The 2022-23 Budget: Clean Energy Package

2022-23 BUDGET The 2022-23 Budget: Clean Energy Package Summary Governor Proposes $2 Billion Clean Energy Package. The Governor proposes $2 billion over two years—almost all General Fund—for a package of proposals intended to help meet the state’s long-term greenhouse gas (GHG) goals. Funding would mostly go to new programs, such as equitable building decarbonization programs, long duration storage projects, an Oroville pump storage project, industrial decarbonization, and green hydrogen projects. Package Generally Targets Reasonable Set of Activities to Promote Deep Decarbonization. A significant portion of the funding would support areas where substantial technological progress is needed to lower the cost of achieving long-term GHG goals. In addition, the equitable building decarbonization programs target one of the largest sources of statewide GHG emissions. Allocating State General Fund, Rather Than Ratepayer Funds, Has Merit. We think there is a strong rationale for using one-time General Fund for these types of programs. By using General Fund instead of ratepayer funds, the Legislature can help limit future increases in electricity rates, which discourage electrification and have regressive effects. Balancing Long-Term Benefits Against Near-Term Priorities. Much of the proposed funding is focused on activities needed to meet long-term, deep decarbonization goals. The Legislature will want to balance the potential long-term benefits of the programs in the Governor’s package with other near- and medium-term priorities. Significant Federal Funding Available for Similar Activities. The federal Infrastructure Investment and Jobs Act includes funding for a wide range of energy-related activities. The Legislature might want to direct the administration to develop a strategy for using state funds in a way that best complements federal funding. Expanding Scope of Certain Programs Could Improve Outcomes. The Governor’s proposal targets certain types of technologies and sectors, while excluding others. The Legislature could consider making the funding available to a broader range of technologies and businesses that might have the potential to help the state meet its long-term climate goals. Recommendations on Specific Proposals. We recommend the Legislature (1) direct the administration to provide additional detail on equitable building decarbonization programs (such as what role will these programs will play relative to other policy strategies and why is the California Energy Commission the most appropriate agency to administer the direct install program), (2) direct the administration to provide additional justification for the Oroville Project given the lack adequate detail about the cost-effectiveness of this project relative to other options, and (3) reject proposed funding for the Department of Water Resources to support energy reliability due to lack of justification. GABRIEL PETEK | LEGISLATIVE ANALYST FEBRUARY 2022 www.lao.ca.gov 1 2022-23 BUDGET BACKGROUND Legislature and Governor Have Ambitious The administration has also established Greenhouse Gas (GHG) Goals. Chapter 488 of long-term GHG goals. On September 10, 2018 2006 (AB 32, Núñez/Pavley) established the goal Governor Brown issued Executive Order B-55-18 of limiting GHG emissions statewide to 1990 levels which established a statewide goal of achieving by 2020. In 2016, Chapter 249 (SB 32, Pavley) carbon neutrality by 2045—meaning annual extended the limit to 40 percent below 1990 levels GHG emissions are equal to or less than carbon by 2030. As shown in Figure 1, emissions have dioxide sequestered or stored. Reducing net decreased since AB 32 was enacted and were GHG emissions to near (or below) zero is also below the 2020 target in 2019. However, the rate known as deep decarbonization. Notably, the of reductions needed to reach the SB 32 target are Legislature has not adopted long-term statewide much greater. deep decarbonization goals in law. However, as Figure 1 State Met 2020 Goal Early, but 2030 Goal More Ambitious Million Metric Tons of Greenhouse Gases 500 450 2020 AB 32 Target 400 350 300 2030 250 Actual Emissions SB 32 Target 200 150 100 50 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Source: California Air Resources Board (2021). California Greenhouse Gas Emission Inventory - 2021 Edition. Data available at: https://ww3.arb.ca.gov/cc/inventory/data/data.htm 2 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET discussed below, the Legislature has established State Law Establishes Policy of 100 Percent specific long-term decarbonization goals in certain Zero-Carbon Electricity by 2045. Chapter 312 of sectors, such as the electricity sector. 2018 (SB 100, de León) established a state policy Emission Reductions Have Been Driven of providing 100 percent of retail electricity with by Electricity Sector. Over the last decade, the zero-carbon resources by 2045. As shown in Figure 3 electricity sector has been the primary driver of on the next page, 59 percent of retail electricity sales statewide GHG emission reductions, as shown in came from zero-carbon resources in 2020, including Figure 2. Reductions from the electricity sector 36 percent from resources that qualify as renewable mostly reflect a changing mix of resources used to under the state’s Renewable Portfolio Standards, generate electricity—primarily large increases in such as onshore wind and solar photovoltaic. renewables (solar and wind) along with a decline Several Different Strategies Aim to Reduce in coal generation. A wide variety of factors have Emissions From Buildings. As shown in Figure 4 on contributed to this shift, including technological the next page, California commercial and residential advancements, changing economic conditions, buildings generated nearly 100 million tons of federal policies, and state policies. (For more emissions in 2018—or nearly one-quarter of annual detail, see our report, Assessing California’s statewide emissions. The three main categories of Climate Policies—Electricity Generation.) Notably, GHG emissions from buildings are: emissions from other sectors—including residential • Combustion. Emissions from burning fossil and commercial buildings, industrial facilities, and fuels on site—primarily natural gas—largely high global warming potential products (such as related to space heating and water heating. refrigerants)—have remained relatively steady or • Refrigerants. Leakage of certain types of increased over the last several years. refrigerants, such as hydrofluorocarbons, found in supermarket refrigeration and air conditioning units. Figure 2 Electricity Is Biggest Driver of Emission Reductions so Far Million Metric Tons of Carbon Dioxide Equivalent 200 180 Transportation 160 140 120 Electric Power 100 Industrial 80 60 Commercial and Residential 40 Agriculture 20 High GWP Recycling and Waste 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 GWP = global warming potential. Source: California Air Resources Board (2021). California Greenhouse Gas Emission Inventory - 2021 Edition. Data available at: https://ww3.arb.ca.gov/cc/inventory/data/data.htm www.lao.ca.gov 3 2022-23 BUDGET • Electricity Generation. Indirect emissions Figure 3 from the electricity system that generates the electricity for buildings. Nearly 60 Percent of Retail Electricity Historically, state efforts to reduce emissions Sales Are From Zero-Carbon Resources from buildings has focused on improving the energy Percent of 2020 Retail Electricity Sales efficiency of buildings and appliances. For example, the California Energy Commission (CEC) develops energy efficiency building codes and standards Natural Gas for new buildings. Additionally, utilities operate and Other Renewables programs using ratepayer funds—totaling at least Fossil Fuel several hundred million dollars annually—that aim to promote energy efficient appliances and buildings. The California Department of Community Services and Development (CSD) administers a wide variety of other programs that provide energy efficiency upgrades for low-income households, including the state Low-Income Weatherization Program and the federal Weatherization Assistance Program. Large Hydro Nuclear Finally, we note that the state supports energy efficiency activities at state buildings, schools, and universities. Figure 4 Greenhouse Gas Emissions From Buildings in 2018 Million Metric Tons of Carbon Dioxide Equivalent Combustion = 40.9 Refrigerant = 12.2 Electricity = 45.3 15.2 8.9 Total = 98.4 45.3 25.7 3.2 Home and Businesses | Direct On-Site Emissions Electricity Generation | Indirect Emissions Source: California Energy Commission Staff. 4 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Recent State Efforts Have Focused on 2021-22 Budget Provided $172 Million for Building Electrification. In recent years, Energy Activities. As described in our post, state efforts have increasingly focused on The 2021-22 California Spending Plan: Natural electrification as a key strategy for reducing Resources and Environmental Protection, the emissions from buildings. This strategy aims to 2021-22 budget included $172 million for various promote the use of electric appliances—such energy-related activities, including programs as heat pumps—instead of natural gas furnaces intended to promote building electrification, and water heaters. For example, Chapter 378 of planning and permitting renewable energy projects, 2018 (SB 1477, Stern) authorized the California and activities intended to promote electric reliability. Public Utilities Commission (CPUC) to develop the This included $75 million General Fund to CEC to Building Initiative for Low-Emissions Development expand the BUILD program to new market rate (BUILD) Program to encourage the installation residential buildings in all areas of the state, of electric appliances in new, low-income including publicly owned utility territories. residential housing in investor-owned utility (IOU) Cap-and-Trade Is Main State Program for territories. CPUC designated CEC as the program Industrial GHG Emissions. The state administers administrator. Senate Bill 1477 directed CPUC relatively few GHG emissions reduction programs to support BUILD with $80 million from revenue for industrial sources. The main emission reduction collected from cap-and-trade allowances that program for industrial sources is the cap-and-trade are given to IOUs and then subsequently sold program, which covers about 75 percent of at auctions. (We describe the state’s overall statewide GHG emissions, including transportation, cap-and-trade program in more detail later in this natural gas, electricity production, and industrial section.) In addition, a variety of other program, sources. Under this program, a limited number planning, and regulatory efforts have begun of permits to emit GHGs are issued and “covered to focus on electrification as a key strategy for entities” can buy and sell allowances. The program long-term building decarbonization. relies on market incentives—reflected through permit prices—and flexibility to encourage the lowest-cost emission reduction activities. PROPOSAL Governor Proposes $2 Billion Clean Energy Equitable Building Decarbonization. Package. The Governor proposes $2 billion over The Governor’s budget provides a total of two years—almost all General Fund—for a package $922.4 million General Fund over two years of programs related to clean energy, building ($323 million in 2022-23 and $600 million in decarbonization, and emission reductions from 2023-24) to CEC for two new residential building industrial sources. Figure 5 on the next page decarbonization programs. These two programs summarizes the key pieces of the Governor’s include (1) $622.4 million for a program to directly proposed package. Most of the funding would go install energy efficient and electric appliances to new programs and activities. Some of the new in low- and moderate-income households and programs—specifically long-duration storage, (2) $300 million for a statewide rebate program Oroville pump storage, industrial decarbonization, for electric appliances that replace natural and green hydrogen—were proposed by the gas appliances. Governor as part of last year’s May Revision for Under the direct install program, contractors 2021-22, but ultimately were not adopted as part of would undertake a variety of energy efficiency the final budget package. In the rest of this section, and building electrification changes (such as we describe the major new programs proposed. heat pumps and electrical panel upgrades) at no cost for eligible households. Eligible households www.lao.ca.gov 5 2022-23 BUDGET would include households in disadvantaged the next five to ten years. Examples of technologies communities (as measured in CalEnviroScreen), at that might receive funding include flow batteries or below 80 percent of statewide median income, (batteries that use a different chemical process or with income limits of moderate or below as than traditional batteries), thermal storage, identified by the California Housing and Community and compressed air technologies. (Pumped Development. CEC estimates that the program hydroelectric storage and lithium-ion batteries could reach 13,000 to 274,000 existing buildings at would not be eligible technologies because they are an estimated cost ranging from $2,000 to $40,000 not considered emerging technologies.) per building. The statewide rebate program would The proposed program would be implemented provide incentives to purchase electric appliances, in two phases. The first phase would include such as heat pump space and water heaters. 12 to 16 demonstration projects ranging from Based on estimated costs of $1,000 to $8,000 per three megawatts (MW) to five MW of capacity. building, about 40,000 to 313,000 buildings would The second phase would include fewer projects— receive rebates under this program. roughly seven to ten—but most projects would Long-Duration Storage Projects. range from five MW to ten MW. Some projects will The proposed budget includes a total of also focus on much longer durations in the range $380 million General Fund ($140 million in of 20 to 100 hours. For context, a recent analysis 2022-23 and $240 million in 2023-24) for from the state’s energy agencies found that there demonstrations and early stage deployment of is a need for a minimum of about 1,000 MW of long-duration storage technologies—defined long-duration storage by 2030 and 4,000 MW as technologies that can store energy for by 2045 to meet the state’s SB 100 goals of eight hours or more—that are on the verge of 100 percent zero-carbon electricity. commercialization. According to the administration, Oroville Pump Storage Project. The Governor the goal of the program is to help support the proposes a total of $240 million General Fund advancement of promising technologies from the ($100 million in 2022-23 and $140 million in demonstration phases to commercial deployment in 2023-24) to modify the Oroville Dam complex Figure 5 Governor’s Proposed Clean Energy Package General Fund (In Millions) Program Department 2022-23 2023-24 Total Equitable building decarbonization CEC $323 $600 $922 Incentives for long duration storage projects CEC 140 240 380 Oroville pump storage project DWR 100 140 240 Industrial decarbonization CEC 110 100 210 Green hydrogen projects CEC 100 — 100 Food Production Investment Program CEC 85 — 85 Offshore wind infrastructure CEC 45 — 45 Incentives for low GWP refrigerants CARB 20 20 40 Energy modeling CEC 7 — 7 AB 525 implementation Various 4a — 4 Staffing to support energy reliability DWR 3 — 3 Distributed energy staffing CPUC 1b 1b 3 Totals $938 $1,101 $2,039 a Includes $1.5 million from Energy Resources Program Account. b From Public Utilities Commission Utilities Reimbursement Account. CEC = California Energy Commission; DWR = Department of Water Resources; GWP = global warming potential; CARB = California Air Resources Board; AB 525 = Chapter 231 of 2021 (AB 525, Chiu); and CPUC = California Public Utilities Commission. 6 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET so it can use its existing pump back operations capture for use in products (such as concrete). to provide long-duration energy storage without Carbon capture projects with geologic storage adverse impacts on spawning salmon in the Feather and petroleum and gas production facilities would River. Funding would support the planning, design, be ineligible. permitting, and construction of the modifications Green Hydrogen Projects. The proposed necessary for the dam to use its existing 480 MW budget includes $100 million General Fund in pumping capacity. The proposed funding would 2022-23 to advance green hydrogen technology also support the construction of a flow control and explore different end uses. Green hydrogen facility with a potential for an additional 20 MW is produced by splitting water into hydrogen hydroelectric generation. and oxygen using renewable electricity. Industrial Decarbonization. The Governor The administration estimates that the funding proposes a total of $210 million General Fund would support 10 to 15 commercial demonstration ($110 million in 2022-23 and $100 million in projects. About two-thirds of the funding would 2023-24) to deploy advanced technologies or focus on lowering the cost of electrolyzers used to develop novel strategies to reduce emissions at produce green hydrogen. Other eligible projects industrial facilities. According to the administration, include those that demonstrate the use of green eligible projects could include electrification of hydrogen for industrial activities, power plants, and heating processes that now use natural gas, energy storage. energy efficiency projects, and deploying carbon OVERARCHING ISSUES FOR LEGISLATIVE CONSIDERATION In this section, we identify overarching comments explore different technology options as proposed for the Legislature to consider as it evaluates the by the Governor could help advance these Governor’s overall clean energy package. technologies, which in turn could help the state Package Generally Targets a Reasonable Set achieve some of its long-term GHG goals at lower of Activities to Promote Deep Decarbonization. cost. In addition, since these technologies could In our view, the Governor’s proposed package also be used in jurisdictions outside of California, reflects a reasonable set of activities to help the any advancements and cost reductions could state achieve deep decarbonization. First, funding have broader GHG benefits if these low-carbon would support key areas where substantial technologies get adopted in other jurisdictions. technological progress could help lower the cost The other largest pieces of funding—the of achieving long-term GHG goals. This includes equitable building decarbonization programs— technologies that can provide zero-carbon target one of the largest sources of statewide electricity at times when renewable resources are GHG emissions. Furthermore, these programs not sufficient to meet electricity demand (such would focus on existing buildings, which represents as long-duration storage and green hydrogen) the vast majority of building-related emissions and and technologies that can help reduce emissions pose some of the most significant challenges to from industrial activities (such as green hydrogen building decarbonization. For example, the long and carbon capture and storage). In general, we lifespan and slow turnover of major appliances in think there is a reasonable policy argument for buildings means a transition to newer technologies government funding to promote the development in existing buildings can take decades. As a result, of newer technologies because the private sector some near-term actions could be important for will likely underinvest in these activities. One-time meeting long-term GHG goals. state funding to support demonstration projects to www.lao.ca.gov 7 2022-23 BUDGET Allocating State General Fund, Rather Than achieve commercial viability. As a result, the GHG Ratepayer Funds, Has Merit. Many of state’s reduction benefits are likely to be relatively modest clean energy programs historically have been paid over the next several years. The Legislature will for by IOU ratepayers through higher electricity want to balance the potential long-term benefits of rates, even though some of the primary goals of the programs in the Governor’s package with other these programs (such as GHG reductions) accrue near- and medium-term priorities. For example, to the broader public. We think there is a strong some alternative spending options include: rationale for using General Fund for programs that • Programs Aimed at Meeting 2030 GHG aim to provide broad societal benefits. Additionally, Goals. The state’s 2030 GHG goals will be the costs for clean energy programs are one factor difficult to meet. The Legislature could redirect that contributes to California’s relatively high retail some of the proposed funding to other electricity rates. (There are many other factors that programs that likely do more to help meet the impact electricity rates, which we do not discuss state’s 2030 goals, such as methane reduction in this brief.) Electricity rates in California are more programs. In determining whether to prioritize than twice as much as the estimated marginal General Fund resources for these such social costs of providing electricity in California, programs, the Legislature will want to consider even after accounting for environmental damages. the availability of other fund sources such as These higher rates have a variety of adverse the Greenhouse Gas Reduction Fund. effects, including: • Other Energy-Related Programs. • High Electricity Rates Discourage The Legislature could prioritize funding for Electrification. As discussed above, other energy-related issues, such as grid one strategy for deep decarbonization resilience and reliability. is electrification, including switching from • Other Statewide Priorities. There might be natural gas appliances to electric appliances. other near-term statewide issues outside of Household and business decisions about the energy and climate policy area that the appliance purchases depend, in part, on how Legislature considers a higher priority use of much they would have to pay for electricity to General Fund. operate the electric appliances. As a result, Significant Federal Funding Available for high electricity rates can discourage adoption Similar Activities. As shown in Figure 6, the of electric appliances. federal Infrastructure Investment and Jobs Act • Electricity Rates Are a Regressive (IIJA) that was enacted in November 2021 includes Approach to Raising Revenue. On average, funding for a wide range of energy-related activities. lower-income households tend to spend a Notably, there is a significant amount of funding greater share of their income on electricity available for clean hydrogen hubs, carbon capture than higher-income households. As a result, demonstration projects, industrial emissions collecting revenue through electricity rates is a demonstration projects, long-duration storage relatively regressive approach to funding clean demonstrations, and energy efficiency activities in energy programs. low-income households. Balancing Long-Term Benefits Against In many cases, detailed federal guidance about Near-Term Priorities. Much of the proposed how the funding can be used and how it will be funding is focused on activities intended to meet allocated is not yet available. As a result, it is long-term, deep decarbonization goals. Although unclear how the Governor’s clean energy package the proposed programs could have merit in the strategically targets funding in a way that best long run, some of these newer technologies and complements the federal IIJA funding. For example, projects might take at least five to ten years to be are there opportunities to use state funding to commercially available, and even longer to become leverage federal funds in a way that helps further cost-competitive. Some ultimately may not ever the state’s goals? Some of the major federal 8 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Figure 6 Select Federal IIJA Funding for Energy-Related Activities (In Millions) 2022-2026 Eligible Estimated Program Description Funding Entities Application Date Clean Energy Demonstrations Regional Clean Hydrogen Development of at least four regional clean $8,000 Private, state/ Summer 2022 Hubs hydrogen hubs. local, NGO Regional clean direct air Development of four regional direct air 3,500 Industry 2nd quarter 2022 capture hubs capture hubs. Carbon capture Development of six facilities to demonstrate 2,537 Private, state/ TBD demonstration projects carbon capture technologies. local, NGO Carbon storage validation Research, development, and demonstration 2,500 Industry 2nd quarter 2022 and testing for carbon storage. Clean Hydrogen Electrolysis Research, demonstration, and deployment 1,000 Industry 2nd quarter 2022 Program program for technologies that produce clean hydrogen using electrolyzers. Carbon capture large-scale Develop carbon capture technologies, 937 Industry, state/ TBD pilot projects electricity generation facilities, and local, NGO industrial facilities. Industrial emissions Demonstration projects that test 500 Industry, state/ 2nd quarter 2022 demonstration projects technologies that reduce industrial local, NGO emissions. Energy Storage Grants for three energy storage 355 Industry, state/ 3rd quarter 2022 Demonstrations demonstration projects. local, NGO Long-duration Demonstration projects focused on 150 Private, state/ 3rd quarter 2022 Demonstration Initiative development of long-duration storage local, NGO and Joint Program technologies. Energy Efficiency Weatherization Assistance Formula based program for energy efficiency $3,500 States, tribes Initial funds 1st Program upgrades for low-income households. quarter 2022 Energy Efficiency and Assist states, local governments develop 550 State/local, tribes Fall 2022 Conservation Block Grants programs to improve energy efficiency. Electric Grid Upgrading Electric Grid Demonstrate innovative approaches to $5,000 States/local, 4th quarter 2022 Reliability and Resiliency transmission, storage, and distribution tribes infrastructure. Preventing Outages and Activities that supplement existing grid 5,000 States, tribes, 4th quarter 2022 Enhancing Grid Resilience hardening efforts and reduce the risk of grid operators, wildfire or reduce disruptive events. private industry Smart Grid Investment Investments that allow buildings to engage 3,000 Utilities By end of 2022 Matching Grant Program in demand flexibility and Smart Grid functions. Energy Improvement in Rural Increased environmental protection from 1,000 Private, state/ Fall 2022 or Remote Areas impacts of energy use and improve local, NGO reliability, safety, and availability of energy in rural areas. IIJA = Infrastructure Investment and Jobs Act; NGO = nongovernmental organization; and TBD = to be determined. www.lao.ca.gov 9 2022-23 BUDGET programs—such as funding to prevent outages and range of technologies that help the state achieve its enhance grid resilience—require a state match, SB 100 goals, which could include long-duration but the Governor’s budget does not allocate storage and hydrogen power, as well as other funding for the state match. Another question is: technologies such as geothermal. Also, it could Are there key gaps in federal funding that state shift funding from the Food Production Incentive funding can help fill? The Legislature might want to Program to the broader industrial decarbonization direct the administration to develop a strategy for program, plus expand eligibility to include other using state funds in a way that best complements technologies such as carbon capture with geologic federal funding. storage. This could provide greater flexibility to fund Expanding Scope of Certain Programs Could the mix of industrial decarbonization projects that Improve Outcomes. The Governor’s proposal have the most GHG-reduction potential. targets certain types of technologies and sectors, Reporting Requirements Needed to Facilitate while excluding others. For example, although Legislative Oversight. The administration does long-duration storage and green hydrogen could not propose any formal reporting to the Legislature be important technologies needed to meet the on program outcomes. We recommend the state’s SB 100 goals, other technologies that Legislature consider adopting requirements that could potentially achieve similar goals would the administration report annually on key program not receive funding under the proposal, such as outcomes, such as estimated emission reductions, geothermal energy. As another example, carbon technological progress, key lessons learned, and capture projects that store carbon in products key challenges. The Legislature could use this (such as cement) would be eligible for the industrial information when making future policy and budget decarbonization program, but carbon capture decisions in this area, including whether to continue projects with geologic storage would not. Finally, any of the proposed programs after the two-year the proposal provides funding to an existing funding expires. program for GHG reduction projects at food Some Proposed Spending Is Excluded From processing facilities, instead of making that funding State Appropriation Limit (SAL). The California available to a broader set of industrial facilities. Constitution imposes a limit on the amount of Limiting the types of eligible projects and sectors revenue the state can appropriate each year. that qualify for funding creates a risk that the The state can exclude certain spending— funds are not used to support the most promising such as on capital outlay projects—from the SAL emission-reduction projects and technologies. calculation. The Department of Finance estimates A more technology- and sector-neutral approach that $644.5 million of the proposed spending can be especially important when there is is for activities that are excludable from the SAL. uncertainty about which technologies will prove In constructing its final clean energy package, to be most feasible and cost-effective in the long we recommend the Legislature be mindful of SAL run. The Legislature could consider modifying the considerations. For example, if the Legislature programs and funding in ways that make a broader were to approve a lower amount of spending on range of technologies and businesses eligible the proposed activities that the administration for the funding, while directing the administration excludes from SAL, it would generally need to select projects based on their potential to to repurpose the associated funding for other help achieve long-term GHG reductions in a SAL-related purposes, such as tax reductions or an cost-effective manner. For example, the Legislature alternative excluded expenditure. could create a program that focuses on a broad 10 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET ASSESSMENT OF AND RECOMMENDATIONS ON SPECIFIC PROGRAMS In this section, we provide comments that • What Impact Will Electrification Efforts are specific to a few of the new programs and Have on Remaining Natural Gas Costs projects that are included in the Governor’s clean for Customers? The natural gas system has energy package. substantial fixed infrastructure costs. As a result, during a transition from natural gas Equitable Building Decarbonization appliances to electric appliances, remaining Focus on Decarbonization of Existing natural gas customers could be left paying Buildings Has Merit. As discussed above, much higher natural gas rates to cover a buildings are a substantial source of GHG greater share of the fixed infrastructure costs. emissions and a large-scale effort to reduce How will the state manage this transition in building emissions is likely needed to achieve a way that does not result in substantially long-term deep decarbonization goals. Pursuant to higher energy costs for households, Chapter 373 of 2018 (AB 3232), CEC assessed the especially low-income households and potential to reduce GHG emissions in residential renters who might be less likely to switch to and commercial buildings by at least 40 percent electric appliances? below 1990 levels by 2030. This assessment • Why Is CEC the Most Appropriate Agency identified expanding use of electric heat pumps to Administer the Direct Install Program? and investing in electrification of existing buildings There are a wide variety of state entities in as key areas for building decarbonization efforts. California that administer building energy Furthermore, in addition to GHG reductions, efficiency programs. Notably, CSD operates building electrification can have other important several different programs that provide benefits, including reducing indoor air pollution direct install energy efficiency services for from natural gas combustion and potentially low-income households. The Legislature reducing household energy bills. might want to ask why CEC—and not Proposal Raises Key Questions About CSD—is the best state entity to administer Statewide Building Decarbonization Strategy. this new program. If the main goal of the The state has undertaken some analysis and program is to ensure the funds are reaching planning related to building decarbonization efforts. low-income households, CSD likely has In addition to the AB 3232 assessment discussed the most experience administering these above, CPUC has an open rulemaking that aims types of programs and working with to, among other things, establish a building third-party contractors that can conduct this decarbonization policy framework. However, work. We are working with CSD to better CPUC has not yet adopted a long-term policy understand: (1) how the specific components strategy for statewide building decarbonization. of the proposed program and CSD’s ongoing Some key questions the Legislature might want to weatherization programs are similar and how consider when evaluating this proposal: they are different, (2) whether CSD’s local service providers could ramp up to provide the • What Is the Role of Rebate and Direct augmented level of service, and (3) whether Install Programs Relative to Other there would be administrative costs at the Building Decarbonization Policy Changes? department to oversee the additional funds. For example, how much should the state focus on rebates and direct install programs compared to other building electrification options, such as changes to the structure of electricity rates that lower the volumetric (cost per kilowatt hour) rates? www.lao.ca.gov 11 2022-23 BUDGET Recommend Legislature Direct generate hydroelectricity when electricity prices Administration to Provide Additional Detail on are relatively high. As a result, the revenue from Equitable Building Decarbonization Programs. electricity sales is expected to exceed the electricity We recommend the Legislature direct the costs related to pumping the water and the higher administration to provide additional detail on how maintenance and operations costs related to these proposed programs fit in the state’s overall running the equipment. Although there is significant building decarbonization strategy and responses uncertainty about the net revenue associated with to the questions identified above. If, after these the project, the Department of Water Resources responses, it is still unclear why the proposed (DWR) projects that the project could generate a approach is the most cost-effective or equitable, few million dollars in annual net revenue once it is then the Legislature could scale back the amount operational. Under the current proposal, the project of funding and/or focus funding in ways that help would be developed using state General Fund, the state evaluate different options and develop a but the net operating revenue would go to support long-term strategy. For example, funding could be the State Water Project and/or reduce costs for used to pilot building decarbonization efforts in a water users. limited (but diverse) number of communities. This Recommend Legislature Direct might help the state better evaluate the benefits, Administration Provide Additional Justification. costs, and challenges of a large-scale building First, we recommend the Legislature direct the decarbonization effort, and help inform future administration to provide additional information legislative budget and policy decisions. about the cost-effectiveness of this project approach relative to other technologies and Oroville Pump Storage Project projects that might be able to provide similar Project Could Have Merit, but No Details types of benefits to the electricity grid. This could on How Project Compares to Alternatives. allow the Legislature to better evaluate whether This proposal has potential merit as a way to the proposed project is the most cost-effective integrate renewable energy onto the grid by approach to achieving the state’s SB 100 goals. providing long-duration energy storage. As Second, if the Legislature provides General discussed above, long-duration energy storage Fund for this project, we recommend it adopt will likely play an important role in meeting the budget trailer bill language requiring DWR to state’s SB 100 goals. Additionally, according to estimate the net annual revenue generated from the administration, this specific project is less the pump storage project once it is operational costly than other pumped hydroelectric storage and transfer this amount of funding to the General projects because the Oroville dam complex Fund. In our view, if state taxpayers are providing already has existing infrastructure for pump back the funding for this project, it would be reasonable operations. However, the administration has not for state taxpayers to receive the financial benefits provided a more detailed analysis that shows this from the project, rather than users of the State project is more cost-effective than other options, Water Project. including alternative pumped hydro projects, other long-duration storage technologies, transmission DWR Resources to capacity upgrades and expansion, and/or other Support Energy Reliability zero-carbon technologies that could be used $3 Million to Support Energy Reliability to balance the grid (such as geothermal or Efforts at DWR. The Governor’s package includes green hydrogen). $3 million General Fund in 2022-23 for DWR to General Fund Would Pay for Project, but support energy reliability activities. According to the Future Financial Benefits Would Accrue to administration, this funding would support actions State Water Project. Once operational, the pump that expand energy supply and storage in California storage facility would use electricity to pump water in coordination with CEC, CPUC, and the California uphill when electricity prices are relatively low and Independent System Operator. 12 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Department Does Not Identify Specific support energy reliability efforts as needs arise, but Energy Reliability Efforts to Justify Request. It is DWR has not identified any specific activities yet. unclear what specific activities this funding would Recommend Legislature Reject Proposal. support. The budget change proposal provides very We recommend the Legislature reject this request little detail on what activities would be conducted. because DWR has not adequately described how According to DWR, the funding would be used to the proposed $3 million would be used or justified the need for these resources. CONCLUSION Overall, the Governor’s proposed clean To help inform its decisions on this package, the energy package could have merit as part of Legislature might want to direct the administration an overall strategy to achieve long-term, deep to provide more information on how this proposal decarbonization. However, as the Legislature complements the significant amount of federal considers this proposal, it will have key decisions funding available for energy-related activities and to make about how it balances long-term GHG how this proposal fits within the broader strategy of reduction goals with other medium- and short-term statewide GHG reduction efforts. Finally, additional priorities, and whether there are modifications reporting on future program outcomes could help that could provide flexibility to ensure that the the Legislature make more informed budget and projects with the most merit are ultimately funded. policy decisions in the future. www.lao.ca.gov 13 2022-23 BUDGET 14 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET www.lao.ca.gov 15 2022-23 BUDGET LAO PUBLICATIONS This report was prepared by Ross Brown and reviewed by Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE