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Why Am I Paying $65/year for Your Solar Panels?

700,000 California homes now have solar panels; what does this mean for everyone else’s rates?

“This is the future,” one of my neighbors recently told me, proudly showing off his rooftop solar panels, “Forget the old, inefficient utility.” The panels do look great, and, for a moment, I got caught up in my neighbor’s “green glow” of eco-righteousness. Should I be doing “my part” for climate?

But wait a second. I already am! As Severin Borenstein has been pointing out for years, a big part of the reason why rooftop solar is so popular in California is our electricity rates. And because of the way rates work, every time another neighbor installs solar, my rates go up. I’m tired of it. Why should they get all the “green glow”? Why should I be paying more for their rooftop solar, particularly given that grid-scale renewables are so much cheaper?

Almost 700,000 homes in California have installed solar, about 5% of all homes in California. Today I want to figure out what this means for the rest of us. No fancy econometrics, no complicated model. I just want to do a simple back-of-the-envelope calculation to try to figure out how big of a deal this is.

brickNote: Green glow. Image licensed under creative commons.

Utilities have a lot of Fixed Costs

It is helpful to take a step back and think about what it takes to deliver electricity. Utilities have lots of what economists call “fixed costs”. For example, utilities have to maintain all the transmission and distribution lines used to deliver power. These costs are fixed (not marginal) because they do not depend on how much electricity is consumed.

truckNote: Utilities have lots of cool trucks. Image licensed under creative commons.

Who pays for these fixed costs? We all do. Every time you use electricity, you help pay for these fixed costs. There is a long history in the United States of regulators setting electricity prices equal to average costs.  Economists have argued that it would be more efficient to set prices equal to marginal cost. But the truth is this didn’t matter much in the past, in part because people didn’t have much choice about whether or not to consume electricity.

Until now. Rooftop solar is an opportunity for consumers to radically reduce the amount of electricity they buy from the utility. In Hawaii there is a lot of talk of “grid defection”, but in 99.9%+ of cases solar homes continue to be connected to the grid. Solar homes use the grid just as much as other households, as they are always either importing or exporting electricity, it’s just that they consume much less grid-electricity.

What this means is that good people like my neighbor contribute much less to paying for utility fixed costs. The fixed costs haven’t gone away, but my neighbor now has a lower electricity bill so pays far less of them. This leaves the utility with a revenue shortfall, and it is forced to raise prices. So who pays for the fixed costs my neighbor used to pay? Everyone else.

wiresNote: Utilities have lots of fixed costs.

A key subtlety here is “net metering”. Households who install rooftop solar pay only for the electricity they consume “on net” after solar generation. This is easy and simple, but also wrong. Implicitly, this means that they get compensated for their solar panels’ sales to the grid at the retail electricity rate. This is too high, significantly exceeding what the utility saves from not having to supply that electricity. Under an alternative rate structure, in which households were paid the wholesale rate, you would not have this “cost-shifting” away from solar households.

Cost Shifting 

Ok, but how much cost shifting is actually happening? Outside California, Arizona, and Hawaii, probably not much. But California has a lot of solar, about half of all U.S. rooftop solar. How much have California electricity rates increased due to the 700,000 homes with solar?

spiral.pngNote: Utility Death Spiral? Source here.

This is tricky because we don’t actually know how much electricity is being produced by rooftop solar. Almost everyone is on net metering, so we only observe net consumption, not solar production. Fortunately, the California Energy Commission has poured over solar radiation information and other data and estimated that total annual generation from California behind-the-meter solar is 9,000 GWh. About two-thirds of this is residential, so about 6,000 GWh. To put this in some context, total annual residential electricity consumption in California is 90,000 GWh.

So how much “cost shifting” does this imply? The average residential electricity price in California is $0.185/kWh, while the average wholesale price is about $0.04/kWh. Accounting for electricity that is lost during delivery to the end customer adds about 9% more per kWh delivered. Thus, each time a California household produces a kWh, the utility experiences a revenue shortfall of about $0.14. Multiply this by total residential distributed solar generation, and you get $840 million annually. California utilities receive $15 billion annually in revenue from residential customers, so the total shortfall is about 5%.

This is a crude calculation, and it could undoubtedly be refined. For example, distributed solar proponents argue that local generation allows the utility to avoid distribution system upgrades, which would represent an additional benefit. These impacts have been found to be relatively small, but this continues to be an area of active research. On the other hand, I’ve also made an assumption that significantly decreases my estimate of cost shift. In particular, I’ve used the average residential retail price, but California customers actually pay increasing block rates so most solar customers face a marginal price well in excess of the average price.


The total revenue shortfall works out to about $0.01 per kWh, or $65/year for the average California household. This is more than I expected. And, I’d bet most Californians are not even aware that this cost shift is happening.

So why am I paying $65/year for other people to have solar? It doesn’t make sense. Sure, I’m concerned about climate change, but my $65/year could go a lot farther if it was used instead for grid-scale renewables. Moreover, this is almost certainly bad from an equity perspective, as we know that high-income households adopt solar much more often than other households. Rooftop solar isn’t getting rid of the utility. It’s just changing who pays for it.

glow.jpgNote: I like seeing my neighbor happy, but they shouldn’t get all the green glow. Source here.

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

Suggested citation: Davis, Lucas. “Why Am I Paying $65/year for Your Solar Panels?” Energy Institute Blog, UC Berkeley, March 26, 2018,

Lucas Davis View All

Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is a Faculty Affiliate at the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Research Associate at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.

168 thoughts on “Why Am I Paying $65/year for Your Solar Panels? Leave a comment

  1. Sort of the same principle applies to a carbon tax or cap-and-trade due to the fact that there are far more middle and lower class people using fossil fuels. The end result is that the bulk of these revenues comes from the middle class and hence, due to the extra revenue, there is no need to call for increasing taxes on the rich.

  2. “This leaves the utility with a revenue shortfall, and it is forced to raise prices”
    The word forced is doing all the work in this argument. Why should other ratepayers guarantee the Profit rate of a utility? The only reason the (privately owned & operated) utlities raise prices for everyone else is so that they can give their share-holders a constant (dividend) profit. So other ratepayers are getting screwed. But not by the solar-panel owners but by utility investors!

    • So other ratepayers are getting screwed. But not by the solar-panel owners but by utility investors!

      Indeed, what’s on the chopping block here is the very notion of maintaining this structure of a Stalinist cooperative (“kolkhoz”), that is, forced collectivization with essentially no right of free exit. The Tennessee Valley Authority forced farmers to ditch their electricity-generating wind turbines and hook up.

      It’s not like cooperatives are bad, as long as they are small. When the grid of the future reemerges, it’ll be a loose network of otherwise independent microgrids, who borrow and lend power to one another with a transfer of payments arrangement (blockchain?), but are otherwise autonomous.

    • Albert,

      Clearly you don’t understand the regulatory model under which investor-owned utilities operate.

      Firstly, the utility has an obligation to serve each customer at a pre-determined regulated tariff regardless of how much that service may cost the utility. These tariffs are designed to allow the utility to recover its prudently incurred costs and earn a rate of return on its invested capital that just equals its cost of capital. In some years the utility earns more than that return; in some years less, depending on weather, fuel prices, customer demand, etc., all of which introduce uncertainty into utility earnings.

      The regulated tariffs are based on projections of how much revenues they will produce. However, if customers adopt measures that unexpectedly reduce usage, e.g., solar panels, high efficiency appliances, conservation, those tariffs must be revised upward to make the utility whole. Conversely, if something happens which increases their revenues (or what they keep after taxes) the tariffs are revised downward. What’s wrong with that?

      What the utility pays out in dividends does not affect what it is allowed to charge customers.

      Finally, let me make clear I am not a shill for the utility industry. I’m an energy consultant who has represented utility clients as well as state utility commissions.

      • Robert Borlick, what you say about variable returns is not so true in California where we have decoupled revenue requirements. Utility earnings are not a function of sales. They tend to fluctuate only when there is a significant external event such wildfires or large scale accidents.

        • muedecon,

          Good point. I didn’t want to get into the details of how the Revenue Adjustment Mechanism (RAM) works in California. However, it does not change the substance of what I stated, which is that if the utility does not fully recover its fixed costs in any time period it rates in subsequent time periods are adjusted upward to allow full cost recovery. What RAM does in California is eliminate regulatory lag, which reduces each IOU’s financial risk and lowers its cost of capital.

          But you are correct.

  3. “Disappointing” does not begin to convey my utter shock and disbelief that a tenured economics professor and professed scholar could publish such an ill researched and sophomoric analysis of the value of rooftop solar energy production. Although I largely agree with the response of Jim Lazar, a highly regarded energy economist, let my pitifully inadequate legal skills in the area add a few points.

    I would first refer you to:
    That page cites studies and meta studies regarding the value of that kilowatt hour of rooftop solar production which is sent back to the grid from a solar system that produces more energy than the host at that moment can use or store.

    Those studies are:

    Solar Meta-studies
    Rooftop Solar: Net Metering is a Net Benefit – Brookings – 2016
    Shining Rewards: The Value of Rooftop Solar Power for Consumers and Society – Environment America & Frontier Group – 2016
    A Regulator’s Guidebook: Calculating the Benefits and Costs of Distributed Solar Generation – IREC – 2013
    A Review of Solar PV Benefit & Cost Studies RMI – 2013

    State Solar Cost-Benefit Analyses
    The Benefits and Costs of Solar Distributed Generation for Arizona Public Service – 2016
    The Benefits and Costs of Distributed Generation for Arizona Public Service – 2013
    2013 Updated Solar PV Value Report – 2013
    Distributed Renewable Energy Operating Impacts and Valuation Study – 2009
    The Benefits and Costs of Net Metering Solar Distributed Generation on the System of Energy in Arkansas – 2017
    California Net Energy Metering Ratepayer Impacts Evaluation – 2013
    Evaluating the Benefits and Costs of Net Energy Metering in California – 2013
    Technical Potential for Local Distributed Photovoltaics in California, Preliminary Assessment – 2012
    California Solar Initiative Cost-Effectiveness Evaluation – 2011
    Quantifying the Benefits of Solar Power for California – 2005
    The Impact of Rate Design and Net Metering on the Bill Savings from Distributed PV for Residential Customers in California – 2010
    Costs and Benefits of Distributed Solar Generation on the Public Service Company of Colorado System – 2013
    An Assessment of Renewable Electric Generating Technologies for Florida – Florida – 2003
    Testimony before the Georgia Public Service Commission re: Georgia Power Company’s Application for its 2013 Integrated Resource Plan
    A Framework for Determining The Costs and Benefits of Renewable Resources in Georgia – 2017
    Evaluation of Hawaii’s Renewable Energy Policy and Procurement – 2014
    CPR PV Valuation Methodology for Iowa – 2016
    LPSC Net Metering Report – 2015
    Value of Distributed Generation-Solar PV in MA – 2015
    Massachusetts Net Metering and Solar Task Force Final Report to the Legislature – 2015
    Maine Distributed Solar Valuation Study – 2015
    Solar Energy in Michigan: The Economic Impact of Distributed Generation on Non-Solar Customers – 2017
    CPR PV Valuation Methodology for Michigan – 2016
    NREL White Paper: The Value of Grid-Connected Photovoltaics in Michigan – 2012
    Net Metering in Mississippi: Costs, Benefits, and Policy Considerations – 2014
    North Carolina
    The Benefits and Costs of Solar Generation for Electric Ratepayers in North Carolina – 2013
    Nevada Net Energy Metering Impacts Evaluation – 2014
    New Jersey & Pennsylvania
    The Value of Distributed Solar Electric Generation to New Jersey and Pennsylvania – 2012
    New York
    New York Solar Study: An Analysis of the Benefits and Costs of Increasing Generation From Photovoltaic Devices in New York – 2012
    Energy and Capacity Valuation of Photovoltaic Power Generation in New York – 2008
    South Carolina
    South Carolina Act 236 Cost Shift and Cost of Service Analysis – 2015
    2014 Value of Solar Executive Summary – 2014
    The Value of Distributed Solar Electric Generation to San Antonio – 2013
    The Value of Distributed Photovoltaics to Austin Energy and the City of Austin – 2006
    Value of Solar in Utah – 2014
    Evaluation of Net Metering in Vermont Conducted Pursuant to Act 99 of 2014 – 2014
    Analyzing the Costs and Benefits of Distributed Solar Generation in Virginia – 2014
    CPR PV Valuation Methodology for Wisconsin – 2016

    Other Value of Solar and Related Studies
    Changes in the Economic Value of Variable Generation at High Penetration Levels: A Pilot Case Study of California – 2012
    Designing Austin Energy’s Solar Tariff Using a Distributed PV Calculator – 2012
    LBNL Putting the Potential Rate Impacts of Distributed Solar into Context – 2017
    Minnesota “Value of Solar” Methodology – 2014
    Value of Distributed Generation – Solar PV in RI – 2015
    New York Public Service Commission – Order Establishing A Benefit Analysis Cost Framework

    The vast majority of these studies demonstrate that the value of that kilowatt hour of solar production exceeds the value of the compensation which is being provided. That is- there is no subsidy.

    Note that there have been exhaustive California specific studies that have demonstrated this point aptly. That is why the California Public Utilities Commission, after extensive proceedings, has set the payments for excess solar production at their current levels. These decisions do not happen extra judicially, nor in a vacuum. They happen after evidence is presented. And the final decisions that are made by seasoned regulators are based on substantial evidence of record. Thank heaven!

    • Jon,

      If you are going to cite a long list of studies that purport to support you point of view, at least provide the authors and who their clients were. A number of the studies cited were done for pro-solar organizations. The studies I have reviewed that were done for pro-solar clients typically include benefits that are nonexistent. For example, they generally include the “benefit” of lower wholesale market prices caused by the price-depressing effect of solar energy (the DRIPE argument). I addressed this in my reply to Jim Lazar.

      One study you cited, “California Net Energy Metering Ratepayer Impacts Evaluation – 2013” revealed that the projected 2020 excess bill savings of all net metered solar customers in California amounts to about $1.1 billion dollars. By excess payments I mean the customers’ bill savings under net metering less the utilities’ costs avoided as a result of the solar generation. That study was not done for a client with a pro-solar interest.

      I could comment on many of the other studies on your list but this is hardly the forum for that amount of effort.

      • Robert-
        Neither you nor the author Davis really want to take to effort to do the analysis to show what the full benefits of rooftop solar are to the grid. That is obvious.

        • Jon, that’s not true.

          I have consistently advocated full compensation for solar providers, including payment at a price equal to the social cost of carbon for the CO2 emissions they displace. I don’t support net metering because the compensation it provides for solar energy bears virtually no relationship to the social benefits that solar energy creates – at least not with the retail tariffs in place today. (Incidentally, California’s four-tiered tariffs are the worst offenders.) This is why I prefer the “by-all, sell-all” model pioneered by Austin Energy and the “value of solar” model advocated by Clean Power Research in Minnesota and elsewhere. Read the briefing paper I co-authored with Lisa Wood for the Institute for Electric Innovation:

          • Robert
            On CA IOU tariffs, the 4 tier structure has largely collapsed to 2 (with a penalty tariff to charge “grow houses” for excessive power use.) And all new solar customers are on 2 tiered TOU rates (of which I’m one.)

  4. Are you sure the assumptions are up to date? I’m in Berkeley, California where PG&E currently charges domestic solar customers a $10/month flat fee for being hooked up to the grid and requires all new solar installations to go to time-of-day pricing, leading to a market for home batteries (like Tesla’s). I did not see any mention of these factors in the post.

    • Gerd, I’m a PG&E customer too. I think that $10/month minimum monthly charge applies to all customers (not just solar customers). It used to apply to the whole retail rate which created a zero tier where I could get roughly the first 50 kWh/mo at no extra cost above my minimum charge sunk cost of $10/mo. But now it applies just on the ~12 cent T&D rate part of the bill, not on the ~8 cent generation rate side. So it creates a “half tier” of a sunk cost of the $10 allowing me to pay only the additional 8 cent generation rate to get the first 125 kWh/month of energy I consume before I get up to the full ~20 cent/kWh “First Tier”. I agree that time of use rates and NEM reform will both encourage home battery usage. I also think home batteries may be useful to avoid having to upsize electrical panels as we add more electrification loads.

  5. When I read article like this, I shake my head.
    So if I am a home owner and change every lightbulb out to LEDs and reduce my electric load
    for lighting 80%, doesn’t that have the same effect to other “un-conserving” ratepayers ? Of course.
    And if I install a solar water heater and reduce my water heating load by 5/6th’s, doesn’t that place another burden on those ratepayers that don’t conserve ?
    And if I install a geothermal heat pump and reduce my electricity for air-conditioning by 67% doesn’t that place another burden on those ratepayers that don’t conserve ?
    So if I zero-out my mid-day electric power with solar-PV system, does that cause the same burden on consumers and ratepayers that don’t conserve, of course !!
    Do I feel bad for the ratepayers who don’t conserve — no way, as I don’t for people who buy gas-guzzling vehicles.
    The reasoning here is faulty. The sustenance of the electric grid should not penalize energy savings and energy efficiency for ratepayers. If energy savings reduces income for electric utilities to maintain the electric grid, then they need to change the electric rates to address that. Scott Sklar, Adjunct Professor, The; George Washington University (GWU) and Steering Committee Chair, Sustainable Energy Coalition (

    • Scott,

      You saved yourself in the last line of your comment. LOL!

      The basic problem with net metering residential customers with solar is that the residential tariffs applied to them are not cost-reflective. This is a long-standing failure of the retail regulatory system. The solution is to put all retail customers under a real time pricing scheme similar to Commonwealth’s Residential Real Time Pricing Program. Customers on that program are charged the hourly day-ahead prices established on the previous day and published on the web. That isn’t quite the ideal solution, which is to establish competitive market-base prices for all residential customers much like what exists in the ISO wholesale markets, but its a lot better than what exists today. Incidentally, Time-of-Day prices are a poor substitute for real time pricing because they are static, whereas RTP rates are dynamic and adjust to current supply-demand conditions.

  6. I’m paying about $10 per month or $120 a year to give some of my neighbors a discount on their bills, if they qualify as low income (or claim to do so).
    I’m paying the utility to lobby the state legislature and PUC, and I’m paying the state legislature and PUC to negotiate with the utility. I paid the fine one of them imposed on the other, and I paid court costs on both sides.
    Next month, I’ll have my own solar which the utility will sell to my neighbors and pay me nothing for, although they will credit it back to me toward my nighttime, off-peak, needs. With solar, instead of paying the Nuclear Decommissioning Fee every month, I’ll be generating enough energy to help them decommission it without having to replace it (though demand is still growing and will need to be met, too).
    Then, I’ll be paying the tariff on the panels, so the Feds can attempt to pay interest on the national debt, if they want to. I liked it better when the Chinese were paying to subsidize it, although I guess they still are. Follow the money: consumers are losing the trade war on both sides.
    Sigh. Whose idea was it that politics is better for consumers?

  7. Thanks for getting this out in the open in a clear way. I’m a California solar customer with utility planning experience and I agree with your assessment that full net metering is a subsidy that’s most useful in launching a starting industry. I think a good transition policy for CA to support solar and to decarbonize further and save methane emissions would be to make a requirement that new solar PV installations must also include 2 or 3 conduits and circuits installed for additional electrification (that will help the customer use the solar to reduce fossil fuel use). The new circuits would be: one to a good EV charger location if the customer has covered parking, one to the water heater location if the customer has fossil water heating, and one to a good heat pump location. These pre-wired circuits would not cost much, but would enable the customer to quickly electrify driving, water heating and space heating as each of those needs to be replaced from time to time. These new loads when converted, would add revenue back into the electric system and reduce rates for everyone. Alternatively, rather than just pre-wiring, a requirement could be made to install electric (efficient heat pump) water heating at the time of solar installation and include it in the tax credit applicable cost of the solar system if it gets more than half of its energy from the solar system (as mentioned in recent IRS opinion letters on solar with batteries and water heating).

  8. I agree with the ‘this is a disappointing post’ comment. My full-snark observation would be that you seem to be arguing that we should all continue to consume electricity unabated so the utility’s fixed costs stay low (as a fraction of electricity cost…)!

    On a more substantial riff on the above – if, instead of installing solar, I do some sort of deep dive into energy efficiency/conservation, isn’t the net effect more or less the same – by your analysis? I’m paying less for electricity – in fact a lot less in CA because with an increasing block rate pricing structure, my avoided cost is $0.28/kWh (Tier 2 price on my last PG&E bill). So – again by your analysis – if I consume less electricity, it means less revenue for PG&E – now its $.28 vs $0.04 — at least until I reduce my consumption enough to move down to the Tier 1 price of $0.20/kWh – and I’m paying less toward the fixed costs.

    Surely you don’t think the wholesale cost of $0.04/kWh is a meaningful number in terms of avoided costs for solar? You can’t argue that economists think that “it would be more efficient to set prices equal to marginal cost” (as a basis for setting retail electricity prices) and then not use the same logic for looking at avoided costs. Last time I looked at the data from Cal ISO, utility (grid) scale solar has its peak effect in the afternoon – with the shoulders getting narrower in the winter and broader in the summer (the peaks are seasonally dependent too). This also partially coincident with the peak summer demand (largely driven by air conditioning in CA) – partially because the AC operations often extend into the evening. Those peak loads were historically (meaning less than 10 years ago) met by load-following fossil-fuel driven plants – e.g., natural-gas fired jet peakers or other thermal plants. So what is the marginal cost (delivered at my meter) of supplying electricity from these peaking plants? Isn’t that the basis for comparing residential (non-grid) solar costs to the utility (I’m making the assumption that the time profile for non-grid and grid solar generation is about the same)?

    Every time we experience a drought (well, almost every time) that extends for more than a couple of years, the local water utility (EBMUD) goes through the agony of having to argue that because their customers are saving too much water, they need to raise rates to cover their fixed costs. Which, in turn, gets a lot of media and customer attention — without getting into the details of whether that is always justified (either the rates or the attention) – the issue of fixed costs (let alone stranded assets) is one that utilities of various stripes and the public (also of various stripes) need to deal with in a much more transparent way.

  9. What prosumers want is for utility shareholders to experience the same investment risk that they do. Utilities need incentives to invest in better grids, but they cannot be allowed to pass through whatever wasteful costs that they wish.

    • Utilities are not allowed to “pass through whatever wasteful costs that they wish.” The utility’s regulatory commission is responsible for only allowing prudently incurred costs to be recovered. Furthermore, a utility’s expected rate of return is limited to its estimated cost of capital.

      In contrast, a prosumer has no upper limit imposed on the rate it can earn on any investment. You have to understand the asymmetry involved here.

      • Robert, more often it’s the other way around. Prosumers run the risk of losing their investments, while utilities are provided a relatively certain return on preapproved investments, no matter whether they end up being economic or not. That risk floor is extremely valuable to shareholders.

        • You are ignoring the fact that prosumers have no upper limit imposed on the rate of return they can earn on their invested capital; investor-owned utilities do.

          You also need to understand the difference between ex ante expectations of what investments are likely to be economic and the ex post results. When I studied decision analysis as a graduate student a mantra that I learned is that good decisions don’t guarantee good outcomes and conversely, poor decisions do not guarantee poor outcomes.

          • My point is that you’re ignoring the risk of economic loss to prosumers, which is of equal magnitude. And regardless, utilities treat wholesale generators differently than prosumers who are providing the same product. Further, prosumers can’t be expected to understand market risks to the same extent as wholesale generators (and it’s ridiculous to demand that prosumers understand that risk before entering the market.) Instead, we need to set up reasonable market bounds to insure equitable sharing of the risk (e.g., fixed price electricity rates for a set period) and recognition of the benefits provided to other customers (e.g., depressed short term electricity and natural gas prices). All of this can be done in a coherent fashion once commissions really acknowledge those benefits and the relative risk exposures.

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