GREEN GROWTH: FROM RELIGION TO REALITY - Sustainia

Chapter 5for other fuel sources. Nuclear was not a generally attractiveoption due to numerous fault lines, limited accessto cooling water, and political opposition. The statepursued renewable and cogeneration options instead. Topromote alternative forms of energy, regulators set highprices on traditional fossil fuel based energy. The statedid also embark on several nuclear projects that laterproved to be significantly more expensive than expected.By the early 1990s the state could boast both the highestrenewable generation capacity and the highest energyprices in the nation.In the 1990s electricity supplies in the entire Westernregion of the United States became tight as per-capitaconsumption outpaced growing generation capacity. InCalifornia an unusually lengthy application process tosituate plants further exacerbated the issue. Given thesources of the problems California faced, deregulationwas from the start unlikely to address high rates and capacityissues. These problems resulted from previouslyincurred high costs and long application processes ratherthan a lack of market forces. In 1996, however, thestate nonetheless passed aggressive deregulation policies.These new policies separated generation and distributionwithin utilities, required all electricity produced fromfossil fuel-fired plants to be sold on the power exchange,and promoted more open access to transmission. TheCalifornia Power Exchange only provided for spot-marketand day-ahead transactions, preventing utilities fromsigning more long-term supply contracts. While wholesalemarkets were deregulated, retail rates remained regulatedin a policy attempt to both safe-guard consumersand address “stranded costs” if prices fell too quickly.Moreover, the isolation between the different electricitysupply networks in the nation meant that even withthe incentive of high prices electricity could not movefrom the Midwest or other regional networks.While the policy did initially boost the number of applicationssubmitted for new plants it did not address theslow application process at the root of the problem and sohad little effect. Moreover, policy uncertainty followingthe legislation began to discourage private companiesfrom investing in new electricity generating facilitates.Amid this tight market, utilities were forced to bid oneven the electricity produced from their own generatorsand prices began to rise. Prices were further exacerbatedby flaws in the market structure that allowed traders withmultiple interests in the transaction to engage in marketmanipulation to drive up prices for their own gain. In essence,deregulation policies combined with market manipulationand political incapacity greatly exacerbatedCalifornia’s electricity concerns and plunged the stateinto crisis.California politicians proved unwilling to make thedifficult and unpopular choices needed to avoid deepeningthe crisis. As deregulated wholesale prices reachedrecord highs retail prices remained regulated forcing utilitiesto take substantial losses in the transaction. Despitepleas from the utilities, the Governor and Legislature refusedto deregulate retail prices, fearing consumer backlash.This culminated in one of the state’s largest utilities,Pacific Gas and Electric, filing for bankruptcy. Then asprices spiked the state choose to reverse course and negotiatelong-term electricity contracts, thereby locking inunfavorable rates for several decades."Moreover, the isolation between the different electricitysupply networks in the nation meant that even withthe incentive of high prices electricity could not movefrom the Midwest or other regional networks"California’s electricity deregulation further tightenedalready tight electricity supplies in the West. Growth indemand had begun outpacing growth in supply throughoutthe Pacific region over the decade leading up tothe electricity crisis. While most states responded byensuring electricity supply through generation facilitiesor medium-to long-term contacts, California utilitieswere mandated to use spot markets. Deregulationpolicies specifically disallowed use of long-term supplycontracts by Investor Owned Utilities (IOUs). IOUs hadpreviously used such contracts as a hedging method tobuffer against price and supply volatility. This was compoundedby the fact that unlike many of the other statesin the region, which were either self-sufficient or net exporters,California imported about 25% of its electricity.When electricity supply fell considerably in 2000 due todrought in the hydro-powered Pacific North West, a lackof capacity, and political uncertainty, California was leftparticularly vulnerable."Local deregulation can go very badly if it is not supportedby policy at the regional and/or national level."Two implications relevant to green growth policy canbe drawn out from this story. First, restructuring energymarkets, necessary for many states’ green growth plans, isa difficult process fraught with the potential for unintendedconsequences. Second, and related - one particulardifficulty is that trying to transform one part of a systemwithout a full assessment of how that part will interactwith the rest of the system can create problems. Californiais part of a national and regional energy system, andthis link provided a troublesome conflict between localand regional practices. Local deregulation can go verybadly if it is not supported by policy at the regional and/or national level.2.3 The next generation: venture capital, green policy,and green energy marketsCalifornia arrives at the present day with two major legaciesfrom its past. The first is the result of the narrativethat has occupied the previous two sections: California’shistory of successful leadership, within the context of theUS, in pollution and energy efficiency policy and resul-54