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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Could California’s Green Energy Strategy Backfire Soon?

California is a poster-child for both the successes and challenges of green energy. Less than two decades ago the state was experiencing an energy meltdown with skyrocketing electricity prices, limited supplies, and rolling blackouts. Today the state generates more than 21,000 megawatts of clean power including more solar power than every other state combined. The governor recently raised clean energy output goals for 2020 and green energy seems to be an enduring trend with the populace.

Yet not all is rosy in California’s green energy future. California is so large and so populous that despite its own massive clean energy generation it still needs significant amounts of clean energy generated by nearby western states. Traditionally those states have been happy to sell that power to energy-hungry California. Now under President Obama’s clean energy plan, those western states will have to meet strict environmental standards on their own and it is less clear if they will be willing to sell power to their energy-hungry neighbor. Related: Fed Defers Rate Hike, But Oil Fundamentals Don’t Matter Anyway

This conundrum is a debacle of California’s own making, of course, since the state has long been a leading advocate for strict green energy standards. In addition, California has already taken on the easiest and most obvious green energy projects, which means that generating additional energy becomes incrementally harder with each new project that is proposed. In essence, the state has already picked all of the low hanging fruit.

Now, new projects are at risk due to objections from the EPA and threats from environmentalists who worry about everything from bird flight paths to desert landscapes. In addition, there is some question about the grid capacity in the state and how well California can continue to cope with the requisite surges in power that accompany significant green energy generation. Related: Does OPEC Have An Ace Up Its Sleeve?

The irony of much of this situation is that it does not have to be this way. In a country with less internal political struggles, green energy generation would be easier. States like Nevada and New Mexico have obvious comparative advantages in producing solar power while places like Wyoming have a significant advantage in wind generation. But a patchwork of laws and regulations that differ between states makes it difficult to generate power in some states and then transmit it to others. Add to that the issues surrounding internal politics and vested interests and you end up with situations where the most viable green energy projects become inexplicably stalled due to political meddling.

The other issue on green energy that California may struggle with in the future is interest rates. While interest rates have remained low for years now, many green energy projects were viable thanks to cheap funding opportunities. As interest rates start to rise, those funding costs will rise leading many energy projects to become uneconomical. It’s unclear how businesses and consumers would react to this, but so far most companies in California seem to have taken the green energy push in stride, building new facilities to generate green power for their own use in many cases. That flexibility will become increasingly difficult to maintain as interest rates and capital costs move higher. Related: Oil Prices Could Surge As This Country Fails To Meet Production Targets

As Congress and the President continue to push green energy requirements ever higher, it is likely that prices for electricity in California will start to rise. The limited supply of potential green energy projects in the state has already been mostly tapped and yet, with demand continuing to grow and carbon starting to be taxed in western states, supply growth options are foggy at best. All of this will likely lead to a situation where, in the future, Californians could find themselves paying much more for power than they do now.

By Michael McDonald of Oilprice.com

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Leave a comment
  • Ian on September 23 2015 said:
    The analogy of 'low hanging fruit' doesn't really apply to renewables. Most of it is solar and wind. The solar resource is about as widely distributed as any resource can possibly be. The state is full of sunny roofs without panels, as well as innumerable other opportunities at all scales. If the low fruit has been picked, the next higher fruit is only millimeters up in the tree. The effects of falling cost and rising conversion efficiency completely swamp this. Wind is much more limited, and many of the best places have been claimed, but at the same time the technology's cost is falling and newer, larger turbines are more effective at harvesting lower speeds, so its viable resource is probably also growing, not shrinking. Your point about rising interest rates is well taken, and not often commented on in the energy press. But for now things look pretty mild on that front.
  • Isaac on October 01 2015 said:
    The most relevant topic of discussion in this article is the role of politics in the generation industry. Generation of electricity shouldn't not be a politicized arena, but thanks to that pesky inert gas carbon dioxide, electric generation is now a political tool. The entire generation industry is being driven by politics instead of technology as it should.

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