Renewable portfolio standard

Based on Wikipedia: Renewable portfolio standard

The Market Trick That Made Green Energy Mainstream

Here's a curious fact: in 2013, electricity from wind turbines became cheaper than electricity from coal, natural gas, or oil. Two years later, solar panels crossed the same threshold. This wasn't an accident. It was the predictable result of a clever policy mechanism that had been quietly reshaping energy markets for over a decade.

The mechanism has an uninspiring name: the Renewable Portfolio Standard, or RPS. But what it does is anything but boring.

How It Works

Imagine you run an electric company. Under a Renewable Portfolio Standard, the government tells you something simple: a certain percentage of the electricity you sell must come from renewable sources like wind, solar, or geothermal. Not optional. Required by law.

But here's where it gets clever. The government doesn't tell you how to meet that requirement.

You could build your own solar farm. You could sign a contract with someone else's wind farm. Or you could buy something called a Renewable Energy Certificate—essentially a piece of paper proving that someone, somewhere, generated a unit of clean electricity.

These certificates trade on open markets. A wind farm in Texas earns one certificate for every megawatt-hour of electricity it generates. That certificate can be sold to an electric company in Ohio that needs to meet its renewable quota but doesn't have any wind farms nearby. Money flows from the company that needs certificates to the company that creates them.

This is the key innovation. The RPS creates demand for renewable energy, then lets the market figure out the cheapest way to supply it.

Why Markets Matter Here

The alternative approach—the government simply building renewable energy projects itself, or dictating exactly which technologies companies must use—has a significant flaw. Central planners rarely know where the best wind blows, which rooftops get the most sun, or which technologies are improving fastest. Markets aggregate this information automatically through price signals.

When a Renewable Portfolio Standard creates a market for clean energy certificates, entrepreneurs have a powerful incentive to find the cheapest possible way to generate renewable electricity. Maybe that's a massive wind farm in the Great Plains. Maybe it's rooftop solar panels in Arizona. Maybe it's a geothermal plant near volcanic activity. The market doesn't care about the method. It just rewards whoever can produce certificates most efficiently.

Competition drives down costs. Innovation accelerates. And the entire renewable energy industry scales up.

The American Patchwork

The United States has never adopted a national Renewable Portfolio Standard, though Congress came close in 2009. A bill called the American Clean Energy and Security Act made it through the Senate's Energy and Natural Resources Committee, calling for just three percent of American electricity to come from non-hydro renewables by 2013. The full Senate never passed it.

But that didn't stop the states.

Twenty-nine states plus the District of Columbia have enacted their own Renewable Portfolio Standards, creating a patchwork of requirements across the country. California leads with perhaps the most ambitious target: legislation passed in October 2015 requires utilities to source fifty percent of their electricity from renewable sources by 2030.

Some states get creative with their rules. Michigan and Virginia, for instance, give solar generation double credit—a solar panel generates two certificates for every unit of electricity, while a wind turbine generates only one. This kind of "multiplier" steers investment toward technologies the state particularly wants to encourage, though it also distorts the pure market mechanism.

The Lawrence Berkeley National Laboratory, a Department of Energy research facility, has tracked the impact of these state-level programs. Their researchers found that Renewable Portfolio Standards were responsible for sixty percent of all growth in American renewable electricity generation since the year 2000. That's a remarkable share for a policy mechanism most people have never heard of.

Interestingly, the RPS share has been declining recently. In 2013, seventy-one percent of new American renewable energy capacity was built specifically to meet RPS requirements. By 2015, that figure had dropped to forty-six percent. What happened? Renewable energy got so cheap that companies started building it voluntarily, without any legal mandate. The policy had succeeded so well it was becoming unnecessary.

The British Version

Across the Atlantic, the United Kingdom calls their version the Renewables Obligation, or RO. It works on similar principles but with some distinctly British characteristics.

The program launched in England and Wales in April 2002, replacing an older system called the Non-Fossil Fuel Obligation that had operated since 1990. Scotland got its own variant the same year. Northern Ireland joined in 2005.

The obligation started small—electricity suppliers had to source just three percent of their power from renewables in the 2002-2003 period. That percentage has ratcheted up over time, reaching 11.1 percent by 2010-2011 and continuing to climb. The program is currently scheduled to run until 2037, an unusually long policy horizon that gives investors confidence to make thirty-year bets on renewable energy infrastructure.

The results have been dramatic. When the Renewables Obligation launched, eligible renewable sources provided just 1.8 percent of the UK's total electricity supply. By 2010, that figure had nearly quadrupled to seven percent. The mechanism worked.

Germany Takes a Different Path

Germany's approach deserves special mention because it illustrates an important alternative to the Renewable Portfolio Standard model.

Instead of requiring utilities to buy a certain percentage of renewable electricity (and letting the market set prices), Germany's Renewable Energy Act of 2000 guaranteed renewable energy producers a fixed price for every unit of electricity they generated. This is called a feed-in tariff.

The difference is subtle but important. Under an RPS, prices fluctuate with supply and demand. A new solar entrepreneur doesn't know exactly how much money each certificate will fetch. Under a feed-in tariff, the government announces prices in advance: "We will pay X euros for every kilowatt-hour of solar electricity you generate for the next twenty years." This removes price uncertainty, making it easier for investors to finance projects.

Germany set ambitious targets: thirty-five percent renewable electricity by 2020, eighty percent by 2050. The feed-in tariff mechanism, by encouraging private investors through guaranteed returns, has made Germany a world leader in renewable energy deployment, particularly in rooftop solar panels.

Which approach works better? Economists have debated this for decades. Feed-in tariffs provide more investor certainty but can overpay for renewable energy if technology costs drop faster than expected. Renewable Portfolio Standards let markets find the lowest cost but can create more volatile investment conditions. Most countries have experimented with both, often combining elements of each.

The Asian Giants

China and South Korea have both adopted renewable energy targets, though their approaches reflect their different political systems.

China set its targets in 2006 and modified them in 2009 with characteristic ambition: 500 gigawatts of renewable electricity capacity by 2020. To put that in perspective, 500 gigawatts is roughly half the total electricity generating capacity of the entire United States. China planned to get there primarily through hydroelectric dams (300 gigawatts), followed by wind (150 gigawatts), biomass like burning agricultural waste (30 gigawatts), and solar panels (20 gigawatts).

The Chinese targets also include an interesting wrinkle: they aim for fifteen percent non-fossil fuel energy by 2020, but that category includes nuclear power alongside renewables. This reflects China's pragmatic approach—any energy source that doesn't emit carbon counts toward the goal.

Japan took yet another approach, rooted in its 1997 Act on the Promotion of New Energy Usage. Rather than setting percentage targets, Japan specified absolute generation amounts—118 million kilowatt-hours by 2012. South Korea's framework, adopted in 2012, focuses on promoting "development, use, and diffusion" of new energy technologies.

The European Union's Framework

The European Union adds another layer of complexity. In 2001, EU officials passed the Directive on Electricity Production from Renewable Energy Sources, which set targets that all member states must meet. By 2020, the EU as a whole was supposed to get thirty-three percent of its electricity and twenty percent of all its energy (including transportation and heating) from renewable sources.

But here's what makes the EU system interesting: individual countries can go further if they want. Germany, as we've seen, adopted more aggressive targets than the EU required. This creates a kind of competition among nations, with some racing ahead while others do the minimum.

Italy, Poland, Sweden, Belgium, and Chile have all adopted RPS-type mechanisms, each adapted to local conditions. The basic concept—require a renewable percentage, let markets find the cheapest path—has proven remarkably portable across different legal systems and electricity markets.

The Bigger Picture

The Renewable Portfolio Standard represents something interesting in the history of environmental policy. For decades, the dominant approach to pollution was what economists call "command and control"—governments would tell companies exactly what technologies to use or exactly how much pollution they could emit. This worked, but it was inefficient. Regulators couldn't possibly know the cheapest way for every company to reduce emissions.

Market-based mechanisms like the RPS try to harness the efficiency of markets for environmental goals. Set the target, then let competition find the best path to reach it.

The results speak for themselves. Wind and solar electricity costs have plummeted. Renewable energy has grown from a tiny fraction of the power mix to a serious competitor with fossil fuels. Investment has poured into clean energy technology.

None of this happened automatically. It happened because policy makers created rules that changed incentives, and markets responded. The Renewable Portfolio Standard isn't glamorous. It doesn't inspire passionate political rallies. But it may be one of the most consequential environmental policies of the twenty-first century—a quiet market mechanism that helped make green energy cheap enough to compete.