CRS Updates Issue Brief on Renewable Energy

Energy security, a major driver of federal renewable energy programs in the past, came back into play as oil and gas prices rose late in the year 2000. The terrorist attack in 2001 and the Iraq war have led to heightened concern about energy security, energy infrastructure vulnerability, and the need for alternative fuels. Further, the 2001 electricity shortages in California, the northeast- midwest blackout of 2003, and continuing high natural gas prices have brought a new emphasis to the role that renewable energy may play in producing electricity, displacing fossil fuel use, and curbing demand for power transmission equipment.

Also, worldwide emphasis on environmental problems of air and water pollution and global climate change, the related development of clean energy technologies in western Europe and Japan, and technology competitiveness may remain important influences on renewable energy policymaking.

The Bush Administration's FY2006 budget request for the Department of Energy's (DOE's) Renewable Energy Program seeks $353.6 million, which is $32.4 million less than the FY2005 appropriation.

The House passed H.R. 2419, the Energy and Water (E&W) appropriations bill for FY2006, which funds DOE's Energy Efficiency (Conservation) and Renewable Energy programs. A new account structure does not provide a total figure for renewable energy programs.

Compared with the House-passed bill, the Senate-passed version of H.R 2419 has increases of $6 million for Biomass and $2 million for Geothermal, and it has decreases of $10 million for Wind, and $1 million for International Renewables.

Also, the Senate version of H.R. 3057 has $180 million for clean (renewable) energy and energy efficiency in developing countries, H.R. 2744 has $23 million for farm-based renewable energy grants and loans, and H.R. 2863 has $5 million for a wind energy project on an Air Force base.

As enacted, H.R. 6 authorizes or reauthorizes several renewable energy programs, sets new goals for renewable energy use in federal facilities and fleets, expands programs for hydrogen fuel cell buses, and sets (§ 1501) a renewable fuels standard of 7.5 billion gallons per year by 2012 to increase use of ethanol and biodiesel. Among the tax measures, § 1301 extends the renewable energy production tax credit (PTC) for two years, § 1303 provides $800 million in renewable energy bonds, § 1335 establishes a residential solar (heat and electricity) tax credit, and § 1337 creates a business solar tax credit. However, the enacted law does not include a Senate-proposed provision to set a 10% renewable portfolio standard (RPS).

As enacted, H.R. 3 contains several provisions for "alterative" and "clean" fuels including sections 1113, 1121, 3010, 3044, and 6015.

MOST RECENT DEVELOPMENTS

On August 8, 2005, the Energy Policy Act of 2005 (H.R. 6, H.Rept. 109-190) was enacted. It authorizes or reauthorizes several renewable energy programs. It also sets new goals for renewable energy in federal facilities and fleets, expands programs for hydrogen fuel cell buses, and § 1501 sets a renewable fuels standard of 7.5 billion gallons per year by 2012 for increased use of ethanol and biodiesel. In the tax title of the bill, § 1301 extends the renewable energy production tax credit (PTC) for two years, § 1303 provides $800 million in renewable energy bonds, § 1335 establishes a residential solar (heat and electricity) tax credit, and § 1337 creates a business solar tax credit. However, the enacted law does not include a Senate-proposed provision to set a 10% renewable portfolio standard (RPS). (Key provisions of H.R. 6 are described in CRS Issue Brief IB10143, Energy Policy: Comprehensive Energy Legislation (H.R. 6) in the 109th Congress. The renewable energy provisions in H.R. 6 and other bills of the 109th Congress are discussed in "Renewables in the 109th Congress," below.)

On July 1, the Senate passed the FY2006 Energy and Water appropriations bill (H.R. 2419), which funds DOE's Energy Efficiency (Conservation) and Renewable Energy programs. Compared with the House-passed bill, the Senate version of H.R 2419 has increases of $6 million for Biomass and $2 million for Geothermal, and it has decreases of $10 million for Wind, and $1 million for International Renewables. (For more details, see "FY2006 DOE Budget" and Table 2.) Also, the Senate version of H.R. 3057 has $180 million for clean (renewable) energy and energy efficiency in developing countries, H.R. 2744 has $23 million for farm-based renewable energy grants and loans, and H.R. 2863 has $5 million for a wind energy project on an Air Force base.

BACKGROUND AND ANALYSIS

After more than 25 years of federal support, some note that renewable energy has achieved neither a high level of market penetration nor a growing market share among other energy sources. A recent review of renewable energy studies by Resources for the Future, Renewable Energy: Winner, Loser, or Innocent Victim?, concludes that the lower-thanprojected market penetration and flat market share are due primarily to declining fossil fuel and electricity prices during this period. In contrast, however, it notes that the costs for renewable energy technologies have declined by amounts equal to or exceeding those of earlier projections.

EIA's Annual Energy Outlook 2005 projects that current policies would yield a 1.5% average annual increase in renewable energy production to 8.1 Q through 2025, resulting in a 38% total increase. This would amount to about 6.1% of the projected 133 Q total demand in 2025. (Detailed breakdowns of renewable energy use appear in EIA's Renewable Energy Trends 2003 and Renewable Energy 2000: Issues and Trends.)

The Agenda 21 adopted at the 1992 United Nations Conference on Environment and Development (UNCED) concluded that mitigating urban air pollution and the adverse impact of energy use on the atmosphere -- such as acid rain and climate change -- requires an emphasis on "clean and renewable energy sources." The U.N. Commission on Sustainable Development oversees implementation of Agenda 21. The 2002 U.N. World Summit on Sustainable Development (Johannesburg Summit) adopted a Political Declaration and a Plan of Implementation (see [http://www.johannesburgsummit.org/]), which includes "Clean Energy" as one of five key policy actions. The U.S. Department of State implemented a $42 million Clean Energy Initiative in 2003 (see [http://www.state.gov/g/oes/sus/wssd/]), and the European Union committed to a $700 million energy partnership.

The subsequent failure of the oil cartel and the return of low oil and gas prices in the early 1980s slowed the federal program. Despite Congress's consistent support for a broader, more aggressive renewable energy program than any Administration, federal spending for these programs fell steadily through 1990. Until 1994, Congress led policy development and funding through legislative initiatives and close reviews of annual budget submissions. FY1995 marked a noteworthy shift, with the 103rd Congress for the first time approving less funding than the Administration had requested. The 104th Congress approved 23% less than the Clinton Administration request for FY1996 and 8% less for FY1997. However, funding turned upward again during the 105th Congress and in the 106th Congress. (A detailed description of DOE programs appears in DOE's FY2006 Congressional Budget Request, DOE/ME-0053, v. 3, February 2005.) From FY1973 through FY2003, the federal government spent about $14.6 billion (in 2003 constant dollars) for renewable energy R&D. Renewable energy R&D funding grew from less than $1 million per year in the early 1970s to over $1.4 billion in FY1979 and FY1980, then declined steadily to $148 million in FY1990. By FY2003, it reached $411 million in 2003 constant dollars.

This spending history can be viewed within the context of DOE spending for the three major energy supply R&D programs: nuclear, fossil, and energy efficiency R&D. From FY1948 through FY1972, in 2003 constant dollars, the federal government spent about $24.3 billion for nuclear (fission and fusion) energy R&D and about $5.5 billion for fossil energy R&D. From FY1973 through FY2003, the federal government spent $49.7 billion for nuclear (fission and fusion), $25.4 billion for fossil, $14.6 billion for renewables, and $11.7 billion for energy efficiency. Total energy R&D spending from FY1948 to FY2003, in 2003 constant dollars, reached $131.2 billion, including $74.0 billion, or 56%, for nuclear; $30.9 billion, or 24%, for fossil; $14.6 billion, or 11%, for renewables; and $11.7 billion, or 9%, for energy efficiency.

DOE's FY2004 renewable energy R&D funding totaled $439.4 million, or about 19% of DOE's energy R&D appropriation. Energy conservation received $559.7 million (24%), fossil energy received $672.8 million (29%), and fission and fusion were appropriated $667.4 million (29%).

Tax Credits. The Energy Tax Act of 1978 (P.L. 95-618) created residential solar credits and residential and business credits for wind energy installations; it expired on December 31, 1985. However, business investment credits were extended repeatedly through the 1980s. Section 1916 of the Energy Policy Act of 1992 (EPACT, P.L. 102-486) extended IB10041 08-22-05 CRS-4 the 10% business tax credits for solar and geothermal equipment indefinitely. Also, EPACT Section 1914 created an income tax "production" credit of 1.5 cents/kwh for electricity produced by wind and closed-loop biomass (energy crops or trees grown only for use as a fuel). P.L. 106-170 expanded this credit to include poultry waste. Section 603 of the Job Creation and Worker Assistance Act (P.L. 107-147) extended the production tax credit to December 31, 2003. The JOBS Act (P.L. 108-357) expanded the PTC (adding solar, geothermal, and open-loop biomass, landfill gas, trash combustion, and certain small hydro) and extended it through the end of 2005. Additionally, P.L. 96-223 created an income tax credit for alcohol fuels; section 9003(a)(3) of P.L. 105-178 extended the 40- to 60- cent/gallon credit through December 31, 2007. Further, the Energy Tax Act created a 5.2 cents/gallon federal excise tax exemption for gasohol (gasoline blended with alcohol), which now stands at 5.3 cents/gallon.

Public Utility Regulatory Policies Act. The Public Utilities Regulatory Policies Act (PURPA, P.L. 95-917) required electric utilities to purchase power produced by qualified renewable power facilities. Under PURPA, the Federal Energy Regulatory Commission (FERC) established rules requiring that electric utilities purchase power from windfarms and other small power producers at an "avoided cost" price based on energy and capacity costs that the utility would otherwise incur by generating the power itself or purchasing it elsewhere. However, to receive avoided cost payments, each renewables facility must file for, and obtain, qualifying facility (QF) status from FERC. EIA's Renewable Energy 2000: Issues reports that, in 1998, QF renewable power capacity reached 12,700 megawatts (MW) and generation reached 64 billion kilowatt- hours (kwh). Thus, QFs provided about 1.6% of national electric capacity and about 1.7% of national electricity generation. In comparison, the capacity of all renewables reached 94,800 MW, or about 12% of national capacity; and generation for all renewables stood at 418,000 kwh, which is about 11.5% of national generation.

State and Local Government Roles. State and local governments have played a key role in renewable energy development. For example, in the early 1980s, a generous state investment tax for wind energy in California combined with PURPA and the federal tax credit to stimulate industry development of the first windfarms. California and New York have invested some state funds in renewable energy R&D. Recently, Texas and several other states have used a regulatory tool, the renewable energy portfolio standard (RPS), to encourage renewable energy. Also, in 2001, the city of San Francisco enacted a $100 million revenue bond (Proposition B, "Vote Solar") to support solar and wind energy implementation.

(For more on federal, state, and local policies (incentives, grants, standards) for renewable energy, see Database of Incentives for Renewable Energy at [http://www.dsireusa.org/].)

The Senate Committee on Energy and Natural Resources held a hearing on RPS on March 8, 2005. Regional differences in the availability of renewable resources, particularly resource availability in the southeastern United States, was a key issue of the discussion. In the April 12 markup of a committee print (to be incorporated into H.R. 6) by the House Committee on Energy and Commerce, an amendment to add an RPS (1% in 2008, increasing by 1% annually through 2027) was rejected (17-30). Proponents noted a growing number of states with an RPS and that EIA reports show an RPS could reduce electricity bills. Opponents raised concerns about the exclusion of existing hydropower facilities and resource limits for the southeastern United States. There was no RPS provision in the House version of H.R. 6. The Senate version had a 10% RPS provision. During the conference, there was an idea put out to compromise by including nuclear and hydropower facilities. Nevertheless, RPS was dropped in conference. (For more background information on RPS, two memoranda are available from the author. For current status of RPS policies in the states, see Database of State Incentives for Renewable Energy at [http://www.dsireusa.org].)

Renewable Energy Production Tax Credit (PTC) and Renewable Energy Production Incentive (REPI). The House version of H.R. 6 had no PTC extension, the Senate version had a three-year extension, and the enacted law (§ 1301) extends the PTC for two years, through the end of calendar year 2007. (A detailed description of the PTC appears in the report Description and Analysis of Certain Federal Tax Provisions Expiring in 2005 and 2006, by the Joint Tax Committee at [http://www.house.gov/jct/x-12-05.pdf].)

Parallel to the PTC, there is a renewable energy production "incentive" (REPI) for state and local governments and nonprofit electrical cooperatives. This 1.5 cent/kwh incentive was created by the Energy Policy Act of 1992 (EPACT) § 1212 and is funded by appropriations to DOE. Eligible facilities currently include solar, wind, biomass, and geothermal energy except municipal solid waste and certain types of dry steam geothermal energy. The enacted law (§ 202) expands REPI to include ocean and wave energy and extends the authorization through FY2016..

Renewable Fuel Standard (RFS). H.R. 6 (§ 1501) defines "renewable fuel" to include ethanol, biodiesel, and natural gas produced from landfills, sewage treatment plants, and certain other sources. Ethanol is the only renewable motor fuel produced in large quantity. In 2003, about 2.8 billion gallons of ethanol were blended with gasoline. Biodiesel is used at a rate of about 50 million gallons per year. In the House version of H.R. 6, the RFS provision called for renewable fuels (primarily ethanol) production to grow to 3.1 billion gallons a year in 2005, and then increase stepwise to 5.0 billion gallons a year by 2012. In the Senate version of H.R. 6, the RFS called for 4.0 billion gallons in 2006, rising to 8.0 billion gallons in 2012. The enacted version (§ 1501) set a standard starting at 4.0 billion gallons in 2006 and rising to 7.5 billion gallons by 2012. Further, an incentive would encourage the use of cellulosic and waste-derived ethanol to fulfill the RFS target, by raising the value of 1.0 gallon of cellulosic or waste-derived ethanol from a previous incentive level of 1.5 gallons of renewable fuel to 2.5 gallons of renewable fuel.

An MTBE "safe harbor" from product liability lawsuits, which had been a major issue in previous omnibus energy bills, was dropped in conference. For more information on the bills' provisions for renewable fuels and MTBE, see CRS Report RL32865, Renewable Fuels and MTBE: A Comparison of Selected Legislative Initiatives; CRS Report RS21676, The Safe-Harbor Provision for Methyl Tertiary Butyl Ether (MTBE); and CRS Report RL32787, MTBE in Gasoline: Clean Air and Drinking Water Issues.

Renewable Hydrogen. As enacted, H.R. 6 (§ 933) would create a program to produce hydrogen from a variety of sources, including renewable energy and renewable fuels, as part of a broader effort to develop hydrogen fuels, vehicles, and infrastructure. The provision includes a focus on distributed energy that uses renewable sources. Another section (§ 808) also calls for use of renewable hydrogen as part of a hydrogen fueling and infrastructure demonstration program.

Renewables Tax Revenue Effect. Table 1 shows the estimated 10- year revenue effect of renewable energy tax provisions in the House version of H.R. 6 (H.R. 1541), the Senate version of H.R. 6, and the enacted law.

              Table 1. H.R. 6, Tax Revenue Effect

The FY2006 budget request aims to "accelerate" the development of hydrogen-powered fuel cell vehicles. The Hydrogen program aims to facilitate industry commercialization of infrastructure for those vehicles by 2015. Goals for other renewable energy technologies generally seek to improve energy production performance while reducing costs. The request also proposes funding tax credits, including an extension of the PTC for wind, biomass, and landfill gas through the end of 2007 and an investment tax credit for residential solar systems through the end of 2009.

For FY2005, the 108th Congress approved the Consolidated Appropriations Act for FY2005, P.L. 108-447 (H.R. 4818, H.Rept. 108- 792). Division C, the Energy and Water appropriations bill, provides $389.1 million for DOE's Renewable Energy program and $121.2 million for OETD. Also, the act has $23.0 million for renewables at USDA and $180 million for clean energy (renewables) and energy efficiency in developing countries.

Renewables Under Electric Industry Restructuring. To encourage a continued role for renewable energy under restructuring, some states and utilities have enacted such measures as a renewable energy portfolio standard (RPS), public benefits fund (PBF), and/or "green" pricing and marketing of renewable power. In the 109th Congress, H.R. 983 and S. 427 have an RPS. A proposed RPS amendment to H.R. 6 was rejected in Energy and Commerce Committee markup.

Green Power. The term "green power" generally refers to electricity supplied in whole or in part from renewable energy sources. Green power marketing (retail or wholesale) is underway in California, Illinois, Massachusetts, New Jersey, New York, Pennsylvania, and Texas. Green pricing is an optional utility service that allows electricity customers who are willing to pay a premium for the environmental benefits of renewable energy to purchase green power instead of conventional power. Utility green pricing programs reach more than one-third of the nation's consumers. (For more on green power, see [http://www.eere.energy.gov/greenpower/].)

Distributed Energy. Distributed energy involves the use of small, modular electricity generators sited close to the customer load that can enable utilities to defer or eliminate costly investments in transmission and distribution system upgrades, and provide customers with quality, reliable energy supplies that may have less environmental impact than traditional fossil fuel generators. Technologies for distributed electricity generation use wind, solar, bioenergy, fuel cells, gas microturbines, hydrogen, combined heat and power, and hybrid power systems. A DOE study, Structural Vulnerability of the North American Power Grid, suggests that adding more distributed power generation could help reduce grid vulnerability. Another DOE study, Homeland Security: Safeguarding America's Future with Energy Efficiency and Renewable Energy Technologies, provides a broad look at the potential to address vulnerabilities. (More information about DOE's Distributed Energy Program is available at [http://www.eere.energy.gov/de/]).

Net Metering. Net metering allows customers with generating facilities to "turn their electric meters backwards" when feeding power into the grid; they receive retail prices for the excess electricity they generate. This encourages customer investment in distributed generation, which includes renewable energy equipment. About 40 states have some form of net metering in place. In the 109th Congress, H.R. 6 (§ 1251) provides for net metering.

Biomass-Generated Synthetic Natural Gas (Syngas). Continuing high natural gas prices have created interest in using renewables to dampen natural gas demand. Renewable energy (mainly biomass) can be used to produce methane (the main component of natural gas), which could possibly substitute directly for natural gas. DOE projects that, by 2020, biomass and energy crops could produce 15% of natural gas needs. A 2005 Harvard University study, The National Gasification Strategy, cites a Princeton University study (A Cost-Benefit Assessment of Biomass Gasification Power Generation in the Pulp and Paper Industry) that says that biomass-generated "black liquor" and wood waste could produce enough syngas to support 25 billion watts (gigawatts) of natural gas-fired power plant capacity by 2020.

Substituting Electricity from Renewables for Gas-Fired Generation. Also, a variety of renewables can generate electricity that indirectly displaces natural gas use for power generation. For many utilities the peak demand (often supported with natural gas peak-load plants) occurs during hot summer afternoons. In many regions, solar and wind energy reach high levels during summer peak periods. The American Wind Energy Association (AWEA) says that by the end of 2005, wind farms will be saving more than 0.5 billion cubic feet (Bcf) of natural gas per day. DOE's report Scenarios for a Clean Energy Future (Table 7.11) projects that, with some federal policy changes, biomass- based power production could be greatly accelerated through 2010. (Also see the 2005 DOE study noted above, and the American Council for an Energy Efficient Economy's report, Impacts of Energy Efficiency and Renewable Energy on Natural Gas Markets.)

EPA's Climate Action Report -- 2002 describes federal renewable energy programs aimed at reducing greenhouse gas emissions. In Climate Change 2001: Mitigation, the Intergovernmental Panel on Climate Change looks at the role that renewables could play in curbing global CO2 emissions.

Since 1988, the federal government has accelerated programs that study the science of global climate change and has initiated programs aimed at mitigating fossil fuel- generated carbon dioxide (CO2) and other human-generated emissions. The federal government funds programs for renewable energy as a mitigation measure at DOE, USDA, the Environmental Protection Agency (EPA), the Agency for International Development (AID), and the World Bank. The latter two agencies have received funding for renewable energy-related climate actions through Foreign Operations appropriations bills.

Because CO2 contributes the largest share of greenhouse gas emission impact, it has been the focus of studies of the potential for reducing emissions through renewable energy and other means. Except for biofuels and biopower, wherever renewable energy equipment displaces fossil fuel use, it will also reduce carbon dioxide (CO2) emissions, as well as pollutants that contribute to water pollution, acid rain, and urban smog. In general, the combustion of biomass for fuel and power production releases CO2 at an intensity that may rival or exceed that for natural gas. However, the growth of biomass material, which absorbs CO2, offsets this release. Hence, net emissions occur only when combustion is based on deforestation. In a "closed loop" system, biomass combustion is based on rotating energy crops, there is no net release, and its displacement of any fossil fuel, including natural gas, reduces CO2 emissions.

LEGISLATION

109th Congress

H.R. 6 (Barton)/S. 10 (Domenici). Energy Policy Act of 2005. Reauthorizes REPI, authorizes increased hydropower at existing dams, sets renewables goal for federal facilities, and establishes residential rebate program. In House, Committee on Energy and Commerce ordered committee print reported, as amended, April 13. Incorporated Domestic Energy Security Act and H.R. 1541 (as Title XIII). Referred to Committees on Energy and Commerce, Resources, Ways and Means, Science, and others April 18. Passed House, amended, April 21. The Senate version of H.R. 6 was brought to the Senate floor on June 14, 2005, and S.Amdt. 775 incorporated S. 10 into the bill as an amendment in the nature of a substitute. The Senate-passed bill included a three-year PTC, an 8 billion gallon RFS, and a 10% RPS. Conference reported (H.Rept. 109-190) July 27. Signed into law August 8.

H.R. 1541 (Thomas). Provides $18 million in residential investment tax credits over three years for solar hot water, photovoltaics, and fuel cell equipment. Committee on Ways and Means ordered bill reported, April 13. Incorporated into H.R. 6.

H.R. 2419 (Hobson). Energy and Water Development Appropriations Act, 2006. Provides funding for DOE renewable energy programs in a new account structure that merges program funding for DOE energy efficiency (conservation) programs formerly funded under Interior Appropriations. Reported (H.Rept. 109-86) May 18, 2005. Passed House, amended, May 24. Senate Appropriations Committee reported (S.Rept. 109-84) June 16. Passed Senate July 1.

S. 427 (Jeffords). Renewable Energy Investment Act of 2005. Creates a federal renewable energy portfolio standard, starting at 5% in 2006 and reaching 20% in 2020 Introduced February 17, 2005; referred to Committee on Energy and Natural Resources.

S. 726 (Alexander). Natural Gas Price Reduction Act of 2005. Section 103 authorizes funding for distributed generation, solar energy, and biomass technologies. Section 104 authorizes funding to accelerate hydrogen and fuel cell development. Section 105 would, under certain conditions, repeal PURPA Section 210 requirements for cogeneration and small power facilities. Section 106 calls for a study of cogeneration and small power. Section 108 directs states to consider requiring net metering services for electric utility customers. Section 113 provides financial incentives to industry to encourage use of gasification equipment that uses biomass and other fuels. Introduced April 6, 2005; referred to Committee on Energy and Natural Resources.

S. 727 (Alexander). Tax Incentives for the Natural Gas Price Reduction Act of 2005. Section 3(a) increases the business investment tax credit for solar energy equipment from 10% to 30% for five years. Section 3(b) establishes a 30% tax credit ($7,500 maximum) over five years for installation (including labor) of residential solar heating equipment. Section 4(a) has a 15% investment tax credit ($2,000 maximum) for residential solar electric (3-year), solar water heating (1-year), and wind energy (1-year) equipment. Section 3(c) extends the renewable energy electricity production tax credit (PTC) for solar and geothermal energy for five years. For other equipment under the PTC, Section 4(b) extends the credit for one year. Introduced April 6, 2005; referred to Committee on Finance.

(A more extensive list of over 100 bills appears in CRS Report RL32860, Energy Efficiency and Renewable Energy Legislation in the 109th Congress.)

CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS

U.S. Congress. Senate. Committee on Energy and Natural Resources. Power Generation Resource Incentives & Diversity Standards. Hearing held March 8, 2005. [http://energy.senate.gov/hearings/witnesslist.cfm?id=1403]

(A more extensive list appears in CRS Report RL32860, Energy Efficiency and Renewable Energy Legislation in the 109th Congress.)

FOR ADDITIONAL READING

Tables showing DOE Renewable Energy R&D Funding trends back to FY1974 (current and constant) are available from the author of this issue brief.

American Solar Energy Society. Renewable Hydrogen Forum. Apr.