Do energy restrictions raise electricity prices?
Do statewide mandates requiring a certain percentage of wind, solar, and other non-carbon resources be used as power sources drive up the cost for consumers?
An interesting debate is playing out. The Center for American Progress (CAP) has put out a policy brief that argues that green energy purchase mandates do not raise local electricity prices. The Renewable Portfolio Standard (RPS) requires that a state's utilities purchase a given percentage of their power from low carbon sources such as wind, solar and hydro. In California, the RPS is set to rise to 33% by the year 2020. As of 2009, 12% of California's power comes from renewables. Is the CAP correct that further ramping up of the RPS will offer environmental benefits without imposing costs on electricity consumers?
For the CAP to be correct, it must be the case that the cost of generating renewable power is falling sharply over time. There is also the issue of "insurance". Given the variability of wind and sunshine, power producers must have alternative backup generators ready to produce. Given that good batteries for storing excess power do not exist, there has to be some slack in capacity to be prepared for contingencies such as when its a cloudy day or a day when the wind isn't blowing. These "backup plans" have costs to maintain them.
It is also the case that renewable power takes a fair bit of land. Is the opportunity cost of the land that renewables are being located on being incorporated into the cost of providing renewable power?
What the CAP article does not discuss is the incidence of the RPS standards. Are the public utility commissions by shielding consumers from price hikes simply lowering the profits of the electric utilities? One way to study this would be to conduct an event study and see if publicly traded electric utilities experience a drop in their stock price when new news about a more aggressive RPS is revealed. Such a finding would indicate that the stock market believes that their profits will fall because their cost of acquiring electricity has gone up.
If introducing the RPS neither raises consumer prices nor lowers the utility's profits, then such an RPS is a free lunch! That would puzzle the typical economist!
The relevant energy policy counter-factual here is; what would the price of electricity and the profits of electric utilities have been under a less aggressive RPS? As the RPS tightens, who bears the incidence of this regulation? The CAP has argued that it is not the consumers and they may be right but if utilities earn lower profits will there be unintended consequences such as reduced investment in maintaining the capital stock and can this have long run consequences for safety?
UPDATE: One energy expert was kind enough to offer a quick answer to this blog post's core question. He argued that renewable power is so far such a small share of a state's total power that its costs are not yet seen. In addition, he pointed out that the low recent natural gas prices have shielded consumers from price hikes.
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