Energizing Appalachia: A Regional Blueprint for Economic and Energy Development

Section I: Energy Overview

Reviewing the global, national, and Appalachian energy landscapes to assess the current conditions of various energy sectors was the first step ARC undertook in developing the Energy Blueprint.

The Global and National Energy Landscapes

The global energy market volatility and rising energy costs of recent years have been driven principally by significant supply and demand imbalances in the world oil and gas markets, due to constraints on supply and rapid growth in demand since the summer of 2003. The world oil supply grew 6.2 percent between 2003 and mid 2006, (Energy Information Administration. [2006]. "International Petroleum [Oil] Production." Retrieved August 31, 2006, from http://www.eia.doe.gov/emeu/international/oilproduction.html; Note: "Oil Supply" is defined as the production of crude oil [including lease condensate], natural gas plant liquids, and other liquids, and refinery gains or losses.) but delays in developing new oil capacity, due to production and infrastructure problems, and political instability in key oil fields have disrupted growth in the oil supply. World natural gas markets have been afflicted by similar problems, although delays and bottlenecks in adding new production and distribution capacity have also been major factors in natural gas price increases. On the demand side, rapid economic growth has spurred the demand for oil and natural gas, especially because of the growing energy demands of the Chinese economy. These short-run imbalances have been reflected in the world spot market for oil (a market where oil is bought with cash and delivered immediately), where average prices increased by 139 percent between August 2003 and August 2006. (Energy Information Administration. [2006]. "Spot Prices." Retrieved August 31, 2006, from http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm) Beyond the short-term factors affecting oil markets, there is increasing concern that long-term growth in the oil supply will slow further as many major oil fields reach peak production over the next 10 to 15 years. (National Research Council, National Academy of Sciences. [2006]. "Trends in Oil Supply and Demand, Potential Peaking of Conventional Oil Production, and Possible Mitigation Options.")

Imbalances in the oil and gas markets ripple through the energy economy in a variety of ways. The most obvious effect is on the costs of transportation fuels and residential and commercial heating. Rising oil and gas prices also affect the costs of generating electricity and supplying energy to the manufacturing and agricultural sectors of the world economy. As prices have risen for each type of energy demand, energy consumers in each sector have begun to switch to lower-cost fuel substitutes, such as ethanol for transportation fuel. In electrical generation, high-cost oil and gas-fired power plants are often taken off line in favor of lower-cost power plants, or replaced by alternative energy technologies such as wind, solar power, and biofuels. Fuel switching, however, takes time and investment. Nevertheless, the world economy has begun to switch fuels by supplying more energy through alternative technologies―where Europe has excelled―and by increasing the production of unconventional liquid fuels, such as gas-to-liquids, coal-to-liquids, and ethanol, particularly in the case of Brazil. A recent forecast by Cambridge Energy Research Associates concluded that these new fuel substitutes will begin to ease energy supply constraints over the 2010 to 2015 period. (Cambridge Energy Research Associates. [August 8, 2006]. "World Oil and Liquids Production Capacity to Grow Significantly through at Least 2015: CERA Update." Retrieved August 31, 2006, from http://www.cera.com/aspx/cda/public1/news/pressReleases/pressReleaseDetails.aspx?CID=8274) Despite these trends, the overall outlook for world energy markets is for slowly rising energy prices over the next few years, with a leveling off over the 2010−2015 period, and then a renewed steady rise in prices. (Forecasts are derived from "Non-Renewable Energy Innovation, Research to Support the Appalachian Energy Initiative," Global Insight Inc. [July 30, 2006]; and from Annual Energy Outlook 2006, EIA, p. 4.)

The United States experienced a $230 billion increase in energy costs in 2005, a 26 percent increase over the preceding year. In 2005, the country consumed approximately 10.5 million megawatt hours of electricity a day. Oil consumption in the United States has reached an all-time high, at 20 million barrels of oil a day―almost 25 percent of the world's use. Approximately 12 million barrels of that 20 million are used solely for transportation. Transportation fuel demand is growing; the number of automobiles in the United States now exceeds the number of people per household. With 12.8 million barrels of oil imported daily, increased demand and high-risk supply have resulted in escalating prices for the fuels required to keep America running. Natural disasters like Hurricane Katrina and global political instability in energy-rich areas such as the Middle East only intensify the nation's concern about future energy prices and the security of its supply. Recent disasters, combined with volatility in the marketplace, present a significant energy challenge to the nation.

While these challenges may seem daunting, the nation has managed to address some of its rising energy needs through improved energy efficiency, which can be measured in two different ways: energy use per dollar of gross domestic product (GDP) and energy use per capita. As Figure 1 shows, the amount of energy used for every dollar of GDP produced by the economy has fallen steadily since 1980. The Energy Information Administration (EIA) of the U.S. Department of Energy forecasts that this trend will continue, based on existing policies of the federal and state government and on private sector investment trends. Economic restructuring also plays a part in explaining the fall in energy use per dollar of GDP, because it caused a shift in economic activity away from manufacturing and energy-intensive uses and toward the relatively less energy-intensive service sectors. The combined effect of energy-efficiency measures and economic restructuring has been that the total amount of energy used by each person in the economy has remained relatively steady, as shown by the "Energy use per capita" trend line in Figure 1. Despite these gains from efficiency investments and shifting economic activity, there are some countervailing trends that are increasing energy use per capita, including increased travel demand and the rising intensity of energy demands by residential users and the service sector.

The growth of computing and telecommunications applications, due to the expansion of the Internet, has led to an increased demand for electricity by residential and commercial users. This trend is so widespread that the EIA has forecast that energy use per capita will begin to rise and will continue to escalate slowly for the next two decades. This means that total U.S. energy consumption will grow slightly faster than it has in the past.

In order to address these concerns, national energy policy has focused on ensuring energy reliability and affordability, and advancing energy independence by reducing dependence on foreign energy sources. (em>(This synopsis of energy policy is taken from "National and State Energy Policy Trends: Appalachian Regional Energy Blueprint Research Brief." The Keystone Center, Washington D.C. August 2006.) To accomplish these goals, a number of policy tools have been deployed over the last five years by both the federal and state governments:

• Technology Research and Development and Demonstration Programs are typically directed to emerging technologies to help advance the effectiveness, and demonstrate the reliability, of the technology. Key examples include clean coal technologies such as integrated gasification and combined-cycle coal (IGCC), carbon-emissions capture, and sequestration.

 

• Investment Incentives . Investment in new energy technology is lagging because the technology is only marginally economical, or there is uncertainty about consumer demand. Examples of investment incentives include purchasing agreements to support demand for coal liquefaction plants that produce liquid fuels, and tax credits for alternative fuel stations that supply ethanol to consumers.

 

• Production Incentives can be effective tools to spur production of energy sources or efficient products, particularly where there is underused production capacity or existing capacity can be redeployed to make new products. A wide array of incentives has been legislated by the states, particularly for developing renewable energy production credits and energy-related manufacturing tax credits.

 

• Consumer Adoption Incentives for Energy Efficiency Purchases include providing information to advance energy-efficient products through consumer rebates, and tax incentives that reduce the cost of technologies and products that are more expensive to purchase but provide life-cycle benefits. Key programs are the federal government's Energy Star labeling and tax incentives, and state programs that build on these incentives.

 

• Standards and Mandates to Promote Energy Efficiency, Market Adoption, and Environmental Quality are exercised when there is a compelling public policy reason and market-based approaches are not effective. Examples include renewable fuel standards, new building codes, and new emission standards, such as state-based greenhouse gas reduction mandates.

National Energy Policy

To meet the national energy policy objectives of energy independence, affordability, and reliability, the Energy Policy Act of 2005 (EPACT) set forth supply-side policies that are designed to increase the availability and diversity of fuel sources, advance technologies that use fuels more efficiently, and address fuel constraints through the development of alternative energy sources. In addition, EPACT set forth demand-side policies and programs that are focused on reducing the need for energy and encouraging end-users to consume energy more efficiently. Many of the EPACT policies and programs described below are designed to take greater advantage of domestic energy sources such as coal and renewable energy or to find alternative energy sources such as biofuels to displace oil imports. This strategy of import substitution can not only increase energy security and price stability, it can also lead to the generation of new energy-based industries and jobs. (This synopsis of energy policy is taken from "National and State Energy Policy Trends: Appalachian Regional Energy Blueprint Research Brief." The Keystone Center, Washington D.C. August 2006.)

• Clean Coal Initiatives: EPACT includes a variety of supports for clean coal technologies, including federal research, development, and demonstration investments in the FutureGen Initiative, (U.S. Department of Energy. [2006]. "FutureGen—Tomorrow's Pollution-Free Power Plant." Retrieved August 31, 2006, from http://www.fossil.energy.gov/programs/powersystems/futuregen/) a public-private sector partnership formed to develop innovative, low-emission technologies to produce hydrogen and electricity from coal and capture the carbon emissions for geologic storage; ultra supercritical pulverized coal plants, which hold the potential for increased efficiency and lower emissions than conventional pulverized coal plants; and new tax investment incentives for clean coal facilities and a seven-year accelerated recovery period on pollution controls on coal-fired electric power plants.
• Coal-to-Liquids: EPACT includes financial incentives for coal-to-liquids development, including loan guarantees and tax investment incentives, and a $1 billion, three-year authorization.
• Oil and Gas Production Incentives: Incentives are provided to increase production in less-accessible, more costly areas, such as coal seams, deep reserves, oil sands and shales, and marginal wells. These "unconventional" oil and gas resources actually exceed the potential of "traditional" resources remaining in the United States. EPACT also provides tax credits of $3.00 per barrel-equivalent for oil shale, tight sands, coal seams, and tar sands sold in the United States.
• Renewable Energy Production Credits: EPACT provides $3.4 billion in production tax credits for ten years to encourage the production of electricity using renewable wind, solar (including the first-ever tax credit for residential solar energy systems), biomass, geothermal, hydropower, refined coal, landfill gas, and municipal solid waste energy sources.
• Nuclear Power: EPACT provides several investment incentives for nuclear power, including a 1.8 cent-per-kilowatt-hour tax credit for new nuclear generation, and a series of loan guarantees, investment protections intended to cover the costs of unforeseen legal or regulatory challenges to plant operations, Price-Anderson Act insurance indemnification extensions, and decommissioning trust tax policy changes, which amount to about $5.7 billion in benefits for the nuclear industry. The tax credit is for the first 6,000 megawatts of new nuclear-generating capacity and is limited to the first eight years of operation and a total of $125 million per 1,000 megawatts of capacity.
• Alternative Fuels: EPACT provides incentives for producing biofuels such as ethanol and bio-diesel, and tax credits for alternative fuel stations to distribute these alternative fuels to consumers. In addition, EPACT provides research and development funding for exploring hydrogen-fuel and fuel-cell technologies.
• Energy Efficiency: EPACT includes a number of tax incentives to promote the implementation of energy efficiency measures and the purchase of efficient appliances by residential, commercial, and industrial energy consumers for the years 2006 and 2007. The U.S. Department of Energy and the U.S. Environmental Protection Agency (EPA) also sponsor a number of voluntary partnership programs that are intended to encourage industries, states, and the commercial and institutional sectors to commit to best practices in energy efficiency in exchange for technical assistance.
  • EPA's Clean Energy-Environment State Partnership Program to encourage states to develop a comprehensive strategy for using existing and new energy policies and programs to promote efficiency and clean energy sources;
  • The ENERGY STAR Product Certification Program to encourage investments in energy efficiency; and
  • The SmartWay SM Transport Partnership, which is a voluntary collaboration between EPA and the freight industry designed to increase energy efficiency while significantly reducing greenhouse gases and air pollution.
These programs include:
• Transportation: EPACT also established provisions for increased fuel efficiency standards for light trucks and SUVs for the first time in a decade, raising the standard from 20.7 miles per gallon to 22.2 miles per gallon for model year 2007 vehicles. The provisions include income tax credits of up to $3,400 per vehicle for purchasers of hybrid vehicles, and incentives for purchasers of fuel cell, advance lean burn diesel, and other alternative fuel vehicles.

Appalachia's Energy Landscape

Appalachia and energy have been closely linked throughout the history of the nation, mainly due to the importance of coal mining in the Region. Appalachian mines currently produce 35 percent of the nation's coal output, and Appalachian coal generated $16 billion of output and $720 million in taxes in 2005. Appalachia is also a net exporter of coal- and nuclear-generated electricity. In 2004, electrical power utilities in the Region generated 15 percent of the total U.S. electrical output, although the population of the Appalachian Region is only 8 percent of the nation's. (Electrical generation data derived from EIA-860 Database Annual Electrical Generation Report and from Electric Power Monthly. Energy Information Administration.)

Another dimension of energy is its impact on employment. More than one million people are directly employed in America's energy industry. In Appalachia, almost 150,000 jobs are generated by the energy industry. Hundreds of thousands more are involved in the production and distribution of products and services for the energy industry. Coal production alone stimulated an estimated 60,000 jobs in indirect supply and the induced consumer spending in 2005. (Regional Economic Models Inc. 2005 model analysis prepared by ARC staff.)

Appalachia's Energy Consumption

Appalachia's energy consumption patterns differ from those of the United States as a whole because the Region exports electrical power. As Table 2 shows, Appalachia's higher share of coal and nuclear electric energy consumption reflects the use of these fuel sources to generate electricity for local consumption and to export to surrounding states. It is noteworthy that the Region's share of high-cost natural gas is lower than the nation's, while its share of "other sources," which is largely made up of renewable energy sources, is lower than the nation's, even though the Region possesses considerable potential in renewable energy sources.

Appalachia's electrical generation capacity and output is far more dependent on coal than the nation's. As Figure 2 shows, more than three-quarters of the Region's electrical output is derived from coal, and 16.5 percent is derived from nuclear power, while gas and oil together contribute about 3 percent. By contrast, the nation as a whole generates half its electricity from coal, 20 percent from nuclear power, and more than 21 percent from gas- and oil-fired power plants.

Another dimension of the Region's energy consumption is how it uses its energy in the residential, commercial, industrial, and transportation sectors. As Figure 3 shows, Appalachia uses slightly more of its energy on residential uses than does the United States as a whole. This probably reflects the lower efficiency of the Region's housing stock. Appalachia's commercial and transportation sectors are relatively smaller than the nation's, so they consume less energy; while the Region's greater manufacturing and electrical production is reflected in the higher share of the industrial sector's energy consumption.

Appalachia's Energy Resources

Coal is abundant in Appalachia. The Region currently has recoverable reserves of 3.9 billion short tons of coal at active mines and recoverable reserves of 52 billion short tons. (Energy Information Administration Annual Coal Report 2005, Tables 14 and 15.) New technologies are under development that will make possible new applications to enhance the extraction, processing, and conversion of coal to a variety of products, including gas and liquid fuels for electricity generation and as substitutes for imported oil. In addition, these coal gasification processes will use new techniques that minimize environmental impacts, such as the extraction of pollutants and carbon gases. The economic consulting firm Global Insight's analysis of the coal industry prospects over the next ten years, which was based on likely scenarios for energy price trends and demand, identifies key opportunities in clean-coal power generation and coal manufacturing of coal-to-liquids, coal-to-gas, and coal-to-chemicals products. The scenarios also suggested the likelihood of the implementation of a comprehensive national greenhouse gas emissions-control policy that provides economic incentives for investments in carbon gas capture and sequestration technology. A national policy could open still more opportunities for coal. (Global Insight Inc. [July 30, 2006]. "Non-Renewable Energy Innovation, Research to Support the Appalachian Energy Initiative.")

The Region also has about 5 percent of the recoverable natural gas resources in the nation, primarily in Kentucky, New York, Ohio, Pennsylvania, Virginia, and West Virginia. The Appalachian Region also contains three to four billion barrels of unconventional oil resources, as evident in Kentucky's oil sands and oil shale.

Though Appalachia is best known for its coal resources, it is beginning to develop its potential for the development of renewable energy sources found in wind, water, and waste products. Wind power is significantly underdeveloped in the Region, and has the greatest potential for development along the ridge lines of the Appalachian Mountains. There are 528 megawatts of installed wind power capacity in the Appalachian states, nearly 1,000 megawatts of planned capacity, and the potential for over 11,000 megawatts of additional capacity.

Significant renewable energy opportunities can also be found in the development of energy from biomass, biofuels, solar power, and hydropower. Energy from biomass converts specially grown crops, sawmill wood residue, agricultural wastes, and other organic matter into new energy sources and fuels. The total annual biomass resources for the Appalachian states are estimated to be over 108 million tons. Biofuel potential is estimated to be 500 million gallons annually, based on converting 2005 output for corn and soybean production to ethanol and biodiesel fuels. Solar power's best potential in the eastern United States, including Appalachia, is likely to be for residential or commercial application. In the Appalachian Region, production of residential and commercial photovoltaic (PV) power is currently viable in southern Appalachia, and several PV manufacturing plants are located throughout northern Appalachia. Passive solar installations such as day-lighting, solar ventilation air preheating, hot water heaters, and pool heating may give the best return on current investment in solar technology. Small and low-impact hydroelectric capability is another largely undeveloped energy resource in Appalachia. The Region is traversed by several major rivers and watersheds that create numerous opportunities for small-scale and low-flow hydropower installations. This category of hydroelectric generation is based on damless technology. Total hydropower potential could be as high as 5,700 megawatts of average available capacity. (Center on Business and Economic Research, Marshall University. [August 28, 2006]. Energy Efficiency and Renewable Energy in Appalachia: Policy and Potential. Retrieved August 31, 2006, from http://www.marshall.edu/cber/research/index.htm)

In addition to this impressive array of potential alternative energy resources, the Appalachian Region possesses an extensive industrial manufacturing base that is already engaged in the production of some of these emerging energy technologies, particularly wind turbine components, solar components and photovoltaic panels, and biofuel plants. (Ibid., chapter 3; and see Economic Development Potential of Conventional and Potential Alternative Sources in Appalachian Counties, Amy Glasmeier, Pennsylvania State University, June 21, 2006.) Appalachia's industrial base has numerous potential supplier chain links that could be cultivated within these alternative energy sectors and that promise additional job creation for the Region's manufacturing base. (Ibid., Glasmeier, June 21, 2006.)

State Policies for Conventional and Alternative Energy, and Energy Efficiency

Recent years have seen comprehensive energy plans either passed or under consideration in many Appalachian states. (Center on Business and Economic Research, Marshall University. [August 28, 2006]. Energy Efficiency and Renewable Energy in Appalachia: Policy and Potential. Retrieved August 31, 2006, from http://www.marshall.edu/cber/research/index.htm) All have similar provisions but emphasize different approaches. These include:

• Promoting conventional fuel production and clean conventional technologies.
• Promoting the use of clean energy technologies, and energy efficiency.
• Maintaining or renewing an ecologically strong environment.
• Expanding electrical generation from renewable or alternative fuels.
• Using biomass, including landfill methane.
• Developing biofuels, including ethanol and biodiesel.
• Providing the lowest-cost energy consistent with other goals.
• Increasing economic development through the creation and expansion of alternative energy manufacturing and distribution.

Specific policies used in various Appalachian states include:

• Conventional Fuels Incentives programs are in place in many states to support the production and use of coal, oil, and gas, including tax exemptions for enhanced recovery of coal and gas and coal-bed methane and incentives for the development of clean coal technologies. Alabama and Virginia have production tax incentives for coal; and Kentucky, Maryland, and Virginia have incentives for indigenous use of coal in their states. Kentucky, New York, and Pennsylvania have clean coal tax incentives. Ohio has a $1/ton tax incentive available to Ohio's investor-owned utilities that use Ohio coal. Several Appalachian states offer tax incentives for the purchase of pollution control technologies. Natural gas tax incentives are offered by Alabama, New York, Pennsylvania, Virginia, and West Virginia. Oil production tax credits are offered by Alabama, Kentucky, New York, and West Virginia. Other incentives include provisions for coal-bed methane recovery in West Virginia and Virginia. Ohio has a clean-coal technologies research, development, and demonstration/deployment (RD & D) program with projects supported by a $100 million coal revolving bond fund. Various other states also have clean-coal technology research and development activities.

• Net Metering, where those who use qualified distributed generators powered by renewable or alternative fuels receive credit or payment for the electricity they produce. Net metering is allowed in North Carolina, Virginia, Maryland, Ohio, Kentucky, New York, Pennsylvania, and Georgia. It is also available through the Tennessee Valley Authority (TVA) in the parts of Tennessee, Mississippi, and North Carolina TVA serves. The provisions in these laws vary, including what types of renewables are eligible, what size generators can be used, whether the programs are voluntary or compulsory, what price is paid for the distributed generation, who pays for the installation to the grid, and the total amount of generation a utility must accept.

• Renewable Energy Portfolio Standards require that a certain percentage of the power either generated or consumed in a state must come from renewable fuels. The utility is required to either build a renewable energy facility or buy renewable energy from another generator to meet the requirement. New York, Pennsylvania, and Maryland have renewable energy portfolio standards.

There are differences among the states as to what should be considered "renewable energy." All include solar and wind power, along with small-scale hydropower. Landfill gas is included by most states. Pennsylvania's standard includes waste from wood or coal, as well as demand-side management.

Standards are often divided into tiers, with requirements that given percentages must be met by using certain fuels such as solar or wind. While the tiers add complexity to the standards, they are considered desirable because they encourage the development of certain renewables.

A recent development is the market for renewable energy credits. Under this program, a generator using renewables can meter the amount of energy produced. The producer then sells the renewable energy in one-megawatt credits, which can be can purchased by a utility to satisfy its renewable-energy requirement.

• Public Benefit Funds, which attach a small charge to each customer's monthly energy bill, are used in New York, Ohio, and Pennsylvania. Monies collected under these programs are used in a wide variety of ways, including subsidizing energy efficiency for low-income households; making low-cost loans or grants for the installation of renewable or alternative energy generation; supporting the research and development of renewable, alternative and efficient energy; encouraging the location of renewable-energy related industry in the state; and remediating impacts from pollution caused by energy generation from conventional fuels.

• Grant and Loan Programs are available in all Appalachian states for certain uses. These programs encourage the adoption, installation, and use of alternative or renewable technologies; provide low-cost loans; promote energy efficiency education; assist low-income consumers; finance research and development; locate renewable energy manufacturing; support the use of biofuels; and reward energy conservation. Differences among state programs are considerable and reflect both the priorities and the financial capabilities of the states using them.

• Tax Incentives are not as widespread as other inducements, but some Appalachian states grant personal and corporate tax incentives, such as deductions or credits for installing or producing renewable or alternative energy. New York, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia provide or allow property-tax exemptions or rate reductions for certain forms of renewable generation or installation. Limited sales tax reductions are also available in Georgia, New York, Maryland, and Ohio for renewable installation.

• Rebate Programs are in place in some states, including New York, Maryland, Pennsylvania, South Carolina, and Kentucky. These programs include the installation of solar equipment, the purchase of energy-efficient appliances, and the production and use of alternative fuels.

• Green Purchasing Programs, which allow consumers to support the generation of clean energy by paying a slight additional charge, have been established by some states and utilities in the Region.

The Region possesses a diverse set of energy resources that hold the potential to generate new businesses and jobs. In addition, Appalachian energy production for the U.S. market will lessen dependence on foreign energy sources while strengthening the regional and national economies.