Equitable Decarbonization Requires Rate Reform
Electricity rates in California are a roadblock to decarbonization, but reform can help.
As a passionate fan of the Chicago Cubs, I grew up expecting to lose. Rays of hope and promise always gave way to defeat and disappointment. I long thought that this aspect of my youth was great preparation for a career studying US climate policy, which seemed to be defined by a similar inevitability of defeat.
But, sometimes things change. The Cubs won the World Series in 2016 (after a brief 108-year drought), and now climate policy is suddenly on a winning streak. In the last several weeks, the Inflation Reduction Act unexpectedly rose from the dead, and California passed a suite of new, aggressive climate bills. This momentum is encouraging, but several factors could derail the ability of legislative gains to produce real carbon mitigation.
Here in California, one of these obstacles is the high price of electricity. In a report released last week, Severin, Meredith and I take a close look at how residential electricity pricing in California is acting as a barrier to a lower carbon economy by artificially raising the cost of electrifying homes and vehicles. (We’ll be hosting a webinar to discuss the report on October 4, 11 am – noon Pacific.)
If you live in California, most of your electricity bill is a regressive electricity “tax”
Our new report, which was supported by Next 10, shows that households served by California’s three large investor-owned utilities (IOUs) pay an average of nearly $700 per year in what we call an “electricity tax.” For customers of Pacific Gas & Electric and San Diego Gas & Electric, this “tax” is about two-thirds of customer bills on average, and it is around half for Southern California Edison customers.
This cost to customers is not literally a tax. It’s the gap between the price customers pay per kWh and the cost to the utility of providing that power. When I turn on my lights, I have to pay about 25 cents per kWh, but it only costs PG&E about 8 cents per KWh to deliver that additional power, including the cost of pollution. The huge gap between price and cost, which we quantified in a companion report last year, exists because California’s IOUs need the extra revenue to cover system costs, and other residual costs for grid hardening, energy efficiency programs, rooftop solar incentives, low-income subsidies and other programs, entirely by raising per kWh prices above cost.
In the report, we label the gap between price and social marginal cost a “tax” on electricity because it represents a fee above cost used to collect revenue to pay for some good or service (in this case the costs of the electricity infrastructure, as well as other state priorities). The problem with recovering needed revenue via this “tax” is that it makes electric vehicles, heat pumps and other climate-friendly technologies more expensive. Turns out it’s also regressive.
In the report, we use anonymized billing data on more than 11 million customers of these IOUs to estimate annual, household-specific electricity tax burdens. Given growing concerns about affordability, we are particularly interested in how this electricity tax varies with income. We use data on income from the US Census as well as survey data from California in order to get the best available estimate of income for each household in the billing data.
Our results show that lower-income households pay a much larger share of their income via the electricity tax than do wealthier households. We label the total paid via the tax the annual “residual cost burden.” As shown in the figure below, the lowest-income customers in both PG&E and SDG&E pay 3% of their income to the electricity tax, and remember that the tax is just the portion of their bill over and above the incremental cost of providing their power.
High prices slow progress on electrification
Does the electricity tax really make a difference for decarbonization? We find that it does.
To think this through, we used survey data on vehicle mileage from California drivers to ask how much extra these drivers would pay per year if they got an electric vehicle as a result of the electricity tax. We call this the “electrification cost premium,” as it shows how much more expensive it is to electrify as a result of having electricity prices above social marginal cost. We used survey data on home energy consumption in the state to do the same calculation for the adoption of a heat pump for space heating.
In both cases, the annual cost premium averages around $600 per year. As shown in the figure below, the amounts vary considerably across IOUs because of differences in the electricity tax across utilities and due to differences in miles driven or heating used.
This cost premium works directly against tax credits that are being proposed as a lynchpin for spurring electrification. A $600 tax, at a 5% discount rate over 15 years, nets out to a present value of $6,500, which means that the electricity cost premium in California effectively undoes the vaunted $7,500 federal tax credit for buying an EV.
Using recent estimates from our Energy Institute colleagues (see here and here), we estimate that lowering volumetric prices to social marginal cost would increase EV adoption by between 13 and 33 percent, and it would boost adoption of electric heating in new homes in the state by around one-third.
Put another way, pushing electrification in California with our current rate structure is like trying to zoom down the highway with your parking break on. If you find yourself in this situation, you should release the brake. Similarly, policymakers can reform rates so that they don’t stall progress on electrification.
What can be done?
The good news about California’s electricity pricing conundrum is that there are ways to foster decarbonization by lowering prices while at the same time making the system more equitable. In this case, equity and efficiency can go together.
There are two key paths to reform.
The first is to lower electricity prices by moving suitable costs onto the state budget that are currently funded through utility bills. This won’t reduce costs, but it allows the state to raise revenue through the state sales tax (which is more progressive than the electricity tax) or income tax (which is dramatically more progressive than the electricity tax). In the report, we discuss which line items might be “suitable” for a transfer, highlighting wildfire mitigation costs and public purpose programs as the most obvious.
The second is to introduce fixed charges that vary by income on electricity bills, an “income-based fixed charge” (IBFC). Earlier this year, the state legislature passed, and the governor signed, a bill requiring the California Public Utility Commission to introduce such a charge by 2024.
In our latest report, we present an example of an IBFC, one designed to be as progressive as the state sales tax. The figure below shows one possible schedule of fixed charges for PG&E, where monthly charges would range from 0 for the lowest income households to $141 for households making more than $200,000 per year (roughly the top one-sixth of households in PG&E territory).
In exchange for adding these fixed charges, the volumetric price would drop dramatically, so the fixed charge is not simply a bill increase. PG&E households making more than $200,000 would, for example, see their monthly bills rise by only $35 per month on average, despite having a $141 monthly fixed charge. Conversely, lower-income households would see savings on average. A household, at any income level, that starts driving an electric vehicle or electrifies their home will see a much smaller bill increase than under the current system.
Bill impacts will vary across households depending upon factors such as their current consumption patterns, CARE participation, and service territory, as shown in the lower part of the figure.
This is but one example plan. Regulators seeking to implement an IBFC will need to consider how many tiers to create, how progressive to make the system, and whether or not to put measures in place to manage the big changes in bills that some might face, such as phasing an IBFC in over time. We hope that our calculations can help kickstart that conversation.
Minimum bills have minimal merit
Minimum bills, which increase bill amounts for households with sufficiently low consumption, are sometimes suggested as an alternative way to raise revenue without raising prices further or adding fixed charges.
We used the billing data to take a look at minimum bills and concluded that they are simultaneously ineffective and highly inequitable. Minimum bills of $30 per month (a dollar a day) raise a trivial amount of additional revenue. At $60 per month, minimum bills can increase revenue by modest amounts, but the burdens are quite regressive. About 40 cents of every dollar raised by minimum bills of $60 per month would come from households making less than $50,000 per year. This is even more regressive than the status quo.
Severin had previously demonstrated that minimum bills were inefficient because they create a zero price for consumption at quantities below the minimum. Now we know they complete the trifecta: they are inefficient, ineffective and inequitable. Minimum bills should be a non-starter.
Conclusion
Having been forged in fires of futility as a kid, I can rest content if the Cubs are lovable losers who resurface to win a title every 50 years or so.
Not so the climate. We need to be greedy about winning. We need to win so much that we get sick and tired of it.
So it is imperative that we remove obvious obstacles that threaten our pursuit of an equitable low-carbon future. The current electricity pricing system in California is one such hazard. We can see it clearly. We know it is unhelpful. We know how to change it. So let’s get to it.
For more information:
- Webinar on second report: October 4, 11 am – noon Pacific
- New report: Paying for Electricity in California: How Residential Rate Design Impacts Equity and Electrification
- First report: Designing Electricity Rates for An Equitable Energy Transition
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Sallee, James, “Equitable Decarbonization Requires Rate Reform,” Energy Institute Blog, UC Berkeley, September 26, 2022, https://energyathaas.wordpress.com/2022/09/26/equitable-decarbonization-requires-rate-reform/
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James Sallee View All
James Sallee is a Professor in the Agricultural and Resource Economics department at UC Berkeley, a Faculty Affiliate at the Energy Institute at Haas, and a Faculty Research Fellow of the National Bureau of Economic Research. Before joining UC Berkeley in 2015, Sallee was an Assistant Professor at the Harris School of Public Policy at the University of Chicago. Sallee is a public economist who studies topics related to energy, the environment and taxation. Much of his work evaluates policies aimed at mitigating greenhouse gas emissions related to the use of automobiles. Sallee completed his Ph.D. in economics at the University of Michigan in 2008. He also holds a B.A. in economics and political science from Macalester College.
Energy Institute Blog 
Good post on a problem that really needs to be addressed, and thanks to James, et al., for suggesting ways to do so.
As for the suggestion to “move suitable costs to the state budget,” obviously that is much easier said than done. First, the state legislature already has the option of raising the state sales and income taxes by a 2/3s vote in both houses, which is a very tough task even with Democrats holding super-majorities in those chambers. The added hurdle in this scenario is that, to get any additional tax revenue dedicated to “suitable costs” from the “electricity tax,” it would have to come with a continuous appropriation for each specific program — that is, for X number of years each program will get Y amount of funding. There would be a lot of pushback on that, with perhaps the exception of low-income subsidies (such as the CARE program) which one could strongly argue is a “suitable” cost.
Frankly, while I am ambivalent about raising the state income tax on the wealthy yet again — realistically, how many more times can we do this? — as proposed by Prop 30, we’d get a much better bang for the buck if we applied that revenue to electricity cost mitigation as opposed to the Prop 30 allocations, as important as they are.
I fully endorse the concept that we need to radically reform electricity pricing to make sure that decarbonization isn’t choked off at the start through high costs. And equity is also a key objective as we go forward. And I am glad to see that this proposal moves to a non discriminatory fixed charge instead of what is a counter productive one focused solely on solar rooftop customers [https://energyathaas.wordpress.com/2022/02/14/everyone-should-pay-a-solar-tax/] (who have delivered at least as much economic benefits as the purported transfers by my calculations: [https://mcubedecon.com/2021/11/30/why-are-we-punishing-customers-for-doing-the-right-thing/])
That said, there’s a fundamental problem with the proposal: Customers do not trust the utilities (who have eroded that trust through a series of recent errors) to be willing to share their incomes (or at least honestly). I can already see the statewide initiative banning the sharing of such data by the state with the utilities. I can even see such an initiative being so restrictive that it could data sharing with a wider group including academic researchers. (Low income households share their income for CARE and FERA but 1) they self report with substantial misreporting and 2) they are getting a clear benefit from doing so.
A second problem is that low income users already receive rate discounts of over 30% through CARE and FERA. In response and to no surprise, those customers have increased their usage. In mobilehome parks, CARE customers use virtually an equal amount of electricity and natural gas as non-CARE (or standard) rate customers. The rebound effect is substantial.
There are several better solutions. The first and easiest is implement the income based bill discount through a fixed monthly discount just as SMUD does. (https://www.smud.org/en/Rate-Information/Low-income-and-nonprofits) It is much less likely to face opposition about sharing income and avoids the rate distortion of the current CARE/FERA structure.
A second is to the decarbonization incentive rate proposed by the Local Government Sustainable Energy Coalition (LGSEC). It would charge the marginal cost of electricity (calculated by the set of utility experts working in the rate cases rather than a single set of academics) to new additive electrification uses such as adding heat pumps and EVs. Those added uses would be given allowances based on utility, CEC and CARB usage data that is already used for other purposes such as line extension allowances, building and appliance standards, vehicle emission profiles and air quality standards. The remainder of household usage would be charged at existing rates to give strong energy efficiency incentives to reduce existing use. https://mcubedecon.com/2022/04/12/proposing-a-clean-financing-decarbonization-incentive-rate/
A third is to refinance the excessive costs incurred to date by the utilities in acquiring generation and infrastructure investment. Of the 70% excess embedded in rates above marginal costs from the rate cases, the vast majority is from these mismanagement costs. Two ways to refinance these costs is to 1) refinance above market renewable PPAs and extend the repayment period so that future ratepayers who will benefit from the lower costs induced by accelerated innovation also pay (https://energyinnovation.org/publication/debt-for-equity-utility-refinance/) and 2) to match utility infrastructure depreciation rates to match the utilization rate e.g., if a substation has a 50% capacity surplus, the depreciation rate should be adjusted for when it will hit capacity rather than just simply using an engineering life. Shareholders will receive a lower annual return with these solutions but they will be assured of fully recovering their investments.
One final point: The PG&E rate you’re paying isn’t 25 cents per kWh–it’s currently an average of 33.5 cents for standard rate customers, and PG&E is asking for an increase to 39 cents by 2026. At that cost, setting one’s own microgrid relying on both stationary and EV batteries starts to become attractive. And adding an income based fixed charge will only enhance what is already a strong incentive. (https://mcubedecon.com/2022/03/17/are-pges-customers-about-to-walk/)
Rather than trying to figure out how to shift costs to one subset of customers or another, we should looking at those who got us into this situation in the first place. What are asking of utility shareholders to mitigate these burdens?
I think this really gets to the crux of it. PG&E and CPUC believe that people’s willingness to pay escalating electricity charges is unbounded. Rooftop solar is not only a way to reduce costs today, but a hedge against PG&E’s unbounded thirst for rate increases.
LOL!
Rooftop solar is the poster child for why the rate designs must be modified in the manner proposed by the NEXT 10 studies.
The current rate structures, which grossly overcharge for energy consumed (the “Electricity Tax”) produce a strong incentive for residential customers to install solar in order to avoid paying the utilities’ fixed costs, including those imposed by the legislature that have nothing to do with delivering electricity (e.g., the CARES subsidy).
Net metering combined with excessively high volumetric energy rates is what has led to massive annual cross-subsidies that shift billions of dollars in costs from the solar customers to everyone else (most of whom are less affluent than the solar customers).
Net metering per se, is not the problem – the inefficient rate design is.
I calculate that distributed solar customers have reduced peak loads in the CAISO by 6,500 to 11,500 MW and saved generation and transmission costs of least $3B annually. That’s of the same magnitude of “cost shifts” claimed by the utilities, so those customers have delivered benefits at least equal to the purported costs.
There’s another group that is even more affluent than solar customers–utility shareholders. Where’s the call for them to bear their fair share?
Moving suitable costs onto the State’s budget is a laudable idea. It will enable homeowners who generate their own power to also pay for what concerns all of us, for example wildfire mitigation costs.
In addition to the IBFC, another strategy to lower the burden on low income households is to introduce rooftop solar or solar gardens (where appropriate). Like the Low Income Home Energy Assistant Program (LIHEAP), funds from the rooftop solar incentive income can be provided for developers to develop rooftop solar or solar gardens, where appropriate, to be fed into the grid at the point of connection to an entire apartment. This will reduce the amount of electricity the entire apartment gets from the utility. If the capacity is large enough, it will reduce the net power the entire apartment uses and lower residents from the higher tier billing to lower ones, consequently lowering the bills they pay.
If the suitable costs are taken off, the IBFC is carefully implemented and the supplementary rooftop or solar garden for the apartments are also well done, more lower income people will be able to purchase electric vehicles, use heat pumps and other climate friendly technologies like electric stoves or ranges and emissions will further reduce.
I agree that much of the “tax” should be shifted to the state budget. And I agree that this would be a benefit to electrification.
If I understand IBFC, energy costs are on top of that. I disagree with IBFC. This exchanging one overly convoluted billing system with another.
The grid, transmission lines plus distribution lines, is close enough to a fixed cost as to be treated like one. The grid is built to handle the connected load. The connected load is relative to the sum of all the panel sizes. The most simple way to determine the fixed charge is one’s panel size relative to the sum of all panels. Apartment dwellers might have 50A panels and mega-mansions 5,000A panels. This is not unlike the fixed charge for water.
People in need would apply to the state for relief.
On a tangent, I have been searching for the fixed cost for the grid. In your research you must have been able to determine it. Can you explain how that determination was made and supply appropriate references? Thanks
OSD
Thanks for the comment. I actually agree that an IBFC adds complexity. Deciding to implement it is thus a trade off. An alternative, which we do discuss in the paper, is to just let the electricity system be regressive if that’s the efficient thing to do, but then make sure there is an adequate safety net in place through other programs in the state. There is merit to this view, but I think it has limited prospects for political success in the current environment. For that reason, we are eager to explore other options. In terms of other references, our first report (https://www.next10.org/publications/electricity-rates) decomposes current rates into different cost components.
Thank you for the link to the document Designing Electric Rates for An Equitable Energy Transition. From the graphs on page 6 I estimated that the percentage of the kWh charges due to transmission and distribution was about 38%. (3+8)/29
I was not confident in that number. First, because it came from a graph. At the bottom of the page was the note “Note: Details on data sources and methodology behind authors’ calculations can be found in the Appendix.” and the note at the bottom of page 2 has the link for the appendix “The Appendix can be found at https://www.next10.org/electricity-rates” Alas, this is not the link to the appendix and has no further relevant links.
Secondly, the graph indicated that the total per kWh charge for SDG&E was ~29¢ and the data was from 3 years ago, 2019. Currently, 2022, this charge is ~39¢
Could you provide a link to the appendix?
Dude,
Senate bill 695 requires utilities to denote their revenue requirement yearly. PG&E’s 2020 report can be found here-
Click to access pge–2020-recommendations.pdf
“Figure 3: Summary of Electric Revenue Requirements and Percentage
of Total Revenue as of January 1, 2020 Compared to January 1, 2019”
of the report contains the data you are interested in.
Electric Transmission is denoted as 18% of their revenue requirements.
Distribution is denoted at 33% of their revenue requirements.
Their transmission revenue requirements were 9% years ago (2016)- http://disq.us/p/1q65su3
Dude,
Senate bill 695 requires utilities to denote their revenue requirement yearly. Compliance reports are generated yearly. PG&E’s 2020 report can be found here-
Click to access pge–2020-recommendations.pdf
“Figure 3: Summary of Electric Revenue Requirements and Percentage
of Total Revenue as of January 1, 2020 Compared to January 1, 2019”
of their report contains the data you are interested in.
Electric Transmission is denoted as 18% of their revenue requirements.
Distribution is denoted at 33% of their revenue requirements.
Their transmission revenue requirements were 9% years ago (2016)- http://disq.us/p/1q65su3
“California’s IOUs need the extra revenue to cover system costs…entirely by raising per kWh prices above cost.”
Why the separation of system costs from per-kWh costs? No business operates without incorporating overhead into the prices it charges its customers. In California’s cost-of-service regulatory structure, price should be equal to overall cost – there is no “tax” involved.
There is a broad assumption that electrifying California homes and businesses will reduce carbon emissions, and another that renewables can completely decarbonize our grid. Neither assumption has merit. Natural gas consumption for generating electricity is now increasing, not decreasing, largely due to the backup required by wind and solar when they aren’t available. And batteries? When the CAISO grid was stretched to its limit on Sept. 6, batteries were providing a whopping 1.9% of our electricity. For the purpose of reducing consumption of fossil fuels, they’re useless. And it has nothing to do with quantity, or investment – we could literally never have enough batteries to power the CAISO grid.
With gas already generating half of California’s native electricity, and gas or coal generating at least one third of its imports, there is no evidence to support the premise space and water heating powered by heat pumps is less emissions-intensive than using gas-fired appliances onsite. So if our goal is rapid decarbonization, the first step is decarbonizing our electricity – anything else is wasting time, when there’s none to waste.
Carl
Please provide current statistics showing that the combination of hydro plus natural gas generation (to account for swings in drought conditions) is increasing in California. I have already posted here in response to your incorrect assertions data showing that gas generation is decreasing.
“Swings in drought conditions” ? Your clumsy attempt to obfuscate the disappointing performance of wind and solar is noted, but irrelevant.
Natural gas consumption is up 37 bcf since 2017:
California Natural Gas Deliveries to Electric Power Consumers, Annual 2021 A 637382 Million Cubic Feet
California Natural Gas Deliveries to Electric Power Consumers, Annual 2020 A 615090 Million Cubic Feet
California Natural Gas Deliveries to Electric Power Consumers, Annual 2019 A 568341 Million Cubic Feet
California Natural Gas Deliveries to Electric Power Consumers, Annual 2018 A 614722 Million Cubic Feet
California Natural Gas Deliveries to Electric Power Consumers, Annual 2017 A 600988 Million Cubic Feet
https://www.eia.gov/opendata/v1/qb.php?sdid=NG.N3045CA2.A
To fill in the missing data that explains the natural gas delivery data:
California water runoff: https://ca.water.usgs.gov/california-drought/california-drought-runoff.html
2017: 18.29 MAF (million acre-feet) (3rd highest on record)
2018: 5.42 MAF
2019: 11.95 MAF
2020: 4.35 MAF
2021: 3.08 MAF
2020: 3.33 MAF
Average hydropower generation is 33,630 GWH or about 17% of total state generation. 2021 production was 14,566 GWH or 43% of average. https://ww2.energy.ca.gov/almanac/renewables_data/hydro/index_cms.php
Hydropower generation:
2017: 43,303 GWH
2018: 26,293 GWH
2019: 38,494 GWH
2020: 21,414 GWH
2021: 14,566 GWH
https://www.eia.gov/opendata/v1/qb.php?category=9&sdid=ELEC.GEN.NG-CA-99.A
Natural gas generation
2017: 88,350 GWH
2018: 89,804 GWH
2019: 85,840 GWH
2020: 92,046 GWH
2021: 96,940 GWH
Total Generation
2017 131,653 100%
2018 116,097 88%
2019 124,334 94%
2020 113,460 86%
2021 111,506 85%
Richard, I have no idea what point you’re trying to make by dragging hydropower into the equation. Is it:
“When hydropower is available in abundance, we don’t need to burn as much natural gas.”?
That’s certainly true. We could say the same thing about wind and solar: “When the wind blows constantly,” or “when the sky is clear, we don’t need to burn as much natural gas.”
What about the times when the wind doesn’t blow at all, the sky is cloudy, or there’s a drought?
No responsible energy policy is founded on optimism. If anything, it assumes the worst possible confluence of events may occur, and prepares for it accordingly. Especially with hydropower: if you’re betting the farm on it to reduce carbon emissions, you’ve already lost the farm.
The West’s historic drought is threatening hydropower at Hoover Dam
“The climate change-fueled drought and overuse of the Colorado River’s water is pushing Lake Mead lower and threatening the dam’s hydroelectricity production. Declining water flow has cut the dam’s power generation capacity almost in half – around 1,076 megawatts – as of June.”
https://www.cnn.com/2022/08/16/us/hoover-dam-hydropower-drought-climate/index.html
The point that other readers will understand is the increase in natural gas generation you attribute to increased wind and solar in fact is due to the decrease in hydropower caused by the ongoing drought in California. Gas generation has historically varied inversely with hydropower generation and the Western grid is designed for this fact. The reality is that the combined generation from those two sources that work synergistically has decreased 15% since 2017. You’ve misattributed cause and effect in your claim.
Does your calculation of the price increase due to electrification account for savings by not using natural gas? In other words what is the net energy cost to the household by electrifying? Thanks
Great question. No, we did not do that calculation in this paper. Our “cost premium” is designed to capture the savings that an EV driver or heat pump adopter would experience if we reformed electricity prices. We did not do an analysis of which technology choice was better. Severin and Jim Bushnell have work in progress that does that. In this paper, we just wanted to quantify the added cost per year given the “tax.” This does translate directly into the empirical studies we used to estimate the implication for adoption. Those papers both use the electricity price directly as a determinant.
AB 841, which requires utilities to pay for the make-ready costs for EV charging (through ratepayers), is a good example of the Legislature adding costs to electricity bills instead of funding statewide infrastructure improvements through the state budget. It’s politically easier to do so than to increase taxes. Unless that dynamic changes, legislators will continue to use utility bills as a way to pay for these social goods.
“…funding statewide infrastructure improvements through the state budget…[is] easier to do…than to increase taxes.”
That is true, but here’s the problem: Let’s say the total “suitable costs” currently funded through IOU bills adds up to $500 million, and the legislature and governor decide to move these costs to the state budget. If there’s no commensurate tax increase and continuous appropriation for those programs — and yes, that would be a tall order (see my earlier post) — then the annual funding for these programs would begin with a line item dollar amount for each of them in the Governor’s January Budget Proposal (or perhaps be put off until the May Revise). And then most of these dollar amounts are subject to considerable debate in the legislative budget committees.
The past two state budgets have of course benefitted from unprecedented surpluses, but that will surely change to a more challenging fiscal picture, perhaps as early as the next budget. When that happens, and especially when there are major deficits, the battle for tax dollars can get very nasty — “Bellum omnium contra omnes,” as Gov. Brown used to say: “the war of all against all.” (When I began working for Brown in 2012, we had a $23 billion deficit.)
In deficit scenarios, you may only get half of the $500 million for the “suitable costs,” or even less if the deficit is steep. The stakeholders behind these programs are well aware of that, which is why they would prefer to keep them funded through the much more reliable revenue stream from IOU customer bills.
Having noted all this, I’m not saying that these costs shouldn’t be shifted to the state budget/General Fund. But we need to be aware of the challenges that come with that as well.
The post is on point. Instead of collecting the fixed charge on the bill, it would be more efficient and more resilient to gaming to instead collect it as part of state income (and maybe also property) taxes. Perhaps the authors have identified that on the bill is easier to implement initially, but this should be only temporary.
In addition, if we are redoing billing, we should absolutely move to Highly Dynamic Prices to be able to integrate higher levels of renewables by shaping demand to more closely match supply – which we will also need to do to meet our electricity policy goals. Luckily, the CPUC has a proceeding on this:
https://www.cpuc.ca.gov/industries-and-topics/electrical-energy/electric-costs/demand-response-dr/demand-response-workshops/advanced-der-and-demand-flexibility-management-workshop
Click to access 492688471.PDF
A Highly Dynamic Price is a retail tariff that:
-Has pricing intervals no longer than an hour and no shorter than five minutes,
-Is set no longer in advance than the day before, and
-Is different every day.
–Bruce
Thanks for the comment. We fully endorse a move towards dynamic pricing to better reflect costs. Dynamic pricing is consistent with our other proposals, just not the focus of this report, for which we did not have access to interval data.
Why would any of these shenanigans be necessary; we have been led to believe that Renewables — electricity produced with wind turbines & solar panels — is not only more reliable than baseload electricity production — but is for all intents and purposes, free?
Hopefully no one here suggested that any source of power was free, but it is absolutely the case that low marginal cost energy sources should be made to transmit a message of low marginal price to consumers when possible, which is precisely what we advocate.
“low marginal cost energy sources should be made to transmit a message of low marginal price to consumers when possible…”
The message to consumers being: “Henceforth, electricity on demand will cost more than electricity when weather/time of day permits.”
Social equity, anyone? If only half of California’s work force could afford such a luxury.
Whoa! Are you calling for the end of markets and the use of price signals to allocate resources in a decentralized fashion? Marxism failed miserably as witnessed by the collapse of the Berlin Wall. Centralized resource allocation is the only means of doing what you’re asserting.
Marxism?! No, comrade. I’m calling for an end to the nonsense markets even exist for retail electricity.
Markets require an arena (whether virtual or physical), buyers and sellers (note plural), and a commodity. Unless you have several service lines connecting you to several independent grids, there is no market – electricity is a monopoly. That means retail buyers have no freedom of choice. And without it, there is no competition to keep prices low.
Many ISOs and RTOs operate wholesale markets, but they’re of no service to retail customers. When you go to the supermarket to buy tomatoes, do you care what the store paid its supplier? Of course not – you will buy from the store that has the best tomatoes, at the lowest price – the price they paid their supplier is irrelevant.
“Use of price signals to allocate resources in a decentralized fashion” is technobabble for “take it or leave it” pricing. When you need electricity, you’re completely at the mercy of whoever owns the wires running from the pole to your home – there is no “decentralized fashion.” And whether you’re aware of it or not, allocating resources based on the weather/time of day disadvantages many lower-income customers, with little flexibility in their schedules to respond to price signals (and likely, less interest in doing so).
You might want to consider learning more about the history of utility regulation in the U.S. It was FDR who first considered access to electricity not a luxury, but the fundamental right of all Americans. He forced utilities to build transmission to farmers in remote locations, not because it was profitable, but because people were dying in the streets from shortages of food during the Great Depression. You’d learn that we’ve already been through this “free-market” electricity fad in the 1920s, and it was a disaster. And you’d understand why in 2022, operating under the illusion a retail market exists will only force us to learn the same lessons again – the hard way.
I’m with you that ISOs and RTOs are largely irrelevant to the costs that retail customers end up paying because it’s actually the cost of acquiring the plants that sets the real marginal costs, not the operating costs of the plants. (More on that some other time.) But that also points out that we now stand on threshold of the technological means for customers to break away from the utility monopoly with DERs. It’s already happening, making the incumbent utilities unhappy. Trying to solve this problem with large central generating stations only makes the problem worse, not better.
But I’m still not seeing how you plan to set the limits on how much energy customers can use? Are you saying that electricity should be free? (And also water since that’s also supplied by monopolies? And garbage pick up?) You will have to allocate resources because they are not unlimited. If you’re centralizing allocation then you’ve stepped into Marxism.
You’re right. We are beholden to the company that controls the wires. But not so much any more, beholden to those that produce the energy.
Those monopolies are allowed under the condition that they serve the people, first, and for this service they are guaranteed a profit. Unfortunately, temptation and greed have taken hold. This situation has gone on so long that the people who oversee the monopoly have lost sight of their responsibility. Which, of course, is to ensure that the people are served. It’s a socialist endeavor even if its outsourced to a for-profit company. Much like trash collection or the city water system or a farmers market where the city leases space to vendors.
I would recommend that the monopolies are strictly wire companies and are separate companies that are not a subsidiary. That is, no energy company can own any part of it. Thus we get a fixed cost for energy delivery. The wire company would be responsible for sizing its equipment to the load provided.
The energy market would become a commodity market. Anyone would be able to choose who provides the energy; a broker, a CCA, or a big energy company the Sempra.