California’s Exploding Rooftop Solar Cost Shift
In 2024, residential PV will shift nearly $4 billion onto others’ bills, more than double the 2020 amount.
There’s a lot of anger in California right now about rising electricity prices. Since 2020, residential rates of the two largest investor-owned utilities – PG&E and Southern California Edison – have risen, respectively, by 38% and 40% after adjusting for inflation. Inflation adjusted rates of San Diego Gas & Electric, the third largest, have only risen 11% during that time, but SDG&E was already the most expensive in 2020. The prices of all three are now more than double the national average. (There are going to be a lot of numbers in this post. If you want the details behind them, this link has a data appendix with the data and code for my calculations.)
(Source)
There’s also been a lot of finger-pointing about the cause of these increases. Some have said it’s the greedy utilities. Others have pointed to the huge costs of addressing the impacts of climate change on California, particularly increased wildfire risk. Still others suggest that a major part of California’s strategy to slow climate change – decarbonizing our grid – is turning out to be exorbitantly expensive, though there is scant evidence of this.
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A rate increase multiplier
Regardless of what is driving utility costs higher, their impact on rates is multiplied when customers install their own generation and buy fewer kilowatts-hours from the grid. That’s because those households – whether they are customers of the utility or of a community choice aggregator – contribute less towards all of the fixed costs in the system, such as vegetation management, grid hardening, distribution line undergrounding, EV charging stations, subsidies for low income customers, energy efficiency programs, and the poles and wires that we all rely on whether we are taking electricity off the grid or putting it onto the grid from our rooftop PV systems.
Since those fixed costs still need to be paid, rates go up, shifting costs onto the kWhs still being bought from the grid. This will be less true for systems registered after last April when compensation for new systems was made somewhat less generous, but that applies to almost none of the systems installed before 2024, which are the ones I am studying here.)
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A decade ago, this was a small concern, because rooftop solar was barely a blip in the total supply picture. In 2014, the homes served by these three IOUs got less than 2% of their electricity off their roofs. Today they get about 20%. As fewer kWhs are sold from the grid, retail rates must rise even more in order to recover the fixed costs of the system.
The problem has become particularly acute in the last four years. During that time, solar capacity on houses has more than doubled at the same time that the utilities’ fixed costs have escalated dramatically due in large part to wildfires and the need for grid hardening against them.
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Figuring the rooftop solar cost shift
What has this done to rates? That takes a lot of calculations, which I detail in the available data appendix. But it turns out that three numbers are the major determinants: the total revenue the utility is permitted to collect from residential customers to cover its operating and fixed costs (known as the revenue requirement), the utility savings from selling a customer fewer kWhs (known as the avoided cost), and the amount of solar on rooftops that is leading to those lower sales.
Since 2020, the real (i.e., inflation-adjusted) revenue requirements of the utilities have increased about 25% for residential customers and rooftop solar has grown 114%, but the avoided cost from each kWh coming off those panels has hardly changed. So, as higher and higher electricity prices have meant customers would save more and more for each solar panel installed, the system hasn’t been saving any more money per panel when they do, and those extra costs have been shifted onto customers who don’t have solar.
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Compared to the case in which residential rooftop solar were treated like actual producers and paid the competitive value of their generation, my analysis concludes that PG&E residential customers with solar in 2024 will shift slightly more than $2 billion of costs to customers paying the utility for their power. For Southern California Edison, it’s around $1.3 billion, and for SDG&E the cost shift will be about $0.5 billion. My findings are largely in line with a separate analysis done by the independent Public Advocates Office of the CPUC. (Their headline number – $6.5 billion for the total cost shift – differs largely because they include commercial and industrial (C&I) customers’ solar, which makes up about one-third of distributed solar capacity, and because I use a somewhat more generous avoided cost than their analysis does.)
The cost shift impact on rates
While it might be tempting to compare these astonishing figures to the revenues collected from residential customers, that would implicitly assume that all of these costs are shifted onto the residential price of electricity. In reality, some costs are shifted onto C&I customers. How much? That’s hard to know. It depends on which costs are allocated to specific customer classes (e.g., the cost of distribution lines in residential neighborhoods) and which are considered systemwide costs (e.g., the cost of billing systems, transmission lines, etc.).
One thing we do know is that residential rates have increased faster than C&I rates in the last decade. In 2014, PG&E residential rates averaged about 7% above C&I, but by 2024, they were 15% higher. SCE went from a 15% differential to a 47% differential over the same time period, while SDG&E’s differential jumped from 2% to 19%. This suggests that the costs that have been going up lately, and the increasing cost shift from distributed solar, have been allocated in higher proportion to residential customers. That’s not surprising given that a lot of the cost increases in the last few years have been defensive investments to harden distribution systems – which are disproportionately associated with residential customers – and because homes have two-thirds of the distributed solar.
To get a feel for the impact, let’s assume that 60%-80% of the cost shift from residential solar goes onto the bills of other residential customers. If so, then 5.7-7.0 cents of the price of each kWh (for customers not on the CARE low-income rate), or 12%-15% of PG&E’s full residential price in 2024, is due to the rooftop solar cost shift. For SCE it is 3.2-4.0 cents or 9%-11% of the price. And for SDG&E it is 7.4-8.8 cents or 19%-22% of the price.
In 2018, Lucas Davis wrote a blog post titled “Why Am I Paying $65/year for Your Solar Panels?” The question is still with us today, except now it’s more like “Why Am I Paying $300/year for Your Solar Panels?”
Getting to a sustainable energy system
I’m not presenting this analysis in order to demonize solar adopters or to make them feel guilty about their choice. It’s not their responsibility to do this sort of analysis. People are busy and utility bills are a burden for many. I don’t blame them for jumping at an opportunity to save money, without working through where those savings come from. The problem is not in our household decision makers, but in our policies. The 2023 change in how new solar installations are compensated was a small step in the right direction, but not a solution.
Nor is the solar cost shift the only problem facing California’s electricity system. Adapting to increased wildfire risk and other impacts of climate change, challenges of maintaining reliability with increased renewables, dysfunctional regulation, inefficient utility operations, and excessive returns on capital investments are all contributing to increased rates. All of these issues – including the exploding solar cost shift – need honest discussions among legislators and policymakers if California is going to successfully navigate today’s unsustainable rate trends.
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I am posting frequently these days on Bluesky @severinborenstein
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Suggested citation: Borenstein, Severin. “California’s Exploding Rooftop Solar Cost Shift” Energy Institute Blog, April 22, 2024, https://energyathaas.wordpress.com/2024/04/22/californias-exploding-rooftop-solar-cost-shift/
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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.
Energy Institute Blog 
once again those of us who have solar panels are lambasted for causing the problem.
Here’s the real reason PG&E rates are skyrocketing in California:
https://www.sfchronicle.com/opinion/openforum/article/california-electric-bills-news-puc-19410274.php
Former CPUC commissioner Lynch raises a number of legitimate concerns in her op-ed. She also contends that the CPUC needs “the backbone to just say no to the utilities’ unceasing demands that customers pay for programs that are ineffective or unnecessarily expensive.”
It should be noted that some of the “programs that are ineffective or uneccesarily expensive” are mandated by laws enacted through the legislature, and there are limits to what the commission can do to modify and perhaps even eliminate them. Assemblymember Blanca Pacheco’s AB 1912 seeks to address this issue prospectively.
There are many utility rate formulas, but a straight Fixed-Variable (FV) would seem to be more equitable in the face of the explosion of solar rooftops. As long as consumers are not “off the grid” they should pay a proportional share of fixed costs (infrastructure, wages, taxes, etc.). Other modified FV formulas that shift fixed costs to variable (kwh use) so that large consumers pay more of the fixed cost does not make sense today when larger consumers have solar panels.
A simple perspective: It’s not that consumers (in CA) with PV solar panels that are taking monies away from others. The utility(ies) pay to have them generate clean electricity through crediting them for this purpose. These utilities have ‘guaranteed’ a rate(s) paid those participating to help CA with the program.
The California solar mandate is a building code that requires new construction homes to have a solar photovoltaic (PV) system as an electricity source. This code, which went into effect on January 1, 2020, applies to single- and multi-family homes that are up to three stories high.Feb 27, 2023
California Solar Mandate: What You Need To Know – EnergySage
as a homeowner who has a rooftop solar that produces more than I use everyday.. I’m only compensated four cents to seven cents a kilowatt hour that I put back into the system.. PG&e didn’t pay for the solar panel infrastructure or the inverters to my house.. all they did was send out an inspector.. the over 10,000 KW hours that I produce into the system in a year I’m only compensated four cents a kilowatt hour.. what is PG&e selling that produce excess electricity at? 25 to 30 cents a kilowatt hour? How much does PG&e pay for out-of-state electricity to be generated and sent here?..
So let me get this straight. A large number of people are getting fed up with the outrageous costs the utility is charging for electricity. So these people invest in rooftop solar to lower their energy costs by producing their own electricity, using significantly less electricity from the utility. Which in turn reduces the utility’s revenue, which forces them to increase their rates for the remaining customers who have not reduced their usage. And the solution is to find ways to spread the burden of the price increases among the people who invested in rooftop solar in order to use less electricity from the utility? So let’s penalize the people with solar and counteract their savings in order to make it “fair” for the others who didn’t invest in solar? That makes perfect sense.
Don’t get me wrong, some of the subsidies and buy-back pricing needs to be adjusted, but trying to find more ways to shift more costs over to customers who are using the grid less, simply because it costs more for others who are using the grid more, is not an “equitable” solution. It would appear there needs to be some more thought put into how the utilities are charging and possibly change the entire fee structure. But it shouldn’t be done in a way that penalizes those who have made an investment in their own electricity producing systems, essentially negating their investment.
So if more people started growing their own food in the next couple of years and it had a dramatic impact on the grocery store industry and food industries, forcing higher prices for fruits and vegetables, would the solution be to find ways to tax those people who are growing their own food because their investment in being more self sufficient has created less demand, resulting in higher prices for others? Is that how supply and demand works now?
Switching out an incandescent light bulb to a CFL or LED light bulb also reduces the draw on the utility so why not add a monthly fee for LED lamps because of “Cost shifting”? Hanging up laundry on a clothesline eliminates Electricity usage or Natural Gas usage as well so have a ”cloths line tax” to cover “cost shifting.” Alameda County Water District, during the California Drought, sent out notices that “Wasteful Water usage” would be prosecuted and everybody stopped watering their lawns. Less water usage meant less revenue, so they added a fixed fee to the water bills everybody had to pay no matter how much water the Houshold used. Since the water bill was less dependent on commodity charges, people started using more water and the district is “flush” with money. Conservation is no longer needed but the fixed charges keep going up. Was this “cost shifting” or just the cost of doing business? Now the State is going to have us all drink treated “Sewer Water” so how will that affect the revenue from our current reliable suppliers of fresh water? Will the “Cost Shifting” be addressed? I stopped drinking “Pepsi”, so they raised their prices to everybody else. So it is “MY FAULT” everybody now pays more? NO! This is the CPUC and utility argument and the one in this article. Hog Wash!
“Don’t get me wrong, some of the subsidies and buy-back pricing needs to be adjusted, but trying to find more ways to shift more costs over to customers who are using the grid less, simply because it costs more for others who are using the grid more, is not an “equitable” solution.”
The bolded part of your assertion egregiously mischaracterizes the NEM cost-shift dynamic. If you want to try to back that assertion up, then you — and others who take similar issue with this post — need to challenge Severin’s calculations in the link that he provided with the data. Your semantics will wilt under the weight of those numbers.
In addition, you make an analogy between rooftop solar houselholds and the hypothetical rapid growth of households growing their own food and the upward impact that would have on the price of “fruits and vegetables” at grocery markets. How would “less demand” for fruits and vegetables in the markets lead to higher prices? “Is that how supply and demand works now?” No, it’s not. And this is a red herring in the context of this blog post.
If ratepayers with rooftop solar and batteries pay the same fixed-rate charges as everyone else, should they not also be paid a fixed rate for avoided fixed costs, irrespective of whether they actually deliver surplus power to the grid? Does the CPUC’s Avoided Cost Calculator adequately compensate residential solar for avoided fixed infrastructure costs including generation, storage, and transmission capacity? Does the ACC include avoided infrastructure financing costs (i.e., can residential customers earn the same return on their infrastructure investments that IOU stockholders do)?
For a counter-argument, please read the following analysis.
https://calssa.org/blog/2021/6/5/debunking-the-cost-shift-debate
Once again (for the fifth time?), thanks for providing the transparent, quantitative analysis and evaluation sorely lacking in California policy debate and formulation.
Bob Archer
At a time when electricity demand is growing very fast, along with utility sales, I just don’t understand why you would suppress distributed renewables as a way to help meet that rising demand.
David Wooley
Goldman School of Public Policy
You have hit the nail on the head. You do not understand. And your ignorance is so massive it threatens our entire economy. Solar users are getting a large subsidy from non-solar users because they enjoy electricity on demand when they need it. That requires a massive fixed cost investment which is paid for mostly by people who do not have solar. In addition, in many jurisdictions, solar users are allowed to sell back excess electricity at top prices even if there is no incremental use for it and it cannot be stored. Those rebates are borne mostly by non-solar customers.
There is no defense in this world against the ignorant who are legion. All you can do is try to thrive and insulate yourself as best you can against the ignorant. It is hard and getting harder.
I don’t see trying to reform net metering (and rate design) as suppressing distributed renewable generation (DG). Many of us would love to work with the industry to develop new ways of implementing distributed generation that are progressively funded, cost-effective, and don’t cause inordinate electric rate increases. However, that option hasn’t been on the table so far because net metering is so lucrative.
The distorted status quo also makes the existing market more inefficient. Net metering at high and rising electric rates have also meant that the DG industry hasn’t had to innovate enough to drive installation costs down because customer demand for DG increases every time rates increase. California has one of the largest established networks of DG installers, it also has some of the world’s most expensive DG installation costs.
Many advocates lament California’s high installation costs and point to low installation costs in Australia. We’ll never get there as long as we keep overpaying, by a greater amount every year, for something that should be getting cheaper over time.
A viable path forward for DER has not yet been proposed. The Avoided Cost Calculator is seriously flawed by both undervaluing certain aspects and ignoring other societal benefits. It’s also extremely important to distinguish between commitments made to customers who already installed systems, and just as with energy efficiency investments, expected a financial return going forward, and those who install new systems going forward, All of this has been conflated and confused, causing all sorts of collateral damage that will damage the prospects for DER going forward. The misleading arguments put forward in California are already being used in other states where the number of customers with rooftop solar are less than 1% as though they alone are causing skyrocketing rates. Suggest something that actually works, not based on a basic misunderstanding of how the solar rooftop industry functions.
I agree with your comment. In addition, distributed renewables are much easier to deploy than grid-scale renewables. The backlog of interconnections to the transmission grid in California is very large, while distributed renewables are very easy to install, and our California Energy Code is mandating them in new buildings.
It is not an either-or. We need both grid-scale and distributed renewables.