Three Ways to Improve Your Renewable Portfolio Standard

Renewable Portfolio Standards (RPSs) have been enacted in 29 states (and DC!), and each year approximately a half dozen of those states enact major revisions to their respective RPSs. Looking to tweak your RPS? Here are three suggestions for improving your policy:

Many states have a long tradition of not obligating municipal power agencies (munis) to comply with state laws regarding electricity generation or sales. In fact, many state utility commissions have little or no authority over the munis within the state. As a result, customers of investor-owned utilities (IOUs) pay electricity prices that include the incremental cost of new wind, solar, hydro, and biomass, but muni customers do not. Yet both sets of customers benefit from reduced pollutants, local tax revenue and employment benefits, and in some regions, prices more insulated from swings in the price of oil and natural gas. States that exempt munis from RPS compliance should consider eliminating the exemption and phasing in muni RPS compliance over a multi-year period.

RPS policies typically have an Alternative Compliance Payment (ACP) that serves as a per-megawatt hour cost cap on RPS compliance. If the per-megawatt hour cost to procure renewable energy exceeds the ACP, utilities can pay the ACP instead. ACPs vary from state to state, and because RECs never reach prices in excess of ACP (utilities would just pay the ACP in that case), differences in ACP value within the same region result in divergent REC pricing behavior within the regional marketplace. When states within the same region use the same ACP, they better unify marketplace rules across their borders. More closely aligned REC marketplace rules both bring the market closer to perfect competition and reduce the risk of disparate rate impacts on customers of neighboring states. States should strive to align ACP schedules across their region.

While some states increase their RPS obligation annually and over small steps, other states have increasing RPS obligations that occur every 3-4 years and with more significant increases. The former approach is stronger—it fosters a more stable renewable energy development industry within the state and provides a steadier set of market signals to utilities, developers, regulators, and policy makers. Policy makers, regulators, utilities, and citizens are all better served by the clearer and more frequent feedback on utility RPS compliance and REC pricing trends that annual RPS obligation increases provide. States should “fill in” multi-year gaps in increasing compliance obligations with intermediate requirements, and states considering increasing the ultimate RPS requirement for a future year should consider requiring annual increases to approach that ultimate goal in steady increments.

RPS policies apply to 55 percent of total U.S. retail electricity sales (Lawrence Berkeley National Laboratory, 2016) and are largely responsible for driving recent investment in renewable energy generation in New England, New York, the Mid-Atlantic, the Upper Midwest, and along the West Coast. The three tweaks suggested above could help make RPS policies more effective at a lower cost.