Energy prices in America are on a tear. Energy inflation was 30% in the previous 12 months and US retail gasoline prices hit a new high of $4.37 per gallon this week. Gasoline futures are up 9.4% since March, a sign that prices are unlikely to fall soon. Electricity prices are rising nationwide as the price of natural gas rises and summer demand begins. California, the nation’s first energy basket case, is once again preparing for summer blackouts, and its energy policies are showing other states what not to do.
California has one of the most aggressive plans in the country to switch to renewable energy. It aims to generate all of its electricity from carbon-free sources by 2045. Cleaner energy is a big goal, and I’m confident that America’s innovators and entrepreneurs will continue to make advancements in nuclear, geothermal, solar and other forms of energy production.
But such advances take time. Making new technologies profitable doesn’t happen overnight, especially when government at all levels hampers new innovations with stacks of regulations. The National Environmental Policy Act, or NEPA, the California Environmental Quality Act, or CEQA, and just about everything that President Biden—the new chief regulator— all this delays new innovations.
California policymakers say they want new energy sources, but instead of cleaning up the state’s regulatory clutter and allowing private sector innovators to innovate, they’re acting as if government mandates can override to market-tested innovation.
For example, state officials are pushing for more solar power, enticing solar companies with tax breaks. At the same time, they refuse fracking permits. Both of these actions undermine competition in the energy market and reduce local government revenues. Less fracking also reduces natural gas supply and increases electricity prices. In response to the state’s action, local governments like Kern County, which are feeling the revenue drop and frustrated with the lack of fracking permits, are fighting back by delaying approvals for solar projects.
Meanwhile, as at the right time, the Biden administration is investigating the evasion of U.S. solar tariffs by some Asian countries. Even without an investigation, tariffs are a political mistake that drive up the cost of every solar project in America. Now the investigation is further disrupting supply chains, delaying nationwide solar projects by up to 18 months.
This situation illustrates why California’s power grid is a mess.
According to the most recent data from the US Energy Information Administration (EIA), California has one of the highest retail electricity prices in the country. As shown in the figure below, in 2020 the price of electricity in California was 18 cents/kWh (blue bars). This was 70% higher than the US average and only five states had higher prices. From 2016 to 2020, the price of electricity in California also increased by 18%, the largest increase in the country (orange line).
People often associate higher prices with better quality, but in the case of California, higher electricity prices are less reliable. As Reuters reported, California officials “project a potential shortfall of 1,700 megawatts this year, a number that could reach 5,000 MW if the grid is taxed by multiple challenges that reduce available power while skyrocketing Requirement”.
Higher electricity prices hurt low-income households the most, as they generally spend a greater proportion of their income on energy. When prices rise, they often have to cut spending elsewhere. California has the highest poverty rate in the country when the cost of living is taken into account, and high energy costs are a part of that.
If America’s energy problems were confined to California, things might not be so bad since people could move to other states with more sensible energy policies. But federal politics under the Biden administration is moving the whole country in the direction of California.
Biden campaigned on 100% carbon-free energy by 2035, 10 years earlier than even California’s lofty but absurd goal. Biden also recently traveled to California to join Governor Gavin Newsome to tout the state’s commitment to cleaner energy. And Biden-backed legislation would mandate a federal clean power performance program that would further tilt the energy market against cheap, reliable natural gas.
High natural gas prices are a feature, not a bug, for the likes of Biden and Newsome because they believe the future will be battery-powered. There is, however, a big problem: the planet does not mine and process enough rare earths to build the necessary batteries. Some estimate that America needs 10 times more rare earths than we currently produce just to meet Biden’s goal for electric vehicle production and 20-25 times more to power the entire economy. through electricity.
America has many necessary elements and is currently the second largest producer of rare earths after China, so availability is not the main problem. The main problem is building new mining and processing capacity, which is part of a larger problem of not being able to build anything in America anymore.
California formed a Lithium Valley Commission in 2020 to supposedly help guide the development of the state’s lithium deposits, an important element in battery production. But two years later, the state doesn’t seem any closer to mining and processing more lithium. Similar lithium mining efforts in neighboring Nevada are opposed by activists who would rather see America reduce its energy demand than develop new energy sources.
The fact is that the extraction and processing of minerals requires the use of resources and energy to build the facilities and factories. This causes disruption in communities, as well as some pollution, which those communities would rather not have. A NIMBY state like California, which is rife with choke points and numerous regulations that can be exploited to block just about anything, is unlikely to lead to a mining renaissance in the United States.
California’s energy problems are unlikely to dissipate. The state discourages the production and consumption of fossil fuels through taxes and regulations, but at the same time it cannot fend for itself to create profitable alternatives. California is the nation’s largest net importer of electricity despite abundant fossil fuel deposits and vast land for solar, wind and nuclear generation. If we are not careful, the whole country could one day find itself in the same situation: all the energy we need at our fingertips, but no will to develop it. Let’s choose a different path.