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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

| 1.  Introduction
                  This paper reviews an updated Annual Energy Outlook 2009 (AEO2009) reference case                   that will be used as the starting point for pending and future analyses of  proposed energy                   and environmental legislation.  The  development of an updated reference case is                   motivated primarily by the enactment of the American Recovery and Reinvestment  Act                   (ARRA) in mid-February 2009.1  ARRA provides  significant new Federal funding, loan                   guarantees, and tax credits to stimulate investments in energy efficiency and  renewable                   energy.  The reference case in the  recently published AEO2009, which reflected laws and                   regulations in effect as of November 2008, does not include ARRA.  The potential effects                   of some ARRA provisions are large enough that an analysis of certain aspects of                   proposed energy and environmental legislation that did not include ARRA in the                   reference case could provide misleading results.2   Use of an updated reference case that                   includes ARRA as the baseline for future analyses of proposed changes in laws  and                   regulations will help to  avoid this problem.                  
The need to develop an updated  reference case following the passage of ARRA also                     provides the Energy Information  Administration (EIA) with an opportunity to update the                     macroeconomic outlook for  the United States and global economies, which has been                     changing at an unusually rapid rate in recent months.  Ordinarily, the macroeconomic                     assumptions for the Annual Energy Outlook reference case are updated annually,  in the                     fall, based on economic  projections provided by IHS Global Insight prior to development                     of the modeling runs  presented in the Annual  Energy Outlook. However, in an                     environment where the macroeconomic expectations are changing rapidly, it is                     appropriate to update the  macroeconomic assumptions as the energy-specific provisions                     of ARRA are incorporated  into EIA’s National Energy Modeling System (NEMS).                     Both the revised macroeconomic outlook  and the energy-related provisions of ARRA                     impact the updated  reference case.  Therefore, the  difference between the recently                     published AEO2009 reference case and the updated  reference case incorporating both                     ARRA and the updated economic forecast reflects more than the energy-related                     provisions in ARRA alone.  Although  future analyses will focus on the difference                     between the updated  reference case and cases using that as a baseline and incorporating                     proposed changes in laws  and regulations, users of EIA’s projections may want to                     understand the relative  roles of ARRA and the change in the macroeconomic outlook in                     driving the difference  between the updated reference case and the one presented in                     AEO2009.                     To  provide insights into this question, this paper presents, in addition to the AEO2009 reference case and the updated reference case, a  “no-stimulus” case that reflects projections  without ARRA.  The effect of ARRA alone,  including its energy-related provisions and its stimulative impact on the  economy, can be roughly estimated by comparing the no-stimulus case to the updated reference  case.3

In addition to a different  macroeconomic outlook, the updated reference case also reflects                     changes made in the  parameters and/or structure of NEMS to reflect the specific energy-                    related provisions of  ARRA.  In some cases, for example, the  extension of production tax                     credits for eligible  renewables, it is relatively straightforward to incorporate ARRA                     provisions.  In other cases, where the  provisions in ARRA fund initiatives that break new                     ground, such as  investment in “smart grid” technologies, modeling changes to reflect                     ARRA are inherently more speculative.   For some ARRA policies, both the nature of the                     investments to be made, the implementation strategy for making those  investments, and                     the effectiveness of the program in increasing energy efficiency or promoting  greater use                     of renewable energy are all uncertain.   In all cases, the modeling changes adopted reflect                     the understanding of EIA analysts of the intended level and implementation of  funding,                     and estimates of impacts based on available literature and/or expert judgment.                     The  energy-specific provisions of ARRA that were represented in some fashion in  NEMS                     include: 
- Weatherization and assisted  housing 
- Energy efficiency and conservation block grant  programs
- State energy programs 
- Plug-in hybrid vehicle tax credit 
- Electric vehicle  tax credit
- Updated tax credits for  renewables 
- Loan guarantees for renewables and biofuels
- Support for carbon capture and storage (CCS)
- Smart grid expenditures. 

Other  major changes in NEMS to reflect changes in energy markets, laws, and                     regulations since the development of the AEO2009 reference case include: 
- Update of macroeconomic  assumptions 
- Update of near-term fuel price  projections 
- Temporary reinstatement of the Clean Air  Interstate Rule (CAIR) 
- Update of Corporate Average Fuel Economy  (CAFE) standards.

The next section of the paper  summarizes the combined impacts of changes to the                     reference case.  It is followed by two sections that briefly  describe the changes made to                     implement the updated  reference case relative to the version of the reference case                     included in the AEO2009 as published in March 2009.  The Appendix to this report                     provides the standard set of Annual  Energy Outlook tables in  a format that facilitates comparisons of the updated  reference case to the no-stimulus case and the AEO2009  reference case published in  March 2009.

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