An Analysis of the Impact of Renewable Portfolio Standards on Residential Electricity Prices
A Renewable Portfolio Standard (RPS) has become a popular policy for states seeking to increase the amount of renewable energy generated for consumers of electricity. The success of these state programs has prompted debate about the viability of a national RPS. The impact that these state level policies have had on the price consumers pay for electricity is the subject of some debate. Several federal organizations have conducted studies of the impact that a national RPS would have on electricity prices paid by consumers. NREL and US EIA utilize models that analyze the inputs in electricity generation to examine the future price impact of changes to electricity generation and show marginal increases in prices paid by end users. Other empirical research has produced similar results, showing that the existence of an RPS increases the price of electricity. These studies miss important aspects of RPS policies that may change how we view these price increases from RPS policies.By examining the previous empirical research on RPS policies, this study seeks to identify the controls necessary to build an effective model. These controls are utilized in a fixed effects model that seeks to show how the controls and variables of interest impact electricity prices paid by residential consumers of electricity. This study utilizes a panel data set from 1990 to 2014 to analyze the impact of these policies controlling for generating capacity, the regulatory status of utilities in each state, demographic characteristics of the states, and fuel prices.The results of the regressions indicate that prices are likely to be higher in states that have an RPS compared to states that do not have such a policy. Several of the characteristics mentioned above have price impacts, and so discussing RPS policies in the context of other factors that contribute to electricity prices is essential. In particular, the regulatory status of utilities in each state is an important determinate of price as well as the amount of renewable energy generated in each state. There are several implications of this analysis that are relevant for policy makers who seek to gain the environmental benefits of these policies, but who are also concerned with the costs those polices may impose on consumers of electricity. First, allowing utilities as much time as possible to comply with the mandates of the RPS will mitigate the price increases associated with implementation of and compliance with the policy. Secondly, policy makers need not fear imposing high targets for their RPS as this is not associated with higher electricity prices. Finally, policy makers should be concerned with the bindingness of the policies they impose. States with non-binding policies tend to have higher electricity prices, likely due to the costs of early compliance. As such imposing interim targets may raise rates more than simply allowing compliance at a pace utilities can bear without substantially increasing prices.
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