Twenty-eight states mandate some degree of Renewable Portfolio Standards on the electric utilities that serve them. This puzzles me.
RPS require utilities to supply a certain amount, or share, of electricity from a defined set of "renewable" sources within some time frame. The higher costs of incremental energy from otherwise uneconomic renewable sources are then passed onto ratepayers through higher electric bills.
The primary argument for RPS mandates is economic: to accelerate the path towards economically competitive renewable energy technologies by forced "premature" adoption while the technology is still "too expensive." In other words, move these technologies down the scale and experience curves. Other arguments include reduced air pollution, reduced CO2 emissions, and increased robustness of energy supply through diversification of sources. (It is at least unclear that the grid is made more robust by adding renewable sources that themselves -- wind, solar -- are intermittent.)
My puzzlement arises from the fact that the costs of a state RPS mandate fall fully upon a state's inhabitants, but the benefits do not. Rather any benefits arising from mandates, if real, accrue to a regional, national or even global constituency. Typically, when costs are localized and benefits widely shared, the economics push entities towards being "free riders." Even if you were an enthusiastic believer in the goal of renewable energy sources generally, and RPS mandates specifically, why would you push for state RPS mandates? Why not let others do the heavy lifting and enjoy the results? Or be satisfied in pushing for national (vs. state) standards? Do you really think that mandates in Connecticut -- or any one states -- will make the critical difference?
The costs of RPS mandates vary but can certainly mean real dough. Assume a state with a U.S. average cost of electricity (10 cents / kwh in 2008) mandates a 10% increase in renewable energy sourcing. The new renewable sources have a delivered, retail cost of, say, 25 cents/kwh. Overall electricity costs would then climb to 11.5 cents/kwh. The average U.S. household consumes about $4,000 of electricity (direct and indirect), so this mandate would increase average household costs to $4,600 per year.
I don't know why 28 states have chosen the apparently altruistic route of taxing their businesses and residents through higher electricity costs. I do have a few hypotheses why they might have:
- Classic politics: small, motivated pressure groups win out over a larger group of diffused, unaware policy losers. In this case we have energy suppliers seeking economic rents combined with "green" advocacy groups. Other advantageous elements: the green aura of the policy, and that costs are hidden in future electricity bills, not current state taxes.
- The emotional sale: these policies are genuinely "feel good" to a large share of voters, economics or cost/benefit analysis be damned. What's $400 per family for a little self-righteousness?
- Cost confusion: policymakers and / or voters are confused about the amount or nature of the the costs of the mandates, or minimize the likelihood of their future existence. Ultimate costs can't be known for certain, with luck will be trivial. And perhaps the evil utilities will end up eating the costs..
- Faux mandates: RPS mandates are written in such a way that their cost burdens will never be material. Offsets, escape clauses, and hard cost limits may be used to cap economic damage. (Automobile mileage standards have traditionally been of this ilk.)
Any or all of these points may be valid and may explain why a particular state has pursued RPS mandates, arguably against its own interests.
A related puzzle: what determines which states are part of the "Thoughtful 28," versus the "Tightwad 22"?
Take a look at a map of states with and without RPS. (Note that 5 states are color coded as "with" but should be considered for our purposes "without" because their targets are voluntary: ND, SD, Utah, Virginia, and Vermont.) In addition, Table One below lists states and their RPS status
Any number of variables may explain membership in these two groups. I found two interesting correlations.
The first is with state right-to-work laws, which actually shows a strong correlation. The map of Right-to-Work states is remarkably similar to the (corrected) RPS map. Only two forced-union states do not have RPS mandates -- Vermont and Alaska. Only five right-to-work states have RPS mandates: Iowa, Texas, Nevada, Arizona, and North Carolina. Iowa's mandate is very modest. Possibly, three of these states are particularly motivated by industrial policy, aiming to push technologies that will disproportionately benefit them (wind in TX and solar in AZ and NV).
Is this correlation explanatory? Maybe. Right-to-work states may be job-first states, or regulation-lite states generally aiming for a welcoming business environment; RPS states would be "other-issue" states. And like RPS legislation, forced-union laws involve benefits flowing to a small but motivated minority funded by a hidden tax on the majority.
The other correlation is with electricity costs. The states with the highest electricity costs tend to have RPS mandates, and states with low costs do not. This makes economic sense. RPS mandates are relatively more expensive for states with existing, cheap alternatives. A 20 cents/ kwh wholesale wind project or a 30 cent solar one is a lot cheaper in Massachusetts (16.5 cents delivered, now) than in West Virginia (6.5 cents). And low-cost states have a competitive advantage to enjoy and exploit, whereas high-cost states have already lost the energy cost battle.
Of the 15 states with the most expensive electricity (average cost: 15.03 cents) only three don't have mandates: Alaska, Vermont, and Florida. Of the 15 states with the cheapest juice (average cost: 6.65 cents), only 4 have mandates: Washington and Oregon, Iowa (small), and Missouri. This suggests that the real U.S. green saints are voters in uber-eco WA and OR, who are going to pay the highest relative cost for incremental renewable resources and take the biggest hit to their relative competitiveness.
|Table One: RPS Mandates by State|
|State||Mandate?||-work state?||Cost/kwh*||U.S. Rank|