State Regulatory Mechanisms for Increasing Renewable Energy Usage

It is no secret that the United States is a major producer of carbon emissions and that policies to curb the emissions of one of the biggest offenders, electricity generation, have not been successful at significantly reducing carbon emissions. However, the physical and regulatory world of energy generation and distribution is complicated, and solutions to reduce electricity carbon emissions will not be as simple as building more wind turbines. This article explores state energy regulation and ways a particular regulatory mechanism may be used to increase renewable energy usage among American consumers.

Throughout the United States, electricity distribution is governed by two broad regulatory categories: regulated and restructured. In regulated states, a few large utilities are granted a state-sanctioned monopoly over energy supply. Consumers have no choice in their utility provider and utilities often have little incentive to diversify where they obtain energy (for example, from renewable sources) unless they are forced to under state or federal law. In restructured states, by contrast, the major utilities still operate and maintain the electricity transmission lines, though consumers are allowed to purchase power from competitive electricity suppliers in addition to the major utilities. This consumer ability to purchase energy from other suppliers increases market competition which can drive down prices and even induce suppliers to offer renewable energy. In this way, restructured energy markets can promote renewable energy use. Despite the potential benefits of opting for an alternative energy supplier, however, consumers in restructured states do not always do so, potentially due to factors such as price or lack of awareness.

One way to overcome price and awareness challenges facing individuals in restructured states is through a mechanism called Community Choice Aggregation programs (CCAs). In CCAs, a city or region chooses an energy supplier for its citizens. Because CCAs have a large customer base, they often have significant market power and can require that a certain percentage of their energy comes from renewable sources. The large customer base can also help keep costs lower for individual consumers. In addition, because the city manages the energy supplier decision, individuals do not need to be aware of energy supplier options. Indeed, CCAs are much more successful at enrolling individuals to receive renewable energy than other voluntary renewable programs because of the default nature of the CCA.

According to the authors of a recent article in Energy Policy, CCA prevalence in the U.S. increased to 750 CCAs in 2017, serving five million customers in seven states and representing about 1% of all U.S. electricity sales. To determine whether CCAs have an impact on renewable energy usage, the authors calculated the number of CCAs which procure a greater percentage of renewable energy than what is required by law (voluntary renewable energy). The authors found that customers in 2017 received more voluntary renewable energy from CCAs than from any other means (such as utility-sponsored voluntary renewable energy programs). The authors estimated that CCAs could increase total U.S. voluntary renewable energy demand by potentially more than 200% as more states permit CCAs.

However, CCAs are not without challenges. One such challenge is maintaining energy costs below those of other providers. In Illinois, for example, CCAs were popular between 2010 and 2013 because their energy prices were below those of the major utilities. When major utility prices fell between 2014 and 2017, many communities left their CCAs. Although CCAs are once again prevalent in Illinois, this program volatility can be a challenge for policymakers designing CCA legislation.

CCAs also face significant challenges in regulated states. Although CCAs are technically feasible in regulated states, only one regulated state (California) currently implements them and one other regulated state (Virginia) allows them but has yet to implement them. One such challenge in these states is exit fees. Because the major utilities hold monopolies, they are traditionally able to recoup money they have invested in infrastructure through user fees. Once customers enter CCAs, however, they are no longer paying the utilities and they generally pay “exit fees” which cover at least part of the utility’s investment. Determining an exit fee can be a major point of contention among policymakers, state utilities, and potential CCA users.

The complexity of the energy world means that the solution to reducing energy-sector carbon emissions is unlikely to be a panacea. Rather, it will be incremental, but significant action at both the state and federal level. CCAs represent one such incremental action where potential for growth is already evident.

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O’Shaughnessy, Eric, Jenny Heeter, Julien Gattaciecca, Jenny Sauer, Kelly Trumbull, Emily Chen. 2019. “Empowered communities: The rise of community choice aggregation in the United States.” Energy Policy 132, (September): 1110-1119. https://doi.org/10.1016/j.enpol.2019.07.001.