Question 1. (a and b) Questions from Senator Wallop: Regulations can impose unforeseen costs on the economy, but they also have the potential to address market failures, be "market enhancing", and reduce costs. For example, cost-effective conservation cannot fairly compete because of the way current utility regulation and ratemaking rewards supply-side investments. Changing regulations so that all resources fairly compete, and their full costs -- including environmental and other externalities are accounted for, promotes more economic efficiency and reduces the costs of providing energy services. Rigorous cost-benefit analysis, uniformly applied to supply and demand-side resources, can be very beneficial in this analytical process. Question 2. (a and b) - Policy initiatives can be an important supplement to market forces, particularly when there are demonstrable market failures. Electricity pricing, for example, is typically at average cost and not marginal cost. Traditional ratemaking discourages utilities from pursuing cost-effective conservation. The environmental cost of utilizing fuel is often not included in the cost of the fuel. Failure to recognize these market limitations would lead to a very sub-optimal allocation of resources if we were to rely solely on the market. The challenge is to design policies that can make maximum use of market forces to accomplish our objectives (like the allowance trading provisions of the clean air act). Question 3. a. The Cranston-Gonzales National Affordable Housing Act requires HUD to update energy standards for housing assisted by HUD, including new homes financed through the FHA program. The new standards must be at least as stringent as the Model Energy Code of the Council of American Building Officials. This requirement is both necessary and desirable. The federal government should not finance energy-inefficient homes that cost more in total terms (mortgage payment plus energy bills) than homes built to modern, cost-effective standards. Building codes prevailing in many parts of the country are lax, permitting homes to be built and financed through FHA that cost much more to operate than necessary. These high energy bills make these homes less affordable, and exacerbate FHA's serious delinquency and default problems. Studies by the Alliance and Pacific Northwest Laboratory show that the efficiency levels in the Model Energy Code are very cost-effective. Not only do the modest added costs of the higher standards quickly pay for themselves in energy savings, homeowners actually pay less each month in mortgage payments plus energy bills than they would for homes built to lesser standards. b. The effect on private mortgage markets will be minimal. Our study shows that the MEC will add about $1,400 to the cost of the average home, contributing about $12 to the mortgage payment at today's rates. This would increase the mortgage payment by only about one percent. This amount is small enough that it will not change normal underwriting practices. Moreover, energy bill savings more than offset the tiny increase in mortgage payments, so the homeowner is immediately better off in a Model Energy Code home. c. Adopting the Model Energy Code for FHA housing will have a minimal impact on the building industry. In fact the National Association of Home Builders now supports the Model Energy Code, as witnessed by its favorable comments on the recent HUD rulemaking adopting the Model Energy Code. About one-third of the states, including Wyoming, already have energy codes at least as stringent as the Model Energy Codes. The effect of the higher FHA standard will be to motivate other states to follow this example. It will alert builders, code officials, and others in the housing industry to the need for more energy-efficient construction. Question 4. The Alliance and the American Council for an Energy Efficient Economy performed a series of analyses to estimate the likely impacts of the bill on national energy use. The attached document summarizes this analysis. To illustrate the kind of analysis used to create these estimates, we describe below the way we estimated the impact of the home energy ratings provision and the lamp and luminary labelling section. The home energy ratings provision in section 3002 calls for DOE to establish guidelines for home energy rating systems, and to offer technical assistance to states. However, because there were no requirements that would necessarily increase the number of energy ratings conducted annually, and because there was neither a performance target nor a funding authorization for the technical assistance effort, we were constrained to project only modest increases in energy ratings and resulting energy savings. Here are the steps in our analysis: 1. 2. 3. 4. Based on our knowledge of market activity, we estimated that currently about 40,000 ratings are conducted each year. We projected that the bill would cause a 10 percent annual increase in the number of ratings through 2000. Based on experience in current field programs, we estimated that 25 percent of the ratings would result in either more efficient new construction or retrofits to older homes. Our field tests and other operating programs indicate that 25 percent energy savings are achievable in either case. Using DOE's Residential Energy Consumption survey to project baseline energy use, we projected the energy savings that would accrue from this level of market penetration. Savings were expressed in annual savings for 2000 and cumulative savings through 2000. The analysis for lamp and equipment labelling in section 3008 is found on the attached spreadsheet in the row entitled "luminaire labelling." Question 5. a. HUD has long required that new homes built under its auspices meet minimum energy standards. Neither HUD, DOE, nor any other agency has proposed that a federally-insured mortgage for an existing home be made contingent on a specific energy efficiency rating. However, DOE is proposing in its National Energy Strategy that energy ratings become mandatory on all homes prior to sale. Also, the Farmers Home Administration, recognizing energy costs as a major factor in the affordability of housing, frequently makes energy improvements in homes financed in its program to bring them up to minimum standards. b. If a home were found to be deficient in energy features prior to being financed via an FHA mortgage, the seller would have several options. First, the seller could make the necessary improvements directly prior to sale, as sellers frequently must do to meet other FHA building standards. The other principal option would be to encourage the buyer to use the energy efficient mortgage option available in the FHA program. This option allows the buyer to add up to $3,500 of energy improvements to the mortgage. c. Imposing this kind of condition would have little effect on resale markets. The FHA program already imposes various standards on the existing housing stock; these already can cost sellers money prior to sale. Energy standards have the unique added value of benefitting the buyer and society through reduced energy use and reduced pollution. And because the energy efficient mortgage option provides an additional way to pay for energy improvements, they are less of a barrier to resales than other building defects. Question 6. a. Existing environmental requirements may have internalized some of the environmental costs associated with energy production and use, but not all of them. Some pollutants, such as carbon dioxide, are not controlled. Others, such as visual, noise, or other aspects may not be the subject of national legislation or otherwise internalized costs. Finally, local conditions may cause local officials to establish higher premiums for environmental protection than set at the national level. The procedures that New York State has adopted, for example, are a model that allows the flexibility to address local conditions or other assessments of environmental damage. b. When considering externalities in the context of least-cost planning, it is certainly appropriate to consider the national security costs and benefits of different options along with environmental benefits. We should choose the least-cost option among all that satisfy our need for energy services. c. Least-cost planning is an evolving art and science. Issues concerning future price estimates, participation rates in demand-side programs, and others illustrate the type of analysis that need refinement. A successful least-cost plan employs sensitivity analysis to evaluate the particular assumptions which may make the result change. It is important to seek a solution that is considered "robust" for the varying sensitivities. Question 7. (a and b) The advancement of new energy supply technologies may have an important role in the growth of the economy, but a better way to phrase the issue is that we must advance the development of new energy service technologies. This would include supply and demand-side technologies. - It is important to recall that the economy grew by 40 percent from 1973-1986 with no growth in total energy use. A whole host of new technologies did appear on the market ranging from light bulbs that are 75 percent more efficient than traditional bulbs to new furnaces and motors. - As the globalization of markets continues, energy efficient products -- those that use energy most efficiently or conserve energy will be at a premium. World-wide energy prices are typically much higher outside the United States, and therefore efficiency "sells" even more there than in the U.S. because of the quicker paybacks. Our manufacturers will have to manufacture these products or American consumers will be purchasing foreign made products of typically greater efficiency. Question 8. It may be appropriate to streamline some regulatory or procedural barriers to bring new technologies to the market faster. It is important, however, that the process ensure that environmental, safety, and other requirements are adequately addressed. Question 9. Least-cost planning can utilize "life-cycle" costing of energy alternatives. The least-cost planning process, however, ensures that all the resources are compared using similar assumptions, such as discount rates, energy price forecasts, and similar information. The planning process seeks to evaluate all resources on a consistent basis. The planning process is also an integrated, dynamic approach, so the interactions among a mix of various resources to meet future energy needs is fully understood. Question 10. (a and b) The least-cost planning process compares all resources on an equal and consistent basis. The goal is to provide for the needed energy services at the lowest total cost, typically on a present value basis. Since the time horizon is included in the analysis, longer lived capital investments are not necessarily disadvantaged. The value of them is discounted, as all resources are, at the appropriate discount rate. The resources being selected may often be efficiency resources because those are the cheapest available. This assessment includes a consideration of critical factors such as reliability, dispensability, diversity, risk, and other important attributes of the electrical system. It would be incorrect to state that the process puts a premium on the acquisition of efficiency resources. It would be correct to state that the result of a fair treatment of all resources on a consistent basis results in efficiency often but by no means always being the selected resource to meet future energy needs. Question 11. (a and b) As detailed in the response to question 6, least-cost planning would include the costs of environmental controls required for particular pollutants to the extent that the cost of the resource includes these controls in its assessment. However, several issues remain. First, the costs of controls may not be an assessment of the true damage done by the pollutant. Second, all pollutants and resulting damage are not controlled. Finally, local conditions may warrant an assessment of a larger premium for environmental damage. National security considerations are an appropriate externality to include in a least-cost assessment. Appendix II-Additional Material Submitted for the Record Energy Technology for Developing Countries: December, 1989 Prepared by Staff From: Lawrence Berkeley Laboratory Argonne National Laboratory Oak Ridge National Laboratory Applied Science Division Prepared for the U.S. Department of Energy under Contract DE-AC03-76SF00098 LBL-28407 UC-400 |