Commanding the Waves to Recede

or California Dreamin’. In an op-ed at the Wall Street Journal Duke prof Steven Sexton is suspicious of the state’s assumptions underpinning its green mandate:

The California Energy Commission, which approved the rule as part of new energy-efficiency regulations, didn’t conduct an objective, independent investigation of the policy’s effects. Instead it relied on economic analysis from the consultancy that proposed the policy, Energy and Environmental Economics Inc. Its study concluded that home buyers get a 100% investment return—paying $40 more in monthly mortgage costs but saving $80 a month on electricity. If it’s such a good deal, why aren’t home buyers clamoring for more panels already? Most new homes aren’t built with solar panels today, even though the state is saturated by solar marketing.

The Energy Commission is too optimistic about the cost of panels. It assumes the cost was $2.93 a watt in 2016 and will decline 17% by 2020. Yet comprehensive analysis of panel costs by the Lawrence Berkeley National Laboratory estimated the average cost of installed panels to be $4.50 a watt for the 2- to 4-kilowatt systems the policy mandates. That is $4,000 more than regulators claim for a 2.6-kilowatt model system in the central part of the state, where 20% of new homes are expected to be built. Berkeley Lab further estimates that costs fell a mere 1% between 2015 and 2016, far short of the 4% average annual decline the regulators predict.

Now consider the alleged savings on energy bills. The commission’s analysis assumes California will maintain its net energy-metering policy, which effectively subsidizes electricity produced by a rooftop solar panel. Residential solar generators are paid as much as eight times what wholesale generators receive, according to a grid operator’s analysis of publicly available data. Dozens of states are rethinking these generous subsidies, paid by ratepayers, because they shift the costs of maintaining the electric grid to relatively poor nonsolar households. The California Public Utilities Commission is set to revisit this regressive policy in 2019—before the solar mandate takes effect.

If the subsidies are removed, solar adopters would be in the red. This is why the electricity generated by the solar mandate should be valued at the cost of its replacement from the grid—not at the subsidized rate households receive. In a presentation at the National Bureau of Economic Research earlier this year, I estimated the value of rooftop generation for each of California’s ZIP Codes using one year of price data from the grid operator. The average electricity value of the solar mandate’s model system is $12.50 a month, far less than the $80 benefit the regulators claim.

Moreover, using statistics to estimate which power plants would respond to additional solar generation, my colleagues and I also estimated the total value of the pollution avoided by the mandate’s model system to be only $6 a month. Even accepting the Energy Commission’s optimism about solar panel costs, the policy’s public benefits are only half as large.

Have no fear. When the time comes to defend the mandate, California’s politicians will defend it using some combination of sophistry, the politicians’ friend and an appeal to emotion (look at all of the people who’ve suffered from brush fires!). The practical effects of the mandate are a lot less important than showing your heart’s in the right place.

California needs to face the harsh reality that its population is already larger than the land’s carrying capacity and the state is too heavily dependent on real estate development.