But many Californians would be disturbed to learn that the cap-and-trade program has no cap on prices for industries to buy emissions allowances.  Cap and trade puts a cap on emissions but not on prices.  Californians would be even more concerned to learn that with no price cap, gasoline prices could rise by over $1 per gallon, to more than $5 a gallon in California; and the stock prices of oil companies could nosedive.

Because of this risk, Severin Borenstein of the UC Berkeley Energy Institute is calling for a “hard price cap” to be placed on bid prices for emission permits.  Borenstein’s warning of a need for a price cap has been echoed by Robert N. Stavins of Harvard University and Todd Schatzki of the Analysis Group, economic financial consultants in Los Angeles.

Cap and trade works by creating a scarcity of permits

Cap and trade is a tax on air pollution that is not called a tax but an “emissions allowance or permit.” Cap and trade is a heavily regulated pollution tax market.  Cap and trade does not work like obtaining a building or business permit from a city.  It works by creating a scarcity of pollution permits and having large oil companies, regulated utilities and municipal utilities bid on them.  As California’s cap-and-trade program continues, the number of permits will be reduced each year to compel polluters to reduce emissions, buy offsets, or be forced to pay enormous prices to pollute.

California’s program will increase its emission cap in 2015, when it expands to include municipal utilities and wholesale water agencies.  Thereafter, the cap will be reduced about 3 percent each year until 2020, when the cap is expected to be 15 percent lower than the 2012 level.

Without choice, there is no such thing as a market.  Where limited choice enters the cap-and-trade program is by allowing polluters to reduce emissions or buy an “offset” instead of a permit.  Instead of reducing its own pollution, a company or utility can purchase an “offset” certificate from an independent organization that uses the money to fund a reduction of C02 somewhere else.  For example, Southern California Edison could buy an offset by funding the reforestation of areas burned by California’s Rim Fire.

California allows only 8 percent of a company’s or utility’s compliance requirements to be offset by three different types of offsets: expansion of forests and urban forests, methane capture on farms and ranches and the reduction of ozone depleting substances.  CARB just began to allow offsets in September.

A problem arises, however, if there is an economic boom resulting in greater pollution, higher costs to abate or control pollution, or offsetting organizations charge holdout prices. CARB’s emission allowance auction “floor price” in 2013 has been about $10 per ton.

Borenstein says it is generally recognized that California could not continue its cap-and-trade program if the price climbed to about $50 per metric ton of C02 in 2013 (then rising 5 percent per year for inflation). Under certain adverse scenarios, pollution allowance prices could increase from $21 to $106 per metric ton (MT) of carbon dioxide emitted. According to Borenstein, an emissions allowance price of $50 per MT would increase gasoline prices about 50 cents per gallon.  Raising allowances over $100 per MT could result in gasoline prices rising over $1 per gallon.

CARB contains prices with reserve allowances

The way CARB currently curbs auction prices is by its “Reserve Policy.” CARB can flood the market with extra allowances in an emergency so that the supply of permits exceeds the demand and, thus, prices would fall.

However, as Stavins points out:

“Nevertheless, the possibility remains that as a result of unanticipated changes in the market (such as higher than anticipated economic growth in California, slower diffusion than anticipated of low-cost abatement technologies, etc.), the current reserve structure could lead to excessively high allowance prices if the reserve is exhausted.”

Borenstein recognizes another insidious problem of not putting a cap on cap-and-trade auction prices per ton of pollution: market uncertainty.  As he puts it:

“Market participants can only speculate at how the state would put the brakes on an allowance market with skyrocketing prices.  And that’s part of the problem. Regulatory uncertainty undermines market credibility, especially in times of extreme outcomes.” 

We can’t know with certainty how fast the economy will grow. And often accurate data on economic growth take years to produce.

Borenstein acknowledges the probability of an emergency scenario could be 10 percent or more.  But such low odds were also prevalent during the California Energy Crisis of 2001 and the recent “Black Swan” event of the Mortgage Meltdown and Banking Crisis of 2008.

CARB has recognized that there is no price containment within its auction rules. It has proposed staggering permit allowances from prior years to be shifted to earlier years if prices got too high.  One cap-and-trade market participant described this proposed system as “trying to fill a bathtub by taking water from one end of the tub and pouring it into the other.” Borenstein writes that CARB’s proposal isn’t enough to protect against a 2001 Energy Crisis-type scenario:

“While the proposed changes are a small step in the right direction, they don’t go far enough to address the fundamental risk to the market from a surge in emissions that could cause the price of allowances to skyrocket.”

Cap-and-trade advocates claim that setting a price ceiling, as Borenstein advocates, would ruin the “environmental integrity of the program.” But Borenstein says that there would be no impact if prices stayed below the price ceiling. And if government has to “step in” during an emergency, then “environmental integrity” would be lost anyway.

CARB amendments not enough

As mentioned, at its October board meeting CARB will reconsider its “Market Based Compliance Mechanisms.”  Economists like Borenstein, Stavins and Schatzki are warning that CARB needs to put a price cap into cap and trade.

Borenstein indicates this is not just a concern of big oil companies and utilities.  A price cap is needed to contain gasoline price spikes for all Californians and stock market crashes for investors. That includes the California Public Employees' Retirement System, which is heavily invested in petroleum-related stocks.

Editor's Note: From an earlier version, Stavins' name was corrected to “Robert.”

Now that the $2.167 billion California Solar Initiative is winding down, electricity ratepayers might ask: What was it and what did it accomplish? Was it:

1.) A cutting edge solar energy project to bring about a “self-sustaining” solar power industry, as touted by the California Public Utilities Commission (CPUC) and state legislators?

The answer is mostly no based on post-project evaluations done by academic experts.

2.) A program to replace very expensive conventional peak time power plants with equally expensive but clean rooftop solar electricity that is generated at the time of day when it is hottest?

The answer is no. Contending that rooftop solar power replaces conventional peak time power is bogus. This is because electricity rates are tiered depending on usage and climate zone and the fact that ultra peak power rates during heat waves and cold snaps only last maybe as much as four weeks out of 52 weeks in a year.

3.) An expensive, artificial green energy and jobs program that is now being wound down, as there is a recovery in the jobs market?

The answer is yes. Since California’s Solar Initiative did not produce a self-sustaining rooftop solar power market (Question No. 1) and cannot be justified as a replacement for expensive peak time electricity, this leaves us with one conclusion: It was mainly a jobs stimulus program that ended up adding about a $200 tax to 10.8 million utility customers’ electric bills.

Public Utilities Commission fudges the numbers

Here’s the background for these conclusions:

In 2001, the CPUC came out with a report, “California Solar Initiative Cost-Effectiveness Evaluation.” The report said that the CSI was a success because it reduced the subsidy for installing solar panels on a house from $2.50 to $0.20 per kilowatt installed. Success was measured by how losses were reduced, not by the actual market price of solar power without subsidies.

The CPUC website fails to clarify that cost of $6.16 per kilowatt is the cost installed, not the regulated price that consumers pay for electricity. What is called “net or reverse metering” — selling excess solar power back into the electricity grid — means that most customers have low electricity bills.

Dr. Severin Borenstein of the UC Berkeley Energy Institute reports that a rooftop solar power lifetime installation costs $86,000 to $91,000, but the value of the power produced over its lifetime is only $19,000 to $51,000.

What Californians actually pay for electricity rates is highly manipulated by what tier of energy use a customer falls into. Rates range from $0.13 to $0.34 per kilowatt-hour depending on usage and what climate zone a customer lives in. The California Public Utilities Commission failed to report what the retail price of rooftop solar power was both with and without subsidies. Presumably, if the retail price was lower than conventional “dirty” power sources the CPUC would have reported that, but it didn’t.

But has weaning electricity customers off large solar power subsidies worked? Did the Solar Initiative create a growing market for solar energy?

Millions of utility customers subsidize solar installations

Of course, the CPUC omitted disclosing that the $6.16 per kilowatt cost of installing rooftop solar power came by adding $2.167 billion to the electricity bills of other California electricity ratepayers. To provide subsidies to the 118,303 recipients of residential, commercial and governmental rooftop solar power installations the electricity bills had to be raised for 10.8 million customers of Southern California Edison, Pacific Gas and Electric (PG&E) and San Diego Gas and Electric (SDG&E) through its subsidiary the California Center for Sustainable Energy (CCSE).

In other words, the Solar Initiative mandated on average about 91 other electricity customers to subsidize the rooftop solar installations of each rooftop solar power installation. Spread over 10.8 million customers, that equates to about a $200 tax per California electricity customer. The California Solar Initiative is another socialized system like Social Security that is based on a larger base of utility ratepayers paying for a smaller number of recipients. It is a program based on privatizing profits and socializing losses.

Thus, the $6.16 per kilowatt cost installed and 43,000 solar-energy-related jobs created by the California Solar Initiative are artificial and not market-based. The program could never have become self-sustaining in the first place.

What has the Solar Initiative accomplished?

In his report “The California Solar Initiative is Ending, What Did It Leave Behind?” Borenstein (right) offers several conclusions:

“So, as the CSI fades away, is residential solar PV (photovoltaic) on stable footing going forward? Probably not. The tax credits are under constant pressure in Washington. The very-steep increasing-block rates seem unlikely to continue, primarily because the tiers don’t reflect real cost differences of supplying power. The power purchase agreements don’t lower the basic costs of residential solar, though they do reduce the customer’s risk from poor PV system performance or a utility rate spike.”

Borenstein says the only benefit gained from California’s Solar Initiative is that the cost of manufacturing solar panels has dropped substantially. But how long will that last without a constant flow of subsidies to retain trained installation crews?

Did the Solar Initiative grow the rooftop solar power market? Borenstein’s answer:

“Unlikely. The entire capacity installed under the CSI is less than 2% of the worldwide PV panel installations since 2007.”

In a previous paper written in 2008, Borenstein also studied whether rooftop solar installations were clustered in areas that would have reduced transmission congestion and the need for investments in new transmission infrastructure?  Borenstein found that rooftop solar was not clustered in the most valuable locations.

The rooftop solar installations completed under the Solar Initiative were not prioritized by geography to reduce grid congestion or eliminate the need for existing transmission lines. Solar-powered houses still need redundant conventional power hookups because sometimes solar panels are in the shade due to cloud cover, windstorms or smog.

But doesn’t rooftop solar replace pricey peak power?

But does rooftop solar power replace expensive and polluting conventional peak power plants (coal, natural gas, oil)? Does it replace expensive but non-polluting industrial solar farms that blight California’s natural deserts?

Peak power is high-priced power resulting from spikes in demand for electricity due to a heat wave, cold snap, power outage from a blackout due to system failure, or from regulations that create a “pricing fever” such as occurred during the California energy crisis of 2001.

Peak power can be contrasted with “base load power,” which is the power needed to meet the energy demands on typical days.

The average price of peak power in California on July 4, 2013 according to “Energy News Data” website ranged from about $7.10 to $49.70 per megawatt hour (or $0.07 to $0.49 per kilowatt hour). The average retail price for non-peak electricity in California is $0.15 per kilowatt-hour as of April 2013. Some of California’s peak power is imported from the Columbia River, the Klamath River, and coal power plants in Arizona, Nevada and Utah.

Peak prices can spike to $250 per megawatt hour (or about $25 per kilowatt hour) during the hot July and August months in California. So heavily subsidized rooftop solar power may look like a real deal. But such peak prices typically only last for one to two weeks or so during the year.

And when the sun doesn’t shine or rain or dust storms reduce solar power output, redundant gas-fired power plants have to be available at an instant to back-up roof top solar power. Back up power — also called “spinning reserves” — doesn’t come cheap because it has to be on stand-by 24/7/365 but can recover its costs only over a very short period of high demand. And back-up power availability means that California rooftop solar power is not actually reducing air pollution. California solar power is merely exporting its pollution by stealth to nearby states just as it does with conventional power.

The dirty secret of all green power is that it does not eliminate backup power plants having to stay on standby and emitting air pollution in the process. So rooftop solar power does not appear to be justifiable or self-sustainable on the basis that it is a cheaper or cleaner source of peak-time power.

Solar advocates have new scheme for post-subsidy sales

Now that subsidies for rooftop solar power are being phased out, the solar energy industry is trying to push subprime energy home loans on unsuspecting homeowners. Has California learned nothing from its catastrophe with subprime residential housing loans?

The solar industry asserts that the bulk of California rooftop solar panels were installed in middle-class ZIP codes and were not just for wealthy homeowners. But the top 20 ZIP codes for residential rooftop solar installations subsidized by the Solar Initiative all were in wealthy ZIP codes and represented 10.3 percent of all the 118,303 installations under the program (see table below). Of a total of 2,591 ZIP codes in California, 20 wealthy ZIP codes ended up with a disproportionately high proportion of rooftop solar installations (data excerpted from interactive website of California Solar Initiative by author). This phenomenon of green-energy subsidies helping the wealthy should be familiar to CalWatchdog readers.

This is why the Little Hoover Commission is calling for a “time out” for all green power in California. The California Solar Initiative was an expensive, artificial jobs and clean-energy program that needs to be seen for what it really was. The California Solar Initiative should be left in the shade where it belongs.