State renewable energy mandates are producing enormous benefits

Much has been made of the rapid rise of renewable energy in the US, but the policy workhorse behind it does not get nearly enough attention or credit.

I’m talking about the renewable portfolio standard (RPS): state laws that mandate a certain minimum amount of renewable energy in the electricity mix, rising over time.

Some 29 states and DC now have RPSs in place.

These standards were mostly passed in the late 1990s and 2000s, when (not coincidentally) Democrats had more power in state governments.

The RPS has a mixed reputation among economists. On one hand, it’s not a carbon tax, which economists view as the fatal flaw of every policy that isn’t a carbon tax. It “picks winners,” thus distorting economic incentives (or so the story goes).

On the other hand, RPSs are real, and carbon taxes are mostly imaginary. It proved possible, at least for a while, to move RPSs through state legislatures, so a bunch moved.

And they have been driving renewable energy deployment. Lawrence Berkeley National Lab (LBNL) estimates that “62% of growth in all U.S. non-hydro renewable generation and 58% of all new renewable energy capacity additions since 2000 [are] being used to serve current RPS demand.”

For the record, the bulk of the renewable energy used to satisfy RPS requirements (like the bulk of RE generally) comes from wind:

Some of the first wave of RPSs will be reaching their final target dates soon, and states will decide whether to extend them or let them lapse.

(Oregon, Rhode Island, and Washington, DC, increased their RPS targets in 2016. Michigan voted to extend its RPS to 15 percent by 2025. Ohio’s legislature voted to make the state’s RPS targets voluntary for two years — effectively extending a suspension of the program that began in 2014 — but as of this writing it is unclear whether Gov. John Kasich will sign or veto it.)

Nonetheless, between now and those final target dates existing RPSs are going to drive a ton of new demand.

Between 2015 and 2030, RPS-driven demand in the US is projected to double, from 200 TWh to 400 TWh. Forty percent of that is from California alone, which is committed to getting 50 percent of its electricity from RE by 2030.

With growth getting ready to go into overdrive, decisions coming up about the fate of RPSs, and a coordinated (thought mostly failing) attack on state clean-energy policies underway on the right, LBNL and NREL have attempted a comprehensive review of the costs, benefits, and future of RPSs in the US.

A report last year took a close look at the cost of RPS compliance from the utility’s perspective and found that:

... RPS compliance costs over the 2010–2013 period were generally equivalent to less than 2% of average statewide retail electricity rates, but varied substantially, with the net cost to utilities and other load-serving entities ranging from -0.4 to 4.8¢ per kilowatt-hour of renewable electricity (kWh-RE). In aggregate, total RPS compliance costs represented approximately $1 billion per year, on average, over the 2010–2013 period.

That summary is taken from the introduction to a report that came out earlier this year, about the benefits of RPSs.

Ryan Wiser and his team of researchers set out to tally up the benefits — or at least a defined set of benefits and impacts — of all US RPSs, taken together, in the year 2013. To skip straight to the end, here’s the summary of their findings:

Let’s break it down a bit.

First, the distinction between benefits and impacts is important. The effects LBNL calls “impacts” are things advocates traditionally frame as benefits. The reason LBNL doesn’t is that they are not net economic benefits.

Rather, they represent a redistribution of existing benefits, from one set of stakeholders to another. Job growth in renewables means less job growth (or job loss) in fossil fuel sectors. Savings for electricity or natural gas consumers mean losses for electricity and natural gas suppliers.

LBNL does not attempt to asses the cumulative, national economic effects of RPSs, but given the size of the US economy and the relatively paltry sums involved in RPS compliance, the effects are likely tiny other way. (And they are not necessarily negative. There’s deadweight loss, yes, but the power sector is not exactly a perfect competitive market at the moment, so there’s no reason to believe the current balance of investments is economically optimal. But that’s an argument for another post.)

Now, this doesn’t mean impacts don’t matter. One might reasonably argue that redistribution of capital from electricity generators to electricity consumers is a good thing — a morally and socially justifiable redistribution. In that way, you could call it a benefit. But it is not a net economic gain.

Where we move into net benefits is when we include the cost of the so-called externalities: water use, local pollution, and greenhouse gas emissions. Shifting from fossil fuel electricity to renewables reduces all of those external costs, considerably.

To wit: In 2013, existing US RPSs avoided $5.2 billion in local pollution impacts and $2.2 billion in climate change impacts.

Put another way: In 2013, for roughly $1 billion in utility compliance costs, RPSs across the US produced $7.4 billion in net societal benefits from avoided pollution.

Benefits dwarf costs. Seems like something even an economist could get excited about!

It is, of course, somewhat more complicated than that. As important as they are, it’s difficult to assess the value of externalities with any precision.

For instance, $5.2 billion is the average assessment for the value of avoided local pollution, but such calculations depend on a number of choices: the value of a life, what second-order effects (like missed job days) to include, what epidemiological techniques to draw on, and so on.

“Across the full range of approaches considered,” the researchers conclude, “[local] health and environmental benefits span $2.6 billion to $9.9 billion (2.6 to 10.1¢/kWh-RE).” That’s a pretty wide range.

The same goes for calculating climate benefits, which involves choosing a “social cost of carbon.” Determining a social cost of carbon itself involves a huge number of assumptions. LBNL reasonably draws on US government estimates, but there are many critics who say the real SCC is much higher.

Even thus constrained, the researchers find that the climate benefits of US RPSs “span $0.7 billion to $6.3 billion (0.7 to 6.4¢/kWh-RE) across the full range of social cost of carbon estimates considered.” Again, a pretty wide range.

Two things worth noting about these estimates on externalities.

One, they are frustratingly imprecise. Though some imprecision is unavoidable (many of the decisions reduce to moral values, which cannot be determined scientifically), there’s much work to be done to tighten them up.

And of course, as the researchers repeatedly acknowledge, each state contemplating an RPS will need to do more customized analysis of costs and benefits. For example, local pollution benefits are greater on the East Coast, where such pollution is a bigger problem.

Two, even the very lowest estimate of both ranges (health and climate effects) adds up to benefits more than three times the costs.

This suggests that reducing pollution by transitioning to clean energy is good public policy, whether or not it is done through economically optimal means. And it suggests that popular policies with a solid track record of success deserve support, even from fussy climate wonks.