Nevada’s new measure to strengthen its Clean Electricity Standard (CES) marks the latest in a flurry of legislative moves to drive the clean energy transition. That makes this a good time to take stock of the latest research and consider whether Clean Electricity Standards really are good policy.
Electricity generation by wind and solar in the United States has increased nearly five-fold in the last decade. In 2018, renewables (including hydroelectric power) provided almost 20% of America’s electricity and total zero-carbon generation (including nuclear) accounted for 39%. Alongside that scale-up, both in the U.S. and globally, the costs of wind and solar have plummeted 69% and 88% respectively, making these renewable energy resources the cheapest source of new generation in many regions. Now, it’s common for new renewables to be less expensive than just the operating costs of existing coal-fired power plants. For example, Colorado recently passed legislation that will facilitate the replacement of uneconomic coal plants with wind by allowing utilities to recover their equity while still realizing savings for consumers and dedicating a portion of the savings to a transition fund for workers and communities.
What Caused the Renewables Surge?
The U.S. renewables boom has been driven by a combination of policy and market forces. Federal tax credits for wind and solar have invigorated sustained investment, and targeted corporate and municipal procurement have further expanded the market. Last year, private sector companies more than doubled their previous record for renewable energy deals, with over 40 major companies accounting for 6.5 gigawatts of announced purchases. Companies across the country recognize the manifold benefits of purchasing renewable energy, and thanks to initiatives like the Renewable Energy Buyers Alliance (REBA), they’ve been capitalizing on the low costs of renewables and spurring local development along the way. And cities have also been making strides in directly procuring renewable energy to meet their ambitious energy and emissions targets. WRI is helping the 25 American Cities Climate Challenge winners and others.
A substantial portion of U.S. renewable energy growth can also be attributed to state clean electricity standards, often codified in law as Renewable Portfolio Standards (RPS). Twenty-nine states have a form of clean electricity standard, a mandate to supply a certain percentage of retail electric sales with energy generated from eligible renewable or other clean sources. They are often enforceable with penalties and the details vary from state to state, with different levels of ambition and differing qualified technologies. Many states have exceeded their original standards ahead of schedule and have responded by setting increasingly aggressive requirements. In just the last few months, New Mexico, Washington and Puerto Rico have adopted 100% clean electricity standards for 2045 or 2050. All told, 10 states, Puerto Rico and Washington DC have requirements for at least 50% of their electricity to come from clean energy sources.
Examining the Cost of Renewables
The renewable energy boom is paying dividends in the form of cleaner air, reductions in heat-trapping pollution, and in making future installations of these technologies cheaper. But at what overall cost?
A controversial new paper from economists at the University of Chicago Energy Policy Institute suggests that these policies have indeed helped to reduce carbon dioxide emissions, albeit at a high cost. On the other hand, evaluations by the Department of Energy Laboratories show that clean electricity standards have had a minimal impact on utility bills. The Lawrence Berkeley National Laboratory (LBNL) and the National Renewable Energy Laboratory (NREL) evaluated these programs in a series of studies and concluded that they raised electricity bills by an average of 2% in 2017. Although renewables were substantially more expensive than fossil fuel generators in the early years of CES programs, the fraction of power required to come from renewables was very low. Only now, when prices have become very competitive, are renewables being required to provide a larger share of total generation.
Renewable Electricity Standards: Good Policy or Bad Move?
The new University of Chicago paper, posted on April 22, presents an alternative estimate of the cost of renewable electricity. Rather than analyzing the costs of specific clean electricity policies, this paper uses statistical methods to estimate the impact of clean electricity standards on retail rates by comparing states that have adopted a CES to those that have not. Their analysis suggests that clean electricity standard policies cost as much as 10 times as much as estimated by NREL/LBNL. (It should be noted that this analysis has not undergone peer review and could be revised substantially before final publication.)
There are numerous reasons to be skeptical of this finding, some of which have been outlined by Jesse Jenkins of the Harvard Kennedy School. For one, this type of statistical approach can have large uncertainties. In fact, the uncertainty bound shown in the Chicago paper ranges from an impact of zero to 4 cents per kilowatt-hour on average retail electricity prices.
Also problematic is that the analysis divides states into just two groups: states with a CES and states without one. The reality is much more nuanced, as the stringency, qualifying energy sources, and implementation mechanisms vary greatly among states. At the same time, states without a CES also have a range of renewable energy and other policies affecting the power sector that are not accounted for, and states with a CES often adopted other policy changes affecting electric power at the same time. The truth of the matter is that all renewable electricity standard policies are not created equal. Depicting them as a single treatment risks ascribing to the CES effects that are driven by other factors, such as differences in implementation details or other concurrent policy changes that are not controlled for.
Another critical issue the study overlooks is that many of the states that have implemented CES policies have also put in place strong energy efficiency policies. This can lead to relatively high retail rates per kilowatt-hour, but relatively low total electricity bills. Using total electricity bills, rather than retail rates, would be a better measure of consumer costs.
Still, the Chicago paper suggests that the much higher costs it finds compared to other estimates could be due to the costs of integrating renewables into the electricity system, noting that other studies may not fully account for this. Three sources of additional cost are proposed, but there is no direct evidence for them in the statistical model and on closer examination they just don’t add up.
- Transmission costs: Depending on where renewable energy projects are sited, new transmission lines may be required. These costs are accounted for in the NREL/LBNL 2016 forward looking study of CES costs, which found that CES policies adopted by 2016 could result in overall savings of nearly 1% of electric system costs to less than a 1% increase in costs. However, a more robust transmission system is desirable for many reasons and these costs could become more significant as the total renewable electricity share moves above 50%. Under a 50% CES scenario, the NREL/LBNL study found that total system costs could increase by 0.6% to 4.5%.
- Backup power: While electricity system planners do need to account for the variability of wind and solar power to balance electricity supply and demand, this does not necessarily require adding new dispatchable capacity. While battery storage is an increasingly cost-effective option to include in an optimized electricity system, the variability of both loads and renewable generation can typically be managed with existing generating capacity and system reserves at the modest renewable energy levels examined in the University of Chicago paper.
- Stranded assets: By requiring additional renewable energy generation, a CES can cause some existing generators to retire before the end of their useful lives, creating stranded assets. Any resulting increase in system costs, however, is attributable to the addition of renewables, not to the retirements, and is accounted for in studies like those conducted by LBNL and NREL. After all, the reason assets become stranded is that other energy sources on the system are less expensive to operate. The way in which early retirements affect retail rates depends on how the electricity market is structured, which varies from state to state. In states with competitive electricity markets, the power plant owners will lose the unrecoverable portion of their upfront capital investment in plants that are not able to compete, but retail electricity rates will not be affected. In states with cost-of-service regulation, the power plant owners may still be allowed to recover their investment, but rates will still be lower than if the plant continued to operate—otherwise, it would not be shut down.
CES Policies in Context
When considering the value of CES policies, it’s necessary to look at the full context and consider benefits as well as costs. As more states strengthen existing policies and enact new ones, renewable energy technology costs are driven down further. States that switch from fossil fuel-burning plants to renewables see considerable air quality improvements and water savings. A 2016 LBNL/NREL study estimated that new renewable resources used to fulfill CES requirements in 2013 were responsible for $5.2 billion in health and environmental benefits. Experts agree that CES policies are not as efficient as a carbon tax in reducing carbon dioxide emissions in the short run, but given multiple objectives, including promoting technological innovation and improving air quality in addition to reducing carbon dioxide emissions, they can be part of an optimal policy portfolio.
Renewable electricity standards are a bona fide success story. As recent state momentum has demonstrated, clean electricity standards remain one of the most popular, bi-partisan and effective climate policies. Today, 83% of Americans support state-level renewable electricity requirements, a level of consensus largely sustained over the past decade. The implementation of these policies has led to reductions in carbon dioxide emissions and conventional air pollution, and forged a strong industry that is poised to create thousands of jobs and become the primary source of electricity in the years to come. This plethora of benefits has been delivered to Americans at a cost of just a few percent on the average electricity bill according to the most detailed and robust analyses.