Debate topic: Is the California Public Utilities Commission’s current proposal for changing the state’s rooftop solar net-metering policy headed in the right direction or the wrong direction?
Ahmad Faruqui, energy economist
Severin Borenstein, Energy Institute at Haas, UC Berkeley
Jeff St. John, Canary Media’s director of news and special projects
This debate took place on January 26, 2022. Watch it:
Here’s an edited transcript of the conversation:
Jeff St. John: Last month, the California Public Utilities Commission issued a proposed decision for replacing the net metering structure that’s governed the value of rooftop solar in the state for more than 20 years with a very different structure that would significantly alter the economics of customer-owned solar systems.
It’s a very complicated proposal, but we can summarize its three main changes. First, it would reduce how much money is paid for rooftop solar energy exported to the grid. Second, it would impose a monthly fee on rooftop solar owners based on the size of their solar systems, a fee that’s higher than any similar fee elsewhere in the country. And third, it would create various credits to ease the financial impact of these changes for a few years and offer various incentives to encourage adding batteries to solar systems and to boost the value of solar for lower-income customers.
So what should California do about rooftop solar?
We’re joined today by two gentlemen who are among the most knowledgeable we could hope to find on the subject, even if they may disagree on what the right course of action is.
Severin Borenstein is a professor at UC Berkeley’s Haas School of Business and Faculty Director of the Energy Institute at Haas, and he has published extensively on electricity markets and renewable energy and advised agencies on energy and climate policy, including the California Energy Commission. He’s on the board of the California Independent System Operator.
Ahmad Faruqui is an energy economist who works on rate design and energy efficiency issues. He advises clients around the world and has co-authored numerous papers and books on electricity pricing and other topics. He comes to you today as a resident of the state of California and EV driver.
It’s important to note that amid the firestorm surrounding this decision, California is fully committed to decarbonization. This net-metering debate is part of a broader debate over how best to achieve that goal.
St. John: Can you summarize your views of the proposed decision? Tell us which parts of it you support? Which parts do you oppose, and which parts do you think ought to be changed?
Ahmad Faruqui: I was really surprised at this decision when it came out. What I was expecting was that the proposed decision would tread the middle ground, not merely the views of a few parties who had given their proposals earlier last year. There are some features that I like about the proposed decision. I believe the time has come to end net metering and to move to net billing. Imports should be priced separately from exports. I support the need to pair batteries with solar panels. I also support the need for lowering export compensation. Finally, I support the notion of allowing solar panels to be oversized to allow for the electrification of homes and vehicles.
However, I don’t support the notion of imposing a grid-access charge. It is totally at odds with the California solar mandate for new homes. An average solar customer today has 7 kilowatts in their panels and they pay $57 a month. The solar tax will double their monthly bill and stretch the payback period to something like 20 years. Who would install solar with that payback period? And without solar, who will install batteries?
I do support gradually lowering the price of exports, but not by 80%. And I don’t support applying these charges retroactively to 15 years from the time the system was installed. That retroactive change has never been seen anywhere else, and it’s too drastic. The way they’re proposing to make those changes is very dramatic, very drastic and totally opposed to California’s goals.
Severin Borenstein: I have to say that I am on the board of governors of the California Independent System Operator, but nothing I say today reflects their views. I’m presenting my personal views. I also want to say that I hope this discussion will help turn down the temperature a little bit on this whole issue. There’s been a lot of vitriol after four years of Trump. I have to say that I really think it’s important to distinguish between people who share the basic goal of fighting climate change but may differ on the means, and people who don’t.
Having said that, let me start by saying that I think there are two different issues that get mixed together here.
One is what role rooftop solar should play in a decarbonized grid. I think that’s largely separate from the question of what [level of] compensation for rooftop solar in California is appropriate.
I think we should primarily focus on the second issue. When we talk about this second issue, we’re really looking at the payment that rooftop solar households get versus the value they bring to the grid. My view is that, like all renewables, rooftop solar should be compensated at the full value it brings to the grid. That’s not just the electricity. It’s the avoided investments and distribution and transmission. It’s the avoided environmental impact to the extent that additional rooftop solar avoids running fossil fuel plants.
I would argue that when you put all that together and we have put out research saying this, the value of rooftop solar is well below 10 cents per kilowatt-hour. In contrast, NEM, net energy metering, is rewarding rooftop solar in PG&E territory at around 26 cents per kilowatt-hour.
That gap is a huge gap, and I think it’s really inappropriate. I do support reducing the export price, and I would support moving to an avoided-cost [rate]. The monthly grid charge is a ham-handed way of trying to make up for the cost shift from the part that isn’t exported. I prefer other approaches. The phase-in is political and I think that’s what you have to do. Finally, I think that the emphasis on pairing with battery storage and grid connection is really good.
Faruqui: I’m very encouraged by Severin’s answer. We could end the debate at this point, but there are a few nuances. I totally agree that the export price should not be the retail rate. It should be something approximating the value of solar. And we can have discussions on whether it’s 10 cents or 5 cents, but it’s certainly not 30 cents or 26 cents. I think we are both on the same page there.
The question is how quickly and how to gradually bring it about and whether or not to do it retroactively to the customers who signed on thinking that they would be on solar with a certain arrangement for 20 years as opposed to the 15 years the proposed decision is talking about. I do have some thoughts on how to deal with the cost shift on the import side of the equation.
Borenstein: Ahmad raised the issue of the retroactive change to 15 years. On the one hand, we are going to cut off, under the proposed position, customers who have had solar for a while. On the other hand, we aren’t going to immediately change the compensation for going forward. We are going to phase in this compensation.
Maybe Ahmad and I can reach an agreement. Say that we extend the compensation for people who have already put in solar but we shorten the runway for implementing this for new solar. I understand the commitment argument of people who already put in solar, though they have fully recouped their investment at this point. But I don’t see the argument for saying that will lead to a gold rush of people going forward.
St. John: Let’s turn to the issue of the cost shift for the second question. Severin, you’ve argued that paying the full retail rate for rooftop solar that’s exported to the grid constitutes a significant cost shift. That is the cost borne not by rooftop solar owners but by people who don’t have solar on their roofs. And Ahmad, you’ve issued a fairly extensive critique of the cost-shift argument. Can you both summarize your positions for us?
Borenstein: The price people are paying is about 26 cents a kilowatt-hour (I’ll just use PG&E figures) and the avoided cost is below 10 cents. What’s in that difference is all of the fixed costs that are in our volumetric rates: the subsidies for low-income [households]; the subsidies for rooftop solar; energy-efficiency programs; vegetation management (which we are ramping up with all of the wildfire issues); wildfire liabilities; grid hardening, early investments in nascent renewables — these are all great ideas. Plus the fixed costs of transmission and distribution.
All of that is not avoided when somebody puts in their rooftop solar. When they stop paying for it, somebody else has to, and those costs get shifted onto other customers.
What our research showed is essentially you can think of that as a tax on the consumption of electricity to pay for all these nonmarginal costs. What we’ve shown is that it is a very regressive tax. It is more regressive when you look at the income levels of people paying for it. It is more regressive than a gas tax, it is more regressive than a sales tax, and it is far, far more regressive than an income tax.
Essentially, we have taken the most regressive tax possible in order to finance this. Some people argue that somehow the utilities are going to pay for it. But that’s not who is going to end up paying for this.
It’s the ratepayers who are going to end up paying for this. We know that it gets shifted to other ratepayers, and it’s a big cost shift. A reasonable estimate these days is about $3 billion a year that’s being moved onto other ratepayers. Essentially, that’s a $3-billion-a-year tax, and it is the most regressive way we could collect that money.
Faruqui: What I’m going to do is try to put the cost shift in perspective. Rate design is [rife] with cost shifts, particularly for residential customers. Let me give you just a few examples: Large customers subsidize small customers; customers with central air-conditioning systems subsidize those without central air conditioning; urban customers subsidize rural customers.
California spends $1.5 billion a year on energy efficiency. Some customers avail themselves of this subsidy, and some get thousands of dollars to do a whole-house upgrade. They’re being subsidized by other customers who are not availing themselves of any energy-efficiency funding.
Then, of course, comes the cost shift that energy efficiency induces once the energy-efficient customers have lowered their consumption. Some are lowering it dramatically, like 20%, 30%, even 50%. Of course, there is this…rate that we have in California where low-income customers get a break of 35% on their monthly electric bills. Who do you think is paying that cost shift? It’s all of the other customers. Which cost shift is good? Which cost shift is bad? That’s an ethical question. I’m not going to get into that.
I do realize, as I mentioned earlier, that NEM 2.0 also creates a cost shift. So my solution is let’s institute a minimum bill of, let’s say, $35 a month, which by the way, right now is $10 a month for solar customers, and move all new solar customers to a sharply differentiated time-varying rate, preferably with a dynamic element to promote load flexibility.
I see no reason at all to institute a grid-access charge. It is, as Severin put it, ham-fisted. It is discriminatory, and it has no cost basis. After all, customers who have solar are customers like any other customer. Why should we do something differently for them on the consumption side? Let’s focus on the export side. Yes, they’re also producers. So let’s price their product based on the value that solar provides to society as a whole.
St. John: Why is there so much dispute over what the cost shift of net metering is today, and what variables are at issue in that dispute?
Borenstein: There isn’t that much dispute, I think, among most people who are taking this seriously and not just talking about “Freedom!” but who are really saying, “What is the difference?” There is some difference of opinion about what the marginal cost saved is and what the avoided cost is. But it’s not that large. And I haven’t seen anybody come up with a number that’s anywhere near 26 cents per kilowatt-hour as the avoided cost.
There’s always going to be a difference in how much transmission and distribution it saves, etc. I do want to address the cost-shift issue, and there are lots of cost shifts, but this one’s different. First, this is a cost shift that is clearly from wealthier individuals to poorer individuals, and just overwhelmingly so. Less so than maybe a few years ago, but still overwhelmingly, and second, people don’t choose to be poor or don’t choose to live in rural areas in response to incentives from electricity rates. People are choosing to install solar in response to these incentives. It is the cost shift that is driving a lot of the solar installation. It’s not just an ethical issue. It actually is an efficiency issue when we offer subsidies that are being paid by other people, and it results in people taking an action that really isn’t the cost-effective way to reduce our greenhouse gas emissions.
Faruqui: A lot of these solar customers usually are larger customers who have overpaid for their fixed costs over decades. Not just years, but decades. Their bills went through the roof every time PG&E has a rate case. My rates have gone up by 12% in just 10 months, and more is expected: $5 billion and $11 billion, then perhaps $20 billion. That is just staggering. That is the biggest cost shift — from the customers to the utility shareholders. That’s the one I’m really concerned about.
St. John: Sammy Roth, a reporter with the L.A. Times, has described a “stark philosophical divide” between the two sides of the net-metering debate — divided over the best way to build solar as fast as possible to combat climate change. One side sees distributed solar and batteries as the better way. And the other side sees utility-scale solar and energy storage as the better way — far more cost-effective on straight cents-per-kilowatt-hour terms. What do you make of this divide? What do you see as the proper balance that we should seek to achieve between these two in terms of the fastest, most cost-effective and equitable way to build out solar capacity?
Faruqui: I do believe there is a very sharp philosophical divide. But unfortunately, it is not just philosophical; it is also ideological now. It’s very difficult to move people from the position that they have locked themselves into. It’s very unfortunate, but what I’m seeing more and more is that people who are investing in solar are being vilified and demonized as being wealthy stealing money from the poor. I don’t think that is anyone’s intention.
What we have is one side that is only supporting the installation of large-scale solar and the associated transmission lines. Why is that? Well, because that generates profits and goes into the rate base. We are told that large-scale solar costs just three pennies per kilowatt-hour. So what good is that for customers paying 30 cents per kilowatt-hour? How does large-scale solar provide resilience to the customer?
I installed solar panels and paired them with a battery in December 2019. Since then, I’ve had several outages on perfectly clear days. Nice weather, no peak-load issues, just a terrible distribution system — which is underground in my area. One time, when it happened twice in 24 hours, I went out and talked to the crew, and they said the transformer had a fire in it. I said, “How come it caught fire?” They said, “It’s almost 100 years old.”
Why am I paying these high bills when the distribution grid is in terrible shape? What good does it do for me to have large-scale solar way out there at [a cost of] three pennies? What works for me as a customer is that by installing solar and pairing it with a battery, I get resilience for my five essential circuits. That’s what more and more people are doing.
There is another issue that arises, which is if we have those high retail rates, how do we electrify homes by installing heat pumps? And how do we encourage people to buy an electric car when electricity is so expensive? We have to find a way to lower the cost of electricity at the customer level. And currently, the best option for doing that is either energy efficiency or solar or possibly both.
And then comes the issue that we saw in California in August 2020 when we had those large-scale power outages. Since then, there has been a lot of interest in having virtual power plants. Those are all structured around the idea of having solar paired with a battery. I do believe we need large-scale solar. I’m not saying we don’t. I believe we need both. We need large-scale as well as small-scale [solar]. I do not believe in having a fight between those two. I think that’s counterproductive.
Borenstein: I’m not saying that wealthy people are stealing from the poor. I’m saying the system is shifting money from the poor to wealthy people. I don’t think they’re doing it to steal money. In fact, I don’t think most of them understand that they are getting a huge subsidy.
I do have to respond to this idea that this is a cost shift that utility shareholders are getting somehow. Utility shareholders do benefit from building transmission. But when we talk about the cost shift from rooftop solar, that is a cost shift that is going to other ratepayers. That is not something that affects utility profits.
Secondly, yes, utilities are big advocates of grid-scale solar. But when we talk about this proposed decision and this disagreement, the [Natural Resources Defense Council], the Utility Reform Network, the CPUC’s Public Advocate office — these are not friends of the utilities, and they are also saying that we need this sort of major change. This is not just a utility issue.
Now, as far as this divide that Sammy [Roth] pointed out, I’m not sure I agree that’s a fair characterization. I’m neutral on technology. I want to get the most cost-effective, equitable solution. But right now, we don’t have a level playing field between rooftop solar and all the other technologies — rooftop solar is getting massively larger subsidies.
I think we shouldn’t be subsidizing it. We have created huge subsidies that have gone up as rates have gone up, and the industry and the people who benefit from it want to keep those subsidies and it looks a lot, frankly, like ethanol and biofuels, where we have locked in subsidies and it turned out the technology has not become as cost-effective and environmentally effective as we had hoped.
As a result, we now are stuck with these very large subsidies every year to ethanol producers.
I just want to rebalance the subsidies. And then whichever technology wins, wins, and…if rooftop tiles become a great technology, that’ll be fabulous, and I’ll be all for it. Last thing on resilience: Resilience is great, but it’s a private value when Ahmad gets to keep his air conditioning and television on. Good for him. And I have no problem with that. But let’s not confuse that with the value that rooftop solar produces for the grid. That’s not a value for the grid. If anything, the “dumb” solar we’re putting on, which is most of the solar without batteries, is actually helping to increase the duck curve and make it harder to balance the grid.
Faruqui: I do see more and more solar customers installing batteries to go along with the solar panels. I believe the numbers I’ve seen were 8% a couple of years ago and now they’re up to 13%, and I do believe that number is going to rise. Whether resilience is private or public is obviously a subject of conversation, but people putting [batteries] in are motivated by the outages that are happening more and more.
Even the utilities and the CPUC’s proposed decision are encouraging people to install batteries. The problem is the batteries are so expensive. We need a subsidy on the battery costs until they come down to make it affordable.
Again, I actually agree with Severin, that on the export side, there’s an enormous subsidy that should be phased out. On the import side, the subsidy is no different than a subsidy for anything else that helps lower the customer’s consumption. Many other voices are attacking it both on the import side and the export side. I wouldn’t claim to accept that there’s a subsidy on the export side. But on the import side, I don’t think it’s huge. I haven’t dug into the $3 billion number to see all the details. All I can say is that as an economist, I have seen studies and studies and no agreement.
Borenstein: I think there is a subsidy on both the imports and the exports. We do have to pay for the grid still. Even the Vibrant Clean Energy study, which was commissioned by the rooftop solar industry, said that we’re only going to get 5% to 7% of our electricity, in an optimized system, from rooftop distributed generation. I think that study is flawed and overstated. But even they agree that most of our power is still going to come from the grid.
We need to pay to upgrade that decrepit grid Ahmad was describing. Batteries are great, but they’re still a private value unless they’re part of a virtual power plant. That is, unless they are actually being dispatched by the grid operator or the distribution system operator — then they present real value to the grid.
St. John: Assembly Bill 327, passed in 2013, requires the CPUC to meet a number of tests in reforming net metering. Those include assuring that the tariff does achieve a balance of costs and benefits to customers and the electrical system. It requires that the CPUC encourages growth of distributed energy in disadvantaged communities. It mandates that renewable distributed generation continues to grow sustainably in the state. The CPUC’s guidance has also been to encourage the growth of energy storage as a necessary adder to what solar is doing and the duck-curve issues that you talked about. How do you think the CPUC ought to balance these mandates, some of which may be things you can do together and others which may be potentially in opposition?
Borenstein: This just proves that the legislature can write legislation that is internally inconsistent. Basically, they’re saying, “Don’t spend any money, but make sure that this industry continues to grow.” I think there’s clearly some conflict here in the legislation. The industry has, under the current subsidies, been growing incredibly rapidly. I think it can continue, but I don’t think it can continue to grow that rapidly and still reach an equitable and cost-effective energy transition.
I think we are going to have to make some adjustments.
If the legislature really wants that sort of growth to continue (and I hope they won’t go down this path), they could just, out of the state budget, pay for those subsidies. We have argued in a paper that moving subsidies onto the state budget is the most obvious and straightforward way to reduce the regressiveness of the current system. If they want to continue the subsidies for rooftop solar at an outsized level, they can do that in a direct way. I hope they won’t, but I think that is the mandate that some legislators want.
Let’s be clear on why this is happening. It is very easy for the legislature to create mandates and to say, “Take care of it, CPUC,” and then the CPUC is stuck with these conflicting mandates and trying to control rates, and that’s why the rates are so astronomical — which as I’ve pointed out, is why so many people are installing solar, but we do have to pay for the grid. We do have to pay for all of these programs that we think are good programs. We won’t agree on exactly which programs should be funded.
There is a way out of this. We have to recognize the internal conflict in that law. I think the sustainable-growth clause is unfortunate and has created a lot of problems. And I’m not familiar with any other case where an industry has not just been given a subsidy, but given a mandate that you keep selling more.
Faruqui: Let me first say that even though the subsidy you could say is going to the solar industry, in practice, it is going to the customers who are installing solar. Yes, the industry profits from it too because they’re selling more solar, but I think the issue is the cost-shift issue that should be concerning the legislature in the PUC and the ways to manage it.
Let me comment on one aspect of this discussion that I think is really important, which is the low-income customers. What can we do so they are also happier customers because their bills go down? And because they are contributing to clean energy?
I have yet to meet a person, regardless of their income, who doesn’t want to have a lower electric bill. I have yet to meet a person who wants to pollute the planet. Perhaps with a few exceptions, but by and large, every person in California wants to promote clean energy.
Unfortunately, it’s expensive. There is no doubt about it. Solar is expensive at the rooftop level. Even leasing is expensive. If your credit qualifications are not there, you will not qualify for the lease. Let me just talk briefly about how we can address this challenge — How do we engage with low-income communities?
Some of you may have read an op-ed, which appeared in the [San Jose] Mercury News a few weeks ago by a reverend in the Catholic church who was talking about how his community is engaging with rooftop solar, and they do not like the proposed decision. We are seeing more and more low- and moderate-income customers who are reaching out and finding ways to install solar, but it’s still a challenge.
So how do we promote it? The best way is to [use] the analogy from energy efficiency. If you’re a low-income customer, you can weatherize your home, you can upgrade your appliances courtesy of the utilities, funded by other customers; as much as $4,500 per customer in rebates is available. And this is not just in California; it’s throughout the country. Why can’t we come up with a similar rebate program that actually will lower the cost of installing solar for low-income customers?
Today, there is no similar rebate for solar panels for any customer. Unlike the energy-efficient air conditioning program, which has huge rebates, solar doesn’t. Let’s do that just with the low-income segment, and we will make it more attractive to them. This is worthy of a workshop or conference discussion to see, as Severin said, if there is a role for the state legislature. Call a webinar conference and sort out how much of that should be in rates and how much of that should be in taxes, how much of that should come from the huge budget surplus that we now have? Maybe Governor Newsom needs to weigh in on how to make solar affordable for low-income customers. That has to be addressed.
St. John: Everyone is pushing in this state to electrify transport and buildings. These things are expensive, and it’s important to craft policies that will allow lower-income and disadvantaged communities to be able to do that and not be stuck with the growing costs of not being able to make that transition. What mix of policies is best suited to support disadvantaged communities? What do you make of whether or not the CPUC’s proposed decision on net metering will move us toward or away from those goals?
Borenstein: I don’t quite agree with the premise. I think there are real goals that we need to focus on for disadvantaged communities, but the ones that I hear from people in the disadvantaged communities are that they want lower rates, reliability and a clean environment. The idea that we should be putting rooftop solar on is sort of a means, not an end. And the problem is that rooftop solar in low-income communities is not going to get us there.
First of all, it’s more expensive, much more expensive. And that’s going to drive up rates. Second of all, what keeps fossil fuel generation alive in these disadvantaged communities is not going to be solved by putting in rooftop solar. It is the hours when the solar isn’t producing that keep those fossil fuels plants running.
More rooftop solar doesn’t really solve that problem. Rooftop solar with virtual power plants does help, but that’s not the cost-effective way to do it. We really need to recognize that what we want to do in disadvantaged communities is clean up the environment, lower their costs, because even with the CARE discount [of 30% to 35% on the electricity bills of low-income households] that Ahmad talked about earlier, that he called “a very large discount,” even with that discount, low-income customers in California are paying way more than customers in other states in the West and way more than the avoided cost of electricity. Even they are paying an electricity tax.
I think it’s important to recognize that we’re not going to put rooftop solar on most houses in California. Even the Vibrant Clean Energy study doesn’t suggest that and that means some customers in low-income communities would get rooftop solar and others would get a higher bill. It’s sort of like going to a casino where a few people win and everybody else ends up losing. I don’t think that’s the way to go. I think this whole idea that people are going to get off the grid or be more resilient or be more protected really is a problem because when we stop investing in public goods, whether it’s schools or health care or infrastructure, we know who gets left behind. Wealthy people can provide for themselves; they have the money to do it. And poor people end up getting lower-quality service. In this case, it’ll be a lower-quality grid, and they end up paying more for it.
I think that this emphasis on putting rooftop solar in disadvantaged communities really is confusing means and goals. The goal should be a clean environment, low cost and reliable service. If rooftop solar were the means to do that, I’d be all for it. But at this point with these technologies, it’s not, and as a result, we’re just going to make the problem worse, when we should be focusing on cleaning up the grid as a whole and lowering prices for disadvantaged communities.
Faruqui: The reference to a casino is somewhat unfortunate. I think it’s a bit of a stretch to compare people putting solar panels to those who are running out to gamble in Las Vegas.
What I do agree with is that it’s just a means to an end and we should look at the cost-effective alternatives for low-income communities. You’re absolutely right. Despite the CARE discount, they’re paying more than people next door pay, in Arizona and in Nevada, and we need to deal with the rate-level issue.
Right now, the state is taking a very proactive approach through its weatherization programs to help the low-income communities in addition to the CARE discount. And all of that is designed to lower their bill. If the focus is to lower their bill, then let’s include rooftop solar in the menu of options, and if it makes economic sense, let’s do it. If it doesn’t make economic sense let’s not do it. It should not be excluded a priori.
Borenstein: I’m going to mostly agree with Ahmad. It should be one of the options in the policy debate. But what we’re going to find out is rooftop solar is not one of the cost-effective options. My reference to the casino is that there are going to be a few lucky households who get rooftop solar through some low-income program but everyone else, and it is going to be the vast majority of low-income customers, are not going to get rooftop solar. They’re likely going to be renters. They don’t have houses that can manage rooftop solar, and we’re just not going to put rooftop solar on every possible house. And those people are going to be losers because it’s going to drive up their prices.
St. John: Let’s broaden our scope and talk about California electricity rate design and policy. Severin, I know that you and your colleagues at Haas have suggested that today’s rate structures are inherently regressive, that they put a greater burden on low-income customers and that there could be some radical ways in changing things from the ground up to deal with that.
The Vibrant Clean Energy study did presume solar and storage located more strategically on the distribution grid lowers distribution costs, and we have been talking for quite a while about the need to reform rates to more effectively balance equity of access to the benefits of clean energy.
Please talk about some of the ways in which California rate design, utility rate design and California policy ought to be changed to prepare for this future?
Faruqui: There are two issues here. One is rate level. And the other is rate design. Rate design can only go so far in lowering the rate level. The problem that California has had for as long as I have lived here, which is since 1974, is that it has always been a very expensive state, for electricity and for everything else. But particularly for electricity.
The situation is now out of control. If you look at the E1 tiered rate that PG&E has, it has no time-of-use; it’s just tiers. The first tier begins at 26 cents per kilowatt-hour. That’s twice the national average of 13 cents, and then it goes higher and higher. The lowest [rate] you can have is 26 cents. So what can we do here to fix the rate level? There’s cost of service, there’s regulation and there’s performance-based ratemaking.
Low-income customers are a priority for the state — they get up to a 35% discount on their bills; they get free weatherization assistance. So I’m saying also give them yet another option to consider: rooftop solar. Give them more rebates if needed. As far as all other customers go, I see no reason why every customer should not be required to pay the same minimum bill, let’s say $35 a month.
There are many customers that I’ve seen in databases who are paying less than $50 a month who don’t have solar. Some are paying less than $30 a month. Some living in small apartments are paying $25 a month. Let’s try to set a minimum bill — maybe it varies by the size of the house or it’s based on the connection as they do in Europe, France, Spain and Italy. Let’s set up some mechanism for recovering these fixed grid costs that Severin and I have been talking about. We have to pay for it in an equitable fashion. Number one is the minimum bill. Number two is sharply differentiated time-of-use rates that encourage, for example, the charging of electric cars and the installation of heat pumps.
But let’s not stop there. Let’s go to step number three, which is to pair them with dynamic pricing for a few days of the year. That’s something that Severin and I are in violent agreement on going back at least two decades to the California energy crisis.
We only have 2% of the customers today in California on dynamic pricing. You need dynamic pricing to get the demand-response benefits, and you need at least 15% of your customers to be on those rates. Why do we only have 2%?
Somebody is going to bring up the fact, perhaps on Twitter, that we already have time-of-use being rolled out across the state by the investor-owned utilities. Well, they are time-of-use just in name. They are fake time-of-use rates, if I can use that term. They are not [genuine] time-of-use rates. They will not make a dent in customer bills or their carbon emissions. From what I’m hearing from my friends and neighbors, people are simply confused and annoyed by these rates. So why are we bothering millions [of customers] for an opportunity that won’t save them anything? It appears to me to be in need of a serious audit, perhaps by the Energy Institute.
Those rates remind me of what happened in the state of Washington in the early 2000s when one of the utilities rolled out what they said was real-time pricing. They rolled it out to some 300,000 customers. They were really time-of-use [rates] and were very mild.
Compare our 2% number to Oklahoma’s 20% number in dynamic pricing. That should shame us. California needs to be in the lead in rate design. Right now California is in the lead in the digital capital of the world status, the land of innovation, but in the world of rate design, it’s nowhere to be seen. Nowhere dignified to be seen.
St. John: Can you tell us about your platonic ideal of rate design or some of the options that you’re looking at?
Borenstein: You’re not going to get any disagreement between us on dynamic pricing. I am all in favor of it. But I don’t think that’s going to solve the problem we’re talking about today.
We started out talking about this monthly grid charge, and I’m not a big fan of it. I think it is a ham-handed approach. But that’s because we have this big problem that it’s not just the exports that are massively subsidized. It’s also the imports. And if people just put a battery behind their meter, they can keep all the power behind the meter and continue to get that big subsidy.
I don’t think that a minimum bill really solves the problem, certainly not at $35 would it even come close in terms of revenue generation. As I’m pointing out, two types of people will be hit by it. People with rooftop solar who are putting in a whole lot of solar. That would be fine. And low-income people who live in small apartments, not all low-income, but disproportionately low-income people who have low bills.
There’s a better approach: move as much of the costs of infrastructure, public policy, special programs, all of the things that the legislature has loaded into rates, move them back onto the state budget. The state budget is a far more progressive way to finance these costs.
It would help to lower the rates, and if we’re going to electrify — if we’re going to make space heating and water heating and electric vehicles really attractive — then we’re going to have to have much, much lower rates. Get those programs out of bills and put them into the state budget where we pay for them through state income taxes and state sales taxes.
To the extent that we can’t put it all on the state budget — and I think there’s no way the legislature would accept it — do it with fixed monthly charges. This only works for residential; this does not solve the commercial-industrial issue, but we’re talking here about residential rooftop — do it with fixed monthly charges. I would prefer to make those fixed monthly charges progressive and make them income-based.
We are now at the point where there’s so much rooftop solar among wealthy customers that the net consumption from the grid is about the same for wealthy customers as for poorer customers. That didn’t used to be the case at all, but now we are at a point where there isn’t that much difference. But if we make those fixed charges income-based, we can actually make this progressive and not put an undue burden on low-income [populations].
Finally, I’ll just say, here’s a fundamental philosophy of this: Nobody should pay less than the burden they impose on the system. But if everybody just pays the burden they impose on the system, that still leaves a lot of residual costs that have to be recovered. Right now we are recovering those through the most regressive tax you could imagine by just raising the price of volumetric electricity. What we could do is move those into other tax sources and have a much better outcome than we have right now.
St. John: I wanted to give each of you just a moment to summarize the key points you wish to leave our audience with as it pertains to the net-metering decision now before the CPUC.
Borenstein: I have nothing against rooftop solar. [Some of my best friends] have rooftop solar.
I think rooftop solar is a fine technology. My views on all of the technologies have changed over time as those technologies have evolved. I think we want to keep rooftop solar in the mix. We want to appropriately subsidize it to reflect its value. And I think the redesign of rates is necessary to do that. We are on a path to doing that right now with the proposed decision and to improving equity. So by and large, I think the proposed decision is the best way to go until we can actually change rates. And when we can actually change rates, then we can just stop arguing about net energy metering. If the cost of volumetric electricity were actually reflecting avoided costs, and we were paying these other costs through something less regressive than an additional tax on electricity, then I think we could stop arguing about net metering.
Faruqui: I think the proposed decision is a horrible mistake. It should be thrown out, and the commission needs to start from scratch. Look at time-varying rates. Look at the minimum bill on the import side and lower compensation on the export side. Just totally get rid of that grid-access charge (it’s insufferable!) and also get rid of the retroactive adjustment. California wants to promote clean energy; it wants to decarbonize the state. If this decision is approved, we will look really bad on the global scale. Based on all the context that I have, I think it’s an embarrassment. I hope we get over it. Otherwise, it would be a terrible mark on our report card.
St. John: Thank you for a great discussion. And thank you to all in our audience for joining.