Renewing the Debate on the Renewables Portfolio Standard (RPS)

Justin Adams, Ph.D.
President and Chief Economist of Encina Advisors, LLC, a Davis-based economics research and analysis firm.

“It’s déjà vu all over again.” – Yogi Berra

As has been reported in these pages and elsewhere, Senators Kevin de León and Mark Leno earlier this month introduced Senate Bill (SB) 350, otherwise known as the “Clean Energy and Pollution Reduction Act of 2015.” The authors developed SB 350 ostensibly to help create jobs in California, grow the state’s economy, and improve public health by mandating that the state achieve three specific targets by 2030. Specifically, SB 350 requires that California reduce the gasoline usage for transportation by 50 percent, increase the energy efficiency of existing buildings by 50 percent, and obtain 50 percent of its electricity from renewable sources such as solar power and wind.

The third requirement – that California obtain 50 percent of its electricity from renewable sources – would come through changes to the state’s Renewables Portfolio Standard (RPS). Under the current RPS, California’s electricity retailers (including publicly owned utilities, investor-owned utilities, electricity service providers, and community choice aggregators) are required to provide 33 percent of the state’s power from renewables by 2020.

While all three of SB 350’s targets merit considerable scrutiny, let’s focus today on the proposed increases to the RPS.

Consider the following passages from SB 350:

California suffers from drought, air pollution, poor water quality, and many other environmental problems. Very little has been done because the special energy interests block change. Californians must take energy reform into their own hands. The alternative to dirty energy is solar and clean energy….

The Solar and Clean Energy Act will put California on the path to energy independence by requiring all electric utilities to produce 50 percent of their electricity from clean energy sources like solar and wind by 2025. Right now, over 22 percent of California’s greenhouse gases comes from electricity generation but around 10 percent of California’s electricity comes from solar and clean energy sources, leaving Californians vulnerable to high energy costs, to political instability in the Middle East, and to being held hostage by big oil companies.

OK, I wasn’t exactly being truthful. These passages aren’t from SB 350, although they clearly look like they could have been. Instead, they are from Proposition 7, the Solar and Clean Energy Act of 2008.

That’s right: 2008. In other words, the people of California debated moving to a 50 percent RPS not even seven years ago. And they rejected the idea at the ballot box.

By an overwhelming margin, I might add – 36 percent for to 64 percent against.

Why was it rejected so soundly? To be sure, some voters were scared away because of flaws in how the proposition itself was crafted. For example, Proposition 7 required that utilities pay 10 percent above market rates for renewable power in perpetuity. That’s absurd on its face. But a major reason why the voters said ‘no’ was that under Proposition 7 the cost of electricity in California would skyrocket.

Back in 2008, I co-authored a study on the cost of Proposition 7 to California. (Full disclosure, the analysis was funded by a coalition of utilities.) We found that increasing the RPS to 50 percent would cost California an additional $11 billion a year by time the proposition was fully implemented in 2025.

That’s $11 billion a year (in 2007 dollars, no less). Or an additional $340 in electricity costs per household every year.

Granted, today’s circumstances are different from those in 2008. Then, the baseline for comparison was a 20 percent RPS, whereas now it is a 33 percent RPS. Then, full implementation would have occurred in 2025, whereas now it would occur in 2030. And then, California was experiencing all-time highs in the price of natural gas – our largest single source of electricity generation – whereas now America’s renaissance in oil and gas production has brought prices down significantly. So, while we cannot necessarily expect SB 350 to generate the exact same increase in electricity costs as Proposition 7, we nevertheless can still expect SB 350 to increase electricity costs significantly.

Here are three findings from the Proposition 7 analysis that are still relevant today:

Increasing the use of renewables means focusing on solar. Even if California tapped all of its projected lower-cost renewables such as geothermal and wind, it would not have enough renewables to meet the 50 percent threshold without a substantial reliance on solar power. Keep in mind that importing renewable power from out of state is made difficult and costly because of insufficient transmission capacity to and throughout California.

The cost of a 50 percent RPS comes down to the cost between solar and natural gas. The figure below, based on data from the U.S. Energy Information Administration, compares the levelized costs of electricity for different types of solar and natural gas generation. Levelized costs essentially amortize the capital and operating costs for generating plants and allow for apples-to-apples comparisons. The figure shows that for plants entering service in 2019 (with an expected 30-year service life), solar power is still relatively expensive. Solar photovoltaic is expected to cost $130 per megawatt hour (in 2012 dollars) and solar thermal as much as $243. By contrast, natural gas generation is expected to run between $66 and $128 per megawatt hour, depending on the specific technology used.

us average levelized costs

It should be noted that the cost of solar power shown here is likely underestimated. Because solar power is intermittent, it typically requires backup resources (i.e., natural gas generation) to ensure that sufficient electricity is readily available to customers.

California taxpayers would suffer a double hit. Residences, businesses, and large industries are certainly large consumers of electricity in California. But there is another consumer that often goes unmentioned: state and local government. The State consumes electricity for owned and leased facilities of departments and agencies (including prisons), the University of California system, the California State University system, and state roadways. Similarly, local governments consume electricity for city and county facilities, school districts, community colleges, and local roads. Combined, they account for about 8 percent of total consumption in the state. That means that Proposition 7 would have added nearly $1 billion in electricity costs paid by state and local governments. And when their bills go up, it’s California taxpayers that are on the hook.

Seeing the reemergence of a 50 percent RPS proposal so soon is like déjà vu all over again. We can all hope, however, that the plan’s supporters experience a similar sensation after its defeat.

Dr. Justin L. Adams is the President and Chief Economist of Encina Advisors, LLC, a Davis-based research and analysis firm.

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