| Concerns over climate change, energy security, and food security are creating renewed interest in renewable energy policy. Recent international mandates for electricity and transport fuels derived from renewable sources are driving significant investment in new capacity. In the United States a majority of states have passed legislation mandating that a significant share of electricity consumed in the state be derived from renewable sources. This research evaluates the optimality of these state-level mandates in the long-term planning processes of electric utilities. In particular I evaluate the effectiveness of these mandates to promote an efficient allocation of generation sources, and the cost-effectiveness of these mandates in reducing emissions from the electricity sector. I find that where wholesale markets for electricity generation are competitive, renewables mandates lead to less economically efficient outcomes than taxes or cost adders. Where wholesale markets are not competitive, for example, because of non-marginal cost pricing due to oligopolistic competition, renewables mandates can lead to more efficient outcomes if their imposition also serves to correct existing market failures. More broadly, this research highlights the importance of understanding the impact of various policy instruments on the displacement of existing generation sources. Because the emissions profiles of existing generators vary significantly throughout the United States, targeting new renewable generation in states with dirtier existing facilities can have a greater impact on reducing emissions. Likewise, if a national renewables mandate is established, compliance trading has the potential to undermine emissions reduction goals if much of the renewables compliance comes from states where existing marginal generators are relatively clean. This analysis presents both theoretical results as well as simulation results based on the electricity market in California. |
