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The Impact of Rate-of-Return Regulation on Electricity Generation from Renewable Energy

Author

Listed:
  • Adrienne M. Ohler

    (Department of Economics, Illinois State University)

Abstract

Traditional electric utility companies face a trade-off between building generation facilities that utilize renewable energy (RE) and non-renewable energy (non-RE). The firm’s input decision to build capacity for either source depends on several constraining factors, including input prices, policies that promote or discourage RE use, and the type of regulation faced by the firm. This paper models the utility company’s decision between RE and non-RE capital types. From the model, two main results are derived. First, rate-of-return (ROR) regulation decreases the investment in RE capital relative to the unregulated firm. These findings suggest restructuring electricity generation markets, which removes the ROR on generating assets, can increase the relative use of RE. Second, the renewable portfolio standard (RPS) increases the investment in capital and labor that requires RE as a source of electricity, as expected. The model shows that the impact of an RPS depends on the amount of ROR regulation.

Suggested Citation

  • Adrienne M. Ohler, 2011. "The Impact of Rate-of-Return Regulation on Electricity Generation from Renewable Energy," Working Paper Series 20110403, Illinois State University, Department of Economics.
    • Handle: RePEc:ils:wpaper:20110403
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    File URL: http://economics.illinoisstate.edu/RePec/Papers/RPS_Firm_Theory.pdf
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    References listed on IDEAS

    as
    1. Madlener, Reinhard & Stagl, Sigrid, 2005. "Sustainability-guided promotion of renewable electricity generation," Ecological Economics, Elsevier, vol. 53(2), pages 147-167, April.
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    Keywords

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    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation

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