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

Listed author(s):
  • Adrienne M. Ohler


    (Department of Economics, Illinois State University)

Registered author(s):

    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.

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    File Function: First version, 2011
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    Paper provided by Illinois State University, Department of Economics in its series Working Paper Series with number 20110403.

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    Length: 20 pages
    Date of creation: May 2011
    Handle: RePEc:ils:wpaper:20110403
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    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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