Executive Summary:

Efforts to pass cap-and-trade legislation in Washington have failed. The prospects for a bill in the new Congress are remote but possible. The results of the November 2010 elections have effectively placed a hold on federal cap-and-trade legislation for the next two years.

Despite the victory of cap-and-trade opponents, the new Congress may be pressured to enact a federal Renewable Portfolio Standard (RPS) in response to calls for a level playing field from states with their own RPS programs. President Obama, in his State of the Union speech on January 25, also has called for a national Clean Energy Standard of 80 percent by the year 2035.

See ATI’s two-page summary of the Effects of Federal Renewable Portfolio Standard Legislation on the U.S. Economy. (PDF)

See ATI’s Study of the Effects of Federal Renewable Portfolio Standard Legislation on the U.S. Economy. (PDF)

RPS policies mandate that electric utilities purchase a minimum percentage of electricity sold from renewable energy resources. Although the definition varies across states, renewable energy generally includes solar, wind, small-scale hydropower, ocean thermal, wave power, geothermal, hydrogen derived from renewable sources, and certain forms of biomass energy. To date, over 30 states and the District of Columbia have enacted RPS mandates.

On September 22, 2010, Senator Jeff Bingaman of New Mexico and Senator Sam Brownback of Kansas introduced the “Renewable Electricity Promotion Act of 2010″ (S. 3813). While the bill failed in the waning days of the 111th Congress, a similar bill is certain to be filed in the current Congress.

Judging from the most recent bill, RPS legislation has significant bipartisan support, especially in the U.S. Senate, a majority of which has been committed to policies combating climate change. Reports suggest that potential Republican supporters include Senators Lisa Murkowski of Alaska, Bob Corker of Tennessee and Jeff Sessions of Alabama, all of who voted “yes” for the RPS provision included in the energy bill. In addition, Republican Sens. Chuck Grassley of Iowa and Olympia Snowe of Maine are known federal RPS supporters.

Most “renewable” electricity sources are more costly and less reliable than conventional energy sources, such as coal and natural gas and stand little chance of commercial success in a competitive market. Thus, producers of renewable energy seek to guarantee a market through RPS legislation. Unfortunately, this guarantee is going to be very costly for ratepayers.

In order to keep the voltage of the electricity grid in equilibrium, intermittent sources such as wind and solar power need reliable back-up sources. If the wind dies down, or blows too hard (which trips a shutdown mechanism in commercial windmills), another power source must be called upon instantly to prevent blackouts and brownouts, causing greater cost and pollution than if wind energy was not used at all. Thus, it is unclear that these power sources actually benefit the environment.

The Beacon Hill Institute (BHI) and the American Tradition Institute (ATI) estimate the effects of S. 3813 on the U.S. economy and three federal RPS scenarios: 15 percent, 20 percent and 30 percent RPS mandates by 2021. We report results for the year 2021 ─ the first year of the highest percentage RPS mandate – and the entire period the S. 3813 would have applied, 2012 – 2039. It is worth noting that to attain President Obama’s Clean Energy Standard goal, a pace of 30 percent RPS by 2021 would likely be a necessary intermediate target.

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 literature review shows the EIA projected costs to be 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 estimates of the cost of federal RPS mandates: low, average and high, using different cost and capacity factors estimates for electricity generating technologies from the academic literature.

We find that a national RPS would impose substantial new costs on U.S. households and businesses over the next three decades. Our cost and economic findings are over and above the existing state RPS mandates that will inflict costs of $1.4 trillion to $2.4 trillion over the same period.

On average, a 15 percent RPS mandate would increase costs an estimated average of $27.8 billion in 2021, within a range of $11.1 billion at the low end and $42.5 billion at the high end. The total cost increase RPS over the period of 2019 – 2039 would fall within a range of $134.9 billion and $528.8 billion. As a result, the 15 percent mandate would increase electricity prices by between 0.27 cents per kilowatt-hour (kWh) or by 2.9 percent, and 1.03 cents per kWh, or 11.3 percent, with an average of 0.68 cents per kWh, or 7.4 percent.

We also calculate the cost of higher RPS mandates of 20 percent and 30 percent by 2021, assuming the policies would be implemented at a similar pace to the 15 percent standard. A 20 percent RPS mandate would increase costs by $59 billion within a range of $23.5 and $90.2 billion in 2021, while the total cost over the period would be $1.051 trillion, within a range of $477.4 billion and $1.373 trillion. The RPS would increase electricity prices by an average of 1.43 cents per kWh (15.6 percent) in 2021, ranging from 0.57 cents per kWh, or 6.2 percent and 1.78 cents per kWh, or 23.9 percent.

A 30 percent RPS mandate would cost by $120.6 billion in 2021 and $51 billion under our low cost case and $190.5 billion under our high cost case. A 30 percent RPS would cost an average of $2.385 trillion over the entire period within a range of $1.08 trillion and $4.059 trillion. This would raise electricity prices by between 1.24 cents per kWh, or 13.5 percent and 4.63 cents per kWh, or over 50 percent.

These increased energy prices would further wound the U.S. economy, and would also inflict significant harm on the health of our citizens. Our economic results are for the year 2021 and the dollar values are expressed in 2010 dollars.

The BHI model suggests that in 2021 the economy will shed between 89,000 and 341,000 jobs under a 15 percent RPS with an average of 223,000 jobs lost. A 20 percent RPS would increase the job losses to between 189,000 and 587,000 jobs and under a 30 percent RPS would destroy between 409,000 and 1.526 million jobs by 2021. We report net employment losses that jobs that would be created to build out renewable electricity power plants and infrastructure under each RPS scenario.

The decrease in labor demand ─ as seen in the job losses ─ will trigger gross wages to fall. In 2021, a 15 percent mandate will reduce annual wages by between $90 and $347 per worker, a 20 percent mandate will reduce wages by between $192 and $597 per worker and a 30 percent mandate will reduce wages by between $416 and $1,552 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 items, such as home goods and services. In 2021, annual real disposable income will fall by between $8.7 billion and $33.4 billion under a 15 percent RPS, $18.5 billion and $57.5 billion under a 20 percent RPS and $40 and $149.5 billion under a 30 percent RPS.

The loss of disposable income also reduces the amount families can spend on critical health care, especially amongst the poorest and least healthy. In 2021, a 15 percent renewable energy mandate would cause between 725 and 2,783 premature deaths per year, mortality rates higher than from tuberculosis or malnutrition, respectively. A 20 percent mandate would cause from 1,542 to 4,792 deaths per year, mortality rates higher than from Hodgkin’s disease and cervical cancer, respectively. A 30 percent mandate would induce from 3,333 to 12,458 deaths per year, mortality rates higher than from operating room errors and HIV, respectively. While there is some overlap between the accounting of lost income and premature deaths, the nation’s health would nevertheless suffer.

Annual investment will fall by between $1.2 billion and $4.4 billion, $2.4 billion and $7.6 billion and $5.3 billion and $19.8 billion under the 15 percent, 20 percent and 30 percent RPS mandates respectively.

Table ES-3 shows how a national RPS policy would affect the annual electricity bills of American households and businesses using our average cost case. In 2021, the 15 percent RPS will cost families an average of $82 more per year, commercial business an average of $568 more per year and industrial businesses an average of $9,723 more per year. Over the 19 years, the average household ratepayers will incur $951 in higher electricity prices, the average commercial ratepayer will spend an extra $6,553 and the average industrial ratepayer $112,227.

Under a 20 percent mandate, residents would face $175 in higher electric bills, commercial business would pay $1,204 more and industrial companies would pay $20,613 more for electricity in 2021. A 30 percent RPS mandate would more than double these figures

The states that have enacted RPS legislation have already felt, or will soon begin to feel the sting of higher electricity prices and resulting economic damage. One could justify the higher electricity costs if the environmental benefits, in terms of reduced GHG, 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 and have been found to actually increase emissions of traditional pollutants that cause acid rain and smog. As a result, a recent study found that wind power actually increase pollution and greenhouse gas emissions.

RPS policies that effectively push wind for high penetration rates for wind power not only provide little to no environmental benefit, but they threaten the reliability of the electrical grid. High Wind power penetration rates would overwhelm the grid and potentially produce brownouts and blackouts, making the prospect of a 20 percent RPS – and especially a 30 percent RPS – based on wind infeasible as a practical matter.

Congress should not only steer clear of any federal RPS legislation, but should commission an independent study to determine the true environmental impact of industrial wind and solar powered electricity generation.

See ATI’s Study of the Effects of Federal Renewable Portfolio Standard Legislation on the U.S. Economy. (PDF)