Academic journal article Contemporary Economic Policy

Have Renewable Portfolio Standards Raised Electricity Rates? Evidence from U.S. Electric Utilities

Academic journal article Contemporary Economic Policy

Have Renewable Portfolio Standards Raised Electricity Rates? Evidence from U.S. Electric Utilities

Article excerpt

Using a panel dataset of U.S. electric utilities, we investigate the effect of a Renewable Portfolio Standards (RPS) on the rates of electric utilities affected by the mandate. Our findings are twofold. First, we find that, on average, electric utilities affected by an RPS mandate charged a higher electricity rate. This would suggest that an RPS mandate is a costly constraint on the utilities that have to comply with the requirement. The second finding of our analysis is that marginal increases in a utility's RPS requirement do not necessarily translate into higher electricity rates. This would imply that the costs imposed on utilities affected by the RPS mandate tend to be fixed costs rather than variable costs. We also find that controlling for time-varying unobserved factors at the state level is key to identifying the RPS effect on electricity' retail rates. (JEL Q42, Q48, L98)

I. INTRODUCTION

To what extent do state renewable electricity mandates affect electric utility rates? The neoclassical competitive model of profit maximization would suggest that, in the short run, Renewable Portfolio Standards (RPS) mandates will raise electricity rates if the cost of electricity generation via renewable energy sources, such as wind and solar, exceeds that of convention fossil fuel sources, such as coal. To this date, all of the available evidence, which is from simulation studies, suggests that RPS mandates will tend to raise electric utility rates. Palmer and Burtraw (2005) find that a 15% national RPS mandate raises average electricity rates by 2% in 2020 compared with the no-mandate baseline scenario. Chen et al. (2008) surveyed 31 state-commissioned studies that investigated the projected effect of RPS policies in several U.S. states. These studies also used energy simulation models. They find that the average effect of an RPS mandate on retail electricity prices ranges from -5% for Texas, to +9% for Arizona. The median effect across the 31 surveyed studies is roughly 0.8%. However, simulation approaches make assumptions on model parameters that ultimately may drive their findings (Fischer 2010). Because the true nature of these technical relationships varies from across states and electric utilities, whether an RPS mandate affects electricity prices is ultimately an empirical question. This article attempts to fill this gap in the literature. The econometric estimates inform policymakers on whether current state RPS policies can lead to higher rates for electricity consumers. Hence, the study is of direct relevance to states currently evaluating the future of their RPS programs and to the broad policy debate on climate change.

Using a unique panel dataset of electric utilities from 2001 to 2012, we estimate the effect of an RPS mandate on the rates of electric utilities affected by the mandate. A major concern in the empirical identification of the RPS effect on electricity retail rates is the endogeneity of the RPS policy variable. This empirical analysis relies on utility-level fixed effects to control for time-invariant unobserved differences among electric utilities, and uses state-by-year fixed effects to capture year to year unobserved time-varying factors across states.

Our findings are twofold. First, we find that, on average, electric utilities affected by an RPS mandate charged a higher electricity rate. This would suggest that an RPS mandate is a costly constraint on the utilities that have to comply with the requirement. The second finding of our analysis is that marginal increases in a utility's RPS requirement do not necessarily translate into higher electricity rates. This would imply that the costs imposed on utilities affected by the RPS mandate tend to be fixed costs rather variable costs. We also find that controlling for time-varying unobserved factors at the state level is key to identifying the RPS effect on electricity retail rates.

II. BACKGROUND AND THEORETICAL CONSIDERATIONS

An RPS policy "requires electric utilities and other retail electric providers to supply a specified minimum amount of customer load with electricity from eligible renewable energy sources" (U. …

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