Are California’s electricity prices rising because customers are installing solar panels?

The rates that the three investor-owned utilities in California charge residential customers for electricity have been rising steadily for the past several years. As an example, consider the trend in the rates that one of these utilities, Pacific Gas & Electric Company, charges its 5.5 million residential customers in northern California.

Some parties contend that these high electric rates are being driven by customers who have installed solar panels on their roofs. They contend that solar customers create an inequitable cost shift from high-income customers to low-income customers. That is not the case, as discussed later.

First, let’s start with the obvious: Climate mitigation through electrification is a top priority for California. Countless economists and the state’s own data make it clear that we will not be able to hit our state’s clean energy goals without rooftop solar.

California’s policy makers, including legislators and regulators, should take the following five steps to promote equitable electrification in the state:

First, stop pointing the finger at the solar cost shift as creating high electric rates. Instead, identify the role being played by inflated utility overhead costs, managerial inefficiencies and excessive executive compensation. California’s rates are now almost three times the US average. They have been higher than the US average since 1979, long before rooftop solar panels arrived on the scene.

Second, recognize that solar panels generate clean energy right at the source. The surplus can go to neighboring homes, avoiding pollution from existing fossil plants and the need to invest in remotely located large-scale renewable projects and the expensive transmission lines that are required to deliver that power to customers. This is a net benefit to society to achieve our climate goals and should be properly incentivized.

Third, understand that solar panels, by lowering electric bills for customers, improve the odds that they will electrify. Many EV owners also have solar panels on their roof. And the economics of installing heat pumps for heating and cooling the house and for water heating improve dramatically when solar panels are installed. In California, home electrification is a core strategy for fighting climate change.  Again, incentives need to be set up to support it, not hinder it. These cost shift claims are a distraction that hinder our collective capacity to create effective market solutions that incentivize clean energy and home electrification.

Fourth, seek to make solar panels affordable for all customers, which is exactly what was happening before the Net Billing Tariff was enacted on April 15, 2023. Of California’s 2 million rooftop solar users, 60% are working class and middle-income folks, and 53% are people of color. Under the Net Billing Tariff, it’s now harder for rooftop solar and storage to pencil out for millions of families in the state. The utilities need to have a business model that is based on market fundamentals – namely profits should go to those who produce value for society. While there is an important role for utility companies in a future green economy –  such as transmission, storage, and developing resiliency models for distributing energy equitably based on differences in where it is being produced vs. needed at any given moment – the current “cost shift” narrative provides just enough fog to make it hard for customers, politicians, and regulators to demand that utilities produce value for society, instead of capturing value simply for their shareholders, given their ownership structure.

Fifth, accept that solar customers with batteries dramatically reduce strain on the grid during peak periods and lower electric rates in wholesale markets. This will benefit all customers, not just the solar customers. Furthermore, on critical days, customers with solar and battery storage may prevent outages, not just at their home, but across several other homes if they can be incentivized to serve as virtual power plants (VPPs). Batteries are expensive to install, and even under NEM 3.0, half of the new solar installations are being carried out without batteries. Thus, governments, federal and state, and utilities should double incentives for customers to install batteries when they install solar panels.

Rather than pointing the finger at the solar cost shift, lawmakers and regulators in California need to study and implement these five steps to get California back on track to hit the state’s clean energy goals.

There is little doubt that a customer’s usage drops dramatically when they install solar panels but that does not mean a cost shift has been created. If reducing usage was equivalent to creating a cost shift, then a cost shift would arrive whenever customers invest in energy efficiency, downsize their homes or move elsewhere. In all these non-solar cases, utility revenues drop, and seeking to recover their revenues, utilities raise their rates. But no one raises the issue of a cost shift when this occurs.

Of course, the real issue is the utility’s recovery of its fixed cost, not its recovery of its overall revenues. Fixed costs are those utility costs that do not vary with usage, and in standard regulatory practice, they include the costs of metering, billing and customer care and, in some cases, the cost of the line which connects the house to the transformer. Many utilities collect some or all these fixed costs through a fixed monthly charge.  Today, the national average monthly fixed charge across 173 investor-owned utilities is $12. However, California regulators have enacted a monthly fixed charge of $25 a month, which is currently uncapped and could rise further.

When a utility company does not have a fixed charge for recovering its fixed costs and, instead, recovers those costs through an energy charge from users, who is subsidizing whom? Large energy users without solar panels are subsidizing the fixed cost deficit of low energy (i.e., efficient) users while low energy users are the beneficiaries of the cost shift.

To illustrate this, assume there is no monthly fixed charge, and the energy charge is a flat rate of 25 cents a kWh that includes 5 cents per kWh for recovering fixed costs in the amount of $25 a month.

Customer A, the average user, consumes 500 kWh a month and pays $125 a month for electricity. Assuming the rate is correctly designed, the utility will recover the fixed costs of $25 a month from the average user.

Customer B, a solar customer, consumes 100 kWh a month from the grid and pays $25 a month to the utility. With this, B only pays $5 a month toward fixed costs. That creates a cost shift of $20 a month ($25 -$5).

Customer C, a low user who is a non-solar customer, consumes 250 kWh a month and pays $62.5 a month. With this, C pays $12.5 toward fixed costs, resulting in a cost shift of $12.5 a month. The low user could be living in a temperate climate, in a small apartment, or in a highly energy efficient house.

Customer D, a large user, consumes 1,000 kWh a month and pays $250 a month. D is overpaying the utility’s fixed costs by $25 a month.

Based on this, utilities that are recovering their fixed costs through an energy charge instead of a fixed rate charge have an incentive to find and support large energy users to cover their fixed costs.  Thus, utilities have no incentive to promote the installation of solar panels, which is counter to our collective climate goals.

With that background, let’s address the question: do solar customers create a cost shift that drives up electric rates? To figure this out, let’s assume that large users are the ones most likely to install solar panels to manage their energy bills.

To assess the cost shift, it is important to think across the lifetime use of the customer, which includes the pre-solar and post-solar periods.

Let’s say, for the sake of argument, that a large user was a non-solar customer for 20 years and installed solar panels during the past 5 years during their total 25 years as a customer. In this scenario, this user over-paid the utility $6,000 (during their 20 years as a large user) and has under-paid the utility by $1,200 for the past 5 years. In this plausible scenario, this customer has still retained a $4,800 over-payment to the utility. Indeed, it would take another 20 years before the under-payment cancels out the over-payment.

In conclusion, customers with solar panels are not driving rates upwards. Several other factors are driving rates upwards. In order to promote electrification in the state, legislators and regulators should refocus their attention on the five steps outlined in this article.

The author, an economist, has worked on electricity pricing issues for more than four decades across the globe. In 2019, he bought an EV and installed solar panels on his roof and paired them with a battery.

Read more articles by Ahmad Faruqui

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