Market and welfare effects of renewable portfolio standards in United States electricity markets

This study analyzes the market and welfare effects of the introduction of Renewable Portfolio Standards (RPS) while considering the empirically relevant (a) interaction of compliance with voluntary green power markets, (b) differences in consumer preferences, and (c) imperfect competition among electricity suppliers. The study accounts for both the supply and demand effects of RPS — i.e., increased costs and a higher consumer valuation for regular power. Our analysis shows that the regular power price always increases after the introduction of RPS, while the effect of RPS on the equilibrium price of green power, the quantities of regular and green power, the welfare of consumers, and suppliers' profits is case-specific and dependent on the relative magnitude of the cost and utility effects, the strength of consumer preference for green power, the suppliers' costs before RPS, the impact of RPS on green power costs, and the degree of competition among power suppliers. While the introduction of RPS aims at increasing the use of green energy in electricity production, our analysis shows that the introduction of the policy can end up reducing the total quantity of green power used. Intriguingly, this adverse policy impact will occur under seemingly optimal conditions for the green power sector; i.e., a high consumer valuation of green energy and/or low cost difference between the green power and its conventional counterpart. Finally, the analysis shows that the policy design can play a key role in determining the incidence of RPS, while the identification of the winners and losers of the policy can provide insights on the political economy of RPS and the positions held by different groups in policy negotiations.