Renewable Portfolio Standards in Colorado and

California: A Cost-Benefit Analysis

Ioann Galitzine, Raveen Mathew & Soma Szabo

Outline

I. Introduction

a. What Are Renewable Portfolio Standards?

II. Colorado Case Study

a. Policy Details

b. Current Progress & Reasons for Success

c. Cost-Benefit Analysis

III. California Case Study

a. Policy Details

b. Current Progress & Reasons for Shortfall

c. Cost-Benefit Analysis

IV. Conclusion

a. Findings

b. Policy Recommendation

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Abstract: Due to economic and environmental factors, states across the US have taken up a green agenda and implemented policies requiring certain portions of their energy to come from renewable sources by a certain date. This paper examines the efficacy of these Renewables Portfolio Standards (RPS). Using Colorado and California as case studies, we analyze the policy’s implementation and undertake a cost-benefit analysis. We conclude that the success of renewable energy mandates depends on the way in which they are implemented. We suggest tweaking the mandates by making them strive towards more specific and attainable goals with clearer penalties.

Introduction

        More and more pressures are being placed on the energy infrastructure of the

United States. The primary pressures stem from two major driving forces that have

been changing the energy landscape of the country in the past several decades:

economic and environmental. Economically, states are pressured to find sources of

energy that meet the growing needs of its local businesses and private residents in a

manner that is cost competitive and sustainable. Environmentally, the sources of energy

and practices for its distribution have to change to adapt to a warming planet and

guarantee short and long-term sustainability of both energy sources and the broader

ecological and climatic conditions.

What Are Renewable Portfolio Standards?

        The most ambitious way has been the implementation of Renewable Portfolio

Standards (RPS). The mandates set specific targets for what percentage of their energy

needs to be sourced renewably by a deadline, usually in the upcoming decade. Some

states have chosen not to create mandates, and no federal mandate exists. The official

term designated to describe the mandates are Renewable Portfolio Standards

generically. The aim of the standards are to make a nationwide positive impact on the

environment, while promoting renewable sources of energy in the long term and

keeping costs for consumers and businesses down.

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        However, while policymakers had a specific aim in mind when creating RPS’s

and an idea of what first steps to take, the results once implemented have been mixed.

Conclusions are difficult to draw since mandates differ across states both in their

nature, ambition, and scope. The question becomes do renewable energy mandates

accomplish their objectives? If some states are more successful than others, what

factors lead to better outcomes? How can the policies be tweaked to provide the most

renewably sourced power at the lowest price possible?

        To provide answers to these questions, we examine the RPS’s as they currently

exist across two states: Colorado and California. Colorado is on track to meet its

standard of 30% by 2020, while California is not on track to meet its standard of 33%

by 2020. We examine a case study and compare the performance of the states based on

their carbon footprint, energy costs, steps taken to meet the standards, and progress to

meet given deadlines. Using data from a number of federal, state and scientific sources,

we perform a cost-benefit analysis of each state to determine RPS success. Finally, our

paper will demonstrate how the changes to the mandates can improve the policy and

make the United States more environmentally friendly and allow consumers to pay less

for their energy needs.

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Colorado Case Study

Policy Details

Colorado was the first state in the nation to establish RPS by ballot initiative

when voters approved the 37th Amendment in November 2004.1 In its original form,

the RPS required utilities serving more than 40,000 customers to generate or purchase

around 10% of their sales using approved renewable energy sources.

In 2007, the RPS was revised to include a separate quota of renewable energy

requirements for electric cooperatives. The list of preapproved renewable energy

sources included solar energy, wind energy, geothermal energy, biomass facilities that

burn nontoxic plants, landfill gas, animal waste, hydropower, recycled energy, and fuel

cells using hydrogen derived from eligible renewables.2 Senate Bill 252, passed in 2013,

approves coal mine methane and pyrolysis of municipal solid waste as renewable

sources, pending a decision from Colorado’s Public Utilities Commission (PUC) on

whether the technologies are greenhouse gas-neutral. In all other matters, the PUC has

implemented rules and regulations for the RPS in connection with Investor-Owned

Utilities (IOUs).

Table 1.1 below demonstrates the incremental procurement requirements of the

RPS, which the state also refers to as the Renewable Energy Standard (RES). In addition

to the incremental RPS requirements, Colorado also has a distributed generation (DG)

target. DG (also known as on-site generation, dispersed generation or decentralized

generation) refers to electricity generated from small energy sources (e.g. solar panels

on building roofs), as opposed at large centralized facilities (i.e. power plants). Along

1 “Colorado: Incentives/Policies for Renewables & Efficiency – Renewable Energy Standard”. Database of State Incentives for Renewable & Efficiency (DSIRE). http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CO24R 2 “Colorado: Incentives/Policies for Renewables & Efficiency – Renewable Energy Standard”. Database of State Incentives for Renewable & Efficiency (DSIRE). http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CO24R

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with the target of reaching 30% renewables by 2020, the state aims to generate 3% of

its electricity through DG by that time. The main component of the 30% target will be

IOUs; electric cooperatives that serve energy to more than 100,000 meters need to

reach 20% of generation from renewable sources by 2020, while those serving fewer

than 100,000 meters will need to reach 10%.

Table 1.1: Incremental Minimum Total RES and DG Generation Requirements for IOUs.

Source: “Colorado’s 30% Renewable Energy Standard”. Governor’s Energy Office. 2010.

Current Progress & Reasons for Success

In 2012, Colorado’s total electricity generation was 52,557,891 MWh, of which

renewable energy production was 7,690,214 MWh.3 This amounts to 14.6% of total

generation, which is in excess of Colorado’s 2012 goal of 14% as seen on Table 1.1.

Figure 1.1 is a good representation of the fact that even though Colorado consumes a lot

of natural gas and coal, it is moving towards a cleaner path in power generation via

hydroelectric power, biomass and other renewable sources.3 “Net Generation by State by Type of Producer by Energy Source”. EIA. 2012. http://www.eia.gov/electricity/data/state/

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Figure 1.1: Colorado Energy Consumption Estimates, 2011. Source: “Colorado State

Profile”. EIA. http://www.eia.gov/state/?sid=CO

From Figure 1.2 we derive that Colorado began its RPS program from a starting

point of close to no renewable energy in 2002, Colorado has grown to ninth in wind

energy production across the US in 2012. With a focus on wind and solar, Colorado is

well on its way to accomplish its goal of 30% in 2020. We outline the reasons for its

tremendous success below.

Figure 1.2: Colorado Electricity Generation from Non-Hydro Renewable Energy Resources

2002 – 2011 (million kWh) Source: U.S. Department of Energy

A vital reason for Colorado’s success in achieving its RPS goals is public support.

Colorado’s RPS was started by voter initiative, demonstrating the public’s interest in

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increasing the use of renewable energy. As such, the residential sector has been and will

continue to be a key component in reaching Colorado’s renewable energy growth

expectations. For example, there has been a voluntary increase in solar power at the

end-use customer level, which has helped Colorado keep pace with its DG target.

Colorado now has the fifth-largest solar photovoltaic market in the US, and in 2013, the

Bureau of Land Management will hold an auction for two Solar Energy Zones that cover

around 3,705 acres, which will increase their market position in the solar photovoltaic

industry. 4

Colorado is home to the National Renewable Energy Laboratory, which has been

working on making renewable energy technology more efficient and cost effective.

Colorado is located in a strategic geographical location due to its mountains, which

create wind pockets that are crucial for the wind industry. Colorado currently has the

country’s tenth-largest wind market, and it added over 500 MW of energy capacity over

the course of 2012, reaching a total capacity of 2.3 GW of wind energy.4 In 2013, wind

energy capacity will increase by 600 MW due to close to $1 billion in investments being

made by utilities, resulting in a 26% increase in generation from wind power.5

Colorado has also been able to make good use of biomass as a source of

renewable energy. The major source of biomass energy in Colorado is the White River

National Forest, specifically fallen trees. The U.S. Forest Service partnered with

Gypsum’s biomass power plant to create an environmentally friendly approach to

burning the wood, as well as incorporating various techniques to diminish the risk of

forest fires.

4 “Renewable Energy in Colorado”. American Council On Renewable Energy (ACORE). 2013. http://www.acore.org/files/pdfs/states/Colorado.pdf 5 Jaffe, M. “Colorado Set to Add 600 MW”. Denver Post. 2013. http://www.denverpost.com/breakingnews/ci_24267816/colorado-set-add-600-megawatts-wind-power-projects 

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The last renewable energy resource in Colorado that has a significant effect on

the RPS is hydropower. Colorado’s mountain rivers create a unique opportunity for

hydroelectricity generation with their fast currents, and there is ample scope for future

expansion. Colorado has already installed 649.9 MW of hydropower capacity, and this

figure will increase steadily.6

Table 1.2: Installed Renewable Energy Capacity, 2012

Source: “Renewable Energy in Colorado”. American Council on Renewable Energy

(ACORE). 2013. http://www.acore.org/files/pdfs/states/Colorado.pdf

In order to increase the adoption of renewable energy so as to meet its RPS goals,

the state of Colorado has provided producers and consumers a number of incentives.

These include pricing discounts, property and equipment tax discounts as well as

performance-based benefits, and they have helped Colorado make huge gains

Figure 1.3 gives a clear picture of the breakdown of end-use consumption. As the

industrial is the biggest share with 423.6 trillion BTU of energy consumption or 28.6%,

the state targeted many of the discounts towards industry, including, but not limited to

incentives and sales discounts for a self-sufficient renewable energy source.

6 “Renewable Energy in Colorado”. American Council On Renewable Energy (ACORE). 2013. http://www.acore.org/files/pdfs/states/Colorado.pdf

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Figure 1.3: Energy Consumption by End-Use Sector, 2011. Source: “Colorado State Profile”.

EIA. http://www.eia.gov/state/?sid=CO

Though the residential sector is the second-smallest consumer (23.8%), the

government came up with a number of relevant incentives, knowing that failing to

involve the residential sector could affect the initial wide public support for RPS.7 To

that end, the PUC has done an excellent job of incentivizing DG. The property and

equipment tax discount is an incentive for residential and commercial users who decide

to install renewable energy systems at their own cost. In 2009, the property discount

added solar panels to the rebate, ideal for residential owners who do not use as much

power as commercial industries. The approved renewable energy systems in this case

include solar thermal systems, small wind systems, biomass systems and geothermal

systems, among others.8

In addition to the government, utilities have also played their part in

encouraging DG. Xcel Energy, Colorado’s leading IOU, created a rewards point system

7 “Colorado State Profile”. EIA. http://www.eia.gov/state/?sid=CO#tabs-2 8 “Colorado: Incentives/Policies for Renewables & Efficiency – Property Tax Exemption”. Database of State Incentives for Renewable & Efficiency (DSIRE). http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CO188F&re=0&ee=0 

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whereby residential homes that set up grid-connected photovoltaic systems can receive

Renewable Energy Credits (REC). This allows homeowners to sell back energy for

credits. A solar system connected to the main grid and producing around 0.5 kW – 10.0

kW can earn a homeowner are $0.06 per kWh for the first ten years. If the individual or

commercial industrial customer produces more than 500 kW, the buyback price is

determined by the market bid price.9

Cost-Benefit Analysis

In order to assess the impact and usefulness of Colorado’s RPS policy, we ran a

cost-benefit analysis; we also did the same for California (details of which can be found

later in the paper). We ran the model from 2011 to 2020; this time period is based on

the fact that both Colorado and California’s latest iterations of their RPS policies took

effect in 2010 (we use 2011 as the starting year it is the first full year during which the

policies are in effect), and aim to achieve their targets in 2020.

For Colorado’s projected electricity generation through to 2020, we used

projections from the Suffolk University (see Table 1.3). These numbers assume that

Colorado achieves its 30% RPS target in 2020, which, as detailed above, the state is

expected to do. Our projections for growth in renewables are partially based on the

intermediate RPS requirements shown in Table 1.1. However, the intermediate

requirements do not reflect reality – while there are huge jumps in 2015 and 2020, and

the requirement is stagnant in other years, Colorado’s renewable electricity growth is

likely to show a smoother, more natural growth profile. We projected annual growth of

1.35% (based on the previous few years) for every year until 2015, for which growth

jumps to 2.70%. Growth returns to 1.35% in 2016, and then this growth rate accelerates

9 “Colorado: Incentives/Policies for Renewables & Efficiency – Xcel Energy Solar Rewards Program”. Database of State Incentives for Renewable & Efficiency (DSIRE). http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CO12F&re=0&ee=0 

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every year, culminating in a jump to 6.30% in 2020. Essentially, we still predict sharp

increases in renewables growth in 2015 and 2020 as Colorado utilities work to reach

the RPS requirements, but we provide a realistic growth model over the 10-year period.

In 2020, our final year, Colorado’s electricity generation from renewable sources

amounts to 22,872.8 GWh, which is 30% of total generation (which stands at 76,199.0

GWh).

Table 1.3: Projected Electricity Sales from 2011-2020

Source: “The Economic Impact of Colorado’s Renewable Portfolio Standard”. Suffolk

University. 2012.

We projected out future renewables generation based on Colorado’s current

renewable mix, with 88% of new renewables generation coming from wind power, and

the remaining 12% from solar power. Hydropower is neglected as Colorado has

concentrated its RPS efforts on wind and solar power. We assume that this proportion

remains the same, as the current project pipeline indicates.

To assess the cost of the policy, we assessed two separate sets of costs. First, we

assessed the cost of building and maintaining renewable energy infrastructure. In

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addition, we examined the additional cost of electricity due to adoption of renewables

(i.e. the increased cost of generation of a kWh of electricity, due to the fact that it

generally costs more to generate electricity from renewable sources, on average, than

non-renewable sources currently).

To help us find the value of the first cost, we looked at a measure known as the

levelized cost. The levelized cost describes the capital cost (both fixed and variable)

operation and management costs as well as transmission investments.10 We obtained

figures for the levelized costs of various energy sources from the EIA. Table 1.4 presents

the levelized costs of the two renewable energy sources that comprise the majority of

Colorado’s RPS. The average levelized costs (in 2011) of on-shore wind (Colorado does

not use off-shore wind as an energy source) and solar are $88.6/MWh and $144.3/MWh

respectively. As the levelized costs are presented in 2011 dollars, we increased them to

account for inflation at a rate of 2% per year.

Table 1.4: Levelized Costs of Wind and Solar Power ($/MWh)

Source: “Levelized Cost”. EIA. http://www.eia.gov/forecasts/aeo/electricity _ generation.cfm

For each year in our model, we calculated what we term the “average cost”,

which we calculated by multiplying the amount of new renewables generation via a

certain source by said source’s levelized cost.

Another element of the cost of renewable infrastructure is that of depreciation.

We used a straight-line depreciation rate for the equipment. In the case of wind power,

10 “Levelized Cost”. EIA. http://www.eia.gov/forecasts/aeo/electricity_generation.cfm 

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lifespan is around 20 years11, or 5% depreciation yearly. Solar panels have a lifespan of

around 40 years12, resulting in 2.5% depreciation annually.

The last cost accounted for in this model was the difference in generation cost

between renewable and non-renewable energy. Table 1.5 shows the generation costs of

each energy source. The “Average Cost of Renewables Generation” was calculated by

multiplying the percentage of generation of wind and solar by their respective

generation costs and adding the two resulting numbers. The same process was used to

arrive at an average cost for Non-Renewable Energy Sources (the EIA’s breakdown of

Colorado’s usage patterns for non-renewable energy resources showed a ratio of coal

being 71.8% of non-renewable generation to natural gas being 28.2%13). The

“Additional Cost of Renewable Generation” was the difference of the two Average Costs

and was multiplied by the “Cumulative Generation from Renewable Sources” for that

given year.

Table 1.5: Generation Cost by Source ($/kWh)

Source: Johnson L. et al. “The Social Cost of Carbon: Implications for Modernizing our

Electricity System”. Journal of Environmental Studies and Sciences. 2013.

11 “Operational and Maintenance Costs for Wind Turbines”. International wind measurement. http://www.windmeasurementinternational.com/wind-turbines/om-turbines.php 12 “The Life Expectancy of Solar Panels”. The ECO experts. http://www.theecoexperts.co.uk/life-expectancy-solar-panels 13 “Colorado State Profile”. EIA. http://www.eia.gov/state/data.cfm?sid=CO 

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It is possible that generation costs for the various sources change in future; in

particular, generation costs for renewable sources may drop, as more and more

innovation occurs, especially in light of the demand resulting from the RPS target.

However, these changes in price cannot be predicted, and there is no guarantee that

prices for non-renewable sources do not fall as well. As such, we assumed that

generation costs do not change apart from inflation (which we accounted for at 2%

annually, as we did for the levelized costs).

After adding up all costs of the RPS, the values needed to be discounted to 2011

using the following formula:

Figure 1.4: Present Value Formula

In this case, PV is the present value in 2011 dollars; FV (the future value) is the

total cost in a given year; r is the interest rate, which equals the yield-to-maturity of a

10-year Treasury Bond in 2011 (3.4%14), and n is the number of years between 2011

and the given year. Through our model, we calculated the net present value (in 2011) of

the costs of Colorado’s RPS to be $12,405.8 million.

We now discuss our model’s assessment of the benefits of Colorado’s RPS

program. The chief benefit of the RPS is the positive effect on the environment; in

Colorado, voters initiated the RPS by ballot wanting a cleaner footprint on the

environment by means of alternative renewable energy.

To quantify the environmental effect, we estimated the amount of carbon dioxide

(CO2) emissions saved due to the RPS and its switch towards relatively clean renewable

14 “Resource Center”. U.S. Department of the Treasury. http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2011 

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energy sources. The same forecasted energy generation numbers were used as those

used in the cost analysis, along with the same numbers for projected renewables

growth.

Table 1.6: Average CO2 Emissions (g/kWh)

Source: Moomaw, W. et al. “Annex II: Methodology”. International Panel on Climate

Change. 2011.

Table 1.6, containing data from the International Panel on Climate Change

(IPCC), shows CO2 emission rate in terms of g/kWh for different energy sources i.e. the

amount of CO2 emitted into the air (in grams) for each unit of power generated (in kWh)

by that source. To calculate the “Average Emission Rate of Non-Renewables

Generation”, we multiplied the percentage of coal and gas by the each source’s

respective average CO2 emissions rate and adding the resulting quantities. The process

was repeated using the emission rate figures for relevant renewable sources to get the

“Average Emission Rate of Renewables Generation”. For the purposes of our model, we

assumed that the emission rate for the various energy sources does not change over the

10-year period.

For each year in our model, we multiplied the amount of cumulative renewables

generation by the “Average Emission Rate of Renewables Generation” in order to obtain

the value for CO2 released (in metric tonnes) by new renewables generation that year.

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We also multiplied the amount of cumulative renewables generation by the “Average

Emission Rate of Non-Renewables Generation”. This gave us a figure to answer the

hypothetical question, “how much extra CO2 would be emitted if no new renewables

were being added, and instead, all the new generation needed by Colorado was

generated by non-renewable resources?” Subtracting the figure for renewables CO2

generation from that of non-renewables CO2 generation gave us a value representing the

CO2 emissions saved by using renewables instead of non-renewables to meet an

increasing percentage of Colorado’s energy needs (as mandated by the state’s RPS).

Having calculated the amount of CO2 emissions saved (or reduced), we then had

to go about quantifying the monetary value of this benefit. To do so, we multiplied the

amount of CO2 saved by the Social Cost of Carbon (SCC), which gave us a dollar value for

the environmental benefits of the RPS. The SCC is an estimate by the federal

government to represent the cost of CO2 emissions in a quantitative monetary way.

Because this cost is somewhat vague and hard to capture, we ran our model using the

government’s low, mid-range and high estimates for the SCC (detailed in Table 1.8).

Table 1.8 Social Cost of Carbon ($/metric tonne)

Source: Johnson L. et al. “The Social Cost of Carbon: Implications for Modernizing our

Electricity System”. Journal of Environmental Studies and Sciences. 2013.

In the scenario where the government’s mid-range estimate for the SCC was

used, our model found that Colorado’s RPS program brings benefits amounting to a net

present value of $12,430.1 million. Once we subtracted the costs as calculated earlier,

we arrived at a net benefit of $24 million. The low estimate for total benefits was $4,143

million (which means a net cost of $8,262 million), and the high estimate for total

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benefits was $19,587 million (which means a net benefit of $7,181 million); see Table

1.7. As such, should Colorado stay on track to meet its RPS requirements, the mid-range

scenario shows that Colorado’s RPS program will be a successful policy as it brings a net

benefit to the state.

Table 1.7: Cost Benefit Analysis ($, million)

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CALIFORNIA CASE STUDY

RPS Policy Details

California established its Renewables Portfolio Standard Program in 2002 under

State Senate Bill 1078, for the purposes of “increasing the diversity, reliability, public

health and environmental benefits of the energy mix”.15 This legislation required the

state’s three IOUs to generate 20% of their electrical output from renewable sources by

2017. At the time, renewables made up 11% of California’s energy portfolio16, and

California’s three IOUs (Southern California Edison, the Pacific Gas and Electric

Company, and San Diego Gas & Electric) generated 75% of California’s electricity. The

bill, which fell under the jurisdiction of the state’s Public Utilities Commission (CPUC),

also had an incremental procurement target, requiring the portion of total electricity

generated by renewables to increase by 1% annually.

In 2003, the Energy Resources Conservation and Development Commission

(usually referred to as the California Energy Commission, or CEC) published the

Integrated Energy Policy Report (IEPR 2003), which recommended accelerating the

target from 2017 to 2010.17 Reflecting this recommendation, Senate Bill 107 in 2006

pushed forward the deadline to reach 20% renewables generation to 2010.

In 2008, then-Governor Arnold Schwarzenegger signed executive order S-14-08,

setting an additional target of 33% of generation via renewable energy by 2020.18 This

was codified into law by Senate Bill X1-2 in 2011. In addition to increasing the target,

the new requirements also covered publicly owned municipal utilities (POUs) in

addition to the IOUs. This change means that 98.2% of the state’s power generation is

15 “California Climate Change Legislation”. California Climate Change Portal. http://www.climatechange.ca.gov/state/legislation.html16 “California Gross System Power for 2002”. California Energy Commission. http://energyalmanac.ca.gov/electricity/system_power/2002_gross_system_power.html17 “Integrated Energy Policy Report 2003”. California Energy Commission. 2003.18 “California Renewable Energy Overview and Programs”. California Energy Commission. http://www.energy.ca.gov/renewables/index.html

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covered by RPS.19 The bill also contains intermediate requirements: specifically, 20% of

generation must come via renewable sources by 2013, and 25% by 2016. It comes

under the jurisdiction of the California Air Resources Board (CARB), which has the

power to regulate POUs (the CPUC only regulates IOUs).

In October 2013, Governor Jerry Brown signed Assembly Bill 327, giving the

CPUC the discretion to “require the procurement of eligible renewable energy resources

in excess” of the 33% target currently in force. Since only CPUC is involved, the bill only

potentially affects IOUs. As of yet however, no changes have been made to the 33%

target.

The following sources are considered approved forms of renewable energy: solar

thermal electric, photovoltaics, landfill gas, wind, biomass, geothermal electric,

municipal solid waste, energy storage, anaerobic digestion, small hydroelectric, tidal

energy, wave energy, ocean thermal, biodiesel and fuel cells using renewable fuels.20

The distinction between small hydroelectric and large hydroelectric is an important

one; small hydroelectric facilities are those that generate 30 MW of electricity or less.

Electricity generated by large hydroelectric plants does not count towards the

renewables total (to put this into perspective, large hydroelectric facilities generated

8.3% of California’s electricity in 201221). Meanwhile, out-of-state generation counts

towards the total, provided it is generated via the methods listed above.

The tracking of progress made towards achieving RPS goals is conducted by the

CEC. Renewable electricity generation is measured through Renewable Energy Credits

(RECs); an REC represents one megawatt-hour (MWh) of electricity generated from a 19 “RPS Project Status Table: September 2013” Database of State Incentives for Renewable & Efficiency (DSIRE). 2013.20 “California: Incentives/Policies for Renewables & Efficiency – Renewables Portfolio Standard”. Database of State Incentives for Renewable & Efficiency (DSIRE). http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CA25R 21 “Total Electricity System Power”. California Energy Commission. http://energyalmanac.ca.gov/electricity/total_system_power.html

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renewable resource. RECs are measured and verified by the Western Renewable Energy

Generation Information System (WREGIS). RECs can be bought, sold, or traded – this

provides an incentive for energy companies to increase their renewables capacity, as

they can then sell extra RECs to utilities who are lagging behind in meeting their RPS

obligations.22 The use of Tradable RECs by a utility to meet its requirements is capped at

25% until 2013, and will shrink to 10% by 2017. In addition, the cost of one REC is

capped at $50.23 Utilities that fail to meet their RPS targets face a non-compliance

penalty, amounting to a fine of 5 cents per kWh; however, the maximum penalty is

capped at $25 million per utility per year.

Current Progress & Reasons for Shortfall

When RPS standards were first established in 2002, 11% of California’s energy

was generated by renewable sources. By 2010, this had reached 13.9%, and in 2012 the

figure was 15.4%.24 Fig 2.1 shows the state’s renewable energy generation breakdown,

while Fig 2.2 displays the overall energy generation breakdown.

22 “Explainer: Renewable Portfolio Standards”. KCET. http://www.kcet.org/news/rewire/explainers/explainer-renewable-portfolio-standards.html23 “California: Incentives/Policies for Renewables & Efficiency – Renewables Portfolio Standard”. Database of State Incentives for Renewable & Efficiency (DSIRE). http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CA25R24 “Total Electricity System Power”. California Energy Commission. http://energyalmanac.ca.gov/electricity/total_system_power.html

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Figure 2.1: Renewable Energy Generation by Resource Type. Source: “Tracking Progress:

Renewable Energy – Overview”. California Energy Commission. 2013.

Figure 2.2: Overall Electrical Generation by Resource Type. Source: “Tracking Progress:

Installed Capacity”. California Energy Commission. 2013.

While Fig. 2.1 does show a steady rise in renewables generation, Fig 2.2 serves as

a reminder that renewables still form only a small portion of the total generation, and

that this portion is not growing as fast as the RPS guidelines demand. Furthermore,

California looks unlikely to reach its targets. Fig 2.3 shows the projected level of

renewable energy generation through to 2020.

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Figure 2.3: Renewable Generation for California and Renewables Portfolio Standard Goals.

Source: “Renewable Power in California: Status and Issues”. California Energy Commission.

2011.

In Fig 2.3, the two green diamonds represent the 33% target: the higher diamond

denotes a level of generation equivalent to 33% of the high assumption for overall

electricity generation in 2020, while the lower diamond represents 33% of the low

assumption. While the orange dashed line (representing IOU and POU signed and

pending contracts) suggests the 33% target will be achieved, this is somewhat

misleading. The true story is related by the green dashed line, which shows the level of

renewables generation expected when taking into account 40% contract failure.

Contract failure refers to cancellation of contracts to build renewable electricity

generation facilities, and the historical rate of contract failure has been 40%.25

There exist a variety of reasons why California is not on track to meet its RPS

requirement of 33% by 2020. One is that the target is, quite simply, very ambitious.

25 “Renewable Power in California: Status and Issues”. California Energy Commission. 2011.

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California’s RPS are among the “most aggressive” renewable energy standards in the

US.26 Percentage-wise, California has the second-highest target (33%) among the 29

states that have instituted some form of RPS, trailing only Hawaii’s goal of 40%.27

Requiring almost one-third of energy to be generated through renewable means

translates to California becoming easily the largest market for renewable energy in the

nation, generating more than double the amount of renewable energy generated by the

next-closest state, Illinois.28

Nevertheless, California had an early start towards renewable power generation,

having established thriving solar and wind power industries using state and federal tax

credits in the 1970s. Moreover, the push towards renewable energy received bipartisan

legislative and gubernatorial support29, another factor that could be argued makes the

ambitious target seem achievable. However, a primary reason California is having

difficulty reaching is the sheer level of expenditure required in order to develop the

infrastructure necessary to generate such a large quantity of renewable energy. CPUC

calculates that new infrastructure investment totaling $115 billion will be needed to

reach the 33% target by 2020.30 While the IOUs are receiving tax breaks and funding to

propel them towards increasing renewables capacity, they still have to provide the

majority of the capital for building new infrastructure.31

The IOUs are very softly penalized for not meeting their RPS requirements, and

so are not discouraged from lagging behind. Penalties for one utility are capped at $25

26 Carroll, M. & Campopiano, M. “Assembly Bill 327 removes upper limit from California's renewables portfolio standard”. Lexology. http   :  //www   .  lexology   .  com/library/detail.aspx?g=54d63b93-232b-440d-ae01-ce1cdb6f6693   27 “Renewable Portfolio Standard Policies”. Database of State Incentives for Renewable & Efficiency (DSIRE). http://www.dsireusa.org/documents/summarymaps/RPS_map.pdf28 “How Renewable Electricity Standards Deliver Economic Benefits”. Union of Concerned Scientists. 2013.29 “California Renewable Energy Overview and Programs”. California Energy Commission. http://www.energy.ca.gov/renewables/index.html30 “33% Renewables Portfolio Standard Implementation Analysis Preliminary Results”. California Public Utilities Commission. 2009.31 Michaels, R. “Intermittent Currents: The Failure of Renewable Electricity Requirements”. 2007.

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million, but this is a negligible amount for these large companies: in 2012, Pacific Gas

and Electric had $15 billion in sales, while Southern California Edison had $12 billion in

sales and San Diego Gas & Electric had $4 billion in sales.

Most renewable resources are located in remote areas, and in order to deliver

power from these areas to consumers, the state will need to upgrade the existing

transmission infrastructure. Thirteen major transmission projects have been identified

as critical towards meeting the 33% target, but of these, only six projects are licensed or

under construction, while the remaining seven do not yet have active licensing

applications.

While the public is largely in favor of renewable energy, there has been frequent

public opposition when it comes to building renewable energy plants, as a number of

major wind and solar energy projects have been blocked or delayed.32 Environmental

concerns have been key to this issue, as some planned facilities were thought to be

likely to disrupt habitats in the areas they were built, and so were the target of protests.

In addition, smaller projects in residential areas (e.g. solar panels on building roofs, or a

small cluster of wind turbines) have been blocked by communities due to aesthetic

reasons.

Lastly, while the state government has made distributed generation a priority

(Governor Brown’s Clean Energy Jobs Plan has set a goal of developing 12,000 MW of

localized electricity generation by 2020), many argue that California’s RPS incentive

schemes – while as or more generous than similar schemes in other states – do not

promote adoption of distributed generation (e.g. residential rooftop solar) adequately

enough to meet the state’s goal. While homeowners are allowed to apply for RECs, a

typical homeowner with a 10 kW solar installation is unlikely to earn even one REC a

32 Tyson, R. “The new look of NIMBYism”. http://wwwp.dailyclimate.org/tdc-newsroom/2012/01/green-nimbyism

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month.33 Some utilities will buy RECs from their distributed generation customers, there

is no legal requirement for utilities to do so. This often means property owners have

trouble selling their RECs, thereby reducing the incentive to install their own panels.

Cost-Benefit Analysis

To establish the overall impact of California’s RPS, we undertook a similar cost-

benefit analysis to that which we did for the Colorado case study. The model was run

from 2011 to 2020, as California’s 33% RPS target expires in that final year.

For California’s projected electricity generation through to 2020, we used

projections from the California Energy Commission (see Table 2.1). For the intervening

years between those for which the CEC gives forecasts, we used the compounded annual

growth rate as the growth rate for each year (i.e. 0.80% between 2012 and 2015, and

1.19% between 2015 and 2020). The values for 2011 and 2012 do not match historical

figures because the historical numbers (shaded blue in Table 2.1) used by the CEC in the

report are weather-normalized from the actual peaks in those years34

We projected growth in renewables using Figure 2.3 as a basis for our estimates.

Taking into account a contract failure rate of 40% (which has been the norm,

historically), renewables generation in 2020 will total around 70,000 GWh (this

amounts to 23.2% of total generation in 2020). Working backwards from this number,

we arrive at growth of 1.00% annually.

Table 2.1: Projected Electricity Sales from 2011-2020

33 “Explainer: Renewable Portfolio Standards”. KCET. http://www.kcet.org/news/rewire/explainers/explainer-renewable-portfolio-standards.html34 “California Energy Demand 2014 – 2024 Revised Forecast Volume 1”. California Energy Commission. 2013.

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Source: “California Energy Demand 2014 – 2024 Revised Forecast Volume 1”. California

Energy Commission. 2013.

As we did for Colorado, we projected out future renewables generation based on

the state’s current renewable mix. For California, 35% of new renewables generation

comes from wind power, 32% from geothermal sources, 15% from biomass, 15% from

small hydroelectric plants and the remaining 3% from solar power. We assumed that

this proportion remained the same throughout the time period in question.

The first cost assessed was that of building and maintaining renewable energy

infrastructure; the same method was used as in the Colorado model. Since we were

projecting renewable generation additions across five renewable sources (as opposed

to Colorado’s two), we obtained levelized cost information for the three new sources,

again from the same source (the EIA). These costs are shown in Table 2.2. We account

for inflation in the same way as in the Colorado model. We calculated the “average cost”

by multiplying the amount of new renewables generation via a certain source by said

source’s levelized cost.

Table 2.2: Levelized Costs of California’s Five Primary Renewable Sources ($/MWh)

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Source: “Levelized Cost”. EIA. http://www.eia.gov/forecasts/aeo/electricity _ generation.cfm

We used a straight-line depreciation rate for the equipment, but since we were

analysing three new sources we obtained information on the lifespan for these

technologies. The average lifespan for a biomass plant is 30 years35 (leading to a

depreciation rate of 3.33% annually), that for hydroelectric plants is 100 years36

(depreciation of 1.00% annually) and the same figure for geothermal plants is 35

years37 (depreciation of 2.86% annually).

The other cost accounted for in this model was the difference in generation cost

between renewable and non-renewable energy. Table 2.3 shows the generation costs of

various energy sources, including those for sources only considered in the California

model. Again, we assumed no change in these costs, outside of inflation at 2%, for

reasons described above.

The “Average Cost of Renewables Generation” was calculated as it was

previously, except this time we accounted for the fact that California has five major

sources by which it produces renewable electricity. The same process was used to

arrive at an average cost for Non-Renewable Energy Sources; the breakdown for

California’s non-renewables generation is as follows: 45% from natural gas, 22% from

nuclear, 19% from large hydro and 14% from coal. The “Additional Cost of Renewable

35 Csencsitz, C. “The Biomass Effect”. The Fine Print. http://www.thefineprintuf.org/2012/04/25/the-biomass-effect/36 “Hydropower: Setting a Course for Our Energy Future”. U.S. Department of Energy. 2004.37 “Geothermal Power Plants”. Energy Experts. http://energyexperts.org/EnergySolutionsDatabase/ResourceDetail.aspx?id=2354

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Generation” was the difference of the two Average Costs and was multiplied by the

“Cumulative Generation from Renewable Sources” for that given year.

Table 2.3: Generation Cost by Source ($/kWh)

Source: Johnson L. et al. “The Social Cost of Carbon: Implications for Modernizing our

Electricity System”. Journal of Environmental Studies and Sciences. 2013.

Using the same present value calculation we used for the Colorado model, we

calculated the net present value of the costs of California’s RPS to be $32,100.6 million.

Regarding benefits of California’s RPS policy, we took the reduction in carbon

emissions to be chief benefit. We estimated the amount of carbon dioxide (CO2)

emissions saved due to the RPS in the same fashion as we did for Colorado, using the

relevant inputs for California (different numbers of sources for both renewables and

non-renewables generation, as well as a different composition for both). Emission rates

for all the relevant sources can be seen in Table 1.6.

Having calculated the amount of carbon emissions saved by using renewables in

place of non-renewables to meet some portion of future energy needs, we then found a

monetary value for this benefit by multiplying the amount of CO2 saved by the SCC.

Again, we presented three scenarios for benefits based on the federal government’s

three estimates for the SCC.

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In the scenario where the government’s mid-range estimate for the SCC was

used, our model found that California’s RPS program brings benefits amounting to a net

present value of $22,323 million. Once we subtracted the costs as calculated earlier, we

arrived at a net cost of $9,777 million. The low estimate for total benefits was $7,441

million (which means a net cost of $24,660 million), and the high estimate for total

benefits was $35,176 million (which means a net benefit of $3,076 million); see Table

2.4. According to our cost-benefit analysis, if California continues on its current path

with regards to increasing renewable generation (as a percentage of its total generation

portfolio), the RPS policy will result in a net cost to the state.

Table 2.4: Cost Benefit Analysis ($, million)

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Conclusion

Renewable Portfolio Standards are the most comprehensive and wide-reaching

efforts the United States is making toward increasing its renewable energy capacity and

generation. As shown however, the policies are far from uniform across states, which

make them difficult to evaluate. What works in one state may not work in another and

what is considered a success in one state may be considered a failure in another. Our

analysis incorporates both Colorado’s and California’s own standards for themselves, as

well as considering their net impact on carbon emissions.

Findings

Overall, we have found that in Colorado, which is on track to meet its own

standards, the amount of carbon reduced by the RPS provides a net benefit for the state

financially and environmentally. In California, we found the opposite to be true.

Although ambitious efforts are being made to increase renewable capacity and meet its

own Renewable Portfolio Standards, California will fall short and its RPS will not be

beneficial financially for the state. It is important to note that both of these results are

based on our mid-range case scenario projections. The price of a metric ton of carbon

emitted is not standardized therefore making it difficult to precisely measure benefits.

We have used estimates from the United States government with low, mid-range, and

high case pricing a metric ton of carbon at $11, $33, and $52 respectively. Which

number one decides to use comes down to a question of values. While some may

particularly value an environmentalist agenda seeing it as laying groundwork for the

future, others may be more focused on reducing energy costs.

Policy Recommendations

Improvements can certainly be made to Renewable Portfolio Standards. The four

primary areas of improvement are: making the standards realistically attainable,

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making and enforcing strict penalties on non-compliance, providing a better exchange

marketplace for renewable energy certificates, and including more power sources in the

renewable definition. The first two areas accompany each other. Standards were set

artificially high in order to be ambitious but this meant that penalties for non-

compliance could not be strictly enforced because it would cause too high of a financial

burden on utilities. However, this has led to many utilities not taking the standards

seriously. If the standards were within the utility company’s reach, fair yet firm

penalties could be strictly enforced. Second, the exchange marketplace for renewable

energy credits needs to be priced more appropriately. There are many restrictions on

pricing that are set by governments therefore causing credits to be priced at below of

above market prices. In order to allow credits to be exchanged at true market value

there should be fewer restrictions on their price. This could encourage more distributed

generation. For instance, in Colorado, Xcel Energy buys all RECs from customers that

generate their own electricity, while in California utilities do this only at their own

discretion; as such, Colorado is on target to reach its DG goals while California is lagging

behind. Fourth, the definition of renewables varies by state and is generally limited. If

the end goal of RPS’s is to increase energy from non-fossil fuel sources, nuclear power

and more methods of hydroelectric power should be incentivized. Not only are these

sources of energy cheaper, they are more scalable for a statewide infrastructure.

To conclude, Renewable Portfolio Standards are most certainly a very important

issue in the energy industry and to the energy future of the United States. The standards

are an important way to address the two important pressures placed on energy

production: the need to be environmentally conscious and affordable. Our paper shows

that there are constructive and unconstructive ways in which to implement the

standards. We hope that lessons can be drawn from our analysis to ensure the former.

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