Tag Archives: RPS

When is $100 billion not that big?

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When it’s measured against $18,675 billion ($18.7 trillion) produced by the U.S. economy. The Heritage Foundation issued a report claiming the Obama Administration imposed $107 billion in new burdens over seven years. That sounds like a huge amount, but that’s only 0.6% (six-tenths of a percent) of the economy. And that’s spread over seven years which means that this the reduction in the GDP growth rate was only 0.08% (eight hundredths of a percent) per year. Against an annual average growth rate of over 2%, that’s a trivial amount. Another way to think of it is this way: if you had a dinner bill from Applebee’s for $19, would you not by dinner it if cost a dime more? Probably not–you wouldn’t even notice.

Plus, the HF’s estimate ignores the benefits of those regulations. This graphic from the OMB that shows the estimated relative benefits to costs of regulation.

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I won’t dig too deeply into the Heritage Foundation’s analysis other than to make a couple of notes about about alternative perspectives that I am familiar with:

  • Heritage Foundation claims that the Clean Power Plan has cost $7.2 billion as the single largest increment. Yet Lawrence Berkeley National Laboratory (which is much better qualified on this issue than the HF) just released a study showing the net financial “costs” of the various renewable portfolio standard (RPS) requirements is actually a benefit $47 to $109 billion. (And that ignores the environmental benefits identified in the report.)
  • After the 2008 financial debacle, the industry was going to face increased regulation to reign in its behavior during the previous decade. So increased regulation under Dodd-Frank is to be expected. And the better question might be what is the drag on the economy from high financial-related transaction costs? One study found that transaction costs may be as high at 45% in the U.S. economy. The financial and legal sectors likely are a bigger drag than government regulation.
  • On FCC net neutrality, see a previous post about how bigger corporations and economic concentration reduces innovation, which leads to reduced growth. Net neutrality is intended to fight that concentration.

Are the benefits of an RPS correct?

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Lawrence Berkeley Lab released a report estimating the economic benefits from the renewable portfolio standards (RPS) around the U.S. Two surprising findings were:

  • ratepayers saved up to $1.2 billion in wholesale power costs (on top of a $1.3-$3.7 billion reduction in natural gas costs from reduced overall demand); and
  • air quality benefits were about equal to GHG reductions in economic value.

Both of these claims require a deeper review because they run contrary to previous analyses.

Based on PG&E’s Power Charge Indifference Adjustment (PCIA), the renewables contracts that it holds are increasing its rates by almost 2 cents per kilowatt-hour. It is only recently that renewable contract prices have started approaching conventional resource costs, so it’s hard to understand how an RPS could have already reduced electricity rates. (I do see that this will eventually be the case.)

Typically the emission reduction benefits from GHG reductions are several multiples of those from criteria air pollutants (e.g., NOx and volatile organic compounds (VOC or ROG) that produce ozone; particulate matter (PM 2.5)). For example, ClimateCost has issued studies estimating reduced energy impacts and health benefits compared to air quality benefits that show much larger GHG benefits.

What is the true price for renewable energy power?

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The renewable energy market has been in upheaval since the collapse of the financing sector in 2008. The withdrawal of easy money and uncertainty over federal tax policy has increased perceived risk.  Large firms have been shedding renewables subsidiaries and promising newcomers have dropped high-profile projects. Waste Management just sold Wheelabrator, exiting the waste-to-energy market. Brightsource suspended its Hidden HIlls solar thermal project. Much of this activity is driven by the perception that wholesale electricity market prices are falling and the underlying fundamentals will lead to further declines.

This perception is misplaced, however. Short run electricity market prices are falling as natural gas becomes cheaper, and more importantly, fossil fuel generation is squeezed out by increasing renewables and falling demand. However, the electricity marketplace hasn’t yet adjusted to the fact that natural gas generation is no longer the only marginal generation resource. In California, the renewables portfolio standard (RPS) makes at least 33% of the marginal generation from renewable resources. When capital costs are correctly figured in, and more long-term contracts are offered to match those deferred resources, power purchase agreement (PPA) prices for the right types of resources should increase, not decrease.

The problem is that the industry hasn’t been able to adjust its procurement model to reflect this new reality. I think this is coming from a combination of utilities continuing to maintain their monopsony (single buyer) position, risk averse regulatory agencies still relying on an obsolete procurement regulatory process, and those agencies enforcing the monopsony power of the utilities in the name of protecting ratepayers. This may not change until there is public acknowledgement that this situation exists. The difficulty is finding the right stakeholders with enough sway to raise the issue.