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Renewable Portfolio Standards: When Do They Lower Energy Prices?

Some studies of renewable portfolio standards find that regulations increase electricity generation costs; others find that the reduced demand for nonrenewable energy sources lowers natural gas prices and that electricity prices follow. This paper presents reasons for why these predictions can vary in the direction as well as the magnitude of their effects. The two driving factors are the elasticity of electricity supply from renewable energy sources relative to nonrenewable ones and the effective stringency of the target. The availability of other baseload generation helps to determine that stringency, and demand elasticity influences only the magnitude of the price effects, not the direction of those effects. The paper also evaluates circumstances under which higher standards can decrease both certificate prices and renewable energy supply. Sensitivity analysis indicates that assumptions about renewable energy supply slopes are more important than those about nonrenewable supplies in predicting the retail price impacts of renewable portfolio standards.

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Energy Specializations: Natural Gas – Markets and Prices; Renewables – Policy and Regulation; Energy and the Environment – Policy and Regulation

JEL Codes: Q42: Alternative Energy Sources, Q41: Energy: Demand and Supply; Prices, Q35: Hydrocarbon Resources

Keywords: climate change, natural gas, portfolio standards, renewable energy

DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No1-5

Published in Volume 31, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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