Beacon Hill Analysis Shows Nevada RPS Hikes Electricity Prices

The state of Nevada—like many others—has implemented a “Renewable Portfolio Standard,” or RPS. According to the state mandate—which was first implemented in 1997 but has since been periodically revised—the state utility, NV Energy, must produce at least 25 percent of its total retail electricity with eligible renewable sources by 2025, and 6 percent of the total must be satisfied with solar energy in particular. Beyond the arbitrariness of these political goals—isn’t it a coincidence that the target is 25 percent by the year 2025?—is the fact that these RPS mandates necessarily raise electricity prices. We can review empirical studies to see just how big the price hikes may be, costing households some $70 more per year and industrial businesses many thousands of dollars annually.

Whenever thinking about an RPS, we must realize that it necessarily makes electricity more expensive than it otherwise would be. Remember, an RPS forces utilities to provide electricity with methods that they would not choose voluntarily. If it were really efficient to produce such a large fraction of electricity with renewable sources, then the government wouldn’t have to force the power companies to do so. Precisely because an RPS and other such mandates makes companies act against their immediate financial interests, these regulations end up causing electricity prices even at the retail level to be higher than they otherwise would be. That means empirical estimates are merely trying to quantify what we know the qualitative result must be.

To get a sense of the quantitative impacts, we can turn to report from last year published by the Nevada Policy Research Institute, and written by scholars from the Beacon Hill Institute located at Suffolk University, has estimated the quantitative impact of Nevada’s electricity mandates. The result is higher electricity prices for both consumers and businesses.

The Beacon Hill analysis uses inputs from the EIA in order to estimate the impact of Nevada’s renewable mandate. Ironically, the price hikes are muted because Nevada is fortunate to have access to plentiful supplies of geothermal energy. (Thus, the RPS will wreak less havoc than in a state without such natural abundance.) Then the Beacon Hill team used its “STAMP” computer model to assess the impact on the Nevada economy as if it had suffered from a retail sales tax of comparable magnitude, because in many respects a hike in energy prices operates like a tax hike. (Notice that the loss to consumers from higher energy prices does not benefit energy producers dollar for dollar, because the higher prices are resulting from being forced to use less efficient energy sources.)

Specifically, the Beacon Hill analysis estimates that:

• The current RPS law will raise the cost of electricity by $174 million for the state’s

electricity consumers in 2025, within a range of $45 million and $310 million.

• Nevada’s electricity prices will rise by 6 percent by 2025, due to the current RPS

law, within a range of 1.6 percent and 10.8 percent.

…

• reduce real disposable income by $233 million, within a range of $72 million and $373 million;

• decrease investment by $29 million, within a range of $9 million and $47 million; and

• increase the average household electricity bill by $70 per year; commercial businesses by an expected $400 per year; and industrial businesses by an expected $26,220 per year.

One can quibble with the specific modeling choices, but (to repeat) the Beacon Hill analysis relied on plausible numerical inputs from the academic literature and government estimates. There is no doubt that Nevada’s RPS raises electricity prices for consumers and businesses alike—at this point we’re just arguing about how much.

IER Senior Economist Bob Murphy authored this post.