Renewable Portfolio Standards Work, But at What Cost?

As policymakers consider energy and environmental goals, renewable portfolio standards (RPS) are one popular tool to encourage the development of renewable power resources. These regulations, also called renewable electricity standards, typically require utilities to source a specified percentage of their power from qualified renewable sources. States adopt RPS programs to incentivize the development of new capacity, reduce their carbon footprints and mitigate volatility in fossil fuel prices. While such regulations do have cost impacts to ratepayers, proponents argue that their benefits exceed their costs.

In the United States, roughly 30 states have adopted such regulations. Each jurisdiction’s program varies depending on local policy objectives and political climates. State RPS programs differ on the amounts of renewable energy required, timelines for implementation and which technologies qualify as “renewable.” For example, power from large-scale hydro and municipal solid waste combustion qualify in some but not all states. While the U.S. has no national RPS, last year both the House and the Senate passed different bills containing RPS measures. It remains to be seen whether either bill will meet approval by both legislative chambers. Challenges include disagreement over which technologies should qualify, as well as over the cost impacts of the renewable mandate.

RPS programs are generally considered to be effective in incentivizing the development of renewable generation. For example, a 2007 report from the Lawrence Berkeley National Laboratory shows that over 50 percent of non-hydroelectric renewable capacity additions between 1998 and 2007 occurred in states with RPS programs. In 2007 alone, 76 percent of new non-hydro renewable capacity occurred in these states. As more and more states adopt RPS measures, the market demand for renewables continues to grow. By 2025, approximately 61 GW of new renewable capacity must be developed in the U.S. to satisfy the existing state RPS goals.

Consumers and policymakers are right to examine the cost impacts of these policies. The true cost of an RPS varies depending on the details of the program, as well as on the nature of the existing power landscape in the jurisdiction.

Where existing renewable resources already exceed the mandated portfolio target, cost impacts may be small. The 2007 Lawrence Berkeley report suggests that existing state RPS programs resulted in rate increases of less than 1.2 percent. A 2008 California study predicts that a more ambitious 33 percent RPS combined with significantly expanded energy efficiency would only increase costs 4 percent.

At first glance, these findings appear dissonant with reports of the prices to be paid to some new renewable resources. For example, in Massachusetts developer Cape Wind Associates has recently reached an agreement with utility National Grid to sell 50 percent of the output from its 468 MW offshore wind project at a price starting at 20.7 cents/kWh, escalating 3.5 percent annually for the 15-year life of the contract. The proposed contract, subject to approval by the Massachusetts Department of Public Utilities, is projected to add $1.50 to the average residential consumer’s monthly bill.

This proposal, driven by Massachusetts’ ambitious RPS, strikes many as a high price for power. The average U.S. retail rate for electricity across all sectors is just under 10 cents/kWh, with consumers in many states paying 7 cents or less. Consumers complain that such contracts are uneconomic, with costs exceeding the benefits. Indeed, renewable projects have faced regulatory rejection over their rate impacts, such as the Rhode Island Public Utilities Commission’s March 2010 rejection of a proposed 24.4 cent/kWh contract between utility National Grid and Deepwater Wind’s proposed Block Island Wind Project as too expensive.

Proponents of RPS measures argue the increased costs are justified. Even in states with aggressive RPS programs, less than 50 percent of the total power must come from renewables. Prices for offshore wind draw attention because they tend to be more expensive than other new renewable resources. However, where existing low-cost renewables such as hydroelectricity qualify for RPS compliance, this blend offsets the price impacts of more expensive projects.

Portfolio standards provide one tool to allow policymakers to incentivize renewable generation. But RPS measures are not the only way to encourage the development of renewable power. Other regulatory approaches, including federal and state tax credits, feed-in tariffs and long-term contracts for renewable projects’ output, serve to encourage power developers to build new renewable projects. These measures are not mutually exclusive with portfolio standards. However, each alternative approach imposes cost impacts on ratepayers, because each essentially serves to pay a price premium to renewable projects. RPS programs can compare favorably to these measures.

Whether or not the U.S. adopts federal regulations, RPS mechanisms are here to stay. Renewable portfolio standards are effective at incentivizing the development of renewable power resources. The challenge to policymakers is to implement stable measures that will balance policy objectives against cost impacts, resulting in a predictable market for renewable power.

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