Investing in Renewable Energy: Reconciling Regional Policy With Renewable Energy Growth

Abstract

To address the effects of climate change, it is imperative for economies to proactively invest in, and deploy, low carbon energy technologies to meet current energy demands. To this effect, several states in the U.S. have implemented policies to incentivize the growth of renewable energy technologies. One of these policies is the renewable portfolio standards (RPS), which mandates that a certain percentage of the total electricity sales of utilities be sourced from renewable energy sources. This paper examines the effectiveness of these policies in driving the growth of specific renewable technologies across different regional transmission organizations (RTOs). It evaluates the adoption of renewable energy technologies across these RTOs to provide insights on the varying successes of these policies. The paper develops a ranking system for the correlations between the strength of RPS and renewable energy capacity growth across the RTOs. Two central observations emerge. First, despite the presence of positive correlations between RPS and renewable energy capacity additions, the capacity growth of renewable energy is not monotonic in time as technological differences characterize regional attributes. Second, the technology returns on RPS mandates are location-specific. Managerial Relevance Statement . The value proposition of this paper is the information it provides to energy technology managers that are constantly faced with tough decisions on what technologies to invest in and where to invest in such technologies. The benefits to be derived from such investments and their enhancement of societal welfare are useful to policymakers in the crafting of these instruments. Thus, understanding the effectiveness of strategies to enhance renewable energy adoption will help to reinforce our knowledge about what works and where. While several policy pronouncements have catalyzed the growth of renewable energy technologies, the capacity increase of these technologies has not been uniformly distributed. This stems from the disparities in energy technology investments because of the conundrum that technology managers, developers and investors face. This ambivalence of investment outcomes impacts the intent to embrace renewable energy. Of relevance to the practice of engineering management, this paper suggests the following: (i) there is a very strong support for the growth of wind technology across all the regions especially where there is abundance of the resource. For example, the ERCOT region is fertile for wind growth; (ii) solar photovoltaic technology has not seen as much growth as wind despite the provision of alternative markets for solar credits. However, there are strong indications that the policy enacted in regions including CAISO, ISONE and some non-RTO states in the north-west will provide investors and technology developers with more incentives for solar technology investments; (iii) It is counterintuitive, but significant, for technology developers and managers to know that investing in renewable energy technology is not always a function of the strength of the policies in the regions. Specifically, developers will do well to consider non-RTO states, or states without such mandates, for their technology investments; (iv) For investors considering where the policies have been effective, then considerations should be given to regions including PJM, ERCOT, and MISO.