markets from outdated
regulatory and statutory barriers to greater competition;
revitalize technology choices whose benefits have been
overwhelmed by regulatory uncertainty, imbalance, and cost;
eliminate Federal tax disincentives to efficiency investments;
impose discipline on the currently fragmented nuclear and
hydroelectric licensing processes; establish clearer
Federal/State responsibility for setting performance standards;
and improve the environmental performance of electricity
generation.
Specific measures to achieve a more efficient, technologically
diverse electricity sector include:
A.
Regulatory/Statutory Reform
1.
Amend PUHCA to increase wholesale power generation
options with protection for consumers. (Option 26)
2.
Amend PURPA to permanently eliminate size caps for all
renewable generation sources selected by a competitive
bidding process, and reduce co-firing limits.
(Options 36 and 37)
3.
Pursue wholesale transmission access under current
authority to assure that greater competition in supply
is not hampered by uncertain access to transmission.
(Option 27)
4.
Reform hydropower licensing in order to reduce current
uncertainty and costs; deregulate licensing of small
dams of up to 5 MW; expand capacity at existing Federal
and non-Federal dams. (Option 29)
9
5.
Reform nuclear power licensing and obtain legislation
to implement the high level waste repository.
(Options 30 and 31)
B.
Technology Development and Transfer
1.
Accelerate renewable energy R&D to reduce cost and
increase market penetration rates. (Option 60)
2.
Accelerate deployment of clean coal technologies
through regulatory treatment. (Option 33)
3.
Develop standardized advanced light water reactors
design certified by the NRC. (Option 30)
4.
Accelerate energy efficiency technology R&D and
transfer. (Option 60)
5.
Transform the renewable energy investment tax credit
due to expire in 1991 into a production credit.
(Option 34)
C.
Federal, State and Private Efficiency Measures
1.
Eliminate taxation of utility efficiency rebates.
(Option 38)
2.
Require IRP processes for all Federal power producers;
increase financial assistance for State IRP.
(Option 38)
3.
Extend current appliance standards and labeling to
commercial lighting and other equipment. (Option 39)
4.
Assist States in promulgating and implementing improved
building standards. (Option 40)
5.
Encourage more widespread use of mortgage incentives
for energy efficient housing. (Option 41)
6.
Create a self-financing fund for Federal efficiency
investments. (Option 42)
7.
Increase emphasis on home weatherization under existing
low income energy assistance programs. (Option 16)
10
8.
Improve the energy management of Federally funded
public housing. (Option 43)
These measures would reduce electricity consumption by up to 7%
in 2000 relative to projected no action basic case, and by 12% in
2010. This is equivalent to generation of power from about 80
(1000 Megawatt) power plants in 2000 and about 150 plants in
2010, although the reduction in capacity needs will lag reduction
in energy use by several years. The measures would increase
renewable electricity generation capacity by 20% in 2000 and 40%
in 2010, and nuclear power generation capacity by 10% in 2010.
SCIENCE AND TECHNOLOGY
The goal of the NES is to expand the role that energy
science and technology plays in achieving energy, economic
and environmental objectives.
Technology development, application and management is the
foundation of future U.S. economic and energy security. New
technology is also a prerequisite to achieving global
environmental objectives.
The primary responsibility for technology development and
commercialization lies with the private sector. But the Federal
government plays a critical role in basic and applied scientific
research, which is the basis for technological breakthroughs.
Through its extensive system of National research laboratories
and its support of academic and private research, the Federal
government substantially influences the scope and pace of energy
technology development.
The results of laboratory research do not always reach the market
place in a timely fashion, nor are they necessarily applied in
areas of special national concern. To the extent that
investments in technology development or improvement are likely
to yield near term economic benefits, private firms have strong
incentives to undertake them. In areas where future prospects
are clouded by price and other economic or policy uncertainties,
private investments are less likely.
Three areas of technology development are key to the successful
implementation of the NES:
Technologies that reduce the transportation sector's near
total reliance on oil either by increasing efficiency of oil
11
use, introducing alternative fuels and technology, and
diversifying travel modes;
Technologies that increase production of domestic
energy resources, especially oil and gas; and
Technologies that improve energy efficiency and increase
technological choice and competition in all sectors of the
economy.
Cooperative technology development efforts between industry and
government reduce private sector investment risks and increase
the likelihood of timely commercialization of R&D results.
Specifically proposed in the NES are: greater industry-led, cost
shared research, expanded use of R&D tax credits, and
encouragement of major innovation through a national prize/award
program.
The NES will foster investment in a diversified portfolio of
research that will offer the possibility of major breakthroughs,
or major improvements, in technologies deemed critical to meeting
U.S. energy, economic and environmental objectives in the late
1990's and in the first decade of the 21st century.
Specific high pay-off R&D measures under consideration for the
NES, and subject to budget negotiations between the agencies
involved and OMB, comprise:
1.
Advanced Oil Recovery Technologies: Expanded R&D aimed at
reducing per barrel recovery costs to $20 - $30.
2.
Advanced Transportation Fuels From Biomass Technologies:
Expand research aimed at reducing the production cost of
ethanol to $.60/gal.
3.
Aeronautics and Air Systems: Research on new materials and
engine designs
4.
Basic research to support advanced energy technologies.
5.
Electric Vehicles: Expanded R&D on batteries to increase
vehicle range and performance.
6.
High Speed Rail and Magnetic Levitation (Maglev)
transportation: Research on advanced propulsion and
guideway construction methods.
12
7.
Industrial Technologies: Research aimed at reducing oil use
in energy intensive industrial processes.
8.
Intelligent Vehicle/Highway Systems: Implementation of the
DOT Intelligent Highway System Initiation as a means to
reduce oil consumption and increasing safety.
9.
Telecommuting: R&D to promote technical solutions to
increased use of telecommunications that could reduce work
related travel.
10. Vehicle Propulsion: Enhanced R&D on ceramic components to
increase market potential for more efficient alternative
vehicles such as gas turbines.
Additionally, the NES recognizes that America's energy security,
future energy technology growth, and workforce competitiveness
are directly linked to the quality of our national mathematics
and science education. By all accounts, American student
achievement in these areas is below desired levels. The National
Education Goals, developed by the President and the Governors
following the Charlottesville Education Summit, provide a
framework for achieving excellence in American education, and
include the goal that "By the year 2000, U.S. students will be
first in the world in science and mathematics achievement."
The National Energy Strategy contains key recommendations for
improving and increasing the technical competence of the American
workforce through improved math, science, technology and
engineering education. The Federal role -- a mere 6% of total
funding at the precollege level -- must be integrated with that
of the States and the private sector to achieve maximum results.
Special emphasis must be placed on recruiting women and
underrepresented minorities into the technical workforce, to
recruiting and preparing qualified math and science teachers for
our schools, and to broadening the base of public science
literacy.
The Secretary of Energy also chairs the Committee on Education
and Human Resources of the Federal Coordinating Council on
Science, Engineering and Technology. This sixteen agency group
is preparing the first coordinated report and budget for direct
Federal spending on math and science education, which will
accompany the President's FY 1992 Budget submission to Congress
in February.
13
The budget cost of the NES enhanced R&D measures has been
estimated at a total of $1.2 billion for five years (DOE only).
Based on the NES current policy case, oil consumption in 2030 is
expected to be 25.4 mmB/D. By 2005, if fully successful, the
enhanced oil recovery R&D could produce an additional 1.4 - 3.1
mmB/D. Overall, the proposed R&D initiatives could achieve
combined oil savings of 5 to 8 mmB/D by 2030.
ENVIRONMENTAL QUALITY
The goal of the NES is to improve environmental quality
through policies that emphasize clean, efficient energy
sources and technologies, without sacrificing economic
growth or affordable energy.
Energy policies that do not enhance environmental quality and
protect public health cannot be sustained. Environmentally
sensitive energy policies, plus science and technology, can
substantially reduce the impacts of energy production,
distribution and consumption on the biosphere.
Electric utilities produce approximately two thirds of total
national SOX emissions. Other air pollutants -- NOX, co, and
VOCs -- result primarily from transportation energy use. Also,
power plants, petroleum refineries, coal and uranium mines and
some oil wells produce waste that unless carefully managed,
adversely affects water quality. About 20% of all point sources
discharges to surface waters in the U.S. are energy related.
Notwithstanding current statutes, which are more comprehensive
than those enacted by any other Nation, the current policy case
forecasts increased environmental stress, largely due to growth
in population, cars and vehicle miles travelled, unless the
American standard of living is to be reduced.
The 1990 Clean Air Act Amendments will limit, and in many cases
reduce from current levels, the major air pollutants from power
plants, transportation use and energy using industries. The NES,
coupled with existing DOE R&D programs, such as the development
of alternative fuels for transportation, clean coal technologies,
and energy efficiency improvements, would further reduce air and
water pollutants and waste from projected levels.
NES measures are estimated to reduce sulfur dioxide emissions by
30 percent, nitrogen oxide by 25 percent and volatile organic
compound emissions by 10 percent in the year 2030 from estimated
14
projections. To offset the volumes of waste from energy
production, the NES proposes measures to reduce current
regulatory inefficiency, and development of new technologies that
minimize wastes.
Although there remains a great deal of scientific uncertainty,
growing international concern regarding the potential for climate
change is causing many nations to consider measures to reduce
greenhouse gases, in particular carbon dioxide (C02). Since
1950, the U.S. share of total CO2 emissions has declined from
about 42% to 23%. By 2025, the U.S. share is projected to be 14%
of the world total. By contrast, developing countries have
increased their share of CO2 contributions from 9% in 1950 to 30%
today. By 2025, their share is projected to be about 48% of
world total.
The measures set out in the NES would reduce the rate of growth
of U.S. CO2 emissions by about 60% of the projected growth from
1990 to 2030. Greater use of nuclear power, renewable energy,
and improvements in energy efficiency in the electricity and
transportation sector, would be the major contributors to this
reduction.
Implementation of the measures proposed in the NES will
substantially improve environmental quality while improving
economic efficiency and maintaining reasonably priced energy.
The cost to the Nation of environmental regulation is over $100
billion per year and growing (1.5% of GNP). The NES proposes to
reduce these costs through more efficient management of
environmental compliance. It calls for wider use of
emissions-trading and other market mechanisms that will be
demonstrated in the implementation of the CAA, and should be
extended to other environmental protection programs. Also, to
reduce the costs of energy, the NES proposes measures to expedite
the siting, permitting and licensing of new energy facilities.
Ultimately, the key to meeting National requirements for energy,
for economic well being, and for environmental quality, will be
new technology. For these reasons, the NES concerns itself not
only with the historical Federal role in basic science and
research, but also with technology transfer and with the quality
of the educational system that will train future technology
developers and managers.
Specific measures to better harmonize energy and environmental
objectives include:
15
1.
Implementing greenhouse gas emission reduction measures
that also make sense for other environmental energy
security, and economic reasons. (Option 45)
2.
Pursuing research aimed at resolving uncertainties
associated with potential global climate change.
(Option 47)
3.
Greater use of mechanisms such as emissions trading and
marketable allowances to reduce compliance costs.
(Option 50)
4.
Development and use of waste minimization technologies
in all energy using sectors. (Option 52)
5.
Clarifying the application of new source review
requirements to existing power plants. (Option 51)
6.
Improving analysis of the impacts of environmental
regulation on energy supply and use. (Option 49)
7.
Using model programs to expedite siting, permitting and
licensing of energy facilities. (Option 48)
8.
Assuring that State programs to regulate radionuclide
emissions are promulgated only if they improve health
and environmental protection, and are applied equally
against risks from all sources. (Option 53)
Conclusion
As a National Energy Strategy, these measures advance the
national interest by:
O
Securing adequate energy supplies at reasonable cost
Reducing our vulnerability to oil market disruptions
Increasing efficiency in the production and use of energy
Removing barriers to the development of domestic energy
resources
Exerting U.S. leadership in energy research, science and
technology.
Enhancing environmental quality.
16
The NES, as constructed by the measures identified in this paper,
satisfies the President's directive to improve energy security,
enhance environmental quality, and provide the energy necessary
to fuel a healthy economy.
APPENDIX I
CONSENSUS OPTIONS
Option
#
Option
2
Allow Access to OCS Consistent with President's 1990 Decisions
3
Allow Access to ANWR
4
Alaskan North Slope Development
5
Gas Pipeline Construction without Federal Certification
6
Gas Pipeline - Coordinated NEPA Review
7
Deregulate Pipeline Sales Rates
8
Reform Pipeline Rate Design
9
Improve Pipeline Transportation
10
Eliminate DOE Import/Export Regulation
11
Reform CAFE Law
12
Accelerate Scrappage of Older Cars
16
Low Income Home Efficiency
24
Stimulate Oil and Gas Production Outside Persian Gulf
26
PUHCA Reform - Greater Competition
27
Transmission Access for Wholesalers
30
Facilitate Expansion of Nuclear Power
31
Nuclear Waste - Comprehensive Solution
33
Encourage Clean Coal in Electric Utilities
35
Municipal Solid Waste to Energy
36
Reform PURPA - Remove Size Cap
37
Reform PURPA - Relax Co-firing Limits
41
Mortgage Financing Incentives
43
Improve the Efficiency for Public Housing
44
Reducing Environmental Impacts of Energy Systems
45
Global Climate Change - Integrate NES
47
Added Global Climate Change Research
48
Reduce Delays in Siting and Permitting
50
Emissions Trading for Environmental Compliance
51
Modified New Source Applicability
52
Encourage Waste Minimization in Industry
53
Dual Regulation of Radionuclides
54
Re-align Federal R&D Priorities
55
DOE Basic Research Capabilities
56
Leverage NES-Related R&D Resources
57
Reform the National Technology Transfer Service
58
Spur the Export of Energy Technologies
59
Math/Science Education Initiative
APPENDIX II
NON-CONSENSUS OPTIONS
Option
#
Option
11 (a)
Higher CAFE Standards
14
Policies to Stimulate Mass Transit/Ride Sharing
New
Alternative Fuels Package (replaces options 17-21)
28
Phase-out Federal Electricity Subsidies
34
Renewable Energy Production Incentive
38
IRP and Tax Free Treatment of Utility Rebates
60
Enhanced R&D
APPENDIX III
MISCELLANEOUS OPTIONS
FOR SUB-CABINET RESOLUTION
Option
#
Option
23
NPR Leasing
25
Oil Pipeline Deregulation
29
Hydropower Regulatory Reform
32
Nuclear Waste - Alternative to Federal Management
39
Equipment Standards or Labeling
40
Strengthen Building Energy Efficiency Standards
42
Fund for Federal Efficiency Investments
49
Energy Impact Analysis for Environmental Rulemaking
ADDENDUM A
ALTERNATIVE FUELS OPTIONS
DRAFT
Overview, NES Alternative Fuel Options
DEC 0 9 1990
Use of alternative transportation fuels can enhance U.S. energy security by reducing U.S. oil
use. The Clean Air Act Amendments of 1990 (CAA) established several programs that involved
use of alternative fuels on the basis of their potential to reduce CO, ozone forming
hydrocarbons, and toxic emissions. We estimate that the CAA will displace, by 2010, about 400
mB/D of U.S. oil imports due to these provisions.
However, in order to more significantly reduce U.S. oil imports, three alternative fuel options are
included in the National Energy Strategy (NES) that would, by the year 2010, add 2 million
barrels per day of oil displacement beyond that achieved in the CAA. These options are:
1.
Cafe Incentive for Alternative Motor Fueled Vehicles: Would eliminate the cap on
the Corporate Average Fuel Economy (CAFE) credits that are earned by motor
vehicle manufacturers from the production of dual fueled or fuel flexible vehicles.
2.
Alternative Fueled Fleets: Would require owners of centrally fueled fleets to
purchase alternative fueled vehicles.
3.
Non-Petroleum Motor Fuel: Would require that at least 10% of U.S. motor fuel
be non petroleum based. This could be accomplished by blending 10% non
petroleum feedstocks into all gasoline and diesel fuel, or an equivalent use of
alternative motor fuels in alternative fueled vehicles.
The combination of the three options offers benefits over a single option, assuring the
achievement of oil displacement goals at the lowest possible total cost and minimum risk to any
one player (vehicle manufacturers, consumers, fleet operators, fuel producers, and fuel
distributors).
The requirement that motor fuels contain a minimum level of non petroleum fuel (with credits
and trading) would encourage refiners and fuel distributors to provide alternative motor fuels for
vehicles capable of using them. Providing neat alternative motor fuels is likely to be a less
costly way of satisfying the blend requirement.
The demand by centrally fueled fleets for alternative fueled vehicles provides a ready market for
vehicles produced in response to the CAFE incentive. In addition, the likelihood that private
purchasers of fuel flexible vehicles would use alternative motor fuels is greatly enhanced by the
incentives provided to refiners to market these fuels.
The additional cost (relative to the cost of imported oil) per barrel of oil displacement provided
by this package of options is estimated to be as low as $4 per barrel, by general use of
alternative fuels compared to up to $21 per barrel by blending non-petroleum feedstocks into
gasoline and diesel fuel: We expect that because of the credit and trading system, the total
cost of these options would be at the low end of this range since market forces would dictate
the most cost effective approach.
In order to maintain Federal leadership, the NES options also include:
4.
Larger Federal Alternative Fueled Fleet: Would accelerate Federal purchase of
alternative fueled vehicles and conversion of conventional vehicles to operation
on natural gas.
While this option is not estimated to displace a significant amount of oil, it demonstrates Federal
leadership and sets an example to State and local governments to use alternative fuels.
DRAFT
DEC 0 7 1990
Title:
CAFE Incentives for Alternative Fuel Vehicles
Option:
Increase or eliminate the cap of 1.2 mpg CAFE credit available to
manufacturers for the production of light duty alternative fuel flexible or dual
fueled vehicles.
Discussion: The Alternative Motor Fuel Act of 1988 (AMFA) provided CAFE credits for
vehicles powered by alcohol or natural gas. The CAFE credit resulting from
production of flexible or dual fueled vehicles is limited to 1.2 mpg (MY 1993 -
2004) or 0.9 mpg (MY 2005 - 2008). This incentive is insufficient to
stimulate the manufacture of more than a few hundred thousand fuel flexible
vehicles per year. While dedicated alternative fuel vehicles receive an
unlimited CAFE credit, dedicated vehicles are likely to be limited to well
defined niche markets.
Without government intervention, it is unlikely that alternative fueled vehicles
would be introduced in sufficient numbers to have any impact on U.S. energy
security for at least two decades. A large number of alternative fueled
vehicles and fueling outlets are required, in addition to the supply of a very
large quantity of at least one alternative transportation fuel. All three pieces
- vehicles, fueling outlets, and fuel supply - are unlikely to come to the
market simultaneously. No single party - vehicle manufacturers, fuel
distributors, or alternative fuel suppliers - have enough incentive to act unless
they are confident that the other two parties are simultaneously acting. In
addition, vehicle manufacturers and fuel distributors would have to make
substantial investments to achieve a sufficient number of vehicles and fueling
outlets before the widespread distribution of any alternative fuel would be
economic. Therefore, the parties making the earliest investments would not
likely reap any benefits, since the actual demand for alternative fuel vehicles
or fuel would not develop until many years after those earliest investments
were made.
This option, in combination with other NES alternative fuel options, is
designed to break this bottleneck in the least obtrusive way. This option
includes no mandated sales of vehicles or fuel. Alternative fuels would only
be purchased by consumers when they were competitive.
PROS:
Would provide a significant incentive to produce alcohol flexible vehicles and
an additional incentive to produce dual fueled CNG powered vehicles to
satisfy clean fuel vehicle requirements of the Clean Air Act.
Provides an alternative to manufacturers that may be more cost effective
than increasing automobile fuel economy. For example, GM would improve
its MY 1995 CAFE by about 4 mpg if it converted its large and luxury class
cars to flexible fuel capability.
Provides only incentives, not mandates - the response of the motor vehicle
industry is voluntary.
Leaves the actual choice and use of alternative fuels to the private sector
and consumers.
Estimated to result in oil displacement of 150 mB/D in 2001, growing to 825
mB/D in 2005, to 2.2 mmB/D in 2010, to 2.3 mmB/D in 2015.
DRAFT 7 1990
The present value (1990) of the estimated reduction in oil prices resulting
from this level of oil displacement is $22 billion. This compares to an
estimated present value of costs of about $5 billion. This estimate is based
on the limiting assumption that OPEC does not react to reduced U.S. oil
demand by reducing OPEC oil production. If OPEC did react, the reduction
in oil prices, and consequent benefits, would be reduced.
The increased cost of vehicles per barrel of oil displaced is estimated to be
$4. This estimate does not include the potential savings to consumers of
alternative fuels relative to conventional fuels.
Provides a large market for future U.S. alcohol production using advanced
technologies from cellulosic, waste, and coal resources. Advancing these
technologies to a commercially competitive stage are major research
objectives of the Department of Energy.
CONS:
Alternative fuels must be produced in sufficiently large volumes, and at
competitive prices, and fuel distributors must choose to make them available,
in order for this option to produce benefits. Otherwise the fuel flexible
vehicles will merely be run on conventional fuels.
Would increase present value of future vehicle costs by $5 billion.
Would reduce oil imports, but would increase methanol imports.
This option may lead to reduced light duty vehicle fuel efficiency by reducing
the effectiveness of mandatory fuel economy standards.
Action Required and by Whom: The Administration would propose legislation to modify
the Motor Vehicle Cost and Savings Act. The required legislation and regulations would be
jointly developed by DOE, EPA, and DOT.
DEC 0 7 1990
Title:
Alternative Fuel Fleets
DRAFT
Option:
This option would require that all fleets of 10 or more vehicles that are
centrally fueled or capable of being centrally fueled purchase, by 1995, 10%
alternative fueled vehicles, growing to 90% by 2000. The vehicles covered
include light duty cars and trucks, and medium to heavy duty trucks. Over-
the-road Class 8 vehicles, or other trucks not capable of being centrally
fueled are not included. In addition, Federal fleets would convert to
alternative fuel use on an advanced schedule. Alternative fueled vehicles are
defined to be vehicles that use motor fuels or energy sources that contain
15% or less petroleum based product. Alternative fueled vehicles are also
defined to include LPG.
Discussion: This option would require nationwide use of alternative fuel vehicles in fleets.
The Clean Air Act has a similar provision with the following differences:
The CAA requirements begin in 1998 and apply to 30% of new
purchases growing to 70% by 2000.
The CAA requirements only apply in 26 nonattainment areas (30% of
the population).
The CAA requirements do not require use of alternative fuels, but
rather, require vehicles to meet "California Low Emission Vehicle
Requirements" (LEV) of 0.075 gpm NMHC, 3.4 gpm CO, and 0.2 gpm
NOₓ. It is estimated that gasoline powered vehicles may be able to
meet these requirements.
Vehicles satisfying this option would also have to meet CAA requirements.
Therefore, by 1998, covered alternative fueled vehicles in the 26
nonattainment areas would have to meet the LEV standards. The CAA
requirements would remain unchanged except that now these LEVs would
have to be powered by alternative fuels to meet both program requirements.
PROS:
Would provide a significant incentive to improve alternative motor vehicle
technology.
Leaves the actual choice of alternative fuels to the private sector and
consumers.
Would displace 900 mB/D of oil (2005). The CAA program would displace 0
to 95 mB/D (2010) depending on whether gasoline or alternative fuel
powered vehicles are used to satisfy the program.
CONS:
By year 2000, the annual increased cost for vehicles would be $2 billion.
The present value of these costs is $8.6 billion (1990 at 10% discount rate).
The total refueling infrastructure cost would be $3.5 billion. The present
value of these costs is $1.4 billion (1990 at 10% discount rate).
DEC 0 7 1990
DRAFT
The cost of infrastructure and vehicles per barrel of oil displaced is:
1995
$32.50
2000
$10.50
2005
$6.10
The cost of infrastructure and vehicles per barrel of oil displaced is high in
the earliest years because of the need to provide refueling infrastructure for
relatively few vehicles.
Action Required and by Whom: The Administration would propose legislation to require
purchase of alternative fuel fleet vehicles and requirements to fuel these vehicles with
alternative fuels (in the case of dual fueled or fuel flexible vehicles). The required
legislation and regulations would be developed by DOE.
DEC 0 7 1990
DRAFT,
Title:
Non-Petroleum Motor Fuel
Option:
This option would require that refiners and motor fuel importers offer for sale
motor fuels that have at least 10% non-petroleum content on an energy
equivalent basis (by 2005, 5% by 2000). Credits and trading would be
provided to allow fuels that contain more than 10% non-petroleum content to
offset fuels that contain less. Therefore, sale of alternative motor fuels would
generate credits that would allow sale of conventional gasoline via trading
and credits.
Discussion: This requirement would be partly met by blending MTBE, ETBE, and ethanol
(all oxygenates) into gasoline. In this regard, it may viewed as a nationwide
extension of the reformulated gasoline provisions of the Clean Air Act
Amendments of 1990. In addition to blending oxygenates into gasoline, this
requirement would also stimulate use of shale oil, tar sands, and coal liquids
("non-conventional oil"). We estimate that of the 15 billion gallons per year
of non-petroleum blend stocks, 9 billion would be comprised of oxygenates,
and 6 billion would be "non-conventional oil." It is also likely that the
15 billion gallon per year requirement may be reduced through credits and
trading if a significant number of alternative fueled vehicles are introduced
due to CAA or other NES programs.
Pros:
Displaces 1 mmB/D of imported oil by 2005.
The reduced oil demand is estimated to lower world oil prices by about
$1 per barrel and save $3-4 billion per year in reduced U.S. oil expenditures.
Encourages purchase and use of alternative fuel vehicles by fleets through
credit and trading program.
Leaves choice of non-petroleum fuels to market.
Cons:
Would cost as much as $7 billion per year, raising the average cost of all
motor fuel by as much as 5 cents per gallon.
Non-petroleum fuels are estimated to cost $21 per barrel more than the
motor fuel they displace.
Would entail substantial administrative apparatus to assure that feedstocks
are non-petroleum. Refiners would have to keep a paper trail of feedstock
acquisitions and the Federal government would set up an enforcement
process to prevent fraud.
Could cause substantial competitive dislocation in the refining and marketing
sectors. Independents would be particularly disadvantaged.
This is a mandate that could become uncontrollable in the Congress. If the
percentage requirements and deadlines are moved up, the costs would
escalate dramatically.
Action Required and by Whom: The Administration would propose legislation to require
minimum levels of non-petroleum feedstocks. The required legislation and regulations
would be developed by DOE.
DEC 0 7 1990
DRAFT
Title:
Larger Federal Alternative Fuel Vehicle Fleet
Option:
The Federal government would accelerate its purchase of new alternative fuel
vehicles and would initiate the conversion of existing vehicles to CNG
operation consistent with the requirement of the Clean Air Act.
Discussion: The Federal government purchases 44,000 light duty vehicles per year and
operates a civilian fleet of 200,000 cars and light trucks. About one-third of
these vehicles are controlled by GSA; the remainder are owned and operated
by individual agencies, e.g., DOD. We expect that, in 1991 and 1992, up to
1000 alternative fuel vehicles will be purchased under the auspices of the
Alternative Motor Fuel Act of 1988 (AMFA). Because the available
alternative fuel models are larger, more luxurious, and more expensive than
the vehicles that would otherwise be purchased by the Federal government,
we expect that the incremental cost of the AMFA vehicles purchased in 1991
and 1992 will be $4000 to $7000. Until there is sufficient fleet demand for a
basic compact alternative fuel car, the manufacturers are unlikely to make
such a car available. In addition, the AMFA CAFE credits (see "CAFE
Incentives for Alternative Fuel Vehicles") encourage manufacturers to produce
large and luxury fuel flexible vehicles instead of compact cars. We assume
for the cost analysis provided below that these problems are partially
overcome and that the incremental vehicle cost would be $2500 for a
methanol fuel flexible vehicle. This assumption is plausible only if a large
and continuing demand were established for these vehicles. The cost of
converting an existing vehicle to CNG operation is estimated to be $2500.
Recently enacted Clean Air Act Amendments established a new mandatory
alternative fuel program for all fleets of ten or more vehicles in 26 cities
designated as serious, severe and extreme non-attainment areas. Under this
requirement, fleets must be converted to alternative fuels in a manner that
will achieve specific emission standards by 1998.
Pros:
A Federal alternative fuel vehicle fleet program could help initiate and
facilitate implementation of the new Clean Air Act requirements.
A program to provide 60,000 vehicles by 1995 would displace 1,300 barrels
per day of oil use by 1995.
Demonstrates Federal leadership and sets an example for State and local
governments and the private sector. Could indirectly generate oil savings by
encouraging greater use of alternative fuel vehicles.
Would reduce emissions of volatile organic compounds (VOCs) by 0.002%.
Use of CNG vehicles may reduce fuel costs and maintenance costs.
CONS:
Refueling facilities would cost about $150 million through 1995 with most of
this cost occurring in the early years. In addition, GSA estimates additional
costs of $45 million due to higher operation costs and lost disposal revenue
(or cost to reconvert or remove tanks, etc.). The net present value of the
costs of this option is $244 million. The nominal annual costs, assuming 4%
annual inflation, are shown in the table below.
DEC 0 7 1990
Federal Alternative Fuel Fleet Cost
(all nominal dollars)
DRAFT
Year
Millions
1991
49
1992
51
1993
103
1994
106
1995
181
If the program cost were attributed to reducing VOCs, VOC reductions would
cost over $200,000 per ton in 1995.
if the program cost were attributed to reducing oil use, oil displacement is
achieved at over $180 per barrel displaced in 1995.
Program is not cost effective unless non-Federal fleet purchases, in
combination with Federal fleet purchases, generated sufficient demand for low
cost alternative fuel vehicles. If the expanded Federal fleet program were
implemented in advance of private sector fleet conversions under the Clean
Air Act, demand would not be sufficient to drive down costs.
Conversion of existing vehicles to use of CNG would void their warranties
and could result in increased Federal maintenance costs. Also, resale of
these vehicles would require removal of CNG equipment, adding further costs
to the program.
Would require changes in agency refueling practices.
Would require installation of alternative fuel refueling outlets.
Action Required and by Whom: The President would issue an executive order requiring
alternative fuel vehicle purchases and conversions consistent with the geographic and
schedule requirements of the Clean Air Act Amendments. GSA and other purchasing
agencies would change their regulations to allow for purchase of available alternative fuel
vehicle models. Authority to purchase alternative fuel vehicles is provided by the
Alternative Motor Fuels Act of 1988. In addition to the authority provided under this Act,
additional funding authorization and appropriation would be required. Additional funding
could be provided via the AMFA program (DOE) or directly to GSA and/or user agencies.
GSA would establish higher rates to recover these costs.
ADDENDUM B
ENHANCED R&D
DRAFT
DEC 10 1990
POTENTIALLY HIGH PAYOFF TECHNOLOGIES FOR REDUCING U.S.
OIL VULNERABILITY
Option:
Increase funding and provide alternative approaches for
enhanced research and development efforts to promote NES
goals for reducing oil vulnerability.
Discussion: This option deals with two separable R&D issues: the
identification of high payoff technologies for reducing U.S. oil
vulnerability and the mechanisms for funding those technologies.
The focus of this option is on oil and for that reason does not
include other worthy R&D opportunities that support the NES. In
particular, some members of the EPC have expressed their support
for additional R&D in other areas such as advanced nuclear power.
Furthermore, it must be pointed out that the discussions of the
various technologies in this paper describe the potential of these
technologies and do not consider the funding mechanism that
ultimately might be used.
The primary responsibility for technological development,
particularly its commercialization, lies with the private sector.
To the extent that investments in development and improvement of
existing technologies are likely to yield economic benefits, firms
will have strong incentives to undertake them. However, in some
key areas, the private sector may not have adequate incentives to
undertake long-term basic research or to ensure that the overall
portfolio of research investments is sufficient to address energy
security concerns. For this reason, an important component of the
NES should be to support a diversified set of research that offer
the possibility of major breakthroughs that would benefit energy
security. It must be understood that these investments are
directed toward long-term benefits and may never pan out.
High Payoff Technologies: The R&D programs that are believed to
offer the greatest potential for reducing oil vulnerability include
the following (listed alphabetically) :
Advanced Oil Recovery Technologies
Advanced Transportation Fuels from Biomass Technologies
Aeronautics and Air Systems
Basic Research to Support Advanced Energy Technologies
Electric Vehicles
High Speed Rail and Maglev
Industrial Technologies
DRAFT
2
DEC 10 1990
Intelligent Vehicle/Highway Systems
Telecommuting
Vehicle Propulsion
These areas were selected on the basis of (1) potential for reduced
demand for petroleum or increased supply of substitutes, and (2)
potential for performance improvements and/or cost reduction
through enhanced R&D. Significant advances in any of these
technology areas could lead to significant commercial potential
under a range of possible future oil price paths. All of these
technologies could yield significant impacts between 2000 and 2030.
Mechanisms for Implementing an Enhanced R&D Initiative: In
addition to identifying potentially high payoff technology R&D
areas, there is a related issue of how best to implement the
initiative. New mechanisms appear to be needed to increase the
prospects for success than historically has been the case. For
example, the Federal Government has had a substantial, broad-based
energy R&D program since the 1973 oil embargo. From FY 1980
through FY 1990, the Federal Government has invested about $21
billion in energy technology R&D. Much of the past energy R&D was
funded in Federal laboratories, or contracted to firms with little
private sector decision-making or cost-sharing. However, this
approach did not necessarily make the best use of the private
sector to increase the effectiveness and ultimate commercialization
of the R&D. This is especially important when considering that new
energy technologies ultimately must be both produced and used
outside the Government.
Alternative Implementation Mechanisms
1. Cost-Shared, Joint Government-Industry-University R&D: This
approach would involve industry-led, joint Government-
Industry-University R&D planning and management with some
degree of cost sharing. The research would be performed by
industry (except in situations where Government labs had
unique research and testing capabilities or by universities
through the use of grants). The formation of industry R&D
consortia would be encouraged where feasible (e.g., in the
pre-competitive R&D stages). This mechanism would maximize
the involvement of the ultimate technology users, enhancing
the technology transfer process, and would minimize Government
overhead. (This issue is discussed in more detail in the
Technology Transfer option paper.)
DRAFT
DEC 10 1990
3
Intellectual property rights would be assigned to the industry
participants consistent with current laws and policies. Each
technology R&D venture would have well-defined goals, end
products and schedules, with a mechanism for evaluation of
results. This approach would seek to take advantage of the
large pool of technical talent and financial resources in the
private sector.
In the case of the basic research initiative, universities
should play a major role. Active university involvement in
aviation R&D worked successfully with NASA and DOD. In
addition, a byproduct would be a cadre of newly trained
university graduates with specialization in advanced fuels,
lubricants, materials, structures, aerodynamics, electronics,
and other oil reduction technologies.
2. Tax Credits for Enhanced R&D. An enhanced energy technology
R&D initiative could be supported through new tax incentives,
that could take several forms:
-
a. modification to the current research and
experimentation (R&E) credit that would provide an
increased credit (e.g., 40 percent) for R&D in
specifically-defined areas of high payoff energy
technology R&D.
-
a production tax credit, applicable to first-of-a-kind
commercial ventures (e.g., pioneer alternative fuels
processing facilities), designed to offset the high
initial costs of new ventures. This credit would have
specific limitation on the number of ventures and length
of time, and would not be an open-ended long-term
production credit to subsidize otherwise uneconomic
alternative energy ventures.
The tax credit options would give maximum flexibility to the
marketplace to select among qualifying R&D projects those with
the highest potential payoff. However, these credits also
have several disadvantages. First, a priority of this
Administration is to make the present 20 percent R&D credit
permanent. (The present credit, which generally applies to
energy-related research, expires on December 31, 1991.)
Attempts to increase the credit for certain energy
technologies would substantially increase the cost of the
credit and would undercut this effort. Second, by targeting
the credit to certain specially-defined technologies, the
proposal would reduce the flexibility of the marketplace to
select other areas with possibly greater potential payoff.
Third, these credits would be difficult to administer.
DRAFT
DEC 10 1990
4
3.
Prizes/Awards. Under this approach, a national award program,
with large cash grants, would be established for major
innovations in new energy technologies. This program would
be Government-funded, and administered by a special board with
broad-based representation. The board could issue specific
national challenges (e.g., an electric vehicle that can travel
200 miles at 50 mph on a single charge), or award prizes to
the best unsolicited applications. This approach appears to
have strong incentive in other areas (e.g., Baldrige Award,
Nobel Prizes), and could spur a new round of entrepreneurial
innovation. However, a prize may not be a sufficient
incentive in technology areas where R&D costs are particularly
high. For this reason, a prize/award program may be more
suitable as a complement, rather than a substitute for other
mechanisms (cost-sharing, tax credits).
Expected
Benefits/Impacts:
Supporting the development and
deployment of new technologies can have significant economic,
environmental, and energy security benefits. It is estimated that
by 2030 between 5 and 8 million barrels a day could be
saved/produced, depending upon the success of the R&D programs.
The increased budgetary costs are not known, but are believed to
be modest, and would not occur until FY 1993. The investment
required to commercialize these technologies likely will be
substantial, but cannot be estimated at this time. As the
attachment shows, modest increases in Federal energy-related R&D,
on a sustained basis, could result in substantial benefits,
especially when leveraged through significant cost-sharing with
industry.
Pros:
O
Targeted investments in potentially high payoff
technology R&D offers the potential to achieve
substantial import reductions without resort to new
regulatory or subsidy programs.
The enhanced oil-vulnerability reduction R&D program
proposed here could help ensure a balanced
(supply/demand side) and comprehensive NES.
The expanded use of cost-sharing and prizes/awards
will engage private interest earlier in the
technology development process and help spread the
modest Federal investment described in this option
across a broader base of technologies.
Cons:
O
An enhanced oil-vulnerability reduction R&D program
may be less successful than envisioned resulting in
high costs with little or no tangible benefits.
DRAFT
DEC 10 1990
5
Furthermore, the critical issues in the
commercialization of new technology are often driven
by economic, institutional and political concerns,
not necessarily technology. Consequently, even if
successful, R&D may not be enough if oil prices are
too low or consumer preferences are unresponsive.
O
Even if successful, a strategy of enhanced R&D will
likely achieve energy security benefits later than
other regulatory alternatives.
O
The program may displace some private sector R&D
investments, even with substantial cost-sharing.
O
An enhanced R&D initiative will be particularly
popular, but will likely be expanded and diluted
with Congressional and other special interest
projects.
Recommended Actions:
1.
The R&D priorities stated above would be refined based upon
a more complete estimate of potential payoffs and costs. The
agencies and OMB would reach agreement on the amount of
additional R&D funding to be phased in over a 5-year period.
The exact amount of additional funding has not been
determined. To the maximum extent feasible, this R&D will be
conducted through greater use of joint government/industry
cost-sharing and awards for innovation. Working closely with
the private sector, the responsible Federal agencies (DOE,
DOT, NASA, etc.) would develop collaborative implementation
plans.
2.
If the EPC wishes to consider the tax credit mechanism, the
Treasury Department would conduct on an interagency basis an
assessment of the advantages of pursuing new tax incentives
for promoting R&D in specifically defined areas of high payoff
energy technology that support NES objectives.
3.
The Office of Science and Technology Policy through the
Federal Coordinating Council for Science, Engineering and
Technology will monitor ongoing Federal R&D programs that
could contribute to the NES objective of reducing oil
vulnerability.
DRAFT
6
DEC 10 1990
ATTACHMENT A
SUMMARY OF R&D OPTIONS
DEC 10 1990
7
DRAFT
Summary of R&D Options
The analyses in the following summaries are based on the assumption
that each technology is independent of the others in terms of their
ability to penetrate the marketplace. These technologies will, to
some extent, compete with one another in the market. Consequently,
the estimates of energy savings provided below overstate the
individual contributions each technology might achieve. The
individual contributions should not be added -- the combined effect
of these technologies will be less than the sum of the individual
expected benefits.
Based on the NES current policy case, oil consumption in 2030 is
expected to be 25.4 million barrels per day (mmB/D). If fully
successful, these technologies could achieve combined oil savings
of 5 to 8 mmB/D by 2030.
Advanced Oil Recovery Technologies
Advanced oil recovery technologies will permit production of
portions of the two-thirds of known U.S. oil that are normally not
recovered using present techniques. Full R&D success could
dramatically increase U.S. proved reserves and increase daily
production between 1.8 - 3.2 mmB/D in 2010. Advanced oil recovery
technologies includes intensive drilling based on advanced
geological/geophysical reservoir interpretation and the injection
of chemicals, gases, or heat to overcome viscous, capillary and
permeability barriers to production. Targeted technological
advances include: interdisciplinary geoscience advances in
improving the definition of reservoir flow paths and better
underground instrumentation and interpretation techniques;
chemicals that are stable and cost effective at elevated
temperatures and salinities; improved wellbore insulation and
downhole steam generation; and methods for enlarging the portion
of the amount of the reservoir that can be effectively swept by
chemicals and steam.
Advanced Transportation Fuels from Biomass
Ethanol is produced commercially from starch and sugar crops such
as corn and sugar cane; however, lignocellulosic feedstocks
(biomass) such as trees and grasses have not yet been converted to
ethanol on a commercial scale in the U.S. Successful R&D could
provide a major alternative to gasoline which is domestic,
renewable, and competitively priced. Research to date has reduced
the projected selling price of ethanol from biomass from
$3.60/gallon in 1980 to $1.27 today. A wide range of, technical
opportunities have been identified to bring the price down to about
$0.60/gallon. The primary obstacle is the need to conduct
DEC 10 1990
DRAFT
8
integrated process experiments to show that the process steps will
work as a system and can be scaled up to commercial scale.
Feedstock improvements and research on conversion process are also
sought, in conjunction with USDA. Successful R&D could result in
the attainment of cost goals and initial commercialization by the
year 2000, leading to a 10-15% reduction in oil use by 2030, or 2.5
- 4 mmB/D.
Aeronautics and Air Systems
In 1989, U.S. air carriers logged 446 billion passenger revenue
miles, consuming about 1 mmB/D of jet fuel and aviation gasoline.
General aviation aircraft consumed an additional 0.07 mmB/D. World
air travel is forecast to double in the next 10 years and to
continue sustained growth of over 5 percent annually thereafter.
NASA supports long-term high risk R&D on enabling technologies for
aeronautics with potential application to both the commercial and
military sector. Current areas of research with high potential
payoff in terms of energy efficiency include: composite airframe
materials for weight reduction in primary aircraft structures,
specifically wing and fuselage; propulsion materials and components
applicable for high efficiency unducted and ultra-high bypass
ducted engines; applications of hybrid laminar flow wings and
nacelles for increased aircraft efficiency through drag reduction;
advanced wing designs with minimum induced drag and improved flap
systems; close coupling between engine and aircraft controls to
allow engines to run more efficiently; technology for fly-by-light
and power-by-wire control systems for both aircraft and engines
that reduce weight and permit optimal power management and
distribution; and automation aids for the air traffic control
system to optimize aircraft scheduling and control for increased
flight path precision and reduced runway occupancy time, and other
methods to support capacity and reduce delays.
The aircraft technologies alone could increase energy efficiency
by 30-60 percent over current commercial aircraft. Improvements
in the air traffic control system could increase energy efficiency
by 5-10 percent.
Basic Research to Support Advanced Energy Technologies
Increasing basic research in selected high priority areas can
accelerate the development of advanced technologies, which can
reduce the demand for oil, increase oil supply or provide
substitutes for oil. These basic science areas include: (1)
advanced materials -- to lower cost and increase performance for
a wide variety of energy technologies; (2) superconductors -- to
BRAFT
DEC 10 1990
9
develop efficient magnets for maglev vehicles and sensors for
increasing efficiency in industry; (3) geosciences -- for
underground imaging to better search for oil, gas, and geothermal
water sources; (4) biosciences -- to find new plants that better
absorb carbon dioxide and new liquid fuels in the biomass area; and
(5) catalysis research -- to develop robotic devices for more
efficient industrial processing, and to reduce wear and friction
in machinery. Research is currently proceeding in all of the above
areas. Increased support in selected areas can stimulate private
sector interest, accelerate the time of developing new technology,
and increase the probability of success.
Electric Vehicles
Federal and private R&D has been conducted on electric vehicles for
the last 15 years. The remaining technical obstacle for more
widespread use of electric vehicles is the development of batteries
that can provide the desired range and power at an acceptable cost.
Vehicle range is currently under 100 miles, and potential use is
limited to urban fleets. An increase to 120 miles would make
electric vehicles attractive for commuting. A 200-mile range would
widen the potential applications further. A consortium of vehicle
manufacturers, battery companies, and utilities is being formed to
accelerate development of improved batteries with government
support. Consideration is also being given to development of
hybrid vehicles, which would use a small engine to overcome the
limitations of battery power. With successful R&D, electric
vehicles could capture 20% of the market by 2030, leading to 1.6
mmB/D of oil savings.
High Speed Rail and Maglev
High speed rail and magnetic levitation (Maglev) transportation
offers the potential for efficient, high-speed travel; it appears
to be best suited for trips of 200-600 miles in length, competing
with both long distance automobile travel and short haul air
travel. Surface and air travel are expected to double in the next
20 to 30 years. If a significant portion of that petroleum fueled
travel could be displaced by high speed rail and Maglev, a
reduction in petroleum demand would be achieved. Maglev vehicles
are levitated and propelled by magnetic fields, and are capable of
attaining speeds of more than 300 mph. The Federal Maglev
initiative is focusing on safety issues of the German Transrapid
system and on studying the research, development and demonstration
needs of a Maglev technology if the U.S. decides to pursue it. An
economic feasibility study by the Department of Transportation is
due to be completed in 1992, which will refine both cost and
benefit estimates.
DEC 10 1990
DRAFT
10
High speed rail and Maglev are capital intensive -- perhaps $7-
$16 million per mile compared with $3 million per mile for suburban
interstate highways. However, because of the technology, it is
expected that Maglev may have lower operating and maintenance costs
than other surface modes. Furthermore, they may be attractive
alternatives in existing transportation corridors and may have the
potential to reduce the need for federal spending in highways and
airports.
Industrial Technologies
Industry accounts for 27% of petroleum use in the U.S., including
1.7 mmB/D for process energy and 1 mmB/D for feedstocks.
Opportunities for petroleum savings exist in process and equipment
improvements and the substitution of alternate fuels and
feedstocks. Increased funding would permit expansion of research
in biotechnologies, high temperature materials, cogeneration, and
other areas of relatively long-term, high-risk R&D unlikely to be
pursued aggressively by industry alone. Since the range of
technologies involved is broad and since there are multiple paths
to the same efficiency outcome, success does not hinge on any
single technical breakthrough. Successful R&D could achieve oil
savings by 2030 of up to 1 mmB/D.
Intelligent Vehicle/Highway Systems (IVHS)
Traffic congestion is a major factor reducing highway fuel
efficiency. For example, in 1987, it was estimated that urban
freeway congestion was responsible for 2 billion gallons of wasted
fuel, two-thirds of which was attributed to non-recurring
incidents. IVHS technologies offer opportunities during such times
for pricing incentives and disincentives. For example, it could
reduce fares to encourage transit use or increase the cost of
parking or freeway tolls to discourage use. One study of the
possible overall savings from advanced traffic management involving
commercial vehicles showed an annual fuel savings of 333,000
barrels a day or $7 billion per year.
IVHS will use state-of-the-art electronics, communications and
computer technology to improve traffic control systems, warn
drivers of dangerous situations, and make more efficient use of the
existing road system. Public transit systems will also receive
major benefits from IVHS developments.
Advanced Traffic Management Systems permit real-time adjustments
of traffic control systems. The movement of traffic is detected
by road side sensors and using this information, traffic lights can
be altered to reflect priorities in traffic flows. Advanced
Traveler Information Systems permit communications between the
DRAFT
DEC 10 1990
11
drive and an information center. Continuous advice can be
transmitted regarding traffic conditions and likely delays ahead.
Additionally, specific advice would be possible in route planning
and directions to the location of a specific destination. Advanced
Vehicle Control Systems would employ advanced technology to help
the driver control the vehicle. Examples are the application of
radar to identify obstacles ahead, to keep cars at a set distance
apart when travelling at high speeds, to judge velocity of oncoming
vehicles at junctions. Finally, the most futuristic idea proposed
under IVHS -- automated vehicle control systems, where the highway
can also provide power to vehicles, holds vast potential to perhaps
double vehicle capacity. Alternative energy sources could be used
to generate electricity which could be inductively coupled to the
vehicle using the roadway. Furthermore, such "powered" highways
could be used to charge electric battery vehicles, thus extending
their range.
Telecommuting
It is estimated that between 40 and 50% of passenger vehicle miles
and travelled (VMT) is for work-related purposes. Telecommuting
is an attractive alternative for workers in the information sector
(and some in the service sector, but not agricultural and
industrial workers) who now constitute the majority of the
workforce. Broadband transmission networks, power and inexpensive
desktop work stations, easy-to-use software, and extensive
remotely-accessible databases constitute the necessary
infrastructure. Communication and supervision are the prime
obstacles to be overcome in making telecommuting more widespread.
R&D can aid the emergence of technological solutions, particularly
in the area of networks. Computer networks today are not
interconnected and it is difficult to send information between any
two systems. For example, broadband, fiber optic connects exist
between cities and exchanges, while cable television networks
connect to individual locations in many areas. R&D and other
investments to permit increased interconnection of networks and
enhanced capabilities for digital data would greatly facilitate
telecommuting. In 1981, there were ready 300,000 flex-place
workers. Today there are an estimated 3.6 million. Estimates are
that there are about 46 million potential telecommuters in the
Nation. The fuel saving potential of these 46 million
telecommuters averages to about 260,000 barrels of oil per day.
Vehicle Propulsion
Enhanced R&D on automotive gas turbines, fuel cells and high
efficiency internal combustion engines (both gasoline and diesel
fueled) would increase the commercial viability of these advanced.
technologies and accelerate their entry into the market. Turbines,
DEC 10 1990
DRAFT
12
which could go into production in this decade, would be 30% to 40%
more efficient than the internal combustion engine and would also
be capable of operating on alternative fuels. Fuel cells,
envisioned for introduction after the year 2000, would be 60% to
80% more efficient and clearly would use alternative fuels. The
use of advanced ceramic materials for engine components is the
critical technical step in turbine development, as turbines derive
their efficiency by operating at high temperatures without cooling.
High efficiency internal combustion engines, incorporating ceramics
and other new materials, could operate at higher temperatures
without the need for cooling systems, and also would be more
capable of operating on alternative fuels. For example, a
successful gas turbine R&D program could allow it to capture 25%
of the market by 2030, leading to 2.0 mmB/D of oil savings.
ADDENDUM C
NON-CONSENSUS OPTIONS
DRAFT
NOV 2 3 1990
Title:
Reform CAFE Program
Option:
The current CAFE law has several major problem areas, which are outlined
below. In. addition, there is a need for a comprehensive analysis of feasible
fuel economy levels, considering technology, economics, and the impacts of
the new Clean Air Act amendments and other recent regulatory requirements.
To address these issues, DOT and DOE will develop proposed legislation to
remedy some of the flaws in the present CAFE law. In consultation with
DOE and other relevant Executive branch agencies, DOT will perform an
independent study on the potential for improving new vehicle fuel economy.
It is expected that the revised legislation, together with the results of the
study, will serve as the basis for a rulemaking process to establish new
vehicle fuel economy requirements.
Discussion: The current CAFE law has several major problem areas:
1)
The law imposes the same standard on full line and limited line
manufacturers. Because of this, the full line manufacturer has to
market small cars with much better fuel economy than the standard to
offset the large car end of the product line, as compared to a
manufacturer specializing in only small cars, whose small cars need
only meet the standard.
2)
The import/domestic fleet distinction can distort the production plans of
both U.S. and import manufacturers without providing any
improvement in overall U.S. fuel efficiency, and can result in an
adverse impact on the U.S. domestic automotive industry (i.e.,
employment, capacity utilization).
3)
To the extent that CAFE standards require extensive size and weight
reductions, they result in increased highway fatality and injury rates.
4)
The legislation works only on the "supply side" of fuel economy
without corresponding market or regulatory incentives on the "demand
side." If manufacturers produce smaller cars, cars with reduced
performance, or cars with improved fuel economy technologies to
meet CAFE requirements, CAFE provides no "demand side" incentives
for consumers to buy them or use them in a fuel-efficient manner.
5)
U.S. manufacturers view penalties imposed for non-compliance as
criminal sanctions that may expose management to stockholder suits.
The current law explicitly identifies noncompliance with CAFE
standards as "unlawful conduct."
DOT and DOE recognize that the current international energy situation
strongly argues in favor of reducing automotive fuel consumption, and that a
modified CAFE law may be a necessity to accomplish this. DOT and DOE
will develop proposed legislation to correct some of the flaws and inequities
of the current CAFE statute, plus enhance its flexibility. This will be new
legislation, not simply a re-work of S. 1224. The scope of future CAFE
rulemaking will, be partly determined by enactment, of legislation to reform
the CAFE statute. Among the items under consideration are:
1)
Elimination of import/domestic fleet distinction. This would allow
manufacturers to include all cars sold, regardless of their foreign or
RAFT
NOV 2 3 1990
U.S./Canadian content, in a single fleet for the determination of CAFE
compliance.
2)
CAFE credit trading and averaging would allow manufacturers that
have higher than required CAFE to sell credits to manufacturers that
have lower than required CAFE. Also, would allow manufacturers to
transfer earned credits within the company from passenger cars to
light trucks or vice-versa to comply with CAFE standards. This would
provide manufacturers producing cars and light trucks with increased
flexibility and compliance options.
3)
Elimination of "unlawful conduct" provisions and substitution of
noncompliance fee for current civil penalties. Would limit the
economic cost of CAFE compliance by providing manufacturers a
clearly legal alternative to meeting CAFE requirements.
4)
Alternative forms of CAFE standards: A volume average fuel
economy (CVFE) standard would include the average interior volume
in the determination of a manufacturer's average automobile fuel
economy. With size- or weight-based fuel economy standards,
manufacturers would need to meet the standards only for those
classes of vehicles which they manufacture, based on size or weight.
With "percentage increase" standards, each manufacturer's standard
would be based on its CAFE performance in a baseline year. Under
any of these approaches, manufacturers that currently produce large
cars would be required to meet a lower average fuel economy
requirement than manufacturers that produce smaller cars.
In addition, in preparation for rulemaking process that would affect vehicles
produced in the mid to late 1990s, DOT will initiate a study on potential
increases in car and light truck fuel economy levels.
The study will be performed in two phases. Phase One will determine
feasible future fuel economy levels for auto manufacturers, considering
technology, capital and manufacturing costs, the industry's clean air and
safety commitments, and the financial and other resource constraints faced
by these companies. Phase Two will examine in more detail the costs to all
auto manufacturers and U.S. consumers of making these improvements, the
need for domestic manufacturers to enhance their competitiveness, the state
of the national economy and its impacts on manufacturers' abilities to afford
these changes, consumer acceptability issues associated with more fuel-
efficient vehicles, and the need of the nation to reduce its reliance on
insecure sources of oil.
This two-phased study should be underway by the end of December 1990.
Phase One is to be completed by the end of June 1991. Phase Two will
take more time. In addition, the NES/EPC interagency working group will
form a study steering committee and study other relevant issues in the future
as necessary.
PROS:
Provides the Administration with a concrete plan of action to address both
the need to eliminate inequities in the CAFE law and to consider further
improvements in vehicle fuel efficiency.
DRAFT
NOV 2 3 1990
Legislative proposals would be designed to (1) reduce or eliminate
discrimination of current CAFE standards against full line and large car
manufacturers, (2) reduce regulatory interference with manufacturers' market
strategy vis a vis size mix, source of parts, and manufacturing location, (3)
provide manufacturer flexibility in allocating fuel economy improvements
between cars and light trucks, and (4) make the CAFE improvements more
cost effective.
Could result in improved motor vehicle fuel economy.
CONS:
Endorses regulatory approach and, notwithstanding relative benefits, is
somewhat inconsistent with Administration's reliance on market principles.
A CAFE credit trading program would have to be carefully structured to avoid
a windfall benefit for manufacturers specializing in small cars. As a
minimum, accumulated past CAFE credits could not be traded.
"Percentage increase" standards restrict consumer choice by not letting all
manufacturers fully complete in large/luxury/performance markets, may be
GATT-illegal, and have negative safety consequences because manufacturers
of lightest, most fuel-efficient cars must make the greatest mpg improvement.
May not satisfy Congressional demands for higher and more certain fuel
efficiency requirements.
Any legislative initiative is subject to modification by Congress.
Action Required and by Whom: The Administration (DOT and DOE) will develop and
propose legislation to implement changes in the CAFE statute as a precondition to
consideration of higher fuel efficiency standards. DOT will initiate a study of fuel economy
capabilities, with DOE, EPA, Commerce, and other relevant Executive branch agencies
contributing data and comments. It is expected that these actions will serve as a basis for
a rulemaking process to establish new fuel economy standards.
Title:
Higher CAFE Standards
Option:
If the "Reform CAFE Law" option is adopted, a rulemaking could be instituted
to consider an increase in the CAFE standard beginning no earlier than
1995. This option discusses the impact of increased standards. For the
purposes of estimating the likely costs and benefits, two higher levels of fuel
economy standards were considered that reflect DOE's estimate of the
capábilities of domestic automobile manufacturers.
New Vehicle Fuel Economy (MY 2001)
Cars
Light Trucks
No Change
31
23
Level II
34
25
Level III
36
27
These increases (Level II and Level III) are rough estimates of the range of
standards that might emerge from a CAFE rulemaking.
Discussion: Efficient operation of the market for fuel efficient cars may be hampered by
externalities associated with petroleum consumption. Other factors may exist
that hamper efficient market operation, but agency staffs do not agree on
these. CAFE standards are a long term means of reducing fuel consumption
since it takes a number of years for changes in new vehicles to work their
way through the vehicle fleet. While increased CAFE standards could be set
by DOT under existing statutory authority it is expected that this option would
only be exercised under reformed CAFE standards.
Net National Economic Benefit: This option has a net present value (benefits minus
costs) of +$6 (Level II) to -$7 billion (Level III) (1990$, 10% rate of discount) if world oil
prices are assumed to change in response to this option, and $0 (Level II) to -$18 billion
(Level III) if they are assumed to stay the same. The net present value does not include
any values associated with either an energy security premium or environmental
benefits/costs. This option is expected to save 2.2 billion to 4.0 billion barrels of oil over
the 1990 to 2020 time period.
PROS:
CAFE levels II and III are estimated by DOE to be achievable with slight
performance losses and some weight reductions (6% for Level III) from
expected future levels. However, automakers may choose additional weight
or performance reductions as an alternative option for improving fuel
economy.
Oil savings of 250 mB/D (Level II) to 450 mB/D (Level III) by 2005.
Oil savings of 350 mB/D (Level II) to 600 mB/D (Level III) by 2010.
The present value of consumer fuel cost savings is $19.2 billion to $38.9
billion (Level II to Level III) for the NES reference case.
The present value of oil price reductions caused by reduced U.S. oil demand
is estimated to be $6 to $11 billion (Level II to Level III, NES reference
case). These estimates are based on the limiting assumption that OPEC
does not react to reduced U.S. oil demand by reducing OPEC oil production
to prevent, or reduce, the decrease in price. If OPEC did react, the
reduction in oil prices, and consequent benefits, would be reduced or
possibly eliminated.
U.S. CO2 emissions, are reduced by 0.7% to 1.2% compared to projected
future U.S. CO₂ emissions (2010) (Level II, to Level III).
Improved fuel economy is estimated to more than offset the VMT related
increase in VOC emissions resulting in VOC reductions of 0.3% to 0.5% in
2010.
CONS:
Would increase single vehicle passenger car crash fatalities by 180 and
serious injuries by 850 in 2010 due to weight reductions used to meet Level
III CAFE estimates. The present value of these losses is estimated to be
$0.5 billion (included in net benefits estimates above). Fatalities and injuries
would also increase in multi-vehicle and light truck crashes. However,
because of changes in technology, safety features, and manufacturing
techniques, past data is not necessarily a reliable guide to future
relationships between vehicle weight and size, and injuries and fatalities.
Would increase vehicle prices ($160 to $495 for Level II and Level III,
respectively) and reduce MY 2001 domestic vehicle sales by 100,000 to
400,000 (Level II to Level III, respectively). The present value of these
véhicle price increases is estimated to be $19 billion to $56 billion (level II to
Level III, respectively).
Increased VMT (2% by the year 2020), resulting from reduced costs of
driving, will increase criteria pollutant emissions. The estimated net effects
for 2010 are: CO, +0.4% to +0.8%; NOₓ, +0.1% to +0.2%.
This increased VMT would increase traffic congestion resulting in economic
loss of $0.5 to 1 billion (Level II to Level III, respectively) (included in net
benefit estimates above).
This increased VMT could also result in an additional 1,100 deaths per year
and 21,000 moderate and serious injuries. We estimate that consumers will
choose to increase VMT because of lower costs of driving.
Contrary to Administration's reliance on market principles.
Regulating fuel efficiency is not the most direct way to reduce fuel
consumption.
Action Required and by Whom: DOT could issue an Advance Notice of Proposed
Rulemaking soliciting comments on increasing CAFE requirements for MY 1996 and
beyond. Subsequent rulemaking actions would determine the maximum feasible fuel
economy subject to rulemaking criteria. Under current law, standards could be lowered at
a later date if market conditions reduce the maximum feasible fuel economy level:
#14
THE
NOV 13 1990
Title :
Policies to Stimulate Mass Transit and Ridesharing
Option:
Remove the tax incentives for automobiles commuting by increasing the
amount of transit benefits employers may provide tax-free to employees, or
taxing employer provided parking.
Discussion: Employers may provide up to $15 a month in tax-free transit benefits to
employees although they may provide unlimited tax-free parking benefits.
The Federal tax code, by permitting parking benefits to be treated as a tax-
free fringe benefit, provides a strong economic incentive to employers to
provide parking. It also creates a strong incentive for commuters to drive to
work because fuel costs are minimal relative to parking costs in large urban
areas. DOT estimates that employer parking subsides amount to between
$25 and $50 billion annually.
The economic incentive to Single Occupancy Vehicle (SOV) commuting can
be reduced by removing the tax exemption for parking benefits or by
increasing tax-free transit benefits to a comparable level. While removing the
parking exemption would have greater impact on transit use and in
encouraging carpooling, removing the parking tax benefit may be technically
difficult to implement.
About a third of all commuting energy in light duty vehicles is expended in
the 21 largest metropolitan areas.
A DOT study indicates that, "The best estimate appears to be that
approximately 20% of those who drive alone and receive free parking would
form carpools or begin using transit for the trip to work if required to pay for
parking."
The effectiveness of these policies would depend upon the availability of
alternatives to single occupant vehicle (SOV) use and their attractiveness. In
most locations where parking is likely to cost more than $50/month,
ridesharing and transit are likely to be viable alternatives to SOV use,
although even in these areas some automobile users do not have access to
adequate transit service.
The various options for increasing employer provided transit benefits are less
controversial and easier to implement. They include permitting tax-free
transit passes at higher levels, for example, $50 a month or higher, as well
as requiring employers who provide free parking to also provide free transit
passes, as is currently required in Los Angeles.
These policies would reduce congestion, air pollution and energy use. The
impact would grow over time, as more employers and employees became
aware of the benefits.
NOV 1 3 1990
Estimated Benefits:
Options
Decrease in
Oil
SOV Use
Savings
Raise Transit Benefit Cap
up to 2%
up to 50 mbd
to $50 a month
in 5 years, 0.3%
in 5 years,
in first year
10 mbd yr 1
Require Employers to Provide
up to 4%
up to 120 mbd
Free Transit Passes if they
Provide Free Parking
Tax parking benefits
PROS:
Reduced traffic congestion.
Reduced parking spaces required.
Reduced urban emissions.
Improved transit service (benefits to the transit dependent).
Increase in Treasury revenues if parking benefit exemption is removed.
CONS:
Short term increases in employer costs (transit pass requirement option).
Small reduction in Treasury revenues if transit deduction is increased.
Requiring transit passes is inconsistent with Administration opposition to
employer mandates.
Increased parking fees would penalize households that must drive (no HOV
opportunities).
Reduces labor market flexibility somewhat.
Action Required and by Whom: New legislation required. Proposed legislation would be
developed by Treasury, DOT, and DOE.
28
DRAFT
NOV 1 5 19
FEDERAL ELECTRICITY SUBSIDIES
Option:
Initiatives to Phase Out Federal Subsidies for
Electricity
O Phase out preferential access to Federal power.
Sell Federal electric power at "PURPA" prices or
market prices. This change could be implemented
gradually over a 10-year period through a
combination of actions, including:
-- Reform Federal Power Marketing Administration
debt repayment practices and direct DOE to
administratively reform PMA debt repayment wherever
possible.
-- Institute a "falling water charge" on Federal
hydropower to bring prices up to market levels where
power is sold below cost and sales are committed by
contract.
-- Where contracts are up for renewal or do not now
exist, auction the power or sell it on the grid at
prices estabished by a process comparable to that
used under PURPA.
Phase out all REA subsidies over ten years.
Establish an interagency working group to develop
specific proposals that all agencies could support.
The task force would offer recommendations for
Congress to consider, as well as, propose
administrative changes which FERC, DOE and other
agencies may undertake to eliminate the inequities
associated with Federal electricity subsidies.
DRAFT
NOV 15 1
No.
Number of
Sales Revenue
1/
Federal
Accoss
Pays
Type of
in
customers
capital
to Fed.
Fed.
Utility
each
subsidy
hydro
Taxes
group
NM
e
$3
.
Cents
/KWH
Investor
236
74
76
113
79
6.50
No
Limited
Yes
-owned
Coopera-
938
10
10
10
9
6.70
REA
Yes
No
tivos
Muni-
1,811
12
12
25
11
5.69
No
Yes
No
cipals
Federal
10
--
--
2
2
3.47
Yes
NA
No
Other
135
2
2
3
2
4.37
No
Limited
No
public
entities
Totals
3,130
98
100
143
100
6.28
Discussion: Federal policies currently provide lower electricity
prices and preferential treatment to different classes of
utilities and their customers. By phasing out the special
treatment and subsidies certain utilities and their customers now
receive from the Federal Government, all of the country's
electric utilities would be put on a more equal footing. The
true cost of producing Federal power would be reflected in prices
and the inequities arising from some customers or regions of the
country receiving preferential treatment, would be ended.
As the table indicates, most of the country's utility
customers are served by investor owned utilities (IOUs). IOUS
compete for funds in private capital markets, have limited access
to low cost Federal hydropower and are subject to the normal
Federal tax code. One fourth of the country's electricity
customers, however, are served by utilities that receive some
form of special treatment from the Federal Government.
REA borrowers who provide service to more than 10 percent of
the electricity customers in the U.S., borrow money from the
Rural Electrification Administration at subsidized rates (5%
interest) and most pay no Federal income taxes.
Municipal utilities serve about 12 percent of America's
electric users. Although they are no longer able to raise tax
free capital they do receive preferential access to Federal
hydropower and they are exempt from paying Federal income taxes.
'Source for sales data is a EIA publicatoin "Annual Outlook
for U.S. Electric Power 1986."
DRAFT
NOV 1 5
However, the deepest subsidies go to the customers of
certain Federal power agencies. After IOUs, the U.S. Government-
is the next largest producer of electricity in the country. The
Federal Government sells power from over 159 Federally built dams
and, in the case of the Tennessee Valley Authority, from fossil
and nuclear plants as well. The 5 Power Marketing
Administrations (PMAs) of the Department of Energy wholesale
about 200 billion kwh of power annually. The PMAs receive
Federal appropriations, significant Federal interest subsidies
from the Treasury and, in addition, they are allowed liberal debt
repayment terms by DOE. The average wholesale price for PMA
power is 2.2 cents per kwh and the average retail price is the
lowest of all categories of U.S. utilities. Even when compared
with hydropower-only utilities, whose wholesale rates average
about 3.7 cents per kwh, the PMAs rates are low. PMAs pay no
Federal taxes and sell their power wholesale to preferential
customers including industrial and commercial users.
The Tennessee Valley Authority (TVA) provides about 32,000
MW of power to 3 million customers in a seven state region in the
Southeast. Since 1959 TVA has received subsidized financing
through its ability to borrow from Treasury's Federal Financing
Bank. As with the PMAS, TVA pays no Federal taxes, has part of
its program funded by Federal appropriations and is not subject
to State PUC regulation.
Historically, these subsidies and special treatment by the
Federal government were intended to achieve certain desirable
social goals. Special treatment for the REA cooperatives and
municipal power was originally intended to accelerate
electrification of non-urbanized areas which were beyond the
reach of large power companies. TVA also aided in the
electrification of rural areas but TVA also was intended to
demonstrate an alternative to the large electrical trusts. The
PMA's predecessor agencies, have had a legitimate role in
promoting regional development by providing low cost power to
areas which were once relatively undeveloped. In addition, the
PMA preference provisions were intended to serve customers in
less urbanized areas where IOUs were unable or unwilling to go.
The Power Marketing Administrations
The DOE's policy has been to allow PMA's to sell power at a
price which is below the Government's cost of providing it. To
date this below-cost pricing policy has cost the Treasury over $4
billion. Over the life of the existing loans the subsidy will
cost the Federal government over $15 billion (nominal).
The below cost pricing policy also has the effect of
undercutting energy conservation while inducing additional demand
for Federal power. This policy is antithetical to the "sound
3
TRAFT
NOV 15
business principles" requirement of the 1944 Flood Control Act,
under which most PMA power is sold.
By law, the PMAs are required to recover all of their
operating and capital costs. But PMAs have not paid back most of
the taxpayers' investments and their interest rates on this debt
are well below market interest rates. Historically, dam
construction early in the century was done at interest rates
which were above then existing Treasury long term rates.
Since the 1950's the PMAs interest rates have been well below the
Treasury's cost of borrowing the money at the time the projects
were built. Most of this low interest debt is of relatively
recent vintage.
O Between 1980 and 1988 a total of 24 major power project
improvements or additions were initiated in the
Bonneville Power Administration's (BPA) system at a cost
of $1.14 billion. The Treasury's average cost of long
term borrowing during this period was 10.58%. Under
current practices Bonneville will repay this investment
at an average annual interest rate of only 3.55%. BPAs
interest subsidy through 1988 for these projects alone,
has reached almost $365 million. BPA through 1989 has
repaid only $15 million of the $1.14 billion in principal
owed on these 1980's projects.
The PMA argue that thir rates are based on "embedded cost
pricing", unfortunately the definition of embedded cost does not
include the full Treasury cost of financing the projects.
The impacts of the various policy options differ, of course,
based on which options are chosen. In general, the options would
have the following advantages and disadvantages:
Pro:
o Establishes a "level playing field" and is consistent
with market economics, a prerequisite for efficient
resource development.
O Stimulates energy conservation, is environmentally sound
and enhances DOE's credibility as a supporter of energy
conservation. Requiring Treasury-cost financing for the
PMAs would eliminate multibillion dollar energy
consumption subsidies at a time when DOE is expanding
energy conservation subsidies.
O Equitable. Eliminates programs that have served their
purpose and that now provide subsidies for certain
electricity customers at the expense of other customers
within the region or in other regions not served by low
cost Federal power.
4
DRAP
NOV 0 & 1900
34
"tle: Renewable Energy Production Incentive
Page 1 of 2
-ion: Enact a performance-based production incentive for certain renewable electric
energy technologies in place of the capital-based investment tax credits.
Description: This option would provide up to a 2 cent/kWh credit against taxable
income .to utilities or private power producers for the production of renewable electric
energy from new facilities. The tax credit would be based on the actual amount of
energy produced during the first seven years of system operation. The incentive would
be in effect for 10 years with the credit's value being phased down from 2 cents to
zero during the last five years. The value would be adjusted for inflation as
reflected in the Consumer Price Index.
In the current marketplace, renewable electric technologies are forced to compete with
established power technologies which, in many cases, have the advantages of (1) a large
existing industrial infrastructure, (2) a low-risk investment position based on low
capital costs and the use of mature technologies, and (3) a financial and regulatory
environment that discourages capital-intensive investment. Several financial
incentives were considered to reduce or eliminate these impediments, including
production credits, investment tax credits, accelerated depreciation schedules, and
low-interest or guaranteed loans. The production incentive was identified as the
preferred approach to enable renewables to overcome these impediments. The most
desirable feature is that the incentive is tied directly to the desired result, namely
energy quality technology. Moreover, the phase-down over the last five years is expected to
production. Thus, the incentive provides support to industry but only for
provide a powerful stimulus to continued technology development. Both electric
'ilities and private power producers are eligible for this credit. Mature renewable
except dry steam), biomass (except those using wastes for fuel), wind, solar thermal
chnologies are excluded to avoid windfalls. Eligible technologies include geothermal
and photovoltaics.
The following illustrates how the current financial and regulatory environment tends to
discourage renewable energy investments. Utilities today must generally rely more on
capital-intensive with little or no fuel costs, require higher revenues to provide the
equity financing than in the past. In this context, most renewables, which are
after-tax return as low capital-cost, high fuel-cost generation systems. Put
same simply, increased capital costs increase taxes while increased fuel costs do not, since
they. are "expensed" for tax purposes. For example, federal taxes paid per kwh of
electricity generated from wind would be 25 to 100% higher than taxes per kwh of energy
generated from a natural gas-fueled intermediate power plant. While this difference
does not affect economy-wide federal tax receipts, it, together with other capital-
related impediments, biases the selection of power generation technologies in favor of
low capital cost options.
Net National Economic Benefit:
This option will advance in time both performance improvements and cost reductions that
Accelerated Case for renewable cost projections by technology, described in the
are projected for these technologies. This effect was modelled by using the
Renewable Energy Technology Evolution document (October 5, 1990). Based on this
analysis, the Net Present Benefit through the year 2030 for this option, relative to
he NES Reference Case, is:
Net Present Value of Consumers' Surplus
$12.00B
Net Present Value of Incentive Costs
$7.89B
Net Present Benefit
$4.11B
DRAFT
NOV c E 1990
`newable Energy Production Incentive
Page 2 of 2
- net present value does not include any values associated with either an energy
security premium or environmental benefits/costs.
Other Estimated Benefits -- Energy And Capacity:
This option is projected to result in earlier renewable energy capacity and production
additions relative to the NES Reference Case:
Year 2000
Year 2030
Electric Capacity Addition
19.1 GW
88 GW
Additional Annual Electric
130 billion kWh
350 billion kWh
Energy Production
or 1.4 quads
or 3.6 quads
Note that cumulative energy production impacts can be calculated in two ways. First,
those systems that result directly from the incentive through the year 2000 will
produce a total of 34 quads over their system lifetimes, which were assumed to average
25 years. However, the incentive also strengthens the renewables industries and
improves their competitive position relative to other energy technologies. This effect
has also been modelled, and including this effect provides a cumulative estimate of 87
quads resulting from this incentive through 2030. (This latter estimate does not count
any energy produced after 2030.)
Other Estimated Benefits -- Environmental:
$ option is projected to provide the following environmental emissions reductions
and corresponding benefits:
Annual
2000
2030
Program Life
SOX Reductions, million tons
0.8
- 0.1
6.7
NOX Reductions, million tons
0.4
0.2
8.9
Carbon Reductions, million tons
27
42
1300
Pros: This option provides a stimulus for near-term renewables contributions and will
result in increased market penetration rates for renewables even after the production
incentive has expired. The option pushes aggressive technology development because of
the phase down and because it only supports actual energy production. If systems fail
to perform, or if renewable penetration is reduced for any reason, incentive costs are
also reduced accordingly. Renewables make use of a domestic energy resource and
provide for greater energy diversity.
Cons: The Program costs are estimated to be $1.77B for the first 5 years and $17.3B
total over the life of the Program (in constant 1990 $). This is a unit cost of 0.5
cents per renewable kWh, counting lifetime outputs for only those systems resulting
from the incentive through 2000; counting all energy produced through 2030 for all
systems resulting from the incentive results in unit costs of 0.2 cents per renewable
kWh.
ion required and by whom: DOE and Treasury draft proposed legislation.
11/1/90
38
DRAFT
11/13/90
Page 1 of 5 NOV 1 c
FEDERAL SUPPORT FOR INTEGRATED RESOURCE PLANNING (IRP)
BRAFT
IN ELECTRICITY MARKETS
Option: The Department of Energy (DOE) should support IRP by:
Financially assisting State-based IRP processes through DOE's existing IRP Program,
while taking full account of competitive procurement of generation and conservation
resources
Supporting legislation to remove Federal taxation of utility efficiency rebates
Facilitating IRP implementation through the Federal Power Marketing Administrations
(PMAs)
Encouraging FERC to foster integrated resource markets
A significant potential exists in the U.S. for increased efficiency in electricity markets by
fostering competitive approaches to resource acquisition. Federal efforts to support current
trends toward greater economic efficiency through IRP, including encouraging efficiency in
electricity production and end-use, conservation investments, and efficient procurement of
new generation capacity, can improve and accelerate these trends, thereby providing
substantial benefits.
IRP is a process where supply- and demand-side resource options are evaluated together in
determining how to serve the electricity needs of consumers at the lowest reasonable cost.
IRP is hampered by regulatory and market imperfections that forestall its development and
reduce its effectiveness. These include: (1) the lack of a well defined market in which
supply and demand options can be evaluated together, (2) State regulatory procedures that
discourage utility involvement in IRP, (3) need for improved methodologies and procedures
to develop, implement, and measure the results of IRP; (4) lack of consumer awareness of,
and involvement in, IRP; (5) Federal tax policies that discourage consumer participation in
utility-sponsored IRP programs; (6) embedded cost pricing policies that reflect historical
rather than marginal costs; and (7) Federally subsidized power, which accounts for about
10% of total U.S. supply.
Application of IRP to the electricity industry is essentially a matter for local entities
including utilities, State commissions, consumers, developers, and other third-party
suppliers. However, due to the critical importance of the electricity industry and the
national benefits that result both from more efficient generation and demand-side
investments (e.g., energy security, economic growth, reduced environmental impacts), the
Federal Government has an important role to play to ensure that IRP is consistent with
market mechanisms, promotes economic efficiency, and avoids mechanisms that contribute
subsidies for particular IRP activities.
DOE could support IRP at the national and State levels through several mechanisms. For
example, these include:
NOV 1 4
DRAFT
11/13/90
Page 2 of 5
A.
FINANCIALLY ASSIST STATE IRP PROCESSES
DRAFT
DOE can provide support for IRP by providing Federal assistance to States to develop and
implement IRP processes, particularly by finding ways for demand and supply options to
be evaluated together.
-
The DOE is providing assistance to the States to develop and implement IRP processes
through its existing IRP Program. This program provides technical and informational
assistance to the States so that IRP processes may be developed and implemented to their
fullest extent.
For fiscal year (FY) 1990, DOE funding for its IRP Program totaled $1.3 million, and for
FY 1991 it is $3 million. Federal assistance to the States could be continued to assist
implementation of IRP and expand IRP processes to other energy markets.
Estimated Impacts: Estimates of electricity demand reductions due to increased Federal
support and State implementation of IRP are 47 gigawatts (GW) in 2010 and 91 GW in
2030. The net economic benefit from these savings is estimated at $34.7 billion for the
period 1990-2030. The net present value of the cost of the Federal program to support
State IRP programs is $86.4 million for the same period of time.
Pros:
Federal assistance to the States could stimulate implementation of IRP.
Significant national benefits can be achieved with minimal Federal involvement
and funding.
Cons:
IRP processes may expand monopoly involvement from electricity supply to
end-use markets.
IRP may contribute to subsidies for some end-users at the expense of others,
and to other inefficiencies if not implemented carefully.
Some States have already adopted or are considering IRP principles with little
or no Federal assistance. Some IRP benefits will occur without Federal
assistance.
Action Required and by Whom: DOE would expand its IRP Program.
B.
ELIMINATE TAXATION OF EFFICIENCY REBATES
At the national level, the Administration can provide support for IRP by supporting
elimination of Federal taxation of utility efficiency rebates to consumers.
Utilities often provide rebates to consumers to encourage their participation in the demand-
side parts of IRP programs. These rebates reduce the cost to consumers of investments in
electricity conservation and efficiency. Utility rebates increase consumer participation rates
in IRP and produce net benefits to society when the total cost of the investment is less
than the cost of the electricity saved.
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The Internal Revenue Service (IRS) has determined that utility rebates to consumers
represent taxable income. Taxation of these rebates reduces their value to consumers,
thereby reducing their participation in IRP programs. The result is reduced energy savings.
The IRS also should clarify its position regarding the tax status of (1) discount coupons
provided to consumers and redeemed by a utility, and (2) credits provided to consumers on
their utility bills for conservation activities.
Taxing electric utility efficiency rebates to consumers is estimated to produce approximately
$400 million in Federal tax revenue during the period 1991 through 1995. It is estimated
that taxing these rebates will increase the cost of residential efficiency investments by
about 20 percent and commercial and industrial investments by about 25 percent. The cost
of the resulting reduction in electricity conservation is likely to outweigh the loss of
revenue to the Treasury from eliminating this tax.
Legislation has been introduced in the House of Representatives, H.R. 4249, that would
exclude from gross income for Federal tax purposes utility efficiency rebates for energy
(natural gas and electricity) and water conservation. Passage of this legislation would
result in a revenue loss to the U.S. Treasury, but would encourage energy efficiency.
Pros:
Eliminating Federal taxation of utility efficiency rebates, (including discount
coupons and billing credits) would encourage energy conservation.
Other benefits such as reduced environmental impacts and improved energy
security also would be enhanced.
The benefits of eliminating this tax (i.e., the value of the resulting energy
conservation) is likely to outweigh its cost (i.e., lost revenue to the Treasury).
Cons:
Elimination of the tax (for electric utilities only) will result in a revenue loss
to the U.S. Treasury of about $400 million over 1991-1995.
Action Required and by Whom: The Department of the Treasury could examine
legislative and administrative alternatives to remove utility efficiency rebates from taxable
income.
C.
IMPLEMENT IRP THROUGH THE FEDERAL POWER MARKETING
ADMINISTRATIONS
DOE could provide Federal support for IRP by facilitating implementation of IRP through
the Federal Power Marketing Administrations (PMAs).
Federal power producers develop and operate hydroelectric and other generation facilities
and market this power through the PMAs. The PMAs market Federal power primarily to
local distribution utilities (municipal, cooperative, and public power district utilities), as
well as to some large industrial customers and investor-owned utilities.
Federal power producers account for about 9 percent of total U.S. generation capacity and
generate about 8 percent of total U.S. electricity. Annual revenue received from the sale
of this generation amounts to about $2 billion. Indirectly, these agencies provide all or a
part of the electricity requirements of about 24 percent of the nation's electricity
consumers.
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The PMAs operate IRP technical assistance programs to encourage conservation and
renewable energy applications by customer utilities. For example, the Bonneville Power
Administration (BPA) has offset approximately 291 MW of demand by implementing
energy efficiency programs at an average cost of about 2 cents/kwh.
DOE could work with BPA on development and implementation of enhanced IRP
principles. DOE also could work with the PMAs to (1) expand technical assistance efforts
that further encourage efficient procurement of new generation and cost-effective
conservation and renewable energy implementation efforts, (2) expand efforts to facilitate
adoption of economically efficient IRP principles by customer utilities.
Prices for PMA power are based on embedded cost principles that result in prices well
below market levels and encourage energy use. An alternative to encouraging energy
conservation, rather than promoting IRP, could be to reform PMA pricing methodologies.
Pros:
Implementation of IRP through the PMAs will produce significant electricity
savings and contribute to environmental and energy security goals.
PMA involvement in IRP will encourage efficient use of a valuable renewable
resource, displacing--to a large extent--less environmentally benign energy
sources.
Cons:
Implementation of IRP through the PMAs would largely be outside traditional
market mechanisms. Unless carefully implemented, these processes could
produce uneconomic results.
Involvement of the PMAs in IRP could add stature to these Federal agencies at
a time when the Federal Government is considering limiting or ending its
participation in the electricity industry.
Modifying PMA pricing methodologies would be a more direct way to
encourage conservation and efficiency investments.
Action Required and by Whom: DOE could support activities through the PMAs that
would result in the development and implementation of cost-effective IRP measures.
D.
ENCOURAGE FERC TO FOSTER INTEGRATED RESOURCE MARKETS
DOE could encourage the FERC to foster IRP within wholesale power markets.
The FERC could promote IRP in wholesale power markets by making a positive
pronouncement that, in approving a rate for a wholesale power transaction, the Commission
does not prevent a State regulatory agency from disallowing recovery of a portion of that
rate when the transaction does not represent the purchasing utility's least cost option, as
determined by a State IRP program.
In addition, the FERC could: (1) encourage wholesale transactions, such as wheeling of
electric power for third party suppliers; and (2) consider instituting efficient pricing policies
for short-term and long-term power transactions, such as spot-pricing and marginal cost-
based pricing, that promote economic efficiency and lower aggregate regional supply costs
throughout regional markets.
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Here, the policy choice is whether regional cost minimization is an appropriate Federal
goal. Clearly, such a goal is implicit in the FERC's recent actions to ease restrictions on
transmission access. Integrated resource markets covering multistate regions have been
developed throughout much of the nation. FERC authority could be exercised to further
improve the efficiency of those markets.
Pros:
FERC attention to efficiency in regional markets could facilitate adoption of
the integrated resource market concept, lowering costs in electricity bulk power
markets. Procedures would need to be developed to resolve inconsistencies
among State plans to avoid harming regional economies.
Supply- and demand-side investments would be put on a more equal footing
over larger regional areas.
Cons:
Regional cost minimization might be inconsistent with State- -level cost
minimization.
Action Required any by Whom: FERC would adopt a policy promoting integrated
resource markets to ensure that firm wholesale transactions are consistent with State IRP
programs.
Prepared by: Russ Profozich
Phone: 586-2699
Date: 11/13/90
Ken Schafer
586-1491