Renewable Portfolio Standards in Energy Policy

A Policy Analysis for the State of New Hampshire
PRS Briefs
PRS Policy Brief 0506-04
Monday, March 13, 2006

A Renewable Portfolio Standard (RPS) is a policy mandate that a given proportion of power supplied by retail electricity providers be derived from approved renewable sources. While there is no uniform approach to the construction or implementation of an RPS policy, several common and important features are shared by states that have successfully established portfolio standards. Most states define the RPS in terms of the percentage of the electricity supply being generated from renewable sources. When defining eligible renewable sources, states often automatically include specific sources for which power-deriving technologies are universally accepted as renewable (e.g., wind and solar-photovoltaic production) and often exclude other energy sources (e.g., nuclear).

Three options by which electricity suppliers may comply with RPS requirements are available: 1) own an eligible renewable energy generator and its output electricity; 2) buy electricity generated by an eligible renewable energy generator; and 3) buy tradable Renewable Energy Certificates (RECs). Energy producers within the state of New Hampshire presently trade RECs through the NEPOOL-GIS system establish by ISO-New England, the not-for-profit corporation that regulates and manages the regional power grid.

The costs of RPS are difficult to estimate due to the natural volatility of energy markets. For eight states that have implemented RPS policies the EPA projected a great variance in cost impact to the consumer. The impact of these policies ranged from an average cost to the consumer of $3.50/year in Pennsylvania to a savings of $4.60/year in Minnesota. Furthermore, the Department of Energy (DoE) found that the retail electricity price impact of a federal 10% RPS culminating in 2020 and continuing through 2030 to be an approximately 0.4% increase, whereas the impact on natural gas prices would be a net 0.6% decline in prices over the same time period. Overall, the DoE report found that combined total end-use expenditures would increase by 0.1%. The design of a state's RPS is determined by three factors: electricity market characteristics, particular state policy objectives, and renewable resource potential. Because these factors influence states differently, there is a high level of variability between the states' RPS. The consideration of any state's experience as being relevant to New Hampshire should ultimately take into account the particular goals of the state.

There are numerous lessons from other states' experiences that New Hampshire can use to evaluate RPS legislation. While it is premature to assess the overall impact of any particular state's effort, an evaluation of the early and immediate experiences that other states have had provides several important results. When forming an RPS it is important to implement a policy that allows producers to meet mandates in the most efficient way and at the lowest cost to the consumer while still maintaining strong incentives to produce clean energy. In order to help ensure these goals, three things are essential:

  • Established time lines should be long enough in order to foster a stable market for renewable energy.
  • Alternative Compliance Payments (ACPs) should be set to serve as a price cap but should be established at a level high enough to still maintain the incentive to invest in renewable production.
  • Compliance periods should be flexible enough to account for natural variance in renewable energy production

Additionally, eligible sources should be defined with the following criteria:

  • Technical Eligibility - the exclusion or required use of certain technologies for deriving power from the resource (e.g., excluding nuclear or hydroelectric energy).
  • Existing vs. New Generation - RPS should serve as an incentive for new clean energy production and not provide windfalls for those already producing electricity from renewable sources.

Finally, three options by which electricity suppliers may comply with RPS requirements are available:

  • Ownership of an eligible renewable energy generator and its output electricity
  • Purchase of electricity generated by an eligible renewable energy generator
  • Purchase of tradable Renewable Energy Certificates (RECs)

Producers of electricity operating in New Hampshire currently trade RECs through ISO -New England's NEPOOL GIS which tracks RPS eligibility, generation attributes, and emissions factors from all electricity generation in the NE-ISO control area.