TODAY’S STUDY: THE LOW COSTS AND BIG BENEFITS OF RENEWABLES STANDARDS
A Survey of State-Level Cost and Benefit Estimates of Renewable Portfolio Standards
Heeter, Barbose, Bird, Weaver, Flores-Espino, Kuskova-Burn, and Wiser, May 2014 (Lawrence Berkeley National Lab/National Renewable Energy Lab)
More than half of U.S. states have renewable portfolio standards (RPS) in place and have collectively deployed approximately 46,000 MW of new renewable energy capacity through year-end 2012. Most of these policies have five or more years of implementation experience, enabling an assessment of their costs and benefits. Understanding RPS benefits and costs is essential for policymakers evaluating existing RPS policies, assessing the need for modifications, and considering new policies.
This report surveys and summarizes existing state-level RPS cost and benefit estimates and examines the various methods used to calculate such estimates. The report relies largely upon data or results reported directly by electric utilities and state regulators. As such, the estimated costs and benefits itemized in this document do not result from the application of a standardized approach or the use of a consistent set of underlying assumptions. Because the reported values may differ from those derived through a more consistent analytical treatment, we do not provide an aggregate national estimate of RPS costs and benefits, nor do we attempt to quantify net RPS benefits at national or state levels.
The report summarizes state-level RPS costs to date and considers how those costs may evolve going forward given scheduled increases in RPS targets and cost containment mechanisms incorporated into existing policies. The report also summarizes RPS benefits estimates, based on published studies for individual states, and discusses key methodological considerations. These estimates, for example, of the social value of carbon emissions reduction and the human health impacts of reduced air emissions, are based on a variety of methodologies and assumptions. In comparison to the summary of estimated RPS costs, the summary of RPS benefits is more limited, as relatively few states have undertaken detailed benefits estimates. Further, for those states that have estimated RPS benefits, most assess only a limited number of impact types; as a consequence, some types of benefits are not reflected in this report.
Our analysis focuses specifically on the incremental cost of meeting RPS targets, i.e., the cost above and beyond what would have been incurred absent the RPS, over the 2010-2012 period. For states with restructured markets, we derive RPS compliance costs based on the cost of renewable energy certificates (RECs) and alternative compliance payments (ACPs). For traditionally regulated states, we instead rely upon RPS cost estimates reported directly by utilities or regulators within annual compliance reports or other regulatory filings (not prospective studies), and translate those estimates into a set of common metrics for comparison. The methods used by utilities and regulators to estimate incremental compliance costs vary considerably from state to state, in some cases reflecting statutory or regulatory requirements, and a number of states are currently engaged in processes to refine and standardize their approaches to RPS cost calculation.
Importantly, the estimated RPS costs summarized within this report must be considered in light of what the underlying data represent and the limitations therein. First and foremost, the comparisons across states are imperfect, given the varying methods and assumptions used (especially among regulated states). Second, the data presented most closely correspond to the costs borne by utilities or other load serving entities; they do not represent net costs to society, nor do they necessarily represent the costs ultimately borne by ratepayers, such as in cases where ACPs or financial penalties are not passed through to rates or differences in the timing of when costs are incurred and recovered in rates. Third, depending upon the state and particular methodology used, the cost data may omit certain costs incurred by utilities (e.g., integration costs), as well as possible benefits. Other analysis has examined integration costs; for example, a number of U.S.-focused studies have found wind integration costs to be less than $5/MWh (Wiser and Bolinger 2013). Finally, the use of REC prices to compute RPS compliance costs in restructured markets is limited in some cases by a lack of REC price transparency and incomplete data on long-term contracts. In addition, REC prices can be quite volatile, with large swings from year to year, depending upon whether a given state or region is in surplus or deficit relative to its RPS obligations. As such, the calculated RPS compliance costs for restructured markets may not correspond well to trends in the underlying cost of renewable electricity.
In light of what the underlying data represent and the limitations therein, the following are key findings with respect to RPS costs.
• Over the 2010-2012 period, average estimated incremental RPS compliance costs in the United States were equivalent to 0.9% of retail electricity rates when calculated as a weighted-average (based on revenues from retail electricity sales in each RPS state) or 1.2% when calculated as a simple average, although substantial variation exists around the averages, both from year-to-year and across states. Focusing on the most recent historical year available, estimated incremental RPS compliance costs were less than 2% of average retail rates for the large majority of states (see Figure ES-1).
• Among restructured markets, estimated incremental compliance costs ranged from 0.1% to 3.8% of retail rates. Expressed in terms of the cost per unit of renewable energy required, estimated incremental RPS compliance costs in these states ranged from $2-$48/MWh. Variation among those states reflects differences in RPS target levels, REC pricing, the composition of RPS resource tiers, and other factors.
• Among traditionally regulated states (excluding California), estimated incremental compliance costs varied from -0.2% (i.e., a net savings) to 3.5% of average retail rates. Variation among these states partly reflects differences in RPS procurement levels. In addition, relatively high estimated costs for a number of states are associated with the presence of distributed generation (DG) set-asides, for which compliance costs tend to be “front-loaded.” The estimated incremental costs of meeting general RPS obligations (i.e., excluding DG or solar set-asides) ranged from -$4 to $44/MWh of renewable energy procured.
• Methodological differences contribute to observed variations in these compliance cost estimates, especially among regulated states. For example, in California, two different methodologies yield derived incremental compliance cost estimates ranging from a net savings equal to 3.6% of retail rates to a net cost of 6.5%, as shown in Figure ES-1.
• Utilities in eight states assess surcharges on customer bills to recoup RPS compliance costs. These utility-reported surcharges, which represent the costs borne directly by customers, ranged in 2012 from about $0.50/month to $4.00/month for average residential customers, and on a statewide average basis, equate to roughly 0.5% to 4% of average retail electricity rates. These customer surcharges may differ from the estimated compliance costs borne by the utility for a variety of reasons, such as differences in the timing or type of costs that can be passed through to customers.
• Estimated incremental RPS compliance costs over the historical period of our analysis reflect the RPS targets applicable during those years (the open circles in Figure ES-1). Under current policies, RPS targets are scheduled to increase significantly, eventually reaching levels represented by the closed circles. Whether and the extent to which incremental RPS costs rise in tandem depends on many factors: renewable energy technology costs trends, natural gas prices, federal tax incentives, and environmental regulations, among others.
• Future RPS compliance costs are limited by cost containment mechanisms built into most RPS policies. Among those states relying principally upon an ACP mechanism for cost containment, RPS costs are effectively capped at roughly 6-9% of average retail rates in most cases. Cost caps in most other states are considerably more stringent, often limiting compliance costs to 1-4% of average retail rates. Compliance costs in several of those states have already reached or are approaching the respective caps.
Policymakers often consider RPS costs within the context of broader social benefits beyond any direct cost savings that may accrue to utilities. Potential benefits of RPS policies include reduced emissions, water savings, fuel diversity, electricity price stability, and economic development. States have most commonly attempted to quantitatively assess avoided emissions and associated human health benefits, economic development impacts, and savings from reductions in wholesale electricity prices. In many cases, these assessments are required by the legislature or public utilities commission (PUC), filed as part of an integrated resource plan (IRP) docket, and prepared for regulatory commissions, energy boards, or public benefit corporations. In this work, we focused on analyses conducted as part of state-level RPS evaluations, but did not review the broader literature on renewable energy benefits in general. While we attempted to conduct a thorough literature review, we have likely omitted some analyses; however, this review provides an indication of the types of benefits analyses that have been conducted and the range of benefits found.
Key findings include:
• A relatively small number of RPS benefits estimates have been developed and methodologies vary considerably, which limits the ability to make comparisons and bounds the range of impacts. We identified studies for eight states that assessed the societal benefits or broader impacts of RPS policies based on our review of literature. Most studies of benefits or impacts are prospective in nature, assessing not only the current RPS impacts, but also examining future impacts, in contrast to the cost estimates previously discussed that are retrospective. Some types of benefits, such as avoided emissions, can accrue for the lifetime of the renewable energy plant, while costs are incurred typically over a shorter period.
• We identified six studies that attempted to quantify the emissions or human health benefits of state RPS policies. Most used modeling approaches to assess scenarios with and without renewable energy and some estimated the dollar values associated with emissions reductions. In some cases, emissions benefits may be captured in estimates of net incremental costs, such as if allowance prices are already embedded in wholesale electricity prices. Estimates of benefits ranged from roughly tens to hundreds of millions of dollars on an annual basis depending on the state and scenario. These estimates translate to approximately $4-23/MWh of renewable generation, depending on the study and the cost value assumed for CO2.
• Similarly, we identified six studies that attempted to quantify economic impacts of an RPS. Two used economic modeling approaches while the others used input-output models or simplified case study approaches. Often input-output models or simplified approaches estimate gross jobs, which do not account for shifts in employment that may occur, as opposed to new net jobs. A number of the studies examined economic development benefits annually or over the lifespan of the renewable energy projects, with benefits on the order of $1-$6 billion, or $22-30/MWh of renewable generation.
• Six states estimated wholesale market price reductions that resulted from an RPS (i.e., the reduction in market clearing prices resulting from an increase in the supply of low marginal-cost renewable resources), typically using electric system modeling or applying estimates from other modeling efforts. The studies generally found wholesale price reductions of about $1/MWh or less within specific markets (total generation), or price suppression benefits of $2-$50/MWh of renewable energy generation.
• Comparison of costs to benefits is challenging, even when they are reported in the same study, given that some incremental cost calculations may already take into account specific benefits, analysis time periods may differ, benefits assessments may address only particular types of benefits, and other factors. Most states for which we have identified benefits estimates did not conduct direct comparisons.
In the future, additional efforts could be undertaken to comprehensively assess the costs and benefits of state RPS policies by comparing costs and benefits directly, using similar methodologies and level of rigor. Further, additional work could be done to standardize incremental cost calculations within and among states provided that such cost calculations are often required by RPS statutes. Efforts in a few states are underway to address standardization of incremental cost calculations; states that have not examined standardization may see the issue arise in the future and be able to learn from the processes and outcomes of existing state standardization efforts…
This report surveys and summarizes existing state-level RPS cost and benefit estimates and examines the various methods used to calculate such estimates. The report relies largely upon data or results reported directly by electric utilities and state regulators. As such, the estimated costs and benefits itemized in this document do not result from the application of a standardized approach or the use of a consistent set of underlying assumptions.
The report summarizes state-level RPS costs to date and considers how those costs may evolve going forward, given scheduled increases in RPS targets and cost containment mechanisms incorporated into existing policies. The report also summarizes RPS benefits estimates, based on published studies for individual states, and discusses key methodological considerations. These estimates, for example of the social value of carbon emissions reduction and the human health impacts of reduced air emissions, are based on a variety of methodologies and assumptions. In comparison to the summary of estimated RPS costs, the summary of RPS benefits is more limited, as relatively few states have undertaken detailed benefits estimates. Further, for those states that have estimated RPS benefits, most assess only a limited number of impact types; as a consequence, some types of benefits are not reflected in this report.
This survey of RPS costs and benefit estimates across states finds that in the most recent year with data available, costs were estimated to be equivalent to less than 2% of retail rates in 17 states, with 10 of these states having estimated costs equivalent to less than 1% of retail rates. The remaining 8 states have costs that are estimated to be equivalent to 2% to 4% of retail rates, averaging the two estimates for California. A limited number of states have developed quantitative benefits estimates, which vary widely in both methodology and magnitude. Benefits estimates have been most commonly developed for avoided emissions and associated air quality improvements, economic development, and wholesale electricity price suppression effects. Because the reported cost and benefit values may differ from those derived through a more consistent analytical treatment, we do not provide an aggregate national estimate of RPS costs and benefits, nor do we attempt to quantify net RPS benefits at national or state levels.
Estimates of costs are limited by available data and the wide variety of methods and assumptions employed. This analysis focuses on comparing estimated incremental costs, which are most appropriate for assessing RPS policy because they net out costs that would otherwise have been incurred to serve loads if the RPS did not exist, such as the need for other forms of generation. We use a standardized method to derive incremental costs in restructured markets based on REC prices, ACP levels, and compliance obligations. Key limitations of this method include omission of other potential policy costs, a lack of REC price transparency, and incomplete data on long term contracts. While REC prices reflect compliance costs, they do not necessarily reflect the cost of renewable technology deployment because they can be strongly influenced by market supply and demand conditions. In regulated states, comparisons of costs are complicated by our reliance on estimates produced by utilities and regulators, who utilize a wide variety of methods and assumptions.
The primary methods used in regulated states for estimating incremental RPS costs are: 1) to compare the cost of renewable generation to that of a proxy generator (a plant type that is most likely to be displaced by the renewable generation); 2) to compare to wholesale electricity market prices; or 3) to conduct electric system modeling with and without the renewable generation. While the modeling approach can provide a more detailed estimate of the resource mix if an RPS were not implemented, assumptions for inputs can significantly influence results. Simplified proxy methods may provide useful perspective on costs, but yield less comprehensive results. In various approaches, assumptions regarding plant lifetime and methods of annualizing costs are important considerations that can significantly affect estimates. The inclusion of costs associated with pre-RPS renewables can lead to overestimates of RPS costs while inclusion of efficiency and indirect expenditures may make it challenging to directly assess costs resulting from the addition of new renewable generation.
Despite differences and uncertainties in cost methodologies, RPS costs are typically bounded by the presence of policy mechanisms to cap costs. Most states have a way to contain RPS costs, typically through either a cap, based on either retail electricity rates or revenue requirements, or by allowing ACPs. Estimated incremental RPS costs in most states are well below the respective cost caps, although a few states are currently operating at or near them.
RPS costs can be considered in the context of policy benefits, although again there are limitations in the ability to compare estimates. While RPS policies have the potential to offer a variety of environmental and social benefits, often only a few types of benefits have been quantified. States have most commonly attempted to estimate avoided emissions and associated human health benefits, economic development impacts, and savings associated with reductions in wholesale electricity prices; in many cases, these assessments have been required by the legislature or PUC. In some cases, the same impacts may be captured in the assessment of incremental costs. In addition, methodologies and level of rigor vary widely, making comparisons challenging.
Going forward, more could be done to comprehensively assess the costs and benefits of state RPS policies. Instead of looking separately at incremental costs and benefits, future analysis could compare costs and benefits directly within and among states, using a consistent methodology and level of rigor.
In addition to more comprehensive analysis of cost and benefits, additional work could be done to standardize incremental cost calculations within and among states, given that incremental cost calculations are often required by RPS statutes. Efforts within a few states are underway to address standardization of incremental cost calculations; states that have not examined standardization may see the issue arise in the future and be able to learn from the processes and outcomes of existing state standardization efforts.
States in restructured markets may find it beneficial to promote REC price transparency, particularly as those markets move towards greater use of long-term contracting. REC price transparency could be encouraged by requiring RPS-obligated entities to report REC prices on a confidential basis to the PUC; prices could then be publically reported only on an aggregated basis.