California's Proposition 7 to Cost Taxpayers Hundreds of Millions Per Year

The opponents of California’s ballot Proposition 7 (read full text of Prop 7) claim it will “cost consumers and taxpayers hundreds of millions per year in higher electric rates – a $300 increase per household per year.” It is hard to get access to the calculations behind these estimates, so we have attempted to come up with estimates of our own.

In our recent post “California Proposition 7″ we put forward some fundamental assumptions and come up with a total projected cost to install the generating facilities. We assume that by 2025 Californians will draw 1,000 gigawatt-hours per day, meaning at 50% renewables we’ll need 500 gigawatt-hours per day to come from renewable sources. We therefore project, based on $2.5 billion per gigawatt of wind generated output, and a 17.5% yield, installing this amount of wind capacity will cost $297 billion. In our post “Megawatt Storage Farms” we estimate California will need 100 gigawatt-hours of peak storage capacity to implement a 50% renewable portfolio standard, and at $350 million per gigawatt-hour of storage, this will cost California another $35 billion. Total costs, about $335 billion.

This amount, $335 billion, is an absolute lowest case. It assumes wind generators can be installed at a rate of $2.5 billion per gigawatt, which is a bargain basement price. It will not get cheaper than this. It assumes solar energy solutions will achieve cost parity with wind energy solutions – something that is possible but certainly not likely to be exceeded. It assumes these storage solutions are the only other investments necessary – when in reality there are substantial transmission upgrades also required, as well as huge “smart grid” upgrades. It assumes all of this will occur without unions taking over the workforce and raising the cost of labor in this government subsidized, government supervised endeavor – is that likely? It assumes environmentalists will get out of the way, and allow thousands of square miles of land to be developed for solar and wind farms as well as transmission corridors and storage infrastructure, without launching costly lawsuits – is that likely?

Nonetheless let’s go with the $335 billion price tag to implement Proposition 7. Let’s assume this capital investment is spread over 16 years, since that is how long we’ll have to get this done. Let’s assume California will have, on average, 40 million residents, and, on average, 10 million households. How much would this capital investment cost per household? Please bear in mind that while households do not consume anywhere near 100% of California’s electricity, the higher costs for electricity that businesses will pay will be passed on to consumers, so one way or another, households will pay for this investment.

The math is not encouraging: $335 billion over 16 years is $21 billion per year, which divided by 10 million households comes up to $2,094 per year per household. This is the capital investment required. It is likely this investment can be financed over a longer period than 16 years, of course, but we are assuming in this example zero interest and an extremely low installation cost. In reality $335 billion projection will never happen – tweak the assumptions just a bit and the costs will probably be about a trillion – easily offsetting the benefits of longer term financing.

The crucial question is this: Will this $2,000 per year cost of capital, which will be paid by each consumer household, be offset by $1,700 per year in the form of cheaper renewable electricity, or more? Renewable electricity is not demonstrably cheaper than conventional electricity to-date, to put it mildly, but we have made some generous assumptions, so let’s continue:

If you take $335 billion of capital investment to create 500 gigawatt-hours of renewable generating capacity and storage, etc., and spread this cost over 20 years (remember, the batteries don’t last more than 5-10 years each, and upgrades and periodic replacement of solar and wind assets are not being counted here, nor are interest payments), you will come up with a capital cost of .09 cents per kilowatt-hour. If you add a $.02 per kilowatt-hour for operations and maintenance you get $.11 per kilowatt-hour.

This is the absolute best case – it assumes no return to the utility, a rock-bottom installed cost for the generating and storage capacity, no costs for transmission lines or smart-grid upgrades, no environmentalist lawsuits, reasonable labor costs, and no financing cost for this money. Try to float a bond with zero return to see what that means. In reality a very optimistic price projection would probably still be around $.20 per kilowatt-hour, or an amount roughly equivalent to what we currently pay for conventional electricity. So it is likely that purchasing this renewable energy will yield no savings to offset the $2,000+ per household capital cost whatsoever. Declaring the utilities will not be allowed to pass these costs on to the consumer is absurd – either they pass through these costs or they go bankrupt. That provision is only one problem with this deeply flawed initiative; read the Sept. 18th memo prepared for the California PUC on Prop. 7 for more.

Wind power resources in the United States.
The USA now has the largest installed base of wind turbines in the world.
(Source: Wikipedia, click for larger image)

Does moving to a progressively higher percentage of renewables hedge Californians against possible future spikes in the cost of natural gas and other conventional fuels? Of course. But California is already moving aggressively towards a higher renewable portfolio standard, and moving too fast in this direction undermines the ability to wait for better and cheaper energy technologies to mature.

It is inspiring to hope California can eventually reach a 50% renewables standard, or more. But to properly realize the economic benefits that will accrue to 50%+ renewable electricity in California, more time, more flexibility, and far, far more thoughtful lawmaking than Proposition 7 will be necessary. Vote no.

3 Responses to “California's Proposition 7 to Cost Taxpayers Hundreds of Millions Per Year”
  1. James Bishop says:

    LA Times Opinion: Prop. 7,
    Clean Energy for California

    These figures are extremely incorrect. Listen to the Attorney General, the Legislative Council and the Legislative Analyst’s Office before believing these numbers.

  2. Ed Ring says:

    James: Thank you for your comment. I would welcome information as to which part of my calculations are not reasonable. It isn’t sufficient to simply say “these figures are incorrect.” Which figures, and why?

    In the legislative analyst’s review of Prop. 7 there are no figures represented, just a summary of some of the variables that might affect short-term and long term costs. In the LA Times opinion piece you link to, there are also no cost figures put forward.

    Here again are my assumptions:
    - 500 gigawatt-hours per day renewables required by 2025
    - $2.5 billion per gigawatt output installed cost
    - 17.5% yield on wind power (wind is the cheapest renewable)
    - 100 gigawatt-hours of storage required
    - $350 million per gigawatt-hour of storage

    These assumptions yield a installation cost of $335 billion, and spread over 20 years that comes to $.09 per kilowatt-hour. My contention, and you may contest it of course, is that in reality the cost will be at least triple this amount, or more, both to install this much new capacity and in terms of the cost per kilowatt-hour, for the following reasons:

    - $2.5 billion per gigawatt-hour output is probably half what it’s really going to cost per gigawatt-hour for renewables
    - the cost of fighting environmentalist lawsuits and complying with union demands will add countless billions to the total costs
    - these costs don’t include ‘smart grid’ upgrades or new and upgraded transmission lines
    - these costs assume zero interest rates and zero return to the investor owned utilities

    If you want to challenge this analysis, it would be helpful to identify which assumptions are unreasonable. The pro-proposition 7 forces have ran a very aggressive campaign, but simply shouting ‘stop global warming’ should not mean we all have to don our financial blinders and stop paying attention to the costs for all this.

  3. Tam Hunt says:

    Ed, I appreciate your efforts to cost out Prop 7, but your analysis is unfortunately just a sketch of a very complex picture. For a much more in-depth analysis, I urge you to review the proposed decision in the PUC’s greenhouse gas proceeding (R.06-04-009), issued a couple of weeks ago. In this report, the PUC discusses at length a very detailed economic analysis provided by E3 consultants, looking at the impacts of achieving deep reductions in GHG emission in the utility sector. The E3 analysis concludes that achieving 33% renewables by 2020 would be equivalent to $133/ton of GHG emissions. This is a very high cost, but it also assumes a fairly stable natural gas cost, which is in my view a wildly improbable outcome over the next decade. It also assumes rather high costs for transmission and integration of intermittent renewables. The good news is, however, that even with these poor assumptions, the E3 analysis finds that the “accelerated policy case,” recommended by the PUC in this decision, would result in net savings for California ratepayers. The accelerated policy case includes ambitious goals for energy effciency, renewables and other programs. The net result is reduced bills for ratepayers, under the E3 analysis. Yes, rates go up under this policy case, but bills go down because customers use less electricity.

    So how does this relate to Prop 7? I believe, after having reviewed Prop 7 many times and using my years of experience in CA energy policy, that Prop 7 will actually get us to 33% by 2020 – not the 40% it calls for. No other legislation will probably get us to 33% by 2020 b/c such legislation has repeatedly failed in the Legislature. And even if it had passed it wouldn’t have done much b/c it didn’t provide new tools for achieving higher levels of renewables. Prop 7 provides many new tools for getting us to higher levels of renewables. So while achieving 33% by 2020, under Prop 7 or some alternative legislation that actually has tools, will certainly cost us some as ratepayers, the overall package of GHG emissions reducing measures recommended by the PUC and the ARB in their Scoping Plan will very likely result in net savings to ratepayers and taxpyaers more generally.


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