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How should California price electricity for customers with rooftop solar panels?

Ahmad Faruqui's picture
Economist-at-Large Retired

Ahmad Faruqui is an energy economist who has worked on electricity pricing issues throughout the globe and testified numerous times before regulatory commissions and governmental bodies.

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  • Jun 9, 2022
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Jon Wellinghoff and Ahmad Faruqui

The California Public Utilities Commission (CPUC) is reconsidering the decision it proposed on December 13 on how to price electricity for customers with rooftop solar panels. The decision would have made rooftop solar panels unaffordable for all but the wealthy customers. It was met with widespread opposition in the state and was the subject of scathing criticism in all but one of California’s major newspapers. Former Governor Arnold Schwarzenegger criticized it an editorial in the New York Times. 

The state has a strong commitment to using renewable energy in all its forms. However, critics of the current pricing arrangement for solar customers -- where power is sold to solar customers at the same rate at which it is bought from them (known as net energy metering, NEM) -- have asserted that because the marginal cost of electricity is much lower than the average cost, customers who install rooftop solar create a revenue deficiency for electric utilities, which requires them to raise rates for all customers, creating an inequitable cost shift. They suggest that if the state is keen on promoting solar adoption, it should find some other mechanism for subsidizing rooftop solar.

We agree that the marginal cost of energy in California is much lower than the average cost. We also note that California’s electric rates recover most costs through an energy charge expressed in cents per kWh. Thus, when any customer lowers their usage either because they install solar panels or because they invest in energy efficiency or because they move to a newer house or an apartment, they create a cost shift.

Let’s illustrate this with a simple example involving five customers. Customer A is a small user, B is an average user, C is a large user, D is a small user who used to be a large user, and E is a low-income customers. For simplicity, let’s assume that A’s monthly bill is $50, B’s is 100, C’s is 150, D’s is 50, and E’s is 50.

California’s investor-owned utilities don’t have a fixed monthly charge and instead levy a minimum bill of $10 a month. Since most revenue is recovered through the energy charge, the bulk of the utility’s fixed costs are embedded in the energy charge. The energy charge is designed so that the average user, B, pays the full amount of fixed costs (i.e., the costs of distribution and transmission).

This means that A, D and E are underpaying their fixed costs, and are being subsidized by C. Let’s assume that D used to be a large user and subsidized these three customers for years and then installed solar. A is living in an apartment or a very energy efficient house.

When it comes to pricing the sale of electricity by the utility to the customer, it does not make any sense to just pick on D as creating a cost shift when C and E are also creating a cost shift.

Of course, there is one additional issue with the solar customer, D. He or she may be exporting power to the grid in the early afternoon, when the solar panels are usually producing more energy than the customer needs. Under the existing NEM arrangements, D is being paid the full retail rate. Under NEM 2.0, that rate varies by time-of-day. Payments are lower in the early afternoon period and higher in the late afternoon period, when solar generation is often insufficient to meet D’s energy needs.

We agree that California needs to reform its NEM policies. Before we provide our preferred approach, let’s review the current energy policy landscape.

California has a very strong commitment to clean energy. It has mandated solar panels on new roofs, spends $1.5 billion on energy efficiency, a large portion of which goes to low-income customers, offers a 30% discount on their electric bills for low-income customers, and levies a progressive state income tax that minimizes the tax burden on low-income customers.

California also has among the highest electric rates in the country that are projected to rise by the billions of dollars in the years to come. At the same time, power outages are becoming more prevalent. Thus, all customers, not just the wealthy, are exploring options for lowering their bills, either by enhancing the energy efficiency of their house or by installing solar panels and increasingly pairing them with batteries.

What is the best way forward? We offer a two-step solution. First, levy a minimum monthly bill on all energy customers and move all customers to time-of-day rates that reflect the variation in electricity costs across the day.

If these changes cannot be made for all customers, let’s do that initially for solar customers (which, by way, is considered discriminatory conduct in several states).

Second, reduce what solar customers are paid for their exports to the value of solar.

Has anyone else done something along these lines? Yes, a minimum energy bill has been applied but just for solar customers in the Carolinas and Texas. Right here, in California, SMUD has applied a fixed monthly charge of $23 on all customers, a variation of the minimum bill concept, and set export compensation at the value of solar.

Has anyone applied the changes retroactively, as was proposed by the CPUC in its December decision? None that we are aware of.

Has anyone else levied a grid access charge, as was proposed by the CPUC? Just about no one. Those that did, e.g., in Arizona and Kansas, have had those charges removed.

There is no reason to make any other changes. California needs to lead the nation in the rollout of distributed energy resources, not turn into a laggard.

Jon Wellinghoff is a former chair of the Federal Energy Regulatory Commission (FERC) and CEO of GridPolicy, Inc.  Ahmad Faruqui is an energy economist who has worked on electricity pricing issues throughout the globe and testified numerous times before regulatory commissions and governmental bodies.

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Rao Konidena's picture
Rao Konidena on Jul 2, 2022

Dear Jon & Ahmad,

I really like your first proposed solution here, "levy a minimum monthly bill on all energy customers and move all customers to time-of-day rates that reflect the variation in electricity costs across the day."

But I am trying to understand where you are coming from, for your second proposed solution, "reduce what solar customers are paid for their exports to the value of solar". Why would you propose a reduction in what the solar customer gets paid? Is the intent here to incentivize storage on-site?

thanks, Rao

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