Assessing California’s Climate Policies—Electricity Generation
Assessing California’s ClimatePolicies—Electricity GenerationGABRIEL PETEKL E G I S L A T I V E A N A LY S TJANUARY 2020
AN LAO REPORTL E G I S L AT I V E A N A LY S T ’ S O F F I C E
AN LAO REPORTExecutive SummaryChapter 135 of 2017 (AB 398, E. Garcia) requires our office to report annually on the economicimpacts and benefits of the state’s greenhouse gas (GHG) limits. In this report, we assessthe effects of some of the state’s major policies intended to reduce GHG emissions from thegeneration of electricity.Electricity Sector Primary Driver of GHG Emission Reductions. Over the last decade, theelectricity sector has been the primary driver of statewide GHG emission reductions. Annualemissions from the electricity sector have declined by about 40 million metric tons (40 percent)over this period. Reductions have mostly been due to a change in the mix of resources used togenerate electricity—primarily large increases in renewables (solar and wind) and, to a lesserextent, reductions in the amount of coal.State Policies Likely Key Factors in Reductions, but Magnitude of Effects Uncertain. Intotal, state policies were likely substantial drivers of changes to the generation mix that loweredannual emissions. However, a wide variety of other factors likely influenced emissions over thesame period, including declines in natural gas prices, declines in prices for renewable generation,and federal policies. We did not identify any academic studies that comprehensively evaluatedthe overall effects attributed to state GHG reduction policies.RPS Likely a Substantial Driver of Emission Reductions at Moderate Cost Per Ton.Based on some “back-of-the-envelope” calculations, we estimate that the Renewable PortfolioStandard (RPS) program (1) reduced annual emissions by up to the low tens of millions of tonsin 2018 and (2) costs about 60 to 70 per ton reduced in energy procurement costs. A varietyof other costs—such as transmission and integration costs—are difficult to quantify, but couldincrease costs by tens of dollars per ton. Although the program likely generated other benefits—such as reducing local air pollutants and contributing to a global decline in solar prices—themagnitude of these effects appears to have been relatively small. Importantly, future costs toincrease renewable generation are likely to be much different than past costs. This is becauseprocurement costs for renewable energy are likely to be much lower in the future due to decliningrenewable prices, but this could be at least partially offset by higher integration costs.Rooftop Solar Policies Generally More Costly. State policies—such as the California SolarInitiative (CSI) and net energy metering (NEM)—likely had a significant impact on the amount ofelectricity generated from rooftop solar, which has reduced annual emissions by several milliontons. However, these policies generally were a more expensive method for reducing emissionsthan policies focused on utility-scale renewables. Costs of electricity from distributed solar are atleast a couple of times higher than utility-scale solar. Furthermore, estimated costs of emissionreductions under CSI were about 150 to 200 per ton. The overall effects of NEM are not clear,but the policy has likely resulted in a substantial financial cost-shift from solar customers tononsolar customers. The magnitude of other potential advantages of rooftop solar—includingknowledge “spillovers” from learning-by-doing and reduced distribution system costs—are lessclear, but appear to be relatively small.Little Known About Effects of SB 1368 and Cap-and-Trade on Emissions. Although a2006 state law that prohibited new long-term contracts with coal power plants (Chapter 598,www.lao.ca.gov1
AN LAO REPORTSB 1368 [Perata]) likely reduced emissions from coal generation, we did not identify any empiricalresearch assessing the magnitude of the effects. For cap-and-trade, the level of costs is clearerthan the level of emission reductions. Market prices for allowances suggest the marginal costs foremission reductions encouraged by the program have been less than 20 per ton, but the overallamount of emission reductions from electricity generation attributable to the program is unclear.The cap-and-trade program has had significant distributional effects in the electricity sector.Specifically, the overall financial benefit to residential electricity customers from utilities sellingallowances and using the proceeds to benefit ratepayers has exceeded the compliance coststhat have been passed on to customers.Resource Shuffling Potentially Offsets Some of the Emission Reductions. Resourceshuffling occurs when the mix of existing electricity supplies changes so that more low-carbonelectricity is sent to California while more high-carbon electricity is sent to other states. Severaldifferent prospective analyses showed that there was potential for significant resource shufflingfrom imports. There has been limited retrospective empirical research estimating resourceshuffling, but some preliminary work suggests it could be a significant factor.Key Issues for Legislative Consideration. We identify some key issues for the Legislature toconsider as it modifies and adopts policies to achieve its GHG goals. Comprehensive Policy Evaluations Lacking. Although the amount of information variesby program, we found a lack of rigorous retrospective evaluations for some programs andeffects. The Legislature might want to consider directing agencies to identify opportunitiesto facilitate retrospective evaluation by ensuring data is available to researchers and,potentially, designing programs in ways that allow for more robust evaluations. In addition,the Legislature could consider additional reporting requirements and/or funding for researchefforts in key areas, including resource shuffling and the effect of distributed solar ondistribution system costs. Mix of Policies Likely Not Most Cost-Effective Way to Reduce GHGs. There has beensubstantial differences in the costs of reducing emissions between cap-and-trade (marginalcost that are currently less than 20 per ton), RPS (average costs of about 60 to 70 perton or more), and policies promoting distributed solar (average costs of roughly 150 to 200 per ton). In the future, the Legislature might want to rely more heavily on the mostcost-effective programs, such as cap-and-trade. In certain limited instances, the Legislaturecould consider adopting policies that are a somewhat more costly way to reduce GHGs ifthose policies result in substantial benefits in other ways, such as reducing local air pollutionand creating knowledge spillovers. High Electricity Prices Could Be a Barrier to GHG Reductions. Retail electricity ratesare substantially higher than the marginal social costs of providing electricity. This is dueto a variety of factors including (1) utilities recovering fixed costs through volumetric rates,(2) declining electricity consumption (which means fixed costs are spread over a smallerbase), and (3) costs for various state-mandated programs. High electricity rates discourageadoption of some technologies—such as electric vehicles and electric appliances—thatcould be used to substantially reduce statewide GHGs. As a result, the Legislature mightwant to consider actions that more closely align retail electricity rates with the marginalcosts of providing the electricity. For example, the Legislature could direct regulatorsto exclude at least some of the fixed costs and certain state policy costs from utilities’volumetric electricity rates, and potentially fund them in other ways.2L E G I S L AT I V E A N A LY S T ’ S O F F I C E
AN LAO REPORTINTRODUCTIONChapter 488 of 2006 (AB 32, Núñez/Pavley) established the goal of limitinggreenhouse gas (GHG) emissions statewide to1990 levels—431 million metric tons (MMT) ofcarbon dioxide equivalent (CO2e)—by 2020. In2016, Chapter 249 (SB 32, Pavley) extended thelimit to 40 percent below 1990 levels—259 MMT ofCO2e—by 2030. As shown in Figure 1, emissionshave decreased since AB 32 was enacted andwere already below the 2020 target in 2017.However, the rate of reductions needed to reachthe SB 32 target are much greater.Chapter 135 of 2017 (AB 398, E. Garcia)requires our office to report annually on theeconomic impacts and benefits of the state’s GHGlimits. In 2018, we issued two reports in fulfillmentof this requirement. First, we released AssessingCalifornia’s Climate Policies—An Overview, whichprovided the analytical framework we are usingto assess the economic impacts and benefits ofFigure 1State Met 2020 Goal Early, but 2030 Goal More AmbitiousMillion Metric Tons of Greenhouse Gases5004502020400AB 32 Target3503002030250Actual EmissionsSB 32 4201620182020202220242026202820303
AN LAO REPORTclimate policies. Second, we released AssessingCalifornia’s Climate Policies—Transportation,which applied that framework to the various stateprograms designed to reduce GHG emissionsfrom the transportation sector. In this report, weassess the effects of the state’s major policiesintended to reduce emissions from the generationof electricity—hereafter referred to as electricitygeneration or electricity supply. (We do not assessthe effects of programs primarily intended to reduceelectricity consumption, such as energy efficiencyprograms, in this report.)OVERVIEW OF ELECTRICITY SECTOR EMISSIONSElectricity Sector BackgroundOverview of Electric Grid. A wide variety ofentities—both public and private—play a role inproviding electricity to California households andbusinesses. In general, there are three main partsof the electric grid: Generation. Electricity frequently isgenerated at large power plants (such asnatural gas, coal, or nuclear power plants)or large renewable generation sites (such aswind farms or solar fields). This large-scalegeneration is also known as utility-scalegeneration. These power plants typically areowned by private companies (including someutilities). Some generation occurs at a smallerscale, such as solar installed at residences,businesses, or other smaller-scale communitylocations. This smaller-scale generation isknown as distributed generation and usually isowned by the property owner or a third-partycompany that installs and owns the generationsource. Transmission. Electricity generatedat utility-scale is transported throughhigh-voltage power lines known astransmission lines. These lines typically areowned by utilities. In some cases, electricityis sent directly from transmission lines toend customers, such as large manufacturingfacilities. Distribution. Generally, electricity istransferred from high-voltage transmissionlines to low-voltage distribution lines beforeit is delivered to customers. For example,distribution lines are often on wooden polesthat run through cities and neighborhoods.4Utilities—both public and private—own andoperate distribution lines.Load Serving Entities (LSEs) ProcureElectricity and Deliver it to Customers. Loadserving entities provide electricity to end users.They are responsible for generating or purchasingelectricity and ensuring it is delivered to householdsand businesses. Historically, investor-ownedutilities (IOUs) and publicly owned utilities(POUs) have been the primary LSEs. IOUs areprivate companies regulated by the CaliforniaPublic Utilities Commission (CPUC). POUs arepublic agencies governed by locally elected orappointed officials. More recently, other typesof nonutility LSEs are providing an increasingshare of electricity to customers. These includecommunity choice aggregators (CCAs), which arelocal government-run entities that buy electricity forcustomers but use IOU distribution to deliver theelectricity, and electric service providers (ESPs),which are private entities that sell electricity directlyto commercial customers in IOU territories. In2018, IOUs provided about 55 percent of electricityto California customers, POUs provided about25 percent, and CCAs and ESPs provided about10 percent each.Electricity Generated From a Wide Variety ofSources. Figure 2 shows the different generationsources used to generate electricity that isconsumed in California. Natural gas is by far thelargest source of generation. Wind, solar, largehydroelectric, unspecified imports, and nuclearcontribute a significant share as well. (Unspecifiedimports are imported electricity where it is notpossible to identify the specific generation sourcesused to produce the electricity.) Roughly 70 percentof electricity consumed in California is generatedL E G I S L AT I V E A N A LY S T ’ S O F F I C E
AN LAO REPORTin-state and the remaining30 percent is generated out ofstate but imported into Californiathrough transmission lines.Major Policies to ReduceElectricity SectorEmissionsFigure 2Electricity Generated From a Wide Variety of SourcesPercent of Total Generation, 2018Natural gasWindSolarThe electricity sector accountsUnspecifiedfor 16 percent of statewide GHGNuclearemissions, according to theDistributed solar PVCalifornia Air Resources BoardGeothermal(CARB) statewide GHG inventory.CoalIn addition to the statewide GHGBiomassgoals discussed above, in recentSmall hydroyears the state has establishedOtherGHG goals that are specific to theelectricity sector. This includesChapter 547 of 2015 (SB 350,de León), which requires CARBPV photovoltaic.to establish 2030 GHG targetsfor the electricity sector (set at arange of 30 MMT to 53 MMT). Inaddition, Chapter 312 of 2018 (SB 100, de León)establishes a state policy of 100 percent zerocarbon electricity by 2045. Over the past coupleof decades, the state has implemented a variety ofpolicies intended to reduce GHG emissions fromelectricity generation. Figure 3, on the next page,summarizes some of the major policies, which wedescribe in more detail below.Renewable Portfolio Standard (RPS). Statelaw requires LSEs (with a few exceptions) toprovide a minimum percent of retail electricitysales from qualifying renewable generation.Qualifying renewables include solar, wind, biomass,geothermal, and small hydroelectric. Notably, undercurrent law, some generation sources that do notdirectly emit GHGs, such as large hydroelectricand nuclear, do not qualify under RPS. Distributedgeneration, such as rooftop solar PV (photovoltaic),technically can qualify. However, in practice, verylittle of it is used to comply in part because certainadministrative actions needed to certify RPSeligibility can be expensive for smaller PV units.The Legislature has increased or extendedthe RPS requirements a few different times overwww.lao.ca.govTotal 314,955 Gigawatt HoursLarge hydroIn-StateImports5101520253035%the last couple of decades. Chapter 516 of 2002(SB 1078, Sher) established a 20 percent RPS by2017, and Chapter 464 of 2006 (SB 107, Simitian)accelerated the 20 percent requirement to 2010.Subsequently, Chapter 1 of 2011 (SBX1 2, Simitian)established a 33 percent requirement by 2020. In2015, SB 350 established a 50 percent requirementby 2030—a target that SB 100 increased to60 percent a few years later. State law andregulations also establish interim RPS requirementsand targets. Figure 4 on page 7, shows the RPSrequirements under current law and regulation.The CPUC oversees IOU, CCA, and ESPcompliance. The California Energy Commission(CEC) oversees POU compliance. An LSE compliesby “retiring” enough renewable energy credits(RECs) to cover its required RPS percentage ofretail sales. A REC is a certificate demonstratingthat one unit of electricity was generated anddelivered from an eligible renewable resource.State law establishes other requirements aboutwhat types of RECs may be used to comply (suchas a maximum percent of RECs from renewableenergy that was generated in other states, but notdelivered to California).5
AN LAO REPORTCalifornia Solar Initiative (CSI). In 2006,Chapter 132 of 2006 (SB 1, Murray) providedstate agencies the authority to establishseveral programs aimed at providing incentivesfor distributed solar—an effort known as GoSolar California. The overall goal was to install3,000 megawatts of distributed solar and transitionthe solar industry to a point where it could beself-sustaining. The biggest program used toachieve this goal was the CSI, which providedfinancial incentives to install rooftop solar onbusinesses and existing homes in IOU territories.Other programs included the New Solar HomePartnership Program, which provided financialincentives for solar on newly constructed homes,and a wide variety of solar programs offeredthrough POUs. The statewide budget for theseprograms was 3.3 billion over a ten year period—from 2006 to 2016—with about 2.7 billion goingto the CSI. The programs were primarily fundedthrough a surcharge on electricity bills.The CSI included several different subprogramsthat provided customer incentives for distributedsolar. The largest subprogram—called the GeneralMarket Program—provided a total of about 2 billion in upfront financial incentives (primarilyrebates—based on per kilowatt of generationcapacity—to offset the upfront cost of the solarunit) for businesses and existing homes installingrooftop solar. The program had a decliningincentives structure. The incentives started highand then automatically decreased over time aseach IOU hit certain thresholds for the total amountof solar installed in its jurisdiction. The incentivesreduced the cost of installing a residential solarunit by about 25 percent in the early years of theprogram and by about 5 percent to 10 percentin the final years. This design was intended togradually reduce customer reliance on subsidiesas the solar industry matured and market pricesdeclined. The General Market Program stoppedaccepting applications for incentives in 2016.Net Energy Metering (NEM). The vast majorityof rooftop solar customers are enrolled in NEM,which supports onsite solar installations. Someversion of NEM has been in place since 1996, buthas been modified several times since then. UnderNEM, the utility effectively pays solar customers(through a bill credit) for the excess electricitythey generate that is exported back to the grid.Under NEM, the customer receives the retail ratefor electricity, which includes costs associatedFigure 3Summary of Major Policies to Reduce Emissions From Electricity GenerationPolicyYear ImplementedDescriptionRenewable Portfolio Standard2003Requires LSEs to generate a minimum percent ofretail electricity from qualifying renewable sources.Percentages increase over time from 20 percent in2010 to 60 percent in 2030.California Solar Initiative2007Provided 2.7 billion over a ten-year period for financialincentives to reduce the cost of installing distributedsolar, such as rooftop solar PV.Net Energy Metering1996Encourages customers to install distributed solargeneration by paying them a retail electricity rate forthe electricity they generate.Emissions Performance Standard(SB 1368) a2007Effectively prohibits LSEs from signing or extendinglong-term contracts with coal power plants.Cap-and-trade2013Requires electricity generators and importers to obtainan allowance or offset to cover each ton of GHGemitted. Program includes other emitters outside ofthe electricity sector, and entities can buy and sellallowances.a Chapter 598 of 2006 (SB 1368, Perata).LSE load serving entity; PV photovoltaic; and GHG greenhouse gas.6L E G I S L AT I V E A N A LY S T ’ S O F F I C E
AN LAO REPORTwith generation, transmission,Figure 4and distribution. For example, ifRPS Requirements Increase Over Timea customer consumes 100 kwhRenewableGeneration as a Percent of Retail Salesof electricity from the grid, butexports 70 kwh of electricity from70%their solar panels back to the grid,60then the customer would pay the50retail rate for 30 kwh of electricity.In response to state legislation,40CPUC made some changes to30the NEM program in 2016. Much20of the basi
Electricity Sector Primary Driver of GHG Emission Reductions. Over the last decade, the electricity sector has been the primary driver of statewide GHG emission reductions. Annual emissions from the electricity sector have declined by about 40 million metric tons (40 percent) over this period.
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