New Jersey, Texas, and California have very different energy profiles. They use different types of energy to power their economy. They have different types of utility systems. And they have different expectations of their energy system.
But these states share one important trait: They’re reaping the benefits of renewable energy. New Jerseyans are first-hand witnesses of how solar power creates new businesses and new jobs. Texans can thank wind power for keeping the lights on during extreme weather that struck the state in early 2011. And Californians are using renewable energy to meet their state’s new greenhouse gas pollution reduction standards.
Twenty-six other states also have renewable energy standards, which require a certain amount of the electricity sold within a state to come from renewable energy. These policies lead to cleaner air, economic development, and a more resilient electrical grid.
Despite these facts, though, renewable energy standards have come under attack. A small but vocal group of right-wing activists and fossil-fuel advocates claim that these policies are raising electricity prices for consumers, which in turn is holding back state economies. As conservative lobbyist Grover Norquist wrote in a recent Politico op-ed:
Renewable energy standards, by design, are intended to drive up energy costs—requiring utilities to use more expensive and often less reliable sources of energy. Not surprisingly, such laws have hit ratepayers hard. States that have a binding [renewable energy standard] now have electricity costs that are 39 percent higher than states that don’t have a binding [standard].
And Robert Bryce of the conservative Manhattan Institute adds:
There is growing evidence that the costs may be too high—that the price tag for purchasing renewable energy, and for building new transmission lines to deliver it, may not only outweigh any environmental benefits but may also be detrimental to the economy, costing jobs rather than adding them.
Fortunately for consumers in the 29 states with renewable energy standards, these critics are wrong. There are no data showing that these standards cause electricity rates to skyrocket.
This issue brief will describe the history of renewable energy standards, explain how electricity rates are determined, and present evidence showing that these standards have not caused electricity prices to rise. This information sets the stage for moving forward in two critical ways: strengthening state-level renewable energy standards so consumers can see even greater benefits from renewable energy, and passing a similar policy at the federal level.
Renewable energy standards are commonsense policies with bipartisan support and economic benefits
At the most basic level, every renewable energy standard is the same: They require utilities to sell a certain amount of energy generated from renewable sources like wind, solar, geothermal, and biomass, among others. Beyond that, the details can vary: States can allow different technologies, such as hydropower or landfill gas; they can either allow electricity generation from out of state or restrict it to only in-state generation; and they can either cover all utilities or exempt certain utilities from the policy.
When state policymakers implemented these standards they crafted them to meet the needs of their state in a commonsense way. Contrary to naysayers’ claims, these are not radical policies. In fact, there’s a long history of bipartisan support for renewable energy standards. These policies were signed into law by former Republican governors like George W. Bush (Texas), Christie Todd Whitman (New Jersey), and Tim Pawlenty (Minnesota), as well as former Democratic governors like Jennifer Granholm (Michigan), Janet Napolitano (Arizona), and Gray Davis (California).
There are many reasons why a state would want a renewable energy standard:
- Using renewable energy instead of fossil fuels has many public health benefits, such as reducing the harmful air pollution that causes asthma.
- These standards create opportunities for new businesses, which can build renewable energy projects.
- These standards can drive down the cost of specific technologies through the “learning by doing” process, in which technologies like solar panels get cheaper as we gain more experience making them.
There are also some very important—and often ignored—reasons why these standards can positively impact electricity rates. The Union of Concerned Scientists has documented how shifting electricity generation from natural gas to renewables causes natural gas prices to go down, making the remaining natural gas generation cheaper than it was before.
Renewable energy standards also ensure resource diversity. In fact, some states call their renewable energy standard a “renewable portfolio standard” to emphasize that renewables are a valuable part of a diverse portfolio of energy resources. Such a diverse portfolio reduces exposure to any single energy source, reducing risk to consumers.
Finally, renewable energy standards play especially important roles in states that restructured their electricity markets. Starting in the 1990s some states moved away from traditional monopoly utilities and toward so-called “deregulated” markets.
In the traditional structure, utilities submit plans to state regulators about their generation mix. Regulators have the ability to make utilities account for things like how a future price on carbon will impact consumers if a utility builds a coal-fired power plant, or how natural gas price spikes could impact consumers if a utility builds a natural gas power plant.
But in a restructured market regulated utilities no longer own power plants and regulators don’t approve their resource plans. Instead, utilities buy power from independently owned and operated power plants. These power-plant owners (commonly called “merchant generators”) have no obligation to provide a diverse mix of electricity. In these states a renewable energy standard is the only way to ensure resource diversity. This is no small issue: Every single state with a restructured utility industry has a renewable energy standard.
Electricity prices are influenced by dozens of factors
Before explaining how renewable energy standards impact electricity rates, it’s worth giving a little bit of background on how the rates are determined.
Typically, a state public utility commission approves a utility’s rates. Through a months-long process, the commission looks at utility data and determines how much it should cost the utility to provide reliable service to all of its customers. This includes a reasonable profit, so that the utility is incentivized to deliver quality electrical service. Then the commission projects how much electricity the utility will sell and divides the amount of money required to provide service by the amount of energy sold to come up with a rate, typically expressed as cents per kilowatt-hour.
Obviously, this is a highly simplified version of a complicated process. Even within this simplified model, though, there are countless factors that influence rates. What is a reasonable profit, for example? Is it 8 percent, 10 percent, or higher? How often should a utility replace electric meters? Should a utility install new pollution-control equipment at an existing power plant, or build a new power plant?
In an analysis of utility rates, economists Ernst Berndt, Roy Epstein, and Michael Doane identified 13 reasons why a utility’s rates may be higher or lower than the average. They include things like the average use per customer, the age of the distribution system, the generation resource mix, and local taxes.
If anything is clear from this, it’s that determining the impact of any particular policy on electricity rates is a challenge, given all the moving parts involved. This is where many people who claim that renewable energy standards are leading to dramatic rate increases go down the wrong path.