Designing More Cost-effective Trading Markets for Renewable Energy

In this paper we study the design of renewable energy portfolio standards (RPSs). We focus on solar energy and analyze two common RPS rules: cross-state trading restrictions and state-specific interim annual targets. Using historically observed RPSs and an empirically calibrated model of state-level solar supply curves, we find that allowing for cross-state trading reduces cost by one-fifth and significantly changes the geographic distribution of new solar installations. Removing interim annual targets over the 2015 to 2019 period reduces cost by one-third by back-loading installations to later years. These cost reductions become much larger when considering more ambitious RPS targets. Our results suggest that more flexible program design such as allowing for cross-state trading, back-loading interim targets, or banking and borrowing renewable energy credits can avoid escalating costs and preserve the political feasibility of renewable energy standards, although such cost savings must be balanced against the social damages from delayed climate action and other economic and political considerations. JEL Classification: H23, Q41, Q42, Q48