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Lessons in Regulatory Hubris

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 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 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.

 

Screen Shot 2018-05-13 at 12.28.14 PM
Annual Average Wholesale Prices and Solar Output in CAISO Market

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.

Screen Shot 2018-05-14 at 7.21.14 AM
Estimated Value of Incremental Solar Capacity (Bushnell and Novan, 2018)

 

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.

40 thoughts on “Lessons in Regulatory Hubris Leave a comment

  1. Good analysis, good points. The GHG hysteria is where it is because we’ve past many GW tipping points. Basically, we’re out of time for this and our only option is to slow the warming in the hope of a miracle or two.

    Mandatory standards were a strategy better suited to 1968 when Hansen testified before congress. The DoD regards GW as the #1 threat to national security. Others, who have spent a lifetime studying these issues view GW as the #1 threat to human existence, at least in any form recognizable to us today.

    So what to do? Go net zero in any way possible. Regard GW as the #1 threat to YOUR security and the security of your progeny. Live as if you understand this in your heart, not just your head. When it comes to costs, understand what it will cost the world’s economy if we fail? It’s not entirely about what we do, it’s about how fast we can get it in place. And no other state is like CA. What will it cost our kids? What is our collective moral and ethical responsibility to come to our senses on this?

    There will be no perfect solution to a FUBAR situation. Get to work! When your own life achieves net-zero status then come back and share what you’ve done. In the mean time, talk is cheap and meaningless in a crisis.

    • There are a significant number of errors in your post:

      1) The “Tipping points” were theoretical concepts – we don’t actually know what the tipping point is, or when it might occur. Many tipping points have come and gone without a profound transformation of our climate. There might be one in our future, but frankly we don’t know for sure, and such an occurrence would only be obvious in retrospect.

      2) We (the U.S. or California) are not the problem – we don’t control the world supply of hydrocarbons, nor do we control the world demand for hydrocarbons. Ergo, our actions will likely have limited effect one way or another. The only truly practical solution is to create energy sources that are cheaper than coal at a retail price. That is about $0.03/kwh. Wind and solar come no where near this standard. Geothermal and hydro meet this standard. Natural gas might, as well as nuclear. But which of these solutions do we promote? The ones that almost assuredly will never solve the problem. Had California invested as much money in nuclear power as it did in wind and solar, it would be 100% carbon free, today. So I might make the same argument – had ecowarriors not demonized nuclear power in the 1970s and 1980s, we would not have any climate issue at all. But you ignored the experts, and now whine about being ignored.

      3) “Mandatory standards were a strategy better suited to 1968 when Hansen testified before congress.” 1968? I think you mean 1988.

      4) “The DoD regards GW as the #1 threat to national security.” Highly unlikely.

      5) “Others, who have spent a lifetime studying these issues view GW as the #1 threat to human existence, at least in any form recognizable to us today.” Again, highly unlikely. It might be in the top 20, but is no where close to number one.

      6) “Go net zero in any way possible.” well, that is the problem isn’t it? We are not approaching the problem “in any way possible” We are approaching it “not this way, but that way.” The only countries that have successfully decarbonized to a large degree have deployed nuclear (France), hydro (France, Ontario, Norway, and Iceland), and geothermal (Iceland) power. France decarbonized their entire electrical sector in 10 years using hydro and nuclear. We know this solution works, at a cost we can manage. Instead we have opted for wind and solar, which both appear unlikely to achieve the goal – we are counting on future inventions to make them work. if this indeed a crises, then might I propose we start acting like it?

      I agree – what is the moral responsibility here? I’m frankly tired of the sing-song about a crises by people who don’t act like it is a crises at all. Forget nuclear – There is around 2 GW of geothermal power in the ground at the Salton sea that could be developed at a low marginal cost, and will supply carbon free energy (and lithium for batteries) for a century. When is the last time an environmental group protested to allow development? Has the state of California lifted a finger to speed development? If not, why not? We’ve known about this resource for 50 years. The land has marginal ecological value. But we insist that the companies trying to develop the resource jump through hoops….and we cost it out of the market.

      • “. The only truly practical solution is to create energy sources that are cheaper than coal at a retail price. That is about $0.03/kwh.”
        Where do you get this number? Lazard’s Cost of Generation shows $60 to $146 per MWH and that largely excludes the external cost of GHG emissions. Meanwhile the same reports solar technologies costing $43 to $53 per MWH. Certainly you can then get into why actual costs diverge from these values, but that occurs on both sides of the ledger. Most of the coal fleet in the developed world is aging, nearing the end of its economic life, so its new plant prices that matter. And right now renewables are displacing fossil resources solely on an economic basis.

        As for nuclear, the new South Carolina and Georgia plants were supposed to show us how nuclear could be constructed cost-effectively. Instead, it turned out to just be the same old story, again. Nuclear is not a cost-effective resource, and only fantasizing about what could have been in an alternative future makes it so. It’s time to move on with what we have at hand.

  2. In Australia where rooftop solar is ubiquitous and increasingly large scale solar is becoming common, we know that per installed kW or produced kWh rooftop solar is not terribly much more expensive than large scale ground based solar. I think I also disagree that mandation requires demonstration of superiority over 30 years. We know in Australia that systems pay for themselves quickly, typically less than 10 years. I suspect for high consumption customers in California the picture would be similar

  3. I was dumbfounded when I first heard about this new mandate. Setting aside the impact on home prices, there are some other practical problems that the CEC likely didn’t address. For example, must homes be oriented to maximize PV production at the expense of aesthetics or safety (as in being buried under a few feet of snow when it slides off a roof)? What about those who live in snow country or areas that are fog-prone or will be building on lots with trees? Should solar be mandatory even if it’s provably not cost effective in those areas?

    How did the CEC determine that a 40% improvement in energy efficiency is cost-effective or even feasible? Are those improvements part of the estimated $10,000 average increase in the cost of building a new home? Did they verify those figures with a variety of builders in a variety of locations> How did the CEC determine how much an average homeowner would save?

    I never understood how a zero-net energy mandate would work because there was little or no information available that explained how seasonal surpluses would be stored. As Jim points out it’s clear the CEC and the unaccountable interest groups that pushed this proposal have taken the attitude that it should be “damn the torpedoes, full speed ahead”.

  4. That RPS standards “don’t care” goes to a largely unappreciated problem of quantitative standards. Quantitative emission standards don’t care either. At least if you’re trying to equate emission taxes with marginal damage costs, you are more likely to notice that the MDCs vary across time, space and setting (indoor vs. outdoor).

    The fundamental problem is that we lose track of the relationship between the target and the ultimate objective of promoting the general welfare. Ad hoc targets also have a tendency to proliferate. For example, suppose the exemption for shaded houses leads developers to plant fast-growing but invasive albizia sapplings (whose branches break and fall on streets, houses, etc.). Now you have to have another law specifying the type of trees to be allowed. This is band-aid economics. Instead of getting rid of original policy distortion, politicians and bureaucrats patch on anther restriction, mandate, or subsidy.

  5. I agree with everything Jim said in this blog. When I first read about the CEC proposal I was appalled for the same reasons Jim has cited.

    In light of the CAISO Duck Curve it appears to me that California’s solar capacity is already past the optimal level. Until we get cheap storage there is a practical limit to how much solar the power system can economically absorb.

    I have frequently considered moving back to California but the problems I see there, including the high cost of living made even higher by the politicians and bureaucrats have kept me in Washington DC – even though I loathe the hot summers and cold winters.

  6. Until this decision the CEC typically took a much more sound and moderated approach to regulation. The ecomomics behind this decision seem fatally flawed from the outset. As your article and several others have pointed out, residential rates still do not reflect real-time system costs and net metering rates over pay customers for energy sales into the system and fail to charge enough for backup / energy sales from the system. Now add to that the massive costs utilities will incur from the distribution system, communication, and internal control systems necessary to manage the density of new solar installations- and all of these costs (because of the CEC mandate) will be passed on to customers by the CPUC. In addition, this solar mandate will skew system costs and drive out investment and research in other productive alternatives.
    All around a really bad policy decision.

  7. Thank you for your commentary. The real problem is that California’s “Groupthink” is working to banish a safe, economical, reliable, dispatchable energy source, namely nuclear power. An independent CPUC Intervenor, Californians for Green Nuclear Power, Inc (CGNP). is mounting a “David versus Goliath” battle against the interests promoting this “groupthink.” (CGNP’s website is CGNP dot org.)

    The problem with placing large quantities of non-dispatchable solar and wind on the California grid is that fossil-fired emissions are INCREASED by such actions. The reason is that fossil-fired generators are required to have much higher “ramp rates” in order to integrate those intermittent generation means. Higher ramp rates are associated with higher fossil-fuel usage, hence greater emissions. Here’s the link to a 2010 analysis from Colorado wind power advocates. http://docs.wind-watch.org/BENTEK-How-Less-Became-More.pdf

    The CEC mandate also increases the risk of difficult-to-extinguish “lithium battery fires”. Please search for the phrase “lithium battery fires” – 15,900 results were returned on 14 May 2018 via Google.

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