“The Impact of Renewables Portfolio Standards on the Economy”: A Response to Critics

Joe Nichols Mar 15, 2017

The Economic Research Center at The Buckeye Institute recently released a policy report, “The Impact of Renewables Portfolio Standards on the Economy,” that used a dynamic model of Ohio’s economy to better understand and quantify the economic effects of the state’s Renewables Portfolio Standards—or RPS.  Our macroeconomic model ultimately revealed that Ohio’s RPS program will slow economic growth and job creation at any level of compliance cost, but we projected compliance costs under four different scenarios showing a broad range of possible economic outcomes. Thus, rather than reading tealeaves or trying to clairvoyantly forecast precise prices for renewable energy credits (RECs), we allow readers to reach their own conclusions about the economic trade-offs created by RPS.

Not surprisingly, RPS advocates and renewable energy lobbyists defended their special interests and challenged the Center’s findings—albeit by ignoring the evidence and misrepresenting the report. We address several of those challenges and misrepresentations here.

First, a renewable energy lobbyist accused the Economic Research Center of ignoring relevant RPS law.

The RPS states that electricity providers “need not” comply with the standards to the extent that compliance would exceed a 3% cost cap. This provision allows electricity providers to argue to the public utilities commission of Ohio—PUCO—that it should permit the provider’s under-compliance.  PUCO’s determination is discretionary, however, and does not guarantee that the provider’s costs will be capped. Further, PUCO proceedings have left it unclear how the cost cap applies to competitive electricity suppliers as opposed to monopolistic electric utilities.  The Economic Research Center did not ignore this legal ambiguity.  Instead, to account for the potentially ambiguous application of the cost cap, the ERC offered four different economic scenarios of RPS compliance costs that allowed for electricity price changes to exceed the cost cap and remain below the cost cap.  Thus, those who read the RPS price cap as strictly binding should focus more closely on the model’s estimation of the price increases at or below the cost cap.

Whether the cost cap is binding or not, increasing or decreasing the compliance cost only affects the magnitude of the state’s losses in gross domestic product (GDP) and employment. Critiques focused on the report’s cost assumptions ignore the report’s more significant finding: implementing Ohio’s RPS will cost the state job opportunities and GDP.

Second, the Ohio Environmental Council (OEC) challenged the report’s findings because PUCO—according to OEC—supposedly found that the RPS actually resulted in cost savings. But PUCO found no such thing.

PUCO’s electricity market model estimated that Ohio’s renewable power plants would reduce wholesale electricity prices by 0.15%. By its own admission, however, the PUCO estimate “does not purport to comprise an overall cost-benefit analysis of these projects.”  PUCO acknowledges that the estimated 0.15% reduction would merely offset REC compliance costs underlying the higher electricity prices, and its report does not claim that RPS is solely responsible for the renewable energy projects being sited in Ohio or that the tiny wholesale price “savings” would lower the retail rates that consumers actually pay. Thus, OEC’s reliance on PUCO’s estimate is misplaced.

Finally, the American Wind Energy Association (AWEA) claims to have “corrected” our model inputs and assumptions, resulting in RPS having positive effects on employment and state GDP.

Among other inaccurate claims, AWEA suggests that we “cherry-picked” old data to support our model’s findings:

“Hidden in an asterisked footnote in the appendix, the report acknowledges that it uses 2011 data to assume the cost of [RECs] to comply with the [RPS] will increase over time, reaching $59/MWh (a Mega-Watt-hour is enough electricity to power a typical home for a month). The report’s argument that renewable energy will increase costs is therefore based on six-year-old data, even though it acknowledges that the cost of a [REC] had fallen to under $15/MWh by 2014.”

AWEA ignores the straightforward fact that in some of our scenarios we assume that REC prices will remain at the historically low price of $15/MWh indefinitely; but in other scenarios we assume that REC prices will rise to historic highs—and we explain our reasons for that assumption. We do not cherry-pick old data to suit one view; rather, we estimate future scenarios under a broad range of potential future REC prices and allow readers to judge which outcome is most likely.

AWEA’s conclusion that RPS will actually have positive effects on employment and GDP conflicts with other empirical data in economics literature, not just our model’s findings. For example, the average annual GDP growth rate in states that never adopted RPS was 2.7% from 1990-2015.[1] The average annual GDP growth rate for RPS states fell from 3.0% to 1.6% after adopting RPS. A more rigorous econometric analysis—two-stage least squares (2SLS)—reveals that adopting RPS negatively affected state GDPs. 2SLS is a statistical technique that allows for a consistent estimation of causal relationships, and the negative macroeconomic effects following RPS implementation are well-documented.[2]

Claims that our assessment of the economic effects of RPS requirements rely on any single assumption are mistaken. On the contrary, our report accounts for various assumptions about future RPS compliance targets and REC prices, and offers a transparent and easily replicated macroeconomic model consistent with other peer-reviewed economic studies. We presented a broad range of feasible electricity market outcomes so that readers and policymakers can better appreciate the trade-offs between perceived benefits of the RPS and its demonstrable economic costs.

[1] We consider only the 48 contiguous states and exclude Texas and Iowa from the analysis because they have non-binding RPS mandates.

[2] See, for example, Constant Tra, “Have Renewable Portfolio Standards Raised Electricity Rates? Evidence from US Electric Utilities,” Contemporary Economic Policy 34, no. 1 (January 2016): 184-189; Rakesh Puram, “An evaluation of the impact of state renewables portfolio standards (RPS) on residential, commercial, and industrial electricity prices,” Georgetown University Graduate School of Arts and Sciences, April 14, 2011,  https://repository.library.georgetown.edu/bitstream/handle/10822/553880/puramRakesh.pdf?sequence=1&isAllowed=y; Oliver Deschenes, “Climate Policy and Labor Markets,” NBER Working Paper No. 1611, June 2010, http://www.nber.org/papers/w16111; Robert Michaels and Robert P. Murphy, “Green Jobs: Fact or Fiction? An Assessment of the Literature,” Institute for Energy Research, January 2009, http://instituteforenergyresearch.org/green-jobs-fact-or-fiction/.