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Electricity Pricing and Electrification for Efficient Greenhouse Gas Reductions

Friedman, Lee. Report issued jointly by Next 10 and the California Council on Science and Technology, July 2, 2013

Abstract

To reach its 2050 greenhouse gas reduction goal, California electricity must become cleaner and some activities that are now fossil-­‐fueled must run partially or fully on the cleaner electricity—a process termed electrification.  This paper recommends pricing policy reforms that will help to make decarbonization and electrification decisions effectively and efficiently. Its emphasis is on better alignment of prices with social costs. But participation of many other jurisdictions besides California is also necessary for mitigating climate change efficiently.  Therefore California policymakers should look favorably upon linkage of its cap-­‐and-­‐trade program with jurisdictions like Quebec that adopt comparable goals and rules.  Policymakers should also act soon to clarify state efforts to reduce GHG emissions beyond the 2020 mandate of AB 32—otherwise, the uncertainty lowers expected future allowance prices and deters investments and research and development efforts for cleaner generation, factories, buildings, and other infrastructure. Substantial  reform  is also needed  with the retail  pricing  of electricity. Restrictions  held over from  the  state’s  2001  electricity  crisis  are  preventing  10  million California  residences  from receiving any carbon price signal at all, despite the fact that they would be compensated for this price increase with dividends. California also needs to transition its electricity customers on to time-­‐varying  rates that reflect the large social cost differences of providing service at different times of the day. The prevailing time-­‐invariant system is an inefficient impediment to vehicle electrification—while it only costs about $.05 per kWh to provide offpeak electricity when recharging is convenient, many customers face rates that are more than 6 times this cost. The same  misalignment  of  rates  with  costs  is  also hindering  the  development  of  grid  storage important to manage increased use of intermittent renewable generation. It is hindering participation  in demand  response  programs  that  avoid inefficient,  high-­‐emission peak generation,  facilitate increased renewable generation,  and can be used to provide better and cleaner ancillary  services.  Time-­‐varying  prices commensurate with costs of service would not only fix these  issues,  but they would  encourage  the development of enabling  technology  to further  improve  all  of these  GHG-­‐reducing  actions.  Important fairness  concerns  about  time-­‐ varying rates can be addressed by several rate design methods, including HOOP (Household On and  Off  Peak)  pricing  that  combines  time-­‐varying 
marginal-­‐cost  based  volumetric  rates  with  a system of non-­‐distorting graduated fees.

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