California’s electricity conundrum

Last Monday, I wrote about how renewable energy is reducing electricity prices in Spain. Maybe predictably, I got some pushback from readers staying that this is not the case in the US. As proof, one reader sent me the chart below of the average electricity price homeowners pay in California, which has aggressively moved to renewables vs. the average US homeowner.

At first glance I thought this might be a mistake where the US and California had been mixed up, but I checked and yes, it is true. Retail electricity prices in California are some 70% higher than the US average even though California covered 58.5% of its electricity needs in 2023 with renewables (hydro + wind + solar).

Retail residential electricity prices in California and the US

Source: US Energy Information Agency

This looked like an interesting mystery to solve, so thank you to all the readers that have mentioned this to me. I honestly appreciate the feedback.

Let’s look at electricity prices in California and indeed all the fifty states of the US. The chart below shows the share of electricity generation covered by renewables in 2023 together with the average retail electricity price in 2023. The horizontal purple line shows the US average. I have labelled the US average and California separately in the chart.

Average retail electricity price per state and renewable energy penetration

Source: US Energy Information Agency. Note: Purple line separates states with below average and above average electricity prices

It is immediately clear that California is a big outlier among states. There is one state with massively higher electricity prices (Hawaii) and a handful of other states with similar prices, but California has the fourth highest electricity prices in the country. Yet, the other states with high electricity prices all have lower renewable energy penetration. In Connecticut, electricity prices are about the same as in California, but they use only 5% renewables and 95% fossil fuels and nuclear.

The chart below cuts out all the states where renewables are less than 40% of energy generation and leaves in only the states that have renewables responsible for a large part or majority of their power supply. Of these 13 states, 10 states have electricity prices below the US average.

Average retail electricity price in states with high renewables penetration

Source: US Energy Information Agency. Note: Purple line separates states with below average and above average electricity prices

So why are electricity prices in California that high?

A team from the Universities in Stanford and Berkeley recently published an article that showed that the intermittency issues and the variability of renewables do not create blackouts or higher electricity prices. On the contrary, on days where renewables were so abundant as to supply more than 100% of the state’s electricity needs, electricity prices dropped by more than 50% compared to the same period the year before when renewables were a smaller share of the electricity generation.

In its Q2 2024 Electric Rates Report, the Public Advocates Office of the California Public Utilities Commission explained why prices are so high in the state.

One driver is that natural gas is significantly more expensive in California than the US average. City gate and retail prices for natural gas in California are about 40% higher than the US average. This is because the gas has to be transported over longer distances and the infrastructure is more expensive to run.

The next important cost factor is wildfire mitigation. As we read in the news once again just a couple of weeks ago, wildfires in California have become larger and more destructive. Electric utility companies must pay for the damage these wildfires cause on their infrastructure and for wildfire mitigation to reduce future damages.

California’s largest electric utility, PG&E used 15% of its 2023 revenues to pay for wildfire mitigation and repairs. In the first half of 2024, this rose to 24% of revenues. California’s second largest electric utility, Southern California Edison, paid 9% of its 2023 revenues and 11% of its 2024 revenues for wildfire mitigation and repairs. Obviously, these companies are increasing their electricity rates to cover these costs.

A third important driver of the California premium is higher electricity demand. Because of climate change heat waves have become more common and extreme. Hence, more people have air conditioners installed in their homes and these air conditioners are running more often and for a longer time. This increased electricity demand significantly in the last five to ten years, which then pushed up electricity prices as supply struggled to keep up with demand.

And yes, there is a fourth component in the form of state subsidies for behind-the-meter home solar which adds to the bill, but compared to the other three factors, it is small fry.

Indeed, the wildfire-related costs to utility companies account for roughly half the premium on California electricity prices and the costs from higher hard-to-match demand for roughly the other half. But it seems the shift to renewables is not responsible for the high electricity prices. After all, why do most states with higher renewables penetration have electricity prices below the national average? Instead, California simply has too little energy supply at low cost and that means it needs to roll out more renewables, not less.