California Points the Way Never to Tread with Energy Policy; It Has the Highest Electric Prices Among the Lower 48

The California Legislative Analyst's Office issued a report a few days ago titled “Assessing California’s Climate Policies—Residential Electricity Rates In California." It is written with the premise that the Golden State must stick to its foolish net zero plans but can’t hide the serious obstacles to the fantasy.

Let me illustrate with some excerpts (emphasis added):

Residential Electricity Rates Are High and Growing. California’s electricity rates are among the highest in the country. On average, residential electricity rates in California are close to double those in the rest of the nation, mostly driven by high rates charged by the state’s three large investor-owned utilities (IOUs). California electricity rates also have been increasing rapidly in recent years—not only growing faster than inflation but also outpacing growth in other states. These trends currently are on track to continue.

Various Reasons for High and Growing Rates. Although the specific reasons for California’s relatively high rates have not been precisely quantified, some of the key factors include: significant and increasing wildfire-related costs, the state’s ambitious greenhouse gas (GHG) reduction programs and policies, and differences in utility operational structures and services territories. Many of these factors are particularly significant for customers of IOUs (as compared to those served by publicly owned utilities [POUs]).

Additionally, within a given utility, the rates that residential customers pay can vary widely. This is largely due to California’s relatively robust cost-reduction programs for low-income households and rooftop solar customers, which are subsidized by other ratepayers who do not qualify for those discounts.

High Electricity Rates Put Strains on Residents and Impede Efforts to Meet Climate Goals. High and increasing electricity rates add cost burdens to ratepayers across the state. Many residents who earn lower incomes or live in hotter regions of the state are feeling these growing costs even more acutely.

High electricity rates also impede the state’s efforts to meet its ambitious climate goals by discouraging households from pursuing electrification through switching out their fossil fuel-powered cars and appliances.

Legislature Faces Difficult Choices Around Electricity Rates. Various emerging issues have the potential to affect residential electricity rates in California. These include the increasing stringency of the state’s GHG reduction goals, growing demands for electricity in the state, and increasing wildfire-related costs. To the extent that these factors raise electricity rates, that will increase already high cost burdens on Californians and make meeting the state’s ambitious climate goals through electrification even more difficult. Accordingly, the Legislature likely will confront difficult decisions about how to approach electricity rates in order to best support its varied goals, including balancing the desires to both mitigate and adapt to climate change as well as preserve affordability.

And, then, there's this:

Ratepayers Pay Additional Costs Associated With Transitioning to Cleaner Sources of Electricity. Electricity rates reflect the costs of implementing various policies to encourage utilities to use cleaner sources of electricity. For example, one of the key programs aimed at shifting the state’s mix of energy sources is the Renewable Portfolio Standard (RPS)—which requires utilities to provide a certain percentage of retail electricity sales from renewable generation.

While the costs of generating electricity from renewable resources have declined in recent years, this transition still has added costs for ratepayers. In our January 2020 report, Assessing California’s Climate Policies – Electricity Generation, we found that RPS costs resulted in an almost 5 percent increase in overall retail rates for IOU customers, which was generally consistent with national studies of RPS programs in other states. (We note, however, that nearly half of states do not have an RPS.)

These problems are perfectly reflected in the following chart:

From 6 PM to 8 AM natural gas, storage or imports must providles the energy renewables cannot supply, but the gas operation has been made less efficient by them, storage is expensive and so are imports. From 9 AM to 6PM renewables deliver excess energy that costs money in the form of constraint payments, payments to others to take it or battery charging. The sole hour when renewables match demand and don’t produce extraordinary costs is 8 AM to 9 AM. Renewables do nothing but distort costs 23 hours per day.

That pretty well summarizes the warnings to legislators, but let's focus on rooftop solar subsidies as an example of the financial hole California has dug for itself. Here is how the report introduces it:

Under a statewide program called net energy metering (NEM), customers who have installed solar panels on their homes typically receive credits on their bills for the electricity those panels generate. As we discuss in the box on page 11, the structures of such credits generally vary depending on whether the customers get electricity from an IOU or POU, as well as on when they installed their solar systems. Under NEM, however, the state historically has not required solar customers to pay for their full share of the fixed costs of the electricity system.

And, here is a fuller description:

California Public Utilities Commission (CPUC) Recently Modified Structure of Solar Credits Provided to Investor-Owned Utility (IOU) Customers.

Customers of IOUs who contracted for solar installations before April 2023 participate in programs called NEM 1.0 or 2.0. Under these programs, customers generally are credited for the electricity that they generate at the IOU’s retail volumetric rate.

In effect, the IOU pays customers the same rate per kilowatt hour for generated electricity as it charges for consumed electricity. IOU customers who contracted for solar systems to be installed after April 2023 are under a new system known as NEM 3.0 (also referred to as Net Billing Tariff), which compensates customers at a notably lower rate…

Adoption of NEM 3.0 Intended to Mitigate Projected Increases in Solar Cost Shift.

The main explanation for why NEM 3.0 provides a lower amount of credit to solar customers compared to the previous NEM programs is that the new structure credits customers only for the costs the utility avoids by not having to buy electricity elsewhere to serve them. In contrast, because the credit in the earlier NEM programs was based on retail volumetric charges, the credits that customers received also essentially included some amount of utilities’ fixed costs— despite the fact that these customers continued to benefit from the infrastructure and activities those costs support.

Consequently, CPUC’s primary rationale for adopting NEM 3.0 is that under NEM 1.0 and 2.0, customers without rooftop solar were effectively subsidizing those with solar. This is because when solar customers do not pay for fixed costs (as generally was the case with NEM 1.0 and NEM 2.0), the costs do not go away. Instead, those fixed costs typically must be built into the volumetric electricity rates that are paid by other (non-solar) customers. CPUC’s estimates of the costs of the NEM program to non-solar IOU ratepayers range from roughly 10 percent to 20 percent of an average non-California Alternate Rates for Energy customer’s monthly electricity bill depending on the utility—accumulating to over $200 to $400 annually per customer.

Furthermore, CPUC anticipated these costs would increase substantially over time, given the trends toward higher fixed costs in electricity rates and a growing share of ratepayers installing rooftop solar.

The move by California to rein rooftop solar costs to the system as a whole effectively reduced net metering benefits solar owners by roughly 75%. This, though, doesn't solve the problem. Rather, it only mitigates it to some extent going forward. That’s because: (1) there is still the 25% to address, and (2) customers who installed their rooftop solar systems before April, 2023, are grandfathered for 20 years from their interconnection date. So, the new system leaves utilities with the burden of the existing subsidies, shifting the costs into higher rates for everyone.

This is one of the major reasons why California electric rates are so high. Will the legislators listen? Not willingly, of course, but circumstances will eventually dictate correction of what cannot continue. Moreover, as it becomes ever more clear that upper income folks who can afford expensive rooftop solar systems are being effectively subsidized by those who cannot afford them, the pressurev to reform thing will also grow. The state has tried to address this offering lower-income households offsets but that's just more tinkering that’s avoiding the issue and raising cots. The report says that, too, if reads between the lines.

We should be thankful for California serving as the laboratory for all bad ideas such as as net metering. It allows other states the opportunity to avoid the same mistakes.

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