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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 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.

19 thoughts on “Rooftop Solar Inequity Leave a comment

  1. I really appreciate Professor Borenstein’s thoughtful post responding to common arguments on rooftop vs. IOU, cost shifts and other regulatory topics. It’s great to see a solid post addressing issues thoughtfully. Unfortunately, it all misses the mark.

    IMHO, the biggest fly in the ointment is that the entire frame of thinking/reference is fundamentally broken. The IOU business model is no longer the correct model for delivering services to energy consumers at lowest possible cost. For example, I’m going all electric in my home and have an EV. The lowest cost power for that transition – an 11.5kW rooftop solar system, two Tesla powerwalls coupled with a device to lower power pulls from my AC and other bigger instantaneous loads. The quote – 12.5 cents if I bought it outright (I get that is a big pill to swallow). But it was quoted at 14 cents if I did a PPA (escalating 2.5% per year for 20 years). Before you roll your eyes at the escalator…do the math. I’ll take that bet over 26 cents today. PG&E simply cannot provide power EVEN at nighttime for anywhere near these rates.

    Sure, that system may not be able to provide all of my needs all of the time…but that’s not the point. I think the system was modeling serving about 80% of my needs. The point? PG&E is going to see a massive drop in revenue from me (and foregone revenue from my new electric appliances). Game over. Competition is NOT a cost shift. It’s competition from a new service provider. Cost shifting is regulatory gobbledygook for the 1950s regulated world. Sorry, but the world has changed and, IMHO, that’s a good thing. We simply do not need to shed anymore ink talking bout why monopolies are bad – PG&E shows that in spades: political capture, regulatory capture, disservice to communities.

    Moreover, none of this discussion is really a poor vs wealthy issue. The monopolist cares nothing for the poor (or anyone else frankly). Access to innovative technologies is a problem of financing and business models and cost curves doing their work. Those issues can and will be solved. This whole post is not to say utilities do not have a role to play…it’s to say that people must start thinking VERY differently about the future because in the end, the world has changed. Technological innovation is driving entry into a formerly monopolistic space. That’s GOOD NEWS.

    It’s also not about fixed costs IMHO. I do not believe for one minute that the billions being poured into “hardening the grid” will do squat to lower wildfire risks or increase quality of service. Wildfires are being decreased because the power is being shut off. That simply is not a model that makes any sense given homes and small biz have a more cost effective solution. Couple that solution with a better business model long term and we all save billions…not pay billions for something that won’t help.

    I started working in telecom deregulation in graduate school. My biggest POV was take a consumer view not an industry/current structure view. It’s played out in spades: after 1996 we had disruption/dislocation, but as entry occurred we say massive consumer benefit and products and services nobody would have imagined: massive decrease in cellular phone prices, one rate billing, iPhones, the internet, Starlink etc. All of the arguments discussed in the post by Prof. B were lobbed against telecom competition…every single one. More bright minds are interested in energy innovation that at any time in the last 25 years – that will lead to better energy products and services…ultimately leading consumer gain. I place my focus there…not the broken model of today.

    Bigger, better, faster, more. Onward.

  2. So, the state offered incentives to people to spend thousands of dollars of their own money in order to gain an advantage in the long term, and now the state wishes to simply renege on the offer? And who cares, right…because its just people with a little bit more discipline, self control, and a deeper thinking ability than the average pot smoking, partying fool. This right here, is why I despise government, and the fools that willingly follow the self serving hypocrites in office.

  3. Here’s a study with a different take on the way forward:
    https://www.canarymedia.com/articles/rooftop-solar-and-home-batteries-make-a-clean-grid-vastly-more-affordable/

    Click to access WhyDERs_ES_Final.pdf

    “In December, energy modeler Christopher Clack and his team at Vibrant Clean Energy debuted a new way to model the energy system that takes into account DERs and the services they provide. They used it to study the effect of DERs on the electricity system, and the results are summarized in A New Roadmap for the Lowest Cost Grid. (Full technical report here; slideshow presentation here.)

    Spoiler: The cheapest possible carbon-free U.S. grid involves vastly more centralized renewable energy, but it also involves vastly more distributed energy. What’s more, far from being binary alternatives, they are complements: The more DERs you put in place, the more centralized renewables you can put on the system. DERs are a utility-scale renewables accelerant.

    The practical implication is that going all out on DERs is to everyone’s benefit, up and down the electricity supply chain, from utilities to consumers.”

  4. I’ll start by posting a link to my blog post that addresses many of the assertions here in detail. And I’ll respond to to several other additional issues.
    https://mcubedecon.com/2021/05/06/can-net-metering-reform-fix-the-rooftop-solar-cost-shift-a-response/

    First, there are many self citations to studies and others with the claim that the authors have no financial interest. E3 has significant financial interests in studies paid for by utilities, including the California IOUs. While they do many good studies, they also have produced studies with certain key shadings of assumptions that support IOUs’ positions. As for studies from the CPUC, commissioners frequently direct the expected outcome of these. The results from the recent Greenbook is a case in point. The CPUC knows where it’s political interests are and acts to satisfy those interests. (I have personally witnessed this first hand while being in the room.) Unfortunately many of the academic studies I see on these cost allocation issues don’t accurately reflect the various financial and regulatory arrangements and have misleading or incorrect findings. This happens simply because academics aren’t involved the “dirty” process of ratemaking and can’t know these things from a distance. (The best academic studies are those done by those who worked in the bowels of those agencies and then went to academics.)

    Second TURN, NRDC and CalAdvocates have all be pushing for centralized control of the grid for decades back to restructuring because they lose political control when the system is decentralized and decision making devolves from the CPUC. They have all fought against CCAs for the same reason. They’ve been fighting solar rooftops almost since its inception as well. Yet they have failed to push for the incentives enacted in AB57 for the IOUs to manage their portfolios or to control the exorbitant contract terms and overabundance of early renewable contracts signed by the IOUs that is the primary reason for the exorbitant growth in rates.

    Third, the claims of rooftop solar subsidies has two fallacious premises. First, it double counts the stranded cost charge from poor portfolio procurement and management I reference above and discussed at greater length in my blog post. Take out that cost and the “subsidy” falls substantially. The second is that solar hasn’t displaced load growth. In reality utility loads and peak demand have been flat since 2006 and even declining over the last three years. Even the peak last August was 3,000 MW below the record in 2017. Rooftop solar has been a significant contributor to this decline. Displaced load means displaced distribution investment (even though the IOUs have justified several billion in added investment by forecasted “growth” that didn’t materialized.) I have documented those phantom load growth forecasts in testimony at the CPUC since 2009. The cost of service studies supposedly showing these subsidies assume a static world in which nothing has changed with the introduction of rooftop solar. Of course nothing could be further from the truth.

    We are at a point where we can start seeing the additional benefits of decentralized energy resources. The most important may be the resilience to be gained by integrating DERs with EVs to ride out local distribution outages (which are 15 times more likely to occur than generation and transmission outages) once the utilities agree to enable this technology that already exists. Another may be the erosion of the political power wielded by large centralized corporate interests. (There was a recent paper showing how increasing market concentration has led to large wealth transfers to corporate shareholders since 1980.) And this debate has highlighted the elephant in the room–how utility shareholders have escaped cost responsibility for decades which has led to our expensive, wasteful system. We need to be asking this fundamental question–where is the shareholders’ skin in this game? “Obligation to serve” isn’t a blank check.

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