How does the adoption of a renewable portfolio standard impact state electricity markets?

Due to concerns over energy prices and global climate change, public interest in policies that promote renewable energy have become increasing popular. In the United States, the federal government has devoted substantial subsides to the production of renewable energy. In an attempt to motivate the transition away from fossil fuels, reduce carbon emissions and diversify electricity supply, twenty-nine states and the District of Columbia have adopted a Renewable Portfolio Standard (RPS).  An RPS is a form of regulation that requires increased electricity production from renewable energy sources. These standards vary by state but generally require a minimum percentage of electricity generation to come from renewable technologies by a predetermined date. This study examines the effect of the adoption of an RPS on electricity rates, making use of the increased availability of data since several policies’ adoption.

Using a fifty state panel over the years 1990-2012, a difference-in-difference and an annualized fixed effects model are estimated to measure how the adoption of an RPS affects the price of electricity in state markets. The annualized models uses dummy variables to estimate the impact in each respective year post adoption. This allows the comparison across states in which an RPS was adopted in different years. Empirical findings show that states that have adopted an RPS have approximately a twenty percent higher all-retail electricity price than states that do not have RPS. Following the adoption of this regulation, a state can expect to see electricity prices rise by roughly five percent on average per year relative to states with no RPS. Once the legislation has been in place for almost a decade, electricity rates begin to dramatically increase upwards of ten percent per year.