An evaluation of the impact of state Renewable Portfolio Standards (RPS) on retail, commercial, and industrial electricity prices

The Renewable Portfolio Standard (RPS) has become a popular mechanism for states to promote renewable energy and its popularity has spurred a potential bill within Congress for a nationwide Federal RPS. While RPS benefits have been touted by several groups, it also has detractors. Among the concerns is that RPS standards could raise electricity rates, given that renewable energy is costlier than traditional fossil fuels. The evidence on the impact of RPS on electricity prices is murky at best: Complex models by NREL and USEIA utilize computer programs with several assumptions which make empirical studies difficult and only predict slight increases in electricity rates associated with RPS standards. Recent theoretical models and empirical studies have found price increases, but often fail to comprehensively include several sets of variables, which in fact could confound results.;Utilizing a combination of past papers and studies to triangulate variables this study aims to develop both a rigorous fixed effects regression model as well as a theoretical framework to explain the results. This study analyzes state level panel data from 2002 to 2008 to analyze the effect of RPS on residential, commercial, and industrial electricity prices, controlling for several factors including amount of electricity generation from renewable and non-renewable sources, customer incentives for renewable energy, macroeconomic and demographic indicators, and fuel price mix. The study contrasts several regressions to illustrate important relationships and how inclusions as well as exclusion of various variables have an effect on electricity rates.;Regression results indicate that the presence of RPS within a state increases the commercial and residential electricity rates, but have no discernable effect on the industrial electricity rate. Although RPS tends to increase electricity prices, the effect has a small impact on higher electricity prices. The models also indicate that jointly all renewable energy generation as well as non-renewable energy generation have an impact on residential, industrial, and commercial price. In addition coal price, personal income, and the number of net metering customers in a state impact commercial, industrial and residential electricity rates. There are two main policy implications that stem from this study. First is that while RPS has an impact on residential and commercial electricity rates, the magnitude is small, especially given the average consumption patterns of households and commercial customers. The second policy implication is that it is that given the significance of several explanatory variables in the theoretical model it is important to discuss the relevance of RPS within the context of electricity sources, both renewable and non-renewable, demand side programs, economic factors, as well as fuel costs.