Strategic Assessment of Renewable Energy in Northeastern Wisconsin

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1 energy center Report Summary 206-R Strategic Assessment of Renewable Energy in Northeastern Wisconsin An analysis for the Wisconsin Focus on Energy program June 2001 ENERGY CENTER OF WISCONSIN

2 Report Summary 206-R Strategic Assessment of Renewable Energy in Northeastern Wisconsin An analsyis for the Wisconsin Focus on Energy program June 2001 Dr. Richard Shaten Primary Investigator Internal Energy LLC Prepared by Professor Erhard Joeres Principal Investigator Institute for Environmental Studies University of Wisconsin-Madison Cristian Nunez-Pacheco Graduate Project Assistant Energy Analysis and Policy program University of Wisconsin-Madison Prepared for 595 Science Drive Madison, WI Phone: Fax:

3 Copyright 2001 Energy Center of Wisconsin All rights reserved This report was prepared as an account of work sponsored by the Energy Center of Wisconsin (ECW). Neither ECW, participants in ECW, the organization(s) listed herein, nor any person on behalf of any of the organizations mentioned herein: (a) makes any warranty, expressed or implied, with respect to the use of any information, apparatus, method, or process disclosed in this report or that such use may not infringe privately owned rights; or (b) assumes any liability with respect to the use of, or damages resulting from the use of, any information, apparatus, method, or process disclosed in this report. Project Manager Craig Schepp Energy Center of Wisconsin Acknowledgement This report is funded by the Wisconsin Department of Administration, Division of Energy. To Get the Full Report The full report, Renewable Energy Strategic Assessment, is available from the Energy Center library. Contact x134,

4 Contents Highlights...1 Report Summary...3 General Assumptions...3 Future Fossil Fuel Prices and Impacts...4 Modeling Assumptions for Fossil Fuels...4 Carbon Tax Scenarios...4 Renewable Energy Scenarios...7 Results...8 Conclusions...10 Policy Discussion...11 Suppliers and Demanders of Energy Products and Services...11 Public Sector Energy Purchasers and Policy Makers...11 Renewable Energy Advocates...12 Reference...12 Tables and Figures Table 1 Cost of electricity from fossil fuel under different carbon tax scenarios...6 Table 2 Availability and cost of electricity from renewable energy resources...7 Table 3 Availability and cost of transportation fuel from renewable energy resources...8 Figure 1 Energy resource flow chart...4 Figure 2 Fossil fuel energy displaced with no carbon tax...9 Figure 3 Fossil fuel energy displaced with medium carbon tax...10

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6 Highlights This executive summary presents the conclusions of a full report, Renewable Energy Strategic Assessment, which estimates the amount of fossil fuel potentially displaced by renewable energy in the Wisconsin Public Service Corporation 23-county Wisconsin Focus on Energy area over the next 30 years. The full report (ECW Publication number 206-1) is available by contacting the ECW library (call ext. 134). Here, least cost and availability are the only criteria that renewables must meet to displace fossil fuel technology. We assume competitive markets. The renewable technologies considered include wind turbines, active and passive solar technologies, and gaseous or distilled fuels from dedicated energy crops and organic waste materials. An economic model compares the price trajectories of the renewable options to coal, natural gas and petroleum across electricity, transportation and thermal energy markets. Expansions of hydroelectricity and nuclear power are excluded from this study. Renewable Energy Market Potential Our analysis shows the following major findings: Even under high fossil fuel inflation rates, without a carbon tax only the daylighting and waste-to-energy options are less expensive than fossil-based electricity before year A $140 per ton carbon tax would drive the price of fossil-based electricity high enough that renewable electricity could provide all new capacity needs at lower cost by Passive solar technologies can displace 500 MW of peak electricity. Commercial daylighting currently costs less than $0.02/kWh for new construction. Rooftop collectors can gather domestic solar hot water on existing structures, but is only affordable at real fossil fuel inflation rates greater than 4% (see Chapter 7 of full report). Solar-PV is less expensive than fossil-based electricity under high fossil fuel inflation coupled with a carbon tax. However, wind satisfies the entire electricity market at lower cost so solar-pv never penetrates the electricity market. Waste streams currently produce 200 MW of electric power in the Focus counties and could be expanded to as much as 400 MW at prices below $.04/kWh. Wood residues and refuse-derived fuel (RDF) can be burned directly to generate electricity. Other sources of combustion include biogas from landfills, wastewater treatment plants, and animal manure. 4,000 MW of electricity could be provided by wind turbines at less than $.04/kWh at the busbar (where the electricity comes directly out of the power plant), enough power to provide all additional and replacement capacity in the Focus counties. Without a carbon tax, however, electricity from fossil fuels is less expensive than wind through year 2025, even if natural gas prices were to double. Under a $140 per ton carbon tax, wind is less expensive than all new fossil-based capacity by

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8 Report Summary Annual energy consumption in the 23-county Focus area is 250 trillion BTU. Almost 90% of this energy is provided by fossil fuels imported from outside of the state. More than $2 billion in energy purchases leaves the local economy. Reliance on energy imports also increases the financial risks caused by supply interruptions and unexpected inflation in energy bills. Residents also bear the costs of the environmental impacts from fossil fuels. Renewable energy offers a cleaner alternative to imported fossil fuels. Wind, sun, energy crops and biological wastes can be utilized to reduce dependence on fossil fuels. Locally produced renewable energy provides economic opportunities for industry and agriculture. As energy dollars are cycled through the local economy they enhance the local tax base. Renewable energy provides insurance against potential fossil fuel inflation and the financial risk of environmental taxes while providing energy security. Currently, low cost waste-to-energy and daylighting technologies yield the equivalent of about 10 trillion BTU of renewable electricity in the Focus area. After adjusting for the difference in average efficiency of renewable and fossil-based electricity generation, this renewable electricity displaces as much as 20 trillion BTU of primary fossil fuels. General Assumptions Tomorrow s competitive energy market must account for interweaving vectors connecting production resources and potential consumer end uses. Figure 1 displays three end-use markets: electricity, transportation and thermal. The primary fuels competing for these markets are categorized as either fossil or renewable. Renewable energy may enter the markets by displacing electricity demand (e.g., daylighting), directly replacing conventional electricity (e.g., wind or photovoltaics), or providing an alternative thermal resource for electricity generation or transportation (e.g., the direct burning of biomass or fluids derived from biomass). Renewable energy prices are compared to fossil fuel prices at the end-use market, thus bypassing thermal market price comparisons (see Chapter 11 of the full report). Mass production and technological progress will continue to reduce the costs of renewable energy. In this study, for any one energy use (electricity, transportation, thermal) total renewable penetration cannot exceed the actual demand in the Focus area. The following values are extrapolations of the maximum actual demand in the Focus area: Electricity Baseload: 5,000 Mw Peaking: 240 Mw Transportation energy: 100 trillion BTU Thermal energy (all sectors): 100 trillion BTU 3

9 R e n e w a b l e E n e r g y S t r a t e g i c A s s e s s m e n t Figure 1. Energy resource flow chart Fossil Fuels Utilization markets Renewable Resources Petroleum Natural Gas Coal Transportation Hydrogen * Electricity Thermal uses Biomass (crops/waste) Sun Wind * Hydrogen may one day serve as an energy storage medium for off-peak electricity or for intermittent renewable resources like the sun and wind. A fuel cell produces electricity from the combination of hydrogen and oxygen; water vapor is the only byproduct. Electric vehicles and other mechanical devices can be powered with the electricity produced from fuel cells fed by hydrogen. Future Fossil Fuel Prices and Impacts Modeling Assumptions for Fossil Fuels 1. Busbar (where the electricity comes directly out of the power plant) prices over 30 years are calculated for renewable electricity. Uncertainty in prices and efficiency are estimated in Monte Carlo simulations for each renewable option 2. Technological change will increase efficiency of fossil fuel conversion. 3. Market pressures may lead to higher prices of fossil fuels. Fossil fuel price trajectories are calculated for real annual energy inflation rates from -1% to 5% Concern over environmental risks may result in a variety of taxes or incentives favoring different energy resources. Carbon Tax Scenarios Uncertainty about the ultimate U.S. ratification of the Kyoto agreements on global warming and implementation of policies for reducing greenhouse gas emissions presents financial risk to producers and consumers. U.S. DOE analysts have calculated carbon tax levels based on the estimated equilibrium price of a traded carbon credit: 1 Future fossil fuel prices are uncertain. "Real fossil fuel inflation rate" (rffir) refers to the increase in fossil fuel prices above and beyond whatever the actual rate of inflation might be in the general economy. The rffir is presented as an independent variable producing a range of fuel price trajectories. Renewable energy is compared to petroleum and natural gas prices under a real inflation range from 1% to 5%. The real price of coal is assumed to be constant over time because of vast domestic supplies. 4

10 R e p o r t S u m m a r y 1. No carbon tax 2. Carbon credit trading confined to domestic $140/ton 3. International carbon credit $250/ton This study presents the rffir price trajectories at five-year intervals through year The least expensive base-load busbar cost of fossil-based electricity is reported in cents per kwh for each of the three carbon tax scenarios. Note that an equivalent amount of thermal energy from coal produces slightly more than double the carbon dioxide as natural gas. Also, differences in power plant efficiency augment the carbon tax penalty against coal. 2 A carbon tax on fossil fuels is chosen as a proxy for the entire range of environmental policies that may affect fossil fuel prices. The U.S. Department of Energy has identified a range of carbon taxes representing the price of a traded carbon credit resulting from various strategies for meeting greenhouse gas emissions levels set by the proposed 1997 Kyoto protocol. Price trajectories are calculated for no carbon tax, $140 per ton and $250 per ton. 2 National averages: 209 tons of carbon dioxide per million BTU of coal burned; 117 tons of carbon dioxide per million BTU of natural gas burned. From State Workbook: Methodologies for Estimating Greenhouse Gas Emissions. Second Edition: Office of Policy, Planning and Evaluation. U.S. Environmental Protection Agency, Washington, D.C

11 R e n e w a b l e E n e r g y S t r a t e g i c A s s e s s m e n t Table 1. Cost of electricity from fossil fuel under different carbon tax scenarios No carbon tax 1 Cost in Year (cents per kwh) Rffir % % % % $140/ton tax Cost in Year (cents per kwh) Rffir % % % % $250/ton tax Cost in Year (cents per kwh) Rffir % % % % With no carbon tax electricity prices are constant with respect to rffir because coal prices are assumed to be constant, always yielding electricity less expensive than natural gas. See Chapter 2 of the full report. 2 Real fossil fuel inflation rate (rffr), which refers to the increase in fossil fuel prices. 6

12 R e p o r t S u m m a r y Renewable Energy Scenarios Estimates for efficiency gains and capital cost reduction resulting from technological advances in renewable energy conversion and utilization vary widely. The cost of producing renewable energy depends on land values and the availability of essential resources. For instance, energy crop prices are related to prices in other agricultural markets. In addition, the federal government provides some incentives for renewable energy. Also, consumers have demonstrated a willingness to pay a premium for green power (see chapter 12 of the full report). Monte Carlo simulations were used to estimate future costs in the factors of production utilized in production of renewable resources. These cost estimates are itemized and substantiated in the full report. Maximum availability for each renewable option is reported in column two. The full report documents the methodology and data used to compute these estimates. Table 2 summarizes the baseload-busbar cost, in cents per kwh, of the renewable electricity options reviewed in this study. Table 3 summarizes the on-site cost, in dollars per million BTU, of producing transportation fuel from various renewable options. Table 2. Availability and cost of electricity from renewable energy resources Cost in Year (cents per kwh) Renewable electricity resource Available capacity (MW ) Daylighting Land/water gas Wood residues Manure gas Wind (class 3) 3, Refuse derived fuel (RDF) Switchgrass* 1, Wind (class 2) 5, Solar-pv 300, * Switch grass is listed instead of corn because it yields ethanol at a lower cost. 7

13 R e n e w a b l e E n e r g y S t r a t e g i c A s s e s s m e n t Table 3. Availability and cost of transportation fuel from renewable energy resources Cost in Year (dollars per MMBTU) Renewable transportation fuel Availability (MMBTU 1 ) Wood residue 5,600, Whey & pulp 2,000, Swichgrass 2 8,000, Biodiesel-soy 12,450, PV-hydrogen unlimited MMBTU = million british thermal units 2 Switch grass is listed instead of corn because it yields ethanol at a lower cost. Results This study considers competitive price as the only criterion for market penetration. Even under high fossil fuel inflation rates, without a carbon tax only the daylighting and waste-to-energy options are less expensive than fossilbased electricity before year 2030 (Figure 2). These resources can displace less than 20% of the Focus area s electric capacity. None of the renewable transportation options are less expensive than petroleum without a carbon tax. 8

14 R e p o r t S u m m a r y Figure 2. Fossil fuel energy displaced with no carbon tax (millions of BTUs) Fossil Fuel Energy Displaced (No Carbon Tax) 350,000, ,000, ,000, ,000, ,000,000 MMBTU 200,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000,000 50,000, rffir years 100,000, ,000,000 50,000, ,000, ,000,000 Rffr = Real fossil fuel inflation rate, which refers to the increase in fossil fuel prices. A $140 per ton carbon tax would drive the price of fossil-based electricity high enough that renewable electricity could provide all new capacity needs at lower cost by 2010, even with no real fossil fuel inflation (Figure 3). Including transportation fuels from energy crops, as much as 300 trillion BTU of fossil fuel could be displaced by renewable energy. 9

15 R e n e w a b l e E n e r g y S t r a t e g i c A s s e s s m e n t Figure 3. Fossil fuel energy displaced with medium carbon tax (millions of BTUs) Fossil Fuel Energy Displaced (Medium Carbon Tax) MMBTU 350,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000, ,000,000 50,000, ,000, ,000,000 50,000, rffir years Rffr = Real fossil fuel inflation rate, which refers to the increase in fossil fuel prices. Conclusions 1. Renewable penetration potentials are driven primarily by economic policies that place taxes on fossil fuels or provide incentives for renewable resources. A carbon tax has been utilized as a proxy for the entire range of policies representing public concern over environmental impact. The carbon tax is a logical choice because of the specific environmental targets enunciated by the Kyoto proposal. The three carbon tax scenarios model the uncertainty surrounding U.S. acceptance and implementation of these agreements. 2. For the next 25 years, electricity and transportation energy from renewable resources will remain more expensive than fossil fuels unless the U.S. Congress enacts a new tax on fossil fuels or significant expansion of the economic incentives supporting renewable energy. 3. Under the moderate carbon tax level of $140 per ton, electricity from renewable energy would be less expensive than fossil-based electricity by All replacement or additional electric capacity could be provided by renewable resources at lower cost than fossil-based electricity. The total amount of renewable energy costing less than fossil fuels approaches 100 trillion BTU by year Almost 90% of this penetration is in electricity from wind. 10

16 R e p o r t S u m m a r y 4. Real annual fossil fuel inflation below 3% has little impact on the aggregate penetration of renewable energy. Electricity from solar-pv would become less expensive than fossil-based electricity under high fossil fuel inflation rates coupled with a carbon tax. However, cheaper electricity generated from widely available class-2 wind sites will always block solar-pv from penetrating the electricity market in the Focus county. Policy Discussion The quantitative output from this study is an inventory of the 30-year forecast market potential of renewable energy options that would be less expensive than fossil fuels under different economic scenarios. We conclude that the single most important variable affecting this trajectory is the possible imposition of a carbon tax on fossil fuels. With no carbon tax and moderate inflation in fossil fuels, of those renewable options evaluated only daylighting and waste-to-energy are less expensive than fossil-based electricity. Under the lower $140 per ton carbon tax the busbar cost of electricity from wind is lower than the busbar cost of electricity from coal or natural gas. This is true even if the real price of coal and natural gas does not increase. Major stakeholders in the energy markets may interpret these economic results and the associated policy implications in different ways. Three stakeholder groups have been identified and policy recommendations for each are enunciated. Suppliers and Demanders of Energy Products and Services The markets for energy products are likely to become less regulated and more competitive over the next few decades. Participants in energy markets must consider the financial risks from overreliance on fossil fuels. Potential environmental taxes and fossil fuel inflation present real financial risks. Serious consideration of these economic risks would result in earlier and larger investments in renewable energy options. Even if the short term price of wind electricity is slightly higher than electricity from fossil fuels, after comparative economic risks are considered, wind may become the chosen option. Public Sector Energy Purchasers and Policy Makers State and local governments spend tax dollars on energy products and services. Public agencies need to consider the economic risks discussed above, since taxpayers and voters demand fiscal responsibility. The actual costs of energy could be lower over time if a diversified public energy portfolio includes lower risk renewable options. Energy purchases and consumption have a direct impact on other public expenditures. Local production of renewable energy provides jobs and expands the local tax base, so the flow of energy dollars away from the Focus counties represents a loss in economic opportunity. Environmental impacts caused by fossil fuels lead to losses in agricultural productivity, pollution clean-up costs and increased expenditures on public health. These costs emerge as higher insurance premiums and higher taxes. A tax on fossil fuels stimulating renewable energy development could actually decrease total costs to taxpayers. The least-cost renewable options vary across regions of our nation and within regions of Wisconsin. Effective energy policy requires planning on the regional level and this study should be expanded to include an inventory of 11

17 R e n e w a b l e E n e r g y S t r a t e g i c A s s e s s m e n t the economically available renewable energy resources for all of Wisconsin. Eventually, Wisconsin would be well served by a regional renewable energy strategic plan, which would be a piece of a national strategic plan. Renewable Energy Advocates There are a significant number of stakeholders in Wisconsin who support a political agenda promoting a transition to renewable energy. Renewable advocates can advance their position by supporting the preceding recommendations made to the private and public purchasers of energy. Consumer education is vital to political success. Energy professionals should be challenged to engage in long term economic planning and to consider the economic risks of fossil fuel inflation and potential environmental taxes. Taxpayers must be made aware of the complete economic costs of fossil fuel utilization and encouraged to support legislation shifting environmental costs directly to the fossil fuels generating these expenses. Public officials should be challenged to adopt holistic economic analyses, so that the total cost of all public expenditures are evaluated as a complete system. Site-specific renewable options should be promoted. This study identifies the renewable options most likely to penetrate energy markets in the Focus counties. The study should be expanded to all of Wisconsin. Regional strategic plans may eventually lead to national and global assessments of the most efficient use of the planet s energy resources. Reference The full report, Renewable Energy Strategic Assessment (ECW Publication number 206-1), is available by contacting the ECW library (call ext. 134). 12

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19 ENERGY CENTER OF WISCONSIN 595 Science Drive Madison, WI Phone: (608) Fax: (608) Printed on Plainfield Plus, a recycled chlorine-free stock containing 20% post-consumer waste.