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.

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.

UNITED STATES ANNUAL AVERAGE WIND POWER

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)