Factoid 21: Renewables on the Rise

Posted on Jan 15, 2008 in Factoids, Featured | 0 comments

Factoid 21: Renewables on the Rise

Renewables Could Economically Provide 25% of U.S. Electricity and Transportation Fuel by 2025

On November 13, 2006, the RAND Corporation released a 73-page study, entitled “Impacts on U.S. Energy Expenditures of Increasing RENEWABLE ENERGY Use” which concludes that renewable energy could play a larger role in the U.S.’s energy future under the right conditions.

The Energy Future Coalition, a nonprofit organization, asked RAND to assess the impact on energy expenditures as well as other impacts associated with the goal known as 25×25.  This refers to having 25 percent of the energy used for electricity and ground motor vehicle transportation fuels in the United States supplied by renewable energy sources by the year 2025.  This 25×25 vision culminates in about 18 percent of total demand in 2025 being met by renewables.  By way of reference, 6 percent of American’s energy use currently comes from renewable sources, and about half of that comes from hydroelectric dams.

Because many aspects of the energy sector and energy technologies are highly uncertain (e.g., future prices and costs of technology), it is unlikely that a few scenarios would capture the range of possible futures that could exist.  Therefore, RAND researchers developed a model based on the National Energy Modeling System (NEMS) created by the U.S. Energy Information Administration to evaluate more than 1,500 economic scenarios of varying energy price and technology cost conditions for renewable and nonrenewable resources, as well as future primary energy costs.

RAND found that meeting the 25 percent renewable energy target for electricity and ground motor vehicle transportation fuels together by 2025 would not increase total national energy spending.  This assumes that renewable energy production costs decline by at least 20 percent between now and 2025 (which is consistent with recent experience) and that fossil fuel prices remain high enough – that is, long-term Oil prices do not fall significantly below the range currently projected by the U.S. Department of Energy’s Energy Information Administration (EIA).

Specifically, if renewable technologies continue to improve at historic rates, then future energy expenditures in a 25×25 future might be 0.5 percent higher or lower than the non-renewables cases, essentially breaking even.  In fact, in the best-case scenarios for renewable energy, RAND’s renewables case could reduce energy expenditures by about 3 percent, or $40 billion.

The study also finds that because prices for gasoline, Natural Gas and Coal are likely to remain high, their cost advantage over renewables will erode.  Its cost estimates assume progress will continue on making ETHANOL from farm wastes, wood chips and other forms of BIOMASS that are much cheaper and more plentiful than corn so that ethanol from farm wastes will be available by 2020.

RAND found that raising the use of renewables to 25 percent of all U.S. motor vehicle fuels consumed could displace about 2.5 million barrels a day of petroleum products in the United States in 2025, or 20 percent of total consumption in EIA projections — the equivalent of the imports from Saudi Arabia and Venezuela.

RAND’s simulations also indicate that, in most cases considered in this study, significant reductions in CARBON DIOXIDE emissions from fossil fuel combustion can be achieved at a relatively low cost.  In 2025, under the 25 percent renewables goal, carbon dioxide emissions from the electricity and fuel sectors would fall by one billion tons.  That reduction is equivalent to eliminating one-seventh of the total U.S. CO2 emissions projected for that year and two-thirds of the projected increase expected between now and 2025, according to EIA forecasts.  It would also reduce emissions of other pollutants or the prices of emission permits, depending on how the different pollutants are regulated.

Moreover, RAND also found that in most cases, increasing the use of renewable fuels — which don’t enlarge the atmosphere’s carbon-dioxide buildup — would be cheaper than federal regulations forcing the reduction of carbon-dioxide emissions, about a third of which come from vehicles.

RAND researchers did not assess the impact of renewable energy used directly by industry in buildings currently using natural gas, in off-road vehicles used for construction and recreation, or in railroad and jet fuel.

RAND researchers assumed that implementation of increased renewable energy use would be carried out at a national level in the least costly manner, versus a more piecemeal approach. Among the important uncertainties considered is the cost to ramp up use of new renewable energy technologies.

The lead author of the study was Mark Bernstein, who was a RAND researcher at the time the report was prepared. Other authors are Jay Griffin and Robert Lempert of RAND.  The study was carried out within the Environment, Energy, and Economic Development program of the RAND Infrastructure, Safety and Environment Division.

# # # # # # #

EXCERPTS FROM EXECUTIVE SUMMARY:

In the last five years, the prices of oil and natural gas have both increased sharply with oil going from roughly $20 a BARREL in 2002 to over $70 a barrel in early 2006.  Moreover, EIA and other industry forecasters now believe that the price of oil will stay at elevated levels for most of the next two decades, though EIA projections do not anticipate that prices will remain at current levels.  EIA’s 2025 projection for oil and natural gas prices increased by more than 30 percent alone between the 2005 and 2006 projections.  In its 2005 Annual Energy Outlook, EIA anticipated that the price of crude oil would fall to around $33 per barrel by 2025; in its 2006 projection, the price of crude was predicted to be at $54 a barrel by 2025.  Higher oil and natural gas prices, if sustained, make renewable energy more competitive today than it was during much of the last quarter-century, when energy prices were lower than their peaks in the 1970s.

The simulation analysis helps to identify the circumstances under which the specified renewable energy target raises or lowers total energy expenditures.  Renewable energy is shown in the simulations to lower total energy expenditures in virtually all cases in which current energy price and technology cost trends continue.  Under a range of plausible futures, therefore, the model results indicate that expanded use of renewables could be achieved at acceptable costs.  Shifting to renewables had adverse impacts on total energy expenditures in cases when (a) fossil fuel prices are lower than current forecasted projections; (b) costs of renewable energy technologies increase or decline less than historical trends as renewables use scales up, and (c) nonrenewable technology costs drop relative to the costs of renewables, the reverse of hat has tended o occur as renewable technologies improve.  If renewable technologies continue to improve at historic rates, leading to roughly 20 percent lower renewables costs by 2025, then future energy expenditures in a 25×25 future might be 0.5 percent higher or lower than the non-renewables cases, essentially breaking even.

One of the more interesting findings of this analysis is the relatively narrow range of expenditure impacts in percentage terms across cases, though the absolute amounts are of note.  Indeed, the most extreme of the 1,500 scenarios produced no more than a 6-percent change in energy expenditures, or about $75 billion in 2025.  This includes the most favorable scenario for nonrenewable energy simulated — in which the costs of renewable energy technology rise 30 percent during the next 20 years, while natural gas, oil, and coal prices fell 50 percent from current projections.  However, as the EIA has shown in recent projections such as its Annual Energy Outlook report, such a rise in energy expenditures would have little or no impact on long-term economic growth.  In 2025, that increase in energy expenditures would amount to roughly one-quarter of a percent of gross domestic product in the United States.  Similarly, in the best-case scenarios for renewable energy, RAND’s renewables case could reduce energy expenditures by about 3 percent, or $40 billion.  (All scenarios assume least-cost implementation of the goal at a national scale.)  This narrow range helps justify RAND’s focus on direct energy expenditures versus broader macroeconomic implications.

In essentially all of the cases considered, electricity expenditures rise.  But those increases are more than cancelled out in the cases where total expenditures fall by reductions in the costs of oil, gas, and coal.  As renewable energy supplants nonrenewable energy, demand for fuels declines, and this drives down the prices of FOSSIL FUELS in the model.  The renewables case could displace about 2.5 million barrels a day of petroleum products in the United States in 2025, or 20 percent of total consumption in EIA projections.

The simulations also indicate that, in most cases considered in this study, significant reductions in carbon dioxide emissions can be achieved at a relatively low cost.  In 2025, under the 25 percent renewables goal, CO2 emissions from the electricity and fuel sectors would fall by one billion tons.  That reduction is equivalent to eliminating one-seventh of the total U.S. carbon dioxide emissions projected for that year and two-thirds of the projected increase expected between now 2025, according to EIA forecasts.  It would also reduce emissions of other pollutants or the prices of emission permits, depending on how the different pollutants are regulated.

The modeling used for this study is designed to illustrate the range of uncertainty around future energy costs that is missing from many previous “best-guess” projections.  Previous forecasts of renewable energy market penetration have used the NEMS developed by EIA; RAND uses a highly aggregated model that simulates NEMS or this study.  However unlike in those other studies, the RAND modeling in this report is based on more than 1,500 simulations of the impact of the renewables goal in 2025, rather than on a handful of scenarios.  By simplifying some aspects of the EIA model – which incorporates thousands of input parameters and requires significant processing time for each run of model – the authors could expand the range of renewable energy scenarios tested.  The result is that we are able to identify potential critical points and ranges where changes in the prices of oil, gas, coal, or renewable technologies are found to result in a reduction or increase in energy expenditures.

It is interesting to note that in RAND’s computer runs of the renewables goal, more scenarios have lower energy expenditures in 2015 than in 2025.  Those findings suggest that, while cost savings from renewable energy will not materialize overnight, they also will not take decades to achieve.  These somewhat unexpected findings are due to the fact that, as the penetration of renewable energy rises from 10 percent of the market in 2015 to 25 percent in 2025, the most favorable renewable sires will already be taken; therefore, costs rise as the U.S. increases its share of renewables, even while costs per unit fall due to technical advances.

RAND did not model some possible emerging technologies such as renewable forms of hydrogen.  In his 2003 State of the Union address, President Bush set a goal of having hydrogen motor vehicles for sale in car dealers’ showrooms by 2025.  Since most estimates show only minimal market penetration of hydrogen by 2025 and the NEMS model does not yet include it, RAND chose not to attempt to model it here.

RAND’s results depend on the ranges of potential future costs and fuel prices considered.  Some readers may take issue with RAND’s assumptions about these ranges.  One of the advantages of the results, depicted in the graphs and figures throughout the chapter of the report is they allow readers to assess the implications of their own assumptions about the nation’s energy future.  For example, readers can see the anticipated difference that a 25-percent drop in forecasted oil prices would have on total energy expenditures in 2025, compared, for example, to a 25-percent increase.

This analysis does not seek to distinguish optimal or robust futures.  It also DOE not seek in the argot of industrial policy, to pick “winners and losers.”  RAND’s aim here is more limited – to project the impact of a significant expansion of renewable energy in the next two decades on energy expenditures across a host of realistic alternatives.

# # # # # # #

NOTE:  On December 5, 2006 the RAND Corporation withdrew its 25×25 energy study results because of errors in the analysis.

Rand officials said the study contained errors in the computer model and numerical assumptions on which findings were based.

Reportedly, the RAND quality assurance process used to review studies failed to detect inadvertent errors in the treatment of existing subsidies for BIOFUELS and the availability of existing HYDROPOWER CAPACITY in the computer code, as well as some other details relating to how the renewable requirement is met and at what cost.

Rand Vice President Debra Knopman said the errors might have an effect on the study’s results but no determination has been made.  She said a revised analysis would be issued early in 2007.

# # # # # # #

As of December 19, 2006, the report could still be found here or

See the Rand Corporation’s December 5, 2006 news release announcing the report’s temporary withdrawal here.

See also the article “Renewable Fuels May Provide 25% of U.S. Energy by 2025” by John J. Fialka in the November 13, 2006 issue of the “Wall Street Journal” here.

Leave a Reply

Your email address will not be published. Required fields are marked *