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How (and who) will pay for our energy infrastructure?

You may have heard that the Federal highway trust fund is running out of money because, darn it, people aren’t using enough gasoline. The transformation of our energy system is rapidly accelerating the need to confront a long-standing problem with how we pay for our transportation and utility infrastructure. For the most part we have paid for this infrastructure through taxes or surcharges on the fuels associated with them. Highway construction and maintenance is supported primarily by a tax on gasoline. Natural gas and Electricity distribution infrastructure is funded through volumetric charges on energy usage.

While at first blush this may seem like a logical, even efficient, approach the problem is that the costs of this infrastructure do not scale with the consumption of these fuels.   A BMW 7 series may tear up the same pavement as a Tesla S class, but only the Beamer is going to be chipping in for the repairs.   What was once a tolerable and subtle cross-subsidy has turned into a serious funding problem.   The somewhat paradoxical problem is that, as our energy consumption gets more efficient, we contribute less to these infrastructure costs. Since the costs don’t go down, we’re left with a funding shortfall.

On the electricity side, the infrastructure is funded through rates that are linked to the volume of kilo-watt hours (KWh) consumed. Its an even more extreme version of the gas-tax problem. Imagine a world where your fourth tank fill-up in a month costs 3 times as much as your first fill-up. That’s a typical electric rate in California. Slide1

This figure illustrates the rate structure for PG&E in my area. The more you consume the higher the per-kWh price gets. On the fourth step (tier) prices rise to over 32 cents/kWh. The problem is that the kWh I consume cost PG&E around 10 cents/kWh (Even that 10 cents includes a bunch of fixed costs like wholesale grid charges, and the costs of funding the CAISO and the CPUC).   The rest pays for transmission, distribution, and other “system” costs – including bond payments for the electricity crisis – that don’t go down when I reduce my consumption. PG&E recovers these fixed costs through a usage-based, per kWh fee.

While this can be a powerful incentive for conservation (and for installing solar panels), it creates a direct conflict between the goals of promoting efficiency and keeping our infrastructure funded. The less gas or electricity I consume, the more those costs need to be recovered through higher taxes or electricity rates.  You could argue that these “mark-ups” of energy costs help to offset another market failure, the environmental cost of energy consumption, but in California we are already pricing the CO2 – at least somewhat.  You could make the case that gasoline should still cost more, but on the electricity side, its pretty tough to justify a 32 cent/kWh price based on environmental damages alone.

These funding systems can also create a situation where individual consumers make choices driven by opportunities to shift costs onto others.   The guy who came to my house last week – yes we have door-to-door solar salesman in Davis – offered to install solar panels for a contract starting around 17 cents a kWh (by the way, sales guy, if you’re reading this call me).   If I take this offer, I’m swapping out power that costs 17 cents for power that cost 10 cents – a losing proposition, right? Except that I’m paying 32 cents for that power and take that other 22 cents or so on the last tier of my electric rate and shift those costs over to other PG&E customers. So I’m saving 15 cents a kWh (again, call me…) but total costs, thanks to the contributions of other PG&E customers,  have gone up by 7 cents.

On a small scale, we’ve lived with this for many years, but we are rapidly reaching the point where raising rates on those without solar to recover these infrastructure costs won’t be viable any longer.   That leaves us with three choices

  1. Stick utility shareholders with the costs.
  2. Reduce the money we spend on infrastructure – perhaps dramatically.
  3. Disconnect the recovery of these costs from the usage of fuel.

Many jurisdictions have been searching, sometimes clumsily, for ways to implement option C. We have the infamous “prius tax” in South Carolina and the solar tax in Arizona. Here in California, we have a proposed road user fee that would start to recover some highway costs on a per-car, rather than per gallon of gas, basis.

In utility regulation the phrase “revenue decoupling” has been around for a long-time. The concept was originally pursued as a means to stop utilities from trying to expand the volumes of product that they sell, and to help incentivize them to embrace energy efficiency.   At its core, revenue decoupling means finding a way to allow utilities to recover their prudent fixed costs in a way that’s not linked to consumption. Some kind of user fee that’s not based on volume is the definition of revenue decoupling.  Distributed generation and improved efficiency aren’t likely to reduce infrastructure costs dramatically anytime soon, so I see more user fees in our future.

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