Common Tragedies

Thoughts on Environmental Economics

The effects of a national RPS on the Southeast

Posted by Rich Sweeney on January 11, 2008

I’m becoming increasingly concerned about the Union for Concerned Scientists. Its gone from simply raising awareness about global warming to strongly advocating very strong policy responses. I came across a UCS briefing the other day which typifies the lack of rigor and questionable logic that has come to define far too much of the organizations work in the past year.

The brief (PDF) is on the impact that a national RPS would have on the southeastern United States . It’s widely feared that the southeast has a lot to loose from an RPS because it does not have very much renewable energy to supply. Yet here are the UCS’s findings:

A national renewable electricity standard can help the Southeast:
• Reduce the billions of dollars spent every year importing fuels from other states and countries by developing local renewable energy resources;
• Create thousands of manufacturing jobs and increase global export opportunities;
• Reduce natural gas costs and reduce or stabilize electricity costs; and
• Purchase the least-expensive renewable energy available, anywhere in the country.

I don’t have time right now to go in to all the problems I have with this report, but I’ll give you some of the highlights. They’re also useful for thinking about RPS policies in general.

The authors are correct to point out that the southeast imports a lot of coal, and that it would import less coal under an RPS. However, this would not translate directly into saving “billions of dollars” as many, if not all, of those dollars would still go out of state and they would still be spent on energy. The only difference is that they would go to purchase renewable energy credits (RECs) as well as coal. The report goes on to say that the southeast has plenty of renewable resources to bring online to meet an RPS, yet I haven’t seen any evidence to support this. Power simply isn’t a major concern on the hydro front, and this will be even more true going forward given the recent water shortages. Wind and geothermal are essentially non-existent, much of the region is actually too hot for viable solar, and wive and tidal technologies are not even close to market fruition. That leaves biomass, which will most likely be dominated by fuel rather than electricity interests.

More generally the report claims that an RPS will reduce electricity prices. I simply don’t see how this is possible. As a general rule of thumb, an RPS will increase prices nationally. In deregulated regions, it’s possible that prices won’t increase, as an RPS essentially works as a transfer from inframarginal producers (like coal) to marginal renewable producers. In regulated regions, prices are equal to the average marginal cost of all producers (for the most part). It’s possible that a regulated state could see a decline in electricity prices under a national RPS, but only if it has a lot of renewable energy, in which it exports RECS and the revenue subsidizes in state prices. Since the southeast is entirely regulated, and is comparatively inefficient at generating electricity from renewables, it’s electricity prices will go up. End of story. (Or think of it this way: as the brief points out the southeast uses a lot of fossil fuels to generate electricity. Under an RPS, it’s still gonna use a lot of fossil fuels, only now its also gonna have to buy RECs to go along with all that coal).

As for the jobs findings they’re expectedly ill-explained. See previous comments for skepticism (here and here).

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6 Responses to “The effects of a national RPS on the Southeast”

  1. Rich, whatever the flaws of the UCS report, I would suggest that “it sounds wrong to me” is not much of a refutation.

    I highly recommend a recent report on the subject by Chris Cooper and Ben Sovacool. You can find a link and a summary here:

    http://gristmill.grist.org/story/2007/8/2/02618/43788

    They go into considerably more detail than UCS, but come to the same basic conclusions: all states have qualifying energy sources, and energy consumers in all states will save money. This is not to say that existing power producers in every state will benefit, but consumers will. I trust its their interests we care more about.

  2. Rich Sweeney said

    Thanks for the comment David. I agree that “it sounds wrong to me” is not much of a refutation. However, as I thought my initial post indicated, I’ve thought about this issue a little more than that.

    As I’ve mentioned on CT before, I do a lot of electricity market modeling at RFF. Over the past 6 months, we’ve probably spent more time analyzing RPS impacts than anything else. Unfortunately this is a very complicated, nuanced, and sometimes technical (read “boring”) problem. Thus, rather put everyone to sleep with a million citations and figures, I figured it’d best to summarize the relevant facts/ issues.

    With that being said, I still stand by the comments/ concerns in the initial post, and encourage everyone to think about the pricing issues I raised. I found the Cooper & Sovacool study you cited to be pretty misleading. It took two sets of results from reputable sources, EIA and LBNL, and simply reversed the conclusions. Both studies found that an RPS leads to a modest increase in electricity prices, yet Cooper & Sovacool conclude the opposite. This seems like the very same “seems wrong to me” mentality you cautioned against in your comment.

    The two most recent EIA RPS analyses found that electricity prices increase on average under a national RPS, that there’s considerable regional variation, and that the Southeast experiences the biggest cost increases. This, alas, was the only point I was trying to make in the initial post. Here are the links:

    http://www.eia.doe.gov/oiaf/servicerpt/eeim/policy.html

    http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V2W-4JT3S8R-1&_user=458509&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000022004&_version=1&_urlVersion=0&_userid=458509&md5=2ad96a3540f1fa750351e471e99f33f0

    Finally, none of this is to say that I am necessarily opposed to a national RPS. I just don’t think we should lie to people about the costs. And as a general rule, any time someone tells me there’s free lunch, my first reaction is to say, “that sounds wrong to me”.

  3. Something else you may have considered, Rich — and if you have I’d love to hear your thinking — is the old subject of externalities as it relates to an RPS. To take just one example, it seems to me there’s a fairly straightforward correlation between increasing coal-fired power generation and increasing asthma, mercury poisoning, and other such health effects. Those very real costs tend to be dispersed into the health care system and into taxes, where they are all but invisible to consumers (or at least invisible with regard to their attachment to coal).

    So you mandate that some part of that increased power generation come from, say, wind. You pay more for the power, but you reduce those healthcare costs (and the costs of mining coal, disposing of coal ash, etc. etc.). If the latter cost reductions more than compensate for the former price increases, don’t you in fact have a free — nay, profitable — lunch?

    It seems to me the real free-lunch fallacy is that “coal is cheap.” For some reason, that rarely “sounds wrong” to people, because they’re told so over and over ad nauseum. But coal’s costs are enormous. They just don’t show up on the power bill.

    So no, shifting to renewables is not a free lunch. What it is is a cheaper lunch than coal.

    Anyway, does stuff like this ever enter into cost estimates for policies like RPS? And if not, why not?

    (Sorry if this is somewhat incoherent — I’m trying to run catch a bus.)

  4. Rich Sweeney said

    David,

    You’re correct about coal fired generation having negative health externalities. However, I’m still not sure this is a good reason to justify an RPS, for two reasons.

    First of all, the government already has programs in place to deal with the pollutants you’re referring to. And, at least by government standards, they’re actually pretty good. The Sox and Nox trading programs have been more successful than anyone could have anticipated, reigning in emissions in a market friendly manner. In fact the success of the Sox program is what’s got so many regulation weary politicians on board for a carbon cap and trade. Mercury is covered under the CAIR act, and, as far as I know, is meeting its binding targets. You can read more about these policies here if you’re interested:

    http://www.epa.gov/hg/

    http://www.epa.gov/airmarkt/trading/index.html

    More generally, I think its worth pointing out that just about everything has positive and negative externalities associated with it, albeit with varying degrees of severity and attenuation. For example, there’s considerable evidence that energy crops’ subsidies are putting upward pressure on food prices and encouraging unsustainable farming practices. Simply focusing on avoiding one negative externality does not provide sufficient information on the welfare effects of undertaking an RPS.

    So to answer your question, I think its a good thing that stuff like this never enters into discussions about an RPS. As you attempt to crowd more and more issues and interest groups under a single tent, you risk trivializing the importance of any particular one. If you’re concerned about health effects, work to strengthen existing pollutant caps. If, for some reason, you want to subsidize rural or “green” jobs, do so explicitly. From my perspective, the most important and urgent issue is the need to curb carbon emissions, and I think the best way to do that is to impose an explicit carbon cap or tax. This would still encourage renewables without picking winners and creating mixed incentives. If you still felt that clean technologies deserved additional support, this could be handled directly with a PTC, for example.

  5. A carbon tax would be great in the abstract (though proponents tend to overstate its superiority to the alternatives). But we don’t live in the abstract. It’s politically impossible, whereas an RPS of 10% has already passed the Senate once and will probably have an easier time of it after the next election.

    Also in the abstract, all sources of electricity have externalities, but in the real world the externalities associated with coal are vastly, vastly greater than those associated with most viable alternatives, and still nowhere close to incorporated in its price. In the abstract, directly raising the cost of pollutants and mining would be preferable, but in the real world such measures are fought tooth and nail, dirty plants get grandfathered, enforcement gets delayed or thwarted, etc. An RPS is at hand.

    In the abstract, a carbon tax would be preferable, but in the real world, dozens of states already have RPSs, with a patchwork of inconsistent standards that blunt their effectiveness and thwart interstate trading of credits. A national RPS would rationalize and reduce the price of existing policies.

    IMO, a cap or tax on carbon is only half the picture. It will raise prices enough to hurt consumers, but not enough to push renewables to scale. You also need positive support for renewables, above all long-term predictability. 10 year (not 1 or 2 year) PTCs are great for that, and I support them. But a national RPS would provide clear national predictability and point in a clear direction.

    Getting where we need to go is going to be messy, and on policy we’re going to have to satisfice, accepting a lot of sub-optimal outcomes along the way. An RPS seems like a positive step, better than the status quo.

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