Should Mandates Or Economics Drive Renewables Switch?
“Climate change has become climate emergency, and the new language is driving governments to mandate energy use changes. California and Texas provide a contrast in how best to achieve energy changes. ”
If we are to decarbonize the world’s economy, policymakers will need to convince the public that they need to alter their living and working patterns, as well as either mandate steps or provide incentives to make the necessary changes happen. Incentives, along with stern lectures, appear to have been the preferred course to effect climate change policies in the past. That strategy seems to have changed in the past 12-24 months, as the language of environmentalists shifted from “climate change” to “climate emergency.” Climate advocates are now claiming the world must stop producing gas- and diesel-powered vehicles by 2030 in order to keep global warming to tolerable levels.
Changing the language to emphasize “emergency” has been coupled with the demand for more draconian steps to reduce carbon emissions if the world is to be saved. From cajoling people and providing incentives to act in certain ways, policymakers are now resorting to mandates to achieve their desired goals. From banning the sale of internal combustion engine (ICE) vehicles to requiring solar panels be installed on all new homes, governments are acting. Maybe not to the satisfaction of everyone. Moreover, policymakers appear to be in a race to shorten the timelines for mandate implementations.
If we look around the world, we see where the earlier policy approaches proved more successful in certain countries compared to others. That may have something to do with the size of a nation’s population, or it might have been that the changes were less intrusive to people’s lifestyles and working conditions. For example, non-cash incentives have been used extensively in Norway to accelerate its switch to electric vehicles (EV). Waving tolls, providing free parking in city centers, allowing EVs to access high occupancy vehicle (HOV) lanes, and installing free charging stations have worked to drive EV penetration in Norway’s fleet to record levels. Of course, Norway only has 5.5 million people, which is about the size of Houston.
Exhibit 15. EV Registrations Per Capita By Nations SOURCE: Wikipedia
In the United States, California has been leading the states in directing its citizens toward a net-zero carbon economy. The California Energy Efficiency Strategic Plan is an ambitious plan that targets development of zero net energy buildings. The goals include:
“All new residential construction will be zero net energy (ZNE) by 2020;
All new commercial construction will be ZNE by 2030;
50% of commercial buildings will be retrofit to ZNE by 2030; and
50% of new major renovations of state buildings will be ZNE by 2025.”
In September, California’s Governor Gavin Newsom signed an executive order that establishes a goal of ending the sale of new gasoline-powered cars in the state by 2035. It also orders the Air Resources Board to immediately begin drafting regulations to achieve the goal by 2035. During his signing ceremony, Gov. Newsom noted that California is home to 34 EV manufacturers and that just under 50% of all EV purchases in the U.S. are in the state. The state’s stature in the EV world is demonstrated in Exhibit 16 that shows California first, followed by Washington, Florida and Texas as the top ranked states for EVs.
Exhibit 16. A Few States Dominate The EV Industry SOURCE: DOE
California is also the leader in other zero-emission vehicles, as it is home to almost all the hydrogen-powered vehicles and all the hydrogen refueling stations. Besides EVs, which includes all versions of vehicles that plug-in to be fueled – battery electric vehicles (BEV) and plug-in hybrid electric vehicles (PHEV) ‒ and hydrogen fuel cell vehicles, there are ones powered by compressed natural gas (CNG) and ethanol, as well as hybrid electric battery/gasoline powered (HEV) units. The ethanol-powered vehicles are often designated as flexible fuel vehicles (FFV), as they can run on either a blend of 85% ethanol and gasoline, or 100% gasoline. The Energy Information Administration (EIA) reports the mix of alternative fuel vehicles (AFV), as of the end of 2018, as shown in Exhibit 17.
Exhibit 17. The Make-up Of Alternative Fuel Fleet SOURCE: EIA
According to National Renewable Energy Laboratory estimates, there were 22.2 million FFVs, 4.3 million HEV, and roughly 500,000 for each of the PHEV and EV categories in the U.S. vehicle fleet. The total AFV fleet represents about 10% of the estimated 278 million light-duty vehicles operating in the United States. Even though the U.S. sells roughly 17 million light-duty vehicles per year, it will be virtually impossible to dramatically alter the composition of the nation’s fleet in the near-term without mandates banning certain types of vehicles. Importantly, the California ban of ICE car sales does not eliminate their ownership or use, let alone the purchase and sale of used ICE cars. It also won’t ban the purchase of new ICE cars in neighboring states and registering them in California.
As California continues to advance its net-zero carbon emissions policies, one wonders how well it is doing in remaking its energy system. It is a very interesting question when one compares California’s energy sources against those of Texas, which has avoided mandates and subsidies for EVs and solar panels. Both California and Texas have renewable portfolio standards (RPS) that mandate a percentage of power or a megawatt total that is provided by carbon-free energy sources.
The Texas legislature established its RPS in 1999 that mandated 5,000 megawatts (MW) of new renewable energy be installed by 2015, or 5.4% of the state’s summer net generating capacity in 2012. It also established a target of 10,000 MW of renewable energy capacity by 2025. According to the Electric Reliability Council of Texas (ERCOT), the program administrator of the RPS, Texas surpassed the 2025 target in 2009 and had 26,045 MW of renewable energy capacity (24,381 MW of which was wind) in 2017.
Interestingly, California’s RPS program wasn’t established until 2002. It called for 20% of electricity retail sales be served by renewable resources by 2017. In 2015, the program was accelerated to mandate a 50% RPS by 2030, and was further increased to 60% by 2030, with a mandate that all the state’s electricity come from carbon-free resources by 2045. By the end of 2017, all of California’s retail electricity sellers either met or exceeded their interim 27% RPS target.
In a fact sheet published by the American Wind Energy Association (AWEA), it touted the history of California with regard to wind energy. It wrote: “California led the world in wind energy development throughout much of the 1980s and 1990s.” Those days are gone, however, as California only ranks fifth in the U.S. for wind power, has 12 wind-related manufacturing facilities and employed 6-7,000 direct wind industry jobs. Capital investment in wind projects through 2019 totaled $15.2 billion, and wind projects provided the state with tax payments of $86 million and $46 million in annual land lease payments.
In contrast, the AWEA headlined its fact sheet on Texas with the following: “Texas is the national leader in the U.S. wind energy industry.” It went on to point out that Texas ranks first in the country for both installed and under-construction wind generating capacity. The state embraced smart policies, such as creating Competitive Renewable Energy Zones (CREZ) that facilitated the construction of wind power transmission lines, enabling power to move from West Texas, with its sparce population, but strong winds, to the heavily populated Central and Eastern regions of the state. The Texas wind industry supports 25-26,000 wind-related jobs, with over 40 manufacturing facilities. The AWEA also noted that with over 30 gigawatts (GW) of wind capacity in Texas, only four countries have more wind power!
The wind energy industry in Texas has provided over $53 billion in capital investment through 2019. Importantly for Texas, the wind energy provides $285 million in state and local tax payments, while also supporting $192 million in land lease payments.
The AWEA noted that “Texas has a competitive electricity market where wind, solar, gas, nuclear and other energy sources compete in real time. Texas established modest renewable energy goals in 1999, and later fast-tracked well-placed transmission lines to resolve congestion and connect windy parts of the state to load centers. This combination of policy and infrastructure allows wind to compete in the market while unlocking economic opportunities for landowners and rural communities.” This philosophy has powered the Texas economy and its development of all forms of energy. That is why it is interesting to compare the evolution of the energy sources for California’s and Texas’ electricity industries, as well as what the development trends have meant for electricity customers.
If we focus on California’s electricity generation by fuel source between 1990 and 2010, we see that wind and solar barely contributed. Natural gas was the primary energy contributor, with nuclear and hydroelectric also significant suppliers. On the other hand, with mandates and subsidies, the state has driven dramatic growth in solar energy, rising from 0.4% in 2010 to 14.0% in 2019. Wind energy’s contribution more than doubled during that time, rising from 3.0% to 6.8%. What is most interesting is the significant role that natural gas continues to play in California’s energy picture. In fact, natural gas provided about the same percentage of the state’s electricity as it did in the 1990s, and it only had its share cut meaningfully in 2019 due to hydroelectric power’s share nearly tripling between 2015 and 2019. California also imports significant amounts of power from neighboring states, most if which is generated by burning natural gas.
The most damning data point is the price of electricity for California residential consumers. After remaining essentially flat during the 1990s, the price per kilowatt-hour (kWh) increased only a total of 2.5 cents between 1990 and 2005. In contrast, over the next 14 years, the price rose by 53%. Year-to-date, California’s residential electricity price has increased to 20.2-cents/kWh, making it the fourth most expensive power among the 48 contiguous states, trailing only Connecticut, Massachusetts and Rhode Island.
Exhibit 18. California Power Market Has Boosted Prices SOURCE: EIA, PPHB
In contrast to California, Texas’ experience with electricity prices have been more stable. Prices during the 1990s were stable in the 7-8-cents/kWh, before jumping into the 11-12-cents/kWh range for 2005-2019. Year-to-date, the residential electricity price for Texas is 11.9-cents/kWh, or consistent with the range of the past 14 years. The stability of electricity prices has come with the growth in natural gas and wind power. The greatest supply change has been the marked reduction in coal-fired power and the marginal decline in nuclear power. Solar is barely a factor, accounting for only 0.1% of the state’s electricity generation last year. The growth of wind and natural gas power supply has helped reduce the state’s carbon emissions, while also helping to restrain power prices.
Exhibit 19. How Texas Power Market Has Evolved SOURCE: EIA, PPHB
The significance of this analysis is to point out that between 2000 and 2019 in California, the state cut its nuclear power supply in half, and reduced natural gas’ contribution by seven percentage points, while it added substantial amounts of wind and solar power. These changes have been accomplished via mandates and subsidies. The result for electricity consumers has been a 76% increase in their cost of electricity, and likely didn’t have much of an impact on carbon emissions as 2019 benefitted from a very strong contribution from hydroelectric power. On the other hand, Texas, while relying on market forces was able to cut its coal use in half, keep its nuclear contribution flat, build wind’s share of power to over 17% and only boost natural gas usage by three percentage points. This has contributed to cleaner air, but importantly, customers only experienced a 47% increase in their cost of electricity. Quite possibly, the large outmigration of California residents, many to Texas, is a reflection of their view of the impact of government mandates and subsidies for clean electricity on their financial health.