EDITOR’S INTRODUCTION

Electric utilities across Canada and the United States have faced significant cost pressures over the last five years related to investments in renewable energy required to meet carbon reduction goals established by federal, provincial and state governments. California is at the top of the list.

California is not alone, however. The wildfire costs California utilities faced were also experienced in Alberta. And the tension between California electric utilities and the solar operators also took place in Canada recently in the feud between the Nova Scotia government and Nova Scotia Power.

This article is a crisp analysis of an innovative new plan to limit the rate increases resulting from the great energy transition. There may be some important lessons for Canadian energy regulators.

THE NEW CALIFORNIA PLAN

California just moved one step closer^[1] to changing the way households pay for electricity. If all goes according to these newly proposed plans,^[2] Californians will be paying lower electricity prices and an “income-graduated” fixed charge by 2025. The impetus for electricity rate reform? California’s retail electricity prices are high and rising. There is a forecasted increase in residential electric rates for all three electric utilities: San Diego Gas and Electric, Pacific Gas and Electric, and Southern California Edison.

Note: An accelerating increase in bundled residential electric rates is forecast for all three IOUs.^[3]

We have argued that these prices are too high because we’re effectively taxing grid electricity consumption to pay for costs that don’t vary with usage (e.g. rising costs of wildfire risk mitigation, compensating wildfire victims, infrastructure costs, public purpose programs).^[4] These too-high electricity prices are slowing progress on electrification and straining the pocketbooks of lower-income households.

In response to these challenges, a new California law requires that residential electricity prices be reduced.^[5] Revenues not recovered in a per-kWh charge will be collected in a fixed monthly charge that increases with household income. By how much should electricity prices be reduced? How should income-graduated fixed charges be set? These are the issues being debated now.

Under this kind of reform, there will be winners and losers. Most low-income households will “win” reductions in their electricity bills. Households like mine — higher-income households with rooftop solar — are the biggest losers. No one likes to pay more, so some rooftop solar advocates — among others — are pushing back.

We love solar panels. It’s amazing that we can charge our electric vehicle (EV) with homemade kWhs. Anyone who wants to invest in generating their own solar electricity should be able to do so. But the way we currently pay for electricity is broken and needs fixing. So, this article offers a pro-solar — and pro-rate reform — perspective.

WHAT DOES ROOFTOP SOLAR HAVE TO LOSE?

Before diving into the specifics of the different proposals on the table, it’s worth reviewing how we currently compensate rooftop solar generation in California, why the status quo is broken, and what the utility-proposed electricity rate structures would do to a solar photovoltaic (PV) owner’s electricity bill.

Status quo rooftop solar compensation

Last year, our solar panels generated more than 4,300 kWhs. When we consumed our homemade solar electricity, we avoided paying the retail rate for grid electricity. Under net metering, when we exported our excess supply back to the grid, we were compensated at the retail rate minus a charge of about 2 cents/kWh. What we “earn” from our solar exports, offsets most of the cost of the grid electricity we consume when the sun goes down.

The graph below plots our average hourly solar PV production in 2022 and the time-of-use EV rate averaged across hours of the year. Accounting for non-bypassable charges, our solar PV generation reduced our bills by over $1,200 in 2022!

Note: The black line represents our retail electricity price averaged across hours of the year. We’re on a PG&E EV rate that features low off-peak rates to promote vehicle charging during off-peak hours. The yellow line summarizes our hourly PV generation which we can track on mysunpower.com.

What’s wrong with this picture?

In California, we use retail electricity prices to raise revenues to cover a long list of non-incremental expenses I described earlier. This means that only a fraction of the savings I see on my bill are savings that my solar panels are actually generating for the world. A significant fraction of my cost “savings” are just cost-shifted onto someone else’s bill since these costs still need to be paid.

The California Public Utilities Commission (CPUC) uses the E3 Avoided Cost Calculator to estimate the social benefits generated by distributed energy resources.^[6] These hourly estimates include avoided fuel costs, benefits associated with reduced greenhouse gas emissions, avoided methane emissions, avoided marginal capacity costs, etc. If you compare these 2022 hourly Social Marginal Cost (SMC) values against my retail rate, the contrast is striking.

Note: The social marginal cost (SMC) numbers come from this 2022 Distributed Energy Resources Avoided Cost Calculator^[7]

During the hours of the day when the sun is shining, my retail price (black) is well above these social marginal cost estimates (green). Valuing our 2022 hourly solar PV production using these SMC estimates adds up to around $185 in avoided costs, far below the $1200 that our family saves. (E3 is working to incorporate some higher estimates of avoided emissions values — but these changes should have a limited impact during hours when my solar panels are cranking).^[8]

How would proposed rate reforms change this picture?

PG&E recently released a retail rate reform proposal that would make two important changes to my electricity bills.^[9] First, my hourly retail rate would be lowered by more than 30 per cent (averaged across hours). Second, I would pay an income-graduated fixed charge of $92 each month (very low-income households would pay only $12). The graph below shows the EV-Time-Of-Use rate that PG&E has proposed.

Note: The proposed EV2 rate is summarized in red. The original version of this post took numbers from Table 1–4 of the PG&E proposal. These were incorrect and the figure shows the corrected numbers.

These proposed changes will reduce my solar PV “savings” and increase my monthly electricity bills. (The Net Energy Metering reform that just took effect will not change this picture for me and everyone else who already has solar).^[10]

Reduced compensation for my solar generation means fewer fixed costs are shifted onto solar have-nots. This seems only fair. I benefit from wildfire risk reduction like everyone else. I also depend on power system infrastructure to export the solar electricity I don’t consume and to keep my lights on when the sun goes down.

Although I don’t love the idea of sending more money to PG&E every month, I see this bill increase as a feature — not a bug — of a reform that aims to recover power system costs more efficiently and more equitably. But not everyone agrees with me…

IN DEFENSE OF THE STATUS QUO?

Under the PG&E proposal, my retail electricity rates would be reduced by over 30 per cent. But there are other proposals on the table that advocate for much smaller rate reductions. The Solar Energy Industries Association (SEIA), for example, is recommending that the price per kWh be decreased by only 2 per cent.^[11]

Here are the key arguments in defense of keeping retail prices higher (as I understand them).

1. We should play by the rules: SEIA cites an earlier CPUC decision that fixed charges should only include costs “that are caused simply by the customer’s presence on the system.” By this narrow definition, fixed charges include only the costs of connecting me to the grid and sending me a complicated utility bill every month. This definition excludes billions of dollars of costs that do not vary with incremental usage (e.g. wildfire mitigation, some power system infrastructure, public purpose programs).

If this is, in fact, the rule on the books, it needs to be changed. Adhering to it locks us into inefficient and regressive retail electricity pricing.

2. High prices promote conservation and efficiency: The SEIA proposal argues that modest reductions in rates would “retain a strong incentive to conserve energy and use it efficiently.”

This argument is misguided. If we are concerned about environmental conservation and efficient energy use, we should be working to accelerate the efficient electrification of homes and vehicles. Keeping electricity prices higher than SMC does the opposite by discouraging efficient fuel switching.

3. High retail electricity prices support investments in rooftop solar: The Sierra Club is recommending that, if rate reforms “unreasonably impair” the payback period for solar and storage, cost elements should be removed from the income graduated fixed charge.

Rooftop solar adopters should be compensated for the benefits they generate for the system. However, under the current rate regime, we are increasingly over-compensated. Keeping electricity rates high to keep my solar payback period artificially short would prioritize rooftop solar over other critical objectives such as electrification efficiency, cost-effective grid decarbonization, and affordability.

SOLAR LOSERS, DON’T BE SORE LOSERS

California’s retail electricity rates are badly broken. The status quo rate regime distorts incentives, discourages electrification, and disproportionately burdens lower-income households. Absent reforms, the situation is only going to get worse as more high-income households invest in rooftop solar to reduce their utility bills, exacerbating the cost shift onto solar-have-nots.

California now has an opportunity to course correct. Lowering electricity rates and raising revenues with an income-graduated fixed charge will reduce barriers to efficient electrification and shift cost burdens off of households that can least afford to pay. Fellow solar losers, we hope we can all take a step back and recognize this as a big win for California and the climate.

* Meredith Fowlie is a professor and Director of the Haas Energy Institute at the University of California at Berkeley. An earlier version of this article was published by the Haas Energy Institute in its monthly Energy Bulletin, see: energyathaas.wordpress.com/2023/04/17/whos-afraid-of-retail-electricity-rate-reform.

1. Danielle Echeverria, “Californians’ Electricity Bills could see huge change if PG&E proposal goes through”, (1 June 2023), online: San Francisco Chronicle <www.sfchronicle.com/bayarea/article/pge-utility-electricity-bills-restructure-plan-17895445.php>.
2. California Public Utilities Commission. ( 7 April 2023) online (pdf): <docs.cpuc.ca.gov/PublishedDocs/SupDoc/R2207005/5911/505748665.pdf>.
3. Ankit Jain, “Key Takeaways from the CPUC Rates and Costs En Banc Hearing and Update on Affordability Metrics”, (10 June 2021), online (pdf): CPUC <ww2.arb.ca.gov/sites/default/files/2021-06/cpuc-metrics_sp_kickoff-electricity_june2021.pdf >.
4. Energy Institute at Haas, UC Berkeley, “Designing Electricity Rates for An Equitable Energy Transition”, (23 February 2021), online (pdf): <www.next10.org/sites/default/files/2021-02/Next10-electricity-rates-v2.pdf>; see also Energy Institute at Haas, University of California, “Paying for Electricity in California: How Residential Rate Design Impacts Equity and Electrification”, (22 September 2022), online (pdf): <www.next10.org/sites/default/files/2022-09/Next10-paying-for-electricity-final-comp.pdf>.
5. US, AB 205, Committee on Budget. Energy, 2021-22, Reg Sess, Cal, 2021, ch 61 (enacted).
6. California Public Utilities Commission “2022 ACC Documentation” (22 June 2022), online (pdf) : CPUC <www.cpuc.ca.gov/-/media/cpuc-website/divisions/energy-division/documents/demand-side-management/acc-models-latest-version/2022-acc-documentation-v1a.pdf>
7. “Avoided Cost Calculator for Distributed Energy Resources”, online: Energy and Environmental Economics <www.ethree.com/public_proceedings/energy-efficiency-calculator>.
8. California Public Utilities Commission, “Societal Cost Test Impact Evaluation”, (January 2022), online (pdf): CPUC <www.cpuc.ca.gov/-/media/cpuc-website/divisions/energy-division/documents/integrated-resource-plan-and-long-term-procurement-plan-irp-ltpp/2019-2020-irp-events-and-materials/societal_cost_test_impact_evaluation.pdf>.
9. California Public Utilities Commission, (April 2023) online (pdf): CPUC <docs.cpuc.ca.gov/PublishedDocs/SupDoc/R2207005/5903/505736526.pdf>.
10. Energy institute at Haas, “Can Net Metering Reform Fix the Rooftop Solar Cost Shift? “, (25 January 2021) online: <energyathaas.wordpress.com/2021/01/25/can-net-metering-reform-fix-the-rooftop-solar-cost-shift>.
11. California Public Utilites Commission (7 April 2023), online (pdf) : CPUC <docs.cpuc.ca.gov/PublishedDocs/SupDoc/R2207005/5907/505462900.pdf>.