California is a unique state in many ways, but when it comes to energy prices, that’s not a good thing. The Golden State not only has the highest electric rates in the country, rates in California have been rising more than twice as fast as any other state in inflation-adjusted terms.
Why are California’s electric rates so high?
One key driver of recent rate increases is the fallout from devastating wildfires. In 2017 and 2018, terrible wildfires that left thousands homeless and over 100 dead were linked to downed transmission lines owned by California utility Pacific Gas & Electric (PG&E). PG&E ended up filing for bankruptcy, and ultimately paid out $13.8 billion to wildfire victims. On top of that, California utilities have subsequently invested heavily in efforts to reduce the risk that faulty transmission will cause future fires. While necessary, these costs have played a major role in driving California’s electric prices to their current record levels.
To deal with this situation, the state enacted Senate Bill 254. Among other things, the law limits utility liability for wildfire damage, and extends surcharges on residents’ electric bills to replenish a wildfire relief fund. SB 254 also makes it easier for California energy companies to sell electricity to other states and creates a government funded subsidy program for new electric transmission.
Managing the wildfire risk that transmission can pose is a serious and tricky issue. Attempts to mitigate the risk — say by burying power lines — can increase the cost of transmission lines by anywhere from 300%to 1000%. Some utilities have acted proactively by turning off power to customers during periods of heightened risk, a solution with its own obvious set of problems. Simply letting utilities go bankrupt is also not ideal. Whatever answer California chose would have involved significant costs.
It might be tempting for government officials to deflect responsibility for high electricity prices onto wildfire mitigation costs. But this would be a mistake, both politically and as a matter of statesmanship. Whatever the merits of SB 254 as a wildfire mitigation measure, it does little to reduce costs to California residents. Given that the need for system upgrades is going to put upward pressure on costs, the state should be looking at what else it can do to ease price pain for California electric consumers.
One sacred cow that the state should re-examine is its renewable energy mandates. California’s Renewable Portfolio Standard (RPS) requires that electric utilities procure 52% of their energy from renewable sources by 2027, with the required amount rising to 60% by 2030.
California’s RPS is one of the most stringent in the nation and these requirements are and will push electric rates higher. Research suggests that solar and wind power do not drive up electricity prices, but this is only true when their deployment is due to market forces. Where renewable deployment is driven by a RPS, it is associated with increasing power prices.
Getting rid of the state’s RPS would not make California anti-renewables or anti-climate. Texas uses more renewable energy than California despite having repealed its fairly modest RPS. And California’s RPS even undermines the effectiveness of the state’s other climate policies, such as its cap and trade program, by forcing utilities into using renewable energy even when doing so may be more expensive than other zero carbon sources.
The ultimate point is that California cannot afford to be fatalistic when it comes to energy prices. If the state faces unique cost challenges due to wildfires, that is no excuse for giving up on trying to keep electricity prices affordable for its residents. Just the opposite. California’s challenges should spur lawmakers to get creative about finding other ways to reduce prices. Josiah Neeley is a resident senior fellow with the R Street Institute’s energy and environment team
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