VX Excerpt: Powering California’s Future (PPIC)
The Public Policy Institute of California (PPIC) hosted its Speaker Series on California’s Future with a half-day conference, Powering California’s Future, at the SAFE Credit Union Convention Center in Sacramento. Our excerpt highlights remarks from California Energy Commission Vice Chair Siva Gunda and California Public Utilities Commission President Alice Reynolds from PPIC’s event.
Gunda addresses California’s “mid-transition” status, flat loads, expected demand from electrification and data centers, and the added strain of upcoming refinery closures. Together, their insights underscored how the evolving dynamics of demand, supply, and infrastructure investment shape what California households and businesses ultimately pay.
“What we’ve seen recently, however, is that the primary driver of increases in electricity bills is climate change.” —Alice Reynolds
[Moderator, Laura Klivans] According to the Legislative Analyst’s Office, the amount people pay for electricity in California has gone up faster than the rate of inflation. Broadly, what are the key drivers behind rising electricity costs in California?
[Alice Reynolds] …there are a variety of charges and costs — things like support for low-income customers, but also the costs of maintaining the system and generating the electricity that ultimately goes to customers. The Public Utilities Commission regularly studies the drivers of these costs and looks closely at what goes into customer bills.
We approve costs through our general rate cases for each of the large electrical utilities, as well as contracts for the generation resources of the utilities we regulate. From there, we work to move the system forward in the least costly way possible. What we’ve seen recently, however, is that the primary driver of increases in electricity bills is climate change.
We’re having to adjust the system to make the infrastructure safer — to prevent wildfire ignitions — while also responding to the broader impacts of climate change: repairing after wildfires, dealing with extreme heat, and managing the added stress on the grid. At the same time, we need to move forward in generating the supply required to meet demand, which has become both higher and more volatile.
Electricity needs today can fluctuate much more than in the past. We’re seeing ‘needle peaks’ that are very difficult to plan for, especially with an increasingly renewable-based supply system. These resources have essentially zero marginal cost and can run continuously, but they are harder to ramp up or down to meet sharp shifts in demand. Another challenge involves compensation for behind-the-meter resources, particularly rooftop solar systems. The key question is how to structure compensation so that it fairly distributes costs, rather than placing disproportionate burdens on a smaller group of customers.
Siva, we are mid-transition. What does that mean, and how does it impact electricity rates?
[Siva Gunda] To back up a little and frame the overarching picture: In California, we started by addressing air quality issues — think about the smog in the 1970s and all the work we’ve done since to reduce emissions. Then the focus shifted to climate change and lowering greenhouse gas emissions. Now, we’re increasingly concerned with addressing local impacts as well.
As we’ve done this, we’re seeing results on the grid. On the electricity side, a large part of the transition is predicated on electrifying major parts of the economy, all supported by a system that must be clean, reliable, and affordable. On the petroleum side, California hit peak gasoline demand in 2008, just before the financial crisis. Demand dipped, rose again, and peaked most recently in 2017. Since then, we’ve seen a steady 1–2% annual decline. Similarly, natural gas forecasts suggest demand is also trending downward.
So what does “mid-transition” mean? I want to credit Dr. Emily Gruber from Notre Dame, who coined the term in her scholarly work. The concept is this: the legacy system is declining, but not fast enough, while the new system is scaling up — but not yet fully enough to be relied on 100%. That creates two issues. First, anytime you scale an emerging technology, it requires public investment — whether in R&D, in EV growth for transportation, or in solar and wind for electricity. At the same time, the legacy system still needs investment to function, whether that’s oil, gas, or traditional grid infrastructure. You can’t simply ignore those costs.
It’s important to see this as an ecosystem. In petroleum, for example, you’re talking about drilling upstream, refining midstream, and getting fuel to the pump downstream. Every step has a potential point of failure, and each one requires financial investment. The same is true on the electricity side, where, as President Reynolds mentioned, rising demand is not just about total load but about when demand occurs. We have to think about distribution across the 8,760 hours in a year — how winter and summer peaks differ, or how one extreme day can create a 55,000 MW spike even when the average peak is 40,000 MW. Meeting those “needle peaks” means investing in extra capacity, and ultimately, those costs are borne by someone.
That’s the challenge of being mid-transition: managing the decline of the old system, scaling the new, and ensuring reliability and affordability for Californians during the overlap.
How does being in the middle of this transition affect what people are paying?
[Siva Gunda]We are investing in two systems. You have to recognize that when you’re paying for two different systems at once, the costs are going to be higher. That is simply the reality of transition.
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Siva, give us a general sense of where overall loads are. Where has California’s electricity demand been over the last 10 years? Where are we headed, and what’s driving that? And we also hear a lot about data centers — where do they stand?
[Siva Gunda] Looking at the last 10 years, demand has actually been pretty flat, which is surprising given the growth of EVs. But the metric you use matters. If you look at annual energy use, the amount appears flat largely because of the amount of behind-the-meter solar we’ve added to the system, which cuts into the total energy pulled from the grid. That said, this won’t remain flat. By the latter part of this decade and especially into the next, we’ll see rapid increases — primarily from building and transportation electrification, along with new demands like data centers. We also don’t yet know the exact load impact of technologies like electrolytic green hydrogen, so we don’t include that in forecasts. But the big drivers right now are end-use electrification and data centers.
Once you acknowledge that demand will grow, the next question is: at what point in the day does it grow? That is critical because it determines what kind of system we need to build. California today has roughly 110 gigawatts of capacity, though not all of it is available every hour. We still rely on about 40 gigawatts of thermal resources, but for shorter and shorter periods. Even if you only need them for a few hours a year, you still have to maintain them — essentially as an insurance policy — and the cost of that passes through to consumers.
Historically, California has been a summer-peaking system because of air conditioning. But as more homes and water heating move to electricity, forecasts show that summer and winter peaks will converge in the next 20 years. That presents another challenge because solar production is lower in winter. Layering these dynamics together makes the system much more complex.
One solution is to maximize the utility of the system we already have. On the load side, that means improving the load factor — shaping demand so that the grid isn’t overbuilt to serve only 50 peak hours a year. On the supply side, it’s about maximizing capacity factor — making sure renewable resources aren’t curtailed. More storage, for example, could reduce solar curtailment. Regionalizing the market could allow California to export excess renewables when they’re produced and import from other states when needed.
Two of California’s oil refineries are projected to close in the next few years. If that happens, demand and supply could diverge further. You and the CEC have put together recommendations for Governor Newsom on managing high prices at the pump. What are those, and how can those lessons inform the broader electricity transition?
[Siva Gunda] Yeah, so this goes back to that mid-transition phase. The big transition of the system — especially petroleum, and really natural gas as well — these are declining systems. But the reality is you still have to keep putting investment into them, even as they’re going down.
For petroleum, I think it comes down to three pieces. First, why are refineries leaving? I’d say two reasons. One is just profitability — the amount of money they make. And contrary to the general notion, if you look at the entire value chain, the refineries are usually not the ones making the most money. That’s downstream, in marketing — how you market the supply from the refinery into the gas station. So the refineries that are not vertically integrated, the wholesale ones just producing product and selling it into the wholesale market, they’re the most exposed.
The second reason is risk. The perceived risk of operating in California, our climate goals, and our health goals they’re getting tighter and tighter. Between those two things, the refineries ask: where do I put my capital to get the best ROI? If the ROI in California is lower than what they can get in the Gulf Coast, then they’re going to move the money there. And I think that’s real. That’s validated.
So as we move forward, the question is: how do you stabilize investment confidence? One way is you reduce costs by creating certainty. That’s important. But at the same time, when you create certainty, you also need adaptive management — so you’re not overshooting infrastructure build. So it’s both: create investor confidence, but keep flexibility in the system.
Then there’s the crude oil piece. California crude oil has been dropping fast. Over the last 40 years, our petroleum consumption went down about 28%, but our production went down about 68%. That’s a big gap. So part of the solution is stabilizing crude oil production and aligning all the different agencies — state, local — because right now everyone is working in their own box. We need to de-silo that to give investors confidence.
The last part, and this is really important, is the people side. As fossil systems decline, there are communities left behind. Workers are losing jobs, and communities are stuck with cleanup and environmental remediation. So if we want Californians to feel confident about this transition, then long-term planning has to start now, and people have to feel like they own this transition.
This excerpt was part of the PPIC’s Powering California's Future Panel 3: Ensuring Affordability, featuring Siva Gunda (California Energy Commission), Alice Reynolds (California Public Utilities Commission), Nora Sheriff (Buchalter), and Adria Tinnin (TURN), and moderated by Laura Klivans(KQED). We share their remarks as relevant discourse on California’s energy grid and solutions to keep energy affordable.