The electricity markets in the two most-populous states couldn’t be more different. California government heavily regulates electricity while Texas allows free market competition in most of the state.
Yet, Texas produced about five times the amount of wind power as did California in 2017 while it generated about 29 percent more non-hydroelectric renewable power (California’s strict renewable power rules excludes the power from large dams as being considered renewable), such as solar, biomass and geothermal than California while California’s retail electric rates were 89 percent higher than Texas’ in 2017.
California’s electric market labors under detailed mandates imposed by busybody politicians exercising their power to save the world. Since 2002, there have been no fewer than 12 laws or state executive orders specifying renewable energy targets. Several other laws proscribe the power mix, such as sharply curtailing greenhouse gas emissions or prohibiting new coal-fired electricity contracts.
In return for all this regulation and government oversight, the big three publicly regulated utilities, Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric (owned by Sempra Energy), are granted a guaranteed rate of return that causes them to build new generating capacity without risk as well as make more profit with higher-priced electricity. With zero incentive to compete, California consumers lose out.
Unfortunately for the other 10 Western states fully or mostly within the Western Interconnect grid, their electricity markets and costs are beginning to be increasingly shaped by politicians in Sacramento and bureaucrats in San Francisco, whether they agree with them or not.
Since 2008, when California’s renewable electricity and greenhouse gas reduction policies really started to accelerate, the inflation-adjusted retail price of electricity has increased 13 percent in the state. The Western region saw its electrical prices rise 8 percent in tandem.
These increases don’t seem too high—until you factor in the fact that inflation-adjusted natural gas prices plummeted 70 percent from 2008 to 2017 in inflation-adjusted terms, thanks to widespread use of fracking in Texas and other states. Fuel accounts for about 40 percent of the cost of operating a typical natural gas electric generating plant and California generates about half of its power from natural gas.
It can only be the ham-fisted hand of government that could cause electric prices to rise by 13 percent when the primary fuel costs for electricity decline by 70 percent.
Now that the U.S. is exporting more oil and natural gas, California, and much of the Western grid, would appear to be very vulnerable to rising natural gas prices.
By comparison, Texas saw retail inflation-adjusted electricity prices decline by 32 percent from 2008 to 2017, reflecting the fact that Texas electricity producers were encouraged to pass the savings of the 70 percent drop in natural gas prices onto consumers—if they didn’t, their consumers would have switched to a different electric provider (most Texans have the ability to choose their electric provider, unless they are served by a municipal utility or an electric co-op).
In the Eastern Interconnect, where public electric utility regulation is high, but the drive to increase renewable energy and cut greenhouse gas emissions isn’t as intense as in the Golden State, electric prices declined by almost 4 percent in inflation-adjusted terms from 2008 to 2017.
California policymakers are now aiming at making the state’s electric grid 100 percent renewable by 2045. Given the practicality of the state’s integration into the Western Interconnect, what this really would mean is that California would produce a surplus of mandated and subsidized solar and wind power during much of the daylight hours which would be exported to Western states below market value. In turn, these states would ship baseload power from fossil fuel plants to California at night. The net result would be terribly inefficient, requiring the maintenance of extensive backup power plants that would only run part of the day or part of the year, but still require staffing and maintenance.
In the meantime, Texas, with its own electric grid covering most of the state’s residents (El Paso is in the Western Interconnect while parts of the Panhandle and eastern Texas are in the Eastern Interconnect), will likely see a continued growth of renewable power—so long as it is competitive, given federal subsidies and tax law.
Texas’ electric market competition ought to continue to deliver lower electric prices that, along with the Lone Star State’s low taxes and light regulatory burden, should fuel its strong economic growth for many years to come.
This commentary was originally featured in Forbes on May 7, 2018.