To date, 26 states have adopted renewable energy standard (RES) laws, which require energy utilities to derive a specified percentage of electricity from renewable energy, by a particular date. These standards range from 8 percent in Pennsylvania by 2020 to 40 percent in Maine by 2017. In November, voters will decide on a measure that would place similar obligations on Missouri’s three investor-owned utilities. The “Missouri Clean Energy Initiative” requires AmerenUE, Kansas City Power & Light, and Empire District Electric to produce 15 percent of their electricity through renewable sources by 2021.

The initiative has some merit. Increasing production of renewable energy would decrease our dependence on coal, lowering fossil fuel costs. It also has the potential to create jobs and reduce carbon emissions, a major concern in Missouri because the state now derives more than 80 percent of its power by burning coal. A diverse energy portfolio would lead to stability in long-term power rates, reducing energy bills. There is, however, a significant problem with the “Missouri Clean Energy Initiative,” and any mandatory RES: the tight government regulations binding power utilities.

The initiative outlines a tight timetable for Missouri’s investor-owned utilities, specifying that 2 percent of produced energy must be renewable by 2011, with at least 15 percent meeting that standard by 2021. The energy law now in effect, the “Green Power Initiative,” has similar goals. It encourages, but does not require, 4-percent renewable energy by 2012, with 8 and 11 percent required by 2015 and 2020, respectively. The new RES would fine utilities if they are unable to reach mandated percentage levels by the corresponding year. It also caps rate increases at 1 percent annually, a provision intended to prevent price spikes.

A study by Missouri Coalition for the Environment, a proponent of the new RES, estimates that rates will increase only 0.6 percent in the first year, and decrease steadily thereafter. While that trend may have held true in other states, there is no guarantee that rates will stay low in Missouri. Furthermore, there is no accurate way to predict future rates if the RES is not passed. Utility rates are highly volatile, and voters should hesitate to base their decisions on estimates. In the event that production costs increase more than the 1 percent by which prices are allowed to rise, power companies would have to make up their losses elsewhere — for instance, through lower shareholder returns, wage cuts, or postponed increases to the wages and benefits of current employees. Also, any planned expansions, such as building new power facilities, would have to be postponed. Alternatively, if utilities exceed the 1-percent cap, they have the option of failing to meet the renewable energy goal for that year, instead paying the initiative’s associated fines.

As natural monopolies, investor-owned power companies are not governed by typical competitive forces. Upon issuing rates to customers, they create value by minimizing costs and inputs rather than through maximizing output. Utilities are not forced to do anything under the current energy law, but if the benefits described by proponents of the RES are indeed optimal both for society and the utilities’ bottom lines, power companies will be ramping up renewable energy production on their own. In fact, Missouri’s current total and planned renewable energy production is already nearing 1 percent.

With the RES in place, power companies would no longer seek to produce the level of renewable energy that is optimal for society, settling instead for the level that is easiest and cheapest to produce. When regulations establish any sort of minimum level, it intensifies the incentive to do the least amount of work necessary to meet that standard, which is one of the reasons that government mandates seldom achieve their goals. In practice, the RES will act as a percentage floor, giving utilities a comfortable public relations image to hide behind. It will allow them to make eco-friendly claims while still producing high levels of nonrenewable energy.

On the surface, the “Missouri Clean Energy Initiative” seems to be a seamless law without negative consequences. It provides a vehicle for Missourians to feel good about mandating renewable energy. But the costs to these regulatory standards are not initially evident. Missouri voters need to be informed of all the law’s potential benefits and drawbacks before the vote on Nov. 4.

Jacob Voss is an intern at the Show-Me Institute. He is currently pursuing a bachelor’s degree in economics at Saint Louis University.