Wood Mackenzie

Press Releases: Life Sciences

Federal Renewable Portfolio Standard Will Reduce Power and Natural Gas Costs, But Not Have a Significant Impact on GHG Emission Levels

Monday 5th March 2007

(Watch William Durbin, Head of Global Gas & Power Research for Wood Mackenzie on E & E's On Point discuss how a US Federal RPS is an "easy first step" for emissions reduction ).


A 15-percent Federal Renewable Energy Portfolio Standard (RPS) will drive down natural gas demand and price, lower the overall price of power, but only lead to a slowing in the growth rate of greenhouse gas emissions (GHG), not an absolute reduction from current levels according to the new Wood Mackenzie report, "The Impact of a Federal Renewable Portfolio Standard."

The United States needs to build 420 GW of capacity over the next 20 years to replace aging facilities and meet its ever-growing need for electricity. Mounting concerns over US dependence on fossil fuels and the need to address global warming are helping to drive efforts in the US Congress to pass legislation establishing a federal standard to mandate the use of renewable energy. Recent RPS proposals call for an average of 15 percent of power generation to come from renewable sources within the next two decades, up from 6 percent today. While the US Congress contemplates a federal standard, 24 states have already adopted legislation mandating targets for renewables. Renewable energy in this case is defined as wind, solar, landfill gas, biomass, and small hydro power.

"Renewable energy alone will not be enough to result in the large GHG reduction targets being proposed," said Joe Sannicandro, VP - North American Power and Michael Pickens, Senior Analyst - North American Power for Wood Mackenzie. "Currently, the US power sector produces 39 percent of the country's total CO2 emissions. Our study shows that a Federal RPS would only be one small piece in a large and complicated puzzle to halt the growth of or reduce the absolute level of CO2 emissions. The study shows that implementing the Federal RPS would reduce total domestic CO2 levels in 2025 by only 10% from the Wood Mackenzie base case. Equally important is that the growth rate in CO2 production is still a positive 0.8% per year under a Federal RPS compared with a growth rate of 1.2% per year in Wood Mackenzie's base case outlook. Clearly, a reduction in total CO2 levels will require other options to be implemented including nuclear power, integrated gasification combined cycle (IGCC) with carbon sequestration and demand-side approaches to reduce the growth rate of electricity consumption."

According to the report, the adoption of a 15% Federal RPS will require a flood of new wind and other renewable projects well beyond current proposed projects, leading to a 500-percent increase in renewable capacity from current levels by 2026. This increase translates into an incremental construction cost of $134 billion (2006 dollars) between 2006 and 2026. The report also shows the switch to renewable energy will drive down demand and price of natural gas. "The lower fuel costs and fossil fuel consumption will lead to lower electricity costs," continued Sannicandro. "Over the next 20 years, the Federal RPS case leads to a savings of $240 billion (2006 dollars) in wholesale power costs, outweighing the higher capital investment to build the additional capacity."

The lower natural gas prices also reduce the total value of other generation technologies, particularly coal and nuclear capacity, potentially impacting the value of transactions involving existing generating assets.

Despite the benefits of renewable energy, there are still several significant challenges confronting the renewables industry that need to be resolved before such a large-scale national renewable program can be achieved, including uncertainty surrounding tax incentives, the ever-present NIMBY concerns, and land requirements for the additional build out of renewable facilities.