Assessing the Costs and Benefits of Renewable Portfolio Standards

Policy Study

Assessing the Costs and Benefits of Renewable Portfolio Standards

A Guide for Policymakers

More than half the states have renewable portfolio standards in place requiring certain and growing percentages of electricity to come from specified sources. Are these policies providing society with measurable benefit? Are they too costly for what they provide? In an attempt to answer this fundamental question, the National Renewable Energy Laboratory and Lawrence Berkeley Laboratory published a survey of estimates from the state regulatory agencies and utilities entitled A Survey of State-Level Costs and Benefits of Renewable Portfolio Standards. Unfortunately, the Survey failed to assess the quality of the estimates and ends up potentially misleading policymakers. The Survey has a number of structural and conceptual problems:

  • Cost estimates include only direct costs to utilities. Other market participants and non-participants carry much of the cost of renewable portfolio standards. Further, the Survey counts the costs for only two years (2010-2012), while counting the benefits for 30 years or more.
  • Neither costs nor benefits occur in a consistent manner over time. The Survey‘s selection of the time-frames magnifies the false impression that benefits are near equal to, or exceed, costs.
  • The Survey is incomplete with respect to the cost of integration of intermittent and volatile generation sources. Specifically it ignores the cost of backup capacity and the lost efficiency of power plants required to balance the output of intermittent and volatile generation. (With wind energy, “backup” is required to operate during periods when the wind is not blowing; “balancing” is required during periods when the wind is blowing but not at a very constant speed.)
  • The Survey does not include environmental impacts that create non-monetized costs, such as noise pollution and avian mortality. Increased noise pollution, in addition to its own health impact, reduces the aesthetics of neighborhoods with renewable installations, thus reducing property values and property taxes to local governments.
  • Higher electricity rates caused by RPS lead to reduced discretionary income for ratepayers, which in turn may lead to premature mortality. This phenomenon is especially regressive (that is, it harms poor people more than wealthy people).
  • The Survey ignores the cost associated with causing prematurely “stranded” assets in the existing fleet of power plants due to lowered capacity factors. RPS effectively wastes useful and serviceable power plants (and the embodied energy and emissions that went into building them), because they will no longer be used at the capacity for which they were designed.
  • The Survey ignores costs for backup and balancing of intermittent and volatile renewables that are shifted to neighboring states.
  • Similarly, the Survey ignores the very expensive Production Tax Credit that shunts almost half of the cost of wind installations onto taxpayers (many of whom realize zero benefit from wind installations) made even worse by special tax depreciation available only to certain renewables.
  • The Survey is silent on lost opportunity. There are commercially available technologies that can achieve the same or better primary objectives (price stability, environmental improvements, etc.) than the specified favored renewables included in RPSs.
  • The Survey assumes that all renewables installed during the period in which RPSs have been in place were the result of the RPSs and that without the RPSs there would have been zero new renewables. This is clearly an error, as renewables were in fact installed prior to any RPS, when market participants found specific installations cost-effective. In some states, there was as much renewable generation, in percentage terms, prior to imposing the RPS as there was after.
  • Some benefits noted in the Survey, including inflated benefits and incomplete netting, are speculative and self-fulfilling rather than meaningful. For example, one RPS benefit claimed is an increase in diversity, even if that supply diversity provides no price hedging, reduction of emissions or other actual benefit. It presumes diversity is a goal and benefit in and of itself.
  • The benefit estimates also suffer from double counting. Double counting is especially prevalent with emission reductions, as those benefits (and their costs) have already been accounted for in such regulatory programs as Clean Air Act Regulations. The majority of the dollar benefits from emission reduction cited in the Survey are from reductions of carbon dioxide “priced” at the EPA’s highly controversial “social cost of carbon.”

Some renewable energy technology installations conserve resources and some don’t: some are efficient and some are not. Renewable portfolio standards (further exacerbated by various federal tax treatments and local subsidies) fail to recognize this distinction and foster the development of inefficient installations, thereby discouraging the use of more efficient and environmentally effective facilities. For example, most of the compliance with state-level RPSs has come in the form of wind energy. Wind energy is unpredictable and volatile, leading to lower value and imposing significant costs on others. Advocating for RPS reveals the belief by proponents that the market would not otherwise embrace cost-effective, resource-conserving installations of renewables. History proves otherwise.

Even more unfortunate is that some advocates are citing the Survey in efforts to extend or expand such policies. The Survey has already been inappropriately cited, such as in congressional testimony, to justify extending and expanding renewable portfolio mandates, including at the national level. Doing so would further harm our economies and negatively impact public health. The Survey should not be used to formulate or justify policy in any state or federal legislation.

Attachments

Mr. Tanton is a senior fellow at Reason Foundation. He is also president of T 2 & Associates, a firm providing consulting services to the energy and technology industries, and director of science and technology assessment with Energy and Environment Legal Institute, a national non-profit energy think tank.

Julian Morris is vice president of research at Reason Foundation, a non-profit think tank advancing free minds and free markets.