Renewable Energy Mandates Raise Electricity Prices

Renewable energy mandates raise electricity prices

Economists at the University of Chicago recently published findings that show state-level renewable energy mandates raise utility prices by an extremely-high 17%. The findings are much higher than an oft-cited 2015 study from the Lawrence Berkeley National Lab that found RPS rates account for only about 2% of utility price increases.

While some energy experts are pulling lessons from the study, saying the US might need to broaden its scope of emissions-cutting tools from pure renewables to clean energy, others are throwing doubt on the report findings, claiming the study doesn’t accurately account for utility costs and the falling prices of renewables.

Renewable energy mandates increase utility prices by 17%, says study

In April 2019, economists at the University of Chicago Energy Policy Institute published a report that assessed the impact of Renewable Portfolio Standards (RPSs) on utility electricity rates. RPSs are state mandates that a certain percentage of electricity sold must come from renewable resources. Currently 33 US states and territories have passed RPS mandates.

Researchers took a deep dive into the subject matter, gathering statistics on RPS programs, electricity prices, generation capacity, and CO2 emissions from states across the US between 1990 and 2015. In the report, the authors claim that, “We believe this is the most comprehensive data set ever compiled on RPS program characteristics and potential outcomes.”

From their analysis, the authors extrapolated two key findings on RPSs and costs. First, they found that seven years after passing RPSs, the average electricity rates increases 11%, or $0.013 per kilowatt-hour (kWh). After 12 years, the price increases by 17% or $0.02 per kWh. With the average US home using about 900 kWh of electricity per month, that increase equates to an additional $18/month (or $216/year), though of course that premium depends on the utility’s actual rates as well as the home’s energy use.

The authors also assessed RPS costs from another angle, comparing costs with the reduction in electricity industry’s carbon intensity. In other words, they figured out how much it cost, per metric ton, to drop CO2 emissions via a Renewable Portfolio Standard.

They found that the cost of avoided CO2 exceeds $130 per metric ton, and can cost up to $460 per metric ton, “several times bigger”, the report notes, than previous estimates on the cost of carbon abatement.

Conservative publications have quickly jumped on the findings. The Institute for Energy Research, an energy non-profit that receives funding from the fossil fuel industry, drew its own unsurprising conclusion on the report, saying “Clearly, renewable portfolio standards are not in the best interests of consumers, raising their electric rates and paying dearly for reductions in carbon dioxide emissions.”

However, actual energy experts are more cautious in their assessment of the report’s findings. Some say the report raises questions around the best methods to curb emissions, while others have outright questioned the report’s methodology and findings.

Previous research says RPSs increase utility rates by 2%

In 2015, the federally-funded Lawrence Berkeley National Lab published a similar study of RPSs’ effects on utility prices. The report, which was so landmark it silenced discussion around this topic for years, found that the costs to comply with RPSs adds less than 2% to retail rates in most states.

Why did the UC study’s results come out so much higher? The authors note that ‘indirect costs’ in their studies are much higher than in other studies. These indirect costs are largely driven via three main issues:

  • Intermittency: Solar and wind generators can’t produce electricity 24/7 and previous studies comparing costs between renewables and fossil fuels haven’t accounted for the additional electricity infrastructure necessary to fill in those gaps in generation.
  • Stranded Assets: When utilities construct new renewable energy generation facilities (like a solar or wind farm), utilities must ‘turn off’ existing generation prematurely. Closing the plants early means utilities can’t fully recuperate all the plant costs. These costs are typically borne by distribution companies, electricity generators, and the ratepayers themselves (ie you and me) through higher electricity rates.
  • Transmissions costs: Solar and wind farms need large amounts of space and so are typically constructed far from population centers. As such, the cost to move that electricity from the power plant to the consumer is higher than fossil-fueled plants, which can be closer to city centers.

Should we move away from RPSs then?

So if renewable energy standards set up systems which raise utility rates and are ultimately a costly way to lower carbon emissions, should we move to another system?

The answer, at least according to some experts, is to broaden the scope of allowable technologies from only renewable energy to clean energy.

To many, clean energy and renewable energy are likely synonymous, but there’s a major difference between the two. Renewable energy only includes energy generation from renewable sources like solar, wind, geothermal, and hydroelectric. Clean energy, on the other hand, allows for non-renewable energy sources that don’t produce emissions. Most usually point to nuclear energy as the most important form of non-renewable clean energy, but it could also include coal and natural gas if CCS (carbon capture and sequestration) technology is included.

When the University of Chicago publicized the report in April this year, they hosted an expert roundtable to discuss the findings. Speaking about the report, roundtable member Melanie Kenderline, who held senior positions at the DOE during Clinton and Obama’s presidencies, said:

“All this says to me is a couple things: That we probably need a clean energy standard as opposed to a renewable portfolio standard because we should not be picking and choosing technologies. And an RPS is pretty selective in which technologies it chooses, and that doesn’t accommodate huge regional differences in how different regions of the country are generating electricity.”

Kenderline as well as other roundtable members agreed that, instead of a nationwide RPS, an economy-wide tax on carbon is a better choice. In today’s climate though, where passing policy that directly tackles carbon emissions – let alone climate change – is almost impossible, states have turned to RPSs as a fill-in measure. However, since RPSs only affect electricity generation – not transportation, manufacturing, or other industries – they can only affect a minority of total carbon emissions, as electricity only accounts for about 38% of carbon emissions nationwide.

Instead, experts say an economy-wide carbon tax, that affects all industries, would be a better solution to combating emissions. However, these are notoriously difficult to pass.

Energy analysts say report oversimplifies the diversity of RPSs

Not all energy experts are satisfied with the University of Columbia’s findings. In the weekly Energy Gang podcast, the three co-hosts – all experts in energy policy – recently discussed the University of Chicago’s ‘controversial’ report, pointing out several potential issues.

The hosts agreed that the report simply doesn’t account for all components that contribute to increases in utility rates. First off, they noted that the study doesn’t accurately account for time-sensitive costs like the higher costs of renewables in the 1990s and early 2000s as compared to today and expensive utility infrastructure upgrades. In the 2000s, many utilities started infrastructure upgrades that they’d put off since the 90s, and the report included those costs – which had nothing to do with RPSs or renewable energy – into their calculations on RPS costs.

On top of that, the podcast hosts warned against pulling something like an ‘average utility rate increase’ from such varied data. With 32 states and territories each passing their own RPSs, there are many different technologies and policies out there. The University of Chicago authors do take some variables into account, assessing the effect of RPSs on late-adoption states (ie those that adopted RPSs since 2004), as well as states with restructured energy markets, solar set-asides (wherein RPSs require a certain percentage of renewable energy come specifically from solar), and coal-heavy states.

However, there’s far greater variability than what the authors include in their study. Some RPSs focus on large utility-scale solar and wind, while others focus on roof-top solar. Some areas favor wind resources while others don’t. Some states only allow utilities to buy renewable electricity from their own state, while some allow utilities to purchase Renewable Energy Credits from other markets. All of these factors can, and do, affect the cost of implementing a Renewable Portfolio Standard.

In a nutshell, the co-hosts say there’s simply too much variability to find an average, and furthermore it’s dangerous to do so.

What exactly is an RPS?

Currently 33 US states and territories, including Washington DC, have passed Renewable Portfolio Standards, or RPSs. RPSs are simply mandates that states pass to encourage growth of renewable energy in their states.

Iowa passed the very first RPS in 1983, requiring its two privately-owned utilities to source a combined 105 MW of renewable energy – quite paltry by today’s standards. Iowa now has more than 7,000 MW of wind energy installed.

Since then, states have continued to pass higher and higher RPS goals. New York, New Jersey, and Oregon set goals of 50% renewable by 2030, 2030, and 2040 respectively. Washington DC, California, Hawaii, New Mexico, Washington, and Puerto Rico have all passed 100% renewable and/or clean energy legislation, typically by 2045 or 2050.

While the state government passes the law, the utilities are typically left to figure out the most effective method to meet the goals – balancing time, cost, and emissions – with approval from their regulatory bodies (typically the state utility commission).

Originally, RPSs weren’t explicitly to encourage clean energy or combat carbon emissions. Instead, as the Energy Gang pointed out, during the 80s and 90s states were more focused on increasing our national security and energy independence. At that time, many were fearful we’d run out of fuels for electricity generation (this was before the domestic natural gas boom we’re enjoying today), so by diversifying our country’s energy generation we were protecting our economy.

Today though, states pass RPSs to encourage the growth of renewable energy resources, oftentimes specifically to curb emissions. When California governor Jerry Brown signed the bill mandating 100% clean energy by 2045, for example, he said, “This bill and the executive order put California on a path to meet the goals of Paris and beyond. It will not be easy. It will not be immediate. But it must be done.”

So what’s the takeaway?

So with all discussion, what’s the takeaway? Here’s two:

First, energy policy is complex. Assessing the energy industry, technology, and costs isn’t something one researcher or organization can sit down and perform. As you can see above, different groups come to results vastly different from one another. No one really knows the perfect solution. Eventually, the body of research leans towards one direction and policy and framework follows (hopefully), but that can take a while.

Second, no one knows what our energy future holds. US states are using RPSs as a way to encourage the growth of renewables and curb emissions, but RPSs might not be the best solution. If you’re looking to lower emissions, a carbon tax makes more sense than an RPS, as it can affect emissions from all industries, not just the energy industry. But in the US it’s notoriously hard to pass carbon abatement regulations, especially in this political climate, so no one can quite foresee what our emissions regulations will look like in ten or twenty years.

Image Source: Public Domain via Pixnio

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