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The Economic Impact of Montana's Renewable Portfolio Standard
Posted by on January 31, 2011, 10:44 AM
Executive Summary:
In 2005, the Montana Legislature passed the Montana Renewable Power Production and Rural Economic Development Act (the Act) which established a state Renewable Portfolio Standard (RPS). The RPS mandates that public utilities and competitive electricity suppliers obtain a minimum percentage of retail electricity sales from renewable resources. Renewable resources include energy from solar, wind, ocean thermal, ocean wave power, geothermal, hydrogen derived from renewable sources, biomass and small hydroelectric facilities.
See the ATI/MPI two-page summary of the Effects of Montana's Renewable Portfolio Standard on the State Economy. (PDF)
See the Full ATI/MPI Study of the Effects of Montana's Renewable Portfolio Standard on the State Economy. (PDF)
Specifically, the Act requires that Montana’s public electric utilities increase the percentage of electricity generated from new renewable energy sources. The RPS will be phased in over time: mandating that renewable sources account for 5 percent of all power generated for the years 2008 - 2009; 10 percent for 2010-2014; 15 percent by 2015 and thereafter.
Since renewable energy generally costs more than conventional energy, many have voiced concerns about higher electric rates. In addition, some renewable energy sources ─ wind and solar power in particular ─ require the installation of conventional backup generation capacity for cloudy, windless days. The need for this backup further boosts the cost of renewable energy.
The American Tradition Institute and the Montana Policy Institute commissioned the Beacon Hill Institute at Suffolk University (BHI) to estimate the costs of the Act and its impact on the state’s economy. To that end, BHI applied its STAMP® (State Tax Analysis Modeling Program), which allowed us to estimate the economic effects of the state RPS mandate.
There exist a wide variety of cost estimates for renewable electricity sources. The U.S. Energy Information Agency (EIA), a division of the Department of Energy, provides estimates for the cost of conventional and renewable electricity generating technologies. However, the EIA’s assumptions are optimistic regarding the cost and capacity of renewable electricity generating sources to produce reliable energy.
A review of the literature shows that in most cases the EIA-projected costs can be found at the low end of the range of estimates, while the EIA’s capacity factor for wind to be at the high end of the range. EIA does not take into account the actual experience of existing renewable electricity power plants. Therefore we provide three cost estimates of the Montana RPS mandates: low, average and high, using different cost and capacity factors estimates for electricity-generating technologies from the academic literature.
In the aggregate, the state’s electricity consumers will pay $225 million in 2015, within a range of $141 million and $348 million, because of the RPS. Over the period of 2010 to 2015, the Act will cost $1.865 billion, within a range of $1.102 billion and $2.886 billion. Montana’s electricity prices will increase by an average of 1.33 cents per kilowatt-hour (kWh), or by 18 percent, in 2015, within a range of $0.83 cents per kWh, or by 11 percent, and 2.06 cents per kWh, or by 28 percent.
These higher energy prices will hurt Montana’s households and businesses and, in turn, inflict significant harm on the state economy. The lower portion of Table 1 presents our estimates of the effects of the RPS in 2010 Net Present Value dollars (NPV).
The BHI models suggests that by 2015 the Montana economy will lose an average of 1,874 jobs, within a range of between 1,172 jobs under our low cost scenario and 2,893 jobs under our high cost scenario. We report net employment losses that include jobs that would be created to build out renewable electricity power plants and infrastructure under each cost scenario.
The decrease in labor demand ─ as seen in the job losses ─ will trigger gross wages to fall. In 2015, the RPS mandate will reduce annual wages by an average of $520 per worker, within a range of between $325 per worker and $803 per worker.
The job losses and price increases will reduce real incomes as firms, households and governments spend more of their budgets on electricity and less on other goods and services such as groceries, entertainment, dining-out and personal services such as haircuts. In 2015 annual real disposable income will fall by $175 million, within a range of $109 million and $270 million.
Annual investment will fall by $20 million, within a range of $12 million and $30 million under our low and high cost cases respectively. As with employment, the investment losses will be tempered by the investments required in building renewable power plants, transmission lines and reconfigurations to the electricity grid.
In 2015, the RPS will cost families an average of $142 per year, commercial businesses by an average of $673 per year and industrial businesses on average $16,722 per year. Over the 10 years, the average household ratepayer will pay $1,163 in higher electricity costs; the average commercial ratepayer will spend an extra $5,527 and the average industrial ratepayer an extra $137,419.
One could justify the higher electricity costs if the environmental benefits, in terms of reduced GHG emissions, outweigh the costs. However it is unclear that the use of renewable energy resources – especially wind and solar – actually reduce GHG emissions. Due to their intermittency, wind and solar require significant backup power sources that are cycled up and down to accommodate the variability in the production of wind and solar power. As a result, a recent study found that wind power actually increases pollution and greenhouse gas emissions. Thus there are no obvious benefits of RPS policies based on heavy uses of wind.
Also, firms with high electricity usage will likely move their production, and emissions, out of Montana to locations with lower electricity prices. Therefore the Montana policy will not reduce global emissions, but rather send jobs and capital investment outside the state.
As a first step Montana’s lawmakers should repeal the Act before electricity costs spiral out of control. Legislators should also demand that all environmental policies be subject to a process of regular and rigorous analysis of their environmental effects, costs and benefits, and economic impacts.
See the Full ATI/MPI Study of the Effects of Montana's Renewable Portfolio Standard on the State Economy. (PDF)
In 2005, the Montana Legislature passed the Montana Renewable Power Production and Rural Economic Development Act (the Act) which established a state Renewable Portfolio Standard (RPS). The RPS mandates that public utilities and competitive electricity suppliers obtain a minimum percentage of retail electricity sales from renewable resources. Renewable resources include energy from solar, wind, ocean thermal, ocean wave power, geothermal, hydrogen derived from renewable sources, biomass and small hydroelectric facilities.
See the ATI/MPI two-page summary of the Effects of Montana's Renewable Portfolio Standard on the State Economy. (PDF)
See the Full ATI/MPI Study of the Effects of Montana's Renewable Portfolio Standard on the State Economy. (PDF)
Specifically, the Act requires that Montana’s public electric utilities increase the percentage of electricity generated from new renewable energy sources. The RPS will be phased in over time: mandating that renewable sources account for 5 percent of all power generated for the years 2008 - 2009; 10 percent for 2010-2014; 15 percent by 2015 and thereafter.
Since renewable energy generally costs more than conventional energy, many have voiced concerns about higher electric rates. In addition, some renewable energy sources ─ wind and solar power in particular ─ require the installation of conventional backup generation capacity for cloudy, windless days. The need for this backup further boosts the cost of renewable energy.
The American Tradition Institute and the Montana Policy Institute commissioned the Beacon Hill Institute at Suffolk University (BHI) to estimate the costs of the Act and its impact on the state’s economy. To that end, BHI applied its STAMP® (State Tax Analysis Modeling Program), which allowed us to estimate the economic effects of the state RPS mandate.
There exist a wide variety of cost estimates for renewable electricity sources. The U.S. Energy Information Agency (EIA), a division of the Department of Energy, provides estimates for the cost of conventional and renewable electricity generating technologies. However, the EIA’s assumptions are optimistic regarding the cost and capacity of renewable electricity generating sources to produce reliable energy.
A review of the literature shows that in most cases the EIA-projected costs can be found at the low end of the range of estimates, while the EIA’s capacity factor for wind to be at the high end of the range. EIA does not take into account the actual experience of existing renewable electricity power plants. Therefore we provide three cost estimates of the Montana RPS mandates: low, average and high, using different cost and capacity factors estimates for electricity-generating technologies from the academic literature.
In the aggregate, the state’s electricity consumers will pay $225 million in 2015, within a range of $141 million and $348 million, because of the RPS. Over the period of 2010 to 2015, the Act will cost $1.865 billion, within a range of $1.102 billion and $2.886 billion. Montana’s electricity prices will increase by an average of 1.33 cents per kilowatt-hour (kWh), or by 18 percent, in 2015, within a range of $0.83 cents per kWh, or by 11 percent, and 2.06 cents per kWh, or by 28 percent.
These higher energy prices will hurt Montana’s households and businesses and, in turn, inflict significant harm on the state economy. The lower portion of Table 1 presents our estimates of the effects of the RPS in 2010 Net Present Value dollars (NPV).
The BHI models suggests that by 2015 the Montana economy will lose an average of 1,874 jobs, within a range of between 1,172 jobs under our low cost scenario and 2,893 jobs under our high cost scenario. We report net employment losses that include jobs that would be created to build out renewable electricity power plants and infrastructure under each cost scenario.
The decrease in labor demand ─ as seen in the job losses ─ will trigger gross wages to fall. In 2015, the RPS mandate will reduce annual wages by an average of $520 per worker, within a range of between $325 per worker and $803 per worker.
The job losses and price increases will reduce real incomes as firms, households and governments spend more of their budgets on electricity and less on other goods and services such as groceries, entertainment, dining-out and personal services such as haircuts. In 2015 annual real disposable income will fall by $175 million, within a range of $109 million and $270 million.
Annual investment will fall by $20 million, within a range of $12 million and $30 million under our low and high cost cases respectively. As with employment, the investment losses will be tempered by the investments required in building renewable power plants, transmission lines and reconfigurations to the electricity grid.
In 2015, the RPS will cost families an average of $142 per year, commercial businesses by an average of $673 per year and industrial businesses on average $16,722 per year. Over the 10 years, the average household ratepayer will pay $1,163 in higher electricity costs; the average commercial ratepayer will spend an extra $5,527 and the average industrial ratepayer an extra $137,419.
One could justify the higher electricity costs if the environmental benefits, in terms of reduced GHG emissions, outweigh the costs. However it is unclear that the use of renewable energy resources – especially wind and solar – actually reduce GHG emissions. Due to their intermittency, wind and solar require significant backup power sources that are cycled up and down to accommodate the variability in the production of wind and solar power. As a result, a recent study found that wind power actually increases pollution and greenhouse gas emissions. Thus there are no obvious benefits of RPS policies based on heavy uses of wind.
Also, firms with high electricity usage will likely move their production, and emissions, out of Montana to locations with lower electricity prices. Therefore the Montana policy will not reduce global emissions, but rather send jobs and capital investment outside the state.
As a first step Montana’s lawmakers should repeal the Act before electricity costs spiral out of control. Legislators should also demand that all environmental policies be subject to a process of regular and rigorous analysis of their environmental effects, costs and benefits, and economic impacts.
See the Full ATI/MPI Study of the Effects of Montana's Renewable Portfolio Standard on the State Economy. (PDF)