California’s high energy prices offer lessons for the nation’s renewables-focused energy policy
California electricity rates just went up—again. The latest Pacific Gas & Electric residential rate hike, which took effect January 1, is part of a steady climb in electricity prices—up more than 30 percent since 2009, according to the California Public Utility Commission. The utility, the state’s largest, attributes this increase to rising wildfire-mitigation costs, including clearing vegetation around power lines and replacing outdated grid equipment.
Until just a few years ago, most PG&E customers could count on some relief from high bills during periods of low usage, which often occur when seasonal heating and cooling needs plummet. Now, some average-sized households can pay over $100 a month even when consumption is at its lowest. How did California electricity prices get so high?
Agricultural & Resource Economics Professor Meredith Fowlie
The West’s more severe fire seasons, driven by record heat and prolonged periods of drought, are just part of the problem. “As the climate changes, we’re coming to terms with what it costs to run power lines through dry forests in hot weather,” says Meredith Fowlie, an associate professor of agricultural and resource economics (ARE) who holds the UC Berkeley Class of 1935 Distinguished Professorship in Energy. “Adaptation is requiring big investments, and that’s showing up on your electricity bill.”
The costs of adapting to increasingly intense fire seasons may be a climate change problem. But zoom out, Fowlie explains, and it gets more complicated. Rising electricity prices are also, in part, an unwelcome consequence of some forward-thinking climate change solutions. Since 2006, when the California Global Warming Solutions Act laid out ambitious carbon-reduction targets, state agencies have responded with new policies meant to lower greenhouse gas emissions and drive down the costs of clean, renewable energy sources like solar and wind.
In many respects, these policies add up to a success story. The state met its 2020 target two years early, getting more than 33 percent of its electricity from renewable sources in 2018, according to the California Energy Commission. But some actions have had unintended impacts, like higher prices. High prices hurt consumers, but on a larger scale, they upset the energy market’s complex balance of pricing, incentives, and investments. Fowlie says that getting that balance right is essential to a fair and equitable energy transition. “California is on the bleeding edge of these concerns,” she says.
Rausser College of Natural Resources economists are unpacking real-world policy outcomes at this edge, and their insights are helping shape the frontier of renewable energy policy.
Those insights could not be timelier. California’s next target is reaching 44 percent renewable energy by 2024. President Joe Biden has signaled assertive climate leadership with many of his cabinet choices—including public policy professor Jennifer Granholm, an expert on clean energy policy, for energy secretary—and a commitment to decarbonizing the U.S. power sector by 2035.
Fowlie—who is also a research associate at the nonpartisan National Bureau of Economic Research and co-directs, with business administration and public policy professor Severin Borenstein, the Energy Institute at Haas—believes these targets are achievable. “There is now a viable path to deep greenhouse gas reductions,” she says.
That path runs through the power sector. The idea, Fowlie says, is to decarbonize electricity production through investments in clean technology, then electrify almost everything—homes, the commercial sector, transportation.
But, she cautions, technologies that “green the grid” need the policy infrastructure to evolve along with them. “There’s a tendency to focus on the technology solutions—the wind and the solar and the batteries—but those aren’t going to work on their own,” she says. “The policy incentives and the markets we design will determine how well that technology works and who pays for it.”
California’s rooftop-solar incentive program illustrates how well-intentioned policy can drive up prices. As part of the state’s 2009 Net Energy Metering program, households with solar arrays get reimbursed for every kilowatt-hour they generate for the grid. This sounds like a reasonable way to encourage rooftop-solar adoption, until you consider how the state prices electricity.
“Pricing should be as simple as ‘I use a kilowatt-hour, I pay a kilowatt-hour,’ but that’s not how it works in California,” says ARE associate professor James Sallee, who with Fowlie and Borenstein published an Energy Institute working paper this spring that charts 10 years of rising electric bills in the state. The kilowatt-hour price on your bill is a retail rate that’s much higher than the cost of delivering that power to you, explains Sallee. That’s because fixed system costs, including wildfire mitigation and infrastructure maintenance and improvement, are loaded into that hourly charge.
Agricultural & Resource Economics Professor James Sallee
“I’m going to pay 27 cents for one kilowatt-hour of electricity at my house,” Sallee estimates, “whereas it only costs about 9 or 10 cents to generate and deliver that unit of electricity.” That 9 or 10 cents accounts for both utility costs and the social costs of pollution, an important measure of actual cost, he says (see also “The Social Cost of Carbon”). So rooftop-solar customers get reimbursed for the power they generate, and they also avoid paying the system costs loaded into the kilowatt-hour price. Meanwhile, the rising per-kilowatt-hour price sends everyone else’s bills ever higher, even if usage stays steady.
Utilities absolutely need to recover fixed costs in order to supply electricity, the economists stress. “When you turn off your lights, we don’t avoid those costs,” Fowlie says.
But why use such an inefficient pricing scheme?
Political expediency is partly to blame. Compared with trying to get voters to pass a parcel or sales tax, it can be quicker and easier to put those costs into electricity rates, which are regulated by the California Public Utilities Commission. “They are legitimate costs, so the CPUC approves them, and the utilities pass it on,” Fowlie says.
The “utility death spiral”
Over-reimbursing for rooftop solar creates some nasty ripple effects. “When a solar customer cuts their bill by $300, PG&E’s costs only go down by $100, so there’s another $200 they’ve got to recover from everybody else,” Sallee explains. “We have a colorful term for this: the utility death spiral.”
Basically, the system’s fixed costs just shift onto non-adopters. And that pool keeps shrinking because, he says, “as more people adopt rooftop solar, you have to keep ramping up the price. And that makes the incentive for the next person to get solar panels stronger and stronger.”
This combination has the unintended consequence of moving fixed costs onto people for whom investing in rooftop solar is not a viable option—typically renters and lower-income households.
The equity implications run deep. A 2019 study published in Nature Sustainability, led by Tufts professor Deborah Sunter while she was an Energy and Resources Group (ERG) postdoctoral scholar, found that Black and Brown communities have significantly lower solar adoption rates—even after adjusting for median income and home ownership. Study co-author Dan Kammen, an ERG professor and the group’s chair, says that’s due to insufficient government solar investments in poorer communities, especially a failure to “seed” a few solar projects among a community’s minority businesses—a practice, the researchers note, that makes adoption rates soar.
This imbalance is beginning to shift as technology prices decline and solar programs that invest in low-income communities grow. But such entrenched challenges help explain why Sallee, Fowlie, and Borenstein, rather than trying to fix the rooftop-solar incentive, are working on the bigger question of recovering system-wide costs in a way that’s both efficient and equitable. For example, if utilities charged everyone a fixed fee for system costs, perhaps $50 or $60 per month, then kilowatt-hour charges would reflect the cost that a household’s consumption actually entails. Other tweaks, such as rebates to adjust for household income, could make this scheme even fairer, the Energy Institute working paper suggests.
The larger lesson is to avoid policies that may be inefficient in the long run, Sallee says, because it’s hard to roll them back later. The Net Energy Metering program met its objective of jump-starting an industry. “But now there’s an industry, and there are millions of homeowners with solar who won’t let you claw back their incentives,” he says.
Another key takeaway from the rooftop-solar incentive is that it returns too much money to consumers for the benefits that the technology—distributed solar—provides to the grid, given that the most efficient path to electrification is utility-scale projects, the economists say. “It’s always going to be better to have one giant facility rather than solar spread across 1,000 rooftops,” says Sallee.
The wind-power feedback loop
Stephen Jarvis, PhD ’20 ERG, says that the same is true for the utility-scale wind projects he studies. “With larger projects, you can spread out a lot of the costs,” he says. “There are all these economies of scale that kick in.”
But large projects aren’t immune to equity and efficiency issues, Jarvis found in an Energy Institute working paper on the impacts of the NIMBY (or “not in my backyard”) problem—when people who may support projects in concept resist efforts to build them in their own neighborhoods.
Jarvis, now a postdoctoral scholar in the Department of Economics at the University of Mannheim in Germany, analyzed planning-process permit documents in the United Kingdom and found that homeowners in affluent, largely politically conservative areas were most likely to oppose large wind projects—often successfully. Wind turbines change the visual landscape. “People with nice views they paid a lot of money for have a vested self-interest in preserving those views,” he says, whereas people in lower-income areas may not have such “visual amenities” to preserve. And, he posits, people with more money likely also have the time and resources to put up a fight.
Energy Institute at Haas Co-Director Severin Borenstein
The result is a bias for developing wind projects in more remote areas, further away from residential neighborhoods, Jarvis found. While avoiding NIMBY fights is just one of the reasons the U.K. has invested in a lot of offshore wind, he notes, “definitely one reason is that local residents get less annoyed. If turbines are 30 miles out in the ocean, they’re not ruining someone’s backyard, so they’re a lot easier to approve.”
But, Jarvis points out, there’s a cost: “Those projects are more expensive to build because you have to send the power over longer distances to get it back to where people live.” The problem doesn’t have a dramatic nickname like utility death spiral, but it’s a similar negative-feedback loop. Satisfying local concerns, however reasonable, “can end up increasing the cost of meeting larger climate commitments because you’re forcing developers to build these more expensive projects,” he says. As his paper neatly sums up, “the key here is that what may be optimal for a given local area may in aggregate create harmful outcomes for society as a whole.”
Solutions have been uneven, with each community fending for itself. That’s why Jarvis’s next question is what a standardized approach might look like. That could help address inequity and get more beneficial projects approved, he says.
Marrying efficiency and equity
One standardized approach to reducing greenhouse gas emissions seems to be working relatively well. California’s Renewable Portfolio Standard requires utilities to generate a prescribed portion of their energy from clean sources. Utilities’ costs to meet these thresholds continue to be “passed through to customers in the form of higher electricity rates,” Fowlie writes in a recent analysis. However, as renewable energy prices have declined, the bit that shows up on individual energy bills has also gotten smaller, her analysis finds. And the program supports utility-scale projects, so consumers are paying the least amount for the most efficient technology. That’s good news for ratepayers—and the climate.
Rising prices aren’t necessarily a bad outcome. Consumer prices should increase, Fowlie stresses, when they don’t reflect the full cost of consumption, including social costs such as pollution and environmental harm.
Unpacking complex implementation lessons, both successes and failures, is building critical new knowledge. “It’s one thing to theorize about how climate policy can work in principle. It’s another thing to implement these policies in the messy real world,” Fowlie notes. If the nation can learn from California’s tangling with these difficult problems, the U.S. might even play a comparable leadership role internationally, she says.
“Decarbonization through electrification is not a crazy idea,” Fowlie says, “given how far storage and renewable energy costs have fallen. You can set an aggressive target for renewable energy investment.” But, she adds, “the policies you put in place to meet those targets—those choices really matter in terms of who ends up paying.”
Misaligned incentives and issues like NIMBYism are cautionary tales that show how failure to create affordable, equal access to clean energy undermines the larger climate goals the policies are meant to achieve.
“It doesn’t have to be like that,” Sallee says. “We can get big efficiency improvements, and we don’t have to sacrifice equity to do it. That’s what we’re trying to push.”