U.S. Department of Energy - Energy Efficiency and Renewable Energy

Weatherization & Intergovernmental Program

Conservation Update: The Role of State Policy in Renewable Energy Development

This article was featured in the January-February 2009 edition of the State Energy Program's bimonthly newsletter, Conservation Update.

by Elizabeth Doris, National Renewable Energy Laboratory

Electricity generation from renewable energy has experienced eight years of robust growth in the United States, and analysts are learning to discern how state energy policies nurture these emerging markets. For example, states with renewable portfolio standards have experienced a surge in the construction of wind power installations.

This growth has captured the attention of state legislatures, who have passed hundreds of renewable energy and energy efficiency bills. Today, every state and most overseas U.S. territories have incentives in place to encourage renewable energy and energy efficiency.

With all this activity, policy makers are faced with a significant challenge to evaluate the effects of individual policies. This article examines the data, lists the factors that influence market development, and shows correlations between market data and state policies:

There are many factors that influence market growth. To be successful, state policies for renewable energy and energy efficiency must reflect local market conditions.

These challenges form the framework of the Best Practices: State Clean Energy Policies Analysis project at the U.S. Department of Energy (DOE) National Renewable Energy Laboratory (NREL). This project uses a uniform methodology to evaluate the environmental, economic, and energy security impacts of state energy policies. Current work involves (1) listing state-specific, contextual factors that drive market transformation, and (2) understanding policy designs that are applicable to a number of states with similar market conditions.

Preliminary Conclusions

There are many factors that influence market growth, and no single energy policy serves every state in the same way. Policies and incentives that support the development of renewable electricity generation succeed when they are based on local market conditions and work within a specific context to move relationships forward.

The conclusions presented in this article are based on an October 2008 technical report published by NREL titled State of the States 2008: Renewable Energy Development and the Role of Policy.

These analyses are still in their early stages, and individual policies cannot yet be statistically correlated with renewable energy market growth in a specific state. However, analysts can list state-specific, contextual factors that support—and barriers that hinder—the development of markets for renewable energy.

This work has led to two interesting conclusions:

1. Market growth correlates with higher numbers of state-level policies
   in place that support the removal of market barriers to renewable energy development.

2. Financial incentives do not stimulate markets on their own
   without broader policies that address market barriers to renewable energy technologies.

Trends in State Renewable Energy Development: Data and Charts

Between 2002 and 2006, U.S. electricity generation from renewable energy resources increased 11% to 385 million megawatt-hours (MWh). Installed capacity increased 5% to 101,383 megawatts (MW) during the same period. In 2006, renewable energy accounted for 9.5% of all electricity generated in the United States.

States can use "most improved" market data to see where they fit into the national picture.
Credit: Bruce Green

This growth is regional and is affected by the availability of local renewable energy resources. For example, growth in wind energy generation is strongest in Texas and the Great Plains; growth in biomass generation is taking place primarily in the South.

Data Trends

Conventional hydropower provides 75% of U.S. renewable energy. However, its share is shrinking because newer technologies such as wind energy are growing more rapidly and because most of the good sites for large-scale hydroelectric installations have already been developed. See a list and state ranking of electricity production of renewable energy resources by state in Table 1 derived from the NREL report.

Between 2001 and 2006, wind energy represented the largest growth in renewable generation nationwide.

According to data from the DOE Energy Information Administration (EIA), between 2001 and 2006:

• 23 states increased electricity generation from wind.
• 24 states increased electricity generation from biomass resources.
• 4 states increased electricity generation from geothermal resources.
• 2 states increased electricity generation from large-scale solar facilities.

(Note that EIA does not collect data for electricity generation from distributed solar facilities).

Sources of State-by-State Data

The most comprehensive information about state renewable energy power generation comes from EIA, which publishes a database of state energy statistics, including some for renewable energy, in its State Energy Data System. Since 2003, EIA has tracked state-by-state renewable energy data in its Renewable Energy Annual report. The most recent EIA data are from 2006.

The DOE Office of Energy Efficiency and Renewable Energy (EERE) publishes these same state-by-state data for renewable power generation in graphical format (for example, Electric Power and Renewable Energy in California); you can compare graphs for different states.

Tables of Market Data Normalized by Population and Gross Product

EIA publishes state production data, which provide the basis for further analysis, for each state and type of renewable energy resource. Many people look at the top-10 list of states with electricity production from wind, solar, and biomass.

However, comparing impacts on the basis of gross electricity generation data can lead to misleading conclusions because of variations in size, population, and economic capacity from one state to the next.

Energy analysts often normalize gross generation data by dividing by population, to compare per capita statistics, and by gross state product, to compare economic statistics. This normalization allows economists to compare market impacts in states of different sizes. The resulting metrics provide state policy makers with methods to better understand market penetration and recent changes in renewable energy development.

A selection of the tables from the State of the States 2008 report follows:

• State ranking and per capita electricity generation from renewable energy resources by state (Table 2)
• States with the greatest increases in total and per capita biomass electricity generation (Table 3).

The report presents charts showing state-by-state renewable energy development for wind, solar, biomass, hydropower, and geothermal resources. These charts reflect differing geographic availability of renewable resources. The charts also show "most-improved" rankings for states with largest growth rates in electricity generation from renewable energy resources. The purpose of comparing growth rates is to recognize the early stages of market development and related challenges.

Read the entire report titled State of the States 2008: Renewable Energy Development and the Role of Policy.

Factors That Influence Renewable Energy Development

Several factors influence renewable energy technology:

A number of factors must converge for renewable energy markets to develop successfully.

• Resource Availability

  The availability of a physical resource is a consideration for renewable energy because it varies considerably.

  However, the question of resource availability turns quickly to how much of that resource can be recovered economically, and this economic question depends on other factors such as technology cost. In the absence of other factors, economic feasibility increases as the availability and quality of the resource increases. Conversely, the cost of developing incremental units increases as the quality or availability of the resource decreases.

• Technology Cost

  The cost of a renewable energy technology includes everything required to deliver power to the consumer, including installation, transmission, and fuel for transportation. Because some renewable energy technologies are in earlier stages of development than their conventional counterparts, price can be the limiting factor in development even in areas with excellent resource potential.

  Other impacts such as state policies and market conditions affect costs. For example, the solar industry experienced severe silicon shortages that drove up prices for photovoltaics (PV) in 2006, and the wind industry and the entire U.S. construction industry have had to deal with steep price increases for steel and concrete during the past two years.

• Economic Context

  The economic context provided by the larger state economy sets the stage for all market development, including energy. The economics of renewable energy are more favorable in states with high electricity costs that in states with low costs. Competing technologies also play a role: electricity costs are generally lowest in coal-producing states.

  Overall wealth is also a factor. A correlation can be shown between states with high per capita gross state products and greater amounts of electricity generation from renewable energy resources.

• Financing and Ownership Structures

  Because of the high cost of electricity systems, developers must be able to finance projects. Financing structures vary, depending on end user and sector (public or private) and range from traditional loans to participation in policy-driven programs that value the public good elements of renewable energy.

• Champions and Stakeholder Buy-In

  This factor is especially difficult to quantify because it involves human behavior and activities. Champions are internal actors—activists, policy makers, and community members—who hold positions of influence and understand energy issues. Whenever champions obtain buy-in from stakeholders, they play influential roles in the development of renewable energy.

The impacts of these factors are interrelated and nonlinear, so quantifying them can be challenging. Nevertheless, by considering the contextual factors, policy makers can gain insight into the effectiveness of potential policies.

The Role of State Policy

Public policy has a major effect on all energy markets, including:

• Technology Development

  The public sector, most often the federal government, supports research and development that the private sector views as too risky (to obtain an immediate and quantifiable return on investment).

• Market Facilitation

  State governments sometimes create or direct markets through mandates such as, for example, a renewable portfolio standard. In this way, the state provides assurances to investors that there will be a market for electricity produced from renewable energy resources.

  Government can also provide financial incentives to encourage individual investments. For example, some states with less-than-optimal solar resources such as New Jersey have successfully used financial incentives to initiate markets for solar technologies.

• Levelizing Costs

  Tax policies directly affect investment decisions and can therefore be used to remove first-cost barriers.

• Removing Institutional Barriers

  Policies for installation and product certification and streamlining of utility interconnection reduce transaction costs.

• Information

  States sometimes support education programs to inform the public about the benefits of renewable energy. These programs reduce uncertainty and thus facilitate development.

How Do State Policies Correlate With Renewable Energy Market Transformation?

State energy policies are optimally designed when they apply broadly and stimulate individual energy projects. Their purpose is to transform markets to the point where they are self-sustaining.

Market transformation theory provides that first removing barriers and then installing financial incentives creates lasting changes in the markets for commercially ready energy efficiency and renewable energy technologies. Because of this emphasis on lasting change, market transformation begins with low-cost measures that overcome market barriers. This is called market preparation, and prepares a foundation for policies that increase technology accessibility through financial incentives.

Correlations Between State Policies and Market Data

In order to measure the effectiveness of state policies that support market transformation, state energy policies must correlate with market data.

The next step is to list states with both types of policies in place—market preparation and technology accessibility. The list is taken from the Database of State Incentives for Renewables and Efficiency (DSIRE) and is listed in Table 4: Summary of States with Renewable Energy Policies and Selected Best Practices.

Finally, we are ready to explore correlations between these state policies and market trends. The first step is to identify correlations between individual policies and increased renewable development in a particular state. Then we'll examine combinations of state policies that are connected with increased development.

What are the results? There is a significant connection (Pearson Coefficient less than 0.05) between the existence of some individual state policies and in-state renewable electricity generation. (In the case of solar energy, this correlation is with installed capacity, not generation.)

We can draw some conclusions from the correlations in the report:

• A state renewable portfolio standard leads to greater electricity generation from wind energy and to higher percentages of renewable power compared with total in-state electricity generation.
• Line extension analyses policies correlate with greater wind energy capacity and generation. This result is interesting in that interviews with state program administrators indicated that this policy was not intended to increase development of renewable resources, but to facilitate the use of most economic "last-mile" electricity solutions.
• Production incentives correlate with increased renewable electric capacity and generation.
• Interconnection policies (which meet the best practices criteria described in the appendices of the State of the States 2008 report and are based on the Network for New Energy Choices method) correlate with increased renewable energy capacity and generation overall. In addition, interconnection policies lead to greater biomass, hydroelectric, and PV capacities.

Finally, there are two important results:

• States with a greater number of market preparation (barrier reduction) policies have greater renewable energy development.
• There is no significant correlation between renewable energy development and policies that encourage technology applicability (incentives) on their own.

These results illustrate the fundamental role of barrier reduction before incentives can become effective. Incentives alone do not effectively increase renewable energy development in the absence of barrier reduction policies.

About the Author

Elizabeth Doris, National Renewable Energy Laboratory

Elizabeth Doris is a senior energy analyst at the DOE National Renewable Energy Laboratory (NREL) in Golden, Colorado. Her work focuses on the evaluation of federal, state, and local policies affecting the development of renewable energy and energy efficiency. Before joining NREL in 2005, she worked as a policy analyst at the American Council for an Energy Efficiency Economy in Washington, D.C. She holds a Bachelor of Arts degree in environmental science from Boston University and a Master of Science degree in environmental policy from Johns Hopkins University. Read more about her background and links to her research publications on the NREL Web site.