Could California’s ambitious zero carbon electricity policy make it harder to cut greenhouse gasses overall?
Sometimes two ideas that seem joined at the hip end up butting heads. A couple current discussions in the energy blog-o-sphere illustrate. One is the debate over moving to 100% carbon-free electricity in California. Another is the push for “electrification” of transportation, water heating and anything else that these days relies on burning natural gas, oil or coal.
The two policy initiatives seem to be complimentary in their pursuit of a low-carbon future: One policy cleans up electricity while the other gets people to switch from using other dirty fuels over to clean power. Except there’s a hitch: Money. If zero-carbon standards significantly increase the retail of price power, then firms and consumers are going to be less likely to favor electricity-intensive products.
Too much of the debate we’ve heard over 100% targets are stuck on the question of whether it is technically feasible. I don’t have strong doubts that it is technically possible. After all you could always resort to rolling blackouts when renewable energy falls short. That’s technically feasible. Buying enough Tesla batteries will (eventually) be technically feasible. Importing hydro power from the Pacific Northwest is definitely technically feasible.
The relevant question is the cost gradient as we scale up from 60 to 70 to 80 percent and higher. What if going from 90 to 100% renewables triples the cost? The timing of the targets also affects the cost, because a zero carbon standard without demand growth requires the early mothballing of existing fossil fueled facilities rather than a diversion of new building from fossil to zero-carbon sources.
It’s not just about cranky electricity customers and a “ratepayer revolt” anymore. Not if we are trying to electrify new sectors. Now you may be thinking: “Of course customers would love electric cars. Isn’t gasoline hella expensive in California?” There certainly has been a lot of media attention paid to gasoline prices, from the potential repeal of the new infrastructure gas tax to the impacts of the low-carbon fuel standard, not to mention one blogger’s obsession with the “mystery surcharge.”
Look at these two trends, however. The right-hand panels plot gasoline prices in California (red) vs. Texas (black). The lower right-hand panel plots the ratio of California gasoline prices over Texas prices. The left-hand panel plots residential electricity price levels and the ratio for the same two states. Not surprisingly, gasoline has always been more expensive in California relative to Texas, and has grown somewhat more so in recent years. The main impression is that both are dominated by global oil prices.
The electricity story is more complicated. Upon restructuring, both the California and Texas markets became more closely tied to the price of natural gas. Both markets rode the gas price up in the 2000s. Texas power prices have ridden the gas price back down again since 2008, while California prices have continued to increase.
The differences are not a result of differential costs of wholesale power in the two markets. In fact, wholesale prices are a little lower in California. A closer look at an electric bill in California provides some more detail. Conveniently, PG&E and other California utilities break down the component costs of retail rates into several categories. Also conveniently, I have a colleague who is, um, “detail oriented” enough to keep careful records of every aspect of his/her energy expenses over a long period of time.
This figure plots the component parts of my colleague’s PG&E rates over time. Unfortunately, comparisons before 2013 become difficult as PG&E’s treatment of the increasing block structure changed in 2013. Distribution and transmission costs have been rising this decade, but what is most striking is that the cost of energy procured by PG&E has been rising, while the wholesale price of energy has been falling. The blue bars constitute PG&E’s average (procured) energy costs, including all its contracts, regulated plants, and other purchases and fees. The black line illustrates the wholesale energy price, as based upon day-ahead northern California June prices in the CAISO’s market. Energy prices in the CAISO market have been trending downward, yet the overall cost of procured energy is going in the opposite direction.
Now I wager that some commenter is going to blame PG&E for this, but this trend of higher procurement cost and lower wholesale prices is a general one for California. It is captured in the comparison of California rates with those of Texas. The Renewable Portfolio Standard (RPS) is likely playing a big role. The growing gap between wholesale and retail prices is a consequence of rapidly adding renewable capacity at costs above the wholesale price that in turn drives down the wholesale market price even farther. It is true that renewable costs are declining, but so is the value of renewable output as captured by the wholesale price. Recent work by Kevin Novan and I have estimated that the additions of utility-scale solar over the last half-decade have reduced power prices by close to $20/MWh during mid-day. Since most new renewable capacity is producing in those same time periods, a solar contract signed in 2016 produced power worth half as much as a contract signed in 2012.
One theme of my work with Severin Borenstein has been that pressure for disruptive change in the power industry grows with the gap between retail prices and wholesale costs. In the past, such pressure help create the Independent Power Producer industry and later spurred the movement for electricity deregulation. Now the pressure may be pushing users off the grid. Anecdotes from Hawaii, another state with a 100% renewable electricity law, point to the risks of pushing the electricity industry too far in front of other sectors. When I last visited, I heard several stories of large commercial or industrial customers considering on-site (gas-fired) generation. Such measures become increasingly attractive as the retail electricity prices rises farther above the option of self-generation, which is not subject to the RPS. It’s enough of a concern that the state is now debating a possible renewable mandate for natural gas.
This is another example of what Meredith Fowlie has called the waterbed effect. You push carbon down on one side and it pops up on another. Just as high energy costs may drive energy-intensive firms to other states, high-cost electricity may drive consumers away from electric power just when we are trying to lure them in. We may resort to the always-popular tool of subsidizing investments for electrification, but the costs of those subsidies are bound to rise if the cost disadvantage of electric water heating or heat pumps grows. And those subsidies are often paid for out of electric rates, making the cost-gap even larger.
Goals like 100% clean or “net-zero” carbon sound like nice round numbers and are politically popular, and there is no easier target than the highly-regulated electricity sector. As we have repeatedly written on this site, however, the world’s climate problem is not going to be solved just by cleaning up the electricity industry, let alone the California electricity industry. Eventually we are going to need a holistic approach that considers all sources of greenhouse gases and makes some attempt to balance the costs of abatement across sectors.
William Nordhaus was just announced as a Nobel Laureate in Economics, largely for his work on the concept of broadly applied carbon pricing. The increasing substitutability of gasoline, electricity, and natural gas illustrates why such an approach is so much more effective than sector level technology mandates. While the Competitive Enterprise Institute may complain that carbon taxes raise electricity and gasoline prices, alternative regulations that pursue piecemeal and uncoordinated solutions ultimately cost more.