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The California energy approach: From conventional to alternative energy sources
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THE CALIFORNIAENERGY APPROACH: FROM CONVENTIONAL TO ALTERNATIVE ENERGY SOURCES EMILIOE. California
Energy Commission,
VARANINI,
III
I II I Howe Ave., Sacramento, CA 95825, U.S.A.
(Received 25 February
1980)
A&m&-The paper outlines the work of a State Government Agency, the California Energy Commission, which is now completing its major analytical task-forecasting California’s future energy demand five, ten and twenty years hence and formulating an optimal state strategy for energy production and conservation. The method used in earlier demand forecasts was simply to extrapolate the tread of past years. These forecasts, prepared mainly by the utilities, lead to alarmingly high figures. By contrast, the approach of the Commission was to study, in depth, the evolution of the demand of each category of end users. Supplemented by a realistic assessment of the impact of various conservation measures and by extensive discussions with d&rent groups of concertsed citizens, the Commission’s approach produced much lower and quite manageable estimates of’future energy demand. In devising an energy supply strategy, the Commission postulated a mix of conventional and alternative energy technologies of proven practicability and diverse lead times. Providing such latitude in the choice of energy options increases the flexibility of the state’s strategy to cope with possible unforeseen developments. At this point, the Commission feels that the time is ripe to shift the emphasis of its work from the analysis to the implementation stage.
I. INTRODUCTION
The California Energy Commision will complete its major analytical work on developing an energy strategy for the state in December 1980. Its goal is to put California on a solid footing towards improving its energy security, keeping costs within reason, minimizing serious environmental damage and ensuring the availability of adequate energy supplies over the next 20 years. The purpose of this presentation is to explain the process that California has undergone in formulating its energy strategy. While the individual steps in this process may not be all that innovative, collectively they represent an attempt to formulate for the first time at the state level, an integrated energy plan that is both practical and realistic. The energy plan will form the basis for decisions on new energy facilities, additional conservation measures, and the development of new technologies. 2. THE
LEGISLATIVE
MANDATE
The California process consists essentially of forecasting and analyzing both energy and electricity requirements and problems five, ten and twenty years hence. It is relevant to this discussion for two reasons. First, what we are really doing is a regional analysis, or more accurately, a sub-national analysis on a regional basis. This analysis is conducted by a staff of 530 people, and our total budget is about $26 million. Thus, we have adequate financing to perform the analytical tasks necessary to prepare long run energy policy. Second, the California Energy Commssion has both regulatory and planning responsibilities. In this sense, the Commission is unusual because its legislative mandate combines both an independent, analytic capability as well as the authority to implement the decisions resulting from its analyses. The process, described in detail in the Commission’s Biennial Report, serves as a basis for policy recommendations to the legislature, governmental agencies, and the private sector. It further provides regulatory guidance for electrical demand forecasting, availability of energy technologies, electricity supply planning criteria, and location of power plants within the state. In 1972 and 1973, several forecasts indicated that the demand for energy in California would continue to grow at about 4% a year and the demand for electricity, at about S& per year through the end of the century. To meet this escalating consumption, interested groups and utilities argued that the state would have to build dozens of nuclear plants and several coal 721
728
EMILIO E.VARANINI,III
plants; develop coal gasificationworks in the western United States where large coal reserves exist; import natural gas from overseas; import oil from Alaska; and build new refineries for oil imports. It was argued that in order to satisfy the projected demand Californiahad to quadruple the size of its energy supply system in the next 25 years, with the prospect of further quadrupling in the subsequent 25 year period. Increased energy consumption would dramatically increase the amount of pollution generated in California, and the need for fresh water supplies to cool the new power plants and for thousands of acres of agriculturaland urban land for new energy facilities. Given the problem of financing and finding suitable locations for all of these energy facilities, solutions appeared infeasible. Consequently, two views emerged. One argued that government had to intervene to provide large scale solutions. The second view questioned the necessity of quadrupling production, and argued that by eliminating waste, many of the adverse consequences of expanding the state’s energy system could be avoided. In 1973,the emerging conservation argument was considered quite radical, even revolutionary. In the past seven years, however, growth and consumption have not increased at the rates projected in the early 1970s; yet, California’s economy has been booming. The gross state product has been growing at a rate faster than it has ever grown in its history. Population growth tapered off, then recently began to increase again. Clearly much of the debate over our energy problem has been the result of misinformation and speculative estimates that have been shown by recent events to be wrong. 3.SETTINGGOALS
When California policy was conceived and enacted in statute, it required the Commissionto adopt standards to reduce waste and inefficiency in new buildings and appliances, and to discourage, to the extent practical, the wasteful use of fossil fuels and nuclear energy. Most importantly, the law established and mandated the state to examine the energy situation independently and thoroughly in order to overcome the misinformationthat was so widespreadat the time. The first step in our process was to determine the objectives that an energy strategy is supposed to achieve. Whileobjectives seem obvious now, they did not at the time. We wanted to preserve and maintain a strong economy; improve and protect the quality of the environment; ensure that burdens were shared equitably between regions, between consumers and producers, and among income groups; and ensure that everyone would have the opportunity to improve the quality of their lives. We perceived two paths to achieving these goals. One was the more conventional path using well known fossil fuel resources and nuclear energy. The other emphasized increased conservation and the use of alternative resources such as solar, wind, biomass, and geothermal. In order to examine these two possible paths, we first undertook a thorough analysis of future energy demand in the state, then investigated how the cost of alternative energy resources affected potential uses in the state. 4.FORECASTINGENERGYDEMAND
In examing the question of future state energy demand, we quickly concluded that the existing techniques for forecasting future demand were seriously flawed. First, they relied generally on questionable assumptions about the relationship between energy use and the growth of the economy. These assumptions proved to be vulnerable to the sharp increase in oil prices beginning in 1973. Second, when we did examine the energy forecasts made by the business community, we found them implausible. Based on these forecasts, people would have their furnaces and air conditioners running simultaneously, their windows open, and the house lights on, while the whole family was out driving their car. The forecasts seemed to ignore how people would actually be using energy in the future and how that would be different from what they are doing now. Using these flawed forecasting techniques, the energy companies in the state were thus grossly inaccurate in their forecast of future state power needs. Since the 1973 creation and enactment of the state’s energy legislation, the utilities have been revising their forecasts drastically downward every year. This phenomenon is not unique to California. It has occurred throughout the United States.
The Californiaenergyapproach
729
To correct these dificienciesin forecasting methodology, the Commissiondeveloped an entirely new forecasting technique called end use f@eu&ng. The InGo theory rrndatying this technique is to predict future energy consumption for each of several uses of energy rather than to predict aggreg& consumption. These uses include air conditioning, water heating, cooking, industrial processes, heating residential and commercial buildings, etc. Standard econometric techniques are used to forecast future activity in each of these areas. Finally, the forecast is derived by summing up the projected individual end use needs. This technique requires an enormous amount of data, and while we were not pleased with the prospect of building elaborate and complicated models, we had no choice, given the inadequacies of other techniques. Another reason for developing this technique was to examine the potential for additional conservation as a substitute for building new supply sources. Using aggregate data, there was no way to reliably estimate the potential for conservation. The Commission’s methodology was unveiled in August 1979,with the publication of the Commission staff’s first independent forecast. At the time it was released, it was extremely controversial. The staff predicted that electricity demand would grow only 2% per year in the next 20 years and overall total energy demand would only grow 1% per year. In contrast, the utilities believed electricity demand would grow at 3& per year and total energy requirements in the range of 2%. (Remember that the same companies predicted growth rates twice that just five years earlier.) When the staff’s estimates became public, they were immediately subjected to intense scrutiny and controversy. The debate was carried on in a lengthy series of hearings held at the Commission between the energy industry forecasters, the staff forecasters, academicians, and public interest groups. Two major differences separated the staff forecasters from the industry forecasters. First, the industry forecasters had assumed energy would become cheaper when adjusted for inflation over time. The staff forecasters felt that this was not a realistic assumption. When the industry forecasts were corrected, using the staff’s price assumptions, conclusions were reasonably close; the difference between the two forecasts was cut in half. The second difference stemmed from the staff’s estimates, contrary to industry estimates, that conservation measures would have a higher payoff and that growth of the economy and personal income would have less of an impact on driving consumption to higher levels. This exercise revealed the differences between variations in methodologicaltechnique and, more importantly, that industry forecasts with regard to future prices were compktely out of line with recent economic realities. In my opinion, this experience shows why a very thorough and independent analytic capability is essential to comprehend the nature and magnitude of the energy problem facing California.At the conclusion of the Energy Commissionhearings,the staff demand forecast, with some corrections, was adopted. Consequently, a great deal of the difficultyin devising an acceptable energy forecast was eliminated. 5. FORECASTING ENERGY SUPPLY
The second major Commission activity focused on future supply sources for the state. The major findingwas that the cost of conventional energy sources would escalate significantlyover the next 20 years and therefore, would require greater expenditures. On the other hand, many of the new sources would decline in price over time, particularly those based on renewable resources. It became apparent that the implementation of more renewable and emerging technologies would make the state’s energy future cheaper and more secure. The whole question turns, however, on how much reliance can be placed on these new technologies which look attractive but are not yet commercially proven. The second phase of our inquiry on supply was to look at what these technologies could contribute. We thought we were quite realistic in assuming that each of these technologies is affected by technological and environmental risks, and by financial and institutional problems. We looked at these problems quite carefully and devised approaches to overcome them. In some cases, it was only necessary to set up better financing arrangements or remove existing subsidies so that new sources could compete. In other cases, what was required was directing research funds in such a way that technologicalrisks could be reduced, by concentrating on the most attractive technologies and completing the necessary research and development. From this analysis we developed an estimate of the maximum energy supply that could be
730
EMILIO E. VARANINI, III
expected from these resources. Adoption of these new energy sources requires neither complex policies, massive government expenditures, or substantial technological breadthroughs. In other words, we believe that the levels of contribution from these new resources are practical and achievable. Some critics say we are being entirely too pessimistic about alternative energy sources. Our purpose was to design a practical energy strategy based on all alternative sources, not one representing the “maximum” feasible use of all of these technologies. We also examined additional conservation measures that could be employed in the state. While the original state law included several conservation measures, the federal government later expanded California’s original statutes in 1978. We suspected that there were still additional energy savings to be gained and in fact, found that there were many things that could still be done to reduce unnecessary and uneconomical uses of energy. 6. ALTERNATIVE ENERGY FUTURES
With these demand and supply studies, we developed a firm foundation for looking into the two most commonly discussed choices for an energy future. The “conventional future”, utilizing oil, gas, coal, and nuclear power has already been implemented by the state and the private sector. The “alternative energy future”, however, requires additional governmental policies and private sector investment to stimulate the use of new technologies and additional conservation. One of the most striking differences between conventional and alternative energy futures is the fact that growth in the use of energy and electricity can be cut in half by the use of addtional conservation measures, improvements, and efficiencies. We found that substantial use of renewable resources, principally the use of wind machines, could be very beneficial to the state. The differences between the two scenarios show that if consumers follow the alternate paths, their energy cost would be reduced by about 50-60 billion dollars in the next 20 years. At the same time, the use of new technology would require more local labor, expanding the number of jobs in the state by 100,000 per year. The largest single savings appear possible in the transportation sector. The major differences in oil consumption result from our recommendations to modify federal policies which we think have an unintended adverse effect. According to current federal law, more oil would be required in the state after 1990 than the amount used in 1985. Because we think this outcome was unintended, we recommended changing the law to allow the state to use more domesticallyproduced natural gas which would dramatically reduce oil use. A large increase in the use of natural gas can be avoided through additional conservation measures which would also reduce the overall amount of energy required. Minimizing risks It is also important to evaluate each strategy in terms of its vulnerabilities. For example, the conventional future has five principal vulnerabilities. (1) Trying to obtain permission to build a fossil fuel plant in the state poses great difficulty because of the state’s air quality problems and the severe restrictions placed on new sources of pollution. Any reliance on existing conventional fossil fuel sources, therefore, must meet air quality standards. (2) The state has under construction several new nuclear plants. Because of the accident at Three Mile Island in Pennsylvania, public concern about the safe operation of these plants has increased markedly. The operation of those plants will probably be delayed for a substantial time period. Therefore, we have to look at ways to compensate for possible long delays in the construction of nuclear plants. (3) Federal restrictions, coupled with uncertainties in world oil markets, make it imperative that we markedly reduce the use of oil in the state. Any plans which involve the continued importation of oil into California would be very vulnerable. (4) Forecasts of future demand might be inaccurate. If future energy demand was underestimated, one would quickly have to develop additional sources of supply to avoid shortages. Any strategy designed around a long lead time would also be too rigid and vulnerable. (5) If untried and unproven technologies are to be implemented, alternatives must be developed if one technology fails. This approach is obviously vulnerable.
The Californiaenergy approach
731
The California strategy includes actions to hedge against these five types of risks. To avoid air quality problems, we have developed policies that rely on technologies that do not use fossil fuel combustion. We prefer that alternative technologies and conservation be utilized. To compensate for possible delays in the operation of nuclear plants, we recommend that contingency plans be prepared for additional plants to be built. To reduce oil consumption, we have recommended additional conservation, increased use of coal, and introduction of alternate technologies. To compensate for possible errors in forecasting, we have suggested that a mixture of projects with long and short lead times be undertaken. For example, we do not want to hamper progress on such projects with long lead times as new coal plants; thus, we recommended approval of two new plants. We can’t afford to wait and find out later that we were wrong, then have too little time left to build coal or any other types of plants. If we are more successful with conservation or new technologies than we expected from our projections, we can defer building the coal plants. Thus, to meet the uncertainty in the availability and price of new technologies, we advocate proceeding to some extent with conventional technologies, while retaining in working condition old plants for limited use as a hedge against possible disappointments in the deployment of new technologies. The steps taken to hedge against the risks of pursuing an alternative energy path seem to have significant environmental and economic advantages over the conventional path. The alternate path is the one that we intend to take as a state energy strategy. To implement that strategy we have recommended in our Biennial Report a number of specific actions. We are looking for a system that will work and last. We are not looking at abstract or philosophical processes in the course of attempting to make policy. CONCLUSION
We found that within our region there are some unique problems. In the past we have not been represented as a state in international transactions. We have allowed our business community to do that, and we have run into some difficult situations where their sensitivities to the larger questions associated with resources were simply nonexistent. For example, there have been some preliminary discussions about a common market type mechanism, including Canada and Mexico. Policies which link human and physical resources may achieve a better and more logical distribution of benefits across North America, rather than processes where there is extraction of resources and associated economic rents without mutual benefits to our trading partners. We are beginning to discover that government simply has to get involved in that process to ensure a certain level of sensitivity not present within California’s business sector. California took a leading position in developing an alternative energy strategy long before the federal government took the problem seriously. In the intervening years, we have developed a very strong analytic capability, examined the problem thoroughly and reached our own conclusions. As a result, we have set forth a vigorous, aggressive energy strategy for the state, which we think makes good sense for its citizens and future generations. One characteristic of this energy strategy is its great potential for adoption by other nations of the world. We do not think that our conclusions are valid only for California or the United States. If other nations undertake this type of detailed analysis, their conclusions might well come out the same. We look forward to the implementation of this strategy in California. We have been successful with the rapid promotion of solar energy. The new plans of the utilities, which have been submitted since our report was adopted, lay out new timetables for the use of unconventional technologies. We have several demonstration projects operating in the state and intend to move from an emphasis on analysis to an emphasis on implementation. While more analytic work must be done to solidify the foundation of this energy strategy, and to monitor the results, the main goal now is to implement what we think is a very sensible strategy.
THE CALIFORNIAENERGY APPROACH: FROM CONVENTIONAL TO ALTERNATIVE ENERGY SOURCES EMILIOE. California
Energy Commission,
VARANINI,
III
I II I Howe Ave., Sacramento, CA 95825, U.S.A.
(Received 25 February
1980)
A&m&-The paper outlines the work of a State Government Agency, the California Energy Commission, which is now completing its major analytical task-forecasting California’s future energy demand five, ten and twenty years hence and formulating an optimal state strategy for energy production and conservation. The method used in earlier demand forecasts was simply to extrapolate the tread of past years. These forecasts, prepared mainly by the utilities, lead to alarmingly high figures. By contrast, the approach of the Commission was to study, in depth, the evolution of the demand of each category of end users. Supplemented by a realistic assessment of the impact of various conservation measures and by extensive discussions with d&rent groups of concertsed citizens, the Commission’s approach produced much lower and quite manageable estimates of’future energy demand. In devising an energy supply strategy, the Commission postulated a mix of conventional and alternative energy technologies of proven practicability and diverse lead times. Providing such latitude in the choice of energy options increases the flexibility of the state’s strategy to cope with possible unforeseen developments. At this point, the Commission feels that the time is ripe to shift the emphasis of its work from the analysis to the implementation stage.
I. INTRODUCTION
The California Energy Commision will complete its major analytical work on developing an energy strategy for the state in December 1980. Its goal is to put California on a solid footing towards improving its energy security, keeping costs within reason, minimizing serious environmental damage and ensuring the availability of adequate energy supplies over the next 20 years. The purpose of this presentation is to explain the process that California has undergone in formulating its energy strategy. While the individual steps in this process may not be all that innovative, collectively they represent an attempt to formulate for the first time at the state level, an integrated energy plan that is both practical and realistic. The energy plan will form the basis for decisions on new energy facilities, additional conservation measures, and the development of new technologies. 2. THE
LEGISLATIVE
MANDATE
The California process consists essentially of forecasting and analyzing both energy and electricity requirements and problems five, ten and twenty years hence. It is relevant to this discussion for two reasons. First, what we are really doing is a regional analysis, or more accurately, a sub-national analysis on a regional basis. This analysis is conducted by a staff of 530 people, and our total budget is about $26 million. Thus, we have adequate financing to perform the analytical tasks necessary to prepare long run energy policy. Second, the California Energy Commssion has both regulatory and planning responsibilities. In this sense, the Commission is unusual because its legislative mandate combines both an independent, analytic capability as well as the authority to implement the decisions resulting from its analyses. The process, described in detail in the Commission’s Biennial Report, serves as a basis for policy recommendations to the legislature, governmental agencies, and the private sector. It further provides regulatory guidance for electrical demand forecasting, availability of energy technologies, electricity supply planning criteria, and location of power plants within the state. In 1972 and 1973, several forecasts indicated that the demand for energy in California would continue to grow at about 4% a year and the demand for electricity, at about S& per year through the end of the century. To meet this escalating consumption, interested groups and utilities argued that the state would have to build dozens of nuclear plants and several coal 721
728
EMILIO E.VARANINI,III
plants; develop coal gasificationworks in the western United States where large coal reserves exist; import natural gas from overseas; import oil from Alaska; and build new refineries for oil imports. It was argued that in order to satisfy the projected demand Californiahad to quadruple the size of its energy supply system in the next 25 years, with the prospect of further quadrupling in the subsequent 25 year period. Increased energy consumption would dramatically increase the amount of pollution generated in California, and the need for fresh water supplies to cool the new power plants and for thousands of acres of agriculturaland urban land for new energy facilities. Given the problem of financing and finding suitable locations for all of these energy facilities, solutions appeared infeasible. Consequently, two views emerged. One argued that government had to intervene to provide large scale solutions. The second view questioned the necessity of quadrupling production, and argued that by eliminating waste, many of the adverse consequences of expanding the state’s energy system could be avoided. In 1973,the emerging conservation argument was considered quite radical, even revolutionary. In the past seven years, however, growth and consumption have not increased at the rates projected in the early 1970s; yet, California’s economy has been booming. The gross state product has been growing at a rate faster than it has ever grown in its history. Population growth tapered off, then recently began to increase again. Clearly much of the debate over our energy problem has been the result of misinformation and speculative estimates that have been shown by recent events to be wrong. 3.SETTINGGOALS
When California policy was conceived and enacted in statute, it required the Commissionto adopt standards to reduce waste and inefficiency in new buildings and appliances, and to discourage, to the extent practical, the wasteful use of fossil fuels and nuclear energy. Most importantly, the law established and mandated the state to examine the energy situation independently and thoroughly in order to overcome the misinformationthat was so widespreadat the time. The first step in our process was to determine the objectives that an energy strategy is supposed to achieve. Whileobjectives seem obvious now, they did not at the time. We wanted to preserve and maintain a strong economy; improve and protect the quality of the environment; ensure that burdens were shared equitably between regions, between consumers and producers, and among income groups; and ensure that everyone would have the opportunity to improve the quality of their lives. We perceived two paths to achieving these goals. One was the more conventional path using well known fossil fuel resources and nuclear energy. The other emphasized increased conservation and the use of alternative resources such as solar, wind, biomass, and geothermal. In order to examine these two possible paths, we first undertook a thorough analysis of future energy demand in the state, then investigated how the cost of alternative energy resources affected potential uses in the state. 4.FORECASTINGENERGYDEMAND
In examing the question of future state energy demand, we quickly concluded that the existing techniques for forecasting future demand were seriously flawed. First, they relied generally on questionable assumptions about the relationship between energy use and the growth of the economy. These assumptions proved to be vulnerable to the sharp increase in oil prices beginning in 1973. Second, when we did examine the energy forecasts made by the business community, we found them implausible. Based on these forecasts, people would have their furnaces and air conditioners running simultaneously, their windows open, and the house lights on, while the whole family was out driving their car. The forecasts seemed to ignore how people would actually be using energy in the future and how that would be different from what they are doing now. Using these flawed forecasting techniques, the energy companies in the state were thus grossly inaccurate in their forecast of future state power needs. Since the 1973 creation and enactment of the state’s energy legislation, the utilities have been revising their forecasts drastically downward every year. This phenomenon is not unique to California. It has occurred throughout the United States.
The Californiaenergyapproach
729
To correct these dificienciesin forecasting methodology, the Commissiondeveloped an entirely new forecasting technique called end use f@eu&ng. The InGo theory rrndatying this technique is to predict future energy consumption for each of several uses of energy rather than to predict aggreg& consumption. These uses include air conditioning, water heating, cooking, industrial processes, heating residential and commercial buildings, etc. Standard econometric techniques are used to forecast future activity in each of these areas. Finally, the forecast is derived by summing up the projected individual end use needs. This technique requires an enormous amount of data, and while we were not pleased with the prospect of building elaborate and complicated models, we had no choice, given the inadequacies of other techniques. Another reason for developing this technique was to examine the potential for additional conservation as a substitute for building new supply sources. Using aggregate data, there was no way to reliably estimate the potential for conservation. The Commission’s methodology was unveiled in August 1979,with the publication of the Commission staff’s first independent forecast. At the time it was released, it was extremely controversial. The staff predicted that electricity demand would grow only 2% per year in the next 20 years and overall total energy demand would only grow 1% per year. In contrast, the utilities believed electricity demand would grow at 3& per year and total energy requirements in the range of 2%. (Remember that the same companies predicted growth rates twice that just five years earlier.) When the staff’s estimates became public, they were immediately subjected to intense scrutiny and controversy. The debate was carried on in a lengthy series of hearings held at the Commission between the energy industry forecasters, the staff forecasters, academicians, and public interest groups. Two major differences separated the staff forecasters from the industry forecasters. First, the industry forecasters had assumed energy would become cheaper when adjusted for inflation over time. The staff forecasters felt that this was not a realistic assumption. When the industry forecasts were corrected, using the staff’s price assumptions, conclusions were reasonably close; the difference between the two forecasts was cut in half. The second difference stemmed from the staff’s estimates, contrary to industry estimates, that conservation measures would have a higher payoff and that growth of the economy and personal income would have less of an impact on driving consumption to higher levels. This exercise revealed the differences between variations in methodologicaltechnique and, more importantly, that industry forecasts with regard to future prices were compktely out of line with recent economic realities. In my opinion, this experience shows why a very thorough and independent analytic capability is essential to comprehend the nature and magnitude of the energy problem facing California.At the conclusion of the Energy Commissionhearings,the staff demand forecast, with some corrections, was adopted. Consequently, a great deal of the difficultyin devising an acceptable energy forecast was eliminated. 5. FORECASTING ENERGY SUPPLY
The second major Commission activity focused on future supply sources for the state. The major findingwas that the cost of conventional energy sources would escalate significantlyover the next 20 years and therefore, would require greater expenditures. On the other hand, many of the new sources would decline in price over time, particularly those based on renewable resources. It became apparent that the implementation of more renewable and emerging technologies would make the state’s energy future cheaper and more secure. The whole question turns, however, on how much reliance can be placed on these new technologies which look attractive but are not yet commercially proven. The second phase of our inquiry on supply was to look at what these technologies could contribute. We thought we were quite realistic in assuming that each of these technologies is affected by technological and environmental risks, and by financial and institutional problems. We looked at these problems quite carefully and devised approaches to overcome them. In some cases, it was only necessary to set up better financing arrangements or remove existing subsidies so that new sources could compete. In other cases, what was required was directing research funds in such a way that technologicalrisks could be reduced, by concentrating on the most attractive technologies and completing the necessary research and development. From this analysis we developed an estimate of the maximum energy supply that could be
730
EMILIO E. VARANINI, III
expected from these resources. Adoption of these new energy sources requires neither complex policies, massive government expenditures, or substantial technological breadthroughs. In other words, we believe that the levels of contribution from these new resources are practical and achievable. Some critics say we are being entirely too pessimistic about alternative energy sources. Our purpose was to design a practical energy strategy based on all alternative sources, not one representing the “maximum” feasible use of all of these technologies. We also examined additional conservation measures that could be employed in the state. While the original state law included several conservation measures, the federal government later expanded California’s original statutes in 1978. We suspected that there were still additional energy savings to be gained and in fact, found that there were many things that could still be done to reduce unnecessary and uneconomical uses of energy. 6. ALTERNATIVE ENERGY FUTURES
With these demand and supply studies, we developed a firm foundation for looking into the two most commonly discussed choices for an energy future. The “conventional future”, utilizing oil, gas, coal, and nuclear power has already been implemented by the state and the private sector. The “alternative energy future”, however, requires additional governmental policies and private sector investment to stimulate the use of new technologies and additional conservation. One of the most striking differences between conventional and alternative energy futures is the fact that growth in the use of energy and electricity can be cut in half by the use of addtional conservation measures, improvements, and efficiencies. We found that substantial use of renewable resources, principally the use of wind machines, could be very beneficial to the state. The differences between the two scenarios show that if consumers follow the alternate paths, their energy cost would be reduced by about 50-60 billion dollars in the next 20 years. At the same time, the use of new technology would require more local labor, expanding the number of jobs in the state by 100,000 per year. The largest single savings appear possible in the transportation sector. The major differences in oil consumption result from our recommendations to modify federal policies which we think have an unintended adverse effect. According to current federal law, more oil would be required in the state after 1990 than the amount used in 1985. Because we think this outcome was unintended, we recommended changing the law to allow the state to use more domesticallyproduced natural gas which would dramatically reduce oil use. A large increase in the use of natural gas can be avoided through additional conservation measures which would also reduce the overall amount of energy required. Minimizing risks It is also important to evaluate each strategy in terms of its vulnerabilities. For example, the conventional future has five principal vulnerabilities. (1) Trying to obtain permission to build a fossil fuel plant in the state poses great difficulty because of the state’s air quality problems and the severe restrictions placed on new sources of pollution. Any reliance on existing conventional fossil fuel sources, therefore, must meet air quality standards. (2) The state has under construction several new nuclear plants. Because of the accident at Three Mile Island in Pennsylvania, public concern about the safe operation of these plants has increased markedly. The operation of those plants will probably be delayed for a substantial time period. Therefore, we have to look at ways to compensate for possible long delays in the construction of nuclear plants. (3) Federal restrictions, coupled with uncertainties in world oil markets, make it imperative that we markedly reduce the use of oil in the state. Any plans which involve the continued importation of oil into California would be very vulnerable. (4) Forecasts of future demand might be inaccurate. If future energy demand was underestimated, one would quickly have to develop additional sources of supply to avoid shortages. Any strategy designed around a long lead time would also be too rigid and vulnerable. (5) If untried and unproven technologies are to be implemented, alternatives must be developed if one technology fails. This approach is obviously vulnerable.
The Californiaenergy approach
731
The California strategy includes actions to hedge against these five types of risks. To avoid air quality problems, we have developed policies that rely on technologies that do not use fossil fuel combustion. We prefer that alternative technologies and conservation be utilized. To compensate for possible delays in the operation of nuclear plants, we recommend that contingency plans be prepared for additional plants to be built. To reduce oil consumption, we have recommended additional conservation, increased use of coal, and introduction of alternate technologies. To compensate for possible errors in forecasting, we have suggested that a mixture of projects with long and short lead times be undertaken. For example, we do not want to hamper progress on such projects with long lead times as new coal plants; thus, we recommended approval of two new plants. We can’t afford to wait and find out later that we were wrong, then have too little time left to build coal or any other types of plants. If we are more successful with conservation or new technologies than we expected from our projections, we can defer building the coal plants. Thus, to meet the uncertainty in the availability and price of new technologies, we advocate proceeding to some extent with conventional technologies, while retaining in working condition old plants for limited use as a hedge against possible disappointments in the deployment of new technologies. The steps taken to hedge against the risks of pursuing an alternative energy path seem to have significant environmental and economic advantages over the conventional path. The alternate path is the one that we intend to take as a state energy strategy. To implement that strategy we have recommended in our Biennial Report a number of specific actions. We are looking for a system that will work and last. We are not looking at abstract or philosophical processes in the course of attempting to make policy. CONCLUSION
We found that within our region there are some unique problems. In the past we have not been represented as a state in international transactions. We have allowed our business community to do that, and we have run into some difficult situations where their sensitivities to the larger questions associated with resources were simply nonexistent. For example, there have been some preliminary discussions about a common market type mechanism, including Canada and Mexico. Policies which link human and physical resources may achieve a better and more logical distribution of benefits across North America, rather than processes where there is extraction of resources and associated economic rents without mutual benefits to our trading partners. We are beginning to discover that government simply has to get involved in that process to ensure a certain level of sensitivity not present within California’s business sector. California took a leading position in developing an alternative energy strategy long before the federal government took the problem seriously. In the intervening years, we have developed a very strong analytic capability, examined the problem thoroughly and reached our own conclusions. As a result, we have set forth a vigorous, aggressive energy strategy for the state, which we think makes good sense for its citizens and future generations. One characteristic of this energy strategy is its great potential for adoption by other nations of the world. We do not think that our conclusions are valid only for California or the United States. If other nations undertake this type of detailed analysis, their conclusions might well come out the same. We look forward to the implementation of this strategy in California. We have been successful with the rapid promotion of solar energy. The new plans of the utilities, which have been submitted since our report was adopted, lay out new timetables for the use of unconventional technologies. We have several demonstration projects operating in the state and intend to move from an emphasis on analysis to an emphasis on implementation. While more analytic work must be done to solidify the foundation of this energy strategy, and to monitor the results, the main goal now is to implement what we think is a very sensible strategy.