EPIC Fail on Renewable Portfolio Standards

A recent paper from the University of Chicago’s Energy Policy Institute (EPIC) reviewed the impact of Renewable Portfolio Standards (RPS) since they were fist implemented in the early 1990s. It has sparked quite a debate in recent weeks. The paper concludes RPS have not been effective . In fact, the paper tries to argue that RPS have been responsible for increased bills for rate payers, while casually ignoring other pertinent factors. Unsurprisingly, naysayers of renewable energy have been quick to either spread the word or pile on with thoughts of their own in the hopes of advancing an anti-renewable energy agenda. They should be careful. The report is full of glaring flaws.

What Is RPS?

RPS is a policy mechanism whereby a state declares a certain percentage of its electricity will come from particular sources of generation by some future date. For example, 30 percent renewable energy by 2030. In some cases, states have taken a more flexible route due to existing - and important – generating assets in their states such as nuclear power plants. In those cases, the RPS states a certain percentage of electricity will come from alternative sources. RPS was first implemented by Iowa in the early 1990s and 29 states (and the District of Columbia) have implemented it as well. All told, approximately 64 percent of nationwide generation falls in statues with an RPS in place. In some cases, RPS have become bolder as they become more popular with some states aiming for 100 percent of their electricity coming from renewable sources.

Although the report treats RPS as a one size fits all solution, it is not, and that is its first flaw. More than one economist has noted the difficulty in assessing various RPS initiatives. In addition to the challenges of varying definitions, renewable-based electricity can be sold across state lines to markets with no RPS, thereby impacting neighboring prices. Cleaner electricity generation means clean air and water whose benefits often cross man made boundaries. And varying targets – 30 percent in one state versus 100 percent in another – complicate analysis even further.

The Report Doesn’t Hold Up

The authors build the lion share of their supporting argument on the levelized cost of energy (LCOE). LCOE considers all the factors behind electricity generation and compares the final per unit price of generation, usually in dollar per megawatt-hour ($/MWH). The figure below from the International Renewable Energy Agency (IRENA) shows all forms of renewable power have a range within which fossil fuel power cost sit (denoted by the dotted black lines). All available technologies have a competitive price point.

The authors claim that using LCOE to demonstrate this competitiveness ignores the additional cost of keeping spinning reserves such as gas-fired turbines online to address intermittency due to cloud cover or reduced wind. Ten years ago, they would have had a point. However, as market analysis shows, renewable energy is, in some markets, reinforcing power systems reliant on fossil fuels. Further, renewable energy and battery energy storage systems (BESS) are increasing because they respond to emergency needs faster than current fossil fuel-based assets. Therefore, not only is intermittency nearly a non-issue, cutting edge solutions can serve to reduce congestion and demand, two factors that can negatively impact a rate payer’s monthly bill.

EPCI’s report also tries to blame RPS for potentially stranded assets. It argues the rapid addition of renewable generating assets has accelerated the rate at which existing fossil fuel assets – which have not recuperated their entire investment cost – are shuttered. In their view, utilities will seek compensation through additional charges to consumers. They almost have a point. Coal fired power plants have been under siege and closing for the last decade. However, this has more to do with the proliferation of natural gas-based generating plants than mandates for renewable-based electricity. As the graph below from the Energy Information Association shows, for as much as renewable energy has grown in the last decade, it still only comprises approximately 18 percent of the US electricity generation matrix. Natural gas-fired generation, on the other hand, has soared to roughly 32 percent from just over 20 percent. In that same time, coal fired-generation has fallen from 40 percent to around 27 percent.

Even if renewable energy did not exist, utilities would seek recompense for their coal plants, so to blame such an increase entirely on RPS is misleading. And indeed, the question of whether or not utilities can do such thing is not settled. As utilities seek to recuperate their costs, utility commissions – designed to protect rate payers – are pushing back, leaving some of these questions to be resolved in court.

Related, the paper attempts to correlate a higher cost of electricity with the added cost of building infrastructure to transmit renewable-generated electricity from faraway places back to the grid. Such costs to the project developer are part of the final offtake price paid by the utility, which, as many studies report, continues to fall below that of fossil fuel-fired generation.

In addition, the report attempts to argue that carbon abatement achieved through an RPS can range between $115 and $530 per metric ton. By comparison, some US-based attempts at carbon markets have the social cost of carbon ranging between $15 and $50. However, this too is misleading. To begin, there is no fully agreed upon price for carbon. A carbon tax, one which includes negative externalities like environmental clean up, would help determine if this supposedly high cost is in fact reasonable. Second, research done by the Lawrence Berkeley National Laboratory and the National Renewable Energy Laboratory show that the estimated gains from cleaner air, reduced water use, increased rate payer health, and, by extension, reduced health care costs can reach over $1.5 trillion by the end of the next decade.

Surprisingly, the report seems to skip an argument against the fiscal incentives supporting renewable energy, such as the investment tax credit (ITC) for solar and the production tax credit (PTC) for wind. However, analysis of subsidies might be beyond the scope of the report. Plus, it would mean honestly addressing the more than $600 billion in subsidies enjoyed by the fossil fuel industry, and (again) the cost of environmental degradation.

Lastly, EPIC’s report appears to have not been peer reviewed, meaning similarly qualified professionals did not have a chance to run the same analysis or scrutinize the work. While there are legitimate concerns over what the peer review process has become, skipping the process implies a rush to emphasize the findings over the rigor of the work. Therefore, take it with a grain of salt.

What Reality Is Telling Us

Policy tools like RPS (among others) are delivering. They – similarly to other policy tools like feed-in tariffs and competitive auctions – have brought more cost competitive sources to the market, which has in turn created more jobs than the fossil fuel sector in recent years and helped the environment. And they are impacting other fossil fuel-heavy sectors like transportation.

Any analysis of overall price increases must include an honest conversation about necessary upgrades to infrastructure used by all sources of generation (e.g., transmission and distribution systems, substations, etc.) It also must account for rising prices in fossil fuels, which still comprise the majority of electricity generation worldwide.

Intelligent people can argue about whether the costs are worth it, the degree to which decisions should be in the hands of consumers or lawmakers, and what fair compensation to all stakeholders looks like. But at least be honest in the assessment. This report, unfortunately, fails this most initial of criteria. Waiving it around fervently only serves to underscores a disingenuous attempt to advocate for the status quo. The energy transition is well underway and it will only increase as the urgency of battling global climate change intensifies.



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© 2020 by Mark Konold