Donovan, John J.

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PRELIMINARY ANALYSIS OF CARTER'SENERGY CONSERVATION PLAN WITHRESPECT TO NEW ENGLAND ISSUES*John J. DonovanWorking Paper No. MIT-EL-77-009WPApril 21, 1977* This report was prepared in the period immediately after the March 20,' 1977energy policy speech made by President Carter. It therefore does not reflectthe subsequent detailed legislative package. iSUMMARYPresident Carter's energy plan will, in all liklihood, be helpfulto the country, to the New England region, and to the people of New Englandin that it appears that it will:* provide better mechanisms to secure equalization of price ofenergy throughout the country. For example, natural gas and oil pricesin New England are heavily dependent on the higher foreign prices. (90%of New England energy is petroleum based, 70% of that is imported).Raising prices of national gas and oil will help this region achieve paritywith the rest of the country.* increase the price gradually, hence easing the economic andsocial impact of the inevitable price increases that will occur as petroleumreserves are depleted.* accelerate the introduction of new technologies such as solar energythrough tax incentives provided in the Carter plan.* encourage conservation through insulation tax incentives and throughgradual increases in the Carter plan.The issues behind Carter's plan will demand serious and intensiveanalysis to give the New England policy makers strategies to assure thatthe interests of the region, the states and the people of New England areupheld. The speech made by President Carter on March 20, 1977 leaves out manydetails that will be important for indepth analysis. Further, there are manyquestions and uncertainties, especially as to the effects on supply that the planas was stated on March 20, 1977 does not answer. This quick reaction is not anindepth study but rather a starting point.The following includes brief comments on some aspects of Carter's proposal.-- rv . _ 1 ~__ _· · 1 . . _. · __·-2-1. INSULATION (AND OTHER HOMEOWNER ENERGY SAVING MEASURES)20% of all energy consumed in New England and 10% of all energyconsumed in the United States is consumed in home heating. As the priceof energy goes up this sector will be affected and in all liklihood,consumption will to some extent be curtailed. The idea of the Carterprogram to encourage conservation in the home is sound.What is needed for the public policy in the region is informationas to what home improvements are the best and most effective for thisregion.Included in this section are two analyses that we have producedusing the MIT regional computational facility. The first analysis gives insightinto the character of the housing stock in Massachusetts. The second analysisgives cost benefit analysis of various home improvements. Such ananalysis could be helpful to homeowners in the region.1.1 Housing Stock in MassachusettsThe "average" or modal home in Massachusetts was built between 1945and 1965 and is a two-story house with 1630 square feet of living area. Ithas an unheated but insulated attic and has 16 windows and 2 doors. Doorsand indows have storm covers but only about half the windows are weatherstripped. It is heated by oil at a cost of $572 per season. Table 2 givesthe detailed breakdown of the description of the homes in this subsample.The "average" or modal home also has a color TV and a frost freerefrigerator, an electric stove, oven and dryer, and its water is heatedby either gas or oil. Table 3 gives a detailed description of energy use.·____·_ _I _ I UI1-3-TABLE 11977 HOUSING STOCKUninsulated HousingSingle SingleFamily FamilyDetached AttachedStock (000)MultiFami lyLow-rise TotalTotalHousingStock*(000)TotalUninsulated HomesAs Percent ofTotal Stock (%)ConnecticutMaineMassachusettsNew HampshireRhode IslandVermontTOTAL NEWENGLAND* Total housing stock isfamily-detached homes,low rise units in 1977.the sum of both insulated and uninsulated singlesingle family-attached homes and multi-familySOURCE: "Simulation Model of Residential Space Heating and Central AirConditioning in New England Disaggregated by State, 1970-2000"by Richard Daifuku for NEEMIS, February 1977.6723196173411493010318181423224.867783117140613664260286979962901824234306126377634814.121.020.117.919.622.218.5-4-TABLE BASIC HOME DESCRIPTION - Massachusetts*Year Built Storm WindowsPrior to 19201920-19451945-19651965-Present23%22%39%16%Type of HouseOne StorySplit LevelTwo StoriesThree Stories32%8%54%6%Living AreaMax.Min.Avg.25007501629Central A/Csq.ft.sq.ft.sq.ft.Avg.Storm DoorsAvg.Weather StrippingWindowsAvg.Weather StrippingDoorsAvg.AtticPresentAbsentPresentNot PresentWinter FuelGasOilPropaneElectricCoalKerosene9%91% Heating AtticPresentAbsentAttic InsulationAvg.29%64%.1%7%.1%0Winter Bill$1050$ 150$ 572*Source; Project Conserve - a sample of 135,000 single family homes in New England84%77%56%62%93%7%5%95%3 inchesMax.Min.Avg.-- ------I  I--· I · Illu*r·ITABLE 3BASIC ENERGY USE*Winter Temperature SettingDay657669.2657669.2657667.9Summer Temperature Setting707976.7707976.7Percentage OwningColor TVOutside Gas LightFrost Free RefrigeratorFrost Free Freezer*Source: Project Conserve - a sample of 135,000 single family homes in New England-5-I'MinMaxAvgEveningMinMaxAvgNightMinMaxAvgDayMinMaxAvgNightMinMaxAvg79.71.873.320.4-6-)-1.2 Cost-Benefit Analysis of Home ImprovementsThe proposed Carter program features an income tax credit forinsulation and weather-proofing of residential structures of 25% onthe first $800 and 15% on the next $1500 invested in home insulation,storm windows and/or storm doors.Figure 1 and Figure 2 depict break-even points incorporating thetax incentive for various possible home improvements. This analysis isfor a New England home having seven rooms, thirteen windows and an atticof approximately 1440 square feet. Break-even periods are calculated forthree improvement scenarios: 1). installation of thirteen stormwindows; 2). installation of two storm doors; 3). installation of6-inch faced fiberglass insulation in the attic floor or roof.The initial cost for the installation of storm windows was assumedto be roughly $500. Two storm doors were assumed to cost $140 ($70 each).These costs are considered high and thus conservative. The cost of 1440square feet of 6-inch insulation is $288. All insulation prices wereobtained from quotations by Ownes-Corning for the Boston area and do notinclude installation charges.The energy consumption of households for space heating was derivedfrom R. Tabors and S. Raskin, "The Cost of a Cold Winter to New EnglandHomeowners," and is defined to be oil consumption per household for anormal heating season. Consumption in each of the New England states wasaveraged to obtain consumption for an average New England household.~_·_I _I I ··~·___ _11·1·_ 11__· 1 __^~-I_ 1 ·-·-· - 11 1 1·--11·1-11_1·_-- · · ---- 11111111-- --- --- -. .-7-The-discount rate is the risk-free rate of 5,75 percent and a timehorizon of ten years is used.Fuel prices for the state and the region are oil prices, also fromTabors and Raskin (1977), and the fuel price inflator is taken to be theincrease in oil prices in 1976, tabulated by the same source. The inflatorwas .12 for Massachusetts and .107 for the NewEngland region.Energy savings rates for each of the five improvements are based onM.I.T. Study: 14% for storm windows; 7% for storm doors; 14 for 6-inchfaced insulation.The Input parameters are summarized in the following table:13 Storm 2 Storm 6 inchWindows Doors insul.Cost $520 $140 $288asConsumption (1831 1831 1831ConsumptionN.E (gal)Consumpti on 1372.50 1372.50 1372.50Discount rate 5.73 5.7 5.7:TimeHorizon (yr) 10 10 10Fuel Price .46 .46 .46Mass-. $-Fuel PriceN.Fuel Price .463 .463 .463. E. $ .4_Mass .12 .12 .12rnflatorN E.Inflator ^57 .107 .107Savings rate .07 .14X ~~~~~~~~.0 14TABLE 4Input Pa:.: _eters for Cost Benefit Analysis-8-Shib41M bLIJLjus-5.O I. 2 3 C0o 1 2 3 9 5-T IrrFigure 1 - Storm Windows//Storm Doors( 'I w~~~~~~~~~~~4~~~~~~~~~~~I3Figure 2 - Insulation-9--J6tv6oDC- I P dktA?~;·Icc) Sr f-JP-CAA.i103-10-As ndicated, all scenarios appear to have a break-even (payback)period of less than four years. The installation of storm doors and6 inches of attic insulation each pay pack their initial investmentcosts in less than two years.Three of the input parameters were altered and analysis completedto determine the sensitivity of the results to input change. Using thebase parameters for New England, lowering the price inflator from .107to .09 (an estimate of inflation in New England) had no appreciable affecton the results. Decreasing the energy savings rate for each improvementby one-half did have an appreciable affect. Storm doors and 6-inchinsulation still maintained a payback period of less than 5 years.Decreasing the cost of a storm window from $40 to $30 and of a stbrmdoor from $70 to $50 resulted in an appreciable improvement in an alreadyshort payback period.The implications of this analysis are two-fold. First, each of thehome improvements described under the initial assumptions are economicallyjustified for our "average" household. (Assuming an average turnover rateof 5 years or more) the Carter proposed tax credit is an incentive forhome improvement. It decreases the payback period in all cases from one-half year to a full year. Finally, it should be realized that the resultsof this analysis are merely illustrative in that they depend on thecharacteristics of the specific structure, costs and prices involved.- - ·-- ·-· -- ---· lllrc··r··-11-2. GASOLINE TAXESThe basic idea of gradually raising prices of gasoline is good forNew England and the country for several reasons - among the most importantare:- It will allow the country to adjust gradually both economicallyand socially to what now appears to be the inevitability of higher prices.- It should result in the accelerated introduction of more energyefficient automobiles.There are issues with respect to the Carter proposed mechanism of atax that the New England governors must address. Among these are:- We suspect that the per capita mileage driven is less for NewEnglanders than for other regions, e.g., Southern California, hence thistax may affect the region less than other regions. However, the cost oftransportation may go up.- What is the price elasticity of gasoline in New England relativeto that for the nation as a whole? If it is higher here than for the restof the country, it is conceivable that New Englanders could reduce theirconsumption below the trigger point, but the rest of the country may notdo so, hence bringing increased taxes despite regional "success."·-. -.· · rnr·-rr.YIYIII·YLI -·'- --·· --. I -I-·. -- 1 I-I1-·I--I L-----·II --· -- I- CCrr·-··-12-3. NATURAL GASEfforts leading to eventual deregulation of natural gas may beeconomically beneficial for New England as prices are equalized for thecountry as a whole. The benefits include:- New England currently pays higher prices for natural gas thando most other regions in the country. As prices rise, New England'sprices will rise relatively less as compared to the rest of the country.- In New England 53% of natural gas is used in residences whileonly 25% is used in industry and 19% in commercial activities. The 53%used by residences will be "old" gas under the Carter plan, and hencenot subject to early increases.- In general, price increases cause lower average consumption(negative elasticity), thus rises in natural gas prices should causea long-run decline in household consumption.·------ ·---I -··- Ily -·-I-'--'--`--'---I1·-·-·--··-·rrr-u-·--13-4. COAL (AND PRICE PARITY ON ALL FORMS OF ENERGY)The idea of letting prices of various presently inexpensive butexhaustible forms of energy rise and encouraging the use of coal issound. Such actions may make the transition smoother. Issues of concernto New England with respect to coal include:4.1 Quantity and Quality of ResourcesThere is some dispute as to how large "knowns coal resources" are(e.g., 1400 billion metric tons [Brown, 1976], to 16 billion metric tons[Schmidt and Hill, 1976]). Part of the difference can be accounted forby the differentiation of "resources and reserves," where reserves aredeposits of quality and magnitude that can be easily and economicallymined at present; and resources represent total known deposits. To beconsidered targets for development, coal must be of relatively high quality(high heating value and low sulfur content), occurring in relatively thick,uniform and extensive beds close to the surface. It appears that there maybe coal deposits in the Naragansett Bay area; its recovery will depend.onthe quality and amount of these indigenous deposits and on national demandsand other reserves of higher quality. National coal reserves are significantlylarger than oil reserves and as a result, will play a larger role in ourefforts toward long-run energy security and transition.4.2 Transportation and DistributionFor coal to be of use in New England serious attention must begiven to the transportation (railroad) capacity.-14-The railroad is the essential link between coal producers and theutilities. At present, the rail industry's challenge is to upgrade itsfacilities to further reduce the costs of delivering coal to New England.New England is the "end of the line" for the unit train. Road beds needfurther improvement and if trains must travel under "slow rules," transporttime and costs are increased even further.To the extent that New England can affect railroad policy, furthertransport and distribution of coal should receive regional policy attentionto anticipate the long lead times required for major improvements in regionalsystems operation.The Carter plan calls for maintenance of air quality controls thatare carefully enforced in the urban areas of New England. As a result,coal combustion must be carried out with extensive air cleaning equipmentor in areas out of air quality control regions such as that planned forSecvi's Island, Maine.4.3 EnvironmentalThe ash content of coal ranges from 4 to 15% or from 80to 300 pounds of ash or slag created with the burning of one tonof coal. The amounts of solid waste from these facilities requireextensive transportation and land filling programs.-15-4.4 Utility Acceptance of CoalThe Carter plan calls for the reconversion of a number of presentlyoil and gas fired power plants back to coal. The importance of thisconversion can be seen in the fact that utility coal consumption droppedfrom 5.0 million tons in as recently as 1969 to 1.1 million tons in 1973and 2.1 million tons in 1974. While it is unclear exactly which plantsmight be affected by such a regulation, a number of plants such as theCambridge Electric Plant at Kendall Square, a recent convert, and theHartford Electric Light Company, at Middletown, will be up for consideration,though stiff environmental regulations may block coal at both sites.4.5 SummaryFor coal to be viable for New England transport bottlenecks for coalmust be eased, environmental regulations must be met and suitable attentionmust be given to disposal of ash.··_I_···l_·_·_L ^___·I_ · _· _·I --- _ I IYIIL----I-· · ·--16-5. CONCLUSIONSNew England is furthest from sources of United States coal productionand is projected to remain with a reliance on foreign oil. New England isclosest to foreign petroleum and furthest from United States sources ofenergy. It will be the least secure region under any United States energysupply scenario. Hence, the New England region's energy security problemsare even more acute and sharply focused than other United States regions,and its high cost of energy focuses attention on the economic and socialproblems of energy source transition. For these reasons, energy problemsfacing New England will, in many respects, be the forerunners of thosefacing other regions.-17-6. WHAT CAN NEEMIS DO WITH RESPECT TO THE CARTER PLAN?Using the MIT regional energy capability the NEEMIS Project at MITis in a particularly advantageous position to do the following:- Conservation: NEEMIS has in operation the computer programs, dataprocedures, training, building analysis capability to meet thePresident's goal of the federal, state and local government in settingan example by reducing consumption in government buildings for heating(20% in old buildings and 45% in new buildings).- Conservation: NEEMIS project has in place the models, analytical capa-bility and has done much of the analysis to assist the homeowner inNew England in evaluating the best home improvement alternatives.- Solar: The NEENIS project at MIT by virtue of its close working rela-tionship with members of the MIT Energy Laboratory working on solar,is in a particularly advantageous position to advise the policymakersand the New England homeowner of realistic, economical and technologicallyfeasible uses and direction.- State Eligibility for Federal Funding: The NEEMIS project through itsuse of the NEEMIS building analysis programs in state and local govern-ment buildings will assist the states in procurement of the proposedmatching federal funds for improvements to those buildings.- Proposing Alternatives: The NEEMIS project has the potential for providingNew England policy makers with needed information for them to take anactive role in proposing alternatives._------ -- _-··· --18-- Analysis of rssues: The NEEMIS unique computational facility provides theregion with the best tools available anywhere for analysts to use toaddress the issues and implications of the Carter plan.- Starting Point: The present NEEMIS models and data provide a base tostart to analyze the yet to be specified taxes, rebates and other issuesof his plan and of the ensuing New England energy situation.Production and Conversion: In addition to the existing "capital"interest in the NEEMIS project, the close proximity, interchange andpersonal relationshipd with members of the MIT Energy Laboratory offersthe region a direct pipeline into leading research in the production andconversion issues of energy. The MIT research, under sizeable grantswith high quality efforts includes technological, economic and policyimplications of the production and conversion on energy (coal, nuclear,fluidized bed combustion, solar, world oil, etc.).This work places the NEEMIS project in a particularly advantageousposition to supply to NERCOM, the states, and the region the badly neededinformation (often unattainable elsewhere) on these matters.- Yet Unforeseen Problems: The NEEMIS project was specifically designed toolto handle unforeseen economic and energy problems, Coupled with a pool ofregional experts (in economics, data processing, statistics, energy),NEEMIS could assure that the best interest of the region was served.- In Summary: The foresight of NERCOM, the New England states, MIT, IBM andother sponsors of the NEEMIS project is now on the verge of paying bigdividends. The region stands unique in its ability to react, propose andimplement a comprehensive energy plan because of NEEMIS.____I_ _~~_ I __ _111 1---1._··. _------- ----- 

Preliminary analysis of Carter’s energy conservation plan with respect to New England issues

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Preliminary analysis of Carter’s energy conservation plan with respect to New England issues

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