Copyright 2001 eMediaMillWorks, Inc.
(f/k/a Federal
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Federal Document Clearing House
Congressional Testimony
July 11, 2001, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 10359 words
COMMITTEE:
SENATE FINANCE
HEADLINE: ENERGY TAX
INCENTIVES
TESTIMONY-BY: DANIEL M. KAMMEN, PROFESSOR
AFFILIATION: ENERGY AND SOCIETY
BODY: July 11, 2001
Statement By
Daniel M. Kammen Professor of Energy and Society Director, Renewable and
Appropriate Energy Laboratory (RAEL) Energy and Resources Group (ERG)
Mr. Chairman and members of the Committee, thank you for this
opportunity to appear before you today to provide testimony on the status of
renewable energy and energy efficiency technologies. My name is Daniel Kammen,
and I am Professor of Energy and Society in the Energy and Resources Group and
in the Department of Nuclear Engineering, as well as Director of the Renewable
and Appropriate Energy Laboratory (RAEL) at the University of California,
Berkeley 1 . I am pleased to be able to present information on how to utilize
the many important advances in renewable energy and energy efficiency
technology, economics, and policy for the formulation of a strong national
energy strategy. This critical initiative is long overdue, as illustrated by the
California energy crisis and the deficiencies that have been revealed in
regional and national energy policy and planning. Additionally, as the threat of
global climate change is becoming widely acknowledged in the U.S., there is
finally a growing understanding that a responsible national energy policy
includes a global climate change mitigation strategy that can be environmentally
effective and economically advantageous. I am concerned that the current crisis
mentality pervading the discussions of energy issues in the country has fostered
an ill- founded rush for "quick fix" solutions that, while politically
expedient, will ultimately do the country more harm than good. It is critical to
examine all energy options, and never before have so many technological
solutions been available to address our energy needs. In the near term, some
expansion of our fossil fuel, and particularly natural gas, supply is warranted
to keep pace with rising demand. However, these measures should be balanced with
measures to develop longer-term and cleaner energy solutions for the future. In
general, while there are needs for new energy generation and infrastructure,
energy efficiency and conservation represent our best short-term options, and
even a natural gas-based strategy is not adequate in the long term to prevent
the build up of unacceptably high CO2 levels. The U.S. spent over $600 billion
on energy last year, with U.S. oil imports climbing to $120 billion, or nearly
$440 of imported oil for every American. These amounts would have been far
higher if not for past investments in energy efficiency research and development
(R&D) and deployment programs. We have made great strides with energy
efficiency in this country, and substantial accomplishments with renewable
energy as well. Renewable energy systems, notably solar, wind, and biomass --
are poised to play a major role in the energy economy and environmental quality
of the nation, but that potential demands greater examination and commitment to
implementation. This is why I am particularly pleased, Mr. Chairman, that you
are holding this hearing today.
In the last decade, the case for
renewable energy has become an economic and environmental 'win-win' proposition.
For many years renewables were seen as environmentally and socially attractive
options that at best occupied niche markets due to barriers of cost and
available infrastructure. That situation has dramatically changed. Renewable
energy resources and technologies - notably solar, wind, small-scale hydro, and
biomass based energy, as well as advanced energy conversion devices such as fuel
cells - have undergone a true revolution in technological innovation, cost
improvements, and in our understanding and analysis of appropriate applications
2 . There are now a number of energy sources, conversion technologies, and
applications, where renewable energy options are either equal, or better, in
price and services provided than the prevailing fossil fuel technologies. For
example, in a number of settings in industrialized nations, wind energy is now
the least cost option across all energy technologies with the added benefit of
being modular and quick to install and bring on-line. In fact, some farmers,
notably in the Midwest, have found that they can generate more income per
hectare from the electricity generated by a wind turbine on their land than from
their crop or ranching proceeds. Furthermore, photovoltaic panels and solar hot
water heaters placed on buildings across America can: help reduce energy costs;
dramatically shave peak-power demands; produce a healthier living environment;
and increase our energy supply while managing our energy demand.
California's energy crisis has raised fundamental questions about
regional and national energy strategies. Rising demand suggests the need for new
energy supplies, and certainly some new energy capacity is needed. However,
there is a wide range of options for achieving supply and demand balance, and
some of these options have not been given adequate attention. In general, the
lack of past state and federal leadership has meant that we have seen too few
incentives for renewable energy development, energy conservation, and efficiency
measures, and too little attention to appropriate power plant siting issues and
transmission and distribution bottlenecks.
As a nation we are ignoring
the importance of maintaining leadership in key technological and industrial
areas, many of which are related to the energy sector.3 This includes keeping
pace with Japan and Germany in the production of solar photovoltaic systems,
catching up with Denmark in wind and cogeneration system deployment, and with
Japan, Germany, and Canada in the development of fuel cell systems. The
development of these industries within the U.S. is vital to both our
international competitiveness and commercial strength, and to our national
security in providing for our own energy needs. Renewable and distributed energy
systems and energy efficiency are areas experiencing tremendous market growth
internationally. These systems combine the latest advances in energy conversion
and storage, with improvements in computer and other advanced technologies, and
are therefore natural areas for U. S. business interests and for U. S. strategic
leadership. The U. S. must improve the financial and political climate for clean
energy systems in order to reassert our leadership in this vital area.
Energy Policy and Financial Recommendations Increase Federal R&D
Funding for Renewable Energy and Energy Efficiency Technologies
Federal
investment in renewable energy and energy efficient technologies has been sparse
and erratic, with each year producing an appropriations battle that is often
lost. A combination of a federal program for steadily increasing funding and
active political leadership would transform the clean energy sector from a good
idea to a pillar of the new economy.
Provide Tax Incentives for
Companies that Develop and Use Renewable Energy and Energy Efficiency
Technologies
Support for the production and further development of
renewable fuels, all found domestically, would have a greater long-term effect
on the energy system, with major health and environmental benefits as an added
bonus. We should extend the existing production tax credits (PTC) for
electricity generated from wind power and closed loop biomass for five years.
Also, this production credit should be expanded to include electricity produced
by open loop biomass (i.e., agricultural and forestry residues but excluding
municipal solid waste), geothermal energy, and landfill gas. The same credit
should be provided to closed loop biomass co-fired with coal, and a smaller
credit (one cent per kWh) should be provided for electricity from open-loop
biomass co-fired with coal. These provisions (in part or full) are included in
the Murkowski- Lott (S. 389) bill, Bingaman- Daschle bill (S. 596), Grassley
bill (S. 530), Reid bill (S. 249), Dorgan bill (S. 94), Collins bill (S. 188),
Filner bill (HR. 269), Foley bill (HR 876), Herger- Matsui bill (HR 1657), and
Dunn bill (HR 1677). I also support a minimum of a 15% investment tax credit for
residential solar electric and water heating systems. This proposal was
introduced by Senator Allard (S. 465) and Representative Hayworth (HR 2076). It
also is included in the Murkowski- Lott (S. 389) bill. In addition, I support a
30% investment tax credit being proposed for small (75 kW and below) windpower
systems as in the proposal in the Bingaman- Daschle (S. 596) bill.
Improved Federal Standards for Vehicle Fuel Economy and Increased
Incentives for High Fuel Economy Vehicles
I believe that a 40 mpg
combined car and light truck fuel economy standard could be easily accomplished
in the 2008 to 2012 timeframe with negligible net cost. I support tax credits of
up to $5,000 for hybrid electric vehicles, up to $6,000 for battery electric
vehicles, and $8,000 for fuel cell vehicles, or an incentive scheme for
energy-use performance that rewards both fuel savings and lower emissions. I
support the CLEAR Act, S. 760, introduced by Senators Hatch, Rockefeller, and
Jeffords, and the companion bill (H.R. 1864) introduced by Rep. Camp. Kammen -
Testimony for the United States Senate Committee on Finance
Energy
Policy and Financial Recommendations (continued) A Federal Renewable Portfolio
Standard (RPS) to Help Build Renewable Energy Markets
I support a 20
percent RPS by 2020. A number of studies indicate that this would result in
renewable energy development in every region of the country with most coming
from wind, biomass, and geothermal sources. A clear and properly constructed
federal standard is needed to set a clear target for industry research,
development, and market growth. I recommend a renewable energy component of 2
percent in 2002, growing to 10 percent in 2010 and 20 percent by 2020 that would
include wind, biomass, geothermal, solar, and landfill gas. This standard is
similar to the one proposed by Senators Jeffords and Lieberman in the 106th
congress (S. 1369).
Federal Standards and Credits to Support Distributed
Small-Scale Energy Generation and Cogeneration (CHP) Small scale distributed
electricity generation has several advantages over traditional central-station
utility service, including reducing line losses, deferring the need for new
transmission capacity and substation upgrades, providing voltage support, and
reducing the demand for spinning reserve capacity. In addition, locating
generating equipment close to the end use allows waste heat to be utilized to
meet heating and hot water demands, significantly boosting overall system
efficiency. I support a 10 percent investment tax credit and seven-year
depreciation period for renewable energy systems or combined heat and power
systems with an overall efficiency of at least 60-70 percent depending on system
size. Similar proposals are included in the Murkowski- Lott energy bill (S.
389), the Bingaman- Daschle energy bill (S. 596), as well as bills targeted to
CHP promotion introduced by Rep. Wilson (H.R. 1045) and Rep. Quinn (H.R. 1945)
in the house.
Renewable Energy Conventional energy sources based on oil,
coal, and natural gas have proven to be highly effective drivers of economic
progress, but at the same time highly damaging to the environment and to human
health. These traditional fossil fuel- based energy sources are facing
increasing pressure on a host of environmental fronts, with perhaps the most
being the looming threat of climate change and a needed reduction in our
greenhouse gas (GHG) emissions. It is now clear that any effort to maintain
atmospheric levels of CO2 below even doubled pre-industrial levels 4 cannot be
met with an oil and coal-dominated global economy, barring radical and uncertain
carbon sequestration efforts.
The potential of renewable energy sources
is enormous as they can in principle meet many times the world's energy demand.
Renewable energy sources such as biomass, wind, solar, hydropower, and
geothermal can provide sustainable energy services while meeting the challenges
of energy security, diversity, and regional as well as global environmental
quality. A transition to a renewable- intensive energy economy is now possible
given the consistent progress in cost and performance of renewable energy
technologies, new methods for managing distributed energy generation, and a
transformation of the transportation system. Costs of solar and wind power
systems have dropped substantially in the past 30 years, and continue to
decline, while the price of oil and gas continue to fluctuate. In fact, fossil
fuel and renewable energy prices are heading in opposite directions when social
and environmental costs are included. Furthermore, the economic and policy
mechanisms needed to support the widespread dissemination of renewable energy
systems have also rapidly evolved. Financial markets are awakening to the future
growth potential of renewable and other new energy technologies, and this is a
harbinger of fully competitive renewable energy systems.
In addition,
renewable energy systems are ideal components of a decentralized power system
that results in lower capital and environmental costs and improved opportunities
for highly efficient cogeneration (combined heat and power) systems. As an
alternative to customary centralized power plants, renewable systems based on PV
arrays, windmills, biomass or small hydropower, can be mass-produced "energy
appliances" capable of being manufactured at low cost and tailored to meet
specific energy loads and service conditions. These systems can have
dramatically reduced as well as widely dispersed environmental impacts, rather
than larger, more centralized impacts that in some cases are serious
contributors to ambient air pollution, acid rain, and global climate change.
This evolution of our ability to meet energy needs with clean sources is only in
its infancy, however, and policy leadership that rewards R&D, power
generation from clean sources, and a leveling of the playing- field with
existing power providers are all critical components of a sound energy strategy.
Recent Progress in Renewable Energy System Cost and Performance There
has been significant progress in cost reductions made by wind and photovoltaic
(PV) systems, while biomass, geothermal, and solar thermal technologies are also
experiencing cost reductions. In general, renewable energy systems are
characterized by low or no fuel costs, although operation and maintenance
(O&M) costs can be considerable. It is important to note, however, that
O&M costs for all new technologies are generally high, and can fall rapidly
with increasing familiarity and operational experience. Renewable energy systems
such as photovoltaics contain far fewer mechanically active parts than
comparable fossil fuel combustion systems, and therefore are likely in the
long-term to be less costly to maintain. Figure 1 presents U.S. DOE projections
for the levelized costs of electricity production from these same renewable
energy technologies, from 1997 to 2030.
Given these potential cost
reductions, recent analyses have shown that additional generating capacity from
wind and solar energy can be added at low incremental costs relative to
additions of fossil fuel-based generation. The economic case for renewables
looks even better when environmental costs are considered along with capital and
operating costs. As shown in Figure 2, geothermal and wind can be competitive
with modern combined-cycle power plants, and geothermal, wind, and biomass all
have lower total costs than advanced coal-fired plants, once approximate
environmental costs are also included .
Leveling the Playing Field for
Renewables: Public and Private Sector Investments and Market Transformations As
shown in Figure 2, renewable energy technologies are characterized by low
environmental costs. In an ideal world, the relatively low environmental costs
of renewables would aid them in competing with conventional technologies, but
many of these environmental costs are "externalities" that are not priced in the
market. Only in certain areas and for certain pollutants do these environmental
costs enter the picture, and clearly further internalizing these costs would
benefit the spread of renewables.
There are two principal rationales for
government support of research and development (R&D) to develop renewables
and other clean energy technologies. First, conventional energy prices generally
do not reflect the social cost of pollution. This provides the rationale, based
on a well-accepted economic argument, to subsidize R&D for alternatives to
polluting fossil fuels. Second, private firms are generally unable to
appropriate all the benefits of their R&D investments. Consequently, the
social rate of return for R&D exceeds available private returns, and firms
therefore do not invest enough in R&D to maximize social welfare. Thus,
innovation "spillover" among clean energy firms is a form of positive
externality that justifies public R&D investment. These provide compelling
arguments for public funding of Market Transformation Programs (MTPs) that
subsidize demand for some clean energy technologies in order to help
commercialize them.
A principal motivation for considering MTPs is
inherent in the production process itself. When a new technology is first
introduced it is invariably more expensive than established substitutes. There
is, however, a clear tendency for the unit cost of manufactured goods to fall as
a function of cumulative production experience. Cost reductions are typically
very rapid at first, but taper off as the industry matures. This relationship is
called an "experience curve' when it accounts for all production costs, and it
can be described by a progress ratio where unit costs fall by a certain percent
with every doubling of cumulative production. Gas turbines, photovoltaic cells
and wind turbines have both exhibited the expected price- production
relationship, with costs falling roughly 20% for each doubling of the number of
units produced (Figure 3).
If firms retain the benefits of their own
production experience they have an incentive to consider experience effects when
deciding how much to produce. Consequently, they will "forward- price,"
producing at a loss initially to bring down their costs and thereby maximize
profit over the entire production period.
In practice, however, the
benefits of production experience often spill over to competitor firms, causing
private firms to under- invest in bringing new products down the experience
curve. Among other channels, experience spillovers could result from hiring
competitors' employees, reverse engineering rivals' products, informal contacts
among employees of rival firms, or even industrial espionage.
Strong
experience effects imply that output is less than the socially efficient level.
MTPs can improve social welfare by correcting the output shortfall associated
with these experience effects.
This suggests a role for MTPs in national
and international technology policies MTPs are best limited to emerging
technologies with steep industry experience curves, a high probability of major
long-term market penetration once subsidies are removed, and price elastic
demand. The condition that they be clean technologies mitigates the risk of poor
MTP performance by adding the value of displaced environmental externalities.
The recent technical and economic advances seen for a range of products make
them ideal candidates for support through market transformation programs, and I
strongly urge federal action to reward the early production and use of clean
energy technologies. Finally, as with energy R&D policy, public agencies
should invest in a portfolio of new clean energy technologies in order to reduce
overall MTP program performance risk through diversification.
Energy
Efficiency Historically, our nation's energy efficiency programs have been a
resounding success. Last year, DOE documented the results of twenty of its most
successful energy efficiency and renewable energy technologies and initiatives
over the past two decades.7 These technologies and activities have already saved
the nation 5.5 quadrillion BTUs of energy, equivalent to the amount of energy
needed to heat every household in the U.S. for about a year. The cost to
taxpayers for these 20 activities was $712 million, less than 3 percent of the
energy bill savings so far. In fact, the energy bill savings from these 20
projects alone is over three times the amount of money appropriated by the
Congress for all DOE energy efficiency and renewable energy programs during the
1990s, demonstrating that spending taxpayers money on energy efficiency R&D
and deployment is a very sound investment.
There is often confusion
about the definition of energy efficiency and energy conservation that is
important to clarify. Energy efficiency means improving equipment and systems to
get the same output (e.g., miles traveled or widgets produced) but with less
energy input. Energy conservation means reducing energy use, and at times may
mean reducing the services received. Examples of energy conservation include
changing thermostat settings, reducing lighting levels, and driving less. To the
extent energy conservation eliminates waste it is generally desirable. For
example, many commercial buildings are excessively lit and over air-conditioned,
wasting large amounts of energy without providing any useful service.
Energy efficiency has been the single greatest asset in improving the U.
S. energy economy. Based on data published by the Energy Information
Administration (EIA), the American Council for an Energy Efficient Economy
(ACEEE) estimates that total primary energy use per capita in the U.S. in 2000
was almost identical to that in 1973. Over the same period, economic output per
capita increased 74 percent. Also, national energy intensity (energy use per
unit of GDP) fell 42 percent between 1973 and 2000. About 60 percent of this
decline is attributable to real energy efficiency improvements and the rest is
due to structural changes and fuel switching. If the United States had not
dramatically reduced its energy intensity over the past 27 years, consumers and
businesses would have spent at least $430 billion more on energy purchases in
2000. Between 1996 and 2000, GDP increased 19 percent while primary energy use
increased just 5 percent. Today's energy problems would be dramatically worse if
energy use had also increased by 19 percent during 1996-2000.
In 1997
the President's Committee of Advisors on Science and Technology (PCAST), a panel
that consisted mainly of distinguished academics and private sector executives
and upon which I served, conducted a detailed review of DOE's energy efficiency
R&D programs. Based on this review the PCAST committee concluded that,
"R&D investments in energy efficiency are the most cost-effective way to
simultaneously reduce the risks of climate change, oil import interruption, and
local air pollution, and to improve the productivity of the economy."PCAST
further recommended that the DOE energy efficiency budget should be doubled
between FY1998 and FY2003, and estimated that this investment could produce a
40:1 return for the nation including reductions in fuel costs of $15--30 billion
by 2005 and $30--45 billion by 2010.
Despite these successes, however,
the U.S. wastes approximately 24 quadrillion BTUs in the production of
electricity annually -- more energy than is used by the entire Japanese economy
for all end uses. According to DOE's recent Interlaboratory Working Group study,
Scenarios for a Clean Energy Future, cost effective end- use technologies might
reduce electricity consumption by 1,000 billion kWh by 2020, which would almost
entirely offset business- as-usual projected growth in electricity use.10 This
level of savings is more than Japan now uses for its entire economy.
Energy efficiency improvement has contributed a great deal to our
nation's economic growth and increased standard of living over the past 25
years, and there continues to be much potential for energy efficiency increases
in the decades to come. It certainly represents the best short-term option for
addressing today's environmental and energy concerns. The U.S. Department of
Energy (DOE) estimates that increasing energy efficiency throughout the economy
could cut national energy use by 10 percent or more in 2010 and about 20 percent
in 2020, with net economic benefits for consumers and businesses. The American
Council for an Energy- Efficient Economy (ACEEE) estimates that adopting a
comprehensive set of policies for advancing energy efficiency could lower
national energy use by as much as 18 percent in 2010 and 33 percent in 2020, and
do so cost-effectively 11 . Many of these changes can be accomplished at
negative cost, while others can be realized for only a few cents/kWh, far less
than the cost delivered by new power plants.
Market barriers to energy
efficiency technologies will continue to persist if we do not invest in tax and
market incentives to encourage their implementation in all sectors of our
economy. Interested consumers - both residential and commercial -- lack access
to information on energy efficient options. Consequently market barriers to
implementation of energy efficient technologies persist.
Policy Options
for Renewable Energy and Energy Efficiency Technology Development I firmly
believe that the ultimate solutions to meeting our nation's energy needs must be
based on private sector investment, bolstered by well-targeted government
support such as tax incentives for emerging energy technologies and R&D.
This must be coupled with policies that open markets to new generating capacity,
rather than through federal subsidies for programs to increase energy supply
using already mature technologies. This latter strategy would only generate
near-term and incremental paybacks, while doing little to promote energy
security or advance social and environmental goals. Instead, we now have the
opportunity to build a sustainable future by engaging and stimulating the
tremendous innovative and entrepreneurial capacity of the U.S. private sector.
To accomplish this, we must pursue policies that guarantee a stable and
predictable economic environment for advancing clean energy technologies. This
can be further bolstered by market and tax incentives to reward actions that
further the public good. With these thoughts in mind, I present several options
that address both the short-term need to increase energy supply and the long-
term goal to have a sustainable, economic and environmentally sound U.S. energy
policy.
1) Increase federal R&D funding for renewable energy and
energy efficiency technologies To date, federal investment in renewable energy
and energy efficient technologies has been sparse and erratic, with each year
producing an appropriations battle that is often lost. The resulting financial
and policy uncertainty discourages effective energy technology development and
deployment in the marketplace. With energy now a clear national priority,
funding for the U.S. Department of Energy's Energy Efficiency and Renewable
Energy Program must be substantially and systematically increased. The
realization that R&D funding provides a critical driver to economic growth
resulted in important commitments, particularly in the life sciences, to double
R&D funding over the next five to ten years. The same return on investment
exists in the energy sector, but it has not been translated into increased
R&D funding for new renewable and energy efficiency technologies 12 . If the
U.S. expects to be a world leader in this emerging industry, as it is in the
biomedical and high-tech sectors, significant investments in renewable energy
and energy efficiency are both essential and profitable.
Federal funding
and leadership for renewable energy and energy efficiency projects has resulted
in a small number of notable successes, such as the Energy Star and Green Lights
Programs that has now been emulated in a number of countries. For example, 15
percent of the public sector building space in the country has now signed up for
the Energy Star Buildings Program and saved more than 21 billion kWh of energy
in 1999 or $1.6 billion in energy bill savings according to EPA. Despite these
achievements, funding in this area has been both scant, and so uneven that
private sector involvement has actually been discouraged. A combination of a
federal program for steadily increasing funding and active political leadership
would transform the clean energy sector from a good idea to a pillar of the new
economy. In particular, promising technologies such as fuel cells deserve
special attention. Fuel cell development is attracting significant public and
private funding and offers the promise of being a keystone technology for the
ultimate transition from natural gas, petroleum, and coal energy to a renewable
and hydrogen based energy economy.
2) Provide tax incentives for
companies and individuals that develop and use renewable energy and energy
efficiency technologies
The R&D tax credit has proven remarkably
effective and popular with private industry, so much so that there is a strong
consensus in both Congress and the Administration to make this credit permanent.
The importance of private sector R&D in commercializing new technologies, an
additional tax incentive for R&D investment in renewable and energy
efficiency technologies is exactly the type of well-targeted federal policy that
is needed. To compliment this, tax incentives directed toward those who use the
technologies would provide the "demand pull' to accelerate the technology
transfer process and rate of market development. The U.S. has largely lost its
position as the global leader in energy innovation, resulting in the loss of
jobs and earning potential for U.S. companies precisely at the time when the
international market for clean energy technologies is booming. Our domestic
industries as well as the global energy economy would both benefit directly and
significantly from a clear commitment to U.S. clean energy leadership.
Currently, Federal tax expenditures have an unequal distribution across
primary energy sources, distorting the market in favor of many conventional
energy technologies. The dollar apportionment of expenditures, including income
and excise tax credits as well as direct subsidies (such as the Renewable Energy
Production Incentive) does not reflect the market distribution of fuels nor does
it encourage the establishment of a market niche for disadvantaged emerging
technologies (See table below). For example, renewable fuels make up four
percent of the US primary energy supply, and yet receive only one percent of
Federal tax expenditures and direct expenditures combined. This does not include
the alcohol fuels excise tax, directed towards ethanol production. The largest
single tax credit in 1999 was the Alternative Fuel Production Credit 13 , which
totaled over one billion dollars. This income tax credit was designed to reduce
dependence on foreign energy imports by encouraging the production of gas, coal,
and oil from non-conventional sources (such as tight gas formations and coalbed
methane) found within the United States. However, support for the production and
further development of renewable fuels, all found domestically, would have a
greater long-term stimulus for the energy system, with major health and
environmental benefits as an added bonus.
We should extend the existing
production tax credits (PTC) for electricity generated from windpower and closed
loop biomass for five years. Also, this production credit should be expanded to
include electricity produced by open loop biomass (i.e., agricultural and
forestry residues but excluding municipal solid waste), geothermal energy, and
landfill gas. The same credit should be provided to closed loop biomass co-fired
with coal, and a smaller credit (one cent per kWh) should be provided for
electricity from open-loop biomass co-fired with coal.
These provisions
(in part or full) are included in the Murkowski- Lott (S. 389) bill,
Bingaman-Daschle bill (S. 596), Grassley bill (S. 530), Reid bill (S. 249),
Dorgan bill (S. 94), Collins bill (S. 188), Filner bill (HR. 269), Foley bill
(HR 876), Herger- Matsui bill (HR 1657), and Dunn bill (HR 1677). As evidenced
by the number of bills introduced the extension and expansion of the PTC has
been garnering strong and consistent support in Congress with many of the
strongest proponents on this committee. The wind credit has proven to be
successful in encouraging strong growth of U.S. wind energy in the last few
years, with a 30 percent increase in 1998 and 40 percent increase in 1999, and
approximately 2,000 MW of wind energy under development or proposed for
completion before the end of 2001 (a 40 percent increase), when the federal wind
energy PTC is scheduled to expire. While the U.S. was once the world leader in
installed wind energy capacity we have since dropped to second place behind
Germany, which now has twice the U.S. installed capacity 14 . In addition, the
major wind turbine manufactures are now all in Europe. Clearly we need to
continue our support for wind energy and extend these benefits, which create
jobs, help our environment and increase our fuel security, to the other
renewables thereby leveling the playing field and further diversifying our
renewable resources.
I also support a minimum of a 15% investment tax
credit for residential solar electric and water heating systems. In this case,
an investment credit is preferable to a production credit due to the relatively
high cost of smaller scale solar technologies at this time. This proposal was
introduced by Senator Allard (S. 465) and Representative Hayworth (HR 2076). It
also is included in the Murkowski-Lott (S. 389) bill. In addition, I support a
30% investment tax credit being proposed for small (75 kW and below) windpower
systems. These are used in commercial and farm applications and are relatively
costly compared to large wind turbines (500 kW and up). This proposal is
included in the Bingaman-Daschle (S. 596) bill.
Energy Efficiency Many
new energy-efficient technologies have been commercialized in recent years or
are nearing commercialization. But these technologies may never be manufactured
on a large scale or widely used due to their initial high cost, market
uncertainty, and lack of consumer awareness. Tax incentives can help
manufactures justify mass marketing and help buyers and manufactures offset the
relatively high first cost premium for new technologies, thereby building market
share and reducing costs through economies of scale. Tax incentives should be
offered for a variety of innovative energy-efficient technologies such as highly
efficient homes, commercial buildings, and appliances. A key element in
designing the credits is for only high efficiency products to be eligible. If
eligibility is set too low then the cost to the Treasury will be high and
incremental energy savings low since the incentives will have paid for sales
that happen anyway. For this reason these tax credits should have limited
duration and be reduced in value over time since once these new technologies
become widely available and produced on a significant scale costs should
decline. In this manner the credits help innovative technologies get established
in the marketplace rather than becoming a permanent subsidy.
A number of
tax bills to encourage high efficiency technologies have recently been
introduced. These include:
- $50-100 for highly efficient clothes
washers and refrigerators, the two highest energy consumers in households, is
included in bills by Senators Lincoln, Allard and Grassley (S. 686) as well as
Murkowski- Lott (S. 389) and Bingaman- Daschle (S. 596) and Representative
Nussle (H.R. 1316).
- $2,000 for highly efficient new homes, introduced
by Senator Bob Smith (S. 207) as well as Murkowski-Lott (S. 389) and Bingman-
Daschle (S. 596) energy bills.
- 20 percent investment tax credit with a
cap for innovative building technologies such as furnaces, stationary fuel
cells, gas-fired pumps, and electric heat pump water heaters is in
Bingman-Daschle (S. 596) energy bill with parts introduced by
- $2.25
per square foot tax deduction for investments in commercial buildings that
achieve a 50 percent of greater reduction in heating and cooling costs compared
to buildings meeting current model codes. This is included in legislation by
Senator Bob Smith (S. 207) and Representative Cummingham (H.R. 778).
Incentives of this magnitude would have a relatively modest direct
impact on energy use and CO2 emissions, saving on the order of 0.3 quadrillion
BTU of energy and 5 million metric tons of carbon emissions per year by the end
of the eligibility period. I favor stronger incentives, however, such as credits
to help establish these innovative products in the marketplace and reduce the
first cost premium so that these products are viable after the credits are
phased out. In this case, the indirect impacts of the incentive could be many
times greater than the direct impacts. Total energy savings could reach 1
quadrillion BTU by 2010 and 2 quadrillion BTU by 2015 if the credits are
successfully implemented .
While tax measures send a clear signal of
support to suppliers and consumers who purchase and manufacture innovative clean
technologies, another important strategy for promoting energy efficiency is the
implementation of building and equipment standards. Tax credits, while
important, do not necessarily remove the market barriers that prevent clean
energy technologies from spreading throughout the marketplace. Minimum
efficiency standards were adopted by President Reagan in 1987, and then expanded
under President Bush in 1992, because market barriers inhibit the purchase of
efficient appliances and equipment. These barriers may include lack of
awareness, rush purchases when an existing appliance breaks down, and purchases
by builders and landlords. Figure 4 shows how federal standards dramatically
increased the market share of highly efficient magnet ballasts used for
lighting.
Standards remove inefficient products from the market but
still leave consumers with a full range of products and features to choose
among. Building, appliance and equipment standards have proven to be one of the
federal government's most effective energy-saving programs. Analyses by DOE and
others indicate that in 2000, appliance and equipment efficiency standards saved
1.2 quadrillion BTUs of energy (1.3 percent of U.S. electric use) and reduced
consumer energy bills by approximately $9 billion with energy bill savings far
exceeding any increase in product cost.
By 2020, standards already
enacted will save 4.3 quadrillion BTU/year (3.5 percent of projected U.S. energy
use), and reduce peak electric demand by 120,000 MW (more than a 10 percent
reduction). ACEEE estimates that energy demand will be reduced in 2020 by 1.0
quadrillion BTU by quickly adopting higher standards for equipment currently
covered, such as central air-conditioners and heat pumps, and new standards for
equipment not covered, such as torchiere (halogen) light fixtures, commercial
refrigerators and reduction of appliances standby power consumption (see Figure
5 for standby power used by today's televisions). This is nearly a 1 percent
reduction in projected U.S. energy use, resulting in a savings of nearly 20
million metric tons of carbon. Consumers and businesses would see their energy
bills decline by approximately $7 billion per year by 2020. Savings in 2010
would be a little less than half this amount.
Additional savings can be
achieved by future updates and expansions to the appliance standards program;
the savings estimated here just apply to actions that can be taken in the next
few years .
New vehicles types based on hybrid gasoline-electric and
fuel cell-electric power systems are now being produced in commercial (gasoline
hybrid) and prototype (fuel cell) quantities. These vehicles are combining
high-efficiency AC induction or permanent magnet electric motors with
revolutionary power systems to produce a new generation of motor vehicles that
are vastly more efficient than today's simple cycle combustion systems. The
potential for future hybrid and fuel cell vehicles to achieve up to 100 miles
per gallon is believed to be both technically and economically viable in the
near-term, and with continued commitments from industry, only clear federal
guidelines and support are needed to move from planning to reality. In the
longer term, fuel cell vehicles running directly on hydrogen promise to allow
motor vehicle use with very low fuel-cycle emissions, and again better
government and industry coordination and cooperation over the next ten years
could do much to hasten the development of this promising technology.
The improvements in fuel economy that these new vehicle types offer will
help to slow growth in petroleum demand, reducing our oil import dependency and
trade deficit. While the Partnership for a New Generation of Vehicles helped to
generate some vehicle technology advances, an increase in the Corporate Average
Fuel Economy (
CAFE) standard, which has been stagnant for 12
years now, is required to provide an incentive for companies to bring these new
vehicles types rapidly to market. Tax credits and incentives are an important
complement to raising CAFE, but we do not believe that they alone can accomplish
the key goal of simultaneously stimulating production of high fuel economy
vehicles and provide strong incentives for consumers to purchase them.
Now, after five years of Congressional bans, studies on the potential
for increases in
CAFE standards to cost-effectively reduce
petroleum demand are now underway by the Department of Transportation and the
National Academy of Sciences. These studies, with results expected later this
summer, will help to suggest optimal levels of increased standards, given the
costs and benefits of higher fuel economy, as well as phase-in schedules that
will protect the competitive interests of domestic automakers.
In the
meantime, other recent analyses of the costs and benefits of providing higher
fuel economy motor vehicles have been conducted by the Union of Concerned
Scientists,1718 MIT, OTA,20 and Oak Ridge National Lab/ACEEE.21 These studies
have generally concluded that with longer-term technologies, motor vehicle fuel
economy can be raised to 45 mpg for cars for $500 to $1,700 per vehicle retail
price increase, and to 30 mpg for light trucks for $800 to $1,400 per vehicle
retail price increase. These improvements could be the basis for a new combined
fuel economy standard of 40 mpg, which could be instituted after first removing
the separate fuel economy standards for cars and light trucks (i.e. closing the
light truck 'loophole' as proposed in S. 804 by Senators Feinstein and Snowe). I
believe the 40 mpg combined car and light truck standard could be easily
accomplished in the 2008 to 2012 timeframe with negligible net cost once fuel
savings are factored in, given adequate lead time for the auto industry to
re-tool for this new generation of vehicles.
I also support tax credits
of up to $5,000 for hybrid electric vehicles, up to $6,000 for battery electric
vehicles, and $8,000 for fuel cell vehicles. These funds could in principle be
raised through a revision of the archaic "gas guzzler' tax, which does not apply
to a significant percentage of the light duty car and truck fleet. The tax
penalty and tax credit in combination could be a revenue-neutral "fee-bate'
scheme, similar to one recently proposed in California, that would
simultaneously send two strong price signals rewarding economical vehicles
(particularly those using advanced drive systems) and penalizing uneconomical
ones. Furthermore, this would help jump start introduction and purchase of the
most innovative, fuel-efficient technologies. However the incentives are
designed, they should be based primarily on energy- use performance and ideally
provide both fuel savings and lower emissions. I support the CLEAR Act, S. 760,
introduced by Senators Hatch, Rockefeller, and Jeffords, and the companion bill
(H.R. 1864) introduced by Rep. Camp.
4) A federal Renewable Portfolio
Standard (RPS) to help build renewable energy markets
The RPS is a
renewable energy content standard, akin to efficiency standards for vehicles and
appliances that have proven successful in the past. A gradually increasing RPS
provides the most economically efficient way of ensuring that a growing
proportion of electricity sales are provided by renewable energy, and is
designed to integrate renewables into the marketplace in the most cost-effective
fashion. In this manner, the market picks the winning and losing technologies
and projects, not administrators. With all the discussion and hype about market
forces, a RPS provides the one true means to use market forces most effectively.
I recommend a renewable energy component of 2 percent in 2002, growing to 10
percent in 2010 and 20 percent by 2020 that would include wind, biomass,
geothermal, solar, and landfill gas. A number of studies indicate that this 20%
in 2020 level of an RPS is broadly good for business and can readily be achieved
24,25 . This standard is similar to the one proposed by Senators Jeffords and
Lieberman in the 106th congress (S. 1369). This bill has not been reintroduced
nor has any other RPS legislation been introduced in this Congress yet. States
that decide to pursue more aggressive goals - many of which make economic and
environmental sense - could be rewarded through an additional federal incentive
program. To achieve compliance a federal RPS should use market dynamics to
stimulate innovation through an active trading program of renewable energy
credits.
Renewable credit trading is analogous to the sulfur allowance
trading system established in the Clean Air Act. Like emissions trading, it is
designed to be administratively simple and to increase flexibility and decrease
the cost of compliance with the standard. Electricity suppliers can generate
renewable electricity themselves, purchase renewable electricity and credits
from generators, or buy credits in a secondary trading market.
The coal,
oil, natural gas, and nuclear power industries are mature; yet continue to
receive considerable government subsidies. Moreover, the market price of fossil
and nuclear energy does not include the cost of the damage they cause to the
environment and human health. Conversely, the market does not give a value to
the environmental and social benefits of renewables. Without the RPS or a
similar mechanism, many renewables will not be able to compete in an
increasingly competitive electricity market focused on producing power at the
lowest direct cost. The RPS is designed to deliver renewables that are most
ready for the market. Additional policies are still needed to support emerging
renewable technologies, like photovoltaics, that have enormous potential to
eventually become commercially competitive through targeted investment
incentives. Smart investors typically acquire a portfolio of stocks and bonds to
reduce risk. Including renewables in America's power supply portfolio would do
the same by protecting consumers from fossil fuel price shocks and supply
shortages. A properly designed RPS will also establish a viable market for the
long-term development of America's renewable energy industries, creating jobs at
home and export opportunities abroad.
The RPS is the surest market based
approach for securing the public benefits of renewables while supplying the
greatest amount of clean power for the lowest price. It creates an ongoing
incentive to drive down costs by providing a dependable and predictable market,
which has been lacking in this country. The RPS will reduce renewable energy
costs by:
- Providing a revenue stream that will enable manufacturers
and developers to obtain reasonable cost financing and make investments in
expanding capacity to meet an expanding renewable energy market.
-
Allowing economies of scale in manufacturing, installation, operation and
maintenance of renewable energy facilities.
- Promoting vigorous
competition among renewable energy developers and technologies to meet the
standard at the lowest cost.
- Inducing development of renewables in the
regions of the country where they are the most cost-effective, while avoiding
expensive long-distance transmission, by allowing national renewable energy
credit trading.
- Reducing transaction costs, by enabling suppliers to
buy credits and avoid having to negotiate many small contracts with individual
renewable energy projects.
Analysis by several groups of the effects of
ramping up to the 20 percent RPS target in 2020 would result in renewable energy
development in every region of the country with most coming from wind, biomass,
and geothermal sources. In particular, the Plains, Western, and Mid-Atlantic
States would generate more than 20 percent of their electricity as shown in
Figure 6. Electricity prices are projected to fall 13 percent between 1997 and
2020 under this RPS (see Figure 7) .
This increase in renewable energy
usage would also reduce some of the projected rise in natural gas prices for all
gas consumers, providing an added savings for households who heat with gas.
Texas has been a leader in developing and implementing a successful RPS that
then Governor Bush signed into law in 1999. The Texas law requires electricity
companies to supply 2,000 MW of new renewable resources by 2009. The state may
meet this goal by the end of 2002, seven years early. The RPS has also been
signed into law in Arizona, Connecticut, Maine, Massachusetts, Nevada, New
Jersey, New Mexico, Pennsylvania, and Wisconsin. Minnesota and Iowa also have
minimum renewables requirements similar to an RPS. Bills with the RPS are also
pending in several states. Variations in the details of these programs have kept
them from being overly successful. A clear and properly constructed federal
standard would correct these problems, and set a clear target for industry
research, development, and market growth 27 . 5) Federal standards to support
distributed small- scale energy generation and cogeneration (CHP) Small scale
distributed electricity generation has several advantages over traditional
central-station utility service. Distributed generation reduces energy losses
incurred by sending electricity through an extensive transmission and
distribution network (often an 8-10 percent loss of energy), defers the need for
new transmission capacity and substation upgrades, provides Kammen - Testimony
for the United States Senate Committee on Finance 16 voltage support, and
reduces the demand for spinning reserve capacity. In addition, the location of
generating equipment close to the end uses allows waste heat to be utilized to
meet heating and hot water demands, significantly boosting overall system
efficiency. Distributed generation has faced several barriers in the
marketplace, most notably from complicated and expensive utility interconnection
requirements. These barriers have led to a push for national safety and power
quality standards, currently being finalized by the Institute of Electrical and
Electronics Engineers (IEEE). Although adoption of these standards would
significantly decrease the economic burden on manufacturers, installers, and
customers, the utilities are allowed discretion in adopting or rejecting these
standards. Therefore, a Federal mandate to require utilities to accept these
standards, along with tax incentives for utilities and customers who use
distributed generation systems, would ease their acceptance into the
marketplace. While all distributed generation systems have the advantage of
lower line losses, there is large variability in the overall efficiencies of the
systems based on system type and installation. It is important to design credits
based on overall efficiency and offset emissions compared to central station
generation. This is accomplished by giving highest priority to renewable systems
or fossil fuel systems that utilize waste heat through combined heat and power
designs. While a distributed generation system may achieve 35-45% electrical
efficiency, the addition of heat utilization can raise overall efficiency to
80%. U.S. CHP capacity in 1999 totaled 52,800 MW of power, but the estimated
potential is several times this. Industrial CHP potential is estimated to be
88,000 MW, the largest sectors being in the chemicals and paper industries.
Commercial CHP potential is estimated to be 75,000 MW, with education, health
care, and office building applications making up the most significant
percentages 28 (See Figure 8). This tremendous resource has the advantage of
offsetting separate electric and fossil fuel heating systems, but CHP
applications are only feasible through the use of onsite distributed electricity
generation. I support a 10% investment tax credit and seven-year depreciation
period for renewable energy systems or combined heat and power systems with an
overall efficiency of at least 60-70% depending on system size. Similar
proposals are included in the Murkowski-Lott energy bill (S. 389), the
Bingaman-Daschle energy bill (S. 596), as well as bills targeted to CHP
promotion introduced by Rep. Wilson (H.R. 1045) and Rep. Quinn (H.R. 1945) in
the house. It is important to note again that these measures would be most
effective coupled with mandated utility interconnection requirements. The U. S.
should pursue a policy of not only net- metered energy use, but also real-time
pricing where homeowners, businesses, and industry can all participate fully in
supplying their excess power generation into the market. Homes with solar
photovoltaic, wind, or fuel-cell systems should be able to sell their excess
energy. Opening the energy supply markets to local generation will provide
strong, economically sound, signals to the utilities, the Qualifying Facilities,
and homeowners that the energy market is fair, accessible, and one where clean
energy generation will be rewarded. The investment in the grid, largely in the
form of upgrades to local sub-stations, will lead to further energy efficiency
benefits as an added bonus. Federal leadership and standards are needed to guide
this transformation. Kammen - Testimony for the United States Senate Committee
on Finance 17 Cost and Benefit Analysis of Clean Energy Policies on Electricity
Generation I agree wholeheartedly with the findings of the Union of Concerned
Scientists', report, Clean Energy Blueprint: A Smarter National Energy Policy
for Today and the Future 29 , which examines the costs, environmental impacts,
and effects on fossil fuel prices and consumer energy bills of a package of
clean energy polices affecting electricity generation. These policies include:
incentives for consumers to purchase more efficient appliances, stricter energy
codes for buildings, residential and commercial building retrofits; voluntary
programs with industry to reduce energy use meaningfully, a RPS requiring
electricity providers to obtain 20 percent of their supplies from renewables
power sources by 2020 using tradable renewable energy credits; and an expanded
production tax credit to include all renewables; and a public benefits fund
funded through a $0.002/kWh charge to customers. This analysis is based on the
Energy Information Administrations National Energy Modeling Systems (NEMS) with
modifications used in the Interlaboratory Working Group's study to accurately
account for the growth and costs of renewable technologies model. Under the
business-as- usual scenario the nation would increase its reliance on coal and
natural gas to meet strong growth in electricity use with an increase of 42
percent by 2020 as shown in Figure 9. To meet this demand it is estimated that
1,300 300-MW power plants would need to be built. Electricity generation from
non-hydro renewables increases from 2 percent today to only 2.4 percent of total
generation in 2020. This amounts to a policy of energy and economic stagnation.
If, on the other hand, the set of clean energy polices listed above are
implemented energy efficiency and renewables will meet a much larger share of
our future energy needs (at least 20 percent) with energy efficiency measures
almost completely offsetting the projected business-as-usual growth in
electricity (Figure 10). Unlike the Bush-Cheney energy plan, this clean energy
strategy plan builds energy security for the U. S. by supporting energy
diversity and domestic supplies. The result is a large decrease in emissions
from the utilities sector compared to business-as-usual projections with
declines continuing beyond 2020. Figure 11 shows the projected power plant
carbon dioxide reductions with the level proposed by the Senator Jeffords' and
Representative Waxman's 4-pollutant power plant emission reduction bills (S. 556
and H.R. 1256). Through a steady shift to clean energy production, the
requirements of these bills would not be difficult or expensive, and if anything
are expected to increase U. S. economic activity. Finally the more efficient use
of energy and the switch from fossil fuels to renewable energy sources saves
consumers money by decreasing energy use in homes, businesses, and industry
while the fuel switching also helps decrease the demand for fossil fuels
resulting in price drops for natural gas as shown in Figure 12. This results in
a lower household electricity bill than business-as-usual predicts as shown in
Figure 13 while average consumer prices are about the same. One of the greatest
advantages that energy efficiency and renewable energy sources offer over new
power plants, transmission lines, and pipelines is the ability to deploy these
technologies very quickly 30 . Consequently we can begin to deploy these
technologies now and so reap the benefits all that much sooner 31 . A range of
studies are all coming to the conclusion that simple but sustained standards and
investments in a clean energy economy are not only possible but would be highly
beneficial to Kammen - Testimony for the United States Senate Committee on
Finance our nation's future prosperity.32 A recent analysis of the whole economy
shows that we can easily meet Kyoto type targets with a net increase of 1
percent in the Nation's GDP 2020 33 . The types of energy efficiency and
renewable technologies and policies described have already proven successful and
cost-effective at the national and state level. I argue that this is even more
reason to increase their support. This will cost-effectively enable us to meet
goals of GHG emission reductions 34 while providing a sustainable clean energy
future. Conclusions We stand at a critical point in the energy, economic, and
environmental evolution of the United States. Renewable energy and energy
efficiency are now not only affordable, but their use will also open new areas
of innovation and technological and economic leadership for the U. S., if we
choose to embrace these options. Creating opportunities and - critically -- a
fair market place for a clean energy economy requires leadership and vision. The
tools to implement this evolution are now well known, and are listed in the
previous section. I look forward to the opportunity to work with you to put
these cost-effective measures into effect. Biographical Sketch: Daniel M. Kammen
Daniel M. Kammen received his undergraduate degree physics from Cornell
University 1984, and his Masters (1986) and Doctorate (1988) degrees in physics,
from Harvard University. He was a Bantrell & Weizmann Postdoctoral Fellow at
the California Institute of Technology, and then a lecturer in the Department of
Physics at Harvard University. From 1992 - 1998 Kammen was on the faculty of the
Woodrow Wilson School of Public and International Affairs at Princeton
University, where he was Chair of the Science, Technology and Environmental
Policy Program. Kammen is now Professor of Energy and Society in the Energy and
Resources Group (ERG), and in the Department of Nuclear Engineering at the
University of California, Berkeley. At Berkeley Kammen is the founding director
of the Renewable and Appropriate Energy Laboratory (
http://socrates.berkeley.edu/~rael),
and is campus representative to the University of California Energy Institute.
He has been a Lecturer in Physics and Natural Science at the University of
Nairobi.
Kammen's research centers on the science, engineering,
economics and policy aspects of energy management, and dissemination of
renewable energy systems. He also works on the health and environmental impacts
of energy generation and use; rural resource management, including issues of
gender and ethnicity; international R&D policy, climate change; and energy
forecasting and risk analysis. He is the author of over 110 journal
publications, a book on environmental, technological, and health risks (Should
We Risk It?, Princeton University Press, 1999) and numerous reports on renewable
energy and development. Kammen received the 1993 21st Century Earth Award and is
a Fellow of the American Physical Society. He is a Permanent Fellow of the
African Academy of Sciences. For information of any of these activities and for
copies of Professor Kammen's writings, see
http://socrates.berkeley.edu/~dkammen.
LOAD-DATE: July 12, 2001