it economical to do so. That is, at some levels of carbon values, it becomes economical to invest in lower-carbon or carbon-free generating capacity to avoid using existing fossil-plants. The capacity left idle as a result could be considered to be either excess capacity or economic plant retirements. For the AEO97, the assumption was that utilities could increase capacity to a level 2 percent above reserve margin requirements. For this analysis, DOE assumed utilities could add significantly more, provided the economic retirements occurred gradually. The excess capacity limit for each of the 13 electricity supply regions was set to 10 percent above the prior year's capacity level, beginning in 2006 (for the 5-year ramp cases) or 2001 (for the 10-year ramp cases). For example, if the excess capacity level for a region reached 5 percent in a given year, the allowable excess capacity would be permitted to increase to 15 percent in that region in the next year. Fuel Substitution in Coal Plants: The assumed maximum fraction of natural gas used in predominately coal-fired plants was increased. For those coal plants recently burning some natural gas, the maximum share of gas use was increased by 5 percentage points over the current percentage used. The AEO97 assumption was that each coal plant's maximum gas share was equal to its current fraction of gas use. Renewables Limits on New Capacity: The AEO97 assumes upper and lower bounds to the annual amounts of new renewable capacity that can be added in each region. For the stabilization cases, the annual upper bounds assumed in each region are 500 MW per year for wind, 400 MW per year for solar thermal capacity, and 200 MW per year (East) and 100 MW per year (West) for biomass. These regional limits are higher than those assumed in the AEO97 (100 to 200 MW per year in selected regions, depending on the technology). In addition, the lower bounds, or floors, on both solar thermal and solar PV were doubled (for a combined, National total floor of about 1.5 GW by 2015) to reflect the expansion of demonstration programs and niche markets that may result from higher sectoral electricity prices. Natural Gas Pricing: In the AEO97 reference case, intraregional natural gas price markups to electric generators are held constant throughout the forecast. Given the increased demand for natural gas for generation in the carbon stabilization scenarios, these markups were adjusted to account for the increased cost of infrastructure necessary to accommodate the added loads. The amount of the markup adjustment was based on the annual change in natural gas consumption for generation. Ethanol Supply: New ethanol supply technologies were assumed to become available beginning in 2010 at prices ranging from $0.75 to $1.02 per gallon (1995 dollars), depending on production levels. The AEO97 assumption for ethanol supply costs were from $0.97 to $1.40 per gallon in 2010. Ethanol is available for blending with gasoline for gasohol, as E85 for ethanol-fueled vehicles, and for ETBE production. Energy Information Administration 2.4 Limitations on Modeling Assumptions The discussion of modeling assumptions in the previous section suggests some of the sources of uncertainty in evaluating energy markets under carbon stabilization scenarios. The assumptions mentioned highlight uncertainty regarding the responsiveness of consumers to significant energy price changes that might occur under carbon stabilization policies, as well as a variety of factors influencing energy supply. While detailing the assumptions that changed from the AEO97 reference case is important, it is also useful to describe modeling assumptions that could represent additional uncertainties in this analysis but were not changed. In particular, no significant changes were incorporated to international energy in this analysis. Coal exports are essentially unchanged from the AE097 reference case, and no changes in the pattern of world oil demand have been assumed. Widespread adoption of carbon stabilization policies may lead to lower coal exports and lower world oil prices than indicated in the stabilization cases. Lower world oil prices could increase the domestic oil demand and offset some of the carbon reductions occurring in these cases. This analysis does not reflect the adoption of unregulated pricing of electricity. In a regulatory environment with cost of service regulation, fuel and other costs have been traditionally passed through to customers. Whether Public Service Commissions would allow the extent of early retirements and replacements of coal plants to reduce total costs assumed in these runs is unclear. With unregulated pricing, early retirement and replacement decisions would be largely driven by economic considerations. Both biomass and municipal solid waste (MSW) are considered zero net carbon emitters in this analysis, primarily because both are assumed to have earlier sequestered any carbon emitted later during combustion. Both biomass and MSW sequester carbon during the growing cycle and later emit it during combustion. If the average stock of standing forests, crops, crop wastes, or MSW is reduced more by combustion than would have occurred without combustion, a requirement for carbon permits may need to be imposed to reflect the net carbon emissions potential.* The macroeconomic impacts of the energy price increases are highly dependent on how the specific carbon reduction policies are formulated. The stabilization runs include some macroeconomic feedback due to changes in energy prices, as modeled in the reduced form Macroeconomic Activity Module of NEMS. However, the full macroeconomic impacts on the energy system, including ossible economic recovery under some scenarios for recycling of revenues from possible permit *Further, if a significant proportion of forecast MSW represents petroleum-based materials (like plastics) rather than biomass, then MSW combustion should be considered a positive net carbon emitter. A cursory review suggests that although the petroleum-based fraction (plastics, tires, etc.) constitutes only about 10 percent of combustible MSW by weight, emissions from that fraction are about 25 percent of total carbon emissions from MSW. Energy Information Administration sales or value collections, were not integrated back into NEMS because the feedback effects were expected to be minor. These macroeconomic effects, assessed using a version of the Data Resources, Inc. (DRI) Macroeconomic model, are discussed in Chapter 4. Additional uncertainties cloud the international emissions trading case which is assumed to result in a $40 per ton carbon permit fee. It may be uneconomical to life-extend, beyond a normal 40-year life, all or even some of the nuclear power plants at a $40 per ton carbon permit value. If technological costs to lifeextend nuclear plants are too high to be economic, an additional 330 billion kilowatthours of electricity will have to be generated almost entirely by fossil fuel units and could result in approximately 30 - 100 million metric tons of additional carbon permits that must be purchased in 2020. The development of a reference case forecast of carbon emissions for developing countries from which purchase of permits is being contemplated will be difficult estimate, may be difficult to reach a meaningful agreement on, and may be susceptible to manipulation by the developing countries. Implementation, monitoring and enforcement of carbon emission targets could be difficult to enforce. Energy Information Administration 3. Energy Model Results and Analysis This section presents the results of the NEMS runs in two parts. First, the Base Case is compared in detail to one of the primary carbon stabilization cases. The stabilization case selected for this more in-depth comparison has a goal of reducing carbon emissions to the 1990-level of 1344 million metric tons of carbon by 2010, after a 5-year phase-in period, or ramp, of increasing reductions. The second section compares the stabilization cases to identify the effects of variations in the timing, magnitude, or phase-in period of the stabilization goal. 3.1 Comparison of the Base and 1990-Level Carbon Stabilization Cases The Base Case is an updated reference case, similar to the AEO97 reference case, but with the forecast horizon extended to 2020. Table 3.1 provides a summary comparison of results from the Policy Base Case and the 1990-Level (1344 million metric ton) Carbon Stabilization Case. For brevity, these cases will be referred to as the "base case" and "stabilization case" in this section. Appendix C contains a set of detailed tables comparing the base case and two stabilization cases, the first case uses a 5-year ramp to reach 1990 levels from 2005 to 2010 while the second uses a 5year period from 2010-2015 over which the average annual carbon emission equals 1990 levels. Energy Prices The carbon reductions in the stabilization case were achieved in part through a carbon emissions permit system. A permit value on average of $130 to $150 per metric ton (1995 dollars) achieves the emissions goal from 2010 to 2020. The permit system induces significant energy market changes, particularly in electricity generation (Table 3.1). Carbon permit values raise the effective energy prices for fossil fuels, with the price of coal, having the highest carbon content, rising the most when compared on a dollar-per-million Btu basis (Figure 3.1). While electricity consumption does not release carbon at the point of use, limitations on carbon emissions raise the price of electricity as the cost of the fossil fuel input is passed on to consumers, along with added costs to cover differences in plant investments. The price of E85 is lower in the stabilization case, due to a more optimistic technological supply assumption and an assumed waiver from carbon permits." "The ethanol supply assumption and carbon permit waiver are based upon the availability in 2010 of a technology for producing ethanol from cellulose (rather than grain). By assumption, the process emits limited greenhouse gases compared to ethanol production from corn or conventional gasoline. Energy Information Administration -12 |