California's Cautionary Energy Tale Continues

Mark Green
Posted April 6, 2023

Watching the collision between California’s renewable energy approach and the demands of real life is something to behold – and a cautionary tale for the rest of America. Friction between the two has generated significant cost impacts for Californians, especially for those who can least afford it.

State and local policymakers in California are pushing electrification, mandating sales of electric cars and heavy trucks, banning the sale of small gasoline-powered engines such as lawnmowers and, in some areas, moving to ban new natural gas-fueled water heaters and furnaces. Years ago the state started turning away from nuclear power. This, on top of highest-in-the-nation gasoline prices, which are largely the product of high state gasoline taxes, a cap and trade fee, a low-carbon fuel fee and boutique fuel-blending requirements.

We’ve written before about the risks of policies creating increasing dependence on still-maturing energy sources. We’ve noted that natural gas actually is the sensible, reliable partner that supports the growth of intermittent wind and solar power.

Californians understand this well. State residents weathered rolling blackouts in August 2020, as available generation was insufficient to offset declining solar generation in the late afternoon hours. There was a near-miss last September, when operators of the state’s power grid urged customers to conserve energy by setting thermostats to a minimum of 78 degrees, turning off unnecessary lights, avoiding using large appliances or charging electric vehicles. Even so, California continues its dubious retreat from natural gas, oil and their many benefits.

Last month the Bay Area Air Quality Management District, which regulates stationary emissions sources in the nine counties of the San Francisco Bay area, announced rules that will ban new natural gas-fueled residential and commercial water heaters and furnaces starting in 2027. Writer Robert Bryce:

The move is the latest example of how California policymakers are adopting a phalanx of regulations that are forcing residents to use electricity instead of natural gas. According to the Sierra Club, which has been leading the effort to ban the direct use of natural gas, 74 California communities have passed forced electrification measures since 2019. And these regulations are being approved at the same time electricity costs in the state are soaring.

Indeed, California is second only to Hawaii in how much residents pay for electricity. While the U.S. Energy Information Administration (EIA) doesn’t collect retail electricity rates or price information, EIA calculates average retail revenues per kilowatt hour (kWh) as a proxy for rates/prices. For California, that was 26.45 cents per kWh in January, 71% more than the U.S. average.

That’s part one of the story. The other part is how rapidly electricity prices have risen since 2008 – up 80%, according to Bryce. He writes:

Rising electricity prices are not a big deal for wealthy Californians who live near the coast and don’t use much air conditioning or heating. They can easily absorb those higher costs. But for low-income Californians, particularly ones living far from the coast and need[ing] lots of air conditioning in the summer and electric heat in the winter, it’s an entirely different story.

The Wall Street Journal editorialized last fall:

Solar and wind power have rapidly expanded thanks to rich government subsidies along with the state’s renewables mandate. These have made it harder for baseload gas and nuclear generators that run around the clock to make money. Many have shut down, and the result is that the state often lacks sufficient power when the sun goes down.

This, then, is the context in which California policymakers have pushed for even more electricity use.

As if soaring electricity costs weren’t enough of a gut punch, there is the situation with the state’s gasoline prices noted above. EIA reports that for the week ending April 3, Californians paid $4.62 for a gallon of regular gasoline, compared to the national average of $3.49 per gallon. Last July, regular gasoline in California crested at $6.13 per gallon.

There are many reasons, and most of them stem from state policies: higher taxes, stricter regulation and requirements for special blends of fuel. The state also has infrastructure issues. No fuel product pipelines enter California, so supply can be constrained when the state’s refineries go offline for maintenance or when waterborne deliveries are delayed due to port congestion.

The Hoover Institution’s Leo Ohanian writes that the state also is seeing impacts from a shrinking gasoline supply within its borders – which Ohanian says likely will shrink more as the state’s 2035 ban on the sale of new gasoline-powered cars nears.

Last fall, Valero Energy’s Scott Folwarkow responded to the California Energy Commission’s demand that refiners explain the state’s high gasoline prices:

As to separation between California prices and the prices in the rest of the United States, we can offer the following information. For Valero, California is the most expensive operating environment in the country and a very hostile regulatory environment for refining. California policy makers have knowingly adopted policies with the expressed intent of eliminating the refinery sector. California requires refiners to pay very high carbon cap and trade fees and burdened gasoline with cost of the low carbon fuel standards. … With the backdrop of these policies, not surprisingly, California has seen refineries completely close or shut down major units. When you shut down refinery operations, you limit the resilience of the supply chain.

Policies matter. California’s course should not be the course for the rest of America. API President and CEO Mike Sommers, in an interview with Fox Business:

“Unfortunately, the way that they are going right now is the exact opposite of the way the United States should be going. … Gov. [Gavin] Newsom should be looking himself in the mirror because it is the state of California, the government of California, that has led to high gas prices in the state of California. … The people that get hurt most here are actually the constituents of the governor. It’s the poorest people who have to commute to work and pay these higher prices – that didn’t happen as a consequence of America’s refiners, the best refiners in the world – but because of the state of California and laws that they have passed.

More from Sommers:

“California for a long time has been a main producing state in the United States. They have vast resources, both offshore and onshore. You want to continue developing those. But this is a state that’s chosen to move away, and it’s only to the detriment of California consumers that they are doing this. It’s time for the people of California to just say, ‘Stop.’”

As we say, California is a cautionary tale for the rest of America. According to EIA, oil and natural gas accounted for about 70% of the energy Americans used in 2022, and the agency’s independent analysis projects the two will supply more than 63% of America’s energy in 2050. The sensible course employs all of America’s energy sources instead of excluding some while forcing a rapid – and, in many ways, a premature – shift to renewables, with potentially significant impacts (again, see California).

For natural gas and oil, it means using technology to continuously improve the environmental performance of operations and products, as API detailed in its Climate Action Framework. It means capitalizing on America’s energy abundance to build a lower carbon future in an orderly way that doesn’t punish American families and businesses (we can’t say it enough: see California).

Sommers described this course in a letter to leaders of the U.S. House of Representatives before passage of H.R. 1 last week:

Real, lasting change comes from bipartisan, common-sense, economically-sound solutions. We all share the common goals of providing reliable energy to Americans; enhancing our energy security; cementing our energy independence for years to come; and making energy safer, cleaner, and more affordable.