Tuesday, October 23, 2007

Renewable Fuels Will Increase Prices to Consumers

Doesn’t the idea of renewable fuels sound great? After all, we all want to release our dependence on oil controlled by governments who are unfriendly to the civilized world. Growing it sounds like such a good idea. However before we totally buy into the renewable fuel plan, all sides need to be considered. Yes, environmental impact is important—who doesn’t want clean air and water? But cost needs to be a factor as well.

The House and Senate (at the time of this writing) have still not gotten together in committee to discuss a merging of the two different bills each passed earlier this year. So it is not too late for consumers/voters to express opinions

This posting comes to us from the Institute for Energy Research where Robert Bradley (one of our Energy Counsel Members) is President. Due to editing for brevity, please visit the Institute for Energy Research for the complete article.

In an attempt to alleviate concerns regarding energy independence, climate change, and high gasoline prices, Congress is expected to consider legislation this fall that would mandate the use of renewable fuels in the transportation and electric generating sectors. The Energy Information Administration (EIA), an independent and statistical agency in the U.S. Department of Energy, released a study in September, requested by Senator Inhofe, that analyzes both a renewable fuels standard (RFS) in the transportation sector and a renewable portfolio standard (RPS) in the electric generating sector. According to the EIA, these mandates would raise energy prices and reduce American economic output by $296 billion over two decades.

The mandates would establish a market for renewable energy credits. Companies would be required to hold credits in proportion to the amount of electricity they sell or the amount of motor transportation fuels they sell, by either producing the required level of renewable fuel or purchasing credits from other companies that generate a larger than required share. (See CARE’s September Newsletter for additional insight on the credits.)

According to the EIA, “achieving 25-percent penetration of renewable fuels in both electricity generation and motor transportation leads to higher energy prices as consumers substitute more expensive renewable fuels for less expensive fossil fuels.” Consumer energy prices rise steadily for the first 10 years of the projection, to 13 percent above expected prices. Higher delivered energy prices reduce real output for the economy, energy consumption, and, indirectly, real consumer spending for other goods and services due to lower purchasing power.

Gasoline and other petroleum products would cost more as oil refiners, blenders, and ethanol producers comply with the mandates, by producing almost 25 billion gallons of corn-based ethanol, 31 billion gallons of cellulosic ethanol, and importing 9 billion gallons of ethanol from foreign markets in 2030, 5 years after the mandates must be reached. Gasoline prices are forecast to have a 61 percent increase (in 2005 dollars).

“Higher prices contribute to a reduction in transportation demand for liquid motor fuels on an energy basis” the EIA said. According to the EIA, “increasing the use of renewable motor fuels leads to higher overall consumption of primary energy, in part because of the significant use of energy in the conversion of biomass to ethanol.” Total energy consumption is up almost 4 percent relative to the baseline in 2025, while biomass consumption is up 192 percent. As a result, the cost of biomass rises from about $30 a ton in 2005 to over $88 a ton in 2030. Approximately 9.2 bushels of the total U.S. corn production in 2025 is used to make ethanol. “As a result, less corn is available for food and feed,” according to the EIA. Corn prices increase to $6.50 per bushel in 2025, compared to an average of about $2.50 over the prior two decades before the ethanol mandates began with the Energy Policy Act of 2005.In the generation sector, electricity prices are 6 percent higher than the baseline in 2030. About 70 percent of all new generating capacity built over the next 2 decades is renewable. The mandates reduce carbon dioxide emissions. They are 14 percent lower than the baseline in 2030, but still remain higher than 2005 levels, by 14 percent.

The EIA cautions, “This analysis suggests that, to comply with mandates, it will be necessary for electricity and motor fuel producers to dramatically increase their use of technologies that play a relatively small role in today’s energy markets. …Big changes in the energy system, especially when implemented quickly, come with numerous uncertainties, the impacts of which may not be fully captured in this study. For example, compliance with the mandates would require successful development and rapid deployment of new technologies, such as biomass gasification power plants and cellulosic ethanol plants, that are not commercially available.” The EIA analysis evaluates the impact of the mandates through 2030, the current time horizon of projections in EIA’s Annual Energy Outlook. The report can be found through the EIA .

IER Distinguished Fellow Mary Hutzler provided this summary

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