$541,800 And Climbing: California Policy Makers Drive Up Housing Costs Yet Again

Tuesday, October 2, 2018
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In June, the California Energy Commission voted to require that almost all new California housing construction (beginning in 2020) have rooftop solar panels, as well as expensive energy-efficient appliances, windows, insulation, and lighting. The goal of this mandate is to further reduce California’s carbon emissions, which is one of outgoing Governor Jerry Brown’s priorities.

There are several significant downsides to this policy. First, this mandate will drive up the cost of California housing. According to Zillow, the median cost of a California home is $541,800, and higher construction costs from this mandate may increase new home prices by as much $30,000 per home. Second, the policy will make California electricity less reliable than it is now by increasing the likelihood of future brownouts and blackouts. Third, there are more cost efficient ways of producing more solar energy than by planting solar panels on everyone’s roofs. Fourth, this mandate will not even move the world’s carbon emissions needle, because its impact within California will be modest and because California is responsible for less than two percent of global carbon emissions.

This mandate won’t do much to reduce carbon emissions even within the state. The energy commission estimates that after three years, the solar mandate will have the same effect on carbon reduction as eliminating 115,000 cars. But this represents only 0.8 percent of California’s registered motor vehicles. Meanwhile, this relatively small reduction in carbon emissions may increase new home construction costs by as much as $9 billion per year.

The reason that this unprecedented mandate will not reduce carbon emissions more is because California electricity generation is powered primarily by natural gas, which produces considerably less carbon emissions than cars. Transportation is the largest source of greenhouse gases in California, producing more than twice as much as electricity generation. Addressing the state’s long-standing failure to build more roads and houses would be more important in reducing carbon emissions than planting solar panels on nearly every new home rooftop.

There are fewer miles of serviceable roads in California today than in the 1990s, which means that California drivers burn tons of fuel while sitting in traffic. LA drivers spend 150 percent more time in traffic than the average US driver, which costs LA drivers about $3,500 per year. A big reason why LA drivers spend so much time in traffic is because California’s housing supply does not come close to keeping up with demand. California’s housing shortage has increased home prices enormously in coastal cities and is causing a growing number of workers to commute long distances from locations with relatively affordable housing, such as the Central Valley and the Inland Empire, to work in areas with high-paying jobs, such as Silicon Valley, the Bay Area, and Los Angeles. In 2016, 471,000 drivers commuted to Los Angeles daily from another county. California is home to the three US cities with the greatest share of workers commuting at least three hours per day because these workers are not able to afford to live near their jobs.

You’re not alone if you’re scratching your head and wondering why policy makers are implementing a mandate that is intended to reduce carbon emissions but will lead some drivers to burn even more fossil fuel as they live even further away from their jobs.

The energy commission estimates that the solar mandate will raise construction costs by about $9,500 per home, and that lower future electricity costs will offset the cost of solar panels. But cost estimates by builders, which include the mandate’s additional requirement of more efficient appliances, lighting, windows, and insulation, are $30,000 in higher construction costs, not $9,500. And if solar panels, extra insulation, thermal windows, and highly energy efficient appliances and lighting were demanded by California homeowners, then builders would build them without any state arm-twisting. The commission seems to have chosen a mandate because consumers don’t value these energy-saving items nearly as much as the commission thinks they should.

 California’s disproportionate bet on solar energy will likely reduce future energy reliability and increase the possibility of brownouts. Solar energy has the major drawback that its production peaks when residential demand is low and it plummets late in the day when demand is higher. This gross imbalance between supply and demand over the course of the day leads to bizarre market outcomes, including California producing so much power at midday that it pays Arizona to take the excess production to prevent an electrical grid overload.

The large imbalance between supply and demand also stresses conventionally generated electricity production, which operates at very inefficient low levels during midday, but then must increase production extremely rapidly in the late afternoon when the sun sets and when residential demand climbs. As California increases its solar power share, this tightrope act of matching supply and demand becomes increasingly complicated and will increase brownouts as operators struggle to keep up with demand.  

Sensibly adopting alternative energy sources suggests waiting until new technologies are developed that can feasibly store renewable energy. This latter issue is perhaps the major drawback to solar and wind power today. Waiting would also allow California to assess alternative options to reduce carbon emissions, including rapidly emerging technologies that capture carbon and turn it into ethanol. More broadly, even if Californians hypothetically did agree to substantially increase solar energy production, then it should be acknowledged that rooftop solar panels are a very inefficient way to do this. Large-scale solar power generation, also known as “solar farms,” produce solar energy at about half the cost as that from rooftop panels.

Only thirty percent of California households—including those with multiple wage earners—can afford the median California home, and new home costs will rise further with the new solar mandate. At one time, California policy makers—both Democrats and Republicans—largely shared a vision of policy making that broadly fostered economic growth and also respected the environment. That vision is gone and has been replaced by policies that depress growth while catering to the preferences of only a small number of Californians. And this is an important reason why so many other Californians struggle.