Economic Impact Analysis of a 20% New

Jersey Renewable Portfolio Standard

New Jersey Board of Public Utilities

December 1, 2004Scott Weiner

Nancy MantellMichael LahrFrank Felder

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R/ECONTM Rutgers Economic Advisory Service

• R/ECONTM is a service of Rutgers Center for Urban Policy Research

• We produce economic analyses, forecasts, and impact assessments for a variety of clients in New Jersey and the rest of the US--Clients include NJ Department of the Treasury, PSE&G, and JCP&L

• We have 2 models used in these endeavors: an econometric model and an Input-Output model

• Both models were used in this study for the BPU

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The Econometric Model

• An econometric model (more than 150 equations)• Equations are based on historical data for New

Jersey and the US for 1970 to 2003• Model sectors:

– Employment and gross state product for 40 industries– Consumer price index– Personal income and its components– Wage rates and price deflators for major industries– Population, labor force and unemployment– Housing permits and construction contracts– Motor vehicle registrations, and – State tax revenues by type of tax, and current and capital expenditures.

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Model Additions for RPS Study

• Energy sector • The energy sector equations include:

– electric price per kilowatt hour, residential and other (commercial and industrial)

– electricity usage per 1000 megawatt hours, residential and other

– electric revenues in billions of dollars– energy taxes in millions of dollars, and – employment at electric utilities (both generation and

distribution) and and other utilities.

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Baseline Forecast

• Baseline forecast (including the new energy sector) based on R/ECONTM forecast of April 2004 for New Jersey and the Global Insight, Inc. US forecast of February 2004

• Forecast is for the period 2004 to 2020

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Baseline Forecast (cont’d)

• For the US: fast growth in 2004; slow, steady growth after 2005

• For New Jersey: similar pattern to that for the nation– Nonagricultural employment: average growth

of 1.2%– Real gross state product: average growth of 3% – The unemployment rate will average 5% during

the forecast period

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The Simulations

• HIGHER ENERGY COSTS (allows the producer price indices for natural gas and coal to rise faster than in BASELINE); by 2020 PPI Energy is 19% higher than in Baseline

• PROPOSED RPS OF 20% IN 2020 (assuming expected cost reductions in wind and PVs)

• PROPOSED RPS OF 20% IN 2020 (cost reductions in wind and PVs do not exceed historic rates of decrease) (also known as Worst Case Scenario)

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Findings of the Simulations RESULT TABLE: PERCENTAGE DIFFERENCES IN SELECTED VARIABLES IN 2020

HIGHER ENERGY PROPOSED RPS PROPOSED RPS PROPOSED RPSCOSTS OF 20% IN 2020 OF 20% IN 2020 OF 20% IN 2020

(NO TECH CHANGES)vs vs vs vs

BASELINE BASELINE HIGHER ENERGY BASELINECOSTS

Electric Price per Kilowatt Hour 4.63% 3.70% -0.88% 24.07%

Electricity Usage in 1000 Megawatt Hours -0.02% -0.03% -0.01% -0.10%

Electric Revenues ($ Millions) 4.91% 3.31% -1.53% 22.66%

Energy Taxes ($ Millions) 2.56% 1.96% -0.58% 13.04%

Gross State Product for Utilities ($ Millions 2000=100) -0.04% 0.00% 0.04% -0.07%

Gross State Product ($Millions 2000=100) -0.04% -0.01% 0.02% -0.15%

Employment at Electric Utitliies (Thousands) -0.03% -0.01% 0.05% -0.09%

NonAgricultural Employment (Thousands) -0.01% 0.00% 0.01% -0.04%

Consumer Price Index (1982=100) 0.10% 0.04% -0.07% 0.41%

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Further Simulations

• Used a combination of the I-O and econometric models

• My colleague Mike Lahr will discuss these findings

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Why Different Models?

• R/Econ model– Good for price effects– Lacks some industry detail: ~ 40 sectors– Tailored to NJ: ideal for tracking effects of energy price

effects

• Region I-O model– Lacks prices– ~ 500 sectors, better articulation of effects– Rutgers’ I-O documented in literature– Good for identifying investment effects

• Short-run construction effects• Long-run operating & maintenance effects

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Navigant Report Relevance

• Compared to alternative: gas-fired turbines– Outside of NJ

• RPS options– Land-fill biogas and biomass (both gasified or fluidized biomass)

• Economically feasible• Unlikely to expand

– Wind• Almost economically viable now• Production assumptions

– Off-shore only in NJ– Rest of PJM may use on-shore

– Solar photovoltaics• Likely to need subsidy through most of period

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Economic Effects of Investment

• Direct Costs– Wind ~ $1,000 per kW– Solar ~ $7,250 per kW

• Apply details to I-O model– Scenario 1: No NJ-based econ dev policies

• Wind power satisfied from rest of PJM• PV & wind manufacturing incentives non-existent• Installation impacts of PV only

– Scenario 2: State-based policies effected• Wind power off-shore in NJ, includes O&M• All units – wind and PV – produced in NJ

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RPS Installation Schedule

Solar PV Wind (MWs Installed) (MWs Installed)Cumulative Annual Cumulative Annual

2005 6 6 2006 11 5 2007 26 15 2008 56 29 266 266 2009 110 55 513 248 2010 130 19 685 172 2011 152 22 886 201 2012 178 26 1,122 236 2013 209 31 1,399 277 2014 245 36 1,725 326 2015 287 42 2,125 399 2016 337 50 2,539 414 2017 395 58 3,023 484 2018 463 68 3,590 567 2019 542 80 4,256 666 2020 636 94 4,864 608

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Scenario 1: No NJ-based Economic Development Policies

Annual impacts 2010 2020Jobs 520 2,600Income $29 M $142 MState and local taxes $2.6 M $13 MGSP $39 M $191 M

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Scenario 2: Economic Development Policies

• All spending retained in NJ• Annual impacts 2010 2020

Jobs 2,700 11,700Income $160 M $694 MState and local taxes $18 M $77 MGSP $218 M $956 M

• Impacts due to PV – 7 times > than for wind

(costs are benefits) – ~50% share of 2020 impacts

(but only 12% of accumulated PV/wind capacity)• Impact greater if NJ becomes production leader for PV & wind

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Health & Environmental Effects

• There are many and substantial health and environmental effects due to air emissions from power plants

• The health and environmental benefits from a RPS result from and depend on the reduction in the atmospheric concentration of emissions, which are (with the exception of carbon dioxide) geographic specific

• The health and environmental benefits of reduced emission concentrations are positive and span a wide range of values

• Quantifying the health and environmental benefits associated with a New Jersey RPS involves many detailed assumptions and using prior studies that may not be completely relevant to New Jersey– A New Jersey analysis requires additional research and modeling in

order to quantify these benefits

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Health &Environmental Effects (cont’d)

• Existing cap-and-trade emission allowance policies for sulfur dioxide and nitrogen oxide act in combination with a RPS so that the RPS may not alone result in reduced levels of these emissions but will lower the price of emission allowances

• Other policymakers use a wide range of externality values that may have limited application to New Jersey but these values are used in this report for illustrative purposes

• Illustrative calculations using generic environmental externality adders indicate that in the year 2020 the environmental benefits of the proposed 20% RPS is in the range of several hundred million dollars

• There are other non- health and environmental effects, but smaller, positive effects of a 20% RPS– Downward pressure on natural gas prices– Improve reliability

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Summary of Findings

• Under the Expected Case assumptions, the proposed 20% RPS compared to the existing RPS would raise electricity prices approximately 3.7% in the year 2020 and have negligible impact on the growth of New Jersey’s economy.

• If natural gas prices rise to levels assumed in the High Energy Price scenario, the proposed 20% RPS has a positive economic impact on the New Jersey economy because electricity prices would be lower than under the existing RPS scenario.

• Under the proposed 20% RPS, the location in New Jersey of all of the manufacturing, operations, and maintenance facilities and employees needed to support the PV and off shore wind infrastructure in New Jersey would be adding approximately 11,700 jobs and attenuate economic benefits to the New Jersey economy in the year 2020. In addition, the number of jobs could grow as demand for goods and services extends throughout the region.

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Summary of Findings (cont’d)

• The health and environmental benefits from a RPS result from and depend on the reduction in the atmospheric concentration of emissions, which are (with the exception of carbon dioxide) geographic specific, and other policymakers use a wide range of externality values that may have limited applications to New Jersey but these values are used in this report for illustrative purposes.

• Illustrative calculations using generic environmental externality adders indicate that in the year 2020 several hundred million dollars in environmental damage may be avoided by implementing a 20% RPS.

• The proposed 20% RPS would lower natural gas prices for consumers in New Jersey and nationwide by reducing the burning of this fuel in power generation.

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Summary of Findings (cont’d)

• The proposed 20% RPS would increase reliability by providing electricity when grid power is not available and may reduce expenditures on T&D within the state.

• The economic and electricity price impacts of the proposed 20% RPS depend substantially on whether expected technological improvements occur that reduce the cost of PV’s and wind power.

• Existing cap-and-trade emission allowances policies for sulfur dioxide and nitrogen oxide act in combination with a RPS so that the RPS may not alone result in reduced levels of these emissions but will lower the price of emission allowances.

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Policy Recommendations that NJ Can Implement Unilaterally

• Monitor future cost reductions in renewable technologies particularly wind and PVs

• Evaluate the appropriateness of off-shore wind in NJ as an electricity generation resource

• Coordinate and integrate various policies to maximize their impact

• Strengthen the link between NJ’s renewable energy and economic development programs by proactive initiatives to attract the location of manufactory and maintenance facilities within the state

• Assess whether NJ should develop the research and modeling capability to quantify the state specific health and environmental benefits of its renewable energy policies and to provide insights into its effectiveness

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Recommendations that Require NJ to Coordinate with Others

• Monitor the adoption of RPS policies by other states in the region, especially regarding the cost and availability of renewable resources

• Establish the link between reductions in emissions due to the RPS and corresponding changes in environmental policies to capture those reductions

• Continue NJ’s leadership role to facilitate trading the essential elements of RECs in the mid-Atlantic and Northeast regions to enhance liquidity in order to finance renewable projects within those regions

• Work with PJM to ensure that the wholesale market and reliability rules applicable to renewables reflect the values these resources provide