California has a funding program -- the public goods charge -- to preserve the level of existing renewable generation and to add new and emerging renewable technologies. An RPS would complement this program by increasing the level of renewable energy generation in California's mix. The PGC provides a "push" for renewable technologies, while the RPS helps "pull" them into the California market by ensuring that there are buyers for renewable energy. Twelve states have minimum renewable energy standards for electricity suppliers, while eight of these states also have renewable energy funds similar to California's.

What Are the Impacts of the California RPS?

Forecasting the direct impact of the RPS on consumer's electricity bills depends strongly on electricity prices, which in turn depend on projections of natural gas prices, since natural gas is the largest source of electricity generation in the state.

For the last two years, natural gas prices have averaged $4 to $6 per million Btu and have occasionally spiked to over $60. No forecast predicted the huge increase in natural gas costs that Californians have paid over the past year. Future gas price forecasts are limited for a number of reasons. Among these are a surge in natural gas use by power plants under construction and geologic assessments that indicate falling gas-field productivity. Furthermore, investments to develop additional infrastructure to serve the growing demand for natural gas -- such as pipelines and liquefied natural gas facilities -- may lead to prices in the range of $4 to $5 per million Btu or higher.

If average annual natural gas prices are $4 per million Btu through 2010, the RPS would save consumers money through 2010, reaching $918 million (in $2001). With natural gas prices of $5 per million Btu, the RPS would reduce consumers' bills even more, with an overall savings of $1.8 billion ($2001) by 2010. If natural gas prices decline, as in the US Energy Information Administration's projection of natural gas costs (about $3 per million Btu on average), the RPS would still save $360 million between 2003 and 2010 ($2001). In the unlikely event that electricity prices fall below $3, the RPS could add a negligible amout to consumer electricity bills. A cost cap mechanism within the RPS ensures that costs would not exceed $10.44 per household annually in 2010 and thereafter. Thus the RPS would provide inexpensive insurance against high natural gas and electricity prices and could save consumers billions of dollars.

Given the considerable uncertainty in accurately forecasting electricity and natural gas supply, demand, and prices in California, we adopted conservative assumptions for this analysis, including the following:

• Natural gas price projections that may be low, because they do not adequately capture the volatility and supply constraints likely to result from building a significant number of new gas plants in the West and around the country. Higher natural gas prices would increase the direct savings from the RPS.
  
  
• Electricity market prices that trend toward the annualized cost of a new natural gas combined-cycle power plant by 2003. This assumption may be low, because it does not reflect the possible role that older, less-efficient natural gas facilities could have in increasing market prices or noncompetitive market conditions or market distortions such as price manipulation. Higher electricity market prices would increase the direct savings from the RPS.
  
  
• A 1.5 percent average annual growth rate in California's electricity demand, which is higher than the average annual growth of 1 percent experienced between 1990 and 1999. If demand grows more slowly, new renewable resources would be needed to meet the RPS requirement, thereby reducing RPS costs.
  
  

Additional Benefits of the RPS

In investing, a diverse portfolio is desirable because diversity reduces risk and can produce greater returns. Adding renewable resources to the electricity generation portfolio reduces the risks posed by over-reliance on a single source of electricity and reduces costs when the costs of producing electricity from nonrenewable sources are high (Awerbuch, 2000). In addition to providing insurance against higher natural gas or electricity market prices, the RPS protects against risks of supply interruptions or shortages. Because of California's abundant renewable resources, the RPS would make the state less dependent on electricity imports, another source of risk. Finally, consumers are likely to save money through lower natural gas bills for heating and other uses, as the RPS reduces demand for natural gas and so helps to keep natural gas prices down.

The RPS would also reduce air pollution and global warming emissions. The RPS would reduce emissions of carbon dioxide by more than 23.7 million metric tons a year by 2010. This is equivalent to removing 3.7 million cars from the road over the same period. What's more, the RPS would provide a hedge against future carbon-reduction measures likely to be required to slow global warming. Increasing the use of clean renewable resources would also lead to reductions in other air pollutants, such as nitrogen oxides, which contribute to smog. Adding nonpolluting electricity plants to California's mix could also reduce the well-publicized cost pressures on fossil-fuel power plants from air quality requirements, which have contributed in part to higher energy prices in California.

The RPS would avoid the need to burn enough natural gas to fuel over 15 new average-sized (300 megawatt) power plants by 2010, somewhat reducing the pressure to drill for new natural gas supplies and build new pipelines.

What Renewable Energy Sources Would Grow?

The RPS mechanism leaves the choice of which renewable sources to acquire to electricity suppliers, creating competition among developers of these resources to meet the standard at the lowest cost. Consequently, there is some uncertainty associated with projecting which renewable resources would be built to meet the RPS. Small differences in assumptions about the future cost of different renewable technologies could easily change the proportions of wind, geothermal, and biomass in the forecasted mix. How the California Energy Commission uses the PGC funds to promote different resources or to create more diversity among renewable energy sources would also affect the renewable energy mix.

In this analysis, wind and geothermal sources make up most of the increase in renewable energy. By 2010, wind power would grow from less than 1.5 percent of the state's total electricity mix to 6.1 percent. Geothermal generation would grow from less than 5 percent today to over 10 percent in 2010. In addition, landfill methane projects located in California would contribute 0.5 percent to the state's total electricity market by 2010.

The addition of an RPS could help free up PGC funds to ensure continued operation of existing renewable sources, if needed. Further, the RPS and PGC together could support greater deployment of higher-cost but high-value technologies than would be possible with either mechanism alone. These higher-cost technologies include biomass gasification, solar photovoltaics, small-scale wind turbines, solar thermal projects, and other technologies using eligible fuels such as fuel cells and methane digesters. The PGC, utility and municipal programs, and the RPS would all provide support for increasing these higher-cost technologies.

Together, the PGC and the RPS could make a real contribution to diversifying California's energy supply, helping to stabilize prices and reducing the many environmental impacts of California's electricity system. The RPS is a prudent and sensible response to the state's greatly expanded reliance upon fossil fuels such as natural gas to generate electricity.