Official Projections Fail to Capture Market Realities, Skewing Policy Considerations
[Washington, D.C. — June 22, 2015]: Renewable energy and energy efficiency are competitive resources in today’s marketplace that will not only be cost-effective mechanisms for compliance with EPA’s Clean Power Plan (CPP) but should also be expected to grow strictly on the basis of cost, according to a report published today by the Advanced Energy Economy Institute. Official projections of renewable energy deployment and the impact of energy efficiency on electric demand growth do not capture market realities, discounting the growth potential of these resources and the role they can play in state compliance plans for the CPP, according to the AEE Institute.
“Costs are dropping fast for wind and solar power, and energy efficiency is almost always the lowest cost way to meet new electricity needs,” said Malcolm Woolf, Senior Vice President for Policy and Government Affairs for Advanced Energy Economy (AEE), a national business association. “There is every reason to believe that renewable energy and efficiency will play growing roles in electricity markets based on price alone. They can also help states reach their Clean Power Plan emission targets at low cost.”
The report, Competitiveness of Renewable Energy and Energy Efficiency in U.S. Markets, is available for download here.
The AEE Institute report shows that official government projections, made by the Energy Information Administration in its Annual Energy Outlook, consistently underestimate the growth rate of renewable energy, leading to “misperceptions” about the performance of these resources in the marketplace. The report demonstrates that EIA projections fall short of actual renewable energy installations year after year, raising doubts about current projections that show little growth in wind or solar capacity stretching out to 2030. For example, the installed generating capacity of solar power is likely to double between 2014 and 2016, based on market analyses that take into account actual projects in the pipeline. Yet in the AEO 2015 forecast, solar capacity does not double from its current level until 2026.
The same is true for energy efficiency, as official projections fail to capture the impact of efficiency investments on electricity consumption. The trend in overall electricity demand growth has been consistently downward in recent years, in parallel with the rise in spending on energy efficiency, which more than tripled from 2005 to 2013. Retail electricity sales have also been flat to slightly declining since 2010, even as the U.S. economy grew about 9 percent in real terms between 2010 and 2014. Yet the AEO 2015 projection shows future electricity demand growth steady at a little less than 1 percent annually out to 2040, discounting the potential that energy efficiency would continue to slow demand growth in the coming years.
The effect of these misperceptions can be seen in some responses to the CPP, which identified renewable energy and energy efficiency as two key sources of emission reduction in the electric power sector. Comments submitted to EPA by several states questioned their ability to develop sufficient renewable energy or to achieve energy efficiency gains on a cost-effective basis beyond what they were getting already. In modeling the impacts of the CPP, the North American Electric Reliability Corp. (NERC) projected no incremental increase in energy efficiency and little additional investment in renewable energy in response to the CPP, treating a large-scale build-out of new natural gas generating capacity as the only way states could meet CPP targets.
The AEE Institute report shows that both renewable energy and energy efficiency are competitive in electricity markets today, can be expected to grow in the future, and can play a significant role in state compliance plans for the CPP, while holding costs down.
Based on data from Lazard, a financial advisory and asset management firm, the report notes that the levelized cost of electricity (LCOE) for utility-scale wind and solar power has declined by 58 percent and 78 percent, respectively, from 2009 to 2014, such that these technologies are increasingly competitive. In 2013, the average wind power purchase agreement (PPA) price was $24/MWh. Similarly, solar PPAs, which provide utilities with peaking power, have declined from $125-$150/MWh in 2008 to current levels of $50-$75/MWh. Utility renewable energy purchases that were once driven primarily by state policies (e.g., renewable portfolio standards) are now increasingly made based on economics. In Texas, Austin Energy signed a 20-year contract in 2014 for 150 MW of solar energy at a price estimated at less than $50/MWh. In 2013, American Electric Power (AEP) bought three times more wind power in Oklahoma than it originally intended because of its value to ratepayers.
Even as renewable energy resources become increasingly cost-competitive, energy efficiency investments cost less than the electricity generation they replace. Utility-run energy efficiency programs are approved by state regulators only if benefits exceed costs. Lawrence Berkeley National Laboratory estimates the U.S. average “total cost of saved energy” for customer-funded utility programs at $46/MWh, based on an analysis of programs in 20 states over a five-year period. This is less than half the average cost of retail power in the United States. Similarly, energy service companies (ESCOs) serving institutional, commercial and industrial markets use a financing model whereby energy savings pay for energy efficiency investments over time. By definition, these projects must be cost effective in order to generate the cash flow that makes them financially viable.
The report concludes: “There is every reason to believe that [renewable energy] and [energy efficiency] will continue to play an increasing role in our changing electric power system strictly on the basis of the economic value they provide. In addition, as states consider ways to comply with EPA’s Clean Power Plan between now and 2030, RE and EE measures will be competitive with other options and available to provide substantial emission reduction opportunities.”
Other reports from AEE and the AEE Institute related to EPA’s Clean Power Plan:
Integrating Renewable Energy into the Electricity Grid, prepared by The Brattle Group
Assessing Virginia’s Energy Future: Employment Impacts of Clean Power Plan Compliance Scenarios, prepared by Meister Consultants Group for the AEE Institute and Virginia Advanced Energy Industries Coalition
EPA’s Clean Power Plan and Reliability: Assessing NERC’s Initial Reliability Review, prepared by The Brattle Group
About Advanced Energy Economy and the Advanced Energy Economy Institute
Advanced Energy Economy (AEE) is a national association of businesses that are making the energy we use secure, clean, and affordable. AEE’s mission is to transform public policy to enable the rapid growth of advanced energy companies. The Advanced Energy Economy Institute is a nonprofit educational and charitable organization whose mission is to raise awareness of the public benefits and opportunities of advanced energy.
Monique Hanis, AEE, 202-391-0884, firstname.lastname@example.org