← Shift Key with Robinson Meyer
Shift Key with Robinson Meyer
Shift Key Classic: California’s Rooftop Solar Question
01:04:33
A blast from the past with the director of the Energy Policy Institute at the University of California, Berkeley’s Haas School of Business, Severin Borenstein.
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- [00:03]
A
You are listening to Shift Key Heat Maps weekly podcast about decarbonization and the shift away from fossil fuels. Well, Happy New Year almost. We are releasing this episode on the final day of 2025. 2025 has been a surprising and turbulent year, to say the least, and I want to start by wishing you and your family a very happy 2026. Let's hope it's more joyful and more peaceful than the past year. Shift Key is off this week, but Heat Map isn. We have new stories every day for you on heatmap News. I actually have a big news story up this morning. I hope you check it out. In the meantime though, here in your podcast feed, we have a classic episode for you. It's about how California broke its electricity bills last year. Before we started talking about how electricity became expensive nationally, we were talking about it in California. California, at least today, has the highest electricity prices in the continental U.S. we're interested in how it got there. And so we spoke with Severin Borenstein, an economist at UC Berkeley, about how rooftop solar, even though it's really good for the climate, was helping to drive up electricity rates across California. It's a good discussion. I learned a lot from it and I think it's a good look too at electricity price dynamics before they became the hot button political issue that they are today. We initially ran this episode on June 5, 2024. Thank you so much for listening. We'll be back next week. We're with an all new episode of ShiftKey, our first in 2026 talk then this episode of ShiftKey is brought to you by Heatmap Pro. Heatmap Pro is the premier platform designed to help users build community supported clean energy and data center projects. Heatmap Pro brings all of heatmap's research, reporting and insights down to the local level in a data and intelligence platform that gives you the information you need to navigate political and permitting risk. It's heatmap software platform that tracks all local opposition to clean energy and data centers, forecasts community sentiment and guides data driven engagement campaigns. Go to heatmap News Pro to book a demo and see the premier intelligence platform for project permitting and community engagement. That's heatmap News Pro or check it out in the show notes now. Hi, I'm Robinson Meyer, the Executive editor of heatmap News.
- [02:28]
B
And I'm Jesse Jenkins, a professor of Energy Systems Engineering at Princeton University.
- [02:32]
A
And you're listening to Shift Key, a podcast from heatmap about decarbonization and the shift away from Fossil fuels. On this week's show, why am I paying for your solar panels? So for a few shows, we've been looking all across this question of rooftop solar. You know, does rooftop solar help the climate? Why is it so costly? We keep coming back to this central issue, which is that in the United States, for some reason, it is way more costly to put solar panels on roofs than it is in other parts of the world. In Australia, in Western Europe, in the US where there's lots of reasons why we should install a lot of rooftop solar to decarbonize the grid and fight climate change. It's for some reason, like, three times more expensive than it is in other places. Two weeks ago, we talked to Mary Powell, the CEO of sunrun, big US Rooftop solar company, about why rooftop solar is so expensive. She talked a lot about regulation, about different jurisdictions. This week, let's look at the consequences. So, Jesse, who would help us understand the consequences of why rooftop solar is just being expensive is such a problem?
- [03:41]
B
Yeah. So to understand why rooftop solar being expensive isn't just a problem for whoever's paying to install that solar on the roof, but also for everybody else who pays for electricity in the same area as the solar installer, we need to take a close look at electricity rate design. All right, now, before everybody turns off their podcasts or shuts their phones down, this is important and it's really interesting, and it's broadly related to how we're going to navigate a transition to a cleaner energy mix that includes a lot more distributed energy resources. Those are resources like rooftop solar or batteries or even how you charge your electric vehicle that. That are located in people's homes and businesses and could play a much bigger role in the future of the grid, but only if we get the prices right. So let's play prices right today. And we have the right guest to join us to unpack that. That's Severin Borenstein, a professor of business administration and public policy and an expert in energy and resource economics at University of California, Berkeley. He is one of the folks I look up to in this field who has been a leading thinker for decades, thinking about electricity markets and rate design and how they have to evolve as we navigate changing technology trends and changing public policy priorities. And so he's going to help us explain how, in California's context, deploying rooftop solar on hundreds of thousands of roofs across California has resulted in a substantial shift of costs onto the bills of people who don't install a rooftop solar to the tune of about $4 billion. So let's unpack that big cost shift and welcome Severin onto the show. I wanted to start with the big solar cost shift question. You wrote a blog post at the Haas Berkeley Energy Exchange blog recently trying to estimate how much the payments to customers in California who have adopted rooftop solar is affecting the bills of those who haven't been able to adopt solar. Can you explain what is at issue here and how you estimated the scale of impact?
- [05:43]
C
Yeah, this is a general problem with distributed generation, but it's much worse in California. When a customer starts generating their own electricity, they generally pay less to the utility. Most people are under what's called net metering, so they get to net out all of their distributed generation from their retail bill. And that would be fine if the utility saved as much when you generate your own electricity as you save. But in fact, electricity prices are well above what the utility actually cost, the actual cost to the utility of generating that and delivering that electricity. Now, in California, that difference has gotten pretty extreme. In this year. In California, a typical retail customer who's not on the low income program is paying over 40 cents a kilowatt hour on average for electricity. But the actual cost of delivering additional electricity to that customer is 10 cents a kilowatt hour or less. That difference, that extra 30 cents in your bill is going towards all sorts of fixed costs that the system has. And of course, some of it's the traditional fixed cost, poles and wires, but a lot of it is fixed costs in California that are paying for dealing with climate change, not reducing our greenhouse gas emissions. That's actually a very tiny piece of it, but dealing with what climate change is doing to the state, paying for grid hardening, undergrounding of wires, wildfires past wildfire liability, future wildfire prevention, and so forth. All of that stuff has been loaded into electricity prices, along with paying for subsidies for low income customers, paying for RD on new technologies, and so forth. As a result, California's prices that we pay are way above the wholesale cost or the cost savings, what's called the avoided cost. And when one household puts in rooftop solar, they pay a lot less to the utility. The utility still has all of those fixed costs, so the cost gets shifted to everyone else, essentially through a price increase for everyone who's buying electricity. What I did is I went and did that calculation. How much are households with solar producing for themselves and how much less are they paying into the system? And as a result, how much do rates have to go up for everyone else? What I found was, and just to Give you context. These are utilities. The three big investor owned utilities have a total revenue requirement of about $55 billion a year, of which about a third. So let's say 15 to 20 billion dollars is residential. The cost shift. The residential cost shift in 2024 will be about $4 billion.
- [08:53]
B
So it is 4 of that 15.
- [08:55]
C
Yes, it is a really big chunk of the entire cost. I estimated that if we look at the last five years when California has seen skyrocketing rates for partially because of all of those increasing costs that we just mentioned, about a third of that increase is being driven by an increase in the rooftop solar cost shift.
- [09:19]
B
Wow. So let me try to break that down a little bit. I should say is not really a problem with solar per se. Right. It is sort of a wicked combination of significantly escalating costs in California due to wildfire prevention and liabilities and other investments in the distribution and transmission grids, which are largely fixed costs that you don't avoid when you produce more solar power. And the particular way in which we design electricity rates which then dictates how solar is valued if either you consume it on site or in the case of net metering, if you export it to the grid and are basically credited as if you could avoid a full kilowatt hour of consumption as well. Right. So it's this sort of combination of those three factors. I just want to stress for listeners like it's. This isn't a problem with solar per se. It's kind of a problem with how we design and structure electricity rates at their core.
- [10:06]
C
Absolutely. If rates really reflected the actual cost of providing those additional kilowatt hours, then people would be facing exactly the right incentives on whether to put in solar or not. Unfortunately, nowhere do they really reflect that. But in California they're just completely out of line and have gotten drastically more out of line in the last few years. The two biggest utilities, PGE and Southern California Edison. PG&E rates have gone up 80% in the last five years and Edison's rates have gone up 90%. So these are just huge increases. Some of it is directly connected to delivering electricity. A lot of it isn't. A lot of it is the impact of climate change. And it's the decision by the state legislature that we're going to pay for these costs by raising your electricity price when we could easily be paying for these through the state budget. Not easily. I mean, there's still costs, but it would be natural to pay for many of them through the state budget.
- [11:12]
A
Severin, I Think in your paper you generated a per household cost of this subsidy. I was wondering if you could just share that and then describe it, because I found it to be an astonishing number.
- [11:24]
C
Yeah. My colleague Lucas Davis wrote a blog post five or six years ago titled why am I paying $65 a year for your solar panels? Unfortunately, the right title today is why am I paying $300 a year for your solar panels? So the average increase in the bill of a non solar home due to the presence of rooftop solar, that cost shift is now over $300 per year.
- [11:57]
B
So this is a significant, I think, very acute example of this friction between how we've been charging people for electricity and what it actually costs to deliver electricity to people. And I think it probably comes as a shock to a lot of people that those two things are not the same, that we have not been paying for electricity the way it actually costs us. We're paying in this sort of very simplified and potentially highly distortionary or confusing manner. So this doesn't just affect solar, it affects all kinds of incentives. If you're thinking about adopting an electric vehicle versus paying for gasoline at the pump or whether you should get a heat pump and how you should size that for the coldest winter days or the hottest summer days. Before we jump into those kinds of implications, I just thought it would be helpful to break down for folks. All right. When I pay my electricity bill, most people probably don't spend more than 60 seconds. If they even spend that, it could be on autopay and they don't think about it at all unless the bill is dramatically higher. But most people don't spend a lot of time thinking about what they're actually paying for when they pay for electricity. So could we break down what is in your bill? Because there's a few different components. You've mentioned a few before, but I think it's helpful to maybe take apart the few big components and then just talk about if how do my actions as a household affect the scale of those costs of each of those key components?
- [13:12]
C
Yeah. So I think it's easiest to think about your bill as having two components. One is how much does the cost when you consume additional electricity actually go up for the utility? So what's in that? The wholesale price of electricity, the losses of delivering it, some pollution costs which are part of society's costs from local pollution from the power plants, some costs from the greenhouse gas emissions. And if you're in a state like California, some of those are direct costs because you have to buy cap and trade allowances to cover those. Those are all the variable costs associated with consumption. And sometimes if you're consuming at peak times, you should also throw in some cost of the need for expanding capacity of the lines of the whole system in order to accommodate you at peak. We calculated all of those costs. In some earlier work, our calculation came to a bit under 10 cents per kilowatt hour. Other people have done it, and mostly, if they're not aligned with the solar industry, have come up with a much lower number. There are many estimates out there between 5 and 8 cents a kilowatt hour, including the number from the California public utilities Commission. So those are the direct costs. Then there are all of the extra costs. Now, some of these are just a natural part of an electricity system. When I was in graduate school, we talked, and we still do, about the natural monopoly problem because there's so many fixed costs in electricity, particularly in transmission and distribution, that really don't change with how much electricity flows over those lines. So if you think about just digging the trenches for distribution systems, if once you do that, you want to put in a big line so those costs are in your bill, and those don't change with how much electricity you consume. And then there are the costs that are not unique to California, But California is really an outlier in how many of them we're putting in that are not costs associated with a normal operational electricity system, but have been put into the bills because either we got to pay them somehow and the legislature has not chosen to step up, or the legislature has actually required them. So in the latter case, we have the most generous program for low income customers in the country for electricity customers, and that is paid for by raising the price for everyone else. Now think about that for a moment. We don't pay for Medicaid by raising the price of medical treatment for everyone else. We don't pay for food stamps through a tax on food for everyone else. But when it comes to electricity, it's just very easy for the legislature to say, yeah, just throw it into the bills.
- [16:14]
A
It's interesting because I'm hearing you talk about costs, and there's some costs that are kind of inherent to running the grid. There's some costs that are associated with kind of every marginal additional kilowatt hour. There's some costs that are public projects that the state either by necessity or goodwill, has decided to undertake. And all these costs kind of wind up in different places. But if we were to think about charges, or we were thinking about places where those costs get Paid for. Is it wrong to like bucket them into three places where there's basically one charge which is just what you have to pay for hooking up to the grid. One charge which is what we would almost think of as the price of electricity. Every additional marginal kilowatt hour you pay the charge more and more. And then a third charge, which is like a third place that money can come from, which is just out of public budget. The state legislator can just send money to the electricity system or to the utility in a certain way. Is it wrong to bucket the charges or how to think about these different problems in those three containers?
- [17:23]
C
Well, yeah, I would shape that slightly differently. Yes, there is one bucket that is the actual incremental cost of consuming more electricity once you're hooked up. There is the cost of hooking up one more customer that turns out to be pretty darn small. There are the costs of the system under normal operations that are fixed costs that paying for those trenches we had to dig to serve the neighborhood and so forth. And then there are all the extraordinary costs that are the reason California's rates are so much higher than the rest of the country. A lot of that has to do with wildfires these days, but it also has to do with a lot of public policies. California's for a long time had the most aggressive energy efficiency program. We pay for that by raising the rates for people who consume electricity. We have very aggressive research and development. We have some contracts for very early solar grid scale solar that are at 150 to $200amegawatt hour, when that power now is worth four or five dollars or 40 or $50amegawatt hour. So we're paying for that excess cost because we made early investments in grid scale solar. That was a public policy we chose to pursue. All of that is paid for not just in your electricity bill, but in your per kilowatt hour charge for each kilowatt hour you consume. And that's why California's rates of the investor owned utilities are more than double the national average.
- [19:04]
B
Now I want to broaden this a little bit for listeners who maybe aren't in California. I live in New Jersey. Rob is usually in Washington D.C. although I think on the road at the moment. This is a broader issue just than California. I mean, it's sort of a very extreme example in the case of California because of all of these policy and climate adaptation resilience measures that have been implemented. But if we take the state of New Jersey, which is a lot closer I think to the national average rate, I pay about 18 cents per kilowatt hour of electricity. I think the average is in the 16 to 18 cents range. So we're kind of typical here in New Jersey. We also have a pretty proactive and generous solar program to support rooftop solar. So there's some similar issues at play here without maybe quite as much magnitude. But I want to focus on this issue where we are paying most of. Basically most of what we pay for is charged as if everything scales with how many kilowatt hours we use, when much of that, as you've explained, doesn't only really the energy that we generate at power plants, the losses across the wires and the sort of social costs of pollution and climate change scale proportionally to the amount of energy we consume. The rest is sort of fixed. But if I look at my bill here in New Jersey, I pay about 18 cents a kilowatt hour for electricity in total. Most of that really. If I were looking at the kind of wholesale price of electricity and some of the policy costs that maybe scale with that as well, like the renewable portfolio standards that are a percentage of generation, so maybe do scale with how much you consume, I completely only come up with about 5 cents a kilowatt hour of cost. That's variable. So of the 18, less than a third is probably kind of marginal cost that I am actually driving when I consume electricity. And just to make it concrete, I recently bought an EV about a year and a half ago. We've driven about 20,000 miles in that in the first year. That's roughly average for a typical light duty vehicle in the US at the 18 cents a kilowatt hour rate, that cost me about $1,200 a year to charge my car. If I were spending only 5 cents a kilowatt hour, paying only for the actual incremental cost of that, you know, incurred. When I charge my car, it would only cost me about $300 a year. So I'm paying an additional $900 a year to charge my EV that really I probably shouldn't. That should be just savings in my pocket. An additional, you know, 80 bucks a month of savings that I could be factoring in when thinking about whether or not to buy an EV versus stick with an internal combustion or hybrid car. These are pretty substantial differences. $900 a year, $850 a year. That's a pretty big incentive that we're not providing for people to electrify. So as we enter this sort of era of electrification, and it's not just about rooftop solar and how we misprice that, but also how we're mispricing all of these other trade offs that we face in our lives between electricity and other fuels. I feel like this issue is getting bigger and bigger, not just in California, but around the country. What are you seeing in terms of these sorts of incentives? Is this significant in your mind for someone's decision to adopt a heat pump or to adopt an EV or other kinds of decisions beyond solar that they're facing in their lives right now?
- [22:14]
C
Yeah. Let me start by saying there are two big problems with the way we do this. One is the equity issue, which I'm sure we'll get back to, which is that it turns out this extra money, when you get it by charging people for kilowatt hours, takes a disproportionate share of the income from low income people. The other is when you set a price for electricity that is way above the actual cost of providing that electricity. It's going to discourage people from electrifying things now. It's also going to discourage people from just using more electricity. And people who love conservation say, well, we should have higher rates to encourage conservation. I think that's misguided beyond some point. And we are way beyond that point in many areas. But setting that aside for a moment, we need people to electrify if we're going to reduce greenhouse gases. The way we're going to elect we're going to reduce building greenhouse gases is by people switching to electric transportation instead of burning gasoline and people switching to electrification for heating, hot water heating, cooking clothes, drying, all the things where you have a choice of using natural gas. In both of those cases, if you overcharge for electricity, you are discouraging people from doing that sort of electrification. I will give you the extreme example again in California right now, even with California's well known very high gasoline prices, gasoline and electricity are about at parity. That is, you don't save money fueling your car with electricity. If you compare a Prius to a Tesla Model 3, which are about the same interior size, you don't save money when you switch to a Tesla Model 3 for fueling. That's nuts. You should be saving three quarters of the cost of fueling by switching to electricity. Likewise, when we start talking about heat pumps now, there's one other aspect of this which is often not appreciated. Not only are we overcharging for electricity, we are undercharging for gasoline. So even with all the taxes, and I've done a bunch of work on this. If you look at the price of gasoline almost everywhere in the country, actually, if you believe the social cost of carbon is over $100 a ton everywhere in the country, gasoline is underpriced. We're not charging enough to reflect the full cost. So it's even worse than just the overpricing of electricity. We're really putting our thumb on the scale in the wrong direction when it comes to getting people to electrify transportation. And it's also true with natural gas, though to a lesser extent. If we're going to consider social cost of carbon over $100 a ton, natural gas is also underpriced pretty much everywhere in the country. So we want people to adopt heat pumps. We want people to put in heat pump water heaters, but we're really sending economic signals to sell them, not to.
- [25:26]
A
You're not going to hear an argument from me that we're underpricing fossil fuels. I do have a question about the kind of story or situation you just laid out, Jesse, and about how it costs maybe an extra 800-700-900 to charge your EV, as compared to a world where we hadn't laid in the per kilowatt hour cost with all these charges, which is one story I heard you telling earlier just a few minutes ago, Severin, was basically that we've chosen to pay for a lot of programs that are connected to the electricity grid through electricity rates. And of course, if we funded them through public dollars, we wouldn't need to run them through the electricity rate structure. However, there's another world where you pay for these systems. We pay for these programs not with, you know, higher per kilowatt hour rates, but with higher fixed charges on the bill. And I guess my question is, would an EV owner in New Jersey, let's say, really capture all of that $800, or would a lot of it just wind up, or some of it, some, maybe X factor, wind up going back on their bill, but now appearing as a fixed charge associated with just the cost of hooking up to the grid and being a participant in the local state electricity system?
- [26:44]
C
Yeah. So certainly if you were a customer of the utility and we put it into fixed charges, that part of your bill would go up. There's no question about that. But how much it would go up would be independent of whether you get an electric vehicle. So when we think about people electrifying, we wouldn't be discouraging them from getting an electric vehicle or putting in a heat pump. We still have to collect the Revenue. One alternative way is a fixed charge on your electric bill. There are two very big problems with that. One is if you just put a uniform fixed charge on electric bills, you are really disproportionately harming low income customers. And you know, from an equity point of view, I think that's a complete loser. And it's the reason we have fixed charges, not just that are zero in California, but that are very low everywhere. Typically 10% of your bill is a fixed charge across the United States. The other big problem is that about 60% of the entire electric load is not residential. It's commercial and industrial. And there is no natural fixed charge on commercial and industrial customers. I mean, you can try, but if you put the same fixed charge on a corner bodega as you put on the Google campus, you're either going to drive out all small companies or you're just not going to do anything because you're not going to collect a significant amount of money. So we're not really addressing the problem with this idea of a uniform fixed charge, which is part of why in California we proposed if we couldn't put more of these costs onto the state budget, to have an income based fixed charge, which I'm going to just say right up front, is an income tax. So it's not a hidden income tax, it's an income tax that if the legislature refuses to put it on the state budget, where we already have a very progressive income tax, it would be a way for them to continue to say it's not us doing it, it's just your electric bill, but have an income tax. That is one solution, but it's only a solution in itself for the residential sector. Again, we don't have a natural analogy for the commercial industrial sector. That's more than half the load.
- [29:14]
B
One thing I appreciate about that proposal is it just as straightforward that this is all basically just taxes, right? These are public purposes that society at large benefits from, like providing income bill assistance to low income people so they can heat their homes in the winter. Making sure that we're promoting clean energy across the state and energy efficiency programs, making sure that we are hardening the grid to wildfires and climate resilience. All of those are public goods that we just need to raise the money for in some kind of fair way. That's sort of the key principle. And you know, there is no economics answer really to what is fair. That's more of a societal question about how we want to allocate these public costs. And we typically do those through progressive taxes of some sort or another. Right. Property taxes that go up as the value of your home goes up. Income taxes that get higher per dollar as you earn more money. That's generally how we pay for these kinds of things. And we have not been doing that for a huge chunk of our electricity bill, which now represents effectively a set of public policies, not just whatever the cost of actually consuming electricity is. Can you talk a little bit about how that's gone in California? Because I know there's the this is how it started, this is how it's going meme we can put up. You had some grander aspirations than where things have ended up in California, but they did just recently approve a shift in this direction. Am I right?
- [30:30]
C
Yeah. So we put out our working paper in 2021. Just to be clear, the first section of the solutions talks about moving costs onto the state budget. And then as a backup, it says we could do this. Income graduated fixed charge. And in our design of an income graduated fixed charge, we had seven categories of income that people could fall into so many different buckets depending on your income.
- [30:57]
B
Just like federal income taxes have different tiers.
- [31:00]
C
That's right. And not as good as federal income taxes because they are just dollar buckets, not marginal rates. But still, we said there that the only way you can do this is if the state tax authority coordinates. Otherwise you'd have to create a whole new income tax mech administrative mechanism. In the summer of 2022, without consulting U.S. estate legislators did two things. One is somebody during the budget reconciliation negotiations put into the state budget a requirement that the California Public Utilities Commission adopt an income graduated fixed charge. It specified there should be three categories and didn't say much more than that. Another bill actually started to look at categories to move on to the state budget. Unfortunately, that second bill died and hasn't been revived yet. Although I keep getting told it might be the first bill. The first was actually passed as part of the budget. So suddenly the CPUC was told develop an income graduated fixed charge. And what was in that clause was have it developed in 2024 and implemented in 2025, which is just breakneck speed for a regulatory commission. So they actually threw it into another proceeding and pushed it along. And last month or less than a month ago, they passed income graduated fixed charge. Now, it didn't really do what we had proposed. There are only really two categories. There's a third that's sort of a fig leaf. It applies to almost no one. People on the low income program will pay $6 a month. People not on the low income program will pay $24.15 a month, a number that just happens to be equal to exactly the fixed charge that the biggest Northern California municipal mud Sacramento municipal utility charges. And the volumetric rates will drop by 5 cents a kilowatt hour to 7 cents, differing across the utilities. So it's not nearly as robust, as aggressive as we had proposed, but it's a step in the right direction. A small step, admittedly, and I should.
- [33:21]
B
Say it's a small step in California terms just because your rates are so large. But 5 to 7 cents a kilowatt hour would be like a third of my bill here in my total bill right here in New Jersey or the national average. So it is a pretty sizable reduction in the relative cost of electrifying your home. Right. Of switching to a heat pump water heater instead of a gas water heater or purchasing an ev. So maybe not quite as far as a truly cost reflective shift would have us maybe design it, but a step towards, you know, paying in a bit more equitable way. I know there's a lot of controversy about the fact that it's a hard cut off. You know, if you're in a low income program, you pay this low level. If you're just above that cutoff, you pay the same as somebody making six figures at Google or wherever else. So not quite as progressive as we might want to see, but yeah, but. And so that's been, I think, a large source of the potential backlash or controversy around the proposal.
- [34:12]
C
So the last part of this so far is that some state legislators, all of whom have voted for that budget bill that it was in, have now decided they're rabidly opposed to the income graduated fixed charge. They've introduced a bill to rescind it, which appears to have died this year. So we'll see if it stays dead. But it looks like this income graduated fixed charge will probably go into effect. Something you pointed out though has really caused a lot of backlash, which is that it's true people just above the low income cutoff on average are going to see increases. And that is very troublesome because it didn't have to be designed that way. It pretty much is a result of the fact that the legislature has tied the hands of the CPUC in how they can implement this by giving them no tools to do more income graduation.
- [35:10]
B
So they would have to coordinate with income tax agencies basically to understand what people's income levels are to implement something more, more complicated. Right. So instead they're using their current low income assistance programs as the only proxy they have.
- [35:23]
C
And I actually met with the state tax authority. They said, we can't help you at all unless the legislature passes new legislation allowing us to share some sort of not very granular information. And what we pictured was the state tax authority sends to the utilities or maybe to a third party who collects this money, a list that says, Severin Borenstein's household is in bucket four, and that's it. And I think that that was completely doable. I did want to loop back to something you said, though, about your bill and how 5 to 7 cents would be a lot on your bill. If you look at California's prices of over $0.40 compared to $0.10 a kilowatt hour for the actual cost of delivering, and you recognize that difference is essentially a tax on electricity, we're reducing the tax, but we're reducing it by like, less than 20%. So the penalty we are still putting on electrifying your transportation or your house is still really substantial.
- [36:29]
A
What's the progressivity? I mean, it sounds like California's attempt to reform its electricity rates is kind of working backward into a question that I had that's almost like a devil's advocate question about our current electricity rate structure, which is, I understand now that trying to electrify when you're trying to get people to electrify when electricity is very expensive is bad. Isn't there a progressivity? And I guess my question would be, what is the progressivity of the system that we have now and especially outside of California? Because it seems like, yes, on the one hand, you know, it's bad that you step out of all these charges and you step out of all these system costs by installing rooftop solar or by emitting yourself from the electricity system in one way or another. On the other hand, richer people probably do use more energy. And so it's not a bad way of kind of backing into this. Like, this is maybe akin to how the gas tax works, where we pay for road maintenance by putting a charge on each additional gallon of gasoline. So just like, what would we have to do to make it more progressive or to change how the system works?
- [37:44]
C
We actually did quite a bit of work on this in California, and I've done a bit outside California. California, actually. It's almost flat now across income. Electricity consumption is almost flat now across income categories, which people find very surprising. But the reality is that poorer people live in the hotter parts of California and use more air conditioning, and richer people disproportionately put in rooftop solar. So when you put those together, the consumption of low income people is not very different. It's within 10 or 20% of the consumption of high income people.
- [38:25]
B
Yeah, and we've looked at this in other jurisdictions as well. My colleague at mit, Scott Berger, looked at this for Northern Illinois. There's been other, couple other studies as well. I mean, there is a non zero positive correlation in most places between consumption and income, but it is not a strong correlation. If you look at the scatter plot, you know, it's quite broad. And just to put like a kind of clear anecdote around that, I mean, think about an urban 30 something professional working for a tech company or a finance company in an urban, you know, condo with relatively low square footage, but making $250,000 a year in household income. That condo has a relatively small square footage. They have the most efficient insulation, the most efficient appliances, et cetera. So even though they're wealthy, they're probably consuming far less than middle or low income household living in a single family, poorly built, not very insulated home in the suburbs, who also, by the way, has to spend a lot more on gasoline to get to work and back as well. So there's a lot of places where this rough correlation that kind of makes intuitive sense as you explained it, Rob, really breaks down all over the place. And then that begs the question, why don't we just use income if that's what we're trying to proxy for, just use income itself, which is how we deal with all kinds of other public policies in a progressive manner. So I think that's what's interesting about this income graduated fixed charge concept is it's just saying, let's just do that. Because that's what we're trying to do here with this volumetric rate, trying to proxy for income.
- [39:51]
C
And the opponents will argue that you're consuming electricity, you should pay for your electricity system. If you consume more electricity, you should pay more for it. That argument has some sway if we're talking about sort of the traditional costs of providing electricity. But if those were the costs, California's rates wouldn't be skyrocketing. They're new costs that we're choosing to put on to electricity. The other aspect of this, and I did some work on this, is that because during the debate in California and in a number of their states, people talk about, well, the energy hogs should pay for more of the system. So I looked into who are the energy hogs, and there's a great data set to do this in California, there's a less good data set to do it nationally. But I've done both. And I asked the question, what is it that makes an energy hog an energy hog? And it turns out that in California, if you compare the above median household consumers to the below median household consumers, 75% of the difference in consumption is explained by three factors. How many people live in the house, what climate they live in, and whether they have rooftop solar. So if instead of looking at household consumption, you look at per capita consumption, if instead of looking at net you look at gross consumption, and if you adjust for how hot is it around there, that explains 75% of the difference between the quote hogs, the above median, and the what I term angels below median. And in fact, if you take the the top 20 and compare them to the bottom 20 percentile, the share that's explained by those factors is even larger.
- [41:40]
B
Does that argue for another potential set of proxies one could use to come up with a fairer rate structure that kind of basically backs out those things that are out of people's control and setting fixed charges or even the volumetric rate?
- [41:52]
C
Yeah, we could start designing a whole new administrative system that bases it based on how wasteful you are in electricity consumption. I'm resistant to that. In the last part of this paper I wrote on, it then starts to compare. Well, why should we be punishing energy hogs in home electricity consumption when first of all, that's only 15% of all of our energy use? It's probably less than 10% of our greenhouse gas emissions. Nobody is punishing flight hogs, which is a huge part of upper incomes greenhouse gas emissions. Nobody is punishing consumption hogs. Of all the things we have delivered to our house, there isn't an increased burden share based on this is something that is wasteful. In fact, of course, if you're a frequent flyer, there's just the opposite.
- [42:48]
B
So I have a question we probably should have asked at the beginning, which is why do we do it this way? Why are our electricity rates the way they are now, which is basically this bundled flat price per kilowatt hour? Or maybe it's become a time of use rate where there's a higher rate in the evening than an overnight or midday. But why do we bundle all these costs into the kilowatt hour charge? What's the sort of historic explanation for why rates today and what we pay for electricity is so divorced from what it actually costs a utility to deliver one more kilowatt hour to Our homes.
- [43:20]
C
Well, let me start, by the way, you mentioned time of use rates. Time varying rates. I am all for time varying rates. That doesn't fundamentally change this problem at all though, because all of those time varying rates are part of that variable cost we talked about, which is less than half in most parts of the country of the full cost. So it hasn't always been this way. Long time ago, fixed charges played a bigger role in most electricity bills and most utility bills. In my water bill and in most water bills, your fixed charge of being hooked up to the water system is a much higher share of your total bill than almost anywhere for electricity.
- [44:00]
B
Or I should say also your Netflix subscription, your cell phone bill, your cable, Internet, all of these things are purely fixed charges, 100% fixed monthly subscriptions, and we don't seem to bat much of an eye at those charges. And here we are Talking about a $25 a month charge for fixed charge in California as this huge controversial thing. It's sort of interesting in proportion.
- [44:23]
C
Yeah. And so then in the 1970s, of course, we had the Arab oil embargo and energy prices went up and there was a real move towards conservation. I think rightly in that there was a recognition people just don't understand how they consume energy. It's not the same as milk, you know, how many gallons of milk you're buying people. The standard analogy was it's like going to a supermarket, getting to the checkout, and they just tell you the total bill and don't tell you which items cost which things. People didn't know how much your refrigerator used versus your television, et cetera. And so there was a real move towards conservation and improved energy efficiency. And the advocates rightly recognized higher prices will get people to pay more attention to what their electricity usage is. So for many decades since then, there's been an advocacy that we want higher prices in order to encourage conservation. And putting costs into fixed charges and lowering the volumetric will lead people to pay less attention to electricity consumption. And I'm all on board with that. The problem is once you get prices above the full cost, including all the externalities, all of the pollution externalities of providing the electricity, you are inefficiently discouraging people from consuming goods. So goods that people, they might be more comfortable if they turn the air conditioning to 74 instead of 76, but they don't because their price is so high. So you can get inefficient conservation. And we have in most of the country pushed past the point of charging prices that reflect social marginal cost. And I think this is largely because there has been this real drive for improved energy efficiency. Then most recently, I have to say, the big advocates are the rooftop solar industry. The rooftop solar industry business model is, I mean, this is just a statement of fact, is built on higher electricity rates. They do better when rates are very high than when they're very low. And in California and many other places, fight like hell when there is a move to increase fixed charges and lower volumetric charges. And so that's been the most recent piece of why we have gotten to where we are today.
- [46:54]
A
We've glanced a few times at what I think so far has only been called cni, but which I believe stands for commercial and industrial. But it's like all the business sides of all the business users of the grid, just at the highest level, how do we split up system costs between consumers and households and the businesses who use the grid? Because we're all on this big system together. And something I've heard about other countries, particularly countries like Germany, where there's a lot of social emphasis on maintaining a manufacturing base and an industrial base, is that there's a lot of indirect subsidies that households pay in terms of energy costs. Basically, households, like, indirectly subsidize industrial users through lots of mechanisms, including electricity costs. And my question is, like, do we do that in the US Broadly speaking, and just generally, how do we split up costs between these two very different kinds of users of the same system?
- [47:59]
C
So we have to recognize first of all that all of these prices, including for commercial industrial customers, are above social marginal costs in most of the country. I wouldn't call it a subsidy so much as we disproportionately put these system fixed costs and other costs we're loading into electricity onto residential customers, nowhere near the way Germany did it. Germany decided we're going to do all sorts of renewables and have much higher costs, but we really can't put those on to CNI customers because they can leave, particularly the industrial customers. So they have kept their industrial rates tamped down while raising residential rates quite a bit. They used to have much higher costs than everyone in the U.S. although California, Hawaii have now passed them. So it's really a question of how are we allocating these other costs. Now, CNI customers typically have somewhat lower system fixed costs because they are connecting to the grid with less distribution line and in some case actually at high voltages. But even setting that aside, we aren't allocating as much onto them. And that is just a public Policy decision. It's a trade off. You know, if you put it on residential people will be very unhappy, but they couldn't do much about it until very recently. Whereas if you put it on commercial industrial, one, they might actually end up leaving the area. And two, they had much greater opportunity for self generation and cogeneration. So in order to avoid those typically inefficient responses, we have disproportionately loaded these costs on to residential customers.
- [49:46]
B
Except now the residential customers can also do something, right? So we recognize this was a problem long ago for commercial industrial customers that if you didn't give them a rate design that actually conveyed the marginal cost of their behavior, they would do all kinds of crazy things up to and including leaving for a cheaper electricity rate location. And typically residential households had really no choice in the matter. You had a monopoly utility, you weren't going to pick up your house and move just because electricity rates you. And you had no other options to generate your energy. But now we do. You can go down to Home Depot and buy a solar system tomorrow, right? You can put a battery in your garage and decide how to operate it. You can. And you're facing now a whole set of electrification choices about whether to consume electricity or another fuel. And all the same issues that were there for commercial industrial customers are now there for households as well. And I think it just increasingly makes the way we've always done it a totally untenable proposition going forward that the costs of continuing to send distortionary signals to households are mounting every year. And I think more importantly on the other side, the savings opportunity of sending more cost reflective rates, more dynamic rates that encourage people to do things that actually save the energy system as much money as it saves your household, those are also going up, right? We've talked in the past on the show about load growth and all the expectations for how much electricity demand is going to explode going forward. That's a big change from the last 20 years when demand has basically been flat. But if we're in an environment where we're actually building out more capacity, more generating capacity, more transmission, more distribution capacity. Now all those household options, the ability to install solar and storage and operate it at the right times of the day to actually displace the need for a bigger transformer on the substation or to add another gas power plant, those are billion dollars of savings opportunities that weren't really relevant 10 years ago or five years ago. So it just feels like we're reaching this kind of crux of mounting costs of doing it the wrong way and bigger and bigger opportunity costs of not doing it the right way and saving lots and lots of money.
- [51:53]
C
Yeah, I wrote a blog post many years ago called the Decline of Sloppy Rate Making that basically said 20 years ago rate making was about equity, what's fair and there wasn't much residential customers could do about it. There was some concern still about CNI responding in inefficient ways, but even they had fewer choices 20 years ago. Now there is just so many alternatives both on the self generation side and on the consumption side that getting the rates wrong is just massively more costly than than it was two decades ago. And unfortunately regulators typically are just not equipped to deal with that. And the sort of bibles and manuals that they use for what's the guideline for doing this don't account for that and don't really in many cases even get those incentives right. And so they advocate for things like high volumetric rates that are really going to undermine both equity and efficiency in the energy transition.
- [53:03]
B
Well, as you know Severan, I helped write a new guidebook for regulators in the Utility of the Future study in 2016. It's still the future because they haven't quite adopted it yet. But we're seeing the kinds of challenges that we emphasized in that MIT study really start to come to a fore now. And the opportunities are also real. We're seeing dynamic. Retailers like Octopus Energy in the UK offer these sorts of cost reflective incentives for people to be very flexible electricity consumers and shape their consumption in ways that saves the grid money and then saves them money. Octopus has grown to become the largest retailer in the UK in just five years by tapping into that opportunity. It's just something that isn't possible in most of the US market because we don't have real retail competition. And so it's up to the regulators to try to actually create the incentive structure for that kind of behavior. And they haven't really risen to that challenge yet. And most of the country really anywhere I should say.
- [53:55]
A
So let me just ask directly then how do we fix this? And we've talked about income, graduated fixed charges, but there's another aspect of this which we haven't quite confronted which is in a lot of parts of the country, certainly in California, you're paying your electricity bill to a company to, to an investor owned utility. And so how do we fix this given the fact that often consumers believe they're interfacing not with a public entity, not with a government, something that they're very used to asking what their income is and then paying a fee for it. But they're paying a bill to a company.
- [54:39]
C
Yeah. So I think the first thing we need to recognize is that there are a lot of costs on the bill that are just not even direct costs of providing electricity. And they really need to have legislatures step up and say we're going to take these costs off the bill and pay for them through the state budget. Now some opponents of that say, well then they're going to get scrutinized and in a bad year they might get cut. And that's true. But in some ways, maybe we need more scrutiny of many of these programs. That would go a long ways. It would take some real legislative courage to do that. But I think it would be a big part of changing this dynamic. And by the way, California, I talked about wildfires and all these additional costs. Those are not staying in California. If you look at the last few years, Oregon, Washington, Colorado, most recently Oklahoma, have had massive wildfires started by utilities. And so we are going to have a lot more of these costs loaded onto bills if we don't change the way we deal with this. Secondly, I think we're going to see and I think we should see a revisiting of the investor owned utility model. When I teach this in my class, I teach all the problems with regulating investor owned utilities and then I talk about municipal or government owned utilities and all the problems of that. And I had a student once say I must have missed something, which was the right answer. And of course there is no right answer. Both of them are highly problematic. We do have municipal utilities and we have government utilities, including some wholesale utilities like Bonneville Power that provide a lot of these services. I think we're going to see and we should see a revisiting of the question of what's the right way to provide this good. You can be free market, but when you get to the electricity industry, free market isn't one of the options. Nobody is suggesting unregulated monopolies provide transmission and distribution. That just wouldn't work. It's a natural monopoly. So I think we are going to revisit that and ask the question of what's the right way to do this and what should be government's role in first of all, obviously covering these social programs and investments in greening the grid and so forth and maybe going the next step and talking about privatizing some sort of auction for things like transmission, which California grid. I'm on the board of governors, the California Independent System operator. Many of the large transmission projects are actually bid out and the cost is not a guaranteed rate of return. So that doesn't solve exactly how we pay for them. But I think there are a lot of ways to re envision the way we pay for electricity that could get us a lot closer to prices that actually reflect the cost of providing electricity and move costs into a much more progressive payment system from a state budget.
- [58:01]
A
You actually beat me to my follow up question because my next thought was going to be as some readers may have seen, Warren Buffett in his annual letter to Berkshire Hathaway investors this year raised actually questions kind of very similar to these, but on the other side about the long term viability of the investor owned utility structure where he said between wildfires and other kind of hardenings of the system that will need to happen due to climate change. And because of course of the effect of climate change itself, he sees and because of other social changes, he sees a kind of long term twilight of the investor owned utility structure coming into view. And it seems like in this conversation too we've been pressing at the limits of the investor owned utility structure where I think one concern that listeners might have about taking some of these programs off the electricity bill and putting them onto state budgets is that that essentially makes the balance sheets of these private companies, investor owned utilities, look a lot better. It puts them in a very different financial position. It de risks certain things for them, it subsidizes certain aspects of their operation. And so my question here, which in some ways you've already anticipated, is that like if we keep following this line of thought to its conclusion, and if we understand that because of different technologies coming online, including rooftop solar, including the long standing possibility of companies and industrial facilities using natural gas doing some kind of on site co generation, do we eventually wind up at a place where governments or some other kind of entity just have to take over electricity systems and then operate them in a very different way from how they've been operated for the past 30 years.
- [60:01]
C
We may, but I'm not sure where we need to because frankly if we get back to a system where the bills are actually just paying for the traditional wires as well as the marginal cost of electricity, I think that that's actually probably a pretty stable system. It's all of these extra costs that are going to get are loaded on in parts of the country and will get loaded on in other parts of the country that I think are the real problem. So I start by confronting those extra costs and how to deal with them. But I think there is going to be an ongoing discussion of what is the role of an investor owned utility and all of the distorted incentives. You know, whether you put something on the government or you put it on the IOUs, there are distorted incentives. We all can point to problems with government agencies. The question is in this new world of what climate change is doing to us and what we need to do to reduce climate change, which are those incentives getting relatively worse or better. And I think in that is the debate we need to have. In some ways I tilt more now. I used to be much more saying IOU regulated utilities aren't great, but they're a lot better than having the government run things. I'm now in a more neutral position on that and need to really think through how do these changes to what's happening in the electricity system affect that balance of using a government agency versus using an investor owned company.
- [61:46]
B
Yeah, I should say too that I mean we're focused a lot on the equity piece of this, which is really important given these mounting kind of public purpose costs. But again, to emphasize the savings opportunity. There is an efficiency argument here too to getting these rates to reflect the actual cost, which is that you're then telling people, yeah, if you can install a solar system that's maybe facing west instead of south and that has a battery paired with it, and you can shave off that evening peak that you would otherwise be contributing to, that would require us all to build bigger transformers and more transmission lines and other types of investments that aren't used very often or just sitting there for that occasional peak that is the better alternative to the monopoly utility. We have alternatives to the wires companies on the margins at least to substitute for these traditional natural monopoly roles. And the only way we can coordinate that regulated monopoly entity and all of the kind of distributed behavior of households and private companies installing solar and batteries and energy efficiency retrofits and everything else is to have some price signals that coordinate those two functions. And that's where again the sloppy rate design leads us to stray. Not just on equity, but also we're going to end up building a lot of wires that the utilities will be perfectly happy to build and rate base and earn money on that we really just don't need. And at the same time we're going to be having a lot of people installing solar systems now maybe paired with batteries to self consume as much energy as they can and not have to export it because they get compensated less for exports. But if you don't remove the distortion on the core rate design, then they're saving way more than they should when they're self consuming. And they're using that battery not to optimize operations with the grid, but to simply save the most money for the household. So somehow we have to bring the household incentives in line with the utility costs and incentives and solve this equity problem. There's the two pieces of the puzzle and there's a lot of work left to be done there.
- [63:35]
C
And I think, you know, we've always had these problems. The problem is that climate change and all of the new costs we're facing have just ramped them up. And it's ramped them up so quickly in places like California and now a lot of other states that regulators haven't caught up yet. And these new concepts like an income graduated, fixed charge that people say, well, nobody's ever done that before. We're going to have to start thinking about things that aren't the way we've done them for the last 30 or 40 years.
- [64:07]
B
We should probably leave it there. Thanks, Severin, for joining us and walking us through all this. We really appreciate your time.
- [64:12]
C
Yeah, it's great to be with you guys.
- [64:16]
A
Thank you so much as always for listening again. We'll be back next week with an all new episode of Shift Key. Our editors are Gillian Goodman and Nico Lauricello. Multimedia editing and audio engineering is by Jacob Lambert and by Nick Woodbury. Our music is by Adam Kramlau. Thank you so much for listening. Happy New Year. See you next week.