ESSAYS IN RENEWABLE ENERGY AND EMISSIONS TRADING

Transcription

1 ESSAYS IN RENEWABLE ENERGY AND EMISSIONS TRADING By JOSHUA D. KNEIFEL A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTORATE OF PHILOSOPHY UNIVERSITY OF FLORIDA

2 c 2008 Johua D. Knefel 2

3 To My Parent, who have upported me through all of my academc achevement. 3

4 ACKNOWLEDGMENTS I thank my upervory commttee char, Lawrence Kenny, along wth my other commttee member (Sanford Berg, Jonathan Hamlton, and Jane Luzar) for ther comment and adve regardng my dertaton. Specal thank goe to Paul Sotkewcz for h nteret, gudance, and upport n my reearch. I alo thank my parent for ther never-endng upport. 4

5 TABLE OF CONTENTS page ACKNOWLEDGMENTS LIST OF TABLES LIST OF FIGURES ABSTRACT CHAPTER 1 EFFECTS OF STATE GOVERNMENT POLICIES ON ELECTRICITY CAPACITY FROM NON-HYDROPOWER RENEWABLE SOURCES Introducton Lterature Revew Model Varable and Data Economc and Poltcal Varable: W t Regulatory Polcy Varable: R t Stattcal Specfcaton and Emprcal Analy Economc and Poltcal Varable: W t Regulatory Polcy Varable: R t State Fxed-Effect Varable: S t Year Varable: T t Concluon EFFECTS OF COAL CONTRACT CONSTRAINTS ON SO 2 TRADING PROGRAM COMPLIANCE DECISIONS Introducton Polcy Background Ttle IV of the Clean Ar Act Amendment Phae I of Ttle IV Phae II of Ttle IV Clean Ar Intertate Rule Lterature Revew Ttle IV: Phae I Utlty-Level Model of Complance Cot Long-Term Coal Contract Ineffcence Reultng from Coal Contract Contrant Model and Parameter Generatng Unt Level Decon-Makng Proce Generatng Unt Problem Frt-Order Condton

6 2.6.3 Characterzng a Unt Spot Market Fuel Choce and Margnal Cot of Abatement from Fuel Swtchng Neceary condton for ung both hgh ulfur and low ulfur coal Only hgh ulfur coal ue: Neceary condton Only low ulfur coal ue: Neceary condton Coal Ue Under a Hgh Sulfur Coal Contract Contrant Coal Ue under a Low Sulfur Coal Contract Contrant Generatng Unt-Level Complance Cot Generatng Unt Net Allowance Poton: Exce Demand Correpondence Cot avng of fuel wtchng veru allowance purchae when P A > MCA, Effect of hgh ulfur coal contract on exce demand and cot Cot avng of allowance purchae veru fuel wtchng when P A < MCA, Effect of low ulfur coal contract Fuel wtchng veru allowance purchae when P A = MCA, Generatng Unt Scrubber Intallaton Choce When wll a generatng unt ntall a crubber? Dfferent margnal cot of abatement Exce demand correpondence Impact of Coal Contract on Exce Demand Correpondence Impact of a bndng hgh ulfur coal contract Impact of a bndng low ulfur coal contract Poble Implcaton on the Allowance Market and Indutry Complance Cot Concluon THE EFFECT OF FUEL CONTRACTING CONSTRAINTS ON SO 2 TRADING PROGRAM COMPLIANCE: EMPIRICAL EVIDENCE Introducton Revew of Generatng Unt Model Generatng Unt Problem Optmal Complance Choce Allowance Market Equlbrum Comparatve Statc: Effect on the Allowance Market Comparatve Statc: Effect of Relatve Fuel Cot on the Allowance Market Comparatve Statc: Effect of Coal Contract on the Allowance Market Gven the Scrubber Choce Impact of hgh ulfur coal contract on allowance market

7 Impact of low ulfur coal contract on allowance market Comparatve Statc: Effect of Coal Contract on the Allowance Market wth Endogenou Scrubber Choce Hgh ulfur coal contract bnd Low ulfur coal contract bnd Complance Cot Complance Cot wth Coal Contract Relatve to Complance Cot from Prevou Stude Total Indutry Complance Cot Impact of Allowance Allocaton on Complance Cot Gven Scrubber the Choce Impact of Allowance Allocaton wth Endogenou Scrubber Choce Smulaton Model Introducton Data Fuel data Allowance, actual emon, and demand data Techncal generator and crubber data Smulaton Model Degn Smulaton Reult Total ndutry cot and allowance market reult Indutry and generatng unt coal ue Generatng unt crubber ntallaton choce Impact of allowance allocaton on the allowance market and complance cot Summary of mulaton reult Plant Level Decon-Makng Proce Introducton Plant-Level Problem Frt-Order Condton Characterzng a Unt Spot Market Fuel Choce Cae 1: Neceary condton for ung both hgh ulfur and low ulfur pot market coal Cae 2: Neceary condton for only hgh ulfur pot market coal ue Cae 3: Neceary condton for only low ulfur pot market coal ue Exce Demand Correpondence Characterzng a Generatng Unt Contract Fuel Choce Cae 1: Neceary condton for hgh ulfur contract coal ue at Generatng Unt Cae 2: Neceary condton for low ulfur contract coal ue at generatng unt Non-Affected Generatng Unt at an Affected Plant

8 Characterzaton of non-affected generatng unt at an affected plant Non-affected generatng unt and hgh ulfur coal contract Scrubber Intallaton Choce Margnal cot of abatement wth and wthout a crubber A Plant Preferred Order of Scrubber Intallaton At whch generatng unt wll a plant ntall a crubber? At what allowance prce wll a plant ntall a crubber at a gven generatng unt? Scrubber ntallaton and hgh ulfur coal contract Scrubber ntallaton and low ulfur coal contract Scrubber Intallaton Example: Plant wth Two Affected Generatng Unt Cae 1: Intall no crubber Cae 2: Intall one crubber Cae 3: Intall two crubber Scrubber Intallaton Example: Plant wth One Affected and One Non-Affected Generatng Unt Summary of Plant Level Reult CONCLUSIONS A CONTRACT IMPACTS ON COSTS AND SCRUBBER INSTALLATION INDIFFERENCE PRICE A.1 Impact on Total Cot and Complance Cot from a Coal Contract Contrant A.2 Dervaton of Cot-Mnmzng Input Ue to Fnd P S A B MARKET EQUILIBRIUM AND SIMULATION DESIGN B.1 Condton for Extence of an Equlbrum B.2 Techncal Detal of Smulaton Model Degn REFERENCES BIOGRAPHICAL SKETCH

9 Table LIST OF TABLES page 1-1 Dependent and Control Varable Regreon Reult Polcy Varable Varable Effect of Sgnfcant Varable Phae I Complance Cot Etmate Hgh Sulfur Coal Contract: Aumpton Hgh Sulfur Coal Contract: Reult Low Sulfur Coal Contract Example: Aumpton Low Sulfur Coal Contract Example: Reult Example Eplon Magntude: Cae Example Eplon Magntude: Cae Example Eplon Magntude Example: Contract Coal Dtrbuton Sulfur Converon by Fuel Type Smulaton Reult Impact of Contract Contrant on Scrubber Choce Smulaton wth Engneerng Data Impact of a Reducton n the Allowance Allocaton of 10% Math Example: Two Affected Unt

10 Fgure LIST OF FIGURES page 2-1 The SO 2 Allowance Prce Exce Demand Correpondence and Complance Cot Savng from Fuel Swtchng Over Allowance Purchang Hgh Sulfur Contract: Shft n Mnmum Exce Demand No Contract: Complance Cot Hgh Sulfur Contract: Complance and Total Cot Hgh Sulfur Contract: Relatve Savng from Contract Coal Cot Savng from Ung Allowance Over Fuel Swtchng Low Sulfur Contract No Contract: Complance Cot Low Sulfur Coal Contract: MCA,c Low Sulfur Coal Contract: MCA,c Complance Cot: P A = MCA, Hgh Sulfur Coal Contract Low Sulfur Coal Contract Exce Demand Correpondence: MCA, < P S A Exce Demand Correpondence: MCA, P S A Impact of a Hgh Sulfur Coal Contract: MCA, < P S A Impact of a Hgh Sulfur Coal Contract: MCA, > P S A Impact of a Low Sulfur Coal Contract: MCA, > P S A Impact of a low ulfur Coal Contract: MCA NS < P S A Exce Demand Correpondence Impact of Hgh Sulfur Coal Contract Impact of Low Sulfur Coal Contract Exce Demand Correpondence wth Scrubber Choce Impact of Hgh Sulfur Coal Contract

11 3-6 Impact of Low Sulfur Coal Contract Gven Scrubber Choce: Shft from Hgh Sulfur Contract Gven Scrubber Choce: Shft from Low Sulfur Contract Wth Scrubber Choce: Shft from Hgh Sulfur Contract Wth Scrubber Choce: Shft from Low Sulfur Contract B-1 Upper Sem-Contnuou Correpondence B-2 Correpondence wth Scrubber Choce

12 Abtract of Dertaton Preented to the Graduate School of the Unverty of Florda n Partal Fulfllment of the Requrement for the Degree of Doctorate of Phloophy ESSAYS IN RENEWABLE ENERGY AND EMISSIONS TRADING Char: Lawrence Kenny Major: Economc By Johua D. Knefel Augut 2008 Envronmental ue have become a key poltcal ue over the pat forty year and ha reulted n the enactment of many dfferent envronmental polce. The three eay n th dertaton add to the lterature of renewable energy polce and ulfur doxde emon tradng. The frt eay acertan whch tate polce are acceleratng deployment of non-hydropower renewable electrcty generaton capacty nto a tate electrc power ndutry. A would be expected, polce that lead to gnfcant ncreae n actual renewable capacty n that tate ether et a Renewable Portfolo Standard wth a certan level of requred renewable capacty or ue Clean Energy Fund to drectly fund utlty-cale renewable capacty contructon. A urprng reult that Requred Green Power Opton, a polcy that merely requre all utlte n a tate to offer the opton for conumer to purchae renewable energy at a premum rate, ha a zable mpact on non-hydro renewable capacty n that tate. The econd eay tude the theoretcal mpact fuel contract contrant have on a electrcty generatng unt complance cot of meetng the emon complance retrcton et by Phae I of the Ttle IV SO 2 Emon Tradng Program. Fuel contract contrant retrct a utlty degree of freedom n coal purchang opton, whch can lead to the ue of a more expenve complance opton and hgher complance cot. 12

13 The thrd eay analytcally and emprcally how how fuel contract contrant mpact the emon allowance market and total electrc power ndutry complance cot. Th paper ue generatng unt-level mulaton to replcate reult from prevou tude and how that fuel contract appear to explan a large porton (65%) of the prevouly unexplaned complance cot mulaton. Alo, my tudy conder a more approprate plant-level decon for complance choce by analytcally analyzng the plant level decon-makng proce to how how cot-mnmzaton at the more complex plant level may devate from cot-mnmzaton at the generatng unt level. 13

14 CHAPTER 1 EFFECTS OF STATE GOVERNMENT POLICIES ON ELECTRICITY CAPACITY FROM NON-HYDROPOWER RENEWABLE SOURCES 1.1 Introducton Renewable energy ha recently become an mportant apect n the U.S. electrcty generaton mx and a prmary focu of government polcy for envronmental and energy ecurty/prce volatlty reaon. Frt, the publc growng concern for the envronment and progrevely trngent regulaton of emon n the electrc power ndutry ha drven polce to ncreae the amount of renewable energy n the electrcty generaton portfolo. Electrcty producton from renewable reource create lttle, and often zero, emon of the pollutant that reult from tradtonal fol fuel generatng technologe. More renewable energy ue help utlte n ther emon complance oblgaton. Moreover, the propect of complance wth any future carbon emon regulaton would further trengthen the ncentve to hft toward cleaner electrcty generatng technologe. 1 Second, recent uncertanty n the U.S. energy upply due to poltcal concern n the Mddle Eat countre and other foregn ol producng countre a well a volatlty n ol and natural ga prce have led to a puh to ncreae U.S. energy ndependence through a greater dometc energy upply and to decreae the mpact on the economy from any prce hock n the fol fuel market, uch a the natural ga prce pke n and followng the 2004 and 2005 hurrcane eaon. 2 1 Smth et al. (2000) etmate the dplacement of emon from the Maachuett Renewable Portfolo Standard. 2 Brd et al. (2005) explan the market factor behnd wnd power deployment, whch nclude the volatlty of natural ga prce. GDS Aocate (2001) upported th factor a well n the reaonng behnd the enactment of Hawa Renewable Portfolo Standard. The delvered prce of natural ga to electrc utlte ha ren from $2.62/mllon cubc foot (MCF) n 1999 to $8.45/MCF n 2005 (EIA Annual Energy Revew 2005). 14

15 Complementng federal polce uch a the producton tax credt, tate government have taken acton to ncreae renewable energy capacty and generaton, wth 41 of the 50 tate enactng polce to encourage the ue of renewable energy n ther tate. Indvdual tate polce how a great deal of varance. The objectve of th paper to determne whch tate polce have led to ncreaed deployment of aggregate non-hydro renewable energy capacty nto a tate electrc power ndutry. 3 The lterature on tate renewable energy polce cont manly of cae tude on polcy effectvene. Only one prevou paper ue econometrc method to etmate the effect of varou tate polce on renewable capacty. Menz and Vachon (2006) meaure the mpact on wnd capacty n 39 tate for In contrat, my paper ue panel data from all 50 tate for to etmate the effect on total nonhydro renewable capacty deployment, not jut wnd power capacty deployment. It etmate the effect of addtonal polce, and alo control for dfference n the market and poltcal envronment. Three dtnctly dfferent type of polce are found to be effectve at expandng non-hydro renewable capacty deployment: a command-and-control polcy known a a Renewable Portfolo Standard (RPS), a tax-and-ubdy cheme facltated through a Publc Beneft Fund (PBF) or Clean Energy Fund (CEF), and a market-baed polcy where conumer can expre ther preference to buy power from renewable reource at a premum prce. The command-and-control polcy target the utlty by mandatng a pecfed level of capacty that mut come from renewable energy, and generally referred to a a Renewable Portfolo Standard. The tax-and-ubdy cheme collect an addtonal charge per unt of electrcty conumed from all cutomer n a tate and place the proceed nto th Publc Beneft Fund or Clean Energy Fund. Mone from the PBF/CEF are ued to 3 The electrc power ndutry accounted for 60% of renewable energy producton n

16 ubdze renewable capacty deployment through grant, loan, or producton ncentve. The market-baed polcy create a dfferentated demand by mandatng that utlte mut offer ther cutomer the choce to purchae green power, whch allow conumer to expre ther preference through payng an extra, utlty common-approved charge for green power. The econometrc reult upport many of the concluon from varou cae tude wth repect to Renewable Portfolo Standard and Clean Energy Fund polce. Moreover, the reult preented here alo how, unlke prevou tude, that the potental for offerng conumer the opton to purchae renewable electrcty at a hgher prce than conventonally produced electrcty can ncreae renewable capacty n a tate. 1.2 Lterature Revew The bulk of the lterature n th area ue cae tude to determne the pecfc charactertc of effectve tate renewable energy polce. There are two man type of cae tude: (1) analye of a pecfc polcy enacted n a partcular tate; and (2) a ummary of the general mpact of a pecfc polcy mechanm ued acro multple tate, ncludng polcy degn charactertc that are effectve acro multple tate. Langn and Wer (2003) analyze the Texa Renewable Portfolo Standard, ncludng the achevement of the polcy mechanm and the degn charactertc that allowed the polcy to be effectve at ncreang renewable energy capacty. It wa found that the clearly defned capacty requrement have been effectve n ncreang renewable capacty n Texa. Wer et al. (2004) condered all Renewable Portfolo Standard and found the ptfall n the current polcy degn. Some key problem n polcy degn nclude nuffcent duraton and tablty of target, weak enforcement, and narrow applcablty of the polcy. Other condton that may mpact a polcy effectvene are the preence of long-term power purchaer and poltcal and regulatory tablty. 16

17 Peterk (2004) provde a non-econometrc analy of the effectvene of dfferent type of Renewable Portfolo Standard a of 2003 for the Unted State Energy Informaton Aocaton (EIA). He fnd that only Renewable Portfolo Standard that mandate a certan level of capacty (number of megawatt) have had any gnfcant mpact on renewable capacty deployment. Polce wth renewable generaton or ale requrement a well a voluntary polcy program were found to have no gnfcant effect. Chen et al. (2007) compare the reult from 28 polcy mpact projecton for tate or utlty-level Renewable Portfolo Standard and fnd that (1) the mpact on electrcty prce mnmal, (2) wnd power expected to be the prmary renewable ued to meet polcy requrement, and (3) the beneft-cot etmate rely heavly on uncertan aumpton, uch a renewable technology cot, natural ga prce, and poble carbon emon polcy n the future. Bolnger et al. (2001) decrbe n detal 14 dfferent tate Clean Energy Fund, enumeratng the regulatory background, fundng approache, the current tatu of the fund, and the reultng mpact on renewable energy. Program that fund utlty-cale project are found to be the mot effectve at ncreang renewable capacty deployment. 4 Bolnger et al. (2004, 2006) ummarze the ame 14 Clean Energy Fund. They fnd that due to delay and cancelled project actual capacty often much lower than ntally oblgated capacty. Wer and Olon (2004) examne partcpaton n 66 utlty green power program. They fnd local green power program have redental partcpaton rate rangng from 0.02% to 6.45% and averagng 1.39%. However, th tudy doe not look at any tate-level Requred Green Power Opton that requre all utlte n a tate to offer conumer the opton to purchae renewable energy. The paper focue on partcpaton rate of 4 Fundng uually baed on actual producton, but t pad n a lump um once the capacty ha been contructed. 17

18 the utlty-baed program, but doe not analyze the mpact of thee local program on renewable energy generaton or capacty. Brd et al. (2005) ummarze federal renewable energy polce, general market factor, and tate-pecfc factor, uch a tate polce, that are drvng the deployment of wnd power. The key market factor are the volatlty n natural ga prce durng the early 2000 and the lowered wnd energy generaton cot due to larger wnd turbne, whch have combned to make wnd power more compettve wth natural ga-fred generaton. Only one paper ha attempted to econometrcally etmate the effect of tate renewable energy polcy on renewable capacty. Menz and Vachon (2006) ue ordnary leat quare to etmate tate polcy effect on wnd power capacty and generaton wth a panel dataet for 39 tate for whle controllng for wnd power avalablty, retal choce, and polcy dummy varable for Publc Beneft Fund, Renewable Portfolo Standard, Requred Green Power Opton, and fuel mx dcloure. 5 Renewable Portfolo Standard, whch requre a mnmum amount of renewable energy capacty or generaton, and Requred Green Power Opton, whch requre all utlte n a tate to offer renewable-baed electrcty to all conumer for a premum prce, are found to have a tattcally gnfcant effect on wnd capacty deployment. No tattcally gnfcant effect were found for Publc Beneft Fund, whch ad both the fundng of energy effcency, and for Clean Energy Fund, whch fund renewable energy program and project. 1.3 Model Th paper ue an ordnary leat quare approach a dd Menz and Vachon (2006), but dffer n many apect. Th paper nclude tate fxed-effect, a larger ample, 5 Fuel mx dcloure a polcy that requre the fuel mx a power producer ue n t electrcty generaton to be dcloed to the publc. It beleved that conumer wll ue th nformaton to purchae electrcty from power producer that ue cleaner burnng fuel or alternatve energy. 18

19 and addtonal and more detaled polcy varable a well a control varable for a tate electrcty market and poltcal envronment. Wthout controllng for dfference n market ze and poltcal envronment, omtted varable may ba the reult and lead to ncorrect polcy nterpretaton. State fxed-effect are ued to control for renewable avalablty and capacty contructed pror to 1996, whch n large part due to the mplementaton of pror federal polcy at the tate level a well a the effect of envronmental preference not captured by other varable. C t = α 0 + β R t + δ W t + S + ɛ t The model etmate total non-hydropower renewable capacty (Ct) for , where ubcrpt the tate and t the year of the pecfc obervaton. R t the vector of even regulatory polce (Clean Energy Fund, Renewable Portfolo Standard wth Capacty Requrement, Renewable Portfolo Standard wth Generaton/Sale Requrement, Net Meterng, Interconnecton Standard, State Government Green Power Purchang, and Requred Green Power Opton) and W t the vector of eght poltcal and economc varable. Vector S the tate fxed-effect dummy varable and vector Tt are the year varable. The year varable, mot of the control varable, and ome of the polcy varable are nteracted wth each tate electrcty generaton level to control for market ze n each tate. The dependent varable the total non-hydropower renewable nameplate capacty n the electrc power ndutry (Ct), whch nclude all nameplate capacty of utlte, ndependent power producer (IPP), and ndutral or commercal combned heat and power producer that ue olar, wnd, geothermal, or boma a an energy ource. 6 The um of all non-hydropower renewable energy n a tate ued ntead of the capacty 6 Nameplate capacty the amount of capacty the generator produce under deal condton. Non-hydro renewable nameplate capacty derved from EIA Htorcal State Electrcty Databae found on the EIA webte n whch olar, boma, geothermal, and wnd nameplate capacty are combned nto a ngle category labeled Other Renewable. 19

20 of one pecfc type of renewable energy becaue ung only one type would preclude any nteretng cro-tate comparon of polcy effect of tate wth dfferent avalable renewable energy reource. 7 For example, comparng the effect of a polcy on Mane and Texa ung only wnd power capacty exclude the polcy effect on boma capacty, whch a more lkely renewable choce for Mane. Both type of renewable reource mut be ncluded to drectly compare the effectvene of polce acro tate. The effect of tate renewable energy polce are bet etmated ung total tate non-hydro renewable capacty a the dependent varable becaue everal polce mandate or fund a pecfc amount of renewable capacty. Polce that do not et pecfc renewable capacty requrement can be meaured n capacty term by controllng for each tate market ze, whch wll be dcued n more detal n Secton 4. A large amount of renewable capacty created before 1996 orgnated from the Publc Utlte Regulatory Polcy Act (PURPA), a federal polcy paed n 1978 requrng utlte to purchae electrcty from Qualfyng Faclte (QF), whch are IPP that meet pecfc requrement and nclude renewable-baed faclte. For a varety of reaon, the effect of PURPA vared from tate to tate. State dummy varable (S) meaure thee effect and other unchangng tate factor, uch a renewable reource avalablty. 8 7 Hydropower not ncluded n the renewable energy capacty becaue mot hydropower wa created well before the md-1990, wth few change n capacty or cot over the tme perod beng analyzed. Thee apect allow hydropower to be condered a type of current generatng technology, whch nclude team or ga turbne fred by natural ga, coal, petroleum, or nuclear power. For hydropower to be a vable power opton there mut be an avalable rver or tream a well a a gnfcant change n elevaton. Mot of thee te n the U.S. already have hydropower capacty n place. Removng hydropower from the dependent varable allow the focu of the paper to be on the polcy effect on the emergng technologe of wnd, olar, boma, and geothermal power 8 (Morr, 2003). There ome concern that expraton and buyout of PURPA contract durng the 1990 have led to decreae n renewable capacty, epecally n Calforna where deregulaton n the early to md-1990 created competton baed on prce 20

21 1.4 Varable and Data Economc and Poltcal Varable: W t Eght varable account for non-polcy varablty (Wt) n nameplate non-hydropower renewable capacty n the electrc power ndutry of each tate for The economc varable meaure the percentage of capacty from hydropower and nuclear power n a tate, net generaton, retal prce, fuel cot, renewable energy cot, and ugarcane producton, whle the poltcal varable meaure a tate preference for renewable capacty. Thee varable are nteracted wth generaton to control for dfferent market ze acro tate. 9 Table 1-1 ummarze the data for the dependent varable (RENEWABLE CAPACITY) and the control varable. 10 Total generaton (GEN) the total amount of electrcty generated (n terawatthour) n a tate for a gven year. 11 It expected that more renewable capacty wll be found n tate that generate more electrcty to help meet the hgher demand for electrcty found n thoe tate. 12 The other control varable a well a ome of the polcy varable are nteracted wth generaton to account for market ze acro tate. For example, wthout any conderaton of cot or envronmental mpact. Any capacty hut down due to PURPA contract expraton after 1996 wll decreae the potve effect of any enacted polcy. There alo the poblty of a tate changng t nterpretaton and enforcement of PURPA after 1996, whch would not be captured n the model. 9 Electrcty generaton n a tate ha been choen to repreent market ze ntead of electrcty ale n a tate becaue ome electrcty ale orgnate from outde a partcular tate. 10 Data on capacty, generaton, and prce are found n the Htorcal Databae of the Electrc Power Annual urvey on the EIA webte. Electrcty ummary data avalable at the tate level from the EIA. 11 A terawatt-hour (TWh) the ame a 1,000 GWh or 1 bllon kwh. 12 Total generaton wa choen ntead of total ale becaue ome of the electrcty demand for a tate power producer may come from other tate. Generaton not contamnated wth thee ntertate ale, whch may otherwe nflate or deflate the market ze meaure. Generaton and ale are hghly correlated (0.952). 21

22 an ncreae n fuel cot wll have a larger mpact on renewable capacty n Calforna than n Rhode Iland. Larger tate hould have more fundng to pay for project to ncreae renewable capacty. Renewable Portfolo Standard wth Sale Requrement et requrement on the percent of generaton that mut orgnate from renewable ource. State wth more generaton wll have more total generaton that requred to orgnate from renewable reource, whch hould lead to more renewable capacty n thoe tate. The followng three varable are ncluded n the model to control for market tructure. Two of thee varable are hydropower capacty (PCT HYDROPOWER) and nuclear power capacty (PCT NUCLEAR) a a percentage of total capacty excludng non-hydro renewable. Hydropower hould lead to le non-hydro renewable capacty becaue hydropower ha low margnal producton cot, and the capacty typcally wa contructed many year ago. Wth lower margnal cot and unk captal cot aocated wth hydropower, hydropower wll be the frt renewable energy to be mplemented becaue t more economcally compettve than mot non-hydropower renewable avalable to the electrc power ndutry. Conumer and/or polcy drven demand for renewable-baed electrcty may not dfferentate between hydropower and other renewable ource, whch allow hydropower to be a ubttute of non-hydro renewable. Smlar to hydropower, nuclear power ha low margnal cot of producng bae load electrcty, ha unk captal cot, and ha no emon. If non-hydro renewable capacty deployed baed on economc factor, gven mlar emon profle, greater nuclear or hydropower capacty hould decreae the amount of non-hydro renewable capacty. An alternatve poblty that regulator n tate wth large amount of nuclear power encourage power producer to ue other reource type to meet new demand. Renewable energy may be ued by utlte to allevate preure from envronmentalt over nuclear power, thu leadng to greater deployment of renewable energy capacty n tate wth large amount of nuclear capacty. The gn of PCT NUCLEAR wll depend on whch of thee two factor ha the larger effect on power producer. 22

23 A tate annual weghted average real fuel cot (n 2002 dollar) per mllon Btu (FUEL COST) meaure the mpact of both a tate compoton of fol fuel mx and a tate average cot for each fol fuel type: coal, natural ga, and fuel ol. 13 FUEL COST capture the effect of all thee varable, whch may have offettng effect on renewable capacty. FUEL COST ued ntead of creatng eparate varable for the cot and capacty of each fol fuel for everal reaon. Frt, ung one varable ntead of fve varable mplfe the model. Second, data on pecfc fol fuel cot are mng for many tate. 14 Levelzed cot of each renewable ource the etmated real cot of producton per klowatt-hour of electrcty over the lfetme of the equpment, ncludng all federal producton ncentve. 15 It capture the economc compettvene of each renewable 13 Fuel cot data can be found on the EIA webte n the electrcty databae ecton under Monthly Cot and Qualty of Fuel for Electrc Plant Databae (FERC Form-423). The cot per unt, Btu per unt, and number of unt purchaed for every fuel purchae made by all publc utlte are ued to obtan a nomnal average fuel cot meaure. The data are aggregated and deflated ung the Conumer Prce Index for all good from the Federal Reerve Bank of St. Lou to get the tate annual average real fuel cot per mllon Btu n January 2002 dollar. FUEL COST ha 30 mng obervaton for 8 dfferent tate. Idaho the only tate wthout any fol fuel purchae. Etmate of the fuel cot are ued to fll n the mng data. The non-idaho mng obervaton are extrapolated from the extng data for a tate from Idaho obervaton are generated by ung the average fuel cot of the tate borderng Idaho. A mng data dummy varable ncluded n the model to capture any ba created through the extrapolaton and approxmaton. 14 There are mng fuel cot obervaton for coal (69), natural ga (65), and fuel ol (58). Th mght be due to no delvere of a partcular fuel to a tate, or t could be the mng obervaton are due to change n data reportng requrement durng the ample perod. 15 Levelzed cot calculated by a model that account for the ntal captal cot of contructng the capacty, expected lfetme of the equpment, nteret rate on debt, nflaton rate, fuel cot, operatonal and mantenance cot, capacty factor of the equpment, and federal producton ncentve. Read McVegh (1999) for a more detaled decrpton of levelzed cot ued n th paper. 23

24 energy type. Renewable energy a well a nuclear and hydropower have lttle or no fuel cot and very hgh captal cot, whle current generatng technologe baed on fol fuel have large fuel cot but lower captal cot. 16 A renewable energy ha gotten cheaper to produce, t ha become more economcally compettve. Th mple that decreae n the levelzed cot of each type of renewable energy wll lead to more renewable capacty. The levelzed cot alo nclude federal producton ncentve polce that vary over tme. 17 Many reearcher have tred to etmate the levelzed cot of energy for each renewable ource. Makng uch an etmate beyond the cope of th paper, o the data et beng ued for th varable obtaned from McVegh et al. (1999). The etmated levelzed cot of energy n the U.S. for each renewable energy ource n real 2002 dollar and etmated for every fve year, from 1980 to Thee data pont are ued to nterpolate a polynomal curve that had the bet ft (hghet r-quared value). Due to th nterpolaton from etmated data, the cot of energy for each type of renewable energy a reaonable though mprece etmate of the decreang cot of renewable energy over tme n the U.S. The reultng trend lne for each type of renewable energy have a hgh correlaton. So a weghted average of the levelzed cot of wnd, olar, boma, and geothermal for the entre U.S. ued to create the new varable RENEW COST, whch an average natonal trend for renewable energy cot Fol fuel cot are uncertan for current generatng technologe, and techncal effcency of captal equpment uncertan for renewable energy generaton. 17 The Renewable Energy Producton Incentve (REPI) and Producton Tax Credt (PTC) were paed n the Energy Polcy Act (EPACT) of The level of the REPI decded by Congre annually, whle the PTC wa reenacted n 1999 and The data pont for 1985, 1990, and 1995 were etmated baed on actual cot nformaton whle 2000 and 2005 were forecat made n The polynomal curve have an order of two for boma and geothermal and three for olar and wnd. 19 The weghted average for each year baed on the ource hare of total non-hydropower net ummer renewable capacty n the U.S n Net nameplate 24

25 If renewable capacty beng contructed on economc ground, a re n the retal prce of electrcty make renewable energy more proftable and hould have a potve effect on renewable capacty. 20 However, retal prce n a tate may be multaneouly determned wth renewable capacty becaue ung more renewable capacty ncreae the average cot of producton, whch could lead to hgher prce. Ung the tate retal prce could alo lead to multcollnearty problem wth fol fuel cot becaue hgher fuel cot wll lead to hgher electrcty prce. To control for th endogenety and poble multcollnearty, the model mut ue a proxy for a tate retal prce. A proxy mut be correlated to the endogenou varable and have no mpact telf on the dependent varable. The weghted average real retal prce per klowatt-hour of the borderng tate (BORDER PRICE) an deal proxy for retal prce becaue t meet both of thee requrement. 21 capacty data for each type of renewable energy are not avalable from the EIA, makng net ummer capacty the cloet avalable alternatve meaure. Even though there a cot of energy etmate for both olar thermal and olar Photovoltac, the olar capacty data are not egregated nto thee two type. A non-weghted average of olar thermal and PV taken to get the levelzed cot for total olar capacty. Snce all olar power account for le than 2.5% of total non-hydro renewable capacty n the U.S., t unlkely that ung ome weghted average of olar thermal and olar PV would make any gnfcant dfference. Summer capacty refer to the maxmum output generatng equpment expected to upply to a ytem demontrated by tet at the tme of ummer peak demand. Nameplate and ummer capacty have hgh correlaton, but are not dentcal due to dfferent operatng condton acro utlte. Defnton of nameplate n Footnote Average retal prce baed on all ale n the market: redental, commercal, ndutral, and other cutomer. Data are avalable from the EIA Htorcal Databae. Average retal prce data are orgnally n nomnal term for each month. Two tep have to be taken to adjut the data nto real term for each year. Frt, the monthly data are dvded by the CPI for all good to get the monthly data nto real term. Second, monthly electrcty ale are ued to get a weghted average prce for each year. The reultng varable the real average retal prce for each tate and year n January 2002 dollar. 21 Borderng tate are all tate that ether hare a border, uch a Arzona and New Mexco, or meet at a corner, uch a Arzona and Colorado. The prce are weghted by ale n the borderng tate. The correlaton of retal prce to BORDER PRICE

26 Ung BORDER PRICE ntead of the tate retal prce remove the poble collnearty wth FUEL COST a well. Florda, Hawa, Louana, and Texa ue the byproduct of ugar producton from ugarcane a a boma fuel. For example, n Hawa ugarcane one of the prmary ource of boma. Due to market condton mot of the ugarcane farm n Hawa were hut down over the 1990, removng the fuel ource for much of the boma capacty n the tate. Change n ugarcane producton are lkely to have an mpact on the amount of boma capacty n a tate. The change n total ton of ugarcane producton from 1996 level (SUGARCANE PROD CHANGE) ncluded n the model to control for t mpact on renewable capacty. SUGARCANE PROD CHANGE the only control varable not nteracted wth generaton. A poltcal varable ncluded to meaure change n renewable energy preference n a tate. The League of Conervaton Voter (LCV) ratng ued to determne f polcy preference for envronmental protecton ncreae renewable energy capacty ndependent from t polcy effect. The League of Conervaton Voter (LCV) annually publhe the Natonal Envronmental Scorecard, whch rate all congreonal vote on conervatonal ue by each repreentatve. 22 For example, f there are ten total vote n a year on envronmental ue and a congreperon voted n favor of conervaton x tme, h or her LCV ratng would be 60. An average of all the vote by a tate repreentatve taken to get the average Houe of Repreentatve core (LCV SCORE). The core from the Houe of Repreentatve are ued ntead of the Senate becaue repreentatve have a horter term n offce 22 Data from the Natonal Envronmental Scorecard avalable from the League of Conervaton Voter webte, The LCV ratng ha been ued n pror tude, ncludng Baldwn and Magee (2000), Kalt and Zupan (1984), and Nelon (2002). 26

27 than enator, two year veru x year. The horter term create greater preure on repreentatve to act accordng to ther conttuent preference. A hgh LCV ratng for a tate ndcate that the tate conttuent are envronmentally frendly and are more lkely to demand electrcty from renewable energy, all other thng beng equal. Conumer or envronmental group n tate wth hgher LCV ratng may be more lkely to preure utlte to ue greater amount of renewable energy no matter whch, f any, polce have been enacted by the tate. Polce may be endogenou to hgher LCV ratng becaue tate wth congreperon who vote for federal pro-envronmental polce may be more lkely to enact tate pro-envronmental polce. The polcy endogenety ue not addreed n the body of th paper becaue LCV SCORE not a trong enough predctor of tate polce to be a atfactory ntrument. Note alo that removng LCV SCORE from the regreon doe not change the other reult Regulatory Polcy Varable: R t Seven of the ndependent varable are polcy varable capturng the effect of dfferent type of renewable energy regulaton, ether by a tate leglature or Publc Utlty Common (Rt). 23 Mot polce are enacted through tate leglaton, and then enforced by the Publc Utlty Common (PUC). There are a few ntance, however, n whch a PUC adopt gudelne wthout tate leglaton. No leglaton or PUC acton requred for tate governor to ue executve order to create a tate government green power purchang agreement or to et voluntary goal for generaton. 23 Informaton on renewable polce avalable on the Databae of State Incentve for Renewable Energy (DSIRE) webte, whch a project of the Intertate Renewable Energy Councl and funded by the U.S. Department of Energy. The nformaton compled from many dfferent ource, ncludng federal and tate offcal, publc utlty common, and renewable energy organzaton. The ource of the nformaton ncluded wthn each polcy decrpton. Bollnger et al. (2001) nclude addtonal nformaton on the enactment and degn of Publc Beneft Fund. 27

28 Polcy dummy varable value are determned by a polcy enactment date, zero before enactment and one after enactment. The enactment date the year that the polcy paed by the tate leglator, created through an executve order, or announced a a mandate under new PUC gudelne. Some of thee polce allow a grace perod for power producer to meet the new regulaton. The effectve date the year that the polcy requrement mut be met. The average lag from the enactment to effectve date a lttle over one year, but can be longer for Renewable Portfolo Standard. The enactment year a better choce to determne when the polcy begn to mpact the power producer. Once a power producer become aware of a future requrement, t may begn to contruct any neceary renewable capacty. Thee acton could lead to large amount of renewable capacty beng contructed between the enactment date and effectve date. Regulatory polce decrbed below nclude a Renewable Portfolo Standard wth a Capacty Requrement, Renewable Portfolo Standard wth a Generaton/Sale Requrement, Clean Energy Fund, Net Meterng, Interconnecton Standard, State Government Green Power Purchang, and Requred Green Power Opton. Table 3-2 ummarze the data for the polcy varable. The frt polcy that wll be dcued a Renewable Portfolo Standard, whch pecfe an amount of a tate electrcty producton, ale, or capacty that mut be renewable-baed. Renewable Portfolo Standard can be dfferentated nto three man tructural form, polce that et (1) mandatory renewable generaton or ale level, (2) voluntary renewable generaton or ale goal, and (3) mandatory renewable energy capacty requrement. The frt type of Renewable Portfolo Standard et a percentage of total generaton or ale for each power producer/retaler that mut orgnate from renewable ource, uually ncreang every year or every few year. For example, Arzona tered renewable level that have to be met began at 0.2% n 2001 and ncreaed by 0.2% each year, 28

29 reultng n a requrement of one percent n Mot other tate Renewable Portfolo Standard have mlar tructure, but vary n percentage level and enforcement date. 24 Iowa, Mnneota, Texa, and Wconn have mandated utlte to ntall a certan level of megawatt of renewable capacty. 25 A long a the requrement are mplemented effectvely, renewable capacty requrement hould ncreae renewable capacty by the ame number of megawatt requred by the mandate. Thee capacty requrement wll make th type of Renewable Portfolo Standard more effectve n th model becaue they target actual capacty contructon veru generaton or ale baed Renewable Portfolo Standard. The dfference between Renewable Portfolo Standard can be accounted for n the model by two varable: a varable that meaure the ze of the renewable generaton or ale requrement (RPS: SALES REQ) and a varable that meaure the ze of the capacty requrement (RPS: CAP REQ). 26 The capacty requrement ze and date are ued to extrapolate the expected requrement for each year aumng a lnear functon, where the power producer ncreae capacty by the ame amount each year untl they meet the fnal requrement, to form the varable RPS: CAP REQ. 24 In 1998, Wconn ntroduced mandatory capacty level before t enacted a Renewable Portfolo Standard wth mandatory generaton or ale n Two tate (Illno and Hawa) wth Renewable Portfolo Sale Goal (not requrement) are counted a Renewable Portfolo Standard wth a ale requrement. The only reult that change when thee non-mandatory goal are treated a a requrement of zero the coeffcent on RPS: SALES REQ become maller and become le gnfcant for all pecfcaton. All other coeffcent reman relatvely unchanged. 25 Mnneota ha had both type of Renewable Portfolo Standard nce A voluntary generaton goal wa enacted n 2001, whle the capacty requrement wa enacted n Capacty requrement range from 50 to 2000 MW, and generaton/ale requrement range from 0-30%. 29

30 RPS: SALES REQ an even more complex varable. The generaton/ale requrement, whch uually et a target about fve year after enactment, lnearly nterpolated backward to the enactment date of the polcy. For example, a polcy enacted n 1996 wth a ale requrement of 1.0% begnnng n 2000 would be lnearly nterpolated to be 0.2% n 1996 and ncreae by 0.2% each year untl t reache 1.0% n Although the requrement not enforced untl 2000, t would be neceary for power producer to begn contructon at leat everal year before 2000 to get the neceary capacty contructed n tme to meet the ale requrement. Although th polcy doe not drectly requre the contructon of renewable capacty, an ncreae n the requred amount of renewable generaton may lead to a need for more renewable capacty. If current level of renewable capacty cannot meet a future generaton/ale requrement, addtonal capacty wll need to be contructed. 27 A Clean Energy Fund a tate-level program that often, but not alway, created through the retructurng of the electrcty market and ued to fund grant, loan, and producton ncentve for both reearch and development and actual deployment of alternatve energy. Many Clean Energy Fund focu on fundng actual renewable capacty deployment, whch hould lead to more renewable capacty n a tate. Clean Energy Fund are pad for through Sytem Beneft Charge (SBC), whch are addtonal charge pad by all conumer on ther electrcty conumpton. SBC can be 27 Some tate Renewable Portfolo Standard a wth generaton/ale requrement allow the ue of ome hydropower electrcty to meet the requrement. However, there are normally pecfc requrement a to whch faclte wll be elgble, ncludng retrcton on a unt maxmum capacty, type of hydropower, and year of ntallaton. For example, ome tate do not allow generatng unt greater than 30 MW to be elgble. One tate doe not allow any hydropower to orgnate from dammed hydropower plant. Another tate only allow electrcty from new hydropower capacty to be elgble. Thee retrcton wll decreae the effectvene of thee polce to ncreae renewable capacty n a tate. However, the complexte of the retrcton make t dffcult to create an approprate meaure for thee effect. 30

31 condered a conumpton tax on electrcty to fund deployment of renewable capacty n the ndutry. In Mnneota, a ettlement wth the electrc utlty Xcel Energy created a mlar fund that payng for renewable energy reearch and deployment. Mane created a voluntary fund mlar to a Clean Energy Fund for the tate cutomer to donate money. 28 Smlar to Renewable Portfolo Standard, Clean Energy Fund mut be dfferentated to undertand how effectve thee polce are at ncreang renewable deployment n a tate. The varable ued n th model a varable that meaure the amount of capacty that beng funded for utlty-cale project from Clean Energy Fund (CEF: CAP FUNDED). 29 Some cutomer may prefer to buld generatng capacty to provde ther home wth ome of ther own electrcty. Net Meterng (NET METERING) allow cutomer that are able to produce more electrcty than they conume n a gven month to ell any exce to the utlty to offet the charge for electrcty n month the cutomer a net purchaer. The effect of net meterng expected to be negatve becaue f renewable energy demander produce ther own renewable electrcty through a olar PV ytem or mall wnd turbne, they wll demand le renewable capacty from power producer. From a utlty perpectve, f t requred to reach a renewable capacty or ale target, thee cutomer-owned faclte may erve to offet a utlty need to buld renewable 28 Databae of State Incentve for Renewable Energy (DSIRE) doe not nclude New Mexco a havng a Clean Energy Fund, whle Bolnger et al. (2001) verfe that New Mexco doe have a Clean Energy Fund. 29 The capacty oblgaton a of 2003 are nterpolated backward lnearly to the enactment year o that an equal amount of addtonal capacty oblgaton are made each year and total the overall oblgaton a of The data for varable orgnated from the Databae of Utlty-Scale Renewable Energy Project from the Clean Energy State Allance (CESA). 31