The Effects of Renewable or Clean Electricity Standards

July 26, 2011

Federal lawmakers have recently considered several policies to alter the mix of fuels used to generate electricity in the United States. Those policies—referred to as renewable or “clean” electricity standards—would lead to greater reliance on energy sources that produce few or no emissions of carbon dioxide (CO2), the most prevalent greenhouse gas contributing to climate change. Currently, only about 10 percent of U.S. electricity is produced from renewable sources.

A CBO study—prepared at the request of the Chairman and Ranking Member of the Senate Energy and Natural Resources Committee—examines how a federal renewable or clean electricity standard would change the mix of fuels used for electricity generation, the amount of CO2 emissions, and the retail price of electricity in different parts of the United States. In particular, the study explores how some proposed features of such standards would affect those outcomes. The study also highlights key design elements to help minimize the costs to U.S. households and businesses.

How Would a Renewable or Clean Electricity Standard Work?

Renewable electricity standards (RES) would require a certain share of the nation’s electricity generation to come from renewable sources, such as wind or solar power. Clean electricity standards (CES) would require a certain percentage of the nation’s electricity generation to come from renewable sources or nonrenewable sources that reduce or eliminate CO2 emissions, such as nuclear power, coal-fired plants that capture and store CO2 emissions, and possibly natural-gas-fired plants. Many renewable and clean electricity standards already exist at the state level.

Utilities would typically be required to comply with a renewable or clean electricity standard by submitting “credits,” each of which certified that a certain amount of electricity had been produced from a qualifying renewable or other clean source. The number of credits that a utility would have to submit would depend on the standard and on the utility’s electricity sales.

The federal government would give credits to generators that produced electricity from qualifying sources, and the generators in turn could sell the credits to the highest bidder. Utilities that generate at least some of their own electricity would comply with the policy either by using credits that they received for producing electricity from qualifying sources or by buying credits from other generators that use qualifying sources. Utilities that do not own generating facilities would need to purchase all of their credits. Utilities’ demand for credits to comply with the standard would encourage generators to produce more electricity from qualifying renewable or other clean sources. If the credits were traded freely, the market could determine the least expensive method of achieving the desired increase in renewable or clean electricity generation.

What Would Be the Potential Effects on Power Generation, CO2 Emissions, and Electricity Prices?

CBO compared the results of seven analyses, conducted by various researchers in the past two years, of different potential federal standards. The comparison reveals some common findings about a national RES or CES policy:

  • Most analyses concluded that the bulk of the increase in renewable generation would come from additional wind generation (mainly in the High Plains region of the western and central United States) and from biomass generation (mainly in the Southeast).
  • Including certain design features in an RES or CES policy could cause the actual percentage of electricity produced from qualifying sources to be less than the standard, if, for example, certain utilities were exempt from complying with the standard.
  • Either an RES or CES would reduce CO2 emissions in the United States compared with the amount that would occur in the absence of the policy. However, the actual emissions reduction would be uncertain and depend on the standard and its particular design features.
  • Either an RES or CES would also raise the average cost of generating electricity in the United States because, in the absence of the standard, regulators and generators would generally choose the lowest-cost method of producing electricity. Higher generation costs would lead to higher electricity prices for many businesses and households; those price effects would differ among regions.
  • Changes in electricity prices offer an indication of the effects of an RES or CES on electricity consumers, but they do not provide a comprehensive measure of the policy’s overall cost.
  • Implementing a federal RES or CES would be complicated by the fact that 31 states and the District of Columbia have some form of renewable or clean electricity standard already in place. As a general rule, a given increase in renewable or clean generation, or a given decrease in emissions, could be accomplished at a lower cost through a single federal standard than through a combination of a federal standard and numerous state standards.

In What Ways Can an Electricity Standard Be More Cost-Effective?

Although the costs of meeting a particular RES or a CES cannot be predicted with certainty, they could be reduced by incorporating certain design features, such as the following:

  • Unrestricted Trading: Letting utilities comply with a standard by submitting credits that could be bought and sold independent of the electricity generation with which they were associated—rather than requiring that each utility get a certain percentage of its electricity directly from renewable or other clean sources—would help overcome various regional limitations and thereby lower utilities’ compliance costs.
  • Expanded Compliance Options: If regulators linked the amount of credits that various technologies could receive to their emissions, then letting both existing and new sources of electricity generation earn credits (rather than just sources that started operating after the policy began) could help better align financial incentives with actual emission reductions. Total costs of reducing CO2 emissions could be lowered even further by allowing emission-reducing improvements in energy efficiency to qualify for credits. For example, generators could upgrade their plants in a manner that allowed them to produce the same amount of electricity from less fossil fuel. Even with a wide variety of compliance options, neither an RES nor a CES would be as cost-effective in cutting CO2 emissions as a “cap-and-trade” program, which could provide direct incentives for cutting emissions throughout the whole economy.
  • Gradual and Flexible Timing: Electricity generation typically involves investments in large-scale and long-lasting physical equipment, and U.S. demand for electricity is growing slowly enough that the potential for investment in new generation and distribution capacity is fairly small. Utilities and generators would therefore benefit from provisions that phased in an RES or CES gradually over an extended period. They would also benefit from being allowed to transfer credits between different time periods—by “banking” current excess credits for use in later years or by “borrowing” credits that they expected to earn in the future for use now.

The study was prepared by Terry Dinan of CBO’s Microeconomic Studies Division and by Brian Prest, formerly of CBO.