Measuring the Contribution to the Economy of Investments in Renewable Energy: Estimates of Future Welfare Gains by Molly Macauley*, Joel Darmstadter*, Jhih-Shyang Shih*, Emily Aronow*, David Austin**, and Tom Bath*** We thank the U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, for their support. * Resources for the Future **now at the U.S. Congressional Budget Office *** independent engineering consultant disc_papers/PDF_files/0205.pdf

Approach Theoretical Framework Cost-index based measure of expected consumer welfare gains from innovation Use of counterfactual and its own technological change Adoption rate External effects Uncertainty (data, forecasts) Discount rate Our Application Electricity generation technologies: --Renewable (PV, solar thermal, biomass, wind, geothermal) --Fossil (Combined cycle gas turbine -- conventional and advanced designs) Two geographic regions (CNV, MAPP) Weibull (“fast,” “slow”) Carbon dioxide, thermal effluent Time period:

Derived Demand for Renewable Energy Technologies: Illustration of Net Surplus Change

Derived demand for renewable energy technologies: illustration of net surplus change with external costs

Derivation of estimating relationships C* dt = E* (u dt, P dt, W dt ) E* (u dt, P I, W RE ) and C* I = E* (u I, P dt, W dt ) (1) E* (u I, P I, W RE ) ½ ln (C* dt x C* I )=½ (s dt +s I ) ln (W dt / W RE ) (2) (Bresnahan, AER 1986) W RE =  W I + (1-  ) W dt (3)

Relationship between expenditures, cost index

Using the index to estimate the present value of consumer surplus Interpretation of the index: “how much better off are we (that is, society in general) as a result of investment in renewables, taking into account the alternative (conventional technology) and differences in the social benefits and costs between renewables and conventional technology?”

Model Framework Aggregate Consumer Surplus Discount rate Private Generation Costs PV, ST, GEO, BIO, Wind, CCGT, A-CCGT (DOE/EIA (2000), DOE/EPRI (1997), authors’ adjustments) Externality Costs Carbon (CCGT) (Krupnick et al. (1996)) Thermal H 2 O (CCGT, Biomass, ST) (Authors’ estimates) Private and Social Generation Costs Cost Indices Private Consumption Expenditures (DOC (2001), authors’ forecasts) “Market Conditions” Adoption rates Electricity prices (DOE/EIA (2000)) Triangular and normal distributions combined with Monte Carlo draws characterize uncertainty.

Diversity of renewable energy resources in the United States.

Electricity Market Module Supply Regions Source: EIA

Weibull Adoption Rate Curves

Examples of External Effects Carbon Water Land use Avian and other ecological resources Lifecycle (such as manufacturing) Distinguishing pecuniary from technological effects

The present value of benefits from 2000 to 2020 for Wind Class 6 from scenario 1 for CNV

Discounted incremental net benefits from 2000 to 2020 for Wind 6 from scenario 1 for CNV Key: % Confidence Interval 95% 75% 50% 25% 5%

Illustrative Results (45 scenarios) Median Present Value, , 5% discount rate CNV Region Largest “loss” Fast adoption of PV w/ A-CCGT and no ext. $11.9 B Largest “gain” Fast adoption of WC6 w/ C-CCGT and ext. $4.6 B. ~ $556/household MAPP Region* $4.9 B. $4.4 B. ~ $600/household * No HGT, ST

Other Results Externalities -- Carbon and thermal externalities enhance relative surplus associated with renewable technologies -- Thermal externality reduces relative surplus associated with ST, BIO (even though externality is also linked with CCGT) Innovation -- Innovation in CCGT reduces median relative surplus associated with renewables by ~ 5%

Other results, continued Uncertainty -- Uncertainty can lead to values +/ % of median at the 5% and 95% confidence intervals Portfolio -- Equal portfolio weights create negative surplus estimates -- Variable portfolio weights can yield positive surplus estimates but smaller than single technology surplus estimates

Conclusions Limits -- Pairwise or exogenously specified portfolio comparisons rather than optimization -- Data gaps (external effects) and assumptions (“GenCo”; deregulation; state/local policies) -- Gross not net of public and private investment or other expenditures to attain cost goals, adoption rates

Conclusions, continued Findings -- Large differences among technologies -- Regional differences -- Adoption push -- Externality internalization -- Useful estimates result from model

Conclusions, continued Contribution -- Offers conceptually grounded measurement approach; alternative to data-intensive econometric models; appeal of “cost index” analogy with Consumer Price Index; tool for program managers -- Allows for uncertainty, externalities, policy simulation -- Could extend to include “green preferences” (data? Are they verified?); state and local policies -- Could extend to NRC-defined benefits including commercialization, knowledge, option values