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  Report #: SR-OIAF/2009-03  Released Date: April 2009  Next Release Date: One-Time

### An Updated Annual Energy Outlook 2009 Reference Case Reflecting Provisions of the            American Recovery and Reinvestment Act and Recent Changes in the Economic Outlook

| 3.  Representing the Provisions of ARRA in the  National Energy           Modeling  System 

 Weatherization,  Assisted Housing, and Energy Efficiency and Conservation Block             Grants 

 ARRA allocates a total of $9.45  billion to weatherize and/or increase the energy             efficiency of low-income housing and  assist local governments in implementing energy efficiency programs.   In NEMS, this increase in funding results in the weatherization of about three million homes over the  next 2 years.  Energy savings estimates  for the             increased investment in weatherization for heating and cooling are based on Oak  Ridge National Laboratory’s analysis of the impacts of weatherization programs  and their persistence for 20 years.  The  regional impact of the increase in funding is based on the Department of Energy’s State  allocation formula.4

State Energy Program 

 ARRA allocates $3.1 billion for States  to implement or enhance energy efficiency             programs. While the money can be spent on a variety of  programs, the ARRA             specifically mentions the adoption of  building codes, specifically the International             Energy Conservation Code (IECC)  2009.  To account for the impact of this  funding in             NEMS, it is assumed that States will adopt and enforce the IECC 2006 code by  2011,             while adopting and enforcing the IECC 2009 code by 2018.  Likewise, States are             assumed to adopt and enforce the ASHRAE 90.1-2007 standard by 2018 for non-residential construction.  States and  local governments are also assumed to use lower             hurdle rates  (specifically the 10-year Treasury bill rate) when purchasing energy-using             equipment for  government-owned facilities during years when ARRA funding is             available. 

Plug-in Hybrid and Electric Vehicle Tax  Credits 

 ARRA contains several changes to the  plug-in hybrid electric vehicle (PHEV) tax credit             originally included in  the Energy Improvement and Extension Act of 2008 that have been             included in the updated  reference case.  For example, ARRA allows  a $2,500 tax credit             for the purchase of qualified PHEVs with a battery capacity of at least 4  kilowatthours.             Starting at a battery capacity of 5 kilowatthours, PHEVs earn an additional  $417 per             kilowatthour battery  credit up to a maximum of $5,000.  The  maximum total PHEV             credit that can be earned  is capped at $7,500 per vehicle.  The  PHEV tax credit eligibility             and phase-out are specific to an individual vehicle manufacturer.  The credits are phased             out once cumulative sales of qualified vehicles reach 200,000 vehicles.  The phase-out             period begins two calendar quarters after the first date in which a  manufacturer’s sales             reach the cumulative sales maximum after December 31, 2009.  The credit is reduced to 50 percent of the total value for the  first two calendar quarters of the phase-out period and then to 25 percent for  the third and forth calendar quarters before being phased out             entirely thereafter.  The credit applies  to vehicles with a gross vehicle weight rating of             less than 14,000 pounds. 

AARA  also allows a tax credit of 10 percent against the cost of a qualified plug-in  allelectric vehicle with a battery capacity of at least 4 kilowatthours.  This credit is subject to the same phase-out schedule as  PHEVs. 

Updated Tax Credits for Renewables 

 Prior to the passage of ARRA, the  production tax credit (PTC) for certain renewable             technologies was to expire on January  1, 2010.  ARRA extended this date to  January 1,             2013, for wind and  January 1, 2014, for all other eligible renewable resources.  In             addition, ARRA allows companies to choose an investment tax credit (ITC) of 30  percent             in lieu of the PTC and  allows for a grant in lieu of this credit to be funded by the U.S.             Treasury.  Under most circumstances for  most technologies, the full PTC would appear to             be more valuable than the 30 percent ITC; however, the difference is often  small.  A             recent report from the  National Renewable Energy Laboratory5 suggests that qualitative             factors, such as the lack of partners with sufficient tax liability, may cause  companies to             favor the ITC grant  option in the current economic environment.   As a result, in this             analysis it has been assumed that eligible renewable technologies will select  the ITC             grant option. 

Loan Guarantees for Renewables, Biofuels,  and Transmission Projects 

 ARRA provides $6 billion to pay the  cost of guarantees for loans authorized by the             Energy Policy Act of 2005.  The purpose  of these loan guarantees is to stimulate the             deployment of  conventional renewable and transmission technologies and innovative             biofuels  technologies.  However, to qualify  eligible projects must be under construction             by September 30, 2011, meaning that longer-term projects that are not already             progressing are unlikely to be able to qualify.   The face value of the loans that may be             guaranteed by this  appropriation will depend on the subsidy costs assigned to the projects             that are eventually selected.  For  example, if the average subsidy cost were 10 percent of             the face value of the  loans, the $6 billion appropriated would support loan guarantees on             $60 billion worth of debt  financing.  This provision has been  represented by lowering the             cost of financing by 2 percentage points for all eligible renewable projects  brought on by             2015.  The 2015 date, 4 years after the  September 30, 2011, start of construction cutoff             date, was chosen to allow  for the construction period associated with most renewable             generating technologies. 

 A different approach was taken to  represent the possible impacts on innovative biofuel             projects.  It was assumed that the  availability of loan guarantees would allow certain             identified projects to be built that would otherwise not proceed under the  current financial climate facing the industry.  In the AEO2009 reference case, with assumptions  developed             prior to the current economic downturn, domestic cellulosic ethanol production  was             projected to reach 150 million gallons in 2012.   However, a review of projects proceeding             towards construction, suggests that, without assistance, only about 74 million  gallons of             domestic cellulosic ethanol production capacity will be built by 2012, because  financing             for these developers has become extremely difficult to obtain and some projects  have             been canceled.  With the loan guarantees  arising from the stimulus package, it is assumed             that the 2012 production rises back to about 110 to 170 million gallons, with  additional             capacity additions occurring under the same financing structure as in AEO2009. 

Support for CCS 

 ARRA provides $3.4 billion for  additional research and development on fossil energy             technologies.  A portion of this funding is expected to be  used to fund projects under the             Clean Coal Power Initiative program, focusing on projects that capture and  sequester             greenhouse gases.  To reflect the impact  of this provision, the updated reference case             assumes that an additional 1 gigawatt of coal capacity with CCS will be  stimulated by             2017. 

Smart Grid Expenditures 

 ARRA provides $4.5 billion for smart  grid demonstration projects.  While  somewhat             difficult to define, smart grid technologies generally include a wide array of             measurement, communications, and control equipment employed throughout the             transmission and distribution system that will enable real-time monitoring of  the             production, flow, and use of power from generator to consumer.  Among other things            once deployed, these smart grid technologies are expected to enable more  efficient use of             the transmission and distribution grid, lower line losses, facilitate greater  use of             renewables, and provide information to utilities and their customers that will  lead to             greater investment in energy efficiency and reduced peak load demands.  The funds             provided will not fund a widespread implementation of smart grid  technologies.  In July             20046 the Electric Power Research Institute  (EPRI) estimated that full deployment would             cost $165 billion.  However, successful  deployment of several demonstration projects             could stimulate more  rapid investment than would otherwise occur.

Several changes were made throughout  the NEMS to represent the impacts of the smart             grid funding provided in ARRA.  In the  electricity module, it was assumed that line             losses would fall slightly, peak loads would fall as customers shifted their  usage patterns,             and customers would be more responsive to pricing signals.  In a 2008 report, EPRI7 estimated that  smart grid technologies could reduce line losses in 2030 by between 3.5             and 28.0 billion kilowatthours.8  Historically,  line losses, expressed as the percentage of electricity lost, have been falling  for many years as utilities make investments to replace             aging or failing equipment.  This trend  was incorporated in the AEO2009 reference case,             which assumed that line losses would fall from roughly 6.9 percent in 2008 to  5.7 percent             in 2030.  In the updated reference case,  it is assumed that the Federal expenditures on             smart grid technologies will stimulate further efforts to lower losses,  reducing them by an             additional 10 to15 billion kilowatthours, roughly one-third the maximum EPRI  estimate. 

 In the same EPRI report, it was also  estimated that smart grid technologies had the             potential to reduce peak demand by 5  percent in 2030 through the increased deployment of demand response  programs.  In the updated reference case,  it is assumed that the             Federal expenditures on smart grid technologies will stimulate efforts that  reduce peak demand in 2030 by 1 percent from what they otherwise would be.  Load is shifted to offpeak hours, so net energy consumed  remains largely constant. 

It was also assumed that increased  investment in smart grid technologies, particularly smart meters on buildings  and homes, would make consumers more responsive to             electricity price changes.  To represent  this, the price elasticity of demand for residential and commercial electricity was  increased for certain uses. 
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