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Rooftop Solar Inequity

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.

 

I still tweet mostly energy news/research/blogs @BorensteinS .

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

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 View All

Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business and Faculty Director of the Energy Institute at Haas. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. He chaired the California Energy Commission's Petroleum Market Advisory Committee from 2015 until its completion in 2017. Currently, he is a member of the Bay Area Air Quality Management District's Advisory Council and a member of the Board of Governors of the California Independent System Operator.

19 thoughts on “Rooftop Solar Inequity Leave a comment

  1. This argument that roof-top solar and net metering are the culprit for raising rates and cost shifting burden to the poor doesn’t make much sense. Following its logic, if instead of solar, a California home or business chooses to reduce its electricity usage by installing energy efficient appliances, LEDs, or simply turning off lights they would still be responsible for hurting the poor. Following its logic, the solution would be to encourage middle- and upper-income Californians to use more electricity so as to shift the fixed cost burden back.

    Of course, these are silly ideas. One of the greatest success stories of the past 30 years is the ability of our state to reduce our energy intensity through technological advance and implementation of energy efficient devices and strategies, including roof-top solar. For purpose of the equity argument, the only difference between roof-top solar and other electricity saving measures is that roof-top solar has been tremendously successful. This success should be embraced and built on, rather than punished.

    Mr. Borenstein identifies the real culprit early on: high fixed costs associated with the old central utility model which is increasingly poorly adapted to our state’s changing climate. Roof-top solar cannot be blamed for the devastation and cost of electricity transmission line induced fires or for the ongoing costs of crude mitigation strategies such as public safety power shut-offs. In fact, roof-top solar, coupled with battery storage, will be the solution that many Californians opt for.

    Our electricity rate structures that attempt to cover these high fixed costs with energy usage-based rates are out of synch. Unfortunately, all Californians will need to bear the cost burden of the central utility legacy. We need to do this in a fair and equitable manner with a basis in logic: customers should not be singled out just because they decided to save electricity using solar as opposed to some other energy savings device or not at all.

    Over the past 50 years, we’ve seen resistance to saving electricity from companies, bureaucracies, and individuals trained and invested in the old utility model. In the 1970s, it was energy efficiency. Today, its roof-top solar. All parties need to come together and establish a new regulation and rate making paradigm that works for all Californians. Let’s embrace and take advantage of the opportunity that falling costs of small scale solar and storage present to address our climate challenges rather than engage in Texas style scapegoating.

    Mac Moore

    • Yes, as Mac Moore points out, it is true that anyone who installs energy efficiency equipment and uses less energy shifts some of the burden of fixed costs to everyone else. A socialized cost, which has been bearable, is not silly but a demonstrate that we value that usage reduction. And there will continue to be such cost socialization as long as embedded costs are recovered through usage based charges. Rooftop solar with NEM is just much more efficient at making that shift because you get paid for surplus energy production, you don’t just reduce your own usage. And if you have TOU rates the usage reduction (apart from the surplus energy) better targets the periods to which more costs have been allocated.
      The phenomenon will not be eliminated by instituting demand charges — rooftop solar reduces peak demand as well as energy usage — although I don’t think there is an NEM effect on demand charges. It’s not even completely eliminated by instituting customer charges, since you’ll have some cord-cutting (albeit not much). The phenomenon would only be eliminated by getting rid of the embedded costs. I htink that would require either accelerated depreciation (a greater near-term rate increase) or disallowance — THAT would be a “new ratemaking paradigm” but I don’t see it coming about without scapegoating much greater than “Texas style”.

  2. What impact does residential solar have on reducing peak demand during the summer AC season, and thus the need for investment in peak demand generation capacity?
    What impact does residential solar PLUS STORAGE have on reducing peak demand during the summer AC season, and thus the need for investment in peak demand generation capacity?

    • Right. The bugaboo about renewable generation has always been storage. When rooftop solar began, the peak was much earlier and the solar was a good thing. Now that that there is a lot more solar, the peak has moved later. So now they incentivize people (with resources) to have storage with their solar and that is what many of us do.

      I personally am happy with having distributed storage subsidized because I can get some insurance for the unreliability of the grid that way, but that is wrong answer. Unfortunately it is the only kind of anwer the politic seems to allow. California’s solar policy hurts the poor not because we incentivize too much, but because we make the remaining ratepayers pay for it instead of the State as a whole. We need to provide the correct incentive to get whatever the desired public benefit is and then pay for it ourselves.

      Some would argue that we incentivize too much and that our solar infrastructure is over built. A reasonable question to ask, but if we have renewable generation objectives that we are not meeting, then we don’t have to do too much studying. Maybe there are smarter ways to get the amount we want. We could Big Brother it with regulation. The State could build it and own it. But those don’t seem very attractive options. If we want the private sector to do something that is otherwise not believed to be cost effective we must incentivize it.

  3. “California’s distributed solar policy hurts the poor. It really is that simple.”

    A point that can’t be emphasized enough, Severin – both from a social equity standpoint, and one that recognizes the value of simplicity.

    In energy circles, the prevailing view seems to be that complexity can solve the problem of climate change – that if we have enough sources of clean energy, if the wind blows when the sun doesn’t shine and vice versa; if we can convert solar power to hydrogen to power the grid at night; if large generation plants can be replaced by many smaller ones, it will somehow add up to a total solution.

    Anyone with experience in physics or engineering will recognize that, in practice, the sum of parts always ends up being more problematic than the whole. Inefficiency, maintenance, and added expense are proportional to the complexity of any mechanical or energy system. And it’s not just California’s distributed solar policy – Germany’s Energiewende can take credit for its host having the most expensive electricity of any non-island country (and a grid that, like ERCOT, came perilously-close to crashing in February).

    “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. ”

    There isn’t much evidence even all of those proposed remedies together would suffice. Lithium-ion storage is three orders of magnitude too expensive and short-lived to be practical. Existing geothermal/hydro resources are mostly spoken for.

    CPUC is counting heavily on imports to take the place of Diablo Canyon’s output after 2025. Like after the closure of San Onofre, however, they will likely be coal- and gas-fired electricity from other western states, greenwashed under the heading of “unspecified sources of energy”. I don’t think anyone would argue closing neighborhood fossil plants by importing electricity from over-the-border fossil plants qualifies as a satisfactory solution.

    “The retail prices are so high, because they are paying for massive fixed costs…these include most transmission and distribution costs, wildfire mitigation…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.”

    Investing in renewable technologies is a fixed cost? No doubt solar, wind and gas developers would like to think so. But in truth, it’s no more fixed than another cost you left out: charging customers $4.5 billion to decommission a state-of-the-art, zero-carbon nuclear plant with 40 years of remaining service life. The fix is in on both, thanks to a governor with everything to gain, and LMI electricity customers with everything to lose.

  4. There are zero up front cost solar options for home owners. There are also grid level solar plant investments available to those who would rather cast their lot in renewables that way.

    • Why would one chose to spend extra money every month to voluntarily subsidize grid level renewable generation for no personal monetary benefit, when they can install rooftop solar on their house, get paid retail with a 5-15 year payback, and their neighbors have to make up the addition cost? The incentives are counter productive, if the goal is decarbonization.

  5. “And, the real alternative crowded out by new rooftop solar going forward is new large-scale solar and wind, which also produces no CO2.”
    Two issues arise with this statement. First, like with any generation resource, manufacturing, installing, maintaining and decommissioning rooftop solar does produce CO2. Solar and wind often also come with disproportionate environmental costs that are not yet fully embedded in net metering credits. Second, if the subsidies you highlight in your article were eliminated and net metering only paid the time-differentiated avoided costs,how likely is it that either rooftop or large-scale solar and wind would economically remain a preferred resource? Adding more solar to an already afternoon surplus and wind to a late evening surplus might be expected to generate a declining avoided cost.

  6. Azmat is right that when a fixed cost has to be allocated to a shrinking demand the unit price goes up. But that’s not what’s happening here; in addition to the denominator of the calculation increasing, the numerator is reduced by payments to departing load (think about how that would apply to the PCIA!).
    Here’s a numerical example. Suppose $360 of costs are allocated to 1000 units of demand; you get a unit cost of 36 cents. If 100 units of demand leave the system, then the 900 remaining units each have an allocated cost of 40 cents. But if those 100 departing units not only avoid paying the price, but get it paid to them, the unit cost increases to 45 cents – the increase itself more than doubles (900*.45 + 100*(-.45) = 360).
    Now, the surplus rooftop solar energy injected to the grid is supplying something, namely energy. If the energy component of the rate represents the downward marginal cost of that energy it is a perfectly reasonable amount to pay for the surplus solar energy. But the surplus solar energy is not supplying any capacity unless it is offsetting load growth. The “duck curve” effect implies that there is no peak period load growth on the margin to offset. And, even if capacity were smoothly divisible – an assumption we make whenever we use the phrase “marginal cost of capacity” – the incremental and decremental marginal costs are not equal; the decremental cost is basically zero.

  7. Very interesting and thought provoking article, Severin. Thank you.

    Sometimes the truth hurts, although I do believe that the more rationale solar players in the residential marketplace are no longer leading with “you can make a bunch of money selling your excess electricity to the grid”. And yes, not all grids are equal. The carbon intensity of different electric grids in different parts of the country vary, and, as you point out, the carbon intensity of the California Grid varies by time of day.

    As residential storage becomes increasingly affordable and a standard offering, and as EV adoption increases it will be interesting to see how the underlying grid economics evolve. A rational and reasonable approach to NEM policy development for California is critical to the build out of an equitable 21st century electric grid.

  8. They rob banks because that is where the money is.
    When the State wants to incentize people to invest in somthing with societal benefits (e.g. in solar), they are going to attract people with capital. Guess what, that means it is people of higher incomes who will take advantage of it. If the State didn’t want that outcome, it should not have done that kind of incentive program, but having done it, it should honor those deals in good faith. Much of the incentive for doing it comes from the high cost of electricity. (While the overall kW cost has been going up over the years, the NEM tariff has been getting steadily worse for rooftop solar as the original deals had a huge peak-to-off peak ratio which was more aligned with solar production.)

    The problem comes from the fact that the burden for the grid incentives falls on the ratepayers. Infrastructure benefits the entire economy–not just the direct users. In the US we mostly pay for infrastructure through taxes not fees. We have FREEways not toll roads, in the main. If we wanted to decrease road building by incentivizing people to live close to where they work or ride-share, would we put increasing tolls on those who couldn’t as we succeeded? That is as dumb as raising rates to pay for people to put on rooftop solar.

    When I calculated solar for me, it was a 7-yr payback, which meant it was a good but not great investment. If NEM rates go down, the payback lenthens(or even goes away). If we want non-Thunbergians to invest, then we have to make it worth their while or not bother. That is the economics part. The equity part comes in when we consider how it is paid for.

    The original sin here was paying for efficiency incentives from ratepayer funds. We were too clever in the “cost of conserved energy” and handling through the PUC rather than the legislature. That logic allowed us to waive our hands and call what is clearly a supply-side technolgy (i.e. solar) the same thing.

    Rooftop solar is not a cost-effective choice for the consumer on its own. If it is societal benefit, then society must either do it directly, madate it or provide enough incentive to make it cost-effective. Society should not care who does the investing as long as the societal benefits accrue Societal benefits are normally paid for from the general fund, not user fees. This article mearly confuses that simple logic by mixing other issues.

  9. Isn’t the larger story – and culprit – the inherent inequities by how those ‘fixed’ costs are allocated in the first place? Recognizing that rate-making is always more complicated than the simple equations, isn’t is also fair to say that allocating the fixed costs disproportionately on the poorer customers the regressive policy that should be addressed first (and to greater effect)? I’m hardly economically disadvantaged (and do not have solar) and yet my small home with no air conditioning pays the same proportion of ‘fixed’ costs as the mega-home across the street, even though their contribution to overall system costs (by using vastly more power during periods of high-cost peak power) is vastly higher than mine. Vastly. Why is the cost-shift question always framed around solar? For those of you who claim so much concern for the disadvantaged, how come there is never any concern about, for example, the air conditioner cost shift? Every one (and more) of the affluent homes you seem to be concerned about having solar unfairly subsidizing also have huge peak hour air conditioning loads (with or without solar) that is an order of magnitude more of an impact on overall system ‘fixed’ costs that we all pay for equally (and regressively). Air conditioning (and other large load that correlate with high-cost peak moments) should be far more concerning to those that profess to be concerned about the protecting the disadvantaged.

  10. All new-tech, solar and EV, shift costs to those who cannot ‘afford’ to switch. Perhaps the same happened when the national highway system shifted train and bus riders to cars. The fixed costs of trains/buses didnt change much, but ridership went down, so fares had to increase. EVs [if not already so] should pay state taxes by miles driven. Rooftop solar should get credit only for the incremental production savings to the utility for generation-avoided at that time. [electrons are instantaneous, so technology CAN figure these easily].
    Is this not similar to tax-reduction for the high-income shifting the tax burden [and-or reduction in services, that then become fee-based] for the rest.

    The utility rates [option cost] for solar homes should be based on the HIGHEST draw from the grid.

    Enough with the tax incentives for early adopters – now get rid of them.

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