ICYMI: New UC Berkeley Analysis Says Including “Residual” Costs on Electricity Bills Exacerbates Inequity Issues and Harms Electrification Goals

Posted on September 28, 2022

Sacramento — In its latest report, “Paying for Electricity in California: How Residential Rate Design Impacts Equity and Electrification,” The Energy Institute at Haas, University of California Berkeley, calls the residual costs, those not directly related to delivering power to customers, an “electricity tax” that is worsening equity and harming the state’s electrification goals.

Noting that the cost burden is shifting from the rooftop solar haves to the have-nots, the report also says the state’s rooftop solar subsidy program makes the electricity tax substantially more regressive.

From the report press release: “While rooftop solar is a win for decarbonization when you look at it in isolation, the trend has made this ‘electricity tax’ even more regressive and inequitable for everyone else,” said James Sallee, Associate Professor in the Agricultural & Resource Economics Department. “Households are billed on net consumption, which means rooftop solar owners are now able to evade a significant share of the residual costs, even though these households benefit from what the fixed costs pay for, such as wildfire mitigation and the capital costs of a reliable backup system.”

Here are some excerpts from the report:

  • “In the United States, it has been standard practice for utility regulators to use retail energy prices as a vehicle for recovering capital and operating costs. In California and many other states, the costs of implementing related government policies, such as subsidizing energy efficiency investments, technology re­search and development, rooftop solar installations, and bill reductions for low-income customers have also been recovered via higher electricity prices.” (page 4)
  • “…recovering system and policy costs via electricity rates that are far above social marginal cost amounts to an effective electricity tax … The tax revenue is used to cover other costs, in this case system costs for the grid and the cost of related policy goals, such as wildfire mitigation, compensation for past victims of wildfires, making early investments in renewable tech­nologies, plus subsidizing energy-efficiency programs, rooftop solar, and low-income customers.” (page 4)
  • “Setting the volumetric price for electricity well above the incremental cost of electricity supply amounts to tax­ing grid electricity consumption. This effective ‘electricity tax’ is both regressive and economically inefficient. It is a regressive way to raise revenues because lower-income households spend a relatively large share of their income on electricity. Against a backdrop of growing income inequality and social stratification, and amidst escalating concerns about energy poverty and affordability, increasing retail electricity prices to keep up with rising power sector fixed costs and related policy costs will only exacerbate these inequalities.” (page 4)
  • “Net metering for rooftop solar makes the effective electricity tax substantially more regressive. This is because wealthier households are much more likely to have rooftop solar. The effect is strongest in SDG&E, where rooftop solar in 2019 already provided over 20 percent of residential electricity under net metering, thus offsetting a majority of the cross-subsidy created by the California Alternative Rates for Energy (CARE) program.” (page 5)
  • “Under the current net metering policy, electricity generated by residential solar systems is compensated at the retail price. Because the retail price exceeds the true social marginal cost by a significant (and growing) margin, this amounts to a significant (and growing) subsidy, as discussed in Designing Electricity Rates for An Equitable Energy Transition.” (page 24)