California’s Energy Policy

A Cautionary Tale for the Nation

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Global warming policies championed by former Vice President Al Gore, California Governor Arnold Schwarzenegger, and several Members of Congress clash with America’s long-term economic and energy interests. These policy makers advocate 70-, 80-, and even 90-percent reductions in carbon dioxide (CO2) emissions by mid-century. Yet the federal Energy Information Administration (EIA) projects a 34-percent increase in U.S. emissions by 2030. Emissions tend to increase along with increases in population and economic output. Is it possible to reduce emissions by 70 percent or more without severe cutbacks in either economic or population growth?

Among other policies, global warming activists call for an effective moratorium on new electrical plants lacking carbon capture and sequestration (CCS), and increased energy efficiency and use of renewable sources. Since it may take two decades to find out whether CCS is economical and decades more to build the infrastructure, and renewables just cannot provide enough, this constitutes a ban on new plants. How then do we meet U.S. electricity needs as the economy and population grows?

Many policy makers and environmental activists assert that the rest of the country can simply replicate California’s demand-side management (DSM) programs, which consist of an assortment of subsidy programs to retrofit buildings and subsidize energy-using equipment. California supposedly shows that we can have it all—a growing population and economy and lower overall energy consumption and emissions. Adopt the “California model” nationwide, they claim, and America will become so much more energy efficient that we will not need new electrical capacity for decades. This will give us time to develop a non-carbon energy system. Many states are set to follow the California model, and several key lawmakers are pushing Congress to enact similar interventions at the federal level. 

In reality, rather than a model, California energy policy is a cautionary tale. Yes, since 1980, per capita electricity consumption in California has remained flat while it has increased in most other states. However, holding per capita consumption flat is not the same as reducing overall consumption or emissions. As California’s economy and population have grown, so have the state’s aggregate electricity consumption and emissions. Today, California consumes 65 percent more electricity than it did in 1980. Coal-based electricity imports from other states grew by 60 percent from 1983 to 2005, and is now 10 percent of California’s total generation, growing from 9 percent in 1983. Even if DSM policies contribute marginally to California’s comparatively low per-capita electricity consumption, this in no way proves that America can afford to ban new coal plants.

DSM proponents exaggerate the energy savings from such policies. Contrary to popular belief, energy efficiency improvements do not reduce society’s overall energy consumption. In fact, greater efficiency leads to more energy use, because efficiency lowers the cost of consumption and frees up dollars for other energy-consuming activities.

Moreover, California’s comparatively low per-capita energy use is not chiefly due to its DSM policies but to other factors that most other states cannot replicate.

First, California’s mild climate aids dramatically in reducing consumption for heating and cooling of homes and businesses.

Second, California’s economy has undergone a structural change, away from energy-intensive manufacturing to less energy-intensive services, which are also more reliant on having a consistent electricity supply. This shift is due in part to manufacturing firms leaving the state because of high energy prices.

Third, while the California economy has grown during the past 25 years, it has also become more volatile.

Fourth, California’s high residential property prices tilt the housing market towards smaller homes and apartments and encourage more people to live in the same household.

The key question for policy makers should be whether California’s energy policies benefit consumers. The answer is no. With a few exceptions, electricity prices in California are higher than in the rest of the nation. The oft-repeated claim that California electricity rates are high but overall bills are low is a myth. Residential power bills increased by 36 percent since 1990.

Moreover, DSM policies have created razor-thin supply margins, resulting in price volatility and rolling blackouts during periods of peak demand. During the summer of 2007, California utilities actually told people to turn off their air conditioners on hot days. That is not efficient. It is a good way to get heat stroke.

California’s ability to slow growth in electricity demand is not due to interventions such as its Demand Side Management programs. California is not an appropriate model for other states or for the nation.