California’s distributed solar policy hurts the poor. It really is that simple.
California regulators and legislators are diving back into Net Energy Metering (NEM) policies, debating how much customers with their own solar systems should receive for producing electricity. Since the 1990s, customers have been paid nearly the full retail price for electricity they export to the grid. With residential prices about double any other western state, that means California regulators offer a sweet deal to solar households. And it’s getting sweeter every year as our electricity prices rise.
As numerous EI blogs and research have pointed out, however, California retail prices are 2-3 times higher than the actual cost avoided when a rooftop system pumps kilowatts into the grid. The retail prices are so high, because they are paying for massive fixed costs, expenses that don’t decline when a household exports solar power to the grid. These include most transmission and distribution costs, wildfire mitigation (think cutting trees and bushes around power lines), compensating past victims of wildfires, paying for energy efficiency programs, subsidizing electricity for low-income customers, and making early investments in new renewable technologies to help them get a foothold.
When a household installs solar in the service areas of the three California investor-owned utilities (PG&E, SCE and SDG&E), the customer saves 20-30 cents for every kilowatt-hour their system produces, but the utility costs only go down by 7-9 cents. (Studies that reach similar conclusions here, here, and here — none paid for by entities with a financial stake in the answer). The extra 10-20 cents are avoided by that household, but those fixed costs still have to be paid. So rates go up for everyone else.
It has been well documented – and surprises no one – that households with solar are disproportionately wealthy (as well as disproportionately white). So, when a customer installs solar, their share of the fixed costs are shifted to other ratepayers who are poorer on average. Net Energy Metering hurts the poor. It’s that simple.
“But wait,” comes the voice of a residential solar advocate, “it’s more complicated than that.” And then comes a checklist of reasons why maybe it’s not a cost shift onto the poor after all.
- “That 7-9 cent utility savings calculation doesn’t account for the societal benefit from rooftop solar power being clean and local, and displacing conventional generation that burns fossil fuels.” Actually, the calculation does account for reduced pollution, using recent estimates of the damage from both criteria pollutants and greenhouse gases. In fact, that number overstates the benefits of putting solar on rooftops, because the primary alternative these days isn’t burning more fossil fuels. It’s installing more large-scale wind and solar plants, which are 3-5 times cheaper according to the latest Lazard independent analysis. (“But the cost of CO2 emissions in your analysis is only $50/ton. It should be far higher.” California has a very clean grid these days, so even doubling the cost of CO2 to $100/ton barely adds another cent to the societal value. And, the real alternative crowded out by new rooftop solar going forward is new large-scale solar and wind, which also produces no CO2. “But rooftop generation is closer to where the power is used so it saves on distribution costs.” Except, the most credible estimates of those savings are tiny compared to the cost difference.)
- “What about the recent Clack et al study that concludes distributed energy resources would lower the cost of reaching grid decarbonization goals?” A full discussion of the details of this study will have to wait for another blog, but (1) it models OPTIMIZED adoption of distributed energy resources, not the “save money by not paying utility fixed costs” incentive that is driving distributed solar installation in California, (2) it models solar plus storage, which accounted for just 5% of systems installed in 2019 (the most recent year for which Lawrence Berkeley Lab has put out data), (3) it does not model storage without rooftop solar, which would be interesting given that most of the benefits seem to come from the storage, and (4) it is a consulting report paid for by the rooftop solar industry (That doesn’t mean that the conclusions are incorrect, but any industry-financed study should be looked at with additional skepticism).
- “Low income customers aren’t hurt by the cost shift, because they get a special low rate, the California Alternative Rate for Energy (CARE).” Except CARE is, by law, a 30%-35% discount off the standard rate. So, when the cost shift pushes up the standard rate, it pushes up the CARE rate by 65%-70% as much. Not quite as bad, but still a cost shift onto the poor. And CARE only protects households with incomes less than 200% of poverty, which for a family of 4 is currently $53,000 per year. You aren’t in poverty if you are slightly above that income, but in California you sure aren’t making ends meet without a struggle.
- “Low income customers live in neighborhoods with greater exposure to local pollution from conventional electricity generation, which rooftop solar allows us to shut down.” Except what is keeping fossil plants alive in California isn’t a lack of solar. It’s the need to balance supply and demand. There is now so much solar on our grid that we have plenty of supply during the times when rooftop panels are cranking out juice. What we need in order to shut down those neighborhood fossil plants is resources that can balance the system when solar wanes – storage, dispatchable renewables (hydro, geothermal), imports from other areas, and/or reductions in demand.
- “Rooftop solar is not the primary reason our rates are so high.” That’s true, those fixed costs mentioned above are the biggest factors. Except it is getting less true every year. NEM has made solar so lucrative for customers that well over half of all the solar on residential rooftops at the end of 2019 was installed in the previous four years (and by all accounts installations continued to accelerate in 2020). The cost shift from all that solar is growing at a disturbing rate. In 2019, it accounted for 4.5 cents of SDG&E’s 29 cent average residential price (2.5 cents of 26 cents for PG&E, 1.4 cents of 21 cents for SCE).
- “Utilities are cynically playing the equity card. They only care about increasing their own profits.” Maybe, except the utilities are not the only, or even the loudest, voices calling for major reduction in the cost shift from NEM. The two most venerable California electricity consumer advocate organizations are leading the charge. (Here are links to the arguments made by The Utility Reform Network and the CPUC’s Public Advocates Office). One of the foremost environmental groups, Natural Resources Defense Council, is also on board. The other leading enviro groups – Environmental Defense Fund and Union of Concerned Scientists – are staying mum, but certainly aren’t defending NEM as it currently works in California.
- “Solar may have been a high-income choice in the past, but a growing share of panels are now going to the poor.” It indeed is not as overwhelmingly tilted as it was a few years ago, but it’s still very tilted. This report from Lawrence Berkeley National Lab finds that the median income of 2019 California solar adopters was about $120,000 versus $78,105 for all households. That gap is down from about $140,000 versus $54,238 in 2010, which was practically the solar stone age. So the gap is closing, but not quickly. New installations today are still much more common among the wealthy than among low and middle income (LMI) customers, in part because LMI families are less likely to own their homes and, if they do, they have smaller roofs. Even if LMI households were someday represented proportionately among solar adopters, the LMI community as a whole would still be hurt by NEM. That’s because households that install solar still pay way more than the 7-9 cents per kWh that the system as a whole saves. So the losses that other ratepayers have to cover are greater than the gains to the households that install the solar. Like customers at a casino, some people go home happy, but as a group they lose money.
Sometimes a regressive cost shift really is just a regressive cost shift. It actually is that simple.
If state leaders still want to prioritize rooftop solar, they could avoid shifting costs onto low and middle income households (and also avoid discouraging electrification with sky-high rates) by subsidizing rooftop systems directly, and transparently, with a program covered by the state budget. Better yet, follow the recent design changes for EV subsidies: limit the rebates to households below a certain income threshold and/or to houses below a certain valuation. I would still rather see the money go to more cost-effective efficient-scale renewables, but direct subsidies may be a solution that everyone fighting for a low-carbon future can grumble about equally.
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Suggested citation: Borenstein, Severin. “Rooftop Solar Inequity” Energy Institute Blog, UC Berkeley, June 1, 2021, https://energyathaas.wordpress.com/2021/06/01/rooftop-solar-inequity/
Severin Borenstein is Professor of the Graduate School in the Economic Analysis and Policy Group at the Haas School of Business and Faculty Director of the Energy Institute at Haas. He received his A.B. from U.C. Berkeley and Ph.D. in Economics from M.I.T. His research focuses on the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. Borenstein is also a research associate of the National Bureau of Economic Research in Cambridge, MA. He served on the Board of Governors of the California Power Exchange from 1997 to 2003. During 1999-2000, he was a member of the California Attorney General's Gasoline Price Task Force. In 2012-13, he served on the Emissions Market Assessment Committee, which advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. In 2014, he was appointed to the California Energy Commission’s Petroleum Market Advisory Committee, which he chaired from 2015 until the Committee was dissolved in 2017. From 2015-2020, he served on the Advisory Council of the Bay Area Air Quality Management District. Since 2019, he has been a member of the Governing Board of the California Independent System Operator.