Energy October 2009

The California Experiment

Busted budgets, failing schools, overcrowded prisons, gridlocked government—California no longer beckons as America’s promised land. Except, that is, in one area: creating a new energy economy. But is its path one the rest of the nation can follow?

James Sweeney, who runs Stanford University’s Precourt Energy Efficiency Center, has calculated with Anant Sudarshan, a colleague, that much of that difference can be explained by factors such as California’s temperate climate, less heavy industry, and even smaller-sized households. But, Sweeney says, the state’s policy decisions still account for a substantial amount—roughly one-fifth to one-fourth—of the gap in electricity usage between California and the nation. The focus on efficiency has produced huge savings: though per kilowatt electricity rates are higher in California than in most other places, consumers pay lower electricity bills because they use so much less power than people elsewhere. A few years ago, the California Energy Commission calculated that the state’s efficiency efforts had preempted the need for 24 large-scale power plants and saved state consumers $56 billion.

Rosenfeld says the past generation’s gains indicate the state can improve its energy intensity (the amount of energy required to produce each dollar of GDP) by about 30 percent every decade. “Efficiency,” he says with a twinkle, “seems to be a renewable resource.”

And there is the initial lesson from California’s energy experience: efficiency is the foundation of any effort to reduce reliance on fossil fuels. As California has learned, the most cost-effective way to replace coal or natural gas or petroleum isn’t to rely on solar or wind or biofuels; it’s to squeeze more work out of less energy.

After the state’s early breakthroughs, the 1990s were largely a lost decade for California on energy. The state detoured into a failed experiment with utility deregulation that produced price spikes and rolling blackouts, forced PG&E into bankruptcy, and helped to make Enron a household name. But even that disaster, which ended when the state legislature suspended the deregulation experiment in 2001, fueled another burst of energy innovation in California.

In July 2002, the legislature passed Fran Pavley’s bill establishing the precedent-setting requirement for auto companies to reduce the tailpipe emissions of the gases linked to global warming, a standard the companies had been expected to meet primarily by improving the fuel efficiency of their vehicles. Since the Clean Air Act in 1970, California—alone among all states—has had the authority to impose pollution-control standards more stringent than the national rules, so long as the federal Environmental Protection Agency concluded that the regulations were not arbitrary or unreasonable. But the lawsuits from the major auto companies, and the Bush administration’s refusal to provide an EPA waiver, had prevented California from implementing the Pavley law until President Obama announced the breakthrough with the auto industry this May.

Those anticipating that the name Pavley is some clever policy acronym like CAFE or COBRA are sometimes surprised to find attached to the legislation the actual Fran Pavley. “It’s really quite hysterical,” she says. “I’ve been at some conferences and there will be legislators from different states and they will go around the room and they’re like, ‘We’ve adopted Pavley.’ ‘They killed Pavley.’ ‘I can’t bring up Pavley.’ And I’ll go, ‘I’m Pavley.’ And they’ll go, ‘What?’ I don’t know what they thought.”

Disarmingly informal and chatty, Pavley is in her spare but somehow homey office in the California Capitol in Sacramento, talking as if we were sitting across a kitchen table. Though we were deep inside the dusky Capitol building, a pair of sunglasses was improbably perched in her hair. Before going into state politics, first in the Assembly and now in the Senate, she had spent most of her career as a middle-school teacher. Even though she had accumulated some political and environmental background as a local mayor and a member of the state Coastal Commission, Pavley might have seemed an unlikely architect of such important legislation. In fact, she benefited from being underestimated (“First-term freshman, middle-school teacher—the opposition didn’t show up in droves,” she recalls), and ultimately she assembled a broad coalition.

Pavley also benefited from another factor she had not anticipated: California’s legacy as an environmental pace-setter. That work dates back to the 1940s, when concern about smog in Los Angeles led the state to establish the nation’s first county-level air-pollution-control districts. Rather than being intimidated by the prospect of setting a new national standard, legislators seemed to welcome that role, particularly after George W.Bush in 2001 renounced the global climate-change treaty. “They weren’t going anywhere [in Washington],” Pavley said. “We had pushed the envelope on unleaded gas and catalytic converters. This was sort of the same.” Governor Gray Davis signed the tailpipe bill into law in late July 2002.

Just weeks later, in September, Davis signed another landmark bill. This one required the state’s three investor-owned utilities to generate 20 percent of their electricity from renewable sources like solar and wind by 2017. This wasn’t the nation’s first so-called Renewable Portfolio Standard for utilities, but it was among the most ambitious. After Schwarzenegger arrived, the state raised the bar on the utilities’ renewable-power requirement twice more: the utilities must generate 20 percent of their power from renewable sources by 2010 and fully 33 percent by 2020.

The state approved its initial renewable-sources standards law soon after the collapse of the dot-com bubble. The new mandates on utilities to buy renewable power reinforced the nascent sense among investors and entrepreneurs that clean energy might be the Next Big Thing. From 2005 through 2008, the amount of venture capital flowing into cleantech start-up companies in California exploded from about $456 million a year to $3.3 billion. By one estimate, California was home to nearly three-fifths of all the U.S. venture capital invested last year in clean energy. With the investment spigots opened, the number of clean-energy companies in California increased by nearly 30 percent between 1995 and 2007.

All of this activity points to the second lesson from California’s energy experience: regulations can create markets. “It’s much easier to make a big investment knowing that there will be a market and an opportunity to participate in it,” says Ellen K. Pao, a partner at Kleiner Perkins Caufield & Byers, a leading Silicon Valley venture firm. Initially, neither the utilities nor the investors seemed convinced that state regulators would enforce the renewable standards. But once the legislature and Schwarzenegger sent a clear message by toughening the requirements, the pace of activity enormously accelerated. Solar energy today provides less than 1 percent of the state’s power, but over the past few years, PG&E and Southern California Edison have leapfrogged each other in signing contracts with start-up companies for what is planned as the world’s largest solar production facility. (The California utilities find solar more attractive than wind because the sun’s energy is available on the hottest days, when demand is greatest, but hot days in California are usually still; the wind in the state blows mostly at night, when demand is lower.) Both SoCal Edison and, more recently, PG&E are also seeking approval from state regulators to operate their own large-scale photovoltaic arrays, many on the roofs of warehouses and other big commercial buildings.

The slow start, and the long lead time needed to construct large renewable facilities and the associated transmission lines, mean the utilities are unlikely to reach the state’s 20 percent threshold by 2010. But most experts believe they will meet the goal not long thereafter. And the tilt in the utilities’ priorities toward alternative energy now appears irreversible.

“There is a smattering of activity in other states… but not what you’d call a marketplace with a recurring flow of opportunity,” says Mike Ahearn, the CEO of First Solar Incorporated, which is manufacturing thin-film solar panels for SoCal Edison’s rooftop project. “California is the solar market in the United States.”

Storm clouds, both literal and metaphoric, were buffeting the Capitol building on the blustery day when I met with Schwarzenegger to discuss the state’s energy strategy. Schwarzenegger and Democrats in the state legislature were still locked in a budget standoff with legislative Republicans. (The immediate impasse was finally broken two days later, but the state didn’t reach a final resolution on the budget until this summer, after voters rejected all but one of the ballot initiatives central to the original agreement.) We met in a tent Schwarzenegger has had constructed, complete with Astroturf flooring, in an interior courtyard of the Capitol building, where he can smoke cigars without violating the building’s no-smoking rule. When I arrived, Schwarzenegger, in a blue suit and cowboy boots emblazoned with the California state seal, was contentedly puffing a stogie. For a man facing fiscal meltdown, he appeared remarkably relaxed, though the weather seemed to be offering its own commentary: the torrential downpour lashing Sacramento that day drummed on the tent so loudly that at times it was hard to hear him talk.

Schwarzenegger had pledged to advance environmental causes during his initial gubernatorial campaign in 2003. But when he arrived in Sacramento, environmentalists and legislative Democrats were skeptical about the commitment of a Republican governor whose most prominent previous association with energy issues had been to encourage General Motors to adapt the Humvee for civilian use. “They felt … when I came here, ‘Oh, here’s a Republican, he is going to set us back seven years, so let’s not hope for much,’” Schwarzenegger told me. Legislators may have heard all his campaign promises, but “they thought it was just stuff that you say in order to get elected.”

In fact, Schwarzenegger would bang heads with environmentalists and their legislative allies on some regulatory issues. But on questions surrounding the transition toward a new energy economy, no governor would prove as visionary or determined. Ambitious new initiatives have cascaded out of Schwarzenegger’s office—including the two measures raising the renewable-power requirement on utilities, a state subsidy program to encourage the installation of electricity-generating solar panels on 1 million California roofs, and in January 2007, an executive order establishing the nation’s first “low-carbon fuel standard,” which requires a reduction of at least 10 percent in the carbon emissions from transportation fuels by 2020.

“People make decisions in this building, a lot of times, based on what is their term,” he told me, gesturing with his cigar toward the offices around him. “So they make a decision, what can be done in the next four years … I always look 50 years ahead, because to me, I cannot think just about what can I accomplish while I am in office. The thing that is important is, what should the state look like 20, 30, 40 years from now.” The search for a new energy strategy also spoke to Schwarzenegger’s desire to define California (and undoubtedly himself) as the forward edge of innovation. “My idea [was] that you shouldn’t just do it for California, that everything we do, we should use as a way of pushing the rest of the world, because I am a big believer in marketing,” he said.

Schwarzenegger’s interest in big, course-changing initiatives, and the continuing desire among Democratic legislative leaders to challenge then-President Bush’s energy policies, converged to produce yet another landmark initiative in 2006. After some occasionally tense maneuvering, the legislature passed and Schwarzenegger signed a Pavley-sponsored bill imposing the nation’s first mandatory statewide reductions in greenhouse-gas emissions. The bill required the state by 2020 to roll back its emissions to the 1990 level—a reduction of about 15 percent from the current level. (By separate executive order, Schwarzenegger also committed the state to an 80 percent reduction by 2050.) Environmentalists had been promoting exactly those goals as national policy without success under Bush. Once again, the stalemate in Washington emboldened Sacramento. California acted, Schwarzenegger told me, “because we saw no hope on the national level.” It was, he continued, “very important to let Washington know, ‘Look, you are not the one making all the decisions.’”

Once California had passed its greenhouse-gas-emissions law, Schwarzenegger deputized Terry Tamminen, his key environmental adviser, to encourage other states to follow. That effort has been a striking success: six states, and four Canadian provinces, have joined with California in the Western Climate Initiative, which has pledged to impose mandatory greenhouse-gas-emission reductions comparable to California’s 2020 goal through a market-based regional cap-and-trade system.

The passage of California’s climate-change legislation captured a third major lesson of the state’s experience: just as regulations create markets, markets create constituencies. Much of the state’s business establishment opposed the bill. But the legislation drew countervailing support from the state’s cleantech community, which was growing partly in response to the state’s earlier alternative-energy initiatives. At a critical moment, a delegation of Silicon Valley venture capitalists and entrepreneurs led by John Doerr of Kleiner Perkins Caufield & Byers visited the Capitol to declare that the greenhouse bill would, in the group’s words, “stimulate innovation, efficiency, and economic benefits.” “It changed the whole dynamic,” Pavley said. “Before, all the papers were [saying], ‘This is an environmental bill,’ and businesses were opposed. After that… It changed the whole discussion.” Schwarzenegger meanwhile helped coax support from more-traditional business interests, including PG&E.

Peter Darbee, a self-described conservative, has become an ardent proponent of mandatory carbon-emission reductions. After assuming PG&E’s top job in 2005, he convened a series of meetings for senior executives with scientists on both sides of the climate issue. The conclusion he reached was unequivocal: “The Earth was warming, mankind was responsible, and the need for action is now.” And partly because of the utility’s experience at meeting the state’s energy-efficiency goals, he said, he also concluded that while there will be “some cost” to reducing greenhouse-gas emissions, “that cost is very small, compared to the cost of not doing something. If people approach this, as we have, as an opportunity, it could actually have zero or little cost, or [produce] a net benefit.”

Darbee’s optimism reflects a larger truth about the politics of energy in California: unlike in most states, enough industries in California have found ways to profit from the state’s first waves of reform to create a durable constituency for continued change and innovation.

As a result of the climate-change bill, the state is several years ahead of the country again, this time in exploring what reducing carbon emissions will actually take. “There was no model to work from,” said Mary D. Nichols, the chairwoman of the California Air Resources Board, which has been tasked with administering the climate bill. Last December, the board approved a “scoping plan” that offered the most detailed road map any government agency has yet charted for reducing greenhouse emissions. It pointed to a fourth major lesson from the California energy experience: moving toward a low-carbon economy will require attacking the problem from almost every conceivable angle.

The plan anticipates that the largest reductions will come from the major reforms the state has adopted in recent years, including the Pavley emissions law, the renewable portfolio requirement, and the cap-and-trade system itself. But it also envisions renewed efficiency efforts, improved regional planning to reduce sprawl, more installation of distributed solar power on rooftops, changes in forestry and water-distribution practices, and so on.

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Ronald Brownstein is the political director for Atlantic Media Company. More

Ronald Brownstein, a two-time finalist for the Pulitzer Prize for his coverage of presidential campaigns, is Atlantic Media's editorial director for strategic partnerships, in charge of long-term editorial strategy. He also writes a weekly column and regularly contributes other pieces for the National Journal, contributes to Quartz, and The Atlantic, and coordinates political coverage and activities across publications produced by Atlantic Media.

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