BHI Policy StudyThe Economic Impact of NorthCarolina’s Renewable Energyand Energy Efficiency PortfolioStandardDavid G. Tuerck, Ph.D.Michael Head, MSEPPaul Bachman, MSIETHE BEACON HILL INSTITUTE AT SUFFOLK UNIVERSITY8 Ashburton PlaceBoston, MA 02108Tel: 617-573-8750, Fax: 617-994-4279Email bhi@beaconhill.org, Web www.beaconhill.orgAUGUST 2009Table of ContentsExecutive Summary ...................................................................................................... 1Introduction................................................................................................................... 4North Carolina-STAMP........................................................................................... 6BHI Estimates and Results ........................................................................................... 7SB 3 under the Cost Recovery Caps ............................................................................ 7SB 3 without the Cost Recovery Caps ......................................................................... 9Conclusion ................................................................................................................... 12Appendix A: Calculating the Net Costs of SB 3........................................................ 13Calculation of Costs and Benefits of Energy Efficiency Programs ............................. 13Calculation of the Net Cost of New Renewable Electricity ........................................ 17Modeling the REPS using STAMP............................................................................ 19The Beacon Hill Institute North Carolina-STAMP Development Team ..................... 20Table of TablesTable 1: Aggregate Net Costs of SB 3 with and without Cost Recovery CAPS ............... 2Table 2: BHI Estimates for SB 3 (NPV, 2009 $).............................................................. 3Table 3: Utility Annual Cost Recovery Fee (per customer).............................................. 5Table 4: Sum of Cost Recovery Fees (millions of current $)............................................ 8Table 5: BHI Estimates of Economic Impacts of SB 3 with Caps (NPV 2009 $).............. 9Table 6: Utility Costs of SB 3 (millions of current $)..................................................... 10Table 7: BHI Estimates of Economic Impacts of SB 3 without Caps (NPV, 2009 $)...... 10Table 8: Calculations of Cost and Benefits of Energy Efficiency Programs ($)............. 16Table 9: Total and Renewable Electricity Generation under REPS ................................ 17Table 10: Costs of New Renewable Capacity (2007$/KWh).......................................... 18Executive SummaryIn 2007, North Carolina passed Senate Bill 3 (SB 3) that established a state Renewable andEnergy Efficiency Portfolio Standard (REPS).The REPS mandates that a percentage ofelectricity generated be derived from new renewable resources. Renewable resources includeenergy from solar, wind, and biomass. Hydroelectric facilities under 10-megawatt (MW) also areincluded. However, municipal electric power companies are exempt from the 10 MW ceiling onhydropower.Specifically, SB 3 requires that all of North Carolina’s public electric utilities increase thepercentage of electricity generated from new renewable energy sources. The REPS will be phasedin over time. SB 3 mandates that the REPS account for 3 percent of state retail electricity salesby 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 newrenewable sources as outlined above. Utilities can also meet a portion of the RPS through theEnergy Efficiency Portfolio Standard. Prior to 2021, utilities can meet 25 percent of the RPSrequirement 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 bypurchasing renewable energy certificates (RECs). RECs are tradable and designed to enableinvestment in renewable energy facilities outside North Carolina. Thus, certificates can bepurchased from in state or out-of-state renewable energy facilities.In the case of utilities purchasing out-of-state RECs, the electricity will not likely be consumed inNorth Carolina. Under this scenario, North Carolina electricity consumers would be subsidizingthe development of renewable energy in other states through the cost recovery mechanisms of SB3 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 electricitysources and up to $1 million in alternative energy research expenditures. The fees escalate withthe REPS requirements, but at modest levels.SB 3 also phases out the current sales tax levied on energy sales to farmers, manufacturers andlaundry service companies for electricity, piped natural gas and other fuels. By cutting thesetaxes, the state stands to lose revenue. According to the General Assembly’s Legislative FiscalNote, the state will lose approximately $20 million in FY09, $30 million in FY10, $45 million inFY11 and $44.7 million in FY12.1Since renewable energy generally costs more than conventional energy, many have voicedconcerns about higher electric rates. Moreover, since North Carolina has a limited ability togenerate renewable energy, the state will start from a low power generation base. In addition,some renewable energy sources - wind and solar power in particular - require the installation ofconventional backup generation capacity for those cloudy, windless days. The need for thisbackup further boosts the cost of renewable energy.The Beacon Hill Institute at Suffolk University (BHI) — in conjunction with the John LockeFoundation — has set out to estimate the costs and benefits of SB 3 and its impact on the state’seconomy. To that end, BHI applied its STAMP® (State Tax Analysis Modeling Program) forNorth Carolina (NC-STAMP), which allowed us to estimate the economic effects of the stateREPS mandate.2BHI 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 reachedeach year. The second estimates the cost to consumers and businesses were the cost recoverycaps 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 CapsWithout Cost Recovery Caps2008-2011$200.83$1,759.772012-2014$195.55$1,870.772015-2021$1,448.18$831.97Total$1,844.55$4,462.51In the aggregate, the state’s electricity consumers will pay $1.845 billion in cost recovery feesbetween 2008 and 2021, which will be added directly to their utility bills. In contrast, if the costrecovery caps were not in place, the REPS would cost North Carolinians $4.463 billion.1General Assembly of North Carolina, Session 2007, Legislative Fiscal Note.http://www.ncga.state.nc.us/Sessions/2007/FiscalNotes/Senate/PDF/SFN0003v4.pdf (accessed May 2008).2Detailed information about the South Carolina -STAMP® model can be found in Appendix A.The Economics of Senate Bill 3 in North Carolina/ August 20092Table 2 presents our estimates of the economic and fiscal effects of the state REPS in 2009 NetPresent Value (NPV) dollars with the cost recovery fee caps in the top half of the table and theno-caps scenario in the bottom half.With the caps in place, North Carolina will lose 3,592 jobs, investment will decrease by $43.20million and real disposable income will fall by $56.80 million by 2021. As a result, the stateeconomic output measured in real state Gross Domestic Product (GDP) will be $140.35 millionlower than without the mandate. The lower economic output will cause state and local taxrevenue collections to fall by $43.49 million including the losses caused by sales tax cuts outlinedin SB 3.Table 2: BHI Estimates for SB 3 (NPV, 2009 $)YearEmployment(Jobs)With Caps2010201220142021Without Caps2010201220142021Investment($millions)Real DisposableIncome($ millions)Real State GDP($ millions)State and localRevenues($ millions)(1,046)(3,078)(3,275)(3,592)(22.94)(38.61)(37.24)(43.20)(8.23)(49.36)(44.09)(56.80)(90.21)(134.65)(116.07)(140.35)(35.12)(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 greatereconomic losses. By 2021, the state would shed more than 15,373 jobs; and would lose $182.61million in investment and $271.15 million in real disposable income. In terms of real state GDP,the economy would be $606.65 million smaller. The negative economic effects would spill overinto 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 20093IntroductionThe debate concerning the environmental and economic impacts of global climate change hasintensified in recent years. Combined with fluctuations in fossil fuel prices, this interest hasencouraged many state governments to respond with public policy initiatives designed to addressclimate-related issues and 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 andEnergy Efficiency Portfolio Standard (REPS). The REPS mandates that a certain percentage ofelectricity generated be derived from new renewable sources.The REPS aims to diversifyenergy sources, encourage investment in renewable energy, and improve air quality. AlthoughCongress has contemplated imposing a national REPS, only state or local governments haveforged ahead in passing legislation they hope will quickly address climate change.Specifically, SB 3 requires that all public electric utilities that provide electric services tocustomers in North Carolina increase the amount of their electricity generated from newrenewable energy sources. The REPS requirement in SB 3 will be phased in over time.Forexample, electricity generated from new renewable energy sources must be equivalent to 3percent of retail sales by 2012, 6 percent of sales by 2016, 10 percent of sales by 2018 and by2021 and thereafter 12.5 percent of sales (10 percent for municipal owned and electricmembership 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 electricitythrough new renewable sources.2. The remaining 5 percent will come from reduced electricity usage – due toenergy efficiency measures.The North Carolina Utilities Commission hired consultants from LaCapra Associates to reviewthe potential costs and benefits of imposing an RPS in North Carolina. Key results from thestudy concluded that NC should have “sufficient renewable resources within the State to meet aThe Economics of Senate Bill 3 in North Carolina/ August 200945% RPS requirement”.3 However, the report goes on to state that North Carolina could expect toexperience difficulties, such as an increase in average retail electricity rates in attempting to meeta more aggressive RPS.Utility companies have the opportunity to meet the requirement by generating electric powerusing renewable energy resources. The bill also allows utility companies to meet part of therenewable requirement by purchasing Renewable Energy Certificates (RECs). Certificates can bepurchased from in-state or out-of-state renewable energy facilities. Therefore, the purchase of anout-of-state certificate acts as an investment in that out-of-state’s renewable energy portfolio, andmay never be sold within North Carolina.Utilities may recover the incremental cost of renewable resources and up to $1 million annuallyin alternative energy research expenditures from customers. The cost per customer account iscapped according to the following schedule in Table 3.Table 3: Utility Annual Cost Recovery Fee ($ per customer)SectorResidentialCommercialIndustrial2008$10$50$5002012$12$150$1,0002015$34$150$1,000SB 3 also phases out the current sales tax paid by farmers and manufacturers for electricity, pipednatural gas and other fuels. Specifically, Section 10 incrementally decreases the tax rate paid byfarms and manufacturing industries until it is eliminated. These sales tax rates will reduce to 1.4percent effective July 1, 2008, to 0.8 percent effective July 1, 2009 and to zero on July 1, 2010.Section 10 also reduces the sales tax rate to 2.85 percent for sales of electricity to commerciallaundry or pressing and dry cleaning establishments. Section 11 phases out the excise taximposed on piped natural gas used by manufacturers and farmers, while Section 12 phases out theprivilege tax paid on their purchases of manufactured fuel.Both taxes will be completelyrepealed by July 2010.3LaCapra Associates, Analysis of a Renewable Portfolio Standard for the State of North Carolina(December, 2006): ii, http://www.ncuc.commerce.state.nc.us/reps/NCRPSReport12-06.pdf,(accessed April 17, 2008).The Economics of Senate Bill 3 in North Carolina/ August 20095The state stands to lose revenue by cutting these taxes. According to the Legislative Fiscal Note,the state and local governments will lose approximately $23.8 million in FY 08-09, $35.4 millionin FY 09-10, $52.6 million in FY 10-11 and $51.7 million in FY 11-12.4Many parties have voiced concerns that requiring a certain level of renewable energy generationwould have too great an impact on electric rates, as renewable generation costs more thanconventional generation. The LaCapra report conclusions support their concerns. The BeaconHill Institute, in conjunction with the John Locke Foundation, estimated the costs and benefits ofSB 3 and the economic impact of the legislation on the state economy.North Carolina-STAMPBHI has developed a Computable General Equilibrium (CGE) model for North Carolina. Thepurpose of the model, called NC-STAMP (North Carolina State Tax Analysis Modeling Program)is to identify the economic effects of a variety of state policy changes.NC-STAMP is a five-year dynamic CGE model that has been programmed to simulate changes intaxes, prices (general and sector specific) and other economic inputs. As such, it provides amathematical description of the economic relationships among producers, households,governments and the rest of the world. It is general in the sense that it takes into account all theimportant markets and flows. It is an equilibrium model because it assumes that demand equalssupply in every market (goods and services, labor and capital). This is achieved by allowingprices to adjust within the model. It is computable because it can be used to generate numericsolutions to concrete policy and tax changes, with the help of a computer.54Legislative Fiscal Note.For a clear introduction to CGE tax models, see John B. Shoven and John Whalley, “Applied GeneralEquilibrium Models of Taxation and International Trade: An Introduction and Survey,” Journal ofEconomic Literature 22 (September, 1984), 1008. Shoven and Whalley have also written a useful book onthe practice of CGE modeling entitled Applying General Equilibrium (Cambridge: Cambridge UniversityPress, 1992).5The Economics of Senate Bill 3 in North Carolina/ August 20096BHI Estimates and ResultsThe RPS mandates that at least 7.5 percent of electricity generated must be derived fromrenewable sources. By mandating the use of renewable sources of electricity, the state isessentially compelling the sale and use of more expensive electricity at higher prices relative toconventional energy. As noted above, SB 3 allows North Carolina energy companies to pass onto customers the higher energy costs, subject to a cap. BHI used the NC-STAMP model tomeasure the changes to the North Carolina economy that will take place as a result of SB 3. Eachestimate 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 companies complywith SB 3 up to the level of the caps outlined in Table 2. The second assumes there are no capsand that the utilities could pass on the entire cost increase onto their customers. The appendixprovides detailed explanations of our methodology.SB 3 under the Cost Recovery CapsBHI assumes that North Carolina’s electric utilities will incur costs that meet the cost recoverycaps under the REPS. The caps will prevent retail electricity prices from rising above thespecified range, and thus the average retail electricity price in North Carolina will increase up tothe cap limit. The price increase will leave consumers with less money to allocate to otherexpenditures 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 estimatethat the utilities will be able to pass the increased costs to consumers by raising prices up to theproposed caps.6 We projected the number of customers in North Carolina for each year from2008 through 2021 using the average compound growth rate from 1990 to 2007 in each category.6U.S. Department of Energy, Energy Information Agency, Electricity, Electric Annual Data Tables,Number of Retail Customers by State by Sector, 1990-2007, Internet, available athttp://www.eia.doe.gov/cneaf/electricity/epa/epa_sprdshts.html,accessed April 15, 2009.The Economics of Senate Bill 3 in North Carolina/ August 20097We 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 billiondollars - the vast majority of the fees. Commercial and industrial electricity customers will pay$255 million in cost recovery fees. In total, North Carolina’s electricity consumers will pay$1.845 billion in cost recovery fees.Table 4: Sum of Cost Recovery Fees (millions of current $)SectorResidentialCommercialIndustrialTotal2008-2011$173.11$27.28$0.44$200.832012-2014$168.56$26.56$0 .43$195.552015-2021$1,248.32$196.71$3.15$1,448.18Total$1,589.99$250.55$4.01$1,844.55SB 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 higherenergy prices will have on these industries. Prior to 2015, revenue reductions from the tax cuts,estimated in the Fiscal Notes, matches the recovery fees for the industrial and commercial sectorslisted on the middle two rows in Table 4. However, starting in 2015 the recovery fees dwarf thetax cuts, providing inadequate relief to these industries thereafter.Moreover, SB 3 does not offer residential and other commercial consumers any relief from higherelectricity prices other than the caps. This omission could add over $1.5 billion to the electricitybills of North Carolina residents and up to $250 million for commercial electricity ratepayers thatdo not qualify for the tax cuts.Table 5 displays our estimates of the economic impact of SB 3. The simulation indicates that SB3 will harm the North Carolina economy. The state will shed 1,046 jobs in 2010, with lossesincreasing to 3,592 jobs by 2021. North Carolinians will face higher utility prices which willincrease their cost of living, which will in turn put downward pressure on households’ disposableincome. This combination of higher energy prices and lower employment will reduce incomes inNorth Carolina. Real disposable 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 20098Table 5: BHI Estimates of Economic Impacts of SB 3 with Caps (NPV 2009 $)2010201220142021Total Employment (Jobs)(1,046)(3,078)(38.61)(3,275)(37.24)(3,592)Investment ($ 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)(35.12)State and local Revenues ($ millions)(43.20)(56.80)(140.35)(43.49)The higher cost of energy will hurt firms’ profit margins, causing them to reduce investment inNorth Carolina. We estimate that investment in North Carolina will drop by $22.94 million in2010 and $43.20 million in 2021. The combination of lower investment, employment andincomes will shave $90.21 million off of real GDP in North Carolina by 2010 and $140.35million by 2021.State and local government revenues will suffer due to the negative economic impact of the SB 3mandates. As a result, tax revenue will decrease by $35.12 million in 2010 and $43.49 million in2021. State and local governments will face the same higher electricity prices as consumers andbusinesses, which will further strain their budgets.SB 3 without the Cost Recovery CapsOne could argue that the recovery caps contained in SB 3 artificially hold the additional cost ofrenewable electricity down and that the true cost of meeting the REPS is significantly higher thanthe caps. The recent experience of Progress Energy provides a telling example. The companyreviewed over 100 proposals to produce electricity from renewable sources in order to begincomplying with the REPS. The cost estimates contained in the proposals were four times higherthan company officials expected.Progress Energy CEO Bill Johnson told the News andObserver, “We actually doubt we can get 7.5 percent within the price cap. You’ll get to the pricecaps in a couple of years.”7BHI estimated the cost of building new renewable electricity facilities in North Carolina to meetthe requirement of SB 3. Table 6 contains the results. New renewable electricity facilities incur7John Murawski, The News & Observer, “Energy Targets Out of Reach: Utility says clean electricity willcost far too much”, Internet, available at http://www.newsobserver.com/business/story/1435874.html,accessed on April 15, 2009.The Economics of Senate Bill 3 in North Carolina/ August 20099costs that include construction, or capital costs, fixed and variable costs for operations andmaintenance and fuel costs, in the case of biomass and waste resource facilities. The cost ofbuilding new renewable facilities will be the largest cost to comply with the REPS, which weestimate to be $5.878 billion from 2009 to 2021. Operating and maintenance and fuels cost willadd an additional $170.45 million to the price.Balanced against the costs of the new renewable electricity generation facilities are savings fromavoiding the construction of new conventional electricity generating facilities and the net costs ofthe EE programs. The avoided costs of new conventional facilities total $1.630 billion and theenergy 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 increases will have on theNorth Carolina economy. Table 7 displays the results in 2009 NPV dollars.Table 6: Utility Costs of SB 3 (millions of current $)Cost Type2009-20122013-20162017-2021Capital Costs$2,007.74$2,171.92$1,699.17Fixed and Variable O&M*17.2238.62114.61Avoided Costs**(271.31)(349.28)(1,009.78)Energy Efficiency Measures(6.11)(9.51)(27.97)Total1,759.771,870.77831.97*Operations, maintenance and fuel for biomass and animal waste electric facilities.**Includes capital, fixed and variable O&M and fuel of conventional sources of electricity.Total$5,878.84170.45(1,630.36)(43.59)4,462.51The implementation of SB 3 without the cost caps would inflict greater damage to the NorthCarolina 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 andbusinesses skyrocket. Again, the combination of higher cost of living and higher unemploymentwould 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 alsofrom making new investments.Table 7: BHI Estimates of Economic Impacts of SB 3 without Caps (NPV, 2009 $)Total Employment (Jobs)Investment ($ millions)Real Disposable Income ($millions)Real Gross Domestic Product ($millions)State and local Revenues ($ millions)2010(13,412)(233.06)(404.87)(899.19)(413.54)The Economics of Senate Bill 3 in North Carolina/ August 20092012(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)10Investment would fall by $233.06 in 2010 and $182.61 million in 2021. The negative effects ofSB 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 $413.54million in 2010 and $246.57 million in 2021. State and local governments would face evenhigher electricity prices than under the cost recovery caps.The Economics of Senate Bill 3 in North Carolina/ August 200911ConclusionSB 3 was signed into law in 2007 to “promote the development of renewable energy and energyefficiency in the state through implementation of a renewable energy and energy efficiencyportfolio standard.”8 However, many current forms of renewable energy — solar and wind inparticular — are more costly and less reliable than conventional sources.The renewable portfolio standard will raise electricity prices for consumers and businesses inNorth Carolina. At the same time, the energy efficiency portfolio standard contained in SB 3 willnot achieve enough energy savings necessary to offset the higher prices. Meanwhile, the NorthCarolina business community will see a reduction in its competitive advantage over the 18 statesthat have not adopted similar legislation.9 The result is that North Carolina will face slowergrowth in disposable income, employment and state GDP over the next 12 years.8SB 3U.S. Department of Energy, Energy Efficiency and Renewable Energy, EERE State Activities andPartnerships, States with Renewable Portfolio Standards, Internet, available athttp://apps1.eere.energy.gov/states/maps/renewable_portfolio_states.cfm, accessed May 2009.9The Economics of Senate Bill 3 in North Carolina/ August 200912Appendix A: Calculating the Net Costs of SB 3Calculation of Costs and Benefits of Energy Efficiency ProgramsSB 3 allows electric utility companies to satisfy a portion of the REPS mandate throughimplementing Energy Efficiency (EE) measures. Utilities may achieve 25 percent of their REPSrequirement through EE before 2021 and 40 percent in 2021 and after.The U.S. Environmental Protection Agency provides a methodology for calculating the socialcosts and benefits of energy efficiency programs.10 The benefits of energy efficiency programsinclude avoided costs of providing additional electricity, which include generation, transmissionand 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 asincremental measured cost. Incremental measured cost attempts to adjust the cost of the energyefficiency device to only measure the amount of energy savings that is in excess of what thecustomer 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 thatare directly attributed to the energy efficiency program. The adjustment attempts to account forfree riders or those that would have made the energy efficiency investment in the absence of theprogram but benefit from the incentives of the program anyway. Other customers may purchasethe equipment but fail to install it. Some equipment will fail and need to be replaced before itsestimated useful lifetime. In addition, the adjustment accounts for the rebound effect whichdilutes the results as some customers increase their electricity consumption in light of lowerelectric bills. There may also be a spillover effect as marketing programs induce people to adoptenergy efficiency measures, but do not participate in the program. Table 8 displays the details ofour calculations of the costs and benefits for the EE programs.We first calculated the amount of electricity that utilities could save through EE programs toachieve the allowable EE portion of the REPS. For example, the first REPS mandate in 2012 isthat 3 percent of electricity generated must be from renewable sources, of which 25 percent may10U.S. Environmental Protection Agency, National Action Plan for Energy Efficiency Resources,Understanding Cost-Effectiveness of Energy Efficiency Programs: Best Practices, Technical Methods, andEmerging Issues for Policy-Makers, Internet, available at http://www.epa.gov/cleanenergy/energyprograms/napee/resources/guides.html; 2-2.The Economics of Senate Bill 3 in North Carolina/ August 200913be achieved through EE programs, or 0.75 percent. We assumed that utilities will invest an equalamount of money in EE programs each year to achieve the goal. Therefore, utilities will investenough to save 0.1875 percent of total 2008 electricity sales per year from 2009 and 2012 (0.75percent / 4 years = 0.1875 percent). We utilized the LaCapra estimates of total electricity demandfor each year and multiplied the figure by the incremental increase in the percentage of the REPSthat can be satisfied through the EE programs. For example, in 2009 we multiplied 156,433,000megawatts hours of electricity of demand by 0.1875 percent to get 293,312 megawatt hours ofelectricity saved. This calculation was repeated for each year REPS requirement increases andfor 2021 which the EE portion of the REPS increases from 25 percent to 40 percent.Next we calculated the costs of the energy efficiency programs for both the utility (administrativecosts, incentives and a portion of installation costs) and the customer (including their portion ofthe equipment purchase and installation costs). The National Action Plan for Energy Efficiency, ajoint project of the U.S. Department of Energy and the Environmental Protection Agency,provides estimates of the utility and customer costs of EE programs in a July 2006 report. Theestimates range from 3 to 5 cents of levelized cost per kilowatt hour: 1 to 3 cents cost to the utilityand 2 cent cost to the customer. We note that the LaCapra report estimates levelized costs of 2cent per kilowatt hour for utilities, which is the midpoint of the estimates contained in theNational Action Plan report. To calculate the utility and customer costs for each year, wemultiplied 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 ofTable 8.EE programs, like all investments, are subject to diminishing returns. In other words, the firstdollar invested in EE programs should achieve a higher rate of energy saved than the last dollarinvested in the programs. Therefore, the cost of EE programs should increase as more resourcesare allocated.Balanced against the principle of diminishing returns is the fact that ourinvestments take place over time and technological progress should shift the costs of EEprograms down, as better and more advanced equipment is available. Despite these offsettingprinciples, it is likely that our use of a flat cost of EE programs overstates their effectiveness,especially in later years.Next we calculated the benefits of the EE programs in the form of saved electricity and clean air.We estimated the benefits from the electricity saved by multiplying our calculation of themegawatt hours saved under the programs by the Southeastern Electricity Reliability Council’sThe Economics of Senate Bill 3 in North Carolina/ August 200914projection of electricity price for the southeastern region.11 For example, in 2009 the electricityprice for the Council projects an electricity price of 7.7 cents per kilowatt hour, multiplied by293,312,000 kilowatt hours (multiplied by 1,000 to convert megawatt hours to kilowatt hours)gives us a savings of $22,577,843. This step was repeated for each year through 2021.Next, we calculated the benefits of reduced emissions of sulfur dioxide (SO2) and nitrogen oxides(NOx).We do not include carbon dioxide because the benefit of reducing carbon dioxideemissions at the state level is negligible because it has no measureable effect on the globalemissions or concentrations. First, we computed the per megawatt hour of emissions by dividingthe EIA estimate of emissions for each chemical by the North Carolina’s electric power industryby the number of megawatts of power demanded.12We needed to price the value of theemissions. Permits to emit sulfur dioxide are traded under the existing cap and trade system thatwas established in the early 1990s to help curb acid rain in the northeast United States. The latestbids by utilities to emit one metric ton of sulfur dioxide was $69.74.13 There is no such readilyavailable price for nitrogen oxides.Instead, we use the figures produced in a study thatestablishes a methodology for the pricing emissions.14 The study values nitrogen oxides at $1,034per 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 andearly equipment failures.We used the estimate from the National Action Plan for EnergyEfficiency that the benefits are reduced by 10 percent due to these factors.15 Therefore our totalbenefits are reduced to $621.060 million.To calculate the Net Present Value (NPV) of the costs and benefits, we followed the NationalAction Plan discount rate of 5 percent for the calculation net benefits to society. The NPV of the11EIA, 2009 Energy Outlook, An Updated Reference Case Reflecting Provisions of the AmericanRecovery and Reinvestment Act, Table 80. Electric Power Projections for EMM Region, Internet, availableat http://www.eia.doe.gov/oiaf/aeo/supplement/stimulus/arra/excel/sup_elec.xls.12EIA, State Energy Profiles, North Carolina, Internet, available athttp://tonto.eia.doe.gov/state/state_energy_profiles.cfm?sid=NC.13U.S. Environmental Protection Agency, Clean Air Markets, 2009 EPA Allowance Auction Results,Internet Available at http://www.epa.gov/airmarkt/trading/2009/09summary.html.14Levy JI, Hammitt JK, Yanagisawa Y, Spengler JD. “Development of a New Damage Function Modelfor Power Plants: Methodology and Applications.” Environmental Science and Technology 33: 4364-4372(1999), for the valuation per metric ton of NOx.15 15U.S. Environmental Protection Agency, National Action Plan for Energy Efficiency Resources, ModelEnergy Efficiency Program Impact Evaluation Guide, Internet, available athttp://www.epa.gov/RDEE/documents/evaluation_guide.pdf, 5-6.The Economics of Senate Bill 3 in North Carolina/ August 200915costs is $274.134 million and the NPV of the benefits is $419.475 million over the period. Thedifference between the benefits and cost is $174.341 million.Our final step was to allocate the net benefits to the utilities and the electricity consumers. Weutilized Duke Energy’s “Save-a-Watt” program as a model, which allows the utility to charge arider fee to all North Carolina’s utility customers to reimburse the company for of the avoidedcosts of the EE programs.16 This rider allows North Carolina’s public utilities to earn a rate ofreturn on the EE programs equal to that which utilities earn on electricity sales in terms of profit.Duke has agreed to charge only 75 percent of total costs. We use the 75 percent as a proxy toallocate net benefits of the EE programs to the utility and customers. Thus the utilities willrealize $130.756 million, while utility customers’ will enjoy net benefits of $43.586 million.Table 8: Calculations of Cost and Benefits of Energy Efficiency Programs ($)2009EE savings (MWh)201020112012201320142015293,312293,312298,768304,313413,393420,653427,88311,732,47511,732,47511,950,72512,172,50016,535,70016,826,10017,115,30022,577,84322,062,87022,704,55222,857,88430,808,77731,518,34631,901,012148,288151,047153,850156,748212,667216,323219,932NPV benefits (2009 $)11,732,47511,381,64311,040,81610,713,12013,842,87413,410,28512,984,819NPV of Costs (2009,$)22,577,84319,040,50018,659,9209,032,38022,969,27722,378,44921,572,229Difference10,845,3687,658,8577,619,104(1,680,740)9,126,4038,968,1648,587,409Utility portion ($)8,134,0265,744,1435,714,328(1,260,555)6,844,8026,726,1236,440,557Consumer gain2,711,3421,914,7141,904,776(420,185)2,281,6012,242,0412,146,852CostsUtility and Consumer ($)BenefitsElectricity Savings ($)Emissions (SO2, NO x, $)2016201820192020580,030590,950601,3331,529,7501,556,6331,583,9838,894,31223,201,20023,638,00024,053,33361,190,00062,265,33363,359,333355,772,47543,705,05245,286,60646,523,406118,483,714122,030,650125,032,423685,493,136298,764304,013309,356786,980800,807814,8794,573,654NPV benefits (2009 $)16,799,08516,280,24315,777,44838,225,51337,044,89035,900,793245,134,005NPV of Costs (2009,$)28,145,42227,771,77327,169,93465,899,67464,635,30869,622,731419,475,441Difference11,346,33611,491,53111,392,48627,674,16127,590,41833,721,938174,341,436EE savings (MWh)20172021TotalCostUtility and Consumer ($)BenefitsElectricity Savings ($)Emissions (SO2, NO x, $)Utility portion ($)8,509,7528,618,6488,544,36520,755,62120,692,81425,291,454130,756,077Consumer gain2,836,5842,872,8832,848,1226,918,5406,897,6058,430,48543,585,35916Duke reaches Save-A-Watt settlement, Charlotte Business Journal, , Internet, available athttp://www.bizjournals.com/triangle/stories/2009/06/08/daily74.html, June 12, 2009The Economics of Senate Bill 3 in North Carolina/ August 200916Calculation of the Net Cost New Renewable ElectricityTo calculate the cost of new sources of renewable energy, BHI utilized data from the EnergyInformation Agency. We collected data of net generating capacity (in megawatt hours) and netsummer capacity (in megawatts) from the North Carolina Electricity Profile for 2007.17 Thesefigures were grown through 2021.18To these totals, we applied the percentage of new renewable generation proscribed by SB 3. Forexample, 3 percent of total electricity generation in North Carolina must be from new renewablesources by 2012. However, EE programs can account for 25 percent of the increase (or 0.75percent), and thus 2.3 percent of the total electricity generation in North Carolina must be derivedfrom new renewable sources. This process was repeated for 2015, 2018 and 2021. In 2021, EEcan satisfy 40 percent of the REPS requirement of 12.5 percent, or 7.5 percent. Table 9 displaysthe results.Table 9: Total and Renewable Electricity Generation under REPSTotal Electricity Generation (GWh)Percent Renewable (less EE)Renewable Generation (GWh)Net summer Renewable Generation (MWh)2012136,9752.253,0826462016142,5754.56,4161,3452018146,6207.510,9962,3052021150,3987.511,2802,364Because our estimates of the new renewable energy requirements under the REPS are expressedin terms of total megawatt hours and net summer capacity in megawatts, we can calculated thenet costs of building and operating the new renewable sources. These include the overnightcapital 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 conventionalfacility).17U.S. Department of Energy, Energy Information Agency, Electricity, StateElectricity Profiles, North Carolina Electricity Profile, 2007 Addition,http://www.eia.doe.gov/cneaf/electricity/st_profiles/north_carolina.html,. April 15, 200918U.S. Department of Energy, Energy Information Agency, 2009 Annual Energy Outlook, Year-by-YearUpdated Annual Energy Outlook 2009 Reference Case with American Recovery and Reinvestment Act,Table 80. Electric Power Projections for EMM Region, East Central Area Reliability CoordinationAgreement, http://www.eia.doe.gov/oiaf/aeo/supplement/stimulus/regionalarra.html, (accessed April 20,2009.)The Economics of Senate Bill 3 in North Carolina/ August 200917We calculated the overnight costs using information from the “Assumptions to the AnnualEnergy Outlook, 2009.”19The costs are displayed by technology (geothermal, landfill gas,photovoltaic, wind, and biomass) by year (2010, 2020 and 2030) and a high-cost and low-costreference case. We used figures from the low cost reference case and 2010 and 2020 for eachtechnology of renewable energy. We calculated an average overnight capital cost of renewableelectricity generation using U.S. Net Summer capacity to weight each technology.20 Table 10contains the results.As one can see from table 10, the EIA estimates for overnight costs of renewable energy show adecrease from 2010 to 2020. This is likely due to expected technological advances in theproduction of renewable energy.However, as noted with EE programs, renewable energysources in North Carolina are subject to diminishing returns and increasing costs as morerenewable energy resources are built in North Carolina. This may cause our estimates of thecosts of renewable energy to be understated.Table 10: Costs of new Renewable Capacity (2007$/KWh)SourceCapitalCosts3,6362,8012,7912,1082010FixedO&M64143041VariableO&M720366112.113.59*BiomassHydroelectricWindWeighted AverageConventional (combustionTurbine)*Includes fuel costs of $0.02 per kilowatt.CapitalCosts3,1162,0582,5442,2842020FixedO&M5510282066112.11VariableO&M61013.59*We calculated a weighted average cost of renewable energy using the LaCapra estimates of thepractical potential of new renewable resources in North Carolina.21 The weighted average figureswere applied to the new megawatts needed to satisfy the REPS requirement for the appropriateyear (2012, 2015, 2018 and 2021). The fixed and variable costs were reduced for 2020 by thepercentage reduction in capital costs between 2010 and 2020.19U.S. Department of Energy, Energy Information Agency, “Assumption to the 2009 Annual EnergyOutlook, Table 13.1: Overnight Capital Cost Characteristics for Renewable Energy GeneratingTechnologies in three cases (2007/$kw):” 156,http://www.eia.doe.gov/oiaf/aeo/assumption/pdf/renewable.pdf, accessed April 20, 2009)20U.S. Department of Energy, Energy Information Agency, “Renewable and Alternative Fuels, Table 4:U.S. Electric Net Summer Capacity, 2003-2007,”http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/table4.html, (accessed April 20,2009.)21LaCapra Associates, Analysis of a Renewable Portfolio Standard for the State of North Carolina(December, 2006): 61, http://www.ncuc.net/rps/rps.htm (accessed June 30, 2009).The Economics of Senate Bill 3 in North Carolina/ August 200918Next we calculated the capital, fixed and O&M costs for conventional electricity generation usingassumption tables form the EIA’s Annual Energy Outlook 2009.22 These costs were applied tothe 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 presumablywill not need to be built under the REPS.We adjusted the avoided cost of conventionalelectricity downward to reflect the unreliability of solar and wind power. The difference betweenthe cost of the new renewable and conventional electricity generation and the net cost of EEprograms represents the net cost of the REPS. Table 6 in the body of the report contains asummary of the results.Modeling the REPS using STAMPNow that we have the net cost of the REPS, we can model their impact on the North Carolinaeconomy 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 theREPS we calculated above.For the sales tax cuts outlined in SB 3, we entered them into the STAMP model using the datafrom the Legislative Fiscal Note. The percentage changes in the economic variables were appliedto 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 theSTAMP model through 2021. We calculated the percentage increase represented by the net costsREPS for each year that the REPS increases, 2012, 2015, 2018 and 2021.We put thesepercentages into the STAMP model as an increase in state fees applied to the utility sector. Theadditional fee revenue stream was allocated back to the utility sector. The result is that utilitycustomers would pay a higher price for utility services that would be refunded back to theindustry. This method was used for both the capped cost recovery fees and the uncapped costrecovery fees.22U.S. Department of Energy, Energy Information Agency, “Assumption to the 2009 Annual EnergyOutlook”, Table 8.2: Cost and Performance Characteristics of New Central Electricity GenerationTechnologies, http://www.eia.doe.gov/oiaf/aeo/assumption/pdf/electricity.pdf, (accessed April 20, 2009): .88.The Economics of Senate Bill 3 in North Carolina/ August 200919The Beacon Hill Institute North Carolina-STAMP Development TeamDavid G. Tuerck is Executive Director of the Beacon Hill Institute for Public Policy Research atSuffolk University where he also serves as Chairman and Professor of Economics. He holds aPh.D. in economics from the University of Virginia and has written extensively on issues oftaxation 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. Bachmanhas authored research papers on state and national tax policy and on state labor policy andproduces the institute’s state revenue forecasts for the Massachusetts legislature. He holds aMaster of Science in International Economics from Suffolk University.Alfonso Sanchez-Penalver is an Economist at the Beacon Hill Institute. He holds a Master ofScience 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 anextensive career in web programming and project management, as well as in accounting andfinancial analysis.Michael Head is a Research Economist at BHI. He holds a Master of Science in EconomicPolicy 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 200920The Beacon Hill Institute at Suffolk University in Boston focuses on federal, state and local economicpolicies as they affect citizens and businesses. The institute conducts research and educational programsto provide timely, concise and readable analyses that help voters, policymakers and opinion leadersunderstand today’s leading public policy issues.©August 2009 by the Beacon Hill Institute at Suffolk UniversityTHE BEACON HILL INSTITUTEFOR PUBLIC POLICY RESEARCHSuffolk University8 Ashburton PlaceBoston, MA 02108Phone: 617-573-8750 Fax: 617-994-4279bhi@beaconhill.orghttp://www.beaconhill.orgThe Economics of Senate Bill 3 in North Carolina/ August 200921