California Green Initiatives Will Likely Impact Industrial Market

The VDC IAC team notes that the recently signed state law in California that requires 1/3 of all energy come from renewable sources in 2020. One significant and controversial detail is that hydroelectric is not considered as being renewable energy. On the surface, this is a commendable commitment that will reduce the need for oil and its associated environmental, political, and economic issues. Depending on how the solar panels and wind turbines are deployed there can be some debate about the environmental trade off but we will leave that aside for this blog.

The impact on industry is something that we want to discuss. If California was an independent country, it would have the worlds 8th largest economy. As one would imagine, it is a location for a huge amount of industrial companies including many that have significant electrical power demand. California already places a burden on these companies as they pay a premium price for energy to subsidize California's social and environmental programs. Experts say that this law will likely increase their costs significantly. Today's Financial Times notes that this will be a 25%  increase over the already double energy cost these California industrial companies pay as compared to competitors in neighboring states. Some industries such as cement producers have to be located near the supply of material and demand for product and they will need to charge significantly more. Steel producers and fabricators also have high electrical energy costs. Together these will increase the cost of building new factories and infrastructure. Other industries are far more portable and the higher energy costs will encourage them to more or, at least relocate their new facilities out of state, to Mexico, or even off-shore.

Let's take a quick look at what the theoretical demand for renewable power generating products. California, ranks lowest of all states for per capita electricity consumption but still uses 257 Billion kWH. If we conservatively consider that 60% of the energy reduction will come from electrical as opposed to solar/thermal, we get a demand for (257 * .33 * .60) of ~50B kWH of solar and wind electicity generator products. This will certainly drive a lot of investments to manufacture these goods but it will take a lot of incentive to actually make them in California.

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