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Will Governor Arnold Really Clear The Air on Energy?

Peter Asmus's picture
Analyst Pike Research

Peter Asmus is an analyst with Pike Research and author of the forthcoming book "Introduction to Energy in California" to be published by the University of California Press in July, 2009.

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  • Dec 5, 2003
California's hapless experiment with deregulating electricity supply played a key role in bringing Arnold Schwarzenegger to power. It was former Gov. Gray Davis' tepid response to the ballooning energy crisis of 2000-2001 that stuck in more than a few voters minds as they voted on the recall. Ironically enough, Schwarzenegger is now calling for a return to deregulation, a policy pushed by his close advisor Pete Wilson, our last Republican governor, and not exactly California’s favorite son. Given the steep price tag consumers are still paying for “deregulation,” one might wonder about this political neophyte’s political judgment.

The truth is the only way for Gov. Arnold to transform his surprisingly idealistic energy platform into reality will require California to radically reverse course in Sacramento. And that means moving toward a system that truly encourages cleaner supply choices. If Schwarzenegger somehow could enact an honest, enlightened form of “deregulation,” he would truly be a superhero among energy policy wonks. But that is a mighty big “if.”

With some validity, Davis pointed his finger at the Bush administration’s for allowing Enron and others to rip off California consumers under California ill-fated experiment with open electricity markets. Yet Davis also revealed his worst flaw during the energy crisis: an oversupply of caution. He waited way too late to act. Then -- to add insult to injury – his underlings locked into $40 billion of fossil fuel supply just before prices in California’s power market dropped down to reasonable levels.

To keep us on the hook for these bad investments, the Davis administration has been inching back toward a regulated model, shifting more and more responsibilities back to the state’s three private utilities – including Pacific Gas & Electric (PG&E). The policy rationale, also valid, is that we all must bear the pain of past mistakes. If Gov. Arnold really wants to follow through on his un-Republican mandate that half of all new homes built in California rely upon solar photovoltaics (PV) for their electricity by 2005, he will indeed have to terminate – not expand -- the hold the PG&E ’s of the world have on our lives. If he really wants to trump a law Davis signed requiring California to double its renewable energy sources from 10 to 20 percent by 2020 -- and instead increase the mandate to 33 percent -- then some radical changes will need to be made in the governance of electricity in California.

The truth is both regulated monopolies and “open” markets have their upsides and downsides. If deregulation means large businesses escape paying for the high-priced power supply contracts Davis authorized and small consumers get stuck with the tab, then Schwarzenegger may be the next candidate for a recall. But if Schwarzenegger can use the force of his personality to somehow work with the Bush administration to renege on the fossil fuel contracts and open up California’s market to solar PV and other renewable power sources, he will make history.

California’s current hybrid reactive approach to energy regulation is not working for the economy or the environment. Private utilities have proven that they are not effective purveyors of energy efficiency in today’s bottom-line driven power markets. The only bright spot in California on the electricity front has been solar PV – small silicon semi-conductors that transform sunlight into electricity. Over half of the solar installed in the nation last year occurred in California.

Yet less than 1 percent of the state’s electricity comes from distributed solar PV, even though this renewable energy technology is ideal for California. We need the power most when the sun shines during hot summer afternoons. Why not use the same sun to create the electricity to run our air conditioners? Solar PV also addresses the terrorist threat. A distributed network of solar systems scattered throughout a grid is a lot safer than a grid featuring large centralized terrorist targets, such as nuclear power plants. But the cost of solar PV is still too high and private utilities such as PG&E want to keep it that way. PG&E and its fellow private utilities are also frustrating efforts to add other renewable energy sources to the state’s power plant portfolio, despite recent legislation and surges in natural gas prices that make fixed-price renewable energy sources look more attractive than ever.

If California were to follow through on what Gov. Arnold proposed during his campaign, billions of dollars in clean energy investment would flow into this state. Schwarzenegger’s bold goals on clean energy outlined in his campaign literature are incredibly naïve. His call for “deregulation” is brave and foolish and borders on political suicide given the energy politics of Sacramento. But if Gov. Arnold can use his personality and create some bridges with progressives concerned about our environment, California just could resurrect its now soiled reputation as a pioneer when it comes to renewable energy sources.

The last “deregulation” bill was a political deal that gave a little to every special interest group, but also opened our wallets to the now defunct Enron, which has some ties to the Schwarzenegger camp. The trick for Gov. Arnold is to encourage innovation with solar and other renewable resources, while protecting small consumers from the greed that plunged California into a crisis on energy in the first place.

An enlightened energy regime could be in the works, a pleasant surprise for those of us who have watched in horror over the last several years as California lost its luster in the eyes of the world. But Gov. Arnold may have raised expectations with such lofty goals – and may by digging his own grave if he blows it, handing the issue of the state’s energy policy right back to Democrats.

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Ravinder Singh's picture
Ravinder Singh on Dec 6, 2003
Dear Peter, It is evident Gray Davis was a timid governor and on the other side were best trained swindlers- refer Batson Report- who corrupted Americas most respected corporations. Enron failed in India absolutely in every sense since 1994 yet it managed to continue wreck everythink that came in its contact. In 1994 itself I introduced Utilities to inovatives but they all bungled up. California can be bright beautiful and polution free. But if a person having stomach pain goes to an accountant or MBA for treatment he will end up in mortury- Enron and others apart from creating blackouts, overcharged consumers in tens billions and above all tarnished the reputation of Califonia----. Industries are migrating to other states. It is possible to save $1000b in USA as Capital investments and energy savings. You let the best of engineers and inventors work and give them resources. Take tough action and make the swindlers accountable. Governer Terminator should go after the swindlers make availabe the resources to inventors and engineers. Ravinder
Jack Ellis's picture
Jack Ellis on Dec 9, 2003
James raises two good points that I concur with. First, that any bias towards renewables in general and solar energy in particular is in direct conflict with lowering energy costs. Second, if the objective of RPS is emissions reduction, then a cap-and-trade system is far more cost-effective than mandates for the many excellent reasons he cites.

Where I'll disagree with James is in assuming the sole objective of RPS is better environmental quality. Despite their limitations, renewables do have the beneficial effect of diversifying California's energy supply. I won't go so far as to claim the short-run cost of that diversification is reasonable given the state's heavy dependence on natural gas, but it fixed-price contracts for renewables do lend some stability to retail electricity prices.

As for the fallout from California's experiment with "deregulation", two comments. First of all, the system was badly in need of reform in 1992 when the debate over deregulation or restructuring or competition or whatever label you prefer was first launched, and the need for sensible reforms are even more urgent today. Price and service terms for electric power should be the result of negotiation between competitive service providers and customers rather than the object of endless litigation before overlapping jurisdictions at the CPUC, the FERC, and state and federal courts. The current system of monopoly franchises wastes talent and resources, greatly impedes decision-making, and encourages the use of antiquated, dirty, inefficient generating facilities that date back to the Korean War era.

Second, if faced with a choice between rolling blackouts on the one hand and real-time prices on the other to ration demand when there's inadequate supply, I suspect an overwhelming majority of electricity consumers would choose the price option. Motorists waited in long lines during the oil embargoes of the 1970's while government-mandated gasoline rationing was in effect. When the market was finally allowed to work, prices rose slightly, but the lines disappeared. The clear lesson: consumers didn't trust the government to efficiently ration limited supply so they engaged in persistent panic buying. By-and-large they did trust the market to work. I cannot possibly imagine how the CPUC, the California Legislature and the California ISO would implement electricity rationing in a way that is any more fair and non-discriminatory than a competitive market would (assuming they could first agree how!).

Graham Honor's picture
Graham Honor on Dec 9, 2003
A few facts:

Solar energy is expensive.

Solar energy is not only PV, solar water heaters are economical today in most sunbelt countries including California, making solar water heaters mandatory in all new building will decrease the dependency on electricity and gas and will add a negligible cost to the building that would be recovered in very few years.

Concentrated Solar Power systems (CSP) can provide dependable electricity as these plants are ideal for hybridization.

CSP costs are lower than PV and a potentially very significant cost reduction with relatively small public investments is achievable, for grid connected power plants the advantages of CSP over PV are so numerous but I will count only several more, better efficiency, lower area usage, no degradation, using hybrid as a back up diminishes the need for storage requires no stand by gas-turbines.... Hundreds of MW of CSP power plants could be operational within about 2 years.

Geothermal resources in California are far from fully exploited, generating base load geothermal energy at competitive prices compared with conventional power plants is an extremely good investment in the future that bears its fruits starting today. Hundreds of MW of Geothermal power plants could be operational within less than 2 years.

Waste heat is the greenest energy source as no extra emissions but one can get more electrical power from gas turbines and other heat omitting devices. Hundreds of MW of waste heat electricity could be operational within about 1 year.

George Kamburoff's picture
George Kamburoff on Dec 16, 2003
This column deserves more than to be taken over by ONE voice caling everyone else "stupid".

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