Tag Archives: solar rooftop

Retail electricity rate reform will not solve California’s problems

Leave a reply

Meredith Fowlie wrote this blog on the proposal to drastically increase California utilities’ residential fixed charges at the Energy Institute at Haas blog. I posted this comment (with some additions and edits) in response.

First, infrastructure costs are responsive to changes in both demand and added generation. It’s just that those costs won’t change for a customer tomorrow–it will take a decade. Given how fast transmission retail rates have risen and have none of the added fixed costs listed here, the marginal cost must be substantially above the current average retail rates of 4 to 8 cents/kWh.

Further, if a customer is being charged a fixed cost for capacity that is being shared with other customers, e.g., distribution and transmission wires, they should be able to sell that capacity to other customers on a periodic basis. While many economists love auctions, the mechanism with the lowest ancillary transaction costs is a dealer market akin a grocery store which buys stocks of goods and then resells. (The New York Stock Exchange is a type of dealer market.) The most likely unit of sale would be in cents per kWh which is the same as today. In this case, the utility would be the dealer, just as today. So we are already in the same situation.

Airlines are another equally capital intensive industry. Yet no one pays a significant fixed charge (there are some membership clubs) and then just a small incremental charge for fuel and cocktails. Fares are based on a representative long run marginal cost of acquiring and maintaining the fleet. Airlines maintain a network just as utilities. Economies of scale matter in building an airline. The only difference is that utilities are able to monopolistically capture their customers and then appeal to state-sponsored regulators to impose prices.

Why are California’s utility rates 30 to 50% or more above the current direct costs of serving customers? The IOUs, and PG&E in particular, over procured renewables in the 2010-2012 period at exorbitant prices (averaging $120/MWH) in part in an attempt to block entry of CCAs. That squandered the opportunity to gain the economics benefits from learning by doing that led to the rapid decline in solar and wind prices over the next decade. In addition, PG&E refused to sell a part of its renewable PPAs to the new CCAs as they started up in the 2014-2017 period. On top of that, PG&E ratepayers paid an additional 50% on an already expensive Diablo Canyon due to the terms of the 1996 Settlement Agreement. (I made the calculations during that case for a client.) And on the T&D side, I pointed out beginning in 2010 that the utilities were overforecasting load growth and their recorded data showed stagnant loads. The peak load from 2006 was the record until 2022 and energy loads have remained largely constant, even declining over the period. The utilities finally started listening the last couple of years but all of that unneeded capital is baked into rates. All of these factors point not to the state or even the CPUC (except as an inept monitor) as being at fault, but rather to the utilities’ mismanagement.

Using Southern California Edison’s (SCE) own numbers, we can illustrate the point. SCE’s total bundled marginal costs in its rate filing are 10.50 cents per kWh for the system and 13.64 cents per kWh for residential customers. In comparison, SCE’s average system rate is 17.62 cents per kWh or 68% higher than the bundled marginal cost, and the average residential rate of 22.44 cents per kWh is 65% higher. From SCE’s workpapers, these cost increases come primarily from four sources.

  1. First, about 10% goes towards various public purpose programs that fund a variety of state-initiated policies such as energy efficiency and research. Much of this should be largely funded out of the state’s General Fund as income distribution through the CARE rate instead. And remember that low income customers are already receiving a 35% discount on rates.
  2. Next, another 10% comes roughly from costs created two decades ago in the wake of the restructuring debacle. The state has now decreed that this revenue stream will instead be used to pay for the damages that utilities have caused with wildfires. Importantly, note that wildfire costs of any kind have not actually reached rates yet. In addition, there are several solutions much less costly than the undergrounding proposed by PG&E and SDG&E, including remote rural microgrids.
  3. Approximately 15% is from higher distribution costs, some of which have been created by over-forecasting load growth over the last 15 years; loads have remained stagnant since 2006.
  4. And finally, around 33% is excessive generation costs caused by paying too much for purchased power agreements signed a decade ago.

An issue raised as rooftop solar spreads farther is the claim that rooftop solar customers are not paying their fair share and instead are imposing costs on other customers, who on average have lower incomes than those with rooftop solar. Yet the math behind the true rate burden for other customers is quite straightforward—if 10% of the customers are paying essentially zero (which they are actually not), the costs for the remaining 90% of the customers cannot go up more than 11% [100%/(100%-10%) = 11% ]. If low-income customers pay only 70% of this—the 11%– then their bills might go up about 8%–hardly a “substantial burden.” (70% x 11% = 7.7%)

As for aligning incentives for electrification, we proposed a more direct alternative on behalf of the Local Government Sustainable Energy Coalition where those who replace a gas appliance or furnace with an electric receive an allowance (much like the all-electric baseline) priced at marginal cost while the remainder is priced at the higher fully-loaded rate. That would reduce the incentive to exit the grid when electrifying while still rewarding those who made past energy efficiency and load reduction investments.

The solution to high rates cannot come from simple rate design; as Old Surfer Dude points out, wealthy customers are just going to exit the grid and self provide. Rate design is just rearranging the deck chairs. The CPUC tried the same thing in the late 1990s with telcom on the assumption that customers would stay put. Instead customers migrated to cell phones and dropped their land lines. The real solution is going to require some good old fashion capitalism with shareholders and associated stakeholders absorbing the costs of their mistakes and greed.

What rooftop solar owners understand isn’t mythological

Leave a reply

Severin Borenstein wrote another blog attacking rooftop solar (a pet peeve of his at least a decade because these weren’t being installed in “optimal” locations in the state) entitled “Myths that Solar Owners Tell Themselves.” Unfortunately he set up a number of “strawman” arguments that really have little to do with the actual issues being debated right now at the CPUC. Here’s responses to each his “myths”:

Myth #1 – Customers are paid only 4 cents per kWh for exports: He’s right in part, but then he ignores the fact that almost all of the power sent out from rooftop panels are used by their neighbors and never gets to the main part of the grid. The utility is redirecting the power down the block.

Myth #2 – The utility sells the power purchased at retail back to other customers at retail so the net so it’s a wash: Borenstein’s claim ignores the fact that when the NEM program began the utilities were buying power that cost more than the retail rate at the time. During NEM 1.0 the IOUs were paying in excess of 10c/kwh for renewable power (RPS) power purchase agreements (PPAs). Add the 4c/kWh for transmission and that’s more than the average rate of 13c/kWh that prevailed during that time. NEM 2.0 added a correction for TOU pricing (that PG&E muffled by including only the marginal generation cost difference by TOU rather than scaling) and that adjusted the price some. But those NEM customers signed up not knowing what the future retail price would be. That’s the downside of failing to provide a fixed price contract tariff option for solar customers back then. So now the IOUs are bearing the consequences of yet another bad management decision because they were in denial about what was coming.

Myth #3 – Rooftop solar is about disrupting the industry: Here Borenstein appears to be unaware of the Market Street Railway case that states that utilities are not protected from technological change. Protecting companies from the consequences of market forces is corporate socialism. If we’re going to protect shareholders from risk (and its even 100% protection), then the grid should be publicly owned instead. Sam Insull set up the regulatory scam a century ago arguing that income assurance was needed for grid investment, and when the whole scheme collapsed in the Depression, the Public Utility Holding Company Act of 1935 (PUHCA)was passed. Shareholders need to pick their poison—either be exposed to risk or transfer their assets public ownership, but wealthy shareholders should not be protected.

Myth #3A – Utilities made bad investments and should bear the risks: Borenstein is arguing since the utilities have run the con for the last decade and gotten approval from the CPUC, they should be protected. Yet I submitted testimony repeatedly starting in 2010 both PG&E’s and SCE’s GRCs that warned that they had overforecasted load growth. I was correct—statewide retail sales are about the same today as they were in 2006. Grid investment would have been much different if those companies had listened and corrected their forecasts. Further the IOUs know how to manipulate their regulatory filings to ensure that they still get their internally targeted income. Decoupling that ensures that the utility receives its guaranteed income regardless of sales further shields them. From 1994 to 2017, PG&E hit its average allowed rate of return within 0.1%. (More on this later.) A UCB economics graduate student found that the return on equity is up to 4% too high (consistent with analysis I’ve done).

Myth #3B – Time to take away the utility’s monopoly: No, we no longer need to have monopoly electric service. The same was said about telecommunications three decades ago. Now we have multiple entities vying for our dollars. The CPUC conducted a study in 1999 that was included in PG&E’s GRC proposed decision (thanks to the late Richard Bilas) that showed that economies of scale disappeared after several hundred thousand customers (and that threshold is likely lower now.) And microgrids are becoming cost effective, especially as PG&E’s rates look like they will surpass 30 cents per kWh by 2026.

Myth #4 – There aren’t barriers to the poor putting panels on their roofs: First, the barriers are largely regulatory, not financial. The CPUC has erected them to prevent aggregation of low-income customers to be able to buy into larger projects that serve these communities.

Second, there are many market mechanisms today where those with lower income are offered products or services at a higher long term price in return for low or no upfront costs. Are we also going to heavily tax car purchases because car leasing is effectively more expensive? What about house ownership vs. rentals? There are issues to address with equity, but to zero in on one small example while ignoring the much wider prevalence sets  up another strawman argument.

Further, there are better ways to address the inequity in rooftop solar distribution. That inequity isn’t occurring duo to affordability but rather because of split incentives between landlords and tenants.

A much easier and more direct fix would be to modify Public Utilities Code Sections 218 to allow local sales among customers or by landlords or homeowner associations to tenants and 739.5 to allow more flexibility in pricing those sales. But allowing those changes will require that the utilities give up iron-fisted control of electricity production.

Myth #5 – Rooftop solar is the only thing that makes it cost-effective to electrify: Borenstein focuses on the what source of high rates. Rooftop solar might be raising rates, but it probably delivered as much in offsetting savings. At most those customers increased rates by 10%, but utility rates are 70-100% above the direct marginal costs of service. The sources of that difference are manifest. PG&E has filed in its 2023 GRC a projected increase in the average standard residential rate to 38 cents per kWh by 2026, and perhaps over 40 cents once undergrounding to mitigate wildfire is included. The NREL studies on microgrids show that individual home microgrids cost about 34 cents per kWh now and battery storage prices are still dropping. Exiting the grid starts to look a lot more attractive.

Maybe if we look only at the status quo as unchanging and accept all of the utilities’ claims about their “necessary” management decisions and the return required to attract investors, then these arguments might hold water. But none of these factors are true based on the empirical work presented in many forums including at the CPUC over the last decade. These beliefs are not so mythological.

Finally, Borenstein finishes with “(a)nd we all need to be open to changing our minds as a result of changing technology and new data.” Yet he has been particularly unyielding on this issue for years, and has not reexamined his own work on electricity markets from two decades ago. The meeting of open minds requires a two-way street.

Guidelines For Better Net Metering; Protecting All Electricity Customers And The Climate

1 Reply

Authors Ahmad Faruqui, Richard McCann and Fereidoon Sioshansi[1] respond to Professor Severin Borenstein’s much-debated proposal to reform California’s net energy metering, which was first published as a blog and later in a Los Angeles Times op-ed.

Guest Juice: Guidelines For Better Net Metering; Protecting All Electricity Customers And The Climate

Deciding if solar installation is suboptimal requires that the initial premises be specified correctly

2 Replies

A recent article “Heterogeneous Solar Capacity Benefits, Appropriability, and the Costs of Suboptimal Siting” in the Journal of the Association of Environmental and Resource Economists finds that distributed solar (e.g., rooftop solar) is not being installed a manner that “optimally” mitigates air pollution damages from electricity generation across the U.S. Unfortunately the paper is built on two premises that do not reflect the reality of available options and appropriate pricing signals.

First, the authors appear to be relying on the premise that sufficient solar, grid-scale or distributed, can be installed cost-effectively across the U.S. While the paper includes geographic variations in generation per installed kilowatt of capacity, it says nothing about the similarly widely varying costs per kilowatt-hour. They do not acknowledge that panels in the Pacific Northwest will cost twice that of those in the Desert Southwest. This importance of this disparity is compounded by the underestimate of the social cost of carbon and the possible conflation of sulfur dioxide and particulate matter damages. The currently accepted social cost of GHG emissions developed by the U.S. Environmental Protection Agency (US EPA) is ranges from $50 to $150 per tonne in 2030 (and recent studies have estimated that this is too low), compared to the outdated $41 per tonne in the article. Most of the SO2 damages arise from creating PM so there is likely double counting for these criteria pollutants. (The study also ignore the strong correlation between GHG and SO2 emissions as coal is the biggest source of both.) The study also fails to account for the enormous transmission costs that would be incurred moving solar output from the Desert Southwest to the Northeast to mitigate the purported damages.

Second, the authors try to claim that rooftop solar has not relieved transmission congestion by looking at grid congestion prices. The problem is that this method is like looking at an empty barn and saying a horse never lived there. Congestion pricing is based on the current transmission capacity situation. It says nothing about the history of transmission congestion or the ability and efforts to look forward to mitigate congestion. The study found that congestion prices were often negative or small in areas with substantial rooftop solar capacity. That doesn’t show that the solar capacity has little value–instead it shows that it actually relieved the congestion effectively–a completely opposite conclusion.

In contrast, the California Independent System Operator (CAISO) calculated in 2017 (contemporaneously with the article’s baseline) that at least $2.6 billion in transmission projects had been deferred. And given the utilities’ poor records on load forecasting, these savings have likely grown substantially. CAISO had anticipated and already relieved the congestion that the authors’ purported metric was searching for.

This disparity in economic results highlights the nature of investing in long-lived infrastructure that requires multiple years to build–one cannot wait for a shortfall to emerge to respond because that’s too late. Instead, one must anticipate those events and act even when its uncertain. This study is yet another example of how relying on the premise that short-run electricity market prices are reflective of long-run marginal costs is mistaken and should be set aside for policy analysis.

What is the real threat to electrification? Not solar rooftops

1 Reply

The real threat to electrification are the rapidly escalating costs in the distribution system, not some anomaly in rate design related to net energy metering. As I have written here several times, rooftop solar if anything has saved ratepayers money so far, just as energy efficiency has done so. PG&E’s 2023 GRC is asking for a 66% increase in distribution rates by 2026 and average rates will approach 40 cents/kWh. We need to be asking why are these increases happening and what can we do to make electricity affordable for everyone.

Perhaps most importantly, the premise that there’s a “least cost” choice put forward by economists at the Energy Institute at Haas among others implies that there’s some centralized social welfare function. This is a mythological construct created for the convenience of economists (of which I’m one) to point to an “efficient” solution. Other societal objectives beyond economic efficiency include equitably allocating cost responsibility based on economic means, managing and sharing risks under uncertainty, and limiting political power that comes from economic assets. Efficiency itself is limited in what it tells us due to the multitude of market imperfections. The “theory of the second best” states that in an economic sector with uncorrected market failures, actions to correct market failures in another related sector with the intent of increasing economic efficiency may actually decrease overall economic efficiency. In the utility world for example, shareholders are protected from financial losses so revenue shortfalls are allocated to customers even as their demands fall. This blunts the risk incentive that is central to economic efficiency. Claiming that adding a fixed charge will “improve” efficiency has little basis without a complete, fundamental assessment of the sector’s market functionality.

The real actors here are individual customers who are making individual decisions in our current economic resource allocation system, and not a central entity dictating choices to each of us. Different customers have different preferences in what they value and what they fear. Rooftop installations have been driven to a large extent by a dread of utility mismanagement that makes expectations about future rates much more uncertain.

The single most important trait of a market economy is the discipline imposed by appropriately assigning risk burden to the decision make and not pricing design. The latter is the tail wagging the dog. Market distortions are universally caused by separating consequences from decisions. And right now the only ability customers have to exercise control over their electricity bills is to somehow exit the system. If we take away that means of discipline we will never be able to control electricity rates in a way that will lead to effective electrification.

Has rooftop solar cost California ratepayers more than the alternatives?

3 Replies

The Energy Institute’s blog has an important premise–that solar rooftop customers have imposed costs on other ratepayers with few benefits. This premise runs counter to the empirical evidence.

First, these customers have deferred an enormous amount of utility-scale generation. In 2005 the CEC forecasted the 2020 CAISO peak load would 58,662 MW. The highest peak after 2006 has been 50,116 MW (in 2017–3,000 MW higher than in August 2020). That’s a savings of 8,546 MW. (Note that residential installations are two-thirds of the distributed solar installations.) The correlation of added distributed solar capacity with that peak reduction is 0.938. Even in 2020, the incremental solar DER was 72% of the peak reduction trend. We can calculate the avoided peak capacity investment from 2006 to today using the CEC’s 2011 Cost of Generation model inputs. Combustion turbines cost $1,366/kW (based on a survey of the 20 installed plants–I managed that survey) and the annual fixed charge rate was 15.3% for a cost of $209/kW-year. The total annual savings is $1.8 billion. The total revenue requirements for the three IOUs plus implied generation costs for DA and CCA LSEs in 2021 was $37 billion. So the annual savings that have accrued to ALL customers is 4.9%. Given that NEM customers are about 4% of the customer base, if those customers paid nothing, everyone else’s bill would only go up by 4% or less than what rooftop solar has saved so far.

In addition, the California Independent System Operator (CAISO) calculated in 2018 that at least $2.6 billion in transmission projects had been deferred through installed distributed solar. Using the amount installed in 2017 of 6,785 MW, the avoided costs are $383/kW or $59/kW-year. This translates to an additional $400 million per year or about 1.1% of utility revenues.

The total savings to customers is over $2.2 billion or about 6% of revenue requirements.

Second, rooftop solar isn’t the most expensive power source. My rooftop system installed in 2017 costs 12.6 cents/kWh (financed separately from our mortgage). In comparison, PG&E’s RPS portfolio cost over 12 cents/kWh in 2019 according to the CPUC’s 2020 Padilla Report, plus there’s an increments transmission cost approaching 4 cents/kWh, so we’re looking at a total delivered cost of 16 cents/kwh for existing renewables. (Note that the system costs to integrate solar are largely the same whether they are utility scale or distributed).

Comparing to the average IOU RPS portfolio cost to that of rooftop solar is appropriate from the perspective of a customer. Utility customers see average, not marginal, costs and average cost pricing is widely prevalent in our economy. To achieve 100% renewable power a reasonable customer will look at average utility costs for the same type of power. We use the same principle by posting on energy efficient appliances the expect bill savings based on utility rates–-not on the marginal resource acquisition costs for the utilities.

And customers who would choose to respond to the marginal cost of new utility power instead will never really see those economic savings because the supposed savings created by that decision will be diffused across all customers. In other words, other customers will extract all of the positive rents created by that choice. We could allow for bypass pricing (which industrial customers get if they threaten to leave the service area) but currently we force other customers to bear the costs of this type of pricing, not shareholders as would occur in other industries. Individual customers are currently the decision making point of view for most energy use purposes and they base those on average cost pricing, so why should we have a single carve out for a special case that is quite similar to energy efficiency?

I wrote more about whether a fixed connection cost is appropriate for NEM customers and the complexity of calculating that charge earlier this week.

Are fixed charges the solution to the solar rooftop dilemma?

2 Replies

A recent post at the Energy Institute at Haas proposed that all residential ratepayers should pay the “solar tax” in the recently withdrawn proposed decision from the California Public Utilities Commission through a connection fee. I agree that charging residential a connection charge is a reasonable solution. (All commercial and agricultural customers in California already pay such a charge.) The more important question though is what that connection fee should be?

Much less of the distribution costs are “fixed” than many proponents understand–we can see an example of the ability to avoid large undergrounding costs by installing microgrids as an example. Southern California Edison has repeatedly asked for a largely fixed “grid charge” for the last dozen years and the intervening ratepayer groups have shown that SCE’s estimate is much too high. A service connection costs about $10-$15/month, not more than $50 per month. So what might be the other elements of a fixed monthly charge rather than collecting these revenues through a volumetric rate as is done today?

A strong economic argument can be made that if the utility is collecting a fixed charge for upstream T&D capacity, then a customer should be able to trade that capacity that they have paid for with other customers. In the face of transaction costs, that market would devolve down to the per kWh price managed by the utility acting as a dealer–just what we have today.

Other candidates abound. How to recover stranded costs really requires a conversation about how much of those costs shareholders should shoulder. Income distributional public purpose costs should be collected from taxes, not rates. Energy efficiency is a resource that should be charged in the generation component, not distribution, and should be treated like other generation resources in cost recovery. The problem is that decoupling which was used to encourage energy efficiency investment has become a backdoor way to recover stranded costs without any conversation about whether that is appropriate–rates go up as demand decreases with little reduction in revenue requirements. So what the connection charge should be becomes quite complex.

Understanding core facts before moving forward with NEM reform

2 Replies

There is a general understanding among the most informed participants and observers that California’ net energy metering (NEM) tariff as originally conceived was not intended to be a permanent fixture. The objective of the NEM rate was to get a nascent renewable energy industry off the ground and now California has more than 11,000 megawatts of distributed solar generation. Now that the distributed energy resources industry is in much less of a need for subsidies, but its full value also must be recognized. To this end it is important to understand some key facts that are sometimes overlooked in the debate.

The true underlying reason for high rates–rising utility revenue requirements

In California, retail electricity rates are so high for two reasons, the first being stranded generation costs and the second being a bunch of “public goods charges” that constitute close to half of the distribution cost. PG&E’s rates have risen 57% since 2009. Many, if not most, NEM customers have installed solar panels as one way to avoid these rising rates. The thing is when NEM 1.0 and 2.0 were adopted, the cost of the renewable power purchase agreements (PPA) portfolios were well over $100/MWH—even $120MWH through 2019, and adding in the other T&D costs, this approached the average system rate as late as 2019 for SCE and PG&E before their downward trends reversed course. That the retail rate skyrocketed while renewable PPAs fell dramatically is a subsequent development that too many people have forgotten.

California uses Ramsey pricing principles to allocate these (the CPUC applies “equal percent marginal costs” or EPMC as a derivative measure), but Ramsey pricing was conceived for one-way pricing. I don’t know what Harold Hotelling would think of using his late student’s work for two way transactions. This is probably the fundamental problem in NEM rates—the stranded and public goods costs are incurred by one party on one side of the ledger (the utility) but the other party (the NEM customer) doesn’t have these same cost categories on the other side of the ledger; they might have their own set of costs but they don’t fall into the same categories. So the issue is how to set two way rates given the odd relationships of these costs and between utilities and ratepayers.

This situation argues for setting aside the stranded costs and public goods to be paid for in some manner other than electric rates. The answer can’t be in a form of a shift of consumption charges to a large access charge (e.g., customer charge) because customers will just leave entirely when half of their current bill is rolled into the new access charge.

The largest nonbypassable charge (NBC), now delineated for all customers, is the power cost indifference adjustment (PCIA). The PCIA is the stranded generation asset charge for the portfolio composed of utility-scale generation. Most of this is power purchase agreements (PPAs) signed within the last decade. For PG&E in 2021 according to its 2020 General Rate Case workpapers, this exceeded 4 cents per kilowatt-hour.

Basic facts about the grid

  • The grid is not a static entity in which there are no changes going forward. Yet the cost of service analysis used in the CPUC’s recent NEM proposed decision assumes that posture. Acknowledging that the system will change going forward depending on our configuration decisions is an important key principle that is continually overlooked in these discussions.
  • In California, a customer is about 15 times more likely to experience an outage due to distribution system problems than from generation/transmission issues. That means that a customer who decides to rely on self-provided resources can have a set up that is 15 times less reliable than the system grid and still have better reliability than conventional service. This is even more true for customers who reside in rural areas.
  • Upstream of the individual service connection (which costs about $10 per month for residential customers based on testimony I have submitted in all three utilities’ rate cases), customers share distribution grid capacity with other customers. They are not given shares of the grid to buy and sell with other customers—we leave that task to the utilities who act as dealers in that market place, owning the capacity and selling it to customers. If we are going to have fixed charges for customers which essentially allocated a capacity share to each of them, those customers also should be entitled to buy and sell capacity as they need it. The end result will be a marketplace which will price distribution capacity on either a daily $ per kilowatt or cents per kilowatt-hour basis. That system will look just like our current distribution pricing system but with a bunch of unnecessary complexity.
  • This situation is even more true for transmission. There most certainly is not a fixed share of the transmission grid to be allocated to each customer. Those shares are highly fungible.

What is the objective of utility regulation: just and reasonable rates or revenue assurance?

At the core of this issue is the question of whether utility shareholders are entitled to largely guaranteed revenues to recover their investments. In a market with some level of competitiveness, the producers face a degree of risk under normal functional conditions (more mundane than wildfire risk)—that is not the case with electric utilities, at least in California. (We cataloged the amount of disallowances for California IOUs in the 2020 cost of capital applications and it was less than one one-hundredth of a percent (0.01%) of revenues over the last decade.) When customers reduce or change their consumption patterns in a manner that reduces sales in a normal market, other customers are not required to pick up the slack—shareholders are. This risk is one of the core benefits of a competitive market, no matter what the degree of imperfection. Neither the utilities or the generators who sell to them under contract face these risks.

Why should we bother with “efficient” pricing if we are pushing the entire burden of achieving that efficiency on customers who have little ability to alter utilities’ investment decisions? Bottom line: if economists argue for “efficient” pricing, they need to also include in that how utility shareholders will participate directly in the outcomes of that efficient pricing without simply shifting revenue requirements to other customers.

As to the intent of the utilities, in my 30 year on the ground experience, the management does not make decisions that are based on “doing good” that go against their profit objective. There are examples of each utility choosing to gain profits that they were not entitled to. We entered into testimony in PG&E’s 1999 GRC a speech by a PG&E CEO talking about how PG&E would exploit the transition period during restructuring to maintain market share. That came back to haunt the state as it set up the conditions for ensuing market manipulation.

Each of these issues have been largely ignored in the debate over what to do about solar rooftop policy and investment going forward. It is time to push these to fore.

A misguided perspective on California’s rooftop solar policy

1 Reply

Severin Borenstein at the Energy Institute at Haas has taken another shot at solar rooftop net energy metering (NEM). He has been a continual critic of California’s energy decentralization policies such as those on distribution energy resources (DER) and community choice aggregators (CCAs). And his viewpoints have been influential at the California Public Utilities Commission.

I read these two statements in his blog post and come to a very different conclusions:

“(I)ndividuals and businesses make investments in response to those policies, and many come to believe that they have a right to see those policies continue indefinitely.”

Yes, the investor owned utilities and certain large scale renewable firms have come to believe that they have a right to see their subsidies continue indefinitely. California utilities are receiving subsidies amounting to $5 billion a year due to poor generation portfolio management. You can see this in your bill with the PCIA. This dwarfs the purported subsidy from rooftop solar. Why no call for reforming how we recover these costs from ratepayers and force shareholder to carry their burden? (And I’m not even bringing up the other big source of rate increases in excessive transmission and distribution investment.)

Why wasn’t there a similar cry against bailing out PG&E in not one but TWO bankruptcies? Both PG&E and SCE have clearly relied on the belief that they deserve subsidies to continue staying in business. (SCE has ridden along behind PG&E in both cases to gain the spoils.) The focus needs to be on ALL players here if these types of subsidies are to be called out.

“(T)he reactions have largely been about how much subsidy rooftop solar companies in California need in order to stay in business.”

We are monitoring two very different sets of media then. I see much more about the ability of consumers to maintain an ability to gain a modicum of energy independence from large monopolies that compel that those consumers buy their service with no viable escape. I also see a reactions about how this will undermine directly our ability to reduce GHG emissions. This directly conflicts with the CEC’s Title 24 building standards that use rooftop solar to achieve net zero energy and electrification in new homes.

Along with the effort to kill CCAs, the apparent proposed solution is to concentrate all power procurement into the hands of three large utilities who haven’t demonstrated a particularly adroit ability at managing their portfolios. Why should we put all of our eggs into one (or three) baskets?

Borenstein continues to rely on an incorrect construct for cost savings created by rooftop solar that relies on short-run hourly wholesale market prices instead of the long-term costs of constructing new power plants, transmission rates derived from average embedded costs instead of full incremental costs and an assumption that distribution investment is not avoided by DER contrary to the methods used in the utilities’ own rate filings. He also appears to ignore the benefits of co-locating generation and storage locally–a set up that becomes much less financially viable if a customer adds storage but is still connected to the grid.

Yes, there are problems with the current compensation model for NEM customers, but we also need to recognize our commitments to customers who made investments believing they were doing the right thing. We need to acknowledge the savings that they created for all of us and the push they gave to lower technology costs. We need to recognize the full set of values that these customers provide and how the current electric market structure is too broken to properly compensate what we want customers to do next–to add more storage. Yet, the real first step is to start at the source of the problem–out of control utility costs that ratepayers are forced to bear entirely.

Why are we punishing customers for doing the right thing?

6 Replies

The saying goes “No good deed goes unpunished.” The California Public Utilities Commission seems to have taken that motto to heart recently, and stands ready to penalize yet another group of customers who answered the clarion call to help solve the state’s problems by radically altering the rules for solar rooftops. Here’s three case studies of recent CPUC actions that undermine incentives for customers to act in the future in response to state initiatives: (1) farmers who invested in response to price incentives, (2) communities that pursued renewables more assertively, and (3) customers who installed solar panels.

Agriculture: Farmers have responded to past time of use (TOU) rate incentives more consistently and enthusiastically than any other customer class. Instead of being rewarded for their consistency, their peak price periods shifted from the afternoon to the early evening. Growers face much more difficulty in avoiding pumping during that latter period.

Since TOU rates were introduced to agricultural customers in the late 1970s, growers have made significant operational changes in response to TOU differentials between peak and off-peak energy prices to minimize their on-peak consumption. These include significant investments in irrigation equipment, storage and conveyance infrastructure and labor deployment rescheduling. The results of these expenditures are illustrated in the figure below, which shows how agricultural loads compare with system-wide load on a peak summer weekday in 2015, contrasting hourly loads to the load at the coincident peak hour. Both the smaller and larger agricultural accounts perform better than a range of representative rate schedules. Most notably agriculture’s aggregate load shape on a summer weekday is inverted relative to system peak, i.e., the highest agricultural loads occur during the lowest system load periods, in contrast with other rate classes.

All other rate schedules shown in the graphic hit their annual peak on the same peak day within the then-applicable peak hours of noon to 6 p.m. In contrast, agriculture electricity demand is less than 80% of its annual peak during those high-load hours, with its daily peak falling outside the peak period. Agriculture’s avoidance of peak hours occurred during the summer agricultural growing season, which coincided with peak system demand—just as the Commission asked customers to do. The Commission could not ask for a better aggregate response to system needs; in contrast to the profiles for all of the other customer groups, agriculture has significantly contributed to shifting the peak to a lower cost evening period.

The significant changes in the peak period price timing and differential that the CPUC adopted increases uncertainty over whether large investments in high water-use efficiency microdrip systems – which typically cost $2,000 per acre–will be financially viable. Microdrip systems have been adopted widely by growers over the last several years—one recent study of tomato irrigation rates in Fresno County could not find any significant quantity of other types of irrigation systems. Such systems can be subject to blockages and leaks that are only detectable at start up in daylight. Growers were able to start overnight irrigation at 6 p.m. under the legacy TOU periods and avoid peak energy use. In addition, workers are able to end their day shortly after 6 p.m. and avoid nighttime accidents. Shifting that load out of the peak period will be much more difficult to do with the peak period ending after sunset.

Contrary to strong Commission direction to incent customers to avoid peak power usage, the shift in TOU periods has served to penalize, and reverse, the great strides the agricultural class has made benefiting the utility system over the last four decades.

Community choice aggregators: CCAs were created, among other reasons, to develop more renewable or “green” power. The state achieved its 2020 target of 33% in large part because of the efforts of CCAs fostered through offerings of 50% and 100% green power to retail customers. CCAs also have offered a range of innovative programs that go beyond the offerings of PG&E, SCE and SDG&E.

Nevertheless, the difficulty of reaching clean energy goals is created by the current structure of the PCIA. The PCIA varies inversely with the market prices in the market–as market prices rise, the PCIA charged to CCAs and direct access (DA) customers decreases. For these customers, their overall retail rate is largely hedged against variation and risk through this inverse relationship.

The portfolios of the incumbent utilities are dominated by long-term contracts with renewables and capital-intensive utility-owned generation. For example, PG&E is paying a risk premium of nearly 2 cents per kilowatt-hour for its investment in these resources. These portfolios are largely impervious to market price swings now, but at a significant cost. The PCIA passes along this hedge through the PCIA to CCAs and DA customers which discourages those latter customers from making their own long term investments. (I wrote earlier about how this mechanism discouraged investment in new capacity for reliability purposes to provide resource adequacy.)

The legacy utilities are not in a position to acquire new renewables–they are forecasting falling loads and decreasing customers as CCAs grow. So the state cannot look to those utilities to meet California’s ambitious goals–it must incentivize CCAs with that task. The CCAs are already game, with many of them offering much more aggressive “green power” options to their customers than PG&E, SCE or SDG&E.

But CCAs place themselves at greater financial risk under the current rules if they sign more long-term contracts. If market prices fall, they must bear the risk of overpaying for both the legacy utility’s portfolio and their own.

Solar net energy metered customers: Distributed solar generation installed under California’s net energy metering (NEM/NEMA) programs has mitigated and even eliminated load and demand growth in areas with established customers. This benefit supports protecting the investments that have been made by existing NEM/NEMA customers. Similarly, NEM/NEMA customers can displace investment in distribution assets. That distribution planners are not considering this impact appropriately is not an excuse for failing to value this benefit. For example, PG&E’s sales fell by 5% from 2010 to 2018 and other utilities had similar declines. Peak loads in the CAISO balancing authority reach their highest point in 2006 and the peak in August 2020 was 6% below that level.

Much of that decrease appears to have been driven by the installation of rooftop solar. The figure above illustrates the trends in CAISO peak loads in the set of top lines and the relationship to added NEM/NEMA installations in the lower corner. It also shows the CEC’s forecast from its 2005 Integrated Energy Policy Report as the top line. Prior to 2006, the CAISO peak was growing at annual rate of 0.97%; after 2006, peak loads have declined at a 0.28% trend. Over the same period, solar NEM capacity grew by over 9,200 megawatts. The correlation factor or “R-squared” between the decline in peak load after 2006 and the incremental NEM additions is 0.93, with 1.0 being perfect correlation. Based on these calculations, NEM capacity has deferred 6,500 megawatts of capacity additions over this period. Comparing the “extreme” 2020 peak to the average conditions load forecast from 2005, the load reduction is over 11,500 megawatts. The obvious conclusion is that these investments by NEM customers have saved all ratepayers both reliability and energy costs while delivering zero-carbon energy.

The CPUC now has before it a rulemaking in which the utilities and some ratepayer advocates are proposing to not only radically reduce the compensation to new NEM/NEMA customers but also to change the terms of the agreements for existing ones.

One of the key principles of providing financial stability is setting prices and rates for long-lived assets such as solar panels and generation plants at the economic value when the investment decision was made to reflect the full value of the assets that would have been acquired otherwise.  If that new resource had not been built, either a ratebased generation asset would have been constructed by the utility at a cost that would have been recovered over a standard 30-year period or more likely, additional PPAs would have been signed. Additionally, the utilities’ investments and procurement costs are not subject to retroactive ratemaking under the rule prohibiting such ratemaking and Public Utilities Code Section 728, thus protecting shareholders from any risk of future changes in state or Commission policies.

Utility customers who similarly invest in generation should be afforded at least the same assurances as the utilities with respect to protection from future Commission decisions that may diminish the value of those investments. Moreover, customers do not have the additional assurances of achieving a certain net income so they already face higher risks than utility shareholders for their investments.

Generators are almost universally afforded the ability to recover capital investments based on prices set for multiple years, and often the economic life of their assets. Utilities are able to put investments in ratebase to be recovered at a fixed rate of return plus depreciation over several decades. Third-party generators are able to sign fixed price contracts for 10, 20, and even 40 years. Some merchant generators may choose to sell only into the short-term “hourly” market, but those plants are not committed to selling whenever the CAISO demands so. Generators are only required to do so when they sign a PPA with an assured payment toward investment recovery.

Ratepayers who make investments that benefit all ratepayers over the long term should be offered tariffs that provide a reasonable assurance of recovery of those investments, similar to the PPAs offered to generators. Ratepayers should be able to gain the same assurances as generators who sign long-term PPAs, or even utilities that ratebase their generation assets, that they will not be forced to bear all of the risk of investing of clean self-generation. These ratepayers should have some assurance over the 20-plus year expected life of their generation investment.