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Yo #energytwitter: here's some quick thoughts on the Greenstone McDowell @Ishan_Nath RPS paper. I'm going to stick to my comparative advantage: thinking about its place in the RPS lit and high-level thoughts on the RPSs themselves, not LCOE models or capacity markets.
As @samori8 said, this is important stuff. RPSs/CESs are our main energy transition tool right now and we can always take a closer look at whether they are doing what we want, and if they're doing it cost-effectively.
This is a tough policy to analyze for a bunch of reasons outlined in the paper, and the authors do some neat stuff in order to take a shot at a comprehensive cost analysis.
So what's the idea behind the paper? The authors' want to understand the costs imposed by RPSs in a top-down way so they can pick up on systems costs from renewables in addition to changes in generation costs.
They start out with some similar ideas to Yin and Powers 2010 paper, and they ultimately work toward getting estimates of $/tCO2 abated and estimate larger numbers than Erik Johnson's 2014 piece on CO2 abatement costs.
They have a pretty comprehensive theory model laying out their approach, but the econ theorist in me wishes there were some explicit results here to link up to the empirics. E.g. how should we expect some of these systems costs to be passed through, what will it depend on?
To estimate costs, they choose retail prices as the LHS variable since REC prices will just reflect gaps in the marginal cost of renewables vs non-renewables. They use nice event study designs in time before and after RPS passage instead of straight calendar time.
They then combine the price effect estimates with estimates of effects on CO2 emissions to back out costs of CO2 reductions. Final numbers are in the $100-$400/tCO2 range.
Cool, so RPSs are more expensive than (some) SCC estimates! We should have known that a priori since this is definitely not a first-best setting, but having SOME number on cost-effectiveness is helpful.
One reason is it gives us evidence of which world we're currently in: one where the inefficiency costs don't seem to be super large and don't obviously dominate their political advantage.
What am I left wondering about?
Other externalities. @ajhollingsworth and I find pretty big benefits from reductions in criteria pollutants and we also find some decent sized effects on CO2 (1 REC -> 58kg CO2).
What happened when RPSs got passed? There's a mention of restructuring but what about demand side energy efficiency policies, etc? These things matter since they'll be added as a charge on retail rates and may be simultaneous.
How should we think about the REC tracking systems in the generation/emissions part of the analysis? The paper claims most trade happens within system. REC trade data are hard to come by but here's some supporting that claim: nrel.gov/docs/fy15osti/…
One interesting thing is that tracking systems were rolled out during and after the 1997-2009 sample period. E.g. WREGIS and MRETS rollout in 2007, MI in 2009, NC in 2010. What's the right way to deal with that?
How should we handle IL, IN, OH, which are in PJM and MRETS? What about legislative rules on trade? E.g. IA bans REC imports, NC allows RECs from ERCOT, etc.
The weighted aggregation is pretty clever though! A REC market does act as a weighted average of individual state RPSs (under a lot of convenient assumptions and complicated weights).
What is the big cost driver? My gut feeling has been these solar carveouts have to be a big driver: SREC prices often are an order of magnitude higher than regular REC prices. They find this in their table 4.
Is it the carveout itself? Solar was pretty expensive early in the sample and you have some states like NJ mandating aggressive carveouts that aren't the best solar location. Or maybe are the carveouts also correlated with aggressive RPSs?
More spillovers: RPSs are likely decreasing wholesale prices by shifting out the generation MC curve. If retail prices are a function of wholesale prices, and RPS and non-RPS states are in the same wholesale market......you might get some spillovers on retail prices.
Will it just be the reduced generation costs? Will the systems costs also spillover? Will we just get reshuffling where non-renewable generation is delivered to non-RPS states? SUTVA concerns are probably the most difficult things for RPSs.
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