Equity issues in TOU rate design

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I attended the Center for Research into Regulated Industries (CRRI) Western Conference last week, which includes many of the economists working on various energy regulatory issues in California. A persistent theme was the interrelationship of time-varying rates (TVR) and development of distributed generation like rooftop solar. One session was even entitled “optimal rates.” We presented a paper on developing the proper perspectives and criteria in valuing distributed solar resources in another session. (More on that in another post.)

With the pending CPUC decision in the residential ratemaking rulemaking, due July 3, time of use rates (TOU) rates were at the top of everyone’s mind. (With PG&E violations of the ex parte rules, the utilities were cautious about who they were presenting with at least one Commission advisor attending. At least one presentation was scotched for that reason.) Various results were presented, and the need for different design elements urged on efficiency grounds. In the end though I was struck most by two equity issues that seem to have been overlooked.

First, various studies have shown that TOU rates deliver larger savings for customers who have various types of automated response equipment such as smart thermostats (e.g., NEST) or smart appliances. Those customers will see bigger bill savings and may find that doing so is more convenient and comfortable. An underlying premise in these studies is that the customer is the decision maker. But for 45% of California’s residents–renters–that is not the case. As a result tenants, who tend to have lower incomes, are likely to be subsidizing home owners who are better equipped to benefit from TOU rates.

Tenants must rely on landlords to make those necessary investments. Landlords don’t pay the bills or realize the direct savings in what is called the “split incentive” problem. And landlords may be concerned that future tenants might not like the commitments that come with the new smart devices. For example, signing up for PG&E’s SmartAC program can face this barrier.

So in considering residential customer impacts, the CPUC should address the likely differential in opportunities and benefits between owner-customers and tenant-customers. Solutions might include rate design differences, or moving toward a model where energy service providers (ESP or ESCo) take over appliance ownership in multifamily buildings. This split incentive is endemic across many programs such as the solar initiative and energy efficiency.

Second, a fixed charge have been proposed to address the anticipated impact of solar net energy metering. The majority of costs to be covered are for the “customer services” that run from the flnal line transformer to the meter. (I’ve been focused on this segment while representing the Western Manufactured Housing Communities Association (WMA) on master-metering issues.) However, the investments in customer services are not uniform across residences. For older homes, the services or “line extensions” may have already been paid off (e.g., most homes built before 1975), and with inflation, the costs for newer homes can be substantially higher.

The fixed charge would be based on one of two methods. In current rate cases, the new or “marginal” cost for a line extension is the starting point of the calculation, and usually the cost is scaled up from that. However, given the depreciation and inflation, the utilities will receive much more revenue than what they are entitled to under regulated returns. In the second method, the average cost for all services will be applied to all customers. This solves the problem of excess revenues for the utility, but it does not address the subsidies that flow from customers in older homes to those in newer ones. Because the residents of older homes tend to be tenants and have lower incomes, this again is a regressive distribution of costs. Solutions might include no fixed charge at all, differences in rates by house vintage, or discounts in the fixed charge as SMUD has instituted.

Regardless, these types of subsidies flow the wrong direction.

Differing views of the future? High speed rail vs electric vehicles

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As I was driving back from Los Angeles to Davis, I thought about how convenient it would be to turn on an auto pilot that allowed us to lock into the train of cars up Highway 99. The only reason I really had to pay attention was due to the varying speeds of the traffic. But that future may be nearer than we might think. Google’s self-driving car is getting most of the press, but in fact there are many similar technologies already on the road. In fact, there’s been some concern that drivers are already pushing the limits on current controls, but collision avoidance devices may soon be standard equipment.

Which brings us to the question: How will high speed rail fare in a world with driverless electric cars? The high speed rail travel forecast appears to assume a similar mix of gasoline-fueled automobiles; in fact, the word “electric” isn’t even in the report. On the other hand, studies show that EV market share probably needs to reach 45% by 2030 to achieve an 80% reduction in GHG emissions by 2050. And the Air Resources Board is considering regulations to implement “fast refueling / battery exchange” that would make the LA-SF trip even easier in an EV. Given the shorter life of automobiles, we might expect that almost all of the highway trips are with EVs by 2045.

We’re left with the question of what are the true emission reductions from HSR in such a world? Are we building a project that’s truly useful life is less than a decade?

Comparison of cost of living

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I came across this comparison of cost of living across different nations. It’s interesting that living in Eastern Europe is less than in Russia and so much less than the rest of Europe.

Decoupling of economic and electricity demand growth

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After posting a dire report about the lack of cost-effectiveness for energy efficiency, I came across this more encouraging graphic. It shows that as national economies become wealthier, the electricity consumption growth rate declines. So we won’t be on a never ending treadmill.

Electricity-GDP

A shocking finding on energy efficiency cost effectiveness

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A study just released from the E2e Project finds that the investment costs in residential energy efficiency greatly exceed the realized benefits.  Earlier the same research program found that even if the energy efficiency measure packages, costing up to $5,000, were given away for free, only 6% of low income homeowners would participate. This is one of the first projects to track from start to finish a full set of energy efficiency projects. Much controversy has swirled around the accuracy of the engineering calculations used to estimate energy savings, and whether market barriers are impeding participation in what appears to be obvious cost saving actions. This study calls into question the premise of “costlessly” promoting energy efficiency actions.

The Project is run jointly by the University of California’s Energy Institute at Haas, the University of Chicago’s EPIC, and MIT.

Is a carbon tax feasible, and is it desirable?

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Stephen Cohen posted on the Energy Collective about whether a carbon tax is political feasible in the current environment. He argues that Republicans are likely to block any such attempt, and instead proponents should focus on efforts to reduce the costs of renewables and non-fossil alternatives. He’s particularly interested in the problem of making the purchase of renewable energy in all forms accessible to lower income groups. He proposes that R&D efforts be increased to achieve that goal.

I see two problems with this approach. First is that it’s not clear the achieving increased R&D investment is any more feasible given likely GOP resistance. Even if the solar R&D investment program was successful on net, the prominence of the Solyndra failure stands in the way.

The second is that failing to internalize the social cost of carbon emissions can lead to future distortions. The biggest problem is not so much the subsidies themselves, which may be justified on a short run basis to spark a market, but rather the difficulty of ending them when they are no longer needed. In one example, California’s Central Valley Project provided subsidized water to farmers with contracts with 40 year terms. The original subsidies were supposed to expire at the point, but the 1992 Central Valley Project Improvement Act provided for renewal of those contracts on similar terms, which was actually expected by farmers for many years prior. Those subsidies were capitalized into land prices and eventually captured by the landowners resulting in a large wealth transfer from tax payers. While the “average” price of water now likely reflects the opportunity cost of water, the marginal price of that water is still below the actual true cost, and farmers still don’t have as strong of an efficiency signal as they should. (In contrast, State Water Project and groundwater pumping costs have little or no real subsidies.) This illustrates how a subsidy has long outlived it’s usefulness and the extreme difficultly in ending them when a political constituency is created.

As a counter point, Martin Weitzman proposes that a carbon tax be created essentially through the backdoor of tariff negotiations. Weitzman points out the difficulty of negotiating quantity targets through such instruments such as the Kyoto Protocol. In contrast, successful tariff negotiations are the norm in the World Trade Organization. The President conducts those negotiations with relatively more independence, even as the current controversy over the Trans-Pacific Partnership has highlighted the exceptions to the rule. That implies that a carbon tariff probably can make it deeper into the federal legislative process than a straight up carbon tax, and the probability of a successful outcome increases significantly.

Assessing the economic impacts of drought regulations

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M.Cubed was asked by the State Water Resources Control Board to prepare an economic assessment of the emergency regulations ordered by the Governor to reduce municipal water use by 25%. We gathered a team that included Roger Mann of RMann Economics, Tom Wegge of TCW Economics, Richard Howitt and Duncan MacEwan of ERA Economics, and prepared the report in about two weeks. The SWRCB included a summary of those findings in its regulatory digest.

The innovative aspect of our study is to steer away from a single point probabilistic estimate of the benefits of the regulations and instead to focus on the potential vulnerability and consequences of the risk of continued drought in the future.

The EO is intended to address potentially significant economic vulnerabilities – risks – rather than statistical or probabilistic expectations. If the drought and high temperatures continue in California, water saved as a result of the order will become increasingly valuable. Under these circumstances, costs estimated to be associated with the EO this year could be more than exceeded by greater adverse impacts next year if the EO had not been issued.

Australia had an extended drought that lasted 10 years before ending in 2012 that cut 1.6% off its GDP. For California that would be $35 billion in a single year which is multiples of the range of costs we estimated for the regulations. In other words, the probability of continued drought would have to be less than 4% to make this option uneconomic.

We also pointed out that while the water utilities will lose revenues this year, as mostly public agencies, they will have to make up those losses in the future. For this reason, those revenue losses should be treated as eventual economic costs.

Is the Future of Electricity Generation Really Distributed?

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Severin Borenstein at UC Energy Institute blogs about the push for distributed solar, perhaps at the expense of other cost-effective renewables development. My somewhat contrary comment on that is here: https://energyathaas.wordpress.com/2015/05/04/is-the-future-of-electricity-generation-really-distributed/#comment-8092

Reblog: CallMe Power – What is a community solar garden

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Here’s a good description of different types of community solar garden configurations:

You can read about community solar garden policies in one of my past blogs.

Legal Planet: California Supreme Court to review San Diego SB 375 climate change ruling

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I blogged earlier on the implications of this case. The UCLA/Boalt Law Schools blog Legal Planet has more on this review.