California’s Energy Policy Shows Us What Not To Do

Energy prices in America are on a tear. Energy inflation was 30% over the previous 12 months and U.S. retail gasoline prices hit a new high of $4.37 per gallon this week. Gasoline futures are up 9.4% since March, a signal that prices are unlikely to fall soon. Electricity prices are rising nationwide as the price of natural gas increases and summer demand begins. California, the nation’s premier energy basket case, is once again bracing for summer blackouts and its energy policies show other states what not to do.

California has one of the country’s most aggressive plans to transition to renewable energy. It aims to produce all its electricity from carbon-free sources by 2045. Cleaner energy is a great goal, and I am confident that America’s innovators and entrepreneurs will continue to make advances in nuclear, geothermal, solar, and other forms of energy production.

But such advances take time. Making new technologies cost effective does not happen overnight, especially when government at all levels obstructs new innovations with piles of regulations. The National Environmental Policy Act, or NEPA, the California Environmental Quality Act, or CEQA, and pretty much anything President Biden—the new regulator-in-chief—does all delay new innovations.

California’s policymakers say they want new energy sources, but instead of cleaning up the state’s regulatory clutter and allowing private-sector innovators to innovate, they act as if government mandates can substitute for market-tested innovation.

For example, state officials insist on more solar power, enticing solar companies with tax breaks. At the same time, they deny fracking permits. Both actions undermine competition in the energy market and reduce local government revenue. Less fracking also reduces the supply of natural gas and raises electricity prices. In response to state action, local governments like Kern County that feel the revenue pinch and are frustrated by the lack of fracking permits retaliate by delaying approvals for solar projects.

Meanwhile, as if on cue, the Biden administration is investigating the evasion of U.S. solar tariffs by some Asian countries. Even without the investigation the tariffs are a policy mistake that increase the cost of every solar project in America. Now the investigation is further disrupting supply chains, causing solar projects nationwide to be delayed up to 18 months.

This situation exemplifies why California’s electrical grid is a mess.

According to the most recent data from the U.S. Energy Information Administration (EIA), California has one of the country’s highest retail electricity prices. As the figure below shows, in 2020 the price for electricity in California was 18 cents/kWh (blue bars). This was 70% higher than the U.S. average and only five states had higher prices. From 2016 to 2020 the price of electricity in California also increased by 18%, the largest increase in the country (orange line).

People often associate higher prices with higher quality, but in the case of California, higher electricity prices come with less reliability. As reported by Reuters, California officials “forecast a potential shortfall of 1,700 megawatts this year, a number that could go as high as 5,000 MW if the grid is taxed by multiple challenges that reduce available power while sending demand soaring”.

Higher electricity prices hurt low-income households the most since they typically allocate a larger proportion of their income to energy. When prices go up, they often must cut spending elsewhere. California has the nation’s highest poverty rate when the cost of living is factored in, and high energy costs are part of the reason.

If America’s energy woes were limited to California things might not be so bad since people could move to other states with more sensible energy policies. But Federal policy under the Biden administration is moving the whole country in California’s direction.

Biden campaigned on 100% carbon-free energy by 2035, 10 years earlier than even California’s ambitious but absurd goal. Biden also recently traveled to California to join Governor Gavin Newsome to tout the state’s commitment to cleaner energy. And Biden-supported legislation would impose a Federal Clean Electricity Performance Program that would further tilt the energy market against cheap, reliable natural gas.

High natural gas prices are a feature, not a bug, for folks like Biden and Newsome since they think the future will be powered by batteries. There is one big problem, though: The planet is not mining and processing enough rare earths to build the necessary batteries. Some estimate that America needs 10 times more rare earths than we currently produce just to reach Biden’s goal for electric vehicle production and 20 to 25 times more to power the entire economy via electricity.

America has many of the needed elements and is currently the second-largest producer of rare earths after China, so availability is not the main problem. The primary problem is building new mining and processing capacity, which is part of a bigger problem of not being able to build anything in America anymore.

California formed a Lithium Valley Commission in 2020 to supposedly help guide the development of the state’s lithium deposits, an important element in battery production. But two years later the state seems no closer to mining and processing more lithium. Similar lithium mining efforts in nearby Nevada are opposed by activists who would rather see America curtail its energy demand than develop new energy sources.

The fact is mining and processing minerals requires using resources and energy to build the facilities and plants. This causes disruption in communities, as well as some pollution, that those communities would rather not have. A NIMBY state like California that is full of choke points and numerous regulations that can be exploited to block just about anything is unlikely to lead a U.S. mining revival.

California’s energy troubles are unlikely to dissipate. The state discourages fossil fuel production and consumption via taxes and regulations, but at the same time it cannot get out of its own way to create cost-effective alternatives. California is the country’s largest net importer of electricity despite abundant fossil fuel deposits and ample land for solar, wind, and nuclear production. If we are not careful the whole country could be in the same situation someday—all the energy we need at our fingertips, but no will to develop it. Let’s choose a different path.

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