Gas is cheap these days. Since 2014, the average price of a gallon of gas in the US has been cut in half to $1.70 and is headed still lower.
Except in California. A gallon of gas is $2.42 on average here. That’s more than 70 cents above the US average.
People in California are so used to paying more that this is seen as good news. Gas prices topped $4 in Los Angeles in the summer of 2015. So Californians are celebrating, not realizing that they are still paying more than the rest of the country.
Expensive is now normal in California. In 2015, a gallon of gas sold at the pump cost 70 cents above the U.S. average, according to the California Energy Commission. And for the month of January 2016, gas prices were 80.1 cents above the national average. That’s huge.
A difference of 70 cents may not sound like much, but multiply that by the 14.9 billion gallons of gasoline consumed in 2015 by drivers in the nation’s most populous state.
The number gets a lot bigger.
California drivers paid a whopping $10.4 billion more for gasoline in 2015 than the US average. Wow.
Why is this so? The reason frequently given is the state’s higher taxes and strict environmental regulations drive gas prices higher.
- California requires the world’s cleanest burning gasoline, which is more expensive to refine. Cost: 10-15 cents more per gallon.
- Anti global warming regulations add a pollution tax on refineries. Cost: 10-15 cents more per gallon.
- Gas taxes are higher in California. Cost in 2016: 10-15 cents.
So taking the low and high of these estimates (which like most of the information used in this post come testimony before a state panel) we get either 10+10+10 or 30 cents or at the high end, 15+15+15 or 45 cents. That accounts for less than half to two-thirds of the 70 cent-per-gallon difference between the average U.S. gas price and California’s.
Where does the other 25-40 cents go?
This, it turns out, is a vexing question, one that a state panel, the Petroleum Market Advisory Committee, has been trying for two years to answer.
Simply put, there isn’t enough gas supply to meet demand, especially in Southern California where most of the state’s population lives. That drives the average price of a gallon of gas higher.
In a properly functioning market economy, scarcity of gasoline, a widely available commodity, should serve as a signal to competitors. There’s money to be made selling gas in California! Competitors arrive with gas to sell. The supply increases until prices gradually fall back to normal.
But that’s not happening. Gas isn’t pouring into California, so prices remain stubbornly high.
The reason why is a bit surprising: A lot of it has to do with geography.
In old 16th and 17th European maps California was depicted as an island. In terms of gasoline, California is an island.
Almost all of California’s gasoline supply is produced inside the state by 13 refineries. And this put the state’s drivers at a major competitive disadvantage.
When everything is working smoothly, these refineries can supply enough gas to meet demand. In fact, California exports gasoline to Nevada and Arizona.
However, things don’t always work smoothly. Refineries break down or catch fire and the sudden shortage can cause prices to shoot up.
Gas prices have remained persistently high in Southern California since an explosion shut down Exxon Mobil’s Torrance refinery in 2015. The Torrance refinery produced somewhere around 10 percent of the state’s gasoline supply.
Outside California, when refineries hut down for routine maintenance or unplanned outages, drivers often don’t even realize it. Other refineries quickly make up the difference.
Take Florida. While California produces all its own gasoline, Florida is the opposite extreme. Florida has zero refineries. It is totally dependent on imported gas. So what does gas cost there? $1.75, a few pennies the national average.
Like most of the country, Florida gets its gasoline via pipeline from the Gulf region. The U.S. Gulf region is a giant gas exporting machine. Texas and Louisiana together account for half of the gasoline refining capacity for all of the United States.
Pipelines can move gas from Texas as far away as New York, but they don’t reach California. (Exactly why this is so is unclear, since a Gulf pipeline could reach Los Angeles through Arizona and New Mexico.)
Pipelines do link California to Nevada and Arizona, but the gas flows only in one direction: out of the state. Gas flows from the Bay Area to Northern Nevada and from Southern California to Las Vegas and Arizona.
If you look at the chart below, you’ll see that the arrows all point east. Also note there are no pipelines linking Northern and Southern California. This is another big problem.
Well, can’t ships bring gas to California to alleviate shortages? Why not ship gas from the Gulf to California in times of shortage?
California’s geography works against it. Outside California, there are only a few refineries in the world that produce gas known as CARB that meets the state’s strict standards. They are all far away.
The closest refinery that produces CARB gas is in the Gulf. It takes 10 days for a tanker from the Gulf to pass through the Panama Canal and reach California.
Due to a quirk of US law, it’s actually more expensive to ship gas to California from the Gulf than from refineries in Asia, even though the voyage from Asia is twice as long. It costs $10 per barrel to ship gas from the Gulf Coast to Los Angeles vs 6 a barrel from Asia.
Under a law known as the Jones Act, ships that sail from one U.S. port to another must be made in the USA and at least 75 percent of the crew has to be American citizens. There are very few Jones Act ships left.
It’s so hard to find a Jones Act ship that gas cannot easily move around even inside California. As noted earlier, there are no gasoline pipelines linking Northern California with Southern California.
At a hearing this month before the Petroleum Advisory Market Committee, an industry analyst noted that gas was 30 cents cheaper recently in Northern California than Southern California. But there was no way to move the gas south.
Few ships and no pipelines mean California’s gas market is isolated from the rest of the country. And this is the real reason why gas is much more expensive in California than the rest of the country.
We here in the Golden State are totally dependent on in-state refineries.
That doesn’t sit well with some people.
This concentration of power has given rise to charges that refiners are using market power to drive prices — and their profits — higher. We’ll take a look at this in our next post.
Benjamin Zycher at Forbes thinks so.
So what’s the problem? First, the credit paid in California for the excess solar power is far higher than the cost of alternative electricity sources, usually from utilities or from the spot power market. Consumers without such solar installations have to finance that excessively expensive electricity, so that overall power prices are forced above the level that would prevail in the absence of the net metering system. This system, by the way, subsidizes the affluent (median income of those installing solar systems: $91,210) at the expense of all other power consumers (median of $67,821), an embarrassing reality from which the supporters of the net-metering system prefer to avert their eyes.
Second, reliability is a hugely valuable attribute of power systems; no one likes blackouts. Electricity bills reflect the cost of that reliability in the form of “capacity” charges, that is, the part of the bill covering the cost of the physical system and its spare capacity, before fuel expenses and other such generation costs. People who install solar systems benefit from the reliability provided by the grid–they consume conventional power at night and at other times that the sun fails to shine–but because they pay only for their “net” power consumption, they get a free ride on the cost of the generation equipment and other capital that yield the reliability upon which they depend. The problem is that the free ride is not free: Other consumers have to pay for it.
Let’s take those one by one.
The idea behind net energy metering is that my demand for electricity and the solar electricity I supply to the grid cancel each other out. During the day, the power generated by my rooftop panels that I don’t use flows into the grid. At night, I am given a credit for the electricity I supplied during the day.
Perhaps Dr. Zycher has forgotten that solar panels are a source of energy that the utility has paid nothing to produce. Here in San Diego, solar panels generate more than 500 megawatts of electricity. In all of California in 2014, solar generated 10,557 gigawatt hours of electricity.
Would Dr. Zycher have me pay for the privilege of supplying electricity into the grid?
If my solar panels generate more power than I consume, I am paid at the wholesale spot market electricity price. I fail to see how this is “excessively expensive” and drives up power prices, as Dr. Zycher asserts. If anything this power is significantly less expensive for the utility, since the power is instantly in the grid, and the utility does not have to haul this energy long distances as it does with other sources of power.
The second point Dr. Zycher makes about reliability is more grounded in fact. It is true that under net metering, solar users don’t pay the full costs of maintaining the grid. This cost is passed along to other non-solar customers. Dr. Zycher is correct in pointing out that is unfair, and the costs should be borne equally by all grid users. San Diego Gas & Electric has estimated these costs at $100 per year. It would be a simple matter to pass this fee along to solar users.
There are genuine subsidies in solar. The cost of installing solar panels is subsidized by U.S. taxpayers, and we can debate this all day. Do we really need solar subsidies? I believe that all subsidies distort price signals. Watch what happens to solar when the tax credit goes away.
Net metering, however, is no subsidy. Rather it is an accounting system that balances supply and demand. Solar may not work everywhere, but it sure makes sense in California. Doing away with it will unfairly doom a pollution-free source of energy that is delivering a reliable supply of power on sunny days when demand in the Golden State is at its peak.
These are boom times for the solar industry. There are no shortage of choices for installers.
I wound up going with a company called Jamar Power Systems. I was very satisfied with the work they did for the price they charged.
Here are some lessons I learned in choosing them.
- Don’t pay for a company’s sales and marketing. Jamar relies almost exclusively on word-of-mouth. Companies with big marketing budgets like SolarCity charged more because customers have to pay for the advertising.
- Look closely at the cost per watt. You will get bids for slightly different size systems and cost per watt is a way to compare them. A fair price for a solar installation is $3.50 per watt for installing the panels and inverter (which coverts DC solar power into AC current that can be used in your home). This is what Jamar charged.
- A company that only does solar may not be around in a couple of years. Jamar has been around since 1984. They do a good business in commercial and residential electrical projects and they are likely to be around when the solar wave crashes.
- Think carefully about the upsell. Many installers recommended Sunpower panels, which are considered the best in the business, the Mercedes of solar panels. Like Mercedes, you pay more. I went with panels made by LG that carry a 25-year warranty. Sunpower panels would have cost 10 percent more, and I didn’t feel they were worth the cost.
- Optimize per panel power generation. A disadvantage to Sunpower panels is that they are often paired with Sunny Boy inverters. While Sunny Boys are well made, they are a bit behind the times. Newer technology allows solar panels to produce more by optimizing the panel when one or more of the panels is in shade. If you have big trees in your backyard like me, this is very helpful. My inverter is made by Solar Edge and it allows me to maximize the power my panels can generate.
Was there anything I didn’t like about Jamar?
They didn’t send someone out to my house until I signed a contract. This bothered me until I met the excellent who worked for them. I suppose they do this to keep costs down.
Another factor pushing me toward solar was net metering.
Net metering is a billing system that credits solar homes for the electricity they produce. If the solar system was properly designed the inflows and outflows will balance.
There is a misconception that people who install rooftop solar panels go “off the grid.” Unless you are willing to pay the extra expense for an array of massive batteries, that’s not true.
When the sun is up my solar panels generate electricity. They generate more power than I can use, and the excess is fed back in the electric grid.
At night, the situation is reversed. My solar panels generate no power. But I keep the lights on, cook dinner, watch TV, and so on. That power comes from the grid.
The catch is that, under California’s net metering law, solar homes are credited for excess power at the retail electricity rate. My average retail electricity rate in 2015, if you recall from the previous post, was 20 cents per kilowatt hour — among the most expensive in the United States.
The wholesale cost that my utility pays for power, according to the U.S. Energy Information Administration (side note: do we really need another government bureaucracy for this?), is around 4 cents per kilowatt hour.
That 16 cents per kilowatt hour difference covers San Diego Gas & Electric’s costs for generating electricity, transmitting it, distributing, and maintaining the grid. Some of it goes to SDG&E’s $500 million annual profit (in 2014).
This is a good deal for me. But it’s a bad deal for the utility’s non-solar customers. They are subsidizing my cost of maintaining the electric grid. SDG&E estimated that families without solar panels pay an extra $100 per year to cover the costs of solar homes.
California’s net metering law capped the number of solar homes at 5 percent of a utility’s aggregate peak demand. Here you can see how close we are to the cap in San Diego. The limit will probably be reached sometime this year.
What happens then? Right now it’s unclear. But my guess is that new rooftop solar customers will eventually have to buy solar at retail rates and sell it at wholesale rates. If you get in under cap you get a 1-to-1 credit for 20 years.
So there was another reason for going solar.
My wife had been urging us to go solar for years.
She saw it as a way to send a message to our community and ourselves that we care about the environment and the future of our planet. We live in sunny San Diego, so it made total sense.
Looking back, I can’t exactly say why I was reluctant to agree. We had the money. I don’t believe that global warming is some giant hoax. I was just … apathetic.
When panels started to pop up everywhere, I decided to run the numbers. As you can see below, I paid an average of 20 cents an hour per kilowatt/hour of electricity.
To put this in perspective, 20 cents per kilowatt hour is about as expensive as it gets for electricity in the United States.
How did this compare to solar?
First off, I wanted to buy my solar panels outright. We had the money to do this and it was a far better investment than leasing. Most people in California choose to lease, which is the most expensive way to go solar. Buying panels outright locks in electricity at a low price, while leasing panels leaves you vulnerable to rising rates, just like with your utility.
I was budgeting about $21,000 for my 4.73kw solar system (including a new electric panel). The U.S. government’s 30 percent tax credit brought the total cost down to around $14,700.
That’s a lot of money but buying a solar system is essentially paying for power up front.
Over 20 years at 20 cents/kWh I will hand over $24,820 to my utility, San Diego Gas & Electric. Running my solar system for 20 years would save me $10,000.
And that’s assuming that rates don’t change (unlikely) and my electric use remains the same (also unlikely).
Solar was starting to make sense.