The impact of state renewable portfolio standards on electric utilities

State-level renewable portfolio standards laws (RPSs) experienced a gradual expansion across the United States over the past 15 years. These laws require utilities to generate a specified percentage of their electricity from renewable sources. We examine the impact of a state’s adoption of an RPS on the stock prices of electric utilities operating in that state. We might naturally expect this impact to be negative, since utilities are expected to be profit-maximizers so that any law forcing a change in behavior would involve a movement away from the utilities’ optimal production mix, reducing profits.  However, electric utilities are often subject to regulatory oversight that limits their profits to a specified rate of return on their approved capital stock.  A new RPS law might allow the utility to invest more money in renewable generation capacity, increasing its allowable level of profits.

We utilize daily stock market data of electric utilities from 1995-2015 from the Center for Research in Security Prices (CRSP) as well as other firm attributes in our analysis.   We also collect information on the dates that each state adopted an RPS, taken from the Database of State Incentives for Renewables and Efficiency (DSIRE,http://www.dsireusa.org).  We then identify the state or states where each utility operates, making it possible to identify which utilities would be affected by each state’s RPS laws, as well as providing a sense of how big an impact each state would have on the utility, based on the share of the utility’s sales deriving from that state.  Our primary analysis is an event study, testing whether a utility’s stock price is affected by the adoption of an RPS in a state where it operates, considering both the enaction date of the law and the date when its provisions take effect.  Recognizing the potential difficulties in identifying the exact timing of the “news” that a state is likely to adopt an RPS, we also consider a longer-run analysis of stock prices to see if they grow more or less quickly in the years after an RPS is adopted.

While we generally anticipate seeing a negative impact of RPS laws on the profitability (and stock price) of electric utilities, the theoretical ambiguity in the sign of the impact and the rapid growth of RPS laws over the past 15 years should make the results of our analysis interesting on both theoretical and practical grounds.