Flatter Rate Design Threatens Solar
By: Adam Gerza
Within the California solar industry there is a general understanding that the project economics of going solar will not be as strong for homeowners as a result of looming changes to residential rates caused by AB 327. But does a 40 percent reduction in energy savings seem too extreme? I ran some numbers and want to share them with you.
Residential electric rates in California have had an “increasing block” structure for the past twelve years. The more you use, the higher your rate. This type of rate design is simple and well understood. It has incentivized customers to use less electricity from the grid, through conservation, energy efficiency retrofits or by generating their own power. There is indisputable evidence that homeowners have responded to this pricing signal: California is a leading state in both energy efficiency and distributed generation solar.
In 2001 rate caps were established on the lower usage tiers, which forced the utilities to levy the majority of their revenue increases onto the higher tiers. Over the years this has led to an increasing differential between the top and bottom rates. The utilities have vociferously argued that this has created an unfair cross-subsidy, whereby high usage customers are paying more than their fair share and low usage customers are not paying enough. In order to remedy this situation, the utilities were able to pass legislation in Sacramento last year to reform electric rates and remove the rate caps on the lower tiers. That legislation, AB 327, allowed the California Public Utilities Commission (CPUC) to redesign residential rates.
The CPUC must strike the appropriate balance of maintaining the price signal for energy efficiency and self-generation while easing rates for high-usage customers. There is a general acceptance that the tier structure will get flatter, but there is disagreement over how far that should go.
Not surprisingly, the proposals that the utilities submitted to the Commission were incredibly aggressive in their attempt to flatten the tiers. All three IOUs submitted virtually identical proposals, featuring three main elements: (1) 2-tier structure, (2) 20% delta between the tiers, and (3) $10 per month fixed charge.
How would these proposed changes affect solar customers?
When I created a model to run these scenarios I expected to see an erosion in solar value, but I was shocked at the extent of that erosion.
The matrix table below compares Pacific Gas & Electric’s current 2014 rate structure versus the 2018 “end state” rate proposal they submitted to the CPUC.
Change in Monthly Bill Savings from Existing Solar Investments Under IOU Rate Proposals
Average Monthly Usage (kWh)
Full Offset System
75% kWh Offset System
50% kWh Offset System
Existing high-usage solar customers stand to lose the most as a result of flatter rates. This is quite relevant, because high-usage customers make up a disproportionate proportion of the existing solar homeowners in the state. The reason is simple: large energy consuming homes have the highest average cost of energy, making them the best candidates for solar. What’s more, many of these high-usage solar homeowners installed a partial offset (or ‘tier-shaver’) system, which optimized the best possible payback by only eliminating the expensive usage. These very customers stand to lose the most as a result of flatter rates.
The rates the IOUs are proposing would lead to significant reductions in savings, which does not seem fair for homeowners who made investments in solar or energy efficiency (EE) retrofits. For customers who cash purchased a solar system or EE upgrade, reduced energy savings would stretch out their payback period and reduce their return-on-investment. For homeowners who third-party-financed their solar system, significantly flatter rates could cause their PPA or lease agreement to go “upside-down,” meaning they would be stuck paying out more than they are saving.
The IOU rate change proposals should not be taken as a given. It’s normal for utilities to ask for twice as much they expect to get. Nevertheless, solar installers should be aware of how damaging these proposals would be. Parties to the proceeding will submit testimony to the CPUC in September, with hearings scheduled for November and a final decision expected in March 2015.
The CPUC has scheduled a series of Public Participation Hearings in September and October. It is essential that the California solar community come out to speak on this important issue. The Commission needs to take a balanced approach in restructuring rates, ensuring they maintain a price signal for energy efficiency and self-generation, and also not destroy the economics of homeowners who have already made green investments.
Adam Gerza is the Director of Government Affairs for Sullivan Solar Power and a CALSEIA elected board member.