Less Carbon, Higher Prices
This piece is excerpted from the new Manhattan Institute report “Less Carbon, Higher Prices: How California’s Climate Policies Affect Lower-Income Residents” by Jonathan Lesser. Read the full paper here.
California has consistently been at the forefront of U.S. energy policy, including aggressive efforts to promote renewable generation, discourage consumption, and create a “low-carbon” economy. By 2020, California will require that one-third of electricity consumed in the Golden State be generated from renewable sources.
Not only is electricity purchased from renewable sources by the state’s utilities more expensive than electricity purchased in the wholesale market; California requires utilities to adopt rate structures that raise the price of electricity as consumption increases. The state is also home to a carbon cap-and-trade program aimed at reducing its greenhouse gas (GHG) emissions by 80 percent below 1990 levels—roughly 433 million tons of CO2 equivalent—by 2050.
The supply and cost of electricity in California are affected by public programs designed to incentivize development of renewable sources: subsidies to encourage development of solar photovoltaic (PV) power at residential and commercial locations; “feed-in” tariffs to encourage small (less than 3 megawatts capacity) PV and bioenergy resources; a carbon cap-and-trade program to reduce GHG emissions; and, most significantly, a renewable portfolio standard (RPS) mandate.
Partly to meet such mandates, California’s average residential electricity prices have increased significantly: the cost of acquiring energy from renewable sources is far higher than the market price of power. Further, because most wind and solar generation is developed in remote locations, California’s utilities have constructed hundreds of miles of new high-voltage transmission lines, whose costs are passed on to households.
Despite projections of imminent cost-competitiveness with fossil fuels, renewable generation continues to be considerably more expensive. During 2003-2013, overall average cost of renewable generation acquired by the aforementioned utilities rose by 55 percent, from $54/MWh to $84/MWh. In contrast, in 2013, the average wholesale market price of generation was slightly more than $46/MWh.
As the Golden State continues its pursuit of a low-carbon economy, its green-energy policies are driving rising numbers of Californians into energy poverty. In 2012, nearly 1 million households spent more than 10 percent of their income on energy bills. In hotter, less affluent inland counties, the rate of energy poverty was as high as 15 percent of households. Absent significant policy reform, the state’s rate of energy poverty seems destined to rise higher.
To alleviate current inequities, California legislators should:
1. Conduct a Cost-Benefit Review. Commission a comprehensive, impartial cost-benefit analysis of the state’s energy policies. Do the benefits of California’s proposed GHG reductions—which, even if realized, will negligibly affect global emissions and climate—outweigh their considerable and rising cost to local businesses and households, particularly low-income Californians?
2. Make the State’s Tariff Structure More Fair. Impose a greater share of the burden of renewable mandates on wealthier households and avoid over-allocating fixed-utility costs to lower-income households, which are least likely to participate in California’s subsidized rooftop solar PV programs.
California’s energy policy is making life more difficult for its low-income residents. The state should reassess its renewable-energy campaign and decide whether forcing its residents into energy poverty is worth the benefits of lower carbon emissions.
Jonathan Lesser is the president of Continental Economics.