Policy Documents

The Economic Impact of Colorado’s Renewable Portfolio Standard

David G. Tuerck, Ph.D., Paul Bachman, MSIE, Michael Head, MSEP –
February 7, 2011

Executive Summary:

In November 2004 Colorado passed Amendment 37, the first voter-approved ballot initiative to create a Renewable Portfolio Standard (RPS) in the United States. In 2007 this law was expanded in House Bill 1281 and its current iteration was detailed in House Bill 1001 in 2010. HB 1001 accelerated the timeline such that by 2020, 30 percent of all retail electricity in Colorado must be derived from a renewable source, including energy from solar, wind, geothermal, hydrogen derived from renewable sources, biomass and small hydroelectric facilities.

Specifically the Act requires that Colorado’s Investor-Owned Utilities increase the percentage of electricity generated from new renewable energy sources. The RPS mandates that renewable sources account for 5 percent of all power generated by 2010; 12 percent by 2011-2014; 20 percent by 2015-2019 and 30 percent for 2020 and thereafter.

The Bill also contains a measure to control costs for retail customers, by limiting the RPS costs that utilities can pass to customers to “two percent of the total electric bill annually for each customer.” But this provision only covers the incremental costs, referred to as the Renewable Energy Standard Adjustment on utility bills. The Electric Commodity Adjustment (ECA) fee is not subject to the 2 percent cap and will absorb the rest of the costs, such as backup energy and capital construction. As a result the cap has no effect on containment of cost increases due to the RPS.

Another component of the Bill – the banking of unused renewable energy credits – helps defray costs initially. By producing more renewable energy then required by law in the first few years of the 5 percent RPS requirement, producers can ‘bank’ these extra units, to reduce the required number of units required in the future, when the mandate increases.

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 commissioned the Beacon Hill Institute at Suffolk University (BHI) to estimate the costs of these House Bills and their impact on the state’s economy. To that end, BHI applied its STAMP® (State Tax Analysis Modeling Program) to estimate the economic effects of the state RPS mandate.

There exists 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’s 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. The EIA does not take into account the actual experience of existing renewable electricity power plants. Therefore we provide three estimates of the cost of Colorado’s RPS mandate: 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 $1.371 billion in 2015 – within a range of $841 million and $2.122 billion – due to the RPS. Over the period of 2011 to 2020, the state RPS will cost $11.778 billion, within a range of $6.412 billion and $18.520 billion. Colorado’s electricity prices will increase in 2015 by an average of 3.75 cents per kilowatt-hour (kWh), or by 40 percent, within a range of 1.23 cents per kWh, or by 13 percent, and 5.97 cents per kWh, or by 64 percent.

These higher energy prices will hurt Colorado’s households and businesses and, in turn, inflict significant harm on the state economy. The BHI model suggests that by 2015 the Colorado economy will lose an average of 18,380 jobs, within a range of between 6,043 jobs under our low cost scenario and 29,242 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 lower portion of Table 1 presents our estimates of the effects of the RPS in 2010 Net Present Value dollars (NPV).

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 $1,269 per worker, within a range of between $417 per worker and $2,019 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 $1.873 billion, within a range of $616 million and $2.981 billion.

Annual investment will fall by $235 million, within a range of $77 million and $373 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 2020 the RPS will cost families an average of $337 per year; commercial businesses an average of $2,360 per year; and industrial businesses on average $43,367 per year. Over the next 10 years the average household ratepayer will pay $1,474 in higher electricity costs; the average commercial ratepayer will spend an extra $10,332; and the average industrial ratepayer an extra $189,879.

One could justify the higher electricity costs if the environmental benefits, in terms of reduced GHG emissions, outweighed the costs. But it is unclear that the use of renewable energy resources – especially wind and solar – significantly reduces 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. As a result, a recent study found that wind power actually increases pollution and greenhouse gas emissions. Thus there are, in fact, no benefits of implementing RPS policies based on heavy uses of wind.

Also firms with high electricity usage will likely move their production and emissions out of Colorado to locations with lower electricity prices. Therefore the Colorado policy will not reduce global emissions, but rather send jobs and capital investment outside the state. As a first step, Colorado policymakers should repeal the expansions to the voter mandated RPS before electricity costs spiral out of control. In addition legislators should demand that future environmental policies be subject to a process of regular and rigorous analysis of their environmental effects, costs, benefits, and economic impacts.