Renewable Portfolio Standards.

• Date: 01 September 2023
• Author: Feldman, Rachel

1. INTRODUCTION

   More than half of U.S. states require that a minimum share of the electricity sold to their residents come from renewable sources. The required shares currently range from 10 percent in Wisconsin to 55 percent in Vermont (NCSL, 2021). And they are scheduled to increase. The share in Washington, D.C., will be 100 percent by 2032, and California and seven other states will follow by 2045 or 2050. These renewable portfolio standards (RPSs) vary in how they define renewables, but they share the common goal of substituting electricity generated by renewable sources for that generated by fossil fuels, thereby reducing local air pollution and greenhouse gases (GHGs). The rules are, so far, one of the main U.S. policies designed to reduce power-sector GHGs.

   Have the state-level RPSs worked so far? The answer is not straightforward, for a few reasons. First and most obviously, in all but two states, RPS rules take the form of a preset fraction, with electricity from eligible renewable sources on top, in the numerator, and total utility electricity sales in the denominator. Utilities must ensure that a sufficient amount of their electricity sales each year comes from renewable sources to meet or exceed that fraction. They can achieve that goal in two ways: increasing renewables in the numerator or decreasing fossil fuel-sourced electricity in the denominator. Increasing renewables does not reduce pollution; reducing fossil fuels does. So whether RPSs reduce pollution depends on how utilities comply. That is why in this paper we assess the separate effects of RPSs on renewables, fossil fuels, greenhouse gas emissions, and electricity prices. (1)

   Second, utilities do not necessarily generate for themselves the electricity they sell to customers. They buy some from wholesale generators. And generators are not necessarily in the same state as the end users. As a result, compliance with RPSs depends on paperwork. When a renewable source generates electricity, it creates one renewable energy credit (REC) for each megawatt-hour (MWh) produced. To meet an RPS of 20 percent, a utility must submit two RECs for each 10 MWh of its sales. The utility can acquire those RECs by purchasing renewable power from suppliers, in which case each MWh comes bundled with one associated REC. Or it can purchase the RECs "unbundled," meaning the purchase does not include any electricity, just the credit for renewable power generated and used elsewhere. Unbundled RECs can be bought and sold among a prescribed list of neighboring states. That interstate trading means that if stricter RPSs do incentivize more renewable energy, they may do so outside the borders of the states enacting them.

   Consider Washington, D.C., an extreme example not only because its RPS ramps up to 100 percent by 2032, but also because the District itself has no utility-scale electricity generators of any kind, renewable or otherwise. To comply with its RPS, retailers who sell electricity in the District have two options. They can buy power from renewable sources outside the District. That would increase demand for renewables in neighboring states. It would also presumably increase electricity prices in both places, constraining electricity supply in the District and increasing demand outside it. Alternatively, retailers can purchase unbundled RECs from renewable sources outside the District. That would increase prices in the District and decrease prices outside it, by increasing supply. Either way, if the District's strict RPS standard increases renewables, that will take place elsewhere. Any research on this issue that omits out-of-state renewables may underestimate the effects of RPS policies.

   From a climate perspective, we do not care where GHG reductions take place, only that they do so, and preferably cost-effectively. But if we are asking whether state-level RPSs have reduced GHG emissions, that tradability makes policy evaluation difficult. There is no one-to-one match between state standards and state renewables or GHG reductions.

   A third complicating issue is that in some places, renewable sources would likely have been built without the RPS rules, thanks to other environmental rules or because generating electricity from wind and solar power has become cost-effective at market prices. In climate jargon this issue is called "nonadditionality": the requirements do not add to renewables that would have been developed anyway. In four of six U.S. regions, renewable energy growth exceeded that required by RPSs between 2000 and 2020 (Barbose, 2021). That overcompliance makes it appear as though the rules have had no effect. But it is possible, in theory, that the excess represented temporary overcompliance in anticipation of future RPS stringency increases. Or it could be that the excess renewables were produced in order to sell RECs to other states where required RPS fractions exceeded local generation. In either case, individual states' RPSs would be--collectively--causing renewables growth, though not at the concurrent time or in the enacting states.

   If the renewables growth in excess of the standards was not additional, however, that would be worrisome. The renewables might simply have been cost-effective at market prices. Or they might have been required by other state regulations or regional cap-and-trade policies, or incentivized by national policies like production or investment tax credits. If the renewables were not built for RPS compliance, those generators could sell the associated RECs unbundled from the electricity and reap a windfall. And places with strict RPSs would be merely transferring money from local ratepayers to neighboring states, with no effect on renewables, fossil fuels, or pollution.

   For those wanting to assess the efficacy of RPSs, this worrisome scenario is confounded by the fact that the direction of causality may be reversed. RPS designers intend for strict RPSs to reduce fossil fuel use, but perhaps it is jurisdictions with abundant and growing renewables that enact strict RPSs. Why not take policy credit for what would be happening anyway? Failure to account for this simultaneity might incorrectly attribute nonadditional renewables growth to the correlated RPSs.

   Finally, a fourth problem arises from the way we measure RPS stringency. RPS laws are mostly written in percentage terms. But we want to measure the effect of RPS stringency on generation from wind, solar, coal, and natural gas, all of which are measured in MWh. We also want to account for any generation from renewables that was already occurring in the RPS state and any that is contemporaneously occurring in other states, which are again measured in MWh. To account for these differences, we assess RPS stringency in terms of the MWh of renewable energy or RECs that would be required, given each state's total electricity sales. Those requirements are calculated and reported by the Lawrence Berkeley National Laboratory (LBNL; Barbose, 2021).

   That RPS stringency measure in turn yields a built-in simultaneity between electricity prices and stringency. If electricity prices fall, causing demand for electricity to increase, the LBNL measure of stringency--required renewables--increases as well. We want to assess the effect of RPSs on electricity prices, but low prices automatically raise the measure of stringency.

   Those last three problems--cross-state RECs trading, endogenous nonadditionality, and the automatic relationship between electricity prices and RPS stringency--make RPSs a difficult subject for policy analysis. To try to account for cross-state REC trading, we start by calculating the total demand for each state's RECs. This includes not just demand from each particular state's RPS. but also demand for RECs by out-of-state utilities needing to comply with their states' RPSs. To begin accounting for nonadditionality, we adjust this measure of total REC demand by subtracting from the own-state RPSs the eligible renewables the states were already generating in the year before their RPSs were passed, and by subtracting from out-of-state RPSs the renewables those other states were generating within their borders. To attempt to account for the endogenous nonadditionality and the simultaneity between electricity prices and RPS stringency, we turn to instrumental variables. In the first stage, we predict each state's total net REC demand using a host of political, economic, geographic, and weather-related instruments, as well as the number of RECs each state could potentially purchase from nearby states.

   Our results, like those of prior studies, present a mixed record. We find only a small or insignificant effect of renewable portfolio standards on the amount of electricity generated from solar and wind sources, matching prior economics research and standing in contrast to some public claims and to one of the policies' goals. Renewable portfolio standards do not appear to account for much, if any, of the growth in renewable electricity sources. On the other hand, the ultimate goal of these policies is to reduce pollution from fossil fuels, and here, our results are consistent with prior work that shows RPSs to have reduced GHG emissions. However, some fragile or even possibly implausible results undermine our confidence in interpreting them causally.

   Before detailing those results, we describe what previous investigations of this issue have found, and we replicate some of the main findings using our data.

2. WHAT WE KNOW SO FAR ABOUT WHETHER RPSs HAVE INCREASED RENEWABLES

   Some policy analysts and RPS advocates assert that RPSs work. The Natural Resources Defense Council (2013) writes that U.S. renewables growth is "driven in large part by" state RPS standards. That echoes the LBNL, which stated that 2.4 percent of all the electricity generated in the United States in 2013 was from renewables built to comply with RPSs (LBNL, 2016). Each year, LBNL updates...