According to a new report, "Renewables Portfolio Standards in the United States: A Status Report with Data through 2007," released by the Lawrence Berkeley National Laboratory, a growing number of states are supporting renewable electricity through the creation of renewable portfolio standards (RPS). The report provides a comprehensive overview of early experience with these state-level RPS policies.
The price of delivered electricity will rise if generators have to pay for carbon dioxide emissions through an implicit or explicit mechanism. There are two main effects that a substantial price on CO2 emissions would have in the short run (before the generation fleet changes significantly). First, consumers would react to increased price by buying less, described by their price elasticity of demand. Second, a price on CO2 emissions would change the order in which existing generators are economically dispatched, depending on their carbon dioxide emissions and marginal fuel prices. Both the price increase and dispatch changes depend on the mix of generation technologies and fuels in the region available for dispatch, although the consumer response to higher prices is the dominant effect. We estimate that the instantaneous imposition of a price of $35 per metric ton on CO2 emissions would lead to a 10% reduction in CO2 emissions in PJM and MISO at a price elasticity of -0.1. Reductions in ERCOT would be about one-third as large. Thus, a price on CO2 emissions that has been shown in earlier work to stimulate investment in new generation technology also provides significant CO2 reductions before new technology is deployed at large scale.
Evidence suggests, albeit tentatively, that feed-in tariffs (FITs) are more effective than alternative support schemes in promoting renewable energy technologies (RETs). FITs provide long-term financial stability for investors in RETs, which, at the prevailing market price of electricity, are not currently cost-efficient enough to compete with traditional fossil fuel technologies. On the other hand, if not properly designed, FITs can be economically inefficient, as is widely regarded to have been the case under the Public Utility Regulatory Policies Act of 1978 (PURPA). Under PURPA, too high a guaranteed price led to the creation of so-called “PURPA machines”—poorly performing generating units that could survive financially only because of heavy subsidies that came at the expense of retail customers. Similarly, because of their adverse impacts on retail electricity rates, German FITs have been subject to increasing political pressure from utilities and customers. In this paper, we propose an innovative two-part FIT, consisting of both a capacity payment and a market-based energy payment, which can be used to meet the renewables policy goals of regulators. Our two-part tariff design draws on the strengths of traditional FITs, relies on market mechanisms, is easy to implement, and avoids the problems caused by distorting wholesale energy markets through above-market energy payments. The approach is modeled on forward capacity market designs that have been recently implemented by several regional transmission organizations in the USA to address needs for new generating capacity to ensure system reliability.
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Hans De Keulenaer (23)
Wee Lam Tay (2)
Sergio Ferreira (1)