Renewable Portfolio Standards (RPS), now existing in 29 states and the District of Columbia, require utilities to provide a certain percentage of electricity consumption from wind, solar, and other forms of renewable energy. Federal policies, such as the wind production tax credit and the solar investment tax credit, also promote the production of wind and solar power. Given the widespread use of rate of return regulation based upon average cost pricing, the costs of these policies are less than transparent. Moreover, to the extent that these policies drive up electricity prices, output and employment could be adversely affected. The objective of this study is to understand and estimate these costs and economic impacts.
Central to this effort is the estimation of the opportunity costs of higher cost, intermittent renewable power in terms of the foregone electricity. These opportunity costs vary considerably by state based upon the cost of existing capacity and availability of wind and solar resources. Accordingly, this study estimates these costs for the twelve states identified in Figure ES1. The timing and stringency of the RPS goals varies considerably by state. Moreover, there is wide variation in the size and composition of electricity generation for this sample of states.
To estimate the costs and benefits of RPS, this study develops develops models of electricity supply and demand for each state. These models are projected using forecasts for coal and natural gas prices out to 2040 from the U.S. Energy Information Administration. The baseline forecast assumes existing electricity production capacity remains in place with new generation requirements met by natural gas integrated combined cycle (NGCC) plants. The RPS scenario imposes the goals identified in Figure ES1. Average electricity generation costs, power consumption, and retail rates under the baseline and RPS scenarios are then compared.
The costs of RPS policies depend upon the opportunity costs of electricity generation from wind and solar. For states with a fleet of low cost electricity generation capacity, imposition of RPS could raise electricity costs significantly because higher cost wind and solar generation displace low cost sources of power. While this displacement reduces expenditures on fossil fuels, coal and natural gas plants are cycled to accommodate the intermittent generation of renewable generators, which reduces their thermal efficiency and raises generation costs. On the other hand, building more renewable energy plants to meet RPS goals reduces the need to build new NGCC plants. Finally, investments in RPS capacity earn federal tax subsidies. Wind power receives a production tax credit of $23 per megawatt hour (Mwh) while solar plants receive a 30% investment tax credit. Hence, RPS policies contribute to lower federal tax revenues.
These costs are summarized in Figure ES1 for the entire twelve states. For example, in 2016 the RPS goals involve $5.4 billion in additional expenditures to build and operate the required RPS facilities, $271 million in cycling costs, and $1.8 billion of tax subsidies. These costs are partially offset by $1,478 billion in fossil fuel cost savings and $261 million in avoided new NGCC generation costs. Hence, the total net cost of RPS policies is $5.762 billion in 2016. The total net costs of RPS policies reach $8.7 billion in 2025 and increase to $8.9 billion in 2040 after RPS goals are met and the unit costs of solar and wind decline due to technological improvements.
These higher costs are passed on to customers in the form of higher retail electricity prices, summarized in Table ES2. States with modest RPS goals, such as South Carolina, experience moderate rate increases. Similarly, states meeting their RPS goals with wind, such as Colorado, fact rate increases of roughly 6%. On the other hand, states meeting rather ambitious RPS goals with relatively higher cost solar power, such as Oregon, North Carolina, Nevada, Utah, and Virginia incur much steeper electricity rate increases.
Electricity rate increases peak as RPS goals are reached in the early 2020s for most states. Thereafter, electricity rate increases begin to taper off as the costs of wind and solar decline due to technological improvements. Despite these expected reductions in the cost of wind and solar technology. RPS policies increase prices for electricity.