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The Economic Impact of North Carolina's Renewable Energy and Energy Efficiency Portfolio Standard

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The Economic Impact of North Carolina’s Renewable Energy and Energy Efficiency Portfolio Standard David G. Tuerck, Ph.D. Michael Head, MSEP Paul Bachman, MSIE

THE BEACON HILL INSTITUTE AT SUFFOLK UNIVERSITY  8 Ashburton Place Boston, MA 02108 Tel: 617-573-8750, Fax: 617-994-4279 Email [email protected] Email  [email protected],, Web www.beaconhill.org www.beaconhill.org   AUGUST 2009 

 

  Table of Contents Executivee Summary Executiv Summary ...................................................................................................... 1  Introduction...................................................................................................................4   North Carolina-STAMP.............. Carolina-STAMP........ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ........... ..... 6 BHI Es Estimat timates es and Results Results ........................................................................................... 7 

SB 3 under the Cost Cost Recovery Recovery Caps ............................................................................ 7 SB 3 without the Cost Cost Recovery Recovery Caps ......................................................................... 9 Conclusi lusion on ................................................................................................................... 12  Conc Appendix A: Calculatin Calculating g the Net Costs of SB 3 ...... ............ ............ ............ ............ ............ ............ ............ ............ ........ .. 13  Calculation Calcul ation of Costs Costs and Benefits Benefits of Energy Efficiency Efficiency Programs ............................. 13 Calculation Calcul ation of the Net Cost of New Renewable Electrici Electricity ty ........................................ 17 Modeling Model ing the REPS using STAMP............................................................................ 19 The Beacon Hill Institute North Carolina-STAMP Development Team Team...... ............ ............ ......... ... 20

Table of Tables

Table 1: Aggregate Net Costs of SB 3 with and without Cost Recovery CAPS ...............2 Table 2: BHI Estimates Estimates for SB 3 (NPV, 2009 $).............................................................. 3 Table 3: Utility Annual Cost Recovery Recovery Fee (per customer).............................................. customer).............................................. 5 Table 4: Sum of Cost Recovery Recovery Fees (millions (millions of current $)............................................ 8 Table 5: BHI Estimates of Economic Impacts of SB 3 with Caps (NPV 2009 $)..............9 Table 6: Utility Costs of SB 3 (millions of current current $)..................................................... 10 Table 7: BHI Estimates of Economic Impacts of SB 3 without C Caps aps (NPV, 2009 $)...... 10 Table 8: Calculations of Cost and Benefits of Energy Efficiency Programs ($)...... ($)............ ........ 16 Table 9: Total and Renewable Electricit Electricity y Generation Generation under REPS ................................ 17 Table 10: Costs of New Renewable Renewable Capacity Capacity (2007$/KWh).......................................... 18

 

Executive Summary In 2007, North Carolina passed Senate Bill 3 (SB 3) that established a state Renewable and Energy Efficiency Portfolio Standard (REPS).

The REPS mandates that a percentage of

electricity generated be derived from new  renewable resources. Renewable resources include energy from solar, wind, and biomass. Hydroelectric facilities under 10-megawatt (MW) also are included. However, municipal electric power compani companies es are exempt from the 10 MW ceiling on hydropower.

Specifically, SB 3 requires that all of North Carolina’s public electric utilities increase the  percentage of electricity generated from new ne w renewable energy sources. The REPS will be phased in over time. SB 3 mandates that the REPS account for 3 perce percent nt of state retail electricity sales  by 2012, 6 percent by 2016, 10 percent by 2018 and 12.5 percent by 2021 and thereafter. Municipally-owned and electric membership utilities need only reach the 10 percent level.

The target consists of two separate requirements. The Renewable Portfolio Standard (RPS) requires utilities to generate the escalating percentages of their retail electricity through new renewable sources as outlined above. Utilities can also meet a portion of the RPS through the Energy Efficiency Portfolio Standard. Prior to 2021, utilities can meet 25 percent of the RPS requirement through energy efficiency (EE) programs, rising to 40 percent in 2021 and after.

SB 3 allows utility companies to meet part of, or the entire, renewable energy requirement by  purchasing renewable energy certificates (RECs). RECs are tradable and designed to enable investment in renewable energy facilities outside North Carolina. Thus, certificates can be  purchased from in state st ate or out-of-state renewable ren ewable energy faciliti facilities. es.

In the case of utilities purchasing out-of-state RECs, the electricity will not likely be consumed in  North Carolina. C arolina. Under this scenario, North Carolina electricity consumers would be subsidizing su bsidizing the development of renewable energy in other states through the cost recovery mechanisms of SB 3 outlined below, while still paying for electricity for use in North Carolina.

Utilities may levy fees on their customers to recover the incremental cost of renewable electricity sources and up to $1 million in alternative energy research research expenditures. The fees escalate escalate with the REPS requirements, but at modest levels.

 

SB 3 also phases out the current sales tax levied on energy sales to farmers, manufacturers and laundry service companies for electricity, piped natural gas and other fuels. By cutting these taxes, the state stands to lose revenue. According to the General General Assembly’s Legislative Fiscal  Note, the state will lose approximately approx imately $20 $ 20 million mil lion in FY09, $30 million mi llion in FY10, $45 million in 1

FY11 and $44.7 million in FY12.  

Since renewable energy generally costs more than conventional energy, many have voiced concerns about higher electric rates. Moreover, since North Carolina has a limited ability to generate renewable energy, energy, the state w will ill start from a low power generation base. In addition, some renewable energy sources - wind and solar power in particular - require the installation of conventional backup generation capacity for those cloudy, windless days. The need for this  backup further boosts boost s the cost of renewable rene wable energy.

The Beacon Hill Institute at Suffolk University (BHI) — in conjunction with the John Locke Foundation — has set out to estimate the costs and benefits of SB 3 and its impact on the state’s ®

economy. To that end, BHI applied its STAMP (State Tax Analysis Modeling Program) for  North Carolina (NC-STAMP), which allowed us to estimate the economic effects of the state 2

REPS mandate.  

BHI estimated the net cost of implementing the REPS under two separate scenarios. In the first, caps on the cost recovery fees paid by North Carolina’s consumers and businesses are reached each year. The second estimates the cost to consumers and businesses were the cost recovery caps not in place. Table 1 displays our cost estimates for both scenarios.

Table 1: Aggregate Net Costs of SB 3 with and without Cost Recovery CAPS (Current, $) Under Cost Recovery Caps Without Cost Recovery Caps

2008-2011 $200.83 $1,759.77

2012-2014 $195.55 $1,870.77

2015-2021 $1,448.18 $831.97

Total $1,844.55 $4,462.51

In the aggregate, the state’s electricity consumers will pay $1.845 billion in cost recovery fees  between 2008 200 8 and 2021, which will be added directly to their t heir utility uti lity bills. In contrast, contrast , if the cost recovery caps were not in place, the REPS would cost North Carolinians $4.463 billion.

1

 General Assembly of North Carolina, Session 2007, Legislative Fiscal Note. http://www.ncga.state.nc. us/Sessions/2007/FiscalNotes/S 2007/FiscalNotes/Senate/PDF/S enate/PDF/SFN0003v4.pdf  FN0003v4.pdf  (accessed  (accessed May 2008). http://www.ncga.state.nc.us/Sessions/ 2 ®  Detailed information about the South Carolina -STAMP model can be found in Appendix A. The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 



 

Table 2 presents our estimates of the economic and fiscal effects of the state REPS in 2009 Net Present Value (NPV) dollars with the cost recovery fee caps in the top half of the table and the no-caps scenario in the bottom half.

With the caps in place, North Carolina will lose 3,592 jobs, investment will decrease by $43.20 million and real disposable disposabl e income will will fall by $56.80 million by 2021. As a result, the state economic output measured in real state Gross Domestic Product (GDP) will be $140.35 million lower than without without the mandate.

The lower economic output will cause state and local tax

revenue collections to fall by $43.49 million including the losses caused by sales tax cuts outlined in SB 3.

Table 2: BHI Estimates for SB 3 (NPV, 2009 $)

Year

Employment (Jobs)

With Caps 2010 2012 2014 2021 Without Caps 2010 2012 2014 2021

Investment ($millions)

Real Disposable Income ($ millions)

Real State GDP ($ millions)

State and local Revenues ($ millions)

(1,046)

(22.94)

(8.23)

(90.21)

(35.12)

(3,078) (3,275) (3,592)

(38.61) (37.24) (43.20)

(49.36) (44.09) (56.80)

(134.65) (116.07) (140.35)

(47.29) (42.22) (43.49)

(13,412) (13,845) (14,202) (15,373)

(233.06) (165.17) (152.34) (182.61)

(404.87) (291.59) (247.01) (271.15)

(899.19) (599.72) (517.39) (606.65)

(413.54) (245.71) (218.41) (246.57)

Were the cost recovery caps not in place, the state economy would experience even greater economic losses. By 2021, the state would shed more than 15,373 jobs; and would would lose $182.61 million in investment and $271.15 million in real disposable income. In terms of real state GDP, the economy economy would be $606.65 million smaller. The negative economic effects would would spill over into state and local tax collections. We estimate a loss of $246.57 million in revenues in 2021.

The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 



 

Introduction The debate concerning the environmental and economic impacts of global climate change has intensified in recent recent years. Combined with fluctuations in fossil fossil fuel prices, this interest has encouraged many state governments to respond with public policy initiatives designed to address climate-related issues and alternative alternative energy sources. North Carolina has been no exception.

In 2007, North Carolina (NC) passed Senate Bill 3 (SB 3) that established a state Renewable and Energy Efficiency Portfolio Standard (REPS). The REPS mandates that a certain percentage of electricity generated generated be derived from new renewable sources.

The REPS aims to diversify

energy sources, encourage investment in renewable energy, and improve air quality. Although Congress has contemplated imposing a national REPS, only state or local governments have forged ahead in passing legislation they hope will quickly address climate change.

Specifically, SB 3 requires that all public electric utilities that provide electric services to customers in North Carolina increase the amount of their electricity generated from new renewable energy sources. The RE REPS PS requirement requirement in SB 3 will be phased in over time.

For

example, electricity generated from new renewable energy sources must be equivalent to 3  percent of retail sales by 2012, 6 percent of sales by 2016, 10 percent of sales by 2018 and by 2021 and thereafter 12.5 percent of sales (10 percent for municipal owned and electric membership utilities). utilities ). Renewable energy resources include solar, wind biomass and hydropower. However, the 2021 target of 12.5 percent consists of two separate requirements:

1.  An RPS that will require utilities to generate 7.5 percent of their electricity through new renewable sources. 2.  The remaining 5 percent will come from reduced electricity usage – due to energy efficiency measures. The North Carolina Utilities Commission hired consultants from LaCapra Associates to review the potential costs and benefits of imposing an R RPS PS in North North Carolina. Key results from the study concluded that NC should have “sufficient renewable resources within the State to meet a

The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 



 

5% RPS requirement”.3  However, the report goes on to state that North Carolina could expect to experience difficulties, such as an increase in average retail electricity rates in attempting to meet a more aggressive RPS.

Utility companies have the opportunity to meet the requirement by generating electric power using renewable energy resources. The bill also allows utility companies to meet part of the renewable requirement by purchasing Renewable Energy Certificates (RECs). Certificates can be  purchased from in-state or out-of-state out -of-state renewable energy facilities. Therefore, the purchase pu rchase of an out-of-state certificate acts as an investment in that out-of-state’s renewable energy portfolio, and may never be sold within North Carolina.

Utilities may recover the incremental cost of renewable resources and up to $1 million annually in alternative energy research expenditures from customers. The cost per customer account is capped according to the following schedule in Table 3.

Table 3: Utility Annual Cost Recovery Fee ($ per customer) Sector Residential Commercial Commerci al Industrial

2008 $10 $50 $500

2012 $12 $150 $1,000

2015

$34 $150 $1,000

SB 3 also phases out the current sales tax paid by farmers and manufacturers for electricity, piped natural gas and other fuels. fuels. Specifically, Section 10 incrementally decreases the tax rate paid by farms and manufacturing manufacturing industries indust ries until it is eliminated. These sales tax rates will reduce to 1.4  percent effective July 1, 2008, 2 008, to 0.8 percent pe rcent effective July Jul y 1, 2009 and to zero on o n July 1, 201 2010. 0.

Section 10 also reduces the sales tax rate to 2.85 percent for sales of electricity to commercial laundry or pressing and dry cleaning establishments.

Section 11 phases out the excise excise tax

imposed on piped natural gas used by manufacturers and farmers, while Section 12 phases out the  privilege tax paid on their purchases of manufactured fuel.

Both taxes will be completely

repealed by July 2010.

3

LaCapra Associates, Analys  Analysis is of a Ren ewable Po Portfolio rtfolio Stand Standard ard for the S tate of North No rth Caro lina 

(December,, 2006): ii, http://www. (December http://www.ncuc.commerce.st ncuc.commerce.state.nc.us/reps/NCR ate.nc.us/reps/NCRPSReport12-06. PSReport12-06.pdf, pdf, (accessed April 17, 2008).

The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 



 

The state stands to lose revenue by cutting these taxes. According to the Legislative Fiscal Note, the state and local governments governments will lose approximately approximately $23.8 million in FY 08-09, $35.4 million 4

in FY 09-10, $52.6 million in FY 10-11 and $51.7 million in FY 11-12.  

Many parties have voiced concerns that requiring a certain level of renewable energy generation would have too great an impact on electric rates, as renewable generation costs more than conventional generation. The LaCapra report conclusions support their concerns. The Beacon Hill Institute, in conjunction with the John Locke Foundation, estimated the costs and benefits of SB 3 and the economic impact of the legislation on the state economy.

North Carolina-STAMP

BHI has developed a Computable General Equilibrium (CGE) model for North Carolina. The  purpose of the t he model, called NC-STAMP NC-ST AMP (North Caroli Carolina na State Tax Analysi Analysiss Modeling Modelin g Program) is to identify the economic effects of a variety of state policy changes.  NC-STAMP is a five-year dynamic CGE C GE model that has been programmed program med to simulate si mulate changes in taxes, prices (general and sector specific) and other economic inputs. As such, it provides a mathematical description of the economic relationships among producers, households, governments governm ents and the rest rest of the world. It is  general  in  in the sense that it takes into account all the important markets and flows. flows. It is an equilibrium model because it assumes that demand equals supply in every market (goods and services, labor and capital). This is achieved by allowing  prices to adjust within the model. It is computable   because it can be used to generate numeric solutions to concrete policy and tax changes, with the help of a computer.5 

4

 Legislative Fiscal Note.  For a clear introduction to CGE tax models, see John B. Shoven and John Whalley, “Applied GeneralEquilibrium Models Models of Taxation and Internati International onal Trade: An Introduction and Survey,” Survey,” Journal of of 5

 Economi c Literatur e 22 (September, 1984), 1008. Shoven and Whalley have also written  Economic written a useful book on the practice of CGE modeling entitled Applying General Equilibrium (Cambridge: Cambridge University Press, 1992). The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 



 

BHI Estimates and Results  The RPS mandates that at least 7.5 percent of electricity generated must be derived from renewable sources. By mandating the use of renewable sources of electricity, the state is essentially compelling the sale and use of more expensive electricity at higher prices relative to conventional energy. As noted above, SB 3 allows North Carolina energy companies companies to pass on to customers the higher energy costs, subject to a ccap. ap. BHI used the NC-STAMP model to measure the changes to the North Carolina economy economy that will take place as a result of SB 3. Each estimate represents the change that will take place in the indicated variable against a “baseline” assumption about the value that variable would take in the indicated year.

We estimated two scenarios under SB 3. The first assumes that the utility utilit y companies comply with SB 3 up to the level of the caps outlined in Table 2. The second assumes there are no caps and that the utilities utilit ies could pass on the entire cost increase onto their customers. The appendix  provides detailed explanations expl anations of our ou r methodolog methodology. y.

 SB 3 under the Cost Recovery Caps

BHI assumes that North Carolina’s electric utilities will incur costs that meet the cost recovery caps under the REPS.

The caps will prevent retail electricity prices from from rising above the

specified range, and thus the average retail electricity price in North Carolina will increase up to the cap limit.

The price increase will leave cconsumers onsumers with less money to allocate to other

expenditures and businesses with less money to fund new investments, hiring and expansion.

Using data from the Energy Information Agency of the U.S. Department of Energy, we estimate that the utilities will be able to pass the increased costs to consumers by raising prices up to the 6

 proposed caps.   We projected the number of customers in North Car Carolina olina for each yea yearr from 2008 through 2021 using the average compound growth rate from 1990 to 2007 in each category.

6 U.S. Department of Energy, Energy Information Agency, Electricity, Electric Annual Data Tables,  Number of Retail Re tail Custo Customers mers by State Stat e by Sector Sector,, 1990-2007, 1990-2 007, Internet, Intern et, availab available le at http://ww http://www.eia.doe.gov/c w.eia.doe.gov/cneaf/electricit neaf/electricity/epa/epa_sprdshts.html y/epa/epa_sprdshts.html,accessed ,accessed April  April 15, 2009.

The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 



 

We then multiplied the appropriate fee for each year by the number of customers in the category. Table 4 contains the gross total fees from 2008 through 2021.

Over the entire period, residential consumers will incur cost recovery fees of $1.590 billion dollars - the vast majority of the fees. Commercial and industrial electricity customers will pay $255 million in cost recovery fees. fees. In total, North North Carolina’s electricity consumers will pay $1.845 billion in cost recovery fees.

Table 4: Sum of Cost Recovery Fees (millions of current $) Sector Residential Commercial Industrial Total

2008-2011 $173.11 $27.28 $0.44 $200.83

2012-2014 $168.56 $26.56 $0 .43 $195.55

2015-2021 $1,248.32 $196.71 $3.15 $1,448.18

Total $1,589.99 $250.55 $4.01 $1,844.55

SB 3 also outlines a series of sales tax cuts for energy-intensive industries such as manufacturing, farming and laundry services. The tax cuts are an attempt to mitigate the effect that the higher energy prices will have on these industries industries.. Prior to 2015, revenue reductions from the tax cuts, estimated in the Fiscal Notes, matches the recovery fees for the industrial and commercial sectors listed on the middle two rows in Table Table 4. However, starting in 2015 the recovery fees dwarf the tax cuts, providing inadequate relief to these industries thereafter.

Moreover, SB 3 does not offer residential and other commercial consumers any relief from higher electricity prices other than the caps. This omission could add over $1.5 billion to the electricity  bills of o f North Carolina Carolin a residents and up tto o $250 million for commercial electricity ratepayers that do not qualify for the tax cuts. Table 5 displays our estimates of the economic impact of SB 3. The simulation indicates that SB 3 will harm the North Carolina Carolina economy. The state will shed 1,046 jobs in 2010, with losses increasing to 3,592 jobs by 2021. North Carolinians will face higher utility prices which will will increase their cost of living, which will in turn put downward pressure on households’ disposable income. This combination of higher energy prices and lower employment will reduce incomes in  North Carolina. Real disposabl disposablee income will fall by $8.23 million in 2010, reaching a loss of $56.80 million by 2021 in NPV 2009 dollars. 

The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 



 

Table 5: BHI Estimates of Economic Impacts of SB 3 with Caps (NPV 2009 $) 2010

2012

2014

2021

Total Employment (Jobs)

(1,046)

(3,078) (38.61)

(3,275) (37.24)

(3,592)

Investment ($ millions) Real Disposable Income ($millions)

(22.94) (8.23)

(49.36) (134.65)

(44.09) (116.07)

Real Gross Domestic Product ($millions)

(90.21)

(47.29)

(42.22)

State and local Revenues ($ millions)  

(35.12)

(43.20) (56.80) (140.35) (43.49)

The higher cost of energy will hurt firms’ profit margins, causing them to reduce investment in  North Carolina. We estimate that investment in North Carolina will drop by $22.94 million in 2010 and $43.20 million in 2021.

The combination of lowe lowerr investment, employment and

incomes will shave $90.21 million off of real GDP in North Carolina by 2010 and $140.35 million by 2021. State and local government revenues will suffer due to the negative economic impact of the SB 3 mandates. As a result, tax revenue will decrease by $35.12 million in 2010 and $43.49 million in 2021. State and local governments will face the same higher electricity prices as consumers and  businesses, which will further strain ttheir heir budgets.  SB 3 without the Cost Recovery Caps

One could argue that the recovery caps contained in SB 3 artificially hold the additional cost of renewable electricity down and that the true cost of meeting the REPS is significantly higher than the caps. caps. The recent experience of Progress Energy provides a telling example. The company reviewed over 100 proposals to produce electricity from renewable sources in order to begin complying with the REPS. The cost estimates contained in the proposals were ffour our times higher than company officials expected.

Progress Energy CEO Bill Johnson told the  News and

Observer, “We actually doubt we can get 7.5 percent within the price cap. cap. You’ll get to the price 7

caps in a couple of years.”   BHI estimated the cost of building new renewable electricity facilities in North Carolina to meet the requirement of SB 3. Table 6 contains the results. New renewable electricity facilities facilities incur

Murawski, The News & Observer, “Energy Targets Out of Reach: Utility says clean electricity will cost far too much”, Internet, available at http://www.new http://www.newsobserver.com/busi sobserver.com/business/story/1435874.html ness/story/1435874.html,, accessed on April 15, 2009.

7 John

The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 



 

costs that include construction, or capital costs, fixed and variable costs for operations and maintenance and fuel costs, in the case of biomass and waste resource facilities. The cost of  building new renewable facilities will be the largest cost to comply with the REPS, which we estimate to be $5.878 billion from 2009 to 2021. Operating and maintenance and fuels cost will add an additional $170.45 million to the price. Balanced against the costs of the new renewable electricity generation facilities are savings from avoiding the construction of new conventional electricity generating facilities and the net costs of the EE programs. The avoided avoided costs of new conventional facilities total $1.630 billion and tthe he energy efficiency programs will save another $43.59 million, bringing the total costs of SB 3 to $4.463 billion through 2021. BHI simulated the impact these cost increa increases ses will have on the  North Carolina economy. econo my. Table 7 displays the results iin n 2009 NPV dollars. dol lars. Table 6: Utility Costs of SB 3 (millions of current $) Cost Type 2009-2012 2013-2016 2017-2021 Capital Costs $2,007.74 $2,171.92 $1,699.17 Fixed and Variable O&M* 17.22 38.62 114.61 Avoided Costs** (271.31) (349.28) (1,009.78) Energy Efficiency Measures (6.11) (9.51) (27.97) Total 1,759.77 1,870.77 831.97 *Operations, maintenance maintenance and fuel for biomass b iomass and animal waste electric facilities. **Includes capital, fixed and variable O&M and fuel of conventional sources of electricity.

Total $5,878.84

170.45 (1,630.36) (43.59) 4,462.51

The implementation of SB 3 without the cost caps would inflict greater damage to the North Carolina economy than under the caps.

Employment would fall by 13,412 jobs in 2010,

increasing to over 15,373 in 2021 as the electric bills of North Carolina’s households and  businesses skyrocket. Again, the t he combination combi nation of higher hig her cost of living l iving and higher hig her unemployment un employment would reduce real disposable income by $404.87 million in 2010 and $271.15 million in 2021. The electricity price increase would not only prevent businesses from hiring workers but also from making new investments.  Table 7: BHI Estimates of Economic Impacts of SB 3 without Caps (NPV, 2009 $) 2010

Total Employment (Jobs) Investment ($ m illions) Real Disposable Income ($millions) Real Gross Domestic Product ($millions) ($ millions) State and local Revenues ($ millions)  

(13,412) (233.06) (404.87) (899.19) (413.54)

The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

2012

(13,845) (165.17) (291.59) (599.72) (245.71)

2014

(14,202) (152.34) (247.01) (517.39) (218.41)

2021

(15,373) (182.61) (271.15) (606.65) (246.57)

10 

 

Investment would fall by $233.06 in 2010 and $182.61 million in 2021. The negative effects of SB 3 would cause state GDP to drop by $899.19 million in 2010 and by $606.65 million in 2021.

The economic damage would reduce state and local government revenues by a total of $413.54 million in 2010 and and $246.57 million in 2021. State and and local governments would would face even higher electricity prices than under the cost recovery caps.

The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

11 

 

Conclusion SB 3 was signed into law in 2007 to “promote the development of renewable energy and energy efficiency in the state through implementation of a renewable energy and energy efficiency 8

 portfolio standard.”   However, many current forms of rrenewable enewable energy — solar and wind wind in  particular — are more costly cos tly and less reliable rel iable than convent conventional ional sources.

The renewable portfolio standard will raise electricity prices for consumers and businesses in  North Carolina. At the same time, t ime, the energy efficiency po portfolio rtfolio standard s tandard contained in SB 3 will not achieve enough enough energy savings necessary to offset the higher prices. Meanwhile, the North Carolina Caro lina business community will see a reduction in its competitive advantage over the 18 states 9

that have not adopted similar legislation.   The result is that North Carolina will face slower growth in disposable income, employment and state GDP over the next 12 years.

8

 SB 3

9 U.S.

Department of Energy, Energy Efficiency and Renewable Energy, EERE State Activities and Partnerships, States with Renewable Portfolio Standards, Internet, available at Partnerships, http://apps1.eere.energy.gov/states/maps/renewable http://apps1.eere.energy.gov/stat es/maps/renewable_portfolio_stat _portfolio_states.cfm es.cfm,, accessed May 2009. The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

12 

 

Appendix A: Calculating the Net Costs of SB 3

Calculation of Costs and Benefits of Energy Efficiency Programs

SB 3 allows electric utility companies to satisfy a portion of the REPS mandate through implementing Energy Efficiency (EE) measures. measures. Utilities may achieve 25 percent of their REPS requirement through EE before 2021 and 40 percent in 2021 and after.

The U.S. Environmental Protection Agency provides a methodology for calculating the social costs and benefits of energy efficiency programs. 10  The benefits of energy efficiency efficiency programs include avoided costs of providing additional electricity, which include generation, transmission and distribution. distribution . There are savings of natural resources such as natural gas, water and clean air. On the cost side the methodology includes program overhead and installation costs as well as incremental measured cost. Incremental measured cost attempts to adjust the cost of the energy efficiency device to only measure the amount of energy savings that is in excess of what the customer would otherwise have made in the absence of an incentive program.

The benefits of the energy efficiency programs must be adjusted to reflect only those gains that are directly attributed to the energy efficiency program. The adjustment attempts to account account for free riders or those that would have made the energy efficiency investment in the absence of the  program but bu t benefit from the th e in incentives centives of tthe he program prog ram any way. Other customers cust omers may purchase pu rchase the equipment but fail to install it. Some equipment will fail and nee need d to be replaced replaced before its estimated useful lifetime. In addition, the adjustment accounts for the rebound effect which dilutes the results as some customers increase their electricity consumption in light of lower electric bills. There may also also be a spillover spillov er effect as marketing programs induce people to adopt energy efficiency measures, but do not participate in the program. Table 8 displays the details of our calculations of the costs and benefits for the EE programs.

We first calculated the amount of electricity that utilities could save through EE programs to achieve the allowable EE portion of the REPS. For example, the first REPS mandate in 2012 is that 3 percent of electricity generated must be from renewable sources, of which 25 percent may 10

 U.S. Environmental Protection Agency, National Action Plan for Energy Efficiency Resource Resources, s,

Understanding Understa nding Cost-Effectiveness of Energy Efficiency Programs: Best Practices, Technical Methods, and Emerging Issues for Policy-Makers, Internet, available at http://www.epa.gov/cleanenergy/energy programs/nap ee/resourc ee/resources/guides es/guides.html .html;; 2-2. The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

13 

 

 be achieved through throug h EE programs, p rograms, or 0 0.75 .75 percent. We assumed tthat hat utilities util ities will invest an equal amount of money in EE programs each year to ac achieve hieve the goal. Therefore, utilities will invest enough to save 0.1875 percent of total 2008 electricity sales per year from 2009 and 2012 (0.75  percent / 4 years y ears = 0.1875 percent). We utilized th thee LaCapra estimates of o f total electricit electricity y demand for each year and multiplied the figure by the incremental increase in the percentage of the REPS that can be satisfied through the EE EE programs. For example, in 2009 we multiplied multipli ed 156,433,000 megawatts hours of electricity of demand by 0.1875 percent to get 293,312 megawatt hours of electricity saved. This calculation was repeated for each year REPS requirement increases and for 2021 which the EE portion of the REPS increases from 25 percent to 40 percent.

 Next we calculated calcul ated the costs cost s of the energy efficiency programs for both the t he utility utili ty (administrative (adminis trative costs, incentives and a portion of installation costs) and the customer (including their portion of the equipment purchase and installation costs). The National Action Plan for Energy Efficiency, a  joint project of the U.S. Department of Energy and the Environmental Protection Agency,  provides estimates of the utility utilit y and customer costs of EE programs in a July 2006 report. The estimatess range from 3 to 5 cents of levelized cost per kilowatt hour: 1 to 3 cents cost to the utility estimate and 2 cent cost to the customer. We note that the LaCapra report estimates levelized costs of 2 cent per kilowatt hour for utilities, which is the midpoint of the estimates contained in the  National Action Plan report.

To calculate the utility and customer costs for each year, we

multiplied the midpoint of 4 cents per kilowatt hour by the kilowatt hours saved by the programs. The result is a cost of $355.773 million displayed in the rightmost column in the bottom half of Table 8.

EE programs, like all all investments, are subject to diminishing returns. In other words, words, the first dollar invested in EE programs should achieve a higher rate of energy saved than the last dollar invested in the programs. Therefore, the cost of EE programs should increase as more resources are allocated.

Balanced against the principle of diminishing diminish ing returns is the fact that our

investments take place over time and technological progress should shift the costs of EE  programs down, as better and more advanced equipment is available. Despite these offsetting  principles, it is likely that our use of a flat cost of EE programs overstates their effectiveness, especially in later years.

 Next we calculated the th e benefits of the EE progr programs ams in the form of saved electricity and clean air. We estimated the benefits from the electricity saved by multiplying our calculation of the megawatt hours saved under the programs by the Southeastern Electricity Reliability Council’s The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

14 

 

 projection of electricity price for the southeastern region.11  For example, in 2009 the electricity  price for the Council projects an electricity price of 7.7 cents per kilowatt kilo watt hour, multiplied multipl ied by 293,312,000 kilowatt hours (multiplied by 1,000 to convert megawatt hours to kilowatt hours) gives us a savings of $22,577,843. $22,577,8 43. This step was rrepeated epeated for each year through 2021.

 Next, we calculated calculat ed the benefits b enefits of reduced redu ced emissio emissions ns of sulfur su lfur dioxide dioxi de (SO2) and nitrogen oxides (NOx).

We do not include carbon carbon dioxide because the benefit of reducing carbon dioxide

emissions at the state level is negligible because it has no measureable effect on the global emissions or concentrations. First, we computed the per megawatt hour of emissions by dividing the EIA estimate of emissions for each chemical by the North Carolina’s electric power industry 12

 by the number of megawatts of power demanded.   We needed to price the value of the emissions. Permits to emit sulfur dioxide are traded under the existing cap and trade system that was established in the early 1990s to help curb acid rain in the northeast United United States. The latest 13

 bids by utilities to emit one metric ton of sulfur dioxide was $69.74.   There is no such readily available price for nitrogen oxides.

Instead, we use the figures produced in a study that

establishes a methodology for the pricing emissions. 14 The study values nitrogen oxides at $1,034  per metric ton. Using these figures, we estimate the emissions benefits of the EE programs as $4.574 million over the entire period.

Then we adjusted the benefits to reflect the rebound effect, free riders, lower installation rates and early equipment equipment failures.

We used the estimate from the National Action Plan for Energy 15

Efficiency that the benefits are reduced by 10 percent due to these factors.   Therefore our total  benefits are reduced to $621.060 $ 621.060 million. milli on.

To calculate the Net Present Value (NPV) of the costs and benefits, we followed the National Action Plan discount rate of 5 percent for the calculation calculation net benefits to society. The NPV of the

11

  EIA, 2009 Energy Outlook, An Updated Reference Case Reflecting Reflecting Provisions of the American Recovery and Reinvestment Act, Table 80. Electric Power Projections for EMM Regi Region, on, Internet, available at http://www.eia. http://www.eia.doe.gov/oiaf/aeo/ doe.gov/oiaf/aeo/supplement/stim supplement/stimulus/arra/excel/sup_ele ulus/arra/excel/sup_elec.xls. c.xls.   12  EIA, State Energy Profiles, North Carolina, Internet, available at http://tonto.eia.doe.gov/state/state_energy_profiles http://tonto.eia.doe.gov/state/ state_energy_profiles.cfm?sid=NC .cfm?sid=NC.. 13  U.S. Environmental Protection Agency, Clean Air Markets, 2009 EPA Allowance Auction Results, http://www.epa.gov/airmarkt/tr epa.gov/airmarkt/trading/2009/09summ ading/2009/09summary.html ary.html.. Internet Available at http://www. 14  Levy JI, Hammitt JK, Yanagisawa Y, Spengler Spengler JD. “Development of a New Damage Function Model for Power Plants: Methodology and Applications.” App lications.”  Environ mental Sc ience and T echnology echnolo gy 33: 4364-4372 (1999), for the valuation per metric ton of NO x.  15 15 U.S.

Environmental Protection Agency, National Action Plan for Energy Efficiency Resources, Model Energy Efficiency Program Impact Evaluation Guide, Internet, available av ailable at http://www.epa.gov/RDEE/ documents/evaluation_guide.pdf  de.pdf , 5-6. http://www.epa.gov/RDEE/documents/evaluation_gui The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

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costs is $274.134 million and the NPV NPV of the benefits is $419.475 million over the period. The difference differ ence between the benefits and cost is $174.341 million.

Our final step was was to allocate allocate the net benefits to the utilities and the electricity consumers. We utilized Duke Energy’s “Save-a-Watt” program as a model, which allows the utility to charge a rider fee to all North Carolina’s utility customers to reimburse the company for of the avoided 16

costs of the EE programs.   This rider allows North Carolina’s public utilities to ea earn rn a rate of return on the EE programs equal to that which utilities earn on electricity sales in terms of profit. Duke has agreed to charge charge only 75 percent of total costs. We use the 75 percent percent as a proxy to allocate alloca te net benefits benefits of the EE programs to the utility and and customers. Thus the utilities will will realize $130.756 million, while utility customers’ will enjoy net benefits of $43.586 million.

Table 8: Calculations of Cost and Benefits Benefits of Energy Efficiency Efficiency Programs ($) 2009

EE savings (MWh)

2010

2011

2012

2013

2014

2015

293,312

293,312

298,768

304,313

413,393

420,653

427,883

11,732,475

11,732,475

11,950,725

12,172,500

16,535,700

16,826,100

17,115,300

22,577,843

22,062,870

22,704,552

22,857,884

30,808,777

31,518,346

31,901,012

148,288

151,047

153,850

156,748

212,667

216,323

219,932

 NPV benefits (2009 $)

11,732,475

11,381,643

11,040,816

10,713,120

13,842,874

13,410,285

12,984,819

 NPV of Costs (2009,$)

22,577,843

19,040,500

18,659,920

9,032,380

22,969,277

22,378,449

21,572,229

Difference

10,845,368

7,658,857

7,619,104

(1,680,740)

9,126,403

8,968,164

8,587,409

Utility portion ($)

8,134,026

5,744,143

5,714,328

(1,260,555)

6,844,802

6,726,123

6,440,557

Consumer gain

2,711,342

1,914,714

1,904,776

(420,185)

2,281,601

2,242,041

2,146,852

Costs Utility and Consumer ($) Benefits Electricity Savings ($) Emissions (SO2, NOx, $)

2016

2018

2019

2020

580,030

590,950

601,333

1,529,750

1,556,633

1,583,983

8,894,312

23,201,200

23,638,000

24,053,333

61,190,000

62,265,333

63,359,333

355,772,475

43,705,052

45,286,606

46,523,406

118,483,714

122,030,650

125,032,423

298,764

304,013

309,356

786,980

800,807

814,879

4,573,654

 NPV benefits (2009 $)

16,799,085

16,280,243

15,777,448

38,225,513

37,044,890

35,900,793

245,134,005

 NPV of Costs (2009,$)

28,145,422

27,771,773

27,169,934

65,899,674

64,635,308

69,622,731

419,475,441

Difference

11,346,336

11,491,531

11,392,486

27,674,161

27,590,418

33,721,938

174,341,436

Utility portion ($)

8,509,752

8,618,648

8,544,365

20,755,621

20,692,814

25,291,454

130,756,077

Consumer gain

2,836,584

2,872,883

2,848,122

6,918,540

6,897,605

8,430,485

43,585,359

EE savings (MWh)

2017

2021

Total

Cost Utility and Consumer ($) Benefits Electricity Savings ($) Emissions (SO2, NOx, $)

685,493,136 

16

 Duke reaches Save-A-Wat Save-A-Wattt settlement, Charlotte Business Journal, , Internet, available at http://www.bizjournals.c w.bizjournals.com/triangle/stori om/triangle/stories/2009/06/08/dail es/2009/06/08/daily74.html y74.html,, June 12, 2009 http://ww The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

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Calculation of the Net Cost New Renewable Electricity

To calculate the cost of new sources of renewable energy, BHI utilized data from the Energy Information Agency. We collected data of net generating capacity (in megawatt hours) and net 17

summer capacity (in megawatts) from the North Carolina Electricity Profile for 2007.   These 18

figures were grown through 2021.  

To these totals, we applied the percentage of new renewable generation proscribed by SB 3. For example, 3 percent of total electricity generation in North Carolina must be from new renewable sources by 2012. However, EE programs can account for 25 percent of the increase (or 0.75  percent), and thus thu s 2.3 percent of the tot total al electricity generation iin n North Carolina Caroli na must be b e derived from new renewable sources. This process was repeated for 2015, 2018 and 2021. In 2021, EE can satisfy 40 percent of the REPS requirement of 12.5 percent, or 7.5 percent. Table 9 displays the results.

Table 9: Total and Renewable Electricity Generation under REPS Total Electricity Generation (GWh) Percent Renewable (less EE) Renewable Generation (GWh)  Net summer Renewable Ren ewable Gen Generation eration (MWh)

2012 136,975 2.25 3,082 646

2016 142,575 4.5 6,416 1,345

2018 146,620 7.5 10,996 2,305

2021 150,398 7.5 11,280 2,364

Because our estimates of the new renewable energy requirements under the REPS are expressed in terms of total megawatt hours and net summer capacity in megawatts, we can calculated the net costs of building and operating the new renewable renewable sources. These include the overnight capital costs (if a facility could be built overnight), variable and fixed operations and maintenance (O & M) costs, fuel costs and avoided cost (cost savings from not building a conventional facility).

17

 U.S. Department of Energy, Energy Information Agency, Electricity, State Electricity Profiles, North Carolina Electricity Profile, 2007 Addition, http://www.eia.doe.gov/c neaf/electricity/st_profiles/nort y/st_profiles/north_carolina.html h_carolina.html,. ,. April 15, 2009 http://www.eia.doe.gov/cneaf/electricit 18  U.S. Department of Energy, Energy Information Agency, 2009 Annual Energy Outlook, Year-by-Year Updated Annual Energy Outlook 2009 Reference Case with American Recovery and Reinvestment Act, Table 80. Electric Power Power Projections for EMM Region, Region, East Central Area Reliability Reliability Coordination Coordination Agreement, http://www.eia http://www.eia.doe.gov/oiaf/ae .doe.gov/oiaf/aeo/supplement/stim o/supplement/stimulus/regionala ulus/regionalarra.html rra.html,, (accessed April 20, 2009.)

The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

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We calculated the overnight costs using information from the “Assumptions to the Annual 19

Energy Outlook, 2009.”   The costs are displayed by technology (geothermal, landfill gas,  photovoltaic,  photovol taic, wind, and biomass) by year (2010, 2020 and 2030) and a high-cost and low-cost reference case. We used figures from the low cost reference case and 2010 and 2020 for eeach ach technology of renewable renewable energy. We calculated an an average overnight capital cost of renewable 20

electricity generation using U.S. Net Summer capacity to weight each technology.   Table 10 contains the results.

As one can see from table 10, the EIA estimates for overnight costs of renewable energy show a decrease from 2010 to 2020.

This is likely due to expected technological advances in the

 production of renewable energy.

However, as noted with EE programs, renewable energy

sources in North Carolina are subject to diminishing returns and increasing costs as more renewable energy resources resources are built in North Carolina. This may cause our estimates of the costs of renewable energy to be understated.

Table 10: Costs of new Renewable Capacity (2007$/KWh) 2010 Source Biomass Hydroelectric Wind Weighted Average Conventional (combustion Turbine)

2020

Capital Costs 3,636 2,801 2,791 2,108

Fixed O&M 64 14 30 41

Variable O&M 7 2 0 3

661

12.11

3.59*

Capital Costs 3,116 2,058 2,544 2,284

Fixed O&M 55 10 28 20

661

12.11

Variable O&M 6 1 0 1 3.59*

*Includes fuel costs of $0.02 per k ilowatt.

We calculated a weighted average cost of renewable energy using the LaCapra estimates of the  practical potential potenti al of new renewable renew able resources in North Carolina. 21  The weighted average figures were applied to the new megawatts needed to satisfy the REPS requirement for the appropriate year (2012, 2015, 2018 and 2021). The fixed and variable costs were reduced ffor or 2020 by the  percentage reduction in capital costs between bet ween 2010 and 2020. 2 020. 19

 U.S. Department of Energy, Energy Information Agency, “Assumption to the 2009 Annual Energy Outlook, Table 13.1: Overnight Capital Cost Charac Characteristics teristics for Renewable Energy Generating Technologies in three cases (2007/$kw):” 156, http://www.eia.doe.gov/oiaf/aeo/assumption/ http://www.eia.doe.gov/oia f/aeo/assumption/pdf/renewable.pdf  pdf/renewable.pdf , accessed April 20, 2009) 20  U.S. Department of Energy, Energy Information Agency, “Renewable and A lternative Fuels, Table 4: U.S. Electric Net Summer Capacity, 2003-2007,” http://www.eia.doe.gov/cneaf/alternate/page/ http://www.eia.doe.gov/c neaf/alternate/page/renew_energy_consump/ta renew_energy_consump/table4.html ble4.html,, (accessed April 20, 2009.) 21 o f a Rene Renewable wable Portfolio Po rtfolio Standard Sta ndard for the State S tate of North No rth Caro lina   LaCapra Associates, Analysis of (December,, 2006): 61, http://www.ncuc.net/rps/rps.htm (accessed (December http://www.ncuc.net/rps/rps.htm (accessed June 30, 2009). The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

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 Next we calculated the capital, fix fixed ed and O&M O& M costs for conventional con ventional electricity generation using 22

assumption tables form the EIA’s Annual Energy Outlook 2009.   These costs were applied to the amount of electricity that would be generated by new renewable sources under the REPS, since this represents the amount of conventional electricity generation capacity that presumably will not need need to be built under the REPS.

We adjusted the avoided cost of conventional

electricity downward to reflect reflect the unreliability of solar and wind power. The difference between the cost of the new renewable and conventional electricity generation and the net cost of EE  programs represents the net cost of the REPS. Table 6 in the body of the report contains a summary of the results.  Modeling the REPS using STAMP

 Now that we have the net cost of the REPS, we can model their impact on the North Carolina economy using STAMP. We simulate the costs and benefits of the SB 3 as changes in tax policy, since the cost recovery fees and uncapped price increases act as a tax on electricity sales. Thus, we place increased state fees on the utility sector in the STAMP model by the net costs of the REPS we calculated above.

For the sales tax cuts outlined in SB 3, we entered them into the STAMP model using the data from the Legislative Fiscal Note. Note. The percentage changes in the economic variables were applied to our baseline forecast of the variables from 2009 to 2021.

In order to estimate the impact of the REPS, we estimated the size of the utility sector within the STAMP model through 2021. We calculated calculated the percentage increase represented by the net costs REPS for each year that the REPS increases, 2012, 2015, 2018 and 2021.

We put these

 percentages into i nto the STAMP S TAMP model mo del as an increase in state fees applied appl ied to the utility sector. The additional fee revenue stream was aallocated llocated back to the utility sector. The result result is that utility customers would pay a higher price for utility services that would be refunded back to the industry. This method was used for both the capped ccost ost recovery fees aand nd the uncapped cost recovery fees.

22

 U.S. Department of Energy, Energy Information Agency, “Assumption to the 2009 Annual Energy Outlook”, Table 8.2: Cost and Performance Characte Characteristics ristics of New Central Electricit Electricity y Generation Technologies, http://www.eia.doe.gov/oiaf/aeo/ass http://www.eia.doe.gov/oiaf/aeo/assumption/pdf/ele umption/pdf/electricity.pdf  ctricity.pdf , (accessed April 20, 2009): . 88. The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

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The Beacon Hill Institute North Carolina-STAMP Development Team

David G. Tuerck   is is Executive Director of the Beacon Hill Institute for Public Policy Research at

Suffolk University where he also serves as Chairman and Professor of Economics. He holds a Ph.D. in economics from the University of Virginia and has written extensively on issues of taxation and public economics. Paul Bachman  is Director of Research at BHI. He manages the institute's research projects, including the STAMP model and conducts research on other projects at the BHI. Mr. Bachman has authored research papers on state and national tax policy and on state labor policy and  produces the institute’s institut e’s state revenue forecasts for the Massachusetts legislature. He holds a Master of Science in International Economics from Suffolk University. Alfonso Sanchez-Penalver  is an Economist at the Beacon Hill Institute. He holds a Master of Science degree in Finance from Boston College, and a BSBA in Finance from Suffolk University. He is currently enrolled in the Ph.D. program in Economics at Suffolk University. He has an extensive career in web programming and project management, as well as in accounting and

financial analysis. Michael Head is a Research Research Economist at BHI. He holds a Master of Science Science in Economic Economic Policy from Suffolk University. The authors would like to thank Frank Conte, BHI Director of Communications, for editorial assistance.

The Economics of Senate Bill 3 in North Carolina/ August  2009  2009 

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The Beacon Hill Institute at Suffolk University in Boston focuses on federal, state and local economic  policies as they affect citizens cit izens and businesses. busi nesses. The ins institute titute conducts research and educational programs p rograms to provide timely, concise and readable analyses that help voters, policymakers and opinion leaders understand today’s leading public policy issues. ©August 2009 by the Beacon Hill Institute at Suffolk University

THE BEACON HILL INSTITUTE FOR PUBLIC POLICY RESEARCH Suffolk University 8 Ashburton Place Boston, MA 02108 Phone: 617-573-8750 Fax: 617-994-4279 [email protected] http://www.beaconhill.org   http://www.beaconhill.org

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