California's Green Energy Cliff
California is headed over the “green energy cliff,” according to Keith Kohl, writing on Energy & Capital. The state is having great success in converting its electrical production away from coal and toward renewables. Its renewable component now far exceeds that of any other state. And it is headed upward as investors scramble to meet the new standard that will require the state to climb from 19 percent to 33 percent renewables by 2020. Just last week four two large institutional investors – Citicorp and MetLife – announced they are joining GE and Mitsubishi in the construction of two huge solar installations in Southern California. Almost simultaneously, Warren Buffett’s MidAmerica bought a 579-MW solar plant from SunPower.
But what is all this doing to the price of electricity? Kohl notes that California residents already pay nearly three times the rate as many other states and that figure is headed straight up as well. All this will weigh heavily on the California economy. Businesses are already responding by moving out at a very rapid rate.
The graph at the left shows the changing composition of California electricity by comparing two years, 2003 and 2010. 2003 is represented in gray, 2010 in black. The renewables sector has climbed dramatically from 4 per to 18.8 percent coal has dropped from 38 percent to 31 percent. The renewables figure is remarkable in that it does NOT include large hydro. Many states allow hydro in their “renewable portfolios.” In California, renewables include only wind, solar, geothermal, biofuels and small hydro. The state has large geothermal resources (think of Old Faithful) and has exploited them to the maximum. It has built dozens of installations capturing methane from garbage landfills, none of them producing more than 1-2 megawatts. It led the nation in windmill construction in the 1980s and 1990s but has since tapered off as sites were exhausted. It is now concentrating on concentrated solar.
The coal figure is also remarkable in that California utilities are not allowed to burn coalL. Only a few small, grandfathered plants around Los Angeles remain. Almost all the 31 percent is coming from out-of-state – Nevada, Utah and the Four Corners complex in New Mexico (whose plume can be seen from outer space). The state has been trying to cut back on this as well.
This rush toward renewables set off the great California Electrical Crisis of 2000-2001, when the state ran short of power. Legend has it that the whole thing was caused by Enron trying to dodge the temporary price controls, buy the fact is the state was short of generating power. This was solved by building natural gas plants and natural gas has also expanded, as the graph shows. This figure is also distorted somewhat in that almost 60 percent of California’s in-state power now comes from natural gas plants, a figure double the national average.
But the outcome, as shows by the graph at the right, is that electricity prices are headed straight up. This is because wind and solar are still far more expensive than fossil fuels and nuclear. These costs are often disguised in that wind and solar can be produced at zero marginal costs when the wind blows or the sun shines. But these sources must be constantly backed up by gas, coal and nuclear, which become more expensive to run when they can only sell their power intermittently.
All this is driving business out of the state. As The Wall Street Journal reported last week, several states have now opened full-time recruiting offices in California hoping to lure away businesses. Chief Executive Magazine ranks California last in the country for its business climate. Taxes and regulations are often mentioned but the “high cost of doing business” – which includes electricity prices – always a major factor as well.