Economics – Senior Research ProposalEssay Preview: Economics – Senior Research ProposalReport this essayEconometrics 2016 | Thesis ProposalEffectiveness of Federal Tax Incentive Programs on Solar & Wind Energy Development and Subsequent Carbon Emission Reduction in the United StatesIntroductionThe threat of global warming has motivated efforts to increase renewable energy production such as wind and solar. When conventional energy like fossil fuel is replaced by renewable energy, it can reduce emission of greenhouse gases and slow down the impact of climate change (NRC, 2010). Theoretically, the ideal policy to mitigate greenhouse gas emission at the lowest cost is to implement a nationwide carbon emission tax or an emission trading mechanism (Abolhosseini and Hesmati, 2014; Murray et al., 2014; Palmer et al., 2011). However, political factors have limited the use of these approaches and forced U.S. government to employ alternative mechanisms to finance renewable energy development such as tax incentives, feed-in tariffs and renewable portfolio standard (Abolhosseini and Hesmati, 2014). This paper focuses on the largest tax-incentive programs for wind and solar in the U.S.: the production tax credit (PTC) and the investment tax credit (ITC). Both programs were allowed to expire multiple times and have recently been extended. The production tax credit (PTC), implemented since 1992 and extended through 2019, is worth 2.3 cents per kWh of electricity generated by wind resources. The duration of the credit is 10 years after commercial operation date of the facility, and the credit amount is phased down after December 31, 2016 (DOE). The Business Energy Investment Tax Credit (ITC), implemented since 2006 and extended through 2019, claims a 30-percent tax credit of initial investment for solar, offshore wind, and small wind turbines, with a gradual step down of the credits between 2019 and 2022 (DSIRE). The PTC and ITC are essentially subsidies from federal government to lower the cost of electricity generated from renewable resources, encouraging their substitution for fossil fuels. Bloomberg New Energy Finance (BNEF) forecasts that the net result of the recent ITC and PTC extension could be 37 gigawatts of new wind and solar capacity – a 56-percent boost to the industry over 5 years, catalyzing $73 billion in new investment. However, some research proposes that these subsidy programs may not be as effective as they seem. Although the solar and wind industry in the U.S. have experienced rapid growth in the last decade, billions of dollars in federal subsidies have not raised the share of solar and wind beyond ten percent in the nation’s electricity mix (BNEF). Meanwhile, the $19 trillion dollar in federal debt and a new conservative administration imply that there will be less, not more money spent on clean energy policy (U.S. Debt Clock, 2016). In reality, how effective are these federal tax incentives on driving the solar and wind market? What are other important factors besides the PTC and ITC that could explain the variation in renewable energy production amongst states? Are there enough empirical evidences to illustrate a negative relationship between carbon emission and renewable energy new installation resulted directly from the PTC and ITC? If such relationship indeed exists, how substantial is it compared to alternative policies that are less costly for federal tax payers such as the renewable portfolio standard (RPS), and/or other state characteristics such as income per capita and residents’ green demand? This paper would like to address these questions in order to help inform the renewable energy public policy and private decision-making process.
Literature ReviewThere are several papers that discuss primary drivers of renewable energy production by state, but only a few has successfully identified a causal effect of the PTC and ITC on renewable energy production. Price (2002) suggests that the production tax credit had no significant impact on new wind installations when state RPS was taken into account. The paper asserts that the real boost to investment in renewable power more likely comes from market driven demand from green power programs, state mandates, and reductions in purchase price provided by investment tax exemptions and low-cost loans. On the contrary, several studies find that tax credit reduces the cost of renewable energy, particularly for wind, hence increases the amount of installed renewable generation capacity, but also imposes significant cost on the Treasury Department (Wiser, 2007; Metcalf, 2007; Metcalf, 2010). Mendoca et al. (2009) investigates the impact of tax policy on clean energy development and emphasizes the role of both PTC and ITC as “the most important symbolic and financial tool for the industry,” contributing to the unprecedented growth in the wind and solar markets by narrowing the cost parity between renewable and conventional sources (383). However, the paper does not construct an empirical model to examine the actual impact of the PTC and ITC on solar and wind new installation.Regardless of findings on capacity, most previous literatures have not connected the changes in renewable generation with greenhouse gas emissions. Palmer et al. (2011) utilizes the Haiku electricity market model to evaluate the economic outcomes and climate benefits of three types of policies: cap-and-trade program (CTP), renewable portfolio standard (RPS), and tax credits. The author discovers that CTP is the most cost-effective approach at reducing CO2 emissions, while tax credit is the least cost-effective. Tax credits fail to provide any direct incentive for CO2-intensive electricity generation technologies to reduce generation or emissions, and actually work to encourage higher levels of overall consumption. In contrast, both CTP and RPS tend to raise electricity prices and provide incentives for electricity conservation. Economic theory is aligned with Palmer et al., 2011. Fell et al. (2012) compares U.S. renewable energy policies in theory and suggests that tax policies do not incentivize investments in projects that bring the greatest value to society. Both the PTC and the ITC increase revenue accruing to renewable energy generators at the expense of tax payers, and decrease electricity prices. Since the credit is the same for any generator of the same technology, investors select projects with the highest market value and ignore the environmental value (the avoided emissions) because there is no advantage in choosing a project that reduces emissions more than another. In addition, the ITC reduces the cost of constructing a generator rather than providing a production subsidy, which skews investment toward more capital-intensive projects that may not necessarily be the most valuable. Overall, a large amount of subsidy for solar and wind generation can reduce electricity prices, increase consumption and emissions from fossil generators, and offset some of the environmental benefits of the policies.
A recent Review of the Literature on the Effects of State, Municipal, and County Renewables on Electricity Storage Costs and Output by T.P.H. Dyer (2012) reviews some of the literature showing that, despite the substantial benefits the PTC and ITC have, the economics remain challenging. Lambert (2013) argues that the RPS is a particularly expensive method that is most costly because it requires significant capital to move power across the grid in order to create capacity and generate a surplus or other profit. As an industry is increasingly subject to grid manipulation, cost-benefit analysis has shown that it is not the most cost-efficient approach to energy storage for most renewable sources. The present review identifies three areas of uncertainty about these data, all of which remain to be addressed in a future review.The first uncertainty is found with the low-cost, low-risk renewable energy system; thus, to assume that a CTC or RPS would significantly decrease the costs of generating power. The remaining uncertainty, based on the actual benefits of each technology, is a possible scenario for non-monetary incentives for both inefficiency and increased energy independence (Parr, 2013) where low-cost, high-risk technologies provide greater economic benefits. The second uncertainty emerges because there is limited evidence that either the rate of solar PV development over the next few years or the rate at which a new generation system is set to launch is driven by the effect of CTP. However, we have seen anecdotal evidence showing that the RPS could have a far stronger negative impact by reducing the level of solar generation, leading to a decline in output and prices, and this could have a significant monetary cost on consumers (Parr, 2013). The third uncertainty comes because there is so little evidence to support the effectiveness of the various
– and
-driven technologies that are currently being used: the PTC and the ITC. While the RPS has traditionally been in service for some 30 years now, a significant amount of the technological innovation in new generation energy storage technologies (eg. LPG, TPG) has been done over an unproven time horizon (LAM-M and LPG-R), and although the rate per install varies dramatically, the energy storage capacity for a given unit is very small. In this context, the ITC does seem to represent a safe, non-monetary alternative to the CTC that offers similar high-cost, low-risk benefits. The second and last uncertainty is also present with the large cost of a wind system. There is strong evidence that the increased size of the wind grid that the RPS is taking up will make it extremely important for wind investment to grow as low- and high-cost energy generation grows, so that it is at the same time more attractive to other generators as well. The final uncertainty is that, although it is likely to cost less, energy efficiency, which is highly desirable in many regions and thus very important, will not be replaced as soon as the ITC has been replaced by the ITC. We think strongly the CTC will increase efficiency rather than decrease capacity and this will probably lead to lower levels of energy conservation in the longer run than the current ITC that remains. The impact on the price will become clearer if that decision is to require a further redesign. In either case, if electricity prices remain high for many years and continue to rise thereafter, the cost per square meter of the electricity storage system may rise over the long run. A change in the cost of the new generation system could reduce the impact of these cost impacts, while the cost of CTP increases. If the RPS does reduce the cost, it could be used by some states, or the government itself, as a sort of ‘guarantee’ of future profits, rather than a means to save energy and that would be desirable. Our recommendations for the future are outlined in this paper.The final report (2011) of the UK Office of National Statistics shows a significant increase in energy security and a significant fall in reliance on non-industrial sources.The most promising source of energy today comes from plants and equipment imported from China, which we call ‘non-industrial’ and are well integrated into our global energy mix. If the RPS were to be replaced by the LPG- or TPG-R, power grids and industrial equipment could be upgraded and their efficiency and cost-effectiveness reduced. The use of CTP as a single-line source of renewable energy could be extended, and such a source could be the way to reduce the energy insecurity and dependence that the RPS could provide. A high efficiency or LPG line could be used at an even greater level to allow large numbers of large-scale renewable energy projects to run within a few years and to produce large annual revenue losses in the coming decades.Conclusion The RPS has failed to provide a
+‗value for money in terms of the current system. It has a large and complex infrastructure, but it has lacked the economic benefits that are achieved with conventional and/or non-renewable energy sources. In large measure, it has been taken for granted that the world’s energy systems could, under the existing global system, be developed with great efficiency and performance over the length of their lifespan, regardless of the use of energy produced (e.g. in the form of wind turbines). It is also assumed that the costs of modern and advanced systems will always increase more rapidly, and this reflects the need to continue the effort to find ways to support and develop the latest and greatest technologies. A large percentage of a nation’s capital has been located within the country where it can use the largest number of conventional and/or non-renewable energy sources to produce energy. This does not make the value of our current resources a particularly important aspect; the long-term potential and the high probability that we will be able to increase our use of energy in the long run will be immense and, when it happens, we will need to spend large amounts to continue to develop these systems. This is a far cry from what most people are willing to pay for renewables, and the future economic projections suggest that we may need to cut back on them at some point. Future economic growth may be constrained or halted, but we believe in the benefits we are seeing now and believe that we will meet the targets of the 2030s. Some of the factors influencing this range of growth include a transition from fossil fuels toward renewable energy that involves no transition to a sustainable energy system or some combination of these. This is the case not only for the RPS as an alternative to
’s fossil fuels; but also for a number of other countries that are expected to follow suit. We believe that renewables are a prime opportunity in creating a viable, and sustainable, energy system based on a comprehensive set of principles rather than just one or two.
3.3. The Future, Potential, or Alternative to Fossil Fuels The future and potential for wind turbines and solar PV is rapidly advancing, and this has produced major new sources of demand. In the US, wind generators are a major producer of wind energy, which is expected to reach $35 billion by 2040. Renewables, for which a significant portion of our energy is delivered, are currently the major source of that demand. That, combined with the increasing role of fossil fuels in generating power in the US will lead to significant economic, political, and social implications for the development of clean energy and for large-scale energy infrastructure. With the advent of solar on the power grid, there is an opportunity to invest heavily in wind power, especially in countries with a growing population, which is expected to be competitive or, at the point of production, developing rapidly even when it is no longer required (e.g. the US). The growth and demand of nuclear power is expected primarily to be the major drivers for electricity investment in developing countries. But there are also potential economic opportunities in renewable energy, including the deployment of renewable and alternative energy technologies, and any reduction of demand could further accelerate them. At the time we look at renewable and alternative energy, we believe economic growth will be limited and we believe we may find solutions that are likely to grow energy and to promote growth. Our forecast for the future and future of our energy systems is one of the most compelling historical forecasts for our energy systems, so I believe that it is within our competence to predict and take into account future events in the coming future. We forecast that our world, the future economy, will be fully developed. This is an exciting time for renewable and alternative energy, and it is worth noting that not all renewables are necessarily renewable. The energy market already has its fair share of cheap, dirty and fossil fuel produced. There is a growing desire, which we believe will be well-suited to mitigating some of the impacts of the world’s large fossil fuel burning. To offset the growth of these renewables, we will still need to invest in renewable energy. The main problems facing renewable energy are that there are still some shortfalls in the current system and are unlikely to be alleviated in the future. Many renewables are simply not economically viable beyond their current capacity. The use of technologies that are not developed or that require significant changes in the way we build electricity systems over a longer time may force us to reduce the use of new technologies. But while they must continue to be considered as “green” (except for a limited degree of their use), they are certainly not always the means that cause the current problems we see of our energy systems. The cost of new technologies are too high and so are technical difficulties that are inherent in the current system and that can
t be overcome easily. The costs of reusing the old, inefficient and cost-consuming technologies (primarily hydro, gas and wind) are too high. We believe that this is because we are currently unable to develop, upgrade, upgrade and re-import those technologies that are the most economically feasible and are considered to be key to the future energy system. We also believe that new technologies are needed to address global warming and other challenges. (But we expect that our forecast will be much higher than those of recent forecasts and may be less likely to include changes to existing technologies.) We continue to rely on wind power because it is a good source of natural gas for our power generation and is cheaper than conventional power. But while there are some renewable sources that are as clean as the electricity that we power on, they are not the main source for the majority of the growth of our world’s energy production over the last 100 years. We believe that a more energy-efficient, higher efficient grid, including a smaller number of large megawatts, will make the transition more natural and safer. It is also likely that some of the technology available from these large solar arrays will be cheaper than they would be in a conventional grid, but that is one of the factors which has led to the current lack on solar generation. Although we expect our future forecast to grow rapidly, our forecast for the future and future of energy systems, that we believe is the most compelling historical forecast, is not as accurate as the forecast presented by the European Electricity Review published in May. Our forecast is only a snapshot and we believe that the long-term energy of our world is changing and we may find the time to change our forecast in greater detail in future editions of this report. All our forecasts for the energy needs of the future are based on the assumptions that we believe will be likely to have a significant impact on the economy and on energy investment. As we have discussed in our foreword and our next two post, although there are some fundamental assumptions that require our confidence we have not all
m that are proven. We cannot predict what will happen to the world’s energy future as a result of an adverse change in our forecast forecasts. We believe that we should not underestimate the long-term impact of technological changes, energy prices, price shocks, changes in social conditions, the climate, health, and political instability, some of which may or may not have the economic or political consequences we may foresee. One consequence of technological changes, the increasing cost of electricity, is that this will add to the cost of producing energy, not decrease it. Since the 1980s, an increasing cost of electricity has been the primary contributor to the increase in the energy demand. On the other hand, the continued cost of electricity by a significant minority of a nation is not of much practical importance to the economy. We find that only a very small percentage of the population has used electricity at a rate that will continue to increase over the long run to some extent. Although the energy costs of a number of countries are already increasing, the vast majority of them are expected to continue to be increasing at a slow or negative scale, depending upon a wide range of factors. As we make increasingly rapid efforts to reduce the cost of energy, we will be able to make progress toward reducing the amount of energy used annually, to a greater extent than ever before. Our forecast for the energy needs of the future does not accurately reflect the reality of increasing energy demands, which will certainly be an increasing burden. But even if our forecast could work out, our future forecast remains a significant contribution to this critical topic. While we believe that our forecast should provide much richer economic and political forecasts for most of the developed world, our assumptions do not include the significant number of countries that have been under the economic control of governments for many years or that can be easily found to be using much cheaper and more efficient energy to produce goods and services, or that are expected to use much or all of their renewable energy supply, or that are already used in many other areas than the developing world. We believe that under these conditions a long response to rising electricity costs in many countries may be necessary to achieve the continued level of growth and to maintain the global power system that has to be replaced by energy-efficient, high-efficiency grids. In those regions of the world with the lowest prices for electricity and relatively high costs of electricity supplied by fossil power or by wind and solar plants, in this country the majority of demand for electricity would come from the developed world. In this country we believe we have an optimistic forecast of about 18% higher renewables for our future energy future compared to the projections in the report. As we have shown in our next section, the future of the energy system depends on several important factors, not least the growth in the world’s energy supply, as measured by annual emissions, and the growth in the number of renewable
-useable renewable power sources as measured by market and national government expenditures. In this section we will evaluate the projections and explain how the growth in such a large system could affect the future energy systems of many developed nations.
2 The Future of the Energy System The increase in the number of renewables that are expected to be installed and the growth in the number of wind and solar plants are important factors in the direction we will move toward the use of clean energy. However, one of the key drivers is a declining trend in demand for electric power. While demand for electricity remains fairly stable because the transition to electric power generation from the current system in which we obtain electricity from other sources has been gradual, our analysis of current supply and demand will reveal that demand for this type of system now is expected to decline. If we expect a sharp increase in the demand for power from this type of system, we estimate that the average residential demand for electricity in the U.S. by 2020 would decline to around 3 to 4% of peak daily-use demand, while demand for electricity from the U.S. from other sources would jump by around 2.5%. But the peak consumption of electricity in the U.S. from all sources would still fall below average and would not add to the declines associated with the electricity mix in most of these major supply chains. Therefore, this future economic growth and increase in the U.S. energy system are essential to offset the costs of other energy sources, including hydrophone, nuclear reactors, utility-scale power plants, and other large grid operators. Other potential energy source costs such as a decrease in the capacity of nuclear power plants, a reduction in the amount of renewables that can be derived from their use, or a decrease in the availability of natural gas are those that will be greatest and most costly in the future. For this reason, we will estimate that we believe that we will need to reduce the rate of demand for electricity in the U.S. by at least 7% during the
2 to 8 months to reach those benefits. We believe that a $1.3 percentage-point increase in natural gas prices from 2014 onward will help offset some of these economic impacts, in particular the effects of reductions in the natural gas price and electricity demand. If we continue to add natural gas to the natural gas mix, most of these benefits will come at the price of increased demand for electricity. Moreover, if prices for fossil fuels are to reach their usual levels, we expect that the United States will only continue to use a low percentage of its gross domestic product, which has increased from 25% in the late 1970’s to as much as 30% by the late 1990s. The most obvious use of natural gas, about 25%, would be in energy generation and storage. We estimate that this use by 2020 will be 20% to 30% of this expected demand, which would provide us with the opportunity to use more efficient and efficient energy sources, such as wind, solar, and nuclear. As a result of these economic benefits, all of our estimates of future demand for electricity for that type of electricity generation, storage, and manufacturing will be conservative and uncertain. This is because of the uncertainty in our estimates of the future demand for electricity using various power sources, including electric grids, and the uncertainty related to supply and demand interactions in our models. If we continue to apply more optimistic assumptions, such as projected changes in the natural gas prices, we believe we will need to reduce demand for electricity by at least 15% or 25% in order to avoid potential disruptions to natural gas supply and demand in our electricity markets throughout the system. Finally, our study of existing plant and utility supply would not show that we are going to meet or exceed the rate of demand for electricity for these types of power plants, such as those in our study below. For this reason, we continue to believe that we will need to maintain or reduce the cost of nuclear reactor power plants, which are the most cost-effective and cost-effective facilities for our energy system. Because we do not expect nuclear and hydropower and wind and solar to meet our increased potential energy needs in the future, this study would be of higher importance, when compared with our other studies, in the future assessment of the future electricity needs of the U.S. nuclear power generation grid. If we continue our conservative assumptions, this study will have to estimate that the U.S. electricity demand for nuclear power should increase or decrease only under a 5% limit for electricity from current generating plants, which will be somewhat pessimistic. However, under a 35% increase for power from other sources, or a 10% increase for electricity from the end of the current generation grid, our study would be of greater benefit in terms of the future energy generation in the electricity mix than under a 10% limit. If we continue our conservative beliefs about nuclear power, we believe that the demand for nuclear power will continue to fall in the coming years. We consider this to be a relatively small role for the new generation of nuclear reactors that will be constructed in the United States through the early 1970’s and will be able
to help drive demand for those reactors for which we expect to be more cost-effective and more efficient. In addition, if we continue modestly to reduce our forecast for the availability of a significant amount of current electrical generation, this study will have to estimate that the current generation of the nuclear power generation system will continue to be affordable and affordable with the additional cost of nuclear energy that we believe will be offset by changes that we anticipate will be the major focus of current and future nuclear energy policy. The United States nuclear industry is, in general, a fairly well-off business. With some exceptions, some of the leading utilities and other large customers, such as the European Union, are on a tight financial footing. We are able to assess, based on our analysis of current energy demand in many different parts of the United States, our ability to meet our energy needs under current and future nuclear energy policies. We believe that a 10% increase in the capacity of our nuclear power system to meet our energy needs would be a modest economic benefit to the industry, but not a significant economic cost to the United States, compared with, say, $100 million for each additional megawatt-hour of current capacity. If we continue the conservative assumptions, our estimate of the total cost of nuclear modernization, the number of reactor reactors operating in the United States, and the amount of investment in nuclear power infrastructure in the United States could be substantially more accurate than these numbers. Our assumptions of future electricity demand under current and future nuclear power policies and other assumptions of our analysis of current production volumes in the United States would have to either reach their equilibrium levels and stay stable at between 1% and 5% below those expected in an economic model, or have to become too low.
The report makes substantial headway over that of other government reports, particularly the State Department’s Energy Economics Summary of FY 2008.
The report, “The Future of Nuclear Power,” uses a slightly different methodology. (Note: Our estimates of U.S. nuclear energy and its prospects through 2030 are based on the assumptions and results of our own analysis of data at the National Nuclear Security Administration, U.S. Energy Information Administration, and in our own assessment of market-based trends from 2010, compared with our assumptions of future production at each location. These projections would not significantly understate the actual production capacity of a current and future nuclear power plant.) However, we believe that those assumptions would be too conservative for U.S. nuclear industry to be included in a credible and comprehensive approach that is consistent with the U.S. government’s estimates. To be sure, we do not anticipate that the United States will meet our energy and the world’s population needs at full employment, if it continues to have a declining nuclear-powered population. However, we believe that a 10% increase in the capacity of our nuclear power system to meet our energy needs would be a modest economic benefit to the industry, and not a significant economic cost to the United States, compared with, say, $100 million for each additional megawatt-hour of current capacity.
In both cases, future production, as determined by the U.S. Energy Information Administration, will be provided in ways consistent with the administration projections of 2010, and the assumptions we have made to justify such production would be more correct and consistent with the assumptions to be included in our analysis of the U.S. demand for electricity in our calculations under current and future nuclear energy policies.
Based on our study of current and future nuclear nuclear power systems and estimates of available power generation, we believe that the capacity of our proposed nuclear power systems has the potential to continue to increase rapidly under all the different possible assumptions for our future nuclear policy. Based on our analyses of our U.S. reactor market and estimates of future nuclear power capacity, we believe that our projected future electricity demand through 2050 will increase steadily and will be based on consistent assumptions. We will make significant progress on the long-term development of the proposed nuclear power units. We expect the potential new technology of the coming nuclear plant should be highly integrated with our existing power generation portfolio, and our estimates of current and future generation could be based on those same findings without affecting our ability to meet the projected electricity demand. Under our estimates of the potential new technologies for each of the reactors in the proposed project, we expect those to be delivered in stages, depending on the estimated cost and capacity of the existing plants. Based on our estimates of the potential new technologies in each scenario, we expect significant growth in the projected supply and demand trends from that scenario (see “Conference Call” for discussion of the proposed future supply and demand trends), and there will be substantial growth in the additional capacity of our proposed nuclear power units for the power needs of our future plants.
Our calculations of the U.S. nuclear industry’s operating future and the projected supply needs of our