A Model Analysis for Evaluating Renewable Portfolio Standards for State Utilities

Each year, more states adopt goals for minimum use of renewable resources in the production of electrical power sold, so-called renewable portfolio standards (RPS). In April 2003, a task force in New Jersey recommended that the Class I renewable resources in that state’s RPS be ramped up from the current 4% to a level of 20% by the year 2020. A report conducted by a new AUBER member organization at Rutgers University for New Jersey’s Board of Public Utilities analyzed some of the economic impacts of the proposed increase in the RPS. (For the full report, see http://www.state.nj.us/bpu/reports/EIAreport.pdf.)

Outside of wind and solar resources, other Class I renewables were deemed not to figure significantly in the RPS. Projected engineering cost estimates reveal that in New Jersey, offshore wind turbines will not be economically viable until about 2008, and solar photovoltaic panels until about the end of the study timeframe. Nonetheless, the proposed RPS for New Jersey stipulates a minimum share for solar photovoltaic resources; hence, the real price of electric power is expected to rise in the out years. The use of renewable resources is expected to have some negative consequences on the state’s economy.

To examine the effect of higher electricity prices on New Jersey, three scenarios were examined using a systems econometric time-series model of the state of New Jersey constructed by R/Econ™ (Rutgers Economic Advisory Service, a new member of AUBER). The scenarios differ based on the expected prevailing price of natural gas, which was identified as the alternative resource to renewables. Global Insight Inc.’s natural gas forecast was used as the baseline forecast. In the low energy price forecast, natural gas prices were expected to rise at a rate of 1% annually. The high energy price forecast assumed a price rise of 3% annually for natural gas beginning in 2005. One technology-based alternative scenario was also performed on the baseline forecast to test the sensitivity of outcomes to projected engineering costs.

Under the baseline case, electricity prices are expected to rise 3.7% by 2020, although they will have negligible impacts on the state’s economy. The report suggests that these relatively small losses to the economy could be partially offset through policies that encourage manufacturers and installers of salient renewable technologies to locate within the state. Of course, the enhanced RPS would also increase the reliability of the grid and reduce spending on electricity transmission and distribution.

The forecasts were extremely sensitive to projected cost reductions of the renewable technologies. And while they were less sensitive to projected energy costs, it is clear that power from renewable energy is more desirable for New Jersey’s economy than that generated via natural gas if the high energy price scenario should come to fruition.

The obvious main benefits of any RPS are environmental gains. The 20% RPS undoubtedly would significantly reduce emissions in the region, particularly from those emitted by the natural gas plants that would be built in the absence of the RPS. While the report includes a large review of the literature valuating such environmental externalities, it falls short of deriving an estimate of the economic value of reducing pollution levels via the RPS. In part, this is because salient valuation data specific to pollution in New Jersey are lacking. It is also because the extent of environmental benefits depends on the interaction of the RPS with existing environmental policies. Nonetheless, rough estimates suggest that the environmental gains from the RPS should be close to offsetting general equilibrium losses in gross state product in the baseline case.

Michael L. Lahr
Rutgers University

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