In California, a third-world solution to a first-world problem

California’s decision to allow Pacific Gas and Electric (PG&E) to shut off electricity to hundreds of thousands of Californians because high winds and dry conditions may cause a downed powerline to start a wildfire is a third-world solution to a first-world problem.

Regions that face similar weather risks, like Australia, Italy and Spain, have significantly increased maintenance activities at existing transmission and distribution facilities, and have monitoring and control technologies that automatically shut electricity off from downed lines before they can start fires. These solutions are costly, but California has the money to pay for them without increasing current retail prices.

In 2018 California spent more than $1.3 billion on energy efficiency programs. That is $35 per capita, virtually all financed by higher retail electricity prices. It is safe to say that the events of the past few days have convinced most Californians that this $35 would be better spent on ensuring that their supply of electricity remains uninterrupted during extreme weather conditions while also ensuring the risk of wildfires caused by downed power lines is substantially reduced.

This choice would be even clearer if Californians knew how these energy efficiency dollars were spent. They typically provide rebates to customers for making energy efficiency investments. An energy efficiency investment is made when a customer purchases a more expensive energy efficient appliance or installs a more expensive energy efficient window. This investment makes economic sense if the energy cost savings over the lifetime of the appliance or window exceeds the cost of this investment. In other words, if an energy efficiency investment makes economic sense, the household should make it without receiving a rebate.

So why charge all customers higher retail prices to give some customers rebates for making these investments? One standard argument is that customers may need the financial “nudge” provided by the rebate to undertake these privately profitable investments. Another is that the customer may not be able to capture all of the economic benefits associated with an energy efficiency investment and the rebate payment makes this socially beneficial investment privately profitable for the customer.

Unfortunately, a growing literature in economics finds that neither of these explanations justifies paying rebates for the vast majority of energy efficiency investments. This literature finds, in other words, that the total energy cost savings from the vast majority of these investments are insufficient to justify their cost. In short, customers receive rebates to make investments with a negative rate of return.

Transferring a significant fraction of the $1.3 billion collected from customers each year to make the transmission and distribution network more resistant to extreme weather conditions and more responsive to line failures provides a direct benefit to all Californians. Electric customers will be more likely to receive service during extreme weather conditions and face a lower risk of wildfires caused by line failures. Customers are not prohibited from making any energy efficiency investments. They just don’t receive a rebate for doing so.

There are also low-cost actions that municipalities can take to reduce the risk of wildfires. Rigorously enforcing local ordinances on the vegetation heights and setbacks from buildings and rapid reporting to the local utility when power lines are close to vegetation can significantly reduce the risk of wildfires. 

Even where I live in the foothills above Silicon Valley, there is little to no enforcement of these regulations — which, to be sure, serves to minimize conflicts between some homeowners and the local government. But it exposes all homeowners to greater risk of wildfires.

Making our transmission and distribution network infrastructure more robust is a superior way to deal with extreme weather conditions than increasing the frequency and geographic scope of electricity curtailments, which are likely to destroy an increasing amount of economic activity in the state. 

Frank A. Wolak is the director of the Program on Energy and Sustainable Development and the Holbrook Working Professor of Commodity Price Studies in the department of economics at Stanford University.