17/11/2018: California Rooftop Solar Mandate: An example of bad groupthink?

In recent news, California legislators have done a gimmick-trick that has earned the state loud applause from the environmentally-minded consumers and activists: California Energy Commission (CEC) recently voted 5-0 to add a new provision to the state’s building code. This includes a requirement that from 2020, all new house and multi-family residences construction of three stories or fewer, along with all major renovations, must be built with rooftop solar panels. Given that the state currently builds ca 113,000 housing units a year, and rising, this should increase significantly already existent solar generation capacity from 15% of the housing stock, currently.

Solar being mandated on virtually all new houses? Sounds like a renewables nirvana, especially given the fact that the state has huge solar generation potential due to its climate. But, as commonly is the case, there is a catch. Or two... or many more... And this means that California's latest policy mandate may be a poor example to follow, and potentially, a bad policy mistake.

Here are the key reasons.

Rooftop solar is about as effective in reducing emissions as waving a broom into the smog. UC Berkeley’s Severin Borenstein argued this in his note to CEC Commissioner (http://faculty.haas.berkeley.edu/borenste/cecweisenmiller180509.pdf). Note: Borenstein also alleges that CEC has failed to involve experts in energy economics in its decision making process - something that is not a good policy formation practice.

UC Davis economics professor James Bushnell accused CEC of “regulatory groupthink.” (https://energyathaas.wordpress.com/2018/10/22/how-should-we-use-our-roofs/) and offered an alternative to roof solar that can generate far greater environmental benefits. There are, of course, other, more efficient ways for deriding emissions, including: mandating more urban density, raising home and cars efficiency standards, expanding the renewable energy mandate, improving grid efficiencies and transmission expansion, and so on. Once again, CEC did not allow for any independent assessment of the proposed plans economic and environmental impacts.

There is an opportunity cost involved in roof solar: California has a state-wide mandate to achieve 50% renewables generation by 2030. Putting more if this target onto roof solar is simply moving generation capacity from one source to the other. Because too top solar is roughly 4-6 times more expensive than industrially-produced renewables, the substitution involves a dramatic reduction in economics of scale. This will raise the overall cost to California of reaching its 2030 target.

Another opportunity cost, this time much more tangible and immediate than 2030 targets is the problem of California grid ability to swallow all the solar generation being put into place. California has to routinely dump excess solar energy supplies during peak generation times, because it is failing to find buyers outside the state. Worse, given the scale of each roof top generation unit, solar electricity from the roof tops cannot be controlled by the grid companies, because smart inverters needed to do this are too expensive for small scale generators.

There is an argument, however, that economics of scale will kick in from a different side: mandating such a huge increase in atomistic (house-level) installations can result in more innovation and lower costs of new technologies going forward. This means that while costs might be high up front, they can potentially be deflated faster over time than absent the mandate. The same argument might hold for improvements in storage.

Worse yet, solar from one roof panel household competes with solar from another roof panel household. All roof top panels generating at virtually the same time across the same time zone state will be simply bidding down the cost of solar during peak generation, not peak demand. Here is an exchange from two experts on this:

Last, but not least, California roof top solar requirements will add new cost, to the housing in a state that is already in the middle of an atrocious housing crisis. CEC own analysis, not tested by any peer review, implies that homeowners are likely to face additional costs of ca $8,000-12,000. Over the depreciation cycle for housing stock, this is likely to translate into $15,600-$23,400 in current dollars (inflation-adjusted, using 2% inflation rate) increase in the cost of housing per household, once property taxes on new build values are factored in. With average house price in California in excess of $420,000, this is equivalent to raising house prices 3.75-5.57 percent. Of course, CEC promises savings that, according the Commission analysis will be net of higher costs. Problem is, no one actually tested these claims, and we simply do not know how the costs of switching all this roof top solar into the grid are going to be distributed across the households.

Macro level view:

Then there is macro level analysis of the solar energy benefits and costs. And California does not come out pretty in this.

A new NBER paper, tiled "Heterogeneous Environmental and Grid Benefits from Rooftop Solar and the Costs of Inefficient Siting Decisions" by Steven E. Sexton, A. Justin Kirkpatrick, Robert Harris, Nicholas Z. Muller (NBER WP 25241, Nov. 2018: https://www.nber.org/papers/w25241.pdf) looked at "federal and state policies in the U.S." These policies "subsidize electricity generation from 1.4 million rooftop solar arrays because of pollution avoidance benefits and grid congestion relief. Yet because these benefits vary across the U.S. according to solar irradiance, technologies of electricity generators, and grid characteristics, the value of these benefits, and, consequently, the optimal subsidy, are largely unknown."

What does this mean? Across the U.S., "policy, therefore, is unlikely to have induced efficient solar investments." The authors provide "the first systematic, theoretically consistent, and empirically valid estimates of pollution damages avoidable by solar capacity in each U.S. zip code". The also link "these external benefits to subsidy levels in each U.S. state, and [estimate] the share of these benefits that spillover to other states." Finally, the authors measure "the energy value of capacity across the U.S. and the value of transmission congestion relief in California."

So what do they find? "Environmental benefits are shown to vary considerably across the U.S., and to largely spillover to neighboring states." Which is not a bad thing in itself, but it also means that some states pay for benefits accruing to other states. These transfers are not voluntary to the payers for solar - the households.

Furthermore, "subsidy levels are essentially uncorrelated with environmental benefits contributing to installed capacity that sacrifices approximately $1 billion per year in environmental benefits." Which, broadly-speaking means that subsidies for rooftop solar are not a great way to achieve environmental benefits.

"...California rooftop solar is shown to generate no congestion relief." Or, as noted above, there are severe grid-related costs involved in rooftop solar in California, the state that decided to mandate it.

Putting more detail on the NBER paper: "Total benefits of solar generation—inclusive of energy values — are estimated to be greatest in the Midwest and Mid-Atlantic. They are least in the West, and particularly the West Coast, where approximately two-thirds of systems are located." Why, given the fact that sunshine is more abundant in California than in the MidWest or Mid-Atlantic?

"These differences are primarily attributable to heterogeneity in marginal responding fossil generation." Oh, wait, that is right: the more solar you put in, the more back up generation you need. And that is before you account for the solar installation possible effects of increasing demand for electricity as the second order effect.

"In California, we find no evidence that rooftop solar capacity systematically relieves congestion. Approximately two-thirds of the 900,000 rooftop solar arrays is located upstream from transmission bottlenecks, contributing to congestion rather than relieving it. If capacity were efficiently allocated, congestion relief benefits in California would have been no more than $15 million in 2017—approximately 7% of total energy value."

Cycle back to that California rooftop solar mandate. Does it really make any environmental sense? Because economics-wise, it does not appear to offer much more than a hype and a pump scheme.

28/6/17: Seattle's Minimum Wage Lessons for California

Two states and Washington DC are raising their minimum wages comes July 1, with Washington DC’s minimum wage rising to $12.50 per hour, the highest state-wide minimum wage level in the U.S. This development comes after 19 states raised their minim wages since January 1, 2017. In addition, New York and Oregon are now using geographically-determined minimum wage, with urban residents and workers receiving higher minimum wages than rural workers.

Still, one of the most ambitious minimum wage laws currently on the books is that of California. For now, California’s minimum wage (for employers with 26 or more workers) is set us $10.50 per hour (a rise of $0.5 per hour on 2016), which puts California in the fourth place in the U.S. in terms of State-mandated minimum wages. It will increase automatically to $11.00 comes January 1, 2018. Thereafter, the minimum wage is set to rise by $1.00 per annum into 2022, reaching $15.00. From 2023 on, minimum wage will be indexed to inflation. Smaller employers (with 25 or fewer employees) will have an extra year to reach $15.00 nominal minimum wage marker, from current (2017) minimum wage level of $10.00 per hour. All in, in theory, current minimum wage employee working full time will earn $21,840 per annum, and this will rise (again in theory) by $1,040 per annum in 2018. So, again, in theory, nominal earnings for a full-time minimum wage employee will reach $31,200 in 2022.

In cities like San Francisco and Los Angeles, local minim wages are even higher. San Francisco is planning to raise its minim wage to $15.00 per hour in 2018, while Los Angeles is targeting the same level in 2020. This means that in 2018, San Francisco minimum wage workers will be $8,320 per annum better off than the State minimum wage earners, and Los Angeles minim wage earnings will be $4,160 above the State level in 2020.

UC Berkeley research centre for labor economics, http://laborcenter.berkeley.edu/15-minimum-wage-in-california/, does some numbers crunching on the distributional impact of California minimum wages. Except, really, it doesn’t. Why?

Because the problem with minimum wage impact estimates is that it ignores a range of other factors, such as, for example the impacts of minimum wage hikes on substations away from labor into capital (including technological capital), and the impacts of jobs offshoring, etc. While economists can control for these factors imperfectly, it is impossible to know with certainty how specific moves in minimum wages will effect incentives for companies to increase capital intensity of their operations, change skills mix for employees, alter future growth and product development plans, etc.

What we do have, however, is historical evidence to go by. And that evidence is a moving target. In particular, it is a moving target because as minimum wages continue to increase, at some point (we call these inflation points), past historical relationships between wages and hours worked, wages and technological investments, wages and R&D, and so on, change as well.

Take the most recent example of Seattle.

In 2016, Seattle raised its $11.00 per hour minimum wage to $13 per hour, the highest in the U.S. Subsequent protests demanded an increase to $15.00 per hour in 2017. However, research by economists at the University of Washington shows that the wage hike could have
1) Triggered steep declines in employment for low-wage workers, and
2) Resulted in a drop in paid hours of work for workers who kept their jobs.

Overall, these negative impacts have more than cancelled out the benefits of higher wages, so that, on average, low-wage workers now earn $125 per month less than before the minimum wage was hiked in January 2016. In simple terms, instead of rising by $4,160 per annum, minimum wage earners’ wages fell $1,500 per annum, creating the adverse movement in earnings of $5,160. Given current minimum wage earnings, in theory, delivering $27,040 per annum in full time wages, this is hardly an insignificant number. For details of the study, see https://evans.uw.edu/sites/default/files/NBER%20Working%20Paper.pdf.

The really worrying matter is that the empirical estimates presented in the University of Washington studies do not cover longer-term potential impacts from capital deepening and technological displacement of minimum wage jobs, because, put simply, we don’t have enough time elapsing from the latest minimum wage hike. Another worrying matter is that, like the majority of studies before it, the Washington study does not directly control for the effects of Seattle’s booming local economy on minimum wage impacts: as Seattle faces general unemployment rate of 3.2 percent, the adverse impacts of the latest hike in the minimum wages can be underestimated due to the tightness in labor markets.

Now, consider the recent past: in her Presidential bid, Hillary Clinton was advocating a federal minimum wage hike to $12.00 per hour from $7.25 per hour. That was hardly enough for a large number of social activists who pushed for even higher hikes. This tendency amongst activists - to pave the road to hell with good intentions, while using someone else’s money and work prospects - is quite problematic. Econometric analysis of minimum wage effects is highly ambiguous and the expected impacts of minimum wage hikes are highly uncertain ex ante. This ambiguity and uncertainty adversely impacts not only employers, including smaller businesses, but also employees. Including those on minimum wages. It also impacts prospective minimum wage employees who, as Seattle evidence suggests, might face lower prospects of gaining a job. More worrying, the parts of the minimum wage literature that show modest positive impacts from minimum wage hikes are based on the data for minimum wage increases from lower levels to moderate levels, not from high levels to extremely high, as is the case with Seattle, San Francisco, Los Angeles and other cities.

That point seems to be well-reflected in the latest study from the University of Washington. In fact, June 2017 paper results stand clearly contrasted by 2016 study that showed that April 2015 hike in Seattle’s minimum wage from $9.47 per hour to $11.00 per hour was basically neutral in terms of its impact on wages. Losses to those workers who ended up without a job post-minimum wage hike were offset by gains for those worker who kept their employment. In effect, April 2015 hike was a transfer of money from jobs-losing workers to jobs keepers.

In a separate study, from the UC Berkeley labor economics center http://irle.berkeley.edu/seattles-minimum-wage-experience-2015-16/, the researchers found that Seattle’s minimum wage hikes were actually effective in boosting incomes of minimum wage workers, albeit only in one sector: the food industry, and the results are established on a cumulative basis for 2009-2016 period. In addition, University of Washington study used higher quality, more detailed and directly comparable data on minimum wage earners than the UC Berkeley study. However, on the opposite side of the argument, the former study excluded multi-location enterprises, e.g. fast food companies, who are often large scale employers of minimum wage workers. The UC Berkeley study is quite bizarre, to be honest, in so far as it focuses on one sector, while the study from the UofW clearly suggests that wider data is available.

In other words, the UC Berkeley study does not quite contradict or negate the University of Washington study, although it highlights the complexity of analysing minimum wage impacts.


PS: This lifts the veil of strangeness from the UC Berkeley study: http://www.zerohedge.com/news/2017-06-28/fake-research-seattle-mayor-knew-critical-min-wage-study-was-coming-so-he-called-ber. It turns out UC Berkeley study was a commissioned hit, financed by the office of the Mayor of Seattle to pre-empt forthcoming UofW study. Worse, the Berkeley team were provided by the Mayor of Seattle with the pre-released draft of the UofW paper. This is at best unethical for both the Mayor's office and for the UC Berkeley team.