What the Solar Rooftop Standard has to tell us about our climate policies.
If you follow this blog, you are probably already aware that last Wednesday, the California Energy Commission, the state agency responsible for adopting energy-efficiency related building standards, added a new standard: starting in 2020 almost all new homes in California must install rooftop solar.
While I have already published an op-ed criticizing the move, I’m going to look on the bright side here. You see, this regulation provides what we in the University biz call a teaching moment. Many of us here have been working on climate and energy policy for a long time and realize that some core problems with regulatory approaches keep cropping up in policy after policy. Let’s call them the symptoms of regulatory groupthink.
So rather than picking exclusively on the new solar standard, we can use it as a case study to help illustrate a broader set of problems with many of our approaches to energy policy. As our climate goals get more ambitious, the stakes are getting much higher and we may not be able to continue to ignore these flaws. We are going to need to treat these symptoms or our climate policy could ride off the rails.
Symptom Number 1: If we like a technology, we mandate it! If we don’t like a technology, we ban it!
One thing the press coverage of the standard seems to overlook is that there are lots of other policy options for promoting low-carbon energy and that we don’t necessarily have to do all of them. There are many pathways to zero-carbon electricity, and many of them don’t require solar PV on all houses. Standards, such as this new mandate from the CEC, are the strongest, and most extreme, tool in the toolkit of energy and environmental regulators. In general a regulatory standard eliminates choice and assumes that the mandated solution is the best one for everyone, everywhere, no matter what their circumstances. Contrary to the stereotype of economists, most believe that regulatory standards have a role to play, but as a kind of last resort. A rule of thumb should be, if everyone were fully informed and faced the right incentives (including the costs of their pollution), they would choose this option. Insulation in a new home meets that description.
In other words, standards should be limited to cases where they mandate an obvious, slam-dunk best option for solving a problem. This is where rooftop solar runs into trouble. In the case of rooftop solar, it should be not just the obvious best choice right now, but for much of the lifetime of a new home. That’s a tough criterion to meet. Consider what you thought to be the slam-dunk best technology 30 years ago.
My colleagues and I who have been critical of the CEC standard in the press have pointed to the fact that electricity from solar on residential rooftops is on average way more expensive than solar in other settings (warehouses, solar farms). I’ve gotten feedback from various commenters, friendly and not-so friendly, making arguments that point to the costs of high-voltage transmission, or concerns over large installations in sensitive desert eco-systems. Such factors should definitely be taken into consideration, and while they may narrow the gap between residential solar and other options, many believe they still don’t outweigh huge cost advantages enjoyed by large-scale installations.
But even having this debate misses a more important point. The burden of proof isn’t on me to show that there are better options for low-carbon energy than residential solar. I’m not the one requiring almost every new home install a nearly $10,000 technology. The burden of proof is on those pushing for a mandate that ignores any concept of a level playing field between possible solutions to show that their technology option is obviously the best choice amongst many others, not just now but also over the coming decades. I don’t think the CEC has come close to meeting that burden.
Symptom Number 2: We continue to treat infrastructure cost-shifts as savings.
This has been a recurring theme on the blog over the years. As Severin Borenstein has pointed out, one of the main reasons residential solar in California looks like a good deal, from the perspective of many households, is because its costs are compared to full retail rates. The problem with this comparison is that retail rates contain a large amount of fixed and sunk infrastructure costs. Those costs don’t go away when a home generates solar energy. Solar homes shift those costs onto non-solar homes.
Consider this situation: we spend $5 Billion to build a bridge across the Bay, and charge commuters $10 per round trip to pay for it. It’s a good public policy decision because each commuter gains $20 in personal value from using the bridge. Right after the bridge is finished, the transportation commission determines that all commuters could own jet skis, and ski across the Bay at a cost of $8 a day. Two dollars less than having to pay the bridge toll! A win-win! It’s clear that for the best interest of those commuters, we should mandate they all buy jet skis. Except that those billions of dollars in jet skis won’t save us the cost of the bridge. Public policy evaluation needs to look at the full social costs of policies, and not treat cost shifts as free money.
Symptom Number 3: The infatuation with “net-zero <something bad>”.
The CEC solar decision is another step in the push for a net-zero energy standard for new homes. The solar mandate has been justified as one way to get the state closer, but still not all the way, to that goal. Rather than make the solar standard look better, this decision should draw more scrutiny upon the net-zero energy aspiration. This building standard target hasn’t received nearly enough attention or scrutiny, possibly because it hasn’t been taken seriously up till now. It’s a great example of the net-zero everything movement. Economists, or anyone who has spent any time thinking about comparative advantage, have long shaken their heads in disbelief at this stuff. Apparently we haven’t articulated the counter-argument clearly enough. Sure, net-zero energy for every new home could be a way to reach our climate goal but it’s almost certainly not the best way. Requiring each California resident to sell enough goods and services to China to offset the imported goods they consume would be a way to address our trade imbalance, but not the right way.
Or think of it this way, why not have net-zero energy standard for each room in a house? That would be crazy, you say? What if the roof above one room isn’t facing south and another is? Well, what if one house has a roof amenable to large amounts of solar and another is a north-facing home with an odd-shaped roof shaded by trees?
Maybe, maybe, net-zero goals have a role as a gimmick for spurring ideas in a demonstration project setting. When we start taking them too literally and applying things like this to every home, we’ve gone too far.
Symptom Number 4: Our renewable energy policies do not adequately account for the energy or capacity value of the resources we acquire.
In much of our policy a green kWh is considered better than a dirty kWh, but not all kWhs are the same. For example, California has been at the forefront of rapidly shifting its electricity production to renewable generation technologies. Utility-scale renewables have been driven by the renewable portfolio standard (RPS). Distributed renewable generation has enjoyed a raft of implicit and explicit subsidies, including net-metering and an extreme rate structure, which together make rooftop solar an attractive option for many California households. What all of these policies share is a complete indifference, incentive wise, to where and when the energy is produced.
Under the RPS everyone has had an incentive to install the technology that produces the most renewable KWh regardless of when they are produced, and, in California, that has turned out to be solar. Recent work by myself and Kevin Novan, also of UC Davis, quantified the impact of the solar binge in California on the wholesale prices of power. In the last 5 years, thanks to the surge of wholesale solar energy (right panel) the price profile has moved from the blue (solid) line above to the red (dashed) line (left panel). What this means is all the solar we have already installed has driven down the value of midday energy. The next KW of solar capacity we install will be far less valuable than the first. The 10,000th MW of solar capacity we install will generate only about half of the value that the 2000th MW did. But the RPS doesn’t care, it just wants its KWh.
The new CEC rooftop solar mandate kind of cares, but in bizarre ways. The CEC uses something called the Time Dependent Valuation methodology, a forecast of the time value of energy and other infrastructure over the coming decades (good luck with that). Who knows, maybe the CEC’s consultants are exactly right and this is what the hourly marginal cost profile will look like, but it sure looks different than what I would have come up with. Maybe reasonable people can disagree on this. This brings us back to point number 1, if reasonable people can disagree, then we shouldn’t be requiring almost everyone to install a technology justified by this one set of debatable assumptions.
As more aggressive and difficult carbon reduction goals loom for California, there seems to be an inclination to grasp at every policy we can think of that can add to the carbon reduction body count. It’s a spaghetti on the wall approach to carbon policy. However, it’s now more important than ever to focus on the efficient tools and policies that can push our carbon reductions in cost-effective ways. We could get away with inefficient policies like net-energy metering and zero-carbon schools when they were relatively small polices. From here on out the costs are going to start to matter.
Suggested citation: Bushnell, James. “Lessons in Regulatory Hubris.” Energy Institute Blog, UC Berkeley, May 14, 2018, https://energyathaas.wordpress.com/2018/05/14/lessons-in-regulatory-hubris/