Chapter 2 Introduction & Background Frozen Efficiency Baseline. This case, which is analyzed only for the buildings sector, assumes that energyconsuming equipment and systems existing in the year 1997 remain at the same efficiency until they are retired. This equipment and these systems retire over the 1997-2010 period at a rate based on standard equipment lifetimes. It assumes that all new equipment employed after 1997 remains at the efficiency of new devices in the year 1997. The frozen efficiency baseline provides an upper bound to likely energy demand (under the economic assumptions applied to all the cases), because it ignores all forces leading to higher efficiency of new equipment in the business-as-usual case. It also ignores any retrofits that might take place if there were economic reasons for early retirement of equipment. This case is presented primarily for heuristic reasons: it describes an easily-understood case in which technology does not change. This is useful for exploring the impacts of technology change. Also, the case is not necessarily divorced from reality: in the era of low energy prices preceding the oil embargo of 1973-74, the energy efficiency of many household, transportation, and industrial technologies changed very little. Business-as-Usual Case. The business-as-usual (BAU) case represents the best estimate of future energy use given current trends in service demand, stock turnover, and natural progress in the efficiency of new equipment. It assumes that R&D and implementation programs at DOE and EPA continue at more or less current levels, without a significant influx of new funding. It captures likely changes in efficiencies of new equipment over the analysis period. It also allows for some early retirement of equipment where cost savings from new energy-efficient products are high relative to purchase and installation costs, as in some industrial motor and drive systems and commercial lighting retrofits. To create this scenario, the buildings and industry sectors adopted the AEO97 reference case as their BAU cases. For the transportation sector, we modified AEO97 somewhat. Specifically, the AEO97 reference case forecasts that the efficiency of passenger cars will increase from 27.5 MPG in 1997 to 31.5 MPG in 2010. We believe such improvements are unlikely in the absence of increases in real gasoline prices and hence our BAU case for transportation leaves the MPG performance of light-duty vehicles in 2010 unchanged from 1997 performance. Efficiency Case. The efficiency case describes the potential for cost-effective, energy-efficient technologies to penetrate the market by the year 2010, given an invigorated public- and private-sector effort to promote energy efficiency through enhanced R&D and market transformation activities. This case assumes that national policy, possibly in combination with exogenous events, leads to an increase in the cost-effectiveness and deployment of energy-efficient technologies. Cost-effectiveness is improved because R&D, in combination with increased deployment efforts, result in declining capital costs. We do not specify the policies or exogenous events that could precipitate such changes. Instead, we examine the potential for technology-based energy and carbon reductions, assuming that significant efforts are undertaken to enhance the attractiveness of these technologies. To be attractive to manufacturers and consumers, a technology must be cost-effective. Thus, this scenario limits itself to describing the potential for cost-effective technologies to reduce energy use and carbon emissions. A technology is defined as "cost-effective" if it delivers a good or service at equal or lower life-cycle costs relative to current practice. Externalities are not internalized in this definition of cost-effective. An energy-efficient technology may be societally cost-effective, for instance by taking into account its air quality or safety benefits, but not be judged cost-effective by our narrower economic criteria. This scenario reflects the view that "policy options exist that would slow climate change without harming American living standards, and these measures may in fact improve U.S. productivity in the longer run" (Arrow et al., 1997). Compared to the business-as-usual case, the efficiency case assumes (1) better technology and (2) higher penetration rates for energy-efficient and low-carbon technologies. 1. "Better technology" results from an invigorated public- and private-sector investment in R&D such that energy-efficient technologies become more cost-competitive based on current fuel prices. Performance Introduction & Background Chapter 2 improvements between 1997 and 2010 are mostly incremental in this scenario, but by 2020 they could be revolutionary. 2. "Higher penetration rates” result from an invigorated set of policies and market transformation programs that reduce market failures and allow markets to operate more efficiently. Through improved information and risk reduction, capital markets for energy-efficiency investments could be strengthened and consumer investment hurdle rates for the purchase of high-efficiency equipment could be lowered. Despite its assumption of an aggressive public commitment to energy efficiency, this scenario also takes into account real-world experience and program implementation constraints which suggest that it is not reasonable to assume that every consumer will purchase the least-cost, high-efficiency technology option. There are many reasons to expect a shortfall from such a maximum case: capital rationing, imperfect information, misplaced incentives, and the unevenness of supply, installation, and maintenance networks (DOE, 1996b). High-Efficiency/Low-Carbon Case. The high-efficiency/low-carbon (HELC) case assumes a greater commitment to reducing carbon emissions through federal policies and programs, strengthened state programs, and very active private sector involvement. One way to view this case is to see it as an attempt to model a world where an international global warming treaty is negotiated over the next few years and where the outcome for the United States (and other Annex I nations) is to stabilize carbon and other greenhouse gas emissions in 2010 at 1990 levels. The United States pursues those reductions by (1) aggressively instituting federal policies to develop and deploy energy-efficiency and low-carbon technologies, such as increased funding for market transformation and R&D efforts and (2) by issuing tradable emission permits. In this rendition of the HE/LC case, policies are put into place by 2000 and progressively phased in until they are fully in place by 2010. The permit price for carbon would presumably rise steadily through 2010. Thus, we have multiple factors affecting consumer and business behavior, including the following: • The recognition that policies to reduce carbon emissions will necessarily follow the signing of an international agreement, including an anticipation of higher relative prices for carbon-based fuels; • The actual increases over time in the permit price of carbon (which we model as averaging either $25 or $50 per tonne for much of this period); • Increased federal effort to accelerate R&D and diffusion of low-carbon technologies; The development and introduction by other countries of advanced low-carbon technologies; and The change in consumer preferences and behavior that would result from an international treaty and national commitment to stabilize greenhouse gases, much like changes in consumer behavior in the aftermath of the oil embargo of 1973-74. In summary, this scenario for 2010 describes a combination of better technology, "readier" markets, and a price of carbon that results in a significantly increased willingness to manufacture, purchase, and use low-carbon technologies. It represents a vigorous national commitment that goes far beyond current efforts. 2.2.4 Methodological Differences Across Sectors The operational definitions used to model these scenarios for the individual end-use sectors reflect the above conceptual definitions, but are nevertheless distinct (Table 2.1). These differences are due partly to the modeling approaches used for each sector. They also reflect the authors' sense of what could "drive" significant increases in energy efficiency in each sector. For instance, to achieve a high-efficiency/low-carbon scenario, the transportation analysis postulates a set of technology breakthroughs. The industrial analysis, on the other hand, achieves its high-efficiency/low-carbon scenario by doubling market penetration rates and Chapter 2 Introduction & Background assuming that energy-efficiency decisions are treated as strategic investments with correspondingly lower hurdle rates. The sectors also differ in the way that life-cycle costs and benefits are calculated to determine the costeffectiveness of technologies in their efficiency scenarios. The buildings sector employs a 7% real discount rate to value the stream of benefits accruing from an investment. These benefits accumulate throughout the specific operational lifetimes assumed for individual technologies. The efficiency case assumes market penetration of about one-third of the technologies that are cost-effective at a 7% real discount but not adopted in the business-as-usual case. The HE/LC case doubles this penetration. The industrial sector assumes a capital recovery factor (CRF) of 15%, rather than 33% (which is the BAU assumption). Thus, to be considered cost-effective in this sector, an investment must pay back in no more than approximately seven years. The transportation sector uses a 7% discount rate, but it is applied only to the first five years of operation, even though the expected lifetime of a vehicle may be much longer. This five-year period is meant to reflect the realities of purchase behavior in this sector, and results in decisions that are based on considerably less than the full life-cycle of benefits. Introduction & Background Chapter 2 Scenario/ Definition Conceptual Table 2.1 Conceptual and Operational Definitions of Scenarios for 2010 Business-as-Usual Best estimate of future Efficiency Potential for cost-effective, High-Efficiency/ Low-Carbon (HE/LC) Optimistic but feasible potential for energy efficiency and low-carbon technology based on a greater commitment to reduce carbon emissions resulting from actions that might include the creation of a market value for carbon of $25 and $50 per tonne. Operational Definitions: Industry Transportation a b AEO97 reference case AEO97 reference case; LIEF AEO97 reference case NEMS - National Energy Modeling System developed by DOE's Energy Information Administration. The cost-effective energy savings potential is defined as the difference between the energy demand that results from using the most energy-efficient of the cost-effective technology currently available or forecasted to be available by 2010, and the energy demand in 2010 assuming business-as-usual rates of technology change and use in the economy. с LIEF Long-Term Industrial Energy Forecasting model developed by Argonne National Laboratory and Lawrence Berkeley National Laboratory. Chapter 2 Introduction & Background 2.2.5 What the Study Does Not Do This report does not describe the policies that might be implemented to achieve higher penetrations of energyefficient and low-carbon technologies. (Reviews of a wide range of possible policy options can be found in several recent publications, including OTA (1991), NAS (1992), and DOE (1996b)). Rather, this report highlights the potential performance and impacts of technological developments and transformed markets. The existence of cost-effective technologies is a prerequisite for public policies to work. Without the technologies, policies to reduce greenhouse gas emissions will be very costly. Indeed, this analysis suggests that carbon stabilization could produce net benefits if the nation invests significantly in cost-effective energy-efficiency and low-carbon technologies. Thus, we believe it is critical to understand the availability of technologies, their performance, and their costs for as many end-uses of energy as possible. Armed with this knowledge, discussion of policies becomes much more meaningful. Without it, such discussion is less likely to lead to good decisions. Thus, we choose to focus this report on the more narrow topic of technologies in the belief that doing a credible job in this area will ultimately further the policy dialogue. A second reason for focusing on technologies is our belief that insufficient attention has been given to the role of R&D on energy-efficient and low-carbon technologies as a means to deal with climate change and other environmental impacts. If effective energy technologies are not developed, then the cost of reducing greenhouse gas emissions (and other environmental impacts of energy) will be very high. As in the AEO97 reference case, each of the scenarios is completed at the national level. Thus, regional variations in population and economic activity are not considered, nor are regional differences in fuel price, weather, or air quality and environmental conditions that might create regional niche markets for particular technologies. As a result, our analyses have undoubtedly overlooked the possible development of regional markets for advanced energy technologies. A valuable next step would be to conduct analyses at a finer geographic scale to produce national estimates that reflect such regional variations. 2.3 OVERVIEW OF THE REPORT The rest of Chapter 2 sets the stage for the remainder of this report. It describes historical energy and carbon trends, both at the national level and by sector, as a backdrop for assessing energy consumption and carbon emission forecasts. It also discusses the government's role in energy R&D, including the rationale for government support and some evidence of past energy-efficiency technology successes that benefited from government sponsorship. Chapters 3 through 5 address each of the major energy end-use sectors: buildings (Chapter 3), industry (Chapter 4), and transportation (Chapter 5). Four tasks are completed for each sector: 1. Energy scenarios with and without a strong efficiency push, focusing on the year 2010, and including comparisons with the AEO97 projections from the National Energy Modeling System; 2. Documentation of the cost and performance assumptions for individual energy-efficient and low-carbon technologies; 3. Development of three scenarios (business-as-usual, efficiency, and high-efficiency/low-carbon cases) for the year 2010 and an explanation of how the scenarios were developed; and 4. Descriptions of new technologies that could become available in the 2010 to 2020 time period, as the result of R&D over the next two decades. |