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
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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