The purpose of this paper is to assess the impact of mandates for electricity generation from renewable energy sources on the electricity industry, fuel suppliers, and electricity consumers. The paper uses a cost-benefit approach to analyze the issue. When assessing the efficacy of proposals to mandate renewable generation, it is pertinent to explore the motivation for electricity restructuring itself as well as the rationale behind promoting renewable energy in the context of a competitively restructured electric industry.

A major motivation for Congress to restructure the electricity industry is to lower the cost of electricity to consumers by improving the overall efficiency of the electricity industry. Most of the recent legislative proposals seek to introduce competition and efficient market discipline into the generation and dispatch of electricity to accomplish this.

However, many proposals also include mandates for the production and / or consumption of non-hydro renewable energy. The objectives commonly offered for imposing mandates for renewable power production are: (1) to overcome market barriers to investment in renewable sources, and (2) to obtain the environmental benefits from using renewable energy rather than fossil fuels to generate electricity.

The first argument is no longer valid if the industry is competitively restructured. In this case, all technologies will be evaluated in terms of their relative economic performance. The second objective, deriving environmental benefits, is not met because of the variety of renewable energy sources and their diverse implications for the environment, e.g., biomass combustion imposes greater environmental damages than that of coal.

The introduction of a mandate for high cost and non-dispatchable sources of generation, such as renewables, is in direct conflict with the objective to lower electric costs to consumers. A legislative mandate for renewable energy will have the following consequences on consumers and the energy industry:

(1) It will displace existing and future natural gas and coal consumption,

(2) It will increase costs to consumers, and

(3) It will impose significant and unnecessary operational inefficiencies on the electricity production and delivery system.

FINDING: The unintended consequences imposed on the fuel suppliers and consumers of a renewable power mandate are significant. Because of a broad renewables mandate:

• Biomass generation will displace existing gas-fired and coal-fired generation, because biomass generation is the only non-hydro renewable generation source that is dispatchable as baseload. Existing natural gas generation will be disproportionately displaced because of the relatively higher variable costs of gas-fired generation (Table 1).

 

• New biomass generation will displace new coal and gas-fired generation. It will tend to replace new coal before new gas capacity, because of the relatively higher capital costs of coal-fired capacity (Table 1). Although a renewable mandate displaces new coal fired capacity first, much of the expected increase in new gas fired capacity would also be displaced (Table 2).

 

• Because wind and solar power are intermittent and non-dispatchable, a mandate for their use will tend to displace generation from new and existing gas-fired capacity. Because wind and solar power are intermittent, additional non-renewable dispatchable capacity may be required to back up wind power.

 

• Renewable power generation is a higher cost source of generation relative to that being displaced by the renewable mandate (Table 1).

 

Capacity built to meet mandated renewable power generation will cost 66% more per MW installed than the conventional new generation capacity that it would displace, and

Baseload generation costs will rise by approximately 12% in excess of forecasts because of a 10% renewables mandate because of a 10% renewables mandate.

Total generation costs will rise by approximately 8% in excess of forecasts

• The requirement for additional dispatchable capacity to backup intermittent and non-dispatchable sources of renewable power.

 

• The reduction in the efficiency of use of the stock of generation capacity, as measured by average capacity factor.

 

• Electricity prices will become more volatile as a result of the increase in the mix of intermittent generation. Dealing with higher price volatility increases the cost of electricity to consumers.

 

• As above market costs for renewable generation are forced into the capacity market, the average cost of generating capacity will be higher, not lower as intended (Table 1).

 

• The total amount of generating capacity will be too large, because of the additional capacity that will be required to backup the intermittent renewable sources.

 

• The amount of non-dispatchable generating capacity will be too high. Increases in the amount of non-dispatchable power generation will decrease the efficiency of system operations.

 

• The price of electricity will be more volatile for consumers due to the increased use of high cost intermittent sources of renewable generation.

 

• Renewable power generating capacity will tend to be located away from electricity consumption centers.

 

INTRODUCTION

In a more competitive electric power generation industry, opportunities to use state or federal regulatory authority over generation facilities to promote the use of renewable energy and other public policy goals will be much more limited than they were in the past. This has led to federal proposals for ways to continue support for renewable energy in a restructured power industry. Such proposals include mandates for a minimum percentage of consumption or generation from specified renewable sources.

Typical of several bills introduced in the 105^th Congress, S. 237 and H.R. 655, propose to create mandates for renewable energy in a restructured power industry. However, each piece of legislation takes a somewhat different approach ­ with, unfortunately, similar unintended negative and contradictory consequences. S. 237 requires all sellers of electricity to end-users (those making "retail sales", defined as "sales for ultimate consumption") to meet required percentages of renewable energy in their total retail sales, while H.R. 655 requires all electric generators to meet required percentages of renewable energy in total generation. Both bills include a wide variety of renewable sources, of which solar, wind, biomass, and geothermal are common to both. H.R. 655 also includes organic waste, dedicated energy crops, landfill gas and tidal energy, while S. 237 also includes waste, except for municipal solid waste, and hydroelectric power. Both allow trading of credits for renewable energy generation nationwide. We will deal only with the four sources included in both bills, and concentrate on wind, solar and biomass.

THE OBJECTIVES OF RENEWABLE ENERGY MANDATES

In the past, regulators were able to use their regulatory authority to shape the generating choices of utilities, through either explicit requirements or subsidies funded by the ratepayer. In essence, regulatory commissions acted as tax collectors, setting rates above competitive levels to raise funds from ratepayers that were then used to pay for renewable energy, energy conservation, and other public policy goals. Complete deregulation of the generation function would eliminate the ability of state utility regulators to promote renewable energy through mandatory generation requirements or through surcharges on the generation side of an integrated regulated utility. As a result, there have been a number of proposals for ways to continue renewable subsidies, either through non-bypassable surcharges on remaining regulated facilities, such as distribution wires, or through direct federal mandates like generation portfolio standards.

In the past, interventions by regulatory authorities to promote renewable energy have been justified on the grounds that they correct market imperfections that limit the adoption of renewable energy. The two imperfections cited are the environmental costs to society associated with electric power generation (but not internalized by the generators) and the distorted incentives faced by electric utilities under traditional cost-of-service regulation.⁽¹⁾

Distorted Incentives: The regulated structure of the electric utility industry, it is alleged, has created market barriers against the adoption of renewable power sources. This argument, no matter how true in the past, is questionable in a more competitive electric industry. Many of the factors that are alleged to be barriers to the adoption of renewable energy are in fact hidden costs that will be borne by consumers if the use of renewable energy is mandated. These include the cost of maintaining backup capacity for energy that is not dispatchable, uncertainties about cost and performance of systems that have not been demonstrated in the market, and costs of connecting and managing intermittent, distributed, and small-scale systems. These costs are not avoided by mandating the use of renewables, rather they are simply shifted to whomever is required to pay for and use renewables in generation. Ultimately, in a deregulated generation market, this is the consumer of electricity.

It is true that public utility regulation may have distorted the choices of utilities among generation alternatives. High rates of return on invested capital encouraged utilities to invest in expensive, large-scale generation technologies. More recently, some state utility regulators have chosen to disallow costs through more stringent prudency review, which put pressure on the overall utilities' rates of return. Consequently, some utilities have chosen to reduce their capital spending by opting for generation technologies with lower capital costs and higher operating costs.

Some suggest that forms of renewable energy may have been disadvantaged by these regulatory distortions. For example, prudence reviews and cost-of-service regulation may reduce the willingness of utilities to try unconventional technologies and cause them to turn to proven options instead. The threat that costs may be disallowed if a generation choice performs below expectations, and the likelihood that rates will be adjusted to eliminate supernormal profits if the choice turns out better than expected, will bias decisions in favor of conventional options.

In addition, regulated prices of electricity based on average embedded costs of production do not provide proper incentives for energy conservation, nor do they allow a distinction in the market among supply sources with different environmental characteristics. In a competitive market, prices are determined by marginal costs of production. Therefore, consumers would pay for the cost of producing what electricity they chose to consume. Competition also encourages the development of alternatives that consumers are willing to pay for, such as the purchase of "green power" that is generated by cleaner technologies.

Competitive restructuring of the electricity industry will eliminate many of the distortions of past economic regulation and put renewable energy and traditional fuels on a more level playing field. Thus, by changing the incentives that utilities face, deregulation by itself removes one rationale for programs to promote renewable energy.

Renewable Mandates & Environmental Goals: The remaining objective of renewable power mandates is to reduce the cost of achieving environmental goals. Under competitive restructuring, utilities will have the same motivation as any other competitive business: to minimize the cost of producing the product or service that they sell. This objective implies, among other things, that utilities will choose the least-cost method of generating electricity, taking into account all current environmental requirements. Renewable mandates can be justified only if there remains some reason why utilities would not choose renewables if they are the least-cost means of generating electricity within current environmental laws, or if there are reasons for going beyond what is required by current law.

It is necessary in both a regulated and an unregulated market to assess the costs and environmental benefits of renewable power mandates. In assessing the benefits, environmental damages rather than fuel sources should be the focus. Mandates are not a cost-effective way to reduce the effects of pollution arising from the electricity sector. Rather, they introduce static distortions into an otherwise adaptive and competitive market. It is better to address the emissions causing the environmental damage than the energy sources producing the emission, because there is only a weak and indirect connection between renewable energy and emissions reduction. For example, coal-fired generation with and without scrubbers have very different environmental (e.g.: social) costs.

The variety of forms of renewable energy included in the mandates virtually guarantees that the mandates will not succeed in achieving the most cost-effective means of reducing emissions. For example, the environmental effects of biomass and geothermal energy -- which adversely affect air and water quality -- are very different from solar and wind power, whose emissions arise mostly during construction or disposal. They also present very different problems in estimating the costs and market effects of mandates. Biomass energy is very much like conventional generation with different fuels, in that it is a continuous, schedulable source likely to be used in baseload operations. The same is true of geothermal energy. Wind and solar energy, however, are available only when conditions are favorable, and cannot be dispatched or scheduled.(2) In addition, wind, solar and geothermal generation applications are limited geographically by climatic and geologic conditions. The costs, market readiness, and potential for expansion of the four types of energy are also very different.

Renewables do not uniformly avoid the environmental costs associated with other forms of generation. For example, as reported in Burtraw and Krupnick (1997), a study performed for the U.S. Department Energy by researchers at Oak Ridge National Laboratory and Resources for the Future, a study for the European Community by researchers from various European institutions, and a study for the State of New York by Hagler Bailly, the environmental impact of biomass generation can exceed those of conventional fuels. A blanket mandate for renewable energy can be a very inefficient way of providing environmental protection if it does not discriminate among renewable sources based on their specific environmental effects. Moreover, many forms of pollution are local in their effects. Thus, a national renewable mandate may fail to provide emissions reductions where they are needed and, at the same time, produce emissions reductions where they are unnecessary. A less costly and more effective approach is to provide incentives for reducing the environmental impacts themselves ­ for example, through a control system that places a value on emissions related to their environmental damages. If renewable energy is sufficiently superior to other alternatives in environmental performance to overcome its other cost disadvantages, a competitive market approach provides all the incentives needed. If renewable energy is not a cost-competitive option for reducing emissions, then there is no environmental justification for promoting renewable energy.

COST OF A RENEWABLE POWER MANDATE TO THE ELECTRICITY SECTOR

To understand the implications of the renewable mandate for the electricity industry, it is useful to start by describing the relative costs and operating characteristics of renewable power generation and conventional technologies.

Relative Costs and Characteristics of Generating Technologies

Relative generation costs. Renewable technologies entail significantly higher total generating costs than their comparable, conventional alternatives, as indicated by Table 1. The total cost of wind power appears to be cheaper than that of coal-fired generation and combustion turbines, but wind power is not comparable because it is intermittent and non-dispatchable. As indicated below, these features reduce the value of wind energy relative to conventional sources and make the cost of integrating wind power into the supply mix more expensive.

The total costs of the alternative power sources are most important in determining which technology will be chosen when adding new capacity, while variable costs (O&M plus fuel costs) are most important in determining which generating plants will be used first (i.e., the order of dispatch). The extremely high capital costs of solar technology suggests that very few of these units will be built, even under a renewable mandate. Investors would tend to prefer wind or biomass options.

Characteristics of the technologies. Coal boilers and gas combined cycle units are used to satisfy baseload consumption of electricity, while gas combustion turbines are used to supply peaking load. The level of consumption varies over the course of the day and year. Baseload consumption refers to that portion of consumption that remains relatively constant over one or more days, while peaking load refers to temporary increases in the level of electricity consumption that occur during the course of a single day.

Biomass is similar to coal in that it is best suited to operate as baseload generation. Consequently, biomass may be expected to compete with conventional fuels for serving baseload consumption. Solar and wind power, in contrast, are intermittent and non-dispatchable sources of electricity that cannot be replied upon for either baseload consumption or peaking load. They would fit into the supply mix on an "as-available" basis. In addition, solar and wind energy sources have capacity factors (i.e., the percentages of time they can generate electricity) that, at their highest, are less than half those of baseload coal and gas-fired technologies (see Table 1).

Solar thermal electricity is available only in the southwestern region of the country where direct solar insolation is high enough for practical operation. In the most favorable areas, such as California, the capacity factor is about 40 percent. Solar photovoltaic technology may be used in virtually all parts of the country, but the capacity factor will vary considerably by location. In California, the capacity factor averages about 24 percent for the year. Wind power is available only in certain areas where wind speed and consistency are high enough to make the technology practical. Capacity factors average as high as 34 percent in high wind areas and drop dramatically in less windy areas.

Fitting Renewable Power into the Supply Mix

How renewable sources of electricity will fit into a restructured electricity market depends in part on how the market will be restructured, how the mandates will be implemented, and how restructuring will affect the demand for electricity. All three factors are uncertain and the various proposed mandates call for different requirements and different implementation methods. We will take a generic approach to the issues in order to provide information that may be used to evaluate all of the bills.
 
 

How will the market be restructured? With regard to how the market will be restructured, we adopt the S. 237 requirement for the development of regional power pools where generation is separated from transmission and distribution, and control of transmission is turned over to an independent system operator (ISO). In addition to the usual control area functions, the ISO or a companion organization will operate a regional spot market for electricity. Generation companies will make offers to supply power, while distribution companies (or retail customers in case retail access is permitted) will bid to buy power on a day-ahead basis for each half-hour of the day. The lowest-cost offers will be dispatched first to supply the market, and all suppliers that are dispatched will receive the same market-clearing price for each half-hour, regardless of their offer price.

Renewable sources will be dispatched only if they offer to supply electricity at a competitive price. Since their costs exceed those of other sources, the mandate plan must provide a means by which the renewable power supplier can offer power below its cost of production. Moreover, the added cost of renewable power would have to be recovered through a non-bypassable surcharge to consumers. Of course, the surcharge will raise the price of electricity to consumers.

How will electricity demand be affected? The shape of the electricity load curve is important to an assessment of how renewables will fit into supply because different generating technologies are required to serve different parts of the load curve.(3) As noted above, baseload capacity operates continuously to serve consumption levels that are constant for one or more days, while cycling and peaking capacity are required to serve the variable parts of the load curve. Importantly, these latter technologies are capable of being dispatched with little advanced notice.

Restructuring may be expected to flatten the load curve because consumers will pay prices for electricity that are closer to their real time values, and prices will increase and decrease with the level of consumption. In contrast to average embedded cost pricing of electricity that characterized the regulated market of the past, variable electricity prices in a restructured world will tend to dampen fluctuations in the level of consumption. As consumption increases during peak load times of the day, prices will rise and discourage consumption. The opposite will happen when consumption falls, so that rising and falling prices will tend to reduce the peaks and fill in the valleys of the load curve. Nevertheless, even though consumption will vary less after restructuring than before, the load curve will continue to exhibit variability and call for diversity as well as dispatchability in generation.

How will the mandate be implemented? Senate bill S. 237 requires each retail supplier to provide retail consumers with a minimum percentage of energy (or renewable credits) sold from renewable sources (presumably retail consumers will have the same requirement when they have direct access to the spot market).(4) H.R. 655, in contrast, requires generators to obtain renewable credits in relation to the amount of electricity they sell.(5) In the latter case, generators may be expected to enter into contracts with renewable power suppliers for the purchase of the required amount of electricity. In the former case, the contracts would be negotiated between Load Serving Entities (a term used to refer to the variety of companies involved in distributing electricity to consumers) and renewable power suppliers. In both cases the contract would specify a premium that would be paid to the renewable power producer to cover the above market cost of renewable technologies compared to the market clearing price of the competitive generation sources. The contract may specify that the premium would not have to be paid for electricity generated during times of the day when the spot price exceeded the renewable power producer's costs of production. At lower spot prices, the premium would increase with the gap between the spot price and renewable power producer's marginal costs, up to a maximum determined by the marginal cost of coal and gas technologies.

Displacement of Coal and Natural Gas

Biomass. Although biomass generation is much more expensive than conventional new generation, biomass would be the most competitive renewable as a baseload supplier. In this segment of the market, biomass would compete with coal and gas combined cycle generation. The total levelized cost of biomass (about 61 Mills/kWh) exceeds that of coal (46 Mills) and gas combined cycle (33 Mills), while the variable cost component for biomass (25 Mills) is about the same as that for gas combined cycle, and above that of coal (21 Mills).

These cost comparisons indicate how biomass would fit into the supply mix. As biomass units are built, they will first displace gas combined cycle units in the dispatch order for serving baseload consumption, primarily because gas has higher variable costs than coal. However, the amount of the subsidy required to encourage investment in biomass units over coal units (the next cheapest alternative) is about 15 Mills/kWh, which is greater by a factor of three than the difference between their respective variable costs. Thus, with a subsidy this large, biomass would displace coal as well as gas in the dispatch order.

The amount of gas and coal generation that will be displaced by biomass depends on the amount of biomass capacity that is mandated to come on-line in the future - relative to the overall growth of electricity demand. If electricity demand grows by more than the increase in biomass capacity, biomass will replace some but not all additions to gas and coal capacity. Moreover, in this circumstance, even though biomass may be dispatched before coal and gas capacity, existing gas and coal capacity may continue to be required.

To get some idea of the potential amount of biomass capacity forthcoming, and the potential displacement of new gas and coal capacity, consider the projections made by the Energy Information Administration in Table 2. The projected generation in the year 2010 will be 4033 billion kWh, and the projected amount of capacity will be 894 gigawatts (i.e., 894,000 MW). This level of capacity represents an addition of 232 gigawatts of new capacity from the beginning of 1994 to 2010. The projected composition of capacity in 2010 includes 98 gigawatts of renewable power, of which 14 gigawatts comes from biomass, solar, wind, and geothermal sources. The expected growth in capacity from this subset of renewable sources is 4 gigawatts. Small increases in biomass, wind, and solar capacity are projected, but no appreciable increase in geothermal is expected.(6)

A hypothetical 10 percent renewables mandate applied to the amount of electricity generated would require a total of 403 billion kWh from renewable sources in 2010. The same percentage applied to capacity leads to a required increase of 89 gigawatts of renewable power capacity. Moreover, if the mandate were satisfied only by biomass, wind, solar, and geothermal sources, an additional 75 gigawatts of renewable capacity would have to be built by 2010 (since 10 gigawatts already exist and an additional 4 gigawatts are expected to come on-stream without the mandate). Thus, the mandate would lead to 76 gigawatts of additional renewable power capacity.

Note that this amount of additional capacity from renewable sources will displace about a third of the total amount of new capacity expected to be needed by 2010. Depending on how renewable capacity grows relative to electricity demand, therefore, the effect of the renewables mandate will fall more heavily on new capacity than on existing capacity. However, since renewables capacity must be dispatched before conventional capacity to satisfy the mandate, the capacity factors of conventional capacity will tend to fall as well.

Most of the additional renewable capacity is likely to be biomass. This conclusion follows from the relative cost advantage of biomass compared to other renewable sources, and because the value of biomass power will exceed that of intermittent wind power.

Additions to biomass generating capacity will likely displace new coal-fired generation first because of the higher cost of coal relative to gas combined cycle units (see Table 1). Note from Table 2, however, that only 22 gigawatts of new coal-fired capacity are expected by 2010. Since an additional 53 gigawatts of renewable capacity will come on-stream, the amount of new biomass capacity could easily exceed the amount of new coal-fired capacity. Consequently, it is reasonable to expect new biomass capacity to displace new gas-fired combined cycle units as well.
 
 

Solar and wind power. Although biomass is generally cheaper than solar and wind power, in some parts of the country and for some uses solar and wind may be more competitive than biomass. The intermittent nature of solar and wind power will limit the role they play in the market, however. Basically, generators of wind and solar energy have two choices: they can offer to sell into the day-ahead spot market during the hours that are most favorable (i.e., the hours that they will most likely generate energy), such as summer daytime hours, or they can sell into the less lucrative, real-time energy market at the going price.

Selling into the day-ahead spot market entails some risk because these units may not be able to generate energy as promised and will have to compensate for any deficit. During peak hours on a hot (but cloudy) summer afternoon the cost penalty for replacement energy may be quite high, i.e., higher than the 45 mills/kWh variable cost of operating combustion turbines (see Table 1).

Solar and wind power will tend to displace gas used in existing cycling and peaking units for both additions to capacity and for energy production. The addition of solar and wind capacity, however, will not displace the need for highly dispatchable gas capacity on a one-for-one basis. Because of the intermittent nature of solar and wind energy, additional gas capacity would be required to fill the gaps when solar and wind power are not available. The market-induced incentive to build such capacity, even though it would have a reduced capacity factor in the gap-filling role, would come from the higher price that follows an interruption in renewables supply.

Effect on Electricity Prices and Consumers

The higher costs of generating electricity from renewable rather than from conventional sources will necessarily raise the price of electricity. A conservative estimate of the higher cost of renewable power may be obtained by assuming that the mandate is satisfied entirely by lower-cost biomass, and that the cost estimates found in Table 1 hold for the entire increment of new biomass capacity.(7) Under these assumptions, 75 gigawatts of biomass capacity costing 61 Mills/kWh will replace 22 gigawatts of coal capacity costing 46 Mills/kWh and 53 gigawatts of gas combined cycle capacity costing 33 Mills/kWh. Thus, the increment of renewable capacity will cost 66 percent more to build and operate than the conventional capacity that it replaces.(8)

A rough estimate of the effect of the more costly increment of renewables capacity on the total cost of generation may obtained by multiplying the share of renewables capacity in the total baseload capacity by the increased cost of renewables (0.66). An estimate of the total amount of baseload capacity is obtained by combining the amount of coal-fired capacity (304 gigawatts) and the amount of gas combined cycle capacity (107.5 gigawatts) projected for 2010(9). The total is 411.5 gigawatts, of which the increment of renewables (75 gigawatts) represents 18.2 percent of the total.

Based on our estimates that mandated renewables would be 18.5% of baseload generation and would cost 66% more then the generation replaced by renewables, the cost of baseload generation would increase by about 12%. We also estimate that baseload generation is about two-thirds of total generation. Therefore, unless there are large differences in the average cost of generation between baseload and total generation, this 12% increase in baseload generation cost translates into about an 8% increase in the cost of total generation.

In addition, the price of electricity is expected to be more volatile as a result of the higher proportion of solar and wind power in the supply mix. This conclusion follows simply because the supply of energy coming from these sources is intermittent and more volatile, and the price of electricity in a competitive market will respond to fluctuations in supply. Moreover, as noted above, higher prices are required to induce generators to invest in additional dispatchable capacity to take the place of renewables when they are not operating as planned.

EFFECT OF A RENEWABLE MANDATE ON THE GOALS OF ELECTRICITY RESTRUCTURING

The primary objective of restructuring is to improve economic efficiency in the production and allocation of electricity. The expected result is lower average electricity prices for consumers. The mandate for renewable power will frustrate this objective in different ways, all of which add up to higher costs for the consumer.

The primary source of inefficiency imposed by a renewables mandate is the higher cost of generation capacity, as discussed above. Another source of inefficiency results from the artificial incentive to locate generation capacity closer to renewable resources than to load centers. Additional renewable capacity will locate at sites that are favorable to biomass, wind, and solar production, not necessarily at sites that best support consumption. Part of the added inefficiency comes from line losses that result from transmitting electricity over longer distances and part comes from the investment in additional transmission facilities required to transport the power to load centers. The concentration of renewable capacity in specific regions of the country will be enhanced, moreover, by the renewable power credit trading system included in some legislation.(11)

Yet another source of inefficiency results from a reduction in the average capacity factor for generation. Renewable production technologies have lower capacity factors and, because they are intermittent, require back-up technologies that would otherwise have higher capacity factors themselves. Consequently, the average amount of generation capacity required to serve consumers must increase, and the stock of generating capacity will be used less efficiently.

Finally, another inefficiency results because consumers are not necessarily buying the share of renewable power they would choose if given the option. Some surveys suggest that consumers are willing to pay more for products that are less damaging to the environment. They may be willing to choose "green power" if given the option, but mandates do not offer consumers the freedom to choose. As a consequence, one cannot assert that any specific renewables target reflects what consumers are willing to pay.

A restructured electricity industry with competition among marketers of power may be expected to provide consumers with the right menu of choices. Competitive power marketers may differentiate the services they provide in order to increase their market share. In addition to conservation services, they may be expected to offer electricity generated from environmentally desirable forms of technologies. However, this service will not be offered if a renewables mandate is in place. If the service is offered, on the other hand, a renewables mandate becomes largely superfluous.

COST-EFFECTIVE APPROACHES FOR INTRODUCING RENEWABLE ENERGY

Current environmental regulations already limit emissions from powerplants. In a competitive market, there are no net benefits from additional mandates for renewable energy. In this context, generators have every incentive to minimize the cost of meeting environmental standards, and to choose renewable energy when it is the least expensive means of generating power, considering both environmental compliance and generating costs. Choosing the most cost-effective generation source requires:
 

• Calculating the difference in emissions between the renewable energy source and the form of generation it would replace
• Estimating the full difference in cost between the renewable source and the form of generation it replaces
• Calculating cost-effectiveness in dollars per ton of reduced emissions
• Comparing the cost-effectiveness of renewable energy to other methods of reducing emissions from powerplants, such as NOx controls on combustion units or sulfur scrubbers, and other sources.

In a competitive electricity market with an environmental control system that places a value on emissions, renewable energy would be brought into the generating mix if it provided cost-effective environmental benefits; it would not be brought in if it failed to provide such benefits. To the extent that renewable energy is able to facilitate compliance with current and future environmental regulations in a cost-effective manner, compared with alternative sources of energy, there will be a market for renewable energy without mandates. Restructuring of the power industry increases rather than decreases these market opportunities for renewables.
 
 
 
 
 
 

Bohi, Douglas R. and Michael A. Toman, The Economics of Energy Security (New York: Kluwer Academic Publishers, 1996).

Burtraw, Dallas and Allan Krupnick, "The Social Costs of Electricity: Do the Numbers Add Up?" Resource and Energy Economics, forthcoming 1997.

Kirshner, Daniel, Barbara Barkovich, Kathy Treleven and Robin Walter, "A Cost-Effective Renewables Policy Can Advance the Transition to Competition." Electricity Journal.

Sustainable Energy Coalition, "Proposed Renewable Energy Provisions in Utility Restructuring Legislation."

U.S. Department of Energy, Energy Information Administration, Annual Energy Outlook, 1997.

ENDNOTES

1. A third argument for government intervention in energy markets involves the energy security costs associated with dependence on imported oil. The general validity of this argument is highly questionable, as demonstrated in Douglas R. Bohi and Michael A. Toman, The Economics of Energy Security, Kluwer Academic publishers, 1996. The argument is even less valid when applied to the use of renewable electricity production to displace oil-fired generation, because of the small amount of oil actually used in electricity generation. For more details on the application of energy security concepts to the electricity sector, see Bohi and Toman, Chapter 6.

2. Dispatchability refers to the ability to turn on and off, or ramp up and down, a generating unit as needed to match changes in the level of consumption. Wind power is either running or not, depending on the strength and consistency of the wind. Intermittence is determined by the weather.

3. The load curve is simply a record of the level of consumption by time of day, extended over one or more days.

4. The required percentage grows from 5 percent in 2003 to 9 percent in 2008 and 12 percent in 2013. Because of regional differences in the cost of renewable power (due to differences in the supply of renewable resources), the bill allows for the trading of renewables credits in a manner analogous to a "cap-and-trade" system of environmental controls. As a result, distribution companies in regions with high costs could purchase renewable power credits from distribution companies in low-cost areas.

5. The required percentage of sales rises from 2 percent in 2001 to 3 percent in 2005 and 4 percent in 2010. Importantly, because hydroelectric power accounts for over 80 percent of current renewable power supply, S. 237 allows ½ credit for hydroelectric power while H.R. 655 allows no credit.

6. The forecast of 4 gigawatts of additional biomass, solar, and wind capacity is influenced by tax credits provided in the Energy Policy Act of 1992. The Act provides a tax credit of 1.5 cents/kWh for electricity produced by new wind plants that become operational between January 1, 1994 and June 30, 1999; and a 10 percent investment tax credit for solar technologies. See EIA, Annual Energy Outlook, 1997, p. 204.

7. Adding renewable sources other than biomass will increase the cost. In addition, adding a large increment of biomass capacity is likely to increase costs above those given in Table 2.

8. The 66 percent estimate is obtained by multiplying 22 gigawatts by 15 Mills (the difference in the costs of biomass and coal units), multiplying 53 gigawatts by 28 Mills (the difference in the costs of biomass and gas combined cycle units), summing the two numbers and dividing by the total cost of the same amount of capacity using coal and gas units. The latter number is obtained by multiplying 22 gigawatts of coal capacity by 46 Mills and 53 gigawatts of gas combined cycle capacity by 33 Mills.

9. As in the EIA AEO forecast, co-generation is excluded from the calculation of baseload capacity because the primary function of these facilities is not electricity production.

10. This approach assumes that the average gas combined cycle unit generates as much energy as the average coal-fired unit. The assumption is reasonable because the two groups of generating units described here have the same capacity factors. The assumption is necessary because the amount of generation produced by the gas combined cycle units is not recorded in the EIA tables.

11. This follows because buyers and sellers of electricity in parts of the country less conducive to renewable power generation will buy renewables credits from generators in parts of the country where better renewable resources are located.