Once again, let me state for the record: getting more energy from clean and renewable sources is a good thing. However, there is a lot more to the energy transition than replacing limited, costly and dirty fossil fuels with clean, cheap and limitless renewables. Let the record show that electricity prices are rising, and in all likelihood will keep increasing for quite a while.
Up, up and away
California provides an excellent illustration, because (i) it is firmly committed to the energy transition; and (ii) it faces the full range of challenges, from the large size of its economy to the parlous state of its energy grid. Between 2001 and 2003, California has more than doubled the amount of electricity it generates from renewables, a 130% increase:
Source: California Energy Commission
Meanwhile, this is what’s been happening to residential electricity prices:
Source: US Energy Information Administration
My friends and colleagues in Silicon Valley are fond of exponential trends, and if the chart above represented the adoption of a new product or app, venture capitalists would definitely want to know more….
So what’s going on here? The first thing to point out is that California stands in a class by itself. Since I left the state in December 2020, California’s residential electricity prices have risen by 70%. They have nearly doubled in just 3 1/2 years.
What explains such a stunning rise in energy costs? Two global factors played a role: (a) the shock to gas prices caused by Russia’s invasion of Ukraine; and (b) the related broader surge in global inflation of 2021-23. These had an impact across the US and beyond. In Florida, residential electricity prices increased by close to 30% over the same period.
Source: US Energy Information Administration
But Florida’s chart looks very different from California’s: the rise is largely limited to a one-year period between early 2022 and early 2023. There is no exponential trend here; Florida’s chart would not catch the eye of a venture capitalist. Now look at how California and Florida stack up against the broader US trend:
Source: US Energy Information Administration
Florida’s prices track the national average; California’s have broken away and taken off, even though since 2001 California reduced its reliance on fossil fuels for electricity generation by 16 percentage points. In California, renewables now account for 46% of power generation; in Florida just 7%. With fossil fuels still accounting for 44% of California’s generation, of course the rise in global gas prices was going to have an impact — but why have California’s electricity prices been rising so much faster than elsewhere? Natural gas alone provides three-quarters of Florida’s electricity, yet the rise in prices here was much more limited.
A costly road ahead
An important factor is the parlous state of California’s power infrastructure. Equipment managed by California utility PG&E has been found responsible for a string of deadly wildfires over several years, costing it multi-billion dollar settlements whose cost gets transferred onto consumers. In addition, California’s utilities need to upgrade and better maintain the grid. Then they have to fund investments in clean energy programs. Aside for the investments in renewables, the other costs are not directly related to the green transition — the grid needs to be upgraded and maintained regardless of the fuels used in generation.
While California is an egregious case, a recent Wall Street Journal piece highlights that other states will also have to invest more in upgrades to physical infrastructure and management systems — a need made obvious by a rise in the frequency of power outages. New investments will be needed both to make up for past neglect and to keep up with rising electricity demand, especially if the adoption of electric vehicles and Artificial Intelligence accelerates as expected. The increase in heat waves and other extreme weather events poses a further challenge: it boosts peak demand at times of extreme heat or cold; and it raises the risk that trees pose to power lines during wind storms.
Feeling unstable
The green transition brings an additional set of complications. An already unstable power grid becomes increasingly dependent on volatile sources of electricity, namely wind and solar. Improvements in energy storage should eventually provide the main solution. Smarter energy demand management will also help, but there are limits to our ability to adapt energy consumption to supply fluctuations. (There would be some poetic justice, though, if we had to change the cadence of our lives to realign it with the rising and setting of the sun…) In the meanwhile, we still need a more stable supply of energy in the form of fossil fuels or nuclear: California has been generating more electricity from fossil fuels in recent years rather than less (a 10% increase between 2019 and 2023).
Another devil-in-the-detail challenge is how to apportion the costs. An important part of the energy transition is its distributed nature: a customer who installs solar panels on her roof brings generation closer to demand and can produce some of her own electricity, reducing her energy bills. But she still needs to be connected to the grid for when the sun does not shine, and therefore should be contributing to the infrastructure costs.
To address the issue, California recently decided to rely more on fixed charges added to customers’ bills, while reducing the variable charge per unit of consumption. This however can create an incentive to consume more energy, when California is already encouraging people to buy electric vehicles and install heat pumps and electric stoves. Is this by design?
“We’re at a time now when our climate goals are not met by necessarily using less electricity. We need to start using more electricity overall,” said Alice Reynolds, president of the California Public Utilities Commission.
I found this quote baffling. California is burning more fossil fuels to meet rising generation demand, and has been unable to raise the share of renewables in power generation for the last seven years. Boosting electricity consumption even further hardly seems like the best strategy.
Bottomline
Electricity demand is likely to rise at an accelerating pace, driven by economic growth, electrification strategies and the AI rush;
We need to invest a lot more in upgrades and maintenance of grid infrastructure and management, partly to make up for decades of underinvestment;
We also need to invest more to bolster the stability of the grid as we shift to more volatile sources of power generation.
The transition to cleaner energy is a good thing, but its costs and challenges need to be assessed in this broader context — especially after three years of high inflation have taken a substantial chunk out of people’s purchasing power. Bringing power to the people will be an increasingly costly and challenging endeavor for quite a while. There’s no future of abundant and cheap energy just around the corner.
Re: "...a customer who installs solar panels on her roof brings generation closer to demand and can produce some of her own electricity, reducing her energy bills. But she still needs to be connected to the grid for when the sun does not shine, and therefore should be contributing to the infrastructure costs."
Here is my most recent bill from Houston Texas:
Base charge: $14.95
Energy Purchased (1420 kWh x $0.127) $180.34
Energy Sent Back to the Grid (457 kWh x $0.127) -$58.04
Transmission and Distribution Utility charge: $61.77
TOTAL $199.02
So although my panels allowed me to generate and use 1580 kwH (not depicted on my bill) during the month and save additional expenses of $200.66, I am still paying to support the grid. I would never dream of using more energy if rates were lowered such that the fixed charges were even more significant. A penny saved is a penny earned. The easiest way to make a dollar is to save a dollar.
This has been a recurring theme for you Marco! It's all very well to talk if renewable energy as the way forward but people really do not know the cost. Perhaps the best thing to do is to shift to bicycles and walk!