Loading up consumers’ electricity bills with socially desirable but costly items, as California and other states are wont to do, has unanticipated and undesirable consequences, says prominent energy economist Severin Borenstein of Berkeley’s Energy Institute at Haas. In a recent blog, he says that “the problem is that the electricity price you face – if you are a customer of one of California’s large investor-owned utilities – is many times higher than the actual cost of generating and delivering those kWhs. That’s because we are paying for gargantuan – and rising – fixed costs by increasing the volumetric (per kWh) price of electricity.”
Borenstein observes, “Many of these expenditures may be good social policy, but they have no direct link to a customer’s consumption volume: compensating victims of past wildfires, technologies and other investments to prevent future wildfires, incentivizing rooftop solar, providing reduced rates for low income customers, supporting R&D on new low carbon technologies, installing EV charging stations, subsidizing energy efficiency upgrades, and the list goes on.”
What’s the real-world impact of this social policy? Borenstein cites the case of hot water heaters. If your hot water heater dies (and they do), should you replace it with one that runs on natural gas or electricity? “To figure that out, you need to know the cost of each type of hot water heater, how quickly each could be installed, how well each will provide for your family’s hot water needs and – because you are on board with California’s climate goals – the GHG emissions from using each. But, since you aren’t a top 1%er, you also want to know how much each would cost to operate.”
A heat pump water heater, he says, is “far more environmentally friendly” than a gas water heater. But in California, where social costs are added to electric bills, “the price of the kilowatt-hours (kWhs) to run a heat pump hot water heater is so high that operating costs put electricity at a significant cost disadvantage…. So, with a guilty conscience, you put in a gas unit, and save a boatload of money on your utility bills.”
The California legislature earlier this year recognized the problem, passing legislation creating a two-tier approach to electric rates. The legislation orders the California Public Utilities Commission to establish a graduated income fixed charge and reduced charges based on electric use. The law mandates the regulators to impose the new system by July 2024.
Borenstein explains that the purpose of the new system is “that reducing the volumetric price would encourage electric over natural gas appliances, and EVs over gasoline vehicles. At the same time it would pay for some of those fixed costs through a fee that is larger for wealthier households, rather than the current approach that disproportionately hits low and middle income families.”
But some legislators – and Borenstein himself – are having doubts about the income tax plan. A letter to the CPUC from 22 legislators who voted for the bill called for an implementation delay and CPUC public hearings. They wrote that “at a minimum, more time will be needed to consider such a significant and far reaching change in policy that will significantly impact rate payers with only a theoretical benefit.” The commission earlier rejected calls for public hearings.
The solons also said that “we are concerned that this proceeding, and its subsequent decision, could ultimately steer the state away from a conservation focus to that of increased electrical consumption, by sending the wrong signal to rate payers. With these proposals, there would be a decoupling of electricity policy from the volumetric and conservation-based model that the CPUC has long been promoting.”
Borenstein said he has concerns about the new policy, but not for the reasons the 22 legislators raised. Their complaint about undermining conservation by reducing the prices, he wrote, is misguided. “Energy efficiency and conservation to reduce environmental damage can be very beneficial, but just like a powerful medicine, too much can be a problem. Our high prices of electricity undermine incentives to get off fossil fuels and reduce emissions by switching to electricity from natural gas and gasoline, such as by installing a heat pump or buying an electric vehicle. That is tying one arm behind the state’s back when it comes to decarbonization.”
“Why do we need another income tax? We don’t.” — Severin Borenstein
Borenstein continued: “The price of electricity should reflect all the costs it imposes – including environmental damage – but California’s price has gone way beyond that. Our own study based on 2019 data found that residential consumers paid 2 to 3 times the cost of producing each kWh. With the skyrocketing rates since then – largely to pay for past wildfire damage and future grid hardening – the gap is now much greater.”
Ultimately, says Borenstein, the new plan “is an income tax, albeit a fairly clumsy one. Why do we need another income tax? We don’t.”
What to do instead? “A much better solution – which would accomplish both of these goals while avoiding the administrative overhead…would be to move those climate and policy costs onto the state budget. That would address both the problem with residential prices and the same issue with commercial and industrial electricity prices, which discourage electrification in those sectors and undermine competitiveness.”
Kennedy Maize