Association for Public Policy Analysis & Management

The majority of American states have taken progressive steps over the past 20 years to foster renewable energy industry activities within their state borders. While there are many policy instruments among which states have chosen for this objective, the most prevalent renewable energy policy has been the renewable portfolio standard (RPS). An RPS is a percentage of electricity sales obligation that must be achieved by participating utilities by a certain year. To fulfill RPS targets, utilities must either generate renewable energy or participate in renewable energy credit or certificate (REC) markets. The addition of a REC market to traditional RPS policies creates a market-based mechanism that offers utilities enhanced flexibility in meeting their RPS mandates.

REC markets could also result in cross-state policy effects that set up additional incentives for various producers to develop renewable energy. An energy producer could sell their generation credits to their in-state REC markets, assuming the presence of an RPS, or to out-of-state REC markets. We might, therefore, expect that the renewable energy industry in the U.S. is not simply driven by the presence of state RPS policies and other factors that have been identified as playing supporting roles, such as average state income and ideology, but also driven by REC markets and the incentives that they provide to develop renewable energy.

This analysis seeks to evaluate the relationship between REC markets and renewable energy development, specifically wind and solar, since the late 1990s, when the first state RPS policies were adopted. Our primary objective is to evaluate whether demand for RECs within any given state is driving renewable energy generation in both the state of interest and in other states. This analysis focuses on state-level dynamics in order to capture policy and REC market activity both within and across state borders. It relies on a mixed-methods approach that integrates statistical analysis of secondary data with telephone interview data, as conducted by the authors in the summer of 2015 with a variety of REC market participants.

We employ two distinct modeling approaches in an effort to understand how in-state RPS obligations and potential out-of-state REC sales drive renewable energy development in any given state, and to address some of the unique challenges associated with the available energy data. First, we estimate standard difference-in-difference models. Second, employ a relatively new application of mixture models to semi-continuous data with space and time effects. While this analysis is complicated by the limitations of the existing infrastructure for tracking REC characteristics, this study seeks to provide the first quantitative assessment of REC markets with the best available data, and also support the hypotheses and findings via in-depth interviews.