December 08, 2016

Renewable Generation Investments are Quickly Eclipsing RPS Mandates, Facilitated by Regional Markets, According to Brattle Economists

Brattle economists have released a presentation that shows the U.S. electric power industry has been investing in renewable resources well beyond states’ renewable portfolio standards (RPS) and targets. The majority of these “beyond-RPS” investments have occurred in regions that: (1) offer access to low-cost wind or solar potential, and (2) have organized regional electricity markets. This facilitation of renewable generation development by regional markets should be considered by western U.S. states as they contemplate the future of their electricity industry and its impact on the environment.

The presentation reviews a number of industry statistics and practices to show how regions with regional transmission operators and independent system operators (RTO/ISO markets) have been facilitating development of renewable generation. The presentation shows that:

  • RTO/ISO markets lead in the growth in U.S. renewable generation. They have achieved this growth through ready-made markets for real-time energy; lower-cost integration, balancing, and congestion management over large regions that provide diversity benefits; and improved regional transmission planning and generation interconnection processes.
  • About half of the U.S. renewable generation investments in the last five years have been in excess of state RPS requirements. These beyond-RPS renewable generation investments are driven by voluntary purchases by utilities, public power entities, (increasingly) commercial and industrial customers, and by merchant renewable developments with spot sales (or short-term contracts) and financial hedges. Very few arrangements take place in non-market regions even if those non-market regions are endowed with locations suitable to constructing low-cost renewable generation.
  • Looking ahead, power purchase arrangements and “green tariffs” with commercial and industrial customers are expected to grow rapidly. Many large corporate users of electricity have already committed to purchasing 60,000 megawatts (MW) of new renewable generation by 2025. RTO/ISO markets provide an effective platform to support this activity and facilitate the development of the resources that customers seek.
  • Renewable generation investments beyond RPS, which reduce carbon dioxide (CO2) emissions by displacing fossil fuel generation, are already reducing annual CO2 emissions by approximately 100 million tons per year nationwide. This corresponds to about five percent of total U.S. electric sector CO2 emissions, or twice the entire electricity sector emissions of California.

“While the successful growth of renewable generation is well documented, we were surprised that half of all renewable generation development has moved beyond RPS mandates and that most of this beyond-RPS activity is contained to RTO/ISO markets,” notes Johannes Pfeifenberger, a Brattle principal and co-author of the presentation. “You may see very little of it in the adjoining non-market region even if the quality of renewable resources is just as high.”

The authors note that the effectiveness of regional markets in facilitating renewable development beyond regulatory mandates will likely be a significant driver of additional emission reductions in the U.S. electric power industry. “The opportunity for forming or joining regional RTO/ISO markets that facilitate renewable generation development beyond RPS mandates needs to be considered, particularly now that western states actively contemplate how they can cost-effectively reduce the environmental footprint of the electricity industry and their economies,” Pfeifenberger added.

The presentation, “The Role of RTO/ISO Markets in Facilitating Renewable Generation Development,” is authored by Brattle Principals Johannes Pfeifenberger and Judy Chang, Senior Associate Onur Aydin, and Associate David Luke Oates. It is available for download using the link below.