California’s Exploding Rooftop Solar Cost Shift
In 2024, residential PV will shift nearly $4 billion onto others’ bills, more than double the 2020 amount.
There’s a lot of anger in California right now about rising electricity prices. Since 2020, residential rates of the two largest investor-owned utilities – PG&E and Southern California Edison – have risen, respectively, by 38% and 40% after adjusting for inflation. Inflation adjusted rates of San Diego Gas & Electric, the third largest, have only risen 11% during that time, but SDG&E was already the most expensive in 2020. The prices of all three are now more than double the national average. (There are going to be a lot of numbers in this post. If you want the details behind them, this link has a data appendix with the data and code for my calculations.)
(Source)
There’s also been a lot of finger-pointing about the cause of these increases. Some have said it’s the greedy utilities. Others have pointed to the huge costs of addressing the impacts of climate change on California, particularly increased wildfire risk. Still others suggest that a major part of California’s strategy to slow climate change – decarbonizing our grid – is turning out to be exorbitantly expensive, though there is scant evidence of this.
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A rate increase multiplier
Regardless of what is driving utility costs higher, their impact on rates is multiplied when customers install their own generation and buy fewer kilowatts-hours from the grid. That’s because those households – whether they are customers of the utility or of a community choice aggregator – contribute less towards all of the fixed costs in the system, such as vegetation management, grid hardening, distribution line undergrounding, EV charging stations, subsidies for low income customers, energy efficiency programs, and the poles and wires that we all rely on whether we are taking electricity off the grid or putting it onto the grid from our rooftop PV systems.
Since those fixed costs still need to be paid, rates go up, shifting costs onto the kWhs still being bought from the grid. This will be less true for systems registered after last April when compensation for new systems was made somewhat less generous, but that applies to almost none of the systems installed before 2024, which are the ones I am studying here.)
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A decade ago, this was a small concern, because rooftop solar was barely a blip in the total supply picture. In 2014, the homes served by these three IOUs got less than 2% of their electricity off their roofs. Today they get about 20%. As fewer kWhs are sold from the grid, retail rates must rise even more in order to recover the fixed costs of the system.
The problem has become particularly acute in the last four years. During that time, solar capacity on houses has more than doubled at the same time that the utilities’ fixed costs have escalated dramatically due in large part to wildfires and the need for grid hardening against them.
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Figuring the rooftop solar cost shift
What has this done to rates? That takes a lot of calculations, which I detail in the available data appendix. But it turns out that three numbers are the major determinants: the total revenue the utility is permitted to collect from residential customers to cover its operating and fixed costs (known as the revenue requirement), the utility savings from selling a customer fewer kWhs (known as the avoided cost), and the amount of solar on rooftops that is leading to those lower sales.
Since 2020, the real (i.e., inflation-adjusted) revenue requirements of the utilities have increased about 25% for residential customers and rooftop solar has grown 114%, but the avoided cost from each kWh coming off those panels has hardly changed. So, as higher and higher electricity prices have meant customers would save more and more for each solar panel installed, the system hasn’t been saving any more money per panel when they do, and those extra costs have been shifted onto customers who don’t have solar.
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Compared to the case in which residential rooftop solar were treated like actual producers and paid the competitive value of their generation, my analysis concludes that PG&E residential customers with solar in 2024 will shift slightly more than $2 billion of costs to customers paying the utility for their power. For Southern California Edison, it’s around $1.3 billion, and for SDG&E the cost shift will be about $0.5 billion. My findings are largely in line with a separate analysis done by the independent Public Advocates Office of the CPUC. (Their headline number – $6.5 billion for the total cost shift – differs largely because they include commercial and industrial (C&I) customers’ solar, which makes up about one-third of distributed solar capacity, and because I use a somewhat more generous avoided cost than their analysis does.)
The cost shift impact on rates
While it might be tempting to compare these astonishing figures to the revenues collected from residential customers, that would implicitly assume that all of these costs are shifted onto the residential price of electricity. In reality, some costs are shifted onto C&I customers. How much? That’s hard to know. It depends on which costs are allocated to specific customer classes (e.g., the cost of distribution lines in residential neighborhoods) and which are considered systemwide costs (e.g., the cost of billing systems, transmission lines, etc.).
One thing we do know is that residential rates have increased faster than C&I rates in the last decade. In 2014, PG&E residential rates averaged about 7% above C&I, but by 2024, they were 15% higher. SCE went from a 15% differential to a 47% differential over the same time period, while SDG&E’s differential jumped from 2% to 19%. This suggests that the costs that have been going up lately, and the increasing cost shift from distributed solar, have been allocated in higher proportion to residential customers. That’s not surprising given that a lot of the cost increases in the last few years have been defensive investments to harden distribution systems – which are disproportionately associated with residential customers – and because homes have two-thirds of the distributed solar.
To get a feel for the impact, let’s assume that 60%-80% of the cost shift from residential solar goes onto the bills of other residential customers. If so, then 5.7-7.0 cents of the price of each kWh (for customers not on the CARE low-income rate), or 12%-15% of PG&E’s full residential price in 2024, is due to the rooftop solar cost shift. For SCE it is 3.2-4.0 cents or 9%-11% of the price. And for SDG&E it is 7.4-8.8 cents or 19%-22% of the price.
In 2018, Lucas Davis wrote a blog post titled “Why Am I Paying $65/year for Your Solar Panels?” The question is still with us today, except now it’s more like “Why Am I Paying $300/year for Your Solar Panels?”
Getting to a sustainable energy system
I’m not presenting this analysis in order to demonize solar adopters or to make them feel guilty about their choice. It’s not their responsibility to do this sort of analysis. People are busy and utility bills are a burden for many. I don’t blame them for jumping at an opportunity to save money, without working through where those savings come from. The problem is not in our household decision makers, but in our policies. The 2023 change in how new solar installations are compensated was a small step in the right direction, but not a solution.
Nor is the solar cost shift the only problem facing California’s electricity system. Adapting to increased wildfire risk and other impacts of climate change, challenges of maintaining reliability with increased renewables, dysfunctional regulation, inefficient utility operations, and excessive returns on capital investments are all contributing to increased rates. All of these issues – including the exploding solar cost shift – need honest discussions among legislators and policymakers if California is going to successfully navigate today’s unsustainable rate trends.
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I am posting frequently these days on Bluesky @severinborenstein
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Suggested citation: Borenstein, Severin. “California’s Exploding Rooftop Solar Cost Shift” Energy Institute Blog, April 22, 2024, https://energyathaas.wordpress.com/2024/04/22/californias-exploding-rooftop-solar-cost-shift/
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Severin Borenstein View All
Severin Borenstein is Professor of the Graduate School in the Economic Analysis and Policy Group at the Haas School of Business and Faculty Director of the Energy Institute at Haas. He received his A.B. from U.C. Berkeley and Ph.D. in Economics from M.I.T. His research focuses on the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. Borenstein is also a research associate of the National Bureau of Economic Research in Cambridge, MA. He served on the Board of Governors of the California Power Exchange from 1997 to 2003. During 1999-2000, he was a member of the California Attorney General's Gasoline Price Task Force. In 2012-13, he served on the Emissions Market Assessment Committee, which advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. In 2014, he was appointed to the California Energy Commission’s Petroleum Market Advisory Committee, which he chaired from 2015 until the Committee was dissolved in 2017. From 2015-2020, he served on the Advisory Council of the Bay Area Air Quality Management District. Since 2019, he has been a member of the Governing Board of the California Independent System Operator.
Energy Institute Blog 
Well done.
I would just like to point out that a lot of things that are currenty lumped under ratepayer costs are not. Low-income subsidies, wildfire risk reduction, climate change mitigation etc are things with strong taxpayer components. A key discussion on rates must include transfering the burden of the public benefit programs to the public.
Dr. Borenstein continues to confuse utility overhead costs with “fixed” costs. The only truly “fixed” costs for an enterprise are interest and depreciation. All other costs are variable costs: all labor costs, the return on equity, taxes are all costs which vary from year to year and vary with the level of earnings of the enterprise.
Every business has overhead costs. The supermarket has a building and parking lot, and is connected to a global food supply, transportation, and warehousing network (much like a power system). They recover these costs in the price of each unit sold. Airlines have billions invested in aircraft, and are supported by billions more invested in airports, service facilities, and millions of employees. They recover these costs in the price of each air ticket sold (with peak prices much higher than off-peak prices).
Some argue that electric utilities are “special” because they bring their product to your home. Amazon, UPS, FedEx, and the USPS do the same, and they all charge volumetrically for their service, often built into the price of the products we buy as “free shipping.”
Most of the costs he identifies, including vegetation management, grid hardening, distribution line undergrounding, EV charging stations, subsidies for low income customers, energy efficiency programs, are all variable costs, not truly fixed costs. They may not vary directly with the number of kilowatt-hours sold, but that does not make them fixed costs.
Two very large costs stand out.
The first is energy efficiency program costs. The California utilities have spent billions of dollars on energy efficiency over the past four decades, and the result has been lower use. According to the CPUC, “due to the state’s efficiency programs, per capita energy use has remained flat, while the rest of the US has increased by about 33 percent.” That benefit is of the same order of magnitude as the contribution of rooftop solar, and has exactly the same impact on rates and on bills for non-participants as solar: overall sales go down, and costs that do not vary with kilowatt-hour output are unchanged in the short run, creating rate pressure. But, like rooftop solar, this investments have long-run benefits in reducing investment in generation capacity, transmission capacity, and distribution system capacity, savings tens of billions of dollars in the long run. Unfortunately, Dr. Borenstein does not measure avoided cost over the truly long-run — a period in which all costs are variable.
The second is the grid hardening and undergrounding. These expenditures are primarily undertaken for the benefit of customers who do not have their own solar systems and batteries. Many friends of mine have chosen to invest in rooftop solar and storage batteries specifically to provide themselves with energy security, not just to reduce their energy bills. It is largely appropriate that these costs are borne primarily by the customers who remain grid-dependent.
My own home has multiple backup systems, include a wood stove, on-site propane storage and the ability to run the fridge and freezer from our electric car. We are bearing the costs of this reliability, not our neighbors. But it means that we may value a reliable grid less than others do. We’ve gone five days without power on a couple of occasions — and due to our investments, the house stays warm and the ice cream stays hard.
There are many ways to look at the California high rate situation. I’ve laid out a set of steps that California could take to bring these under control. With a combination of tough regulation, creative regulation, and modern electric rate design, I think California could halt the spiral of rates, and for grid-dependent customers, the accompanying spiral of bills.
https://energycentral.com/c/um/better-solution-californias-electricity-rate-challenge
Modern electric rate design is ONE of the solutions I recognize. Here I disagree in a substantial way with the current rate design in California, which fails to charge customers a reasonable monthly fee for the direct investment at the point of interconnection. That should be $5-$10 per month for an apartment, $10 – $20 per month for a single-family home, and significantly more for a rural home or mansion that requires more investment in site infrastructure: transformers, service drops, metering, and billing. Hawaii has adopted these principles. California does need to reform rate design, but not in the manner proposed by the utilities. There is no cost-related basis to charge people based on their income level (and doing so will chase away those customers most able to afford grid independence). Electricity (and gas, water, and sewer) rates should reflected the actual costs of providing service.
Punishing the people who have made investments to avoid dependence on the grid as the sole source of their electricity is not the best path. California will need MORE, not less, from rooftop solar if it is to meet its climate goals. The alternative, billions of dollars spent on central solar, wind, and nuclear facilities, billions more on new transmission lines, and yet more billions on distribution grid capacity upgrades, is a costly, risky, and slow path to a better world.
“Many friends of mine have chosen to invest in rooftop solar and storage batteries specifically to provide themselves with energy security, not just to reduce their energy bills. It is largely appropriate that these costs are borne primarily by the customers who remain grid-dependent.”
I’m assuming that “these costs” refer to grid hardening. But those “friends” of yours are also “grid-dependent.” Or are you saying they are totally off the grid? I figure it’s highly likely they “reduce their energy bills” in good through NEM. No grid, no NEM.
Finally, you maintain that the only “true” fixed costs are “interest and depreciation.” But that begs the question: Just what is it that is depreciating? It’s infrastructure. How can that NOT be a fixed cost?
Good on you for not just jumping on the ever popular greedy utility argument. If all three IOUs have significantly higher rates than the 20% of California customers served by POUs, it seems reasonable to question the role that public policy, as implemented by the CPUC, has on rates.
On the chart of utility rates, it would interesting to extend the time period back, even as far back to when PURPA was implemented, and include the national average.
The cost shift is made worse by overpaying for mid-day excess PV that has a relatively lower value to the grid than at other times of the day. Moving to hourly retail prices is one part of the solution (along with fixed charges and some amount of differential import/export prices).
Bruce Nordman, LBNL
All NEM 2.0 customers who installed solar starting in 2017 have been on TOU rates. Most residential customers are now on TOU rates by default.
Turning Rooftop Solar homeowners into “Villans” when utilities encouraged homeowners to buy and install solar is a really low blow. Why not talk about TURN and how they cost shifted 30% of utility customers onto CARE and made higher income people pay for that. And what other programs that lowered some people’s utility bills while raising others? How about the Tiered rates that charged up to 400% more in Tier 5 for large households that used more electricity than small households and made it advantageous to install solar in the first place? In 2007, when I first started installing my Rooftop Solar System, I had a choice to install mine “ON-GRID” or “OFF-GRID”. I chose ”OFF-GRID” and could power 50% of my home without any utility supplied power. This is how I got out of Tier 5 and Tier 4 ridiculously high rates. I could have just as easily shut off my electric dryer, electric oven and air conditioning and achieved the same reduction. What about all those that purchased energy star rated appliances and switched out to LED lighting? That reduced their usage also so blame them for “Cost Shifting” as well. The average household now uses less energy than they did in the 1960s thanks to LED and CFL lighting and energy star appliances and utilities infrastructure costs have risen. Pointing one’s finger at rooftop solar and making it the villain is MAGA hog wash.
Actually he did not demonize “Rooftop Solar” if you read the whole thing.
Get over your TDS. Not EVERYTHING is “MAGA”. You people are sick.
Telling my neighbors their higher prices are caused by my owning Rooftop Solar Just as the CPUC and utilities have done is turning us into Villans for doing the right thing to reduce fossil fuels… Defiantly a MAGA message as seen on FOX news. Just like villainizing EV owners.
Amen.
good to see the data behind the change. if not already part of the rates, there should be a fixed cost associated with the peak usage of the connection. [my water bill is about half ‘fixed’ connection charge]
The same shift is on for road use recovery – no gas use by EVs means they escape paying their share of road upkeep.
I understand the point you are making. But couldn’t a similar comparison be made regarding property taxes paying for schools? Many taxpayers do not have children in public schools, yet continue to pay for them. EV’s also use the roads, public safety services i.e. fire and police services, etc. They use traffic signals, need accidents cleared and natural disaster damage mitigated. Gasoline has nothing to do with road upkeep. Your “carbon footprint” may be smaller, but all vehicles contribute to road degradation.
“there should be a fixed cost associated with the peak usage of the connection”
I agree with you. That seems the obvious next step. As things stand here in California, the grid connection cost is fixed; a customer connected via a 100A or a 400A panel pay the same. The proposal does not change that setup. The proposal raises that fixed cost, regardless of size of connection.
While the numbers all balance nicely, the premise of this article is a lie.
OSD
Too much brains. Not enough common sense.
When you force Net metering (1.0), followed by 2.0 and sell back “at Retail” up to 5% of utility output you have an obvious cost shift (40cents at retail when the costs at wholesale are actually 5cents per kilowatt <or negative on the ‘duck’ curve> shows the inane aspects of the California cost shift).
What did you expect would happen?
Grandma and the ‘poor’ pay for all the rate increases. They have no choice.
Exported energy from rooftop solar goes to the nearest net consumer(s) Link to proofs. This is why rooftop solar should be compensated at retail rates.
The post includes a lot of (NEM 2.0) numbers but I think they are obscuring the real issue. The final paragraph in the post is the important point: the current, old, setup is obsolete, but not because of residential rooftop installations.
Cost-shifting is a distraction. If, and I hope it happens, if Community Solar gets approved by the CPUC and installations happen at large, everybody can benefit from distributed energy. And, regardless of the CPUC decision, more of us will install batteries behind-the-meter and benefit from cost reduction in TOU rates: the battery prices continue to go down, and the new California energy code requires new construction to include batteries, or at least to be battery ready.
Distributed Energy Resources are here to stay. It is good to generate energy closer to the load. DER are good for customers, and for the grid. Any solution needs to embrace them.
Interesting stuff, but also seems like it will only drive further incentives to install solar since solar prices continue to decline and rates seem poised to only increase. With falling battery prices I wouldn’t be surprised to see a rapidly growing number of California’s leave the grid entirely.