Oct 14, 2023

What would fixed charges on electricity bills mean for rooftop solar customers?

By all indications, a new law that would establish monthly fixed charges on electricity bills that vary according to household income will also apply to customers who have installed solar in the service territories of power companies regulated by the California Public Utilities Commission, including San Diego Gas & Electric.

The question at this early stage is, how high will those fixed charges be each month? Ultimately, that will be decided by the commission.

For the record:

7:52 a.m. April 16, 2023This story has been corrected to say that Severin Borenstein thinks many customers will pay more under a fixed charge but not most.

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The law's supporters say the charges will help lower-income customers and more accurately reflect the fixed costs that go into running the state's electric system.

But the solar industry and rooftop installers say if the monthly fee is set too high, it will undermine one of the main reasons customers installed their rooftop systems in the first place — to dramatically slash their monthly electric bills.

"It's not the fixed charge that's necessarily the problem," said Michael Powers, co-founder of Stellar Solar, based in Oceanside, "it's how big is that as a portion of your total bill."

Last summer, the Legislature passed Assembly Bill 205, a wide-ranging piece of legislation dubbed the "energy trailer bill" that Gov. Gavin Newsom signed into law. Most of the floor debate focused on one section of the bill that created a strategic reliability reserve to be overseen by the California Department of Water Resources.

But the legislation also included a provision calling on the commission — or CPUC — to adopt a fixed monthly charge based on household income. The rationale was based on giving lower-income Californians some financial relief from ever-increasing electrical bills.

Currently, monthly utility bills include not only the cost, transmission and distribution of the electricity itself but also the dollars that investor-owned utilities spend on other programs — such as reducing wildfire risk, "public purpose programs" like the California Alternative Rates for Energy (CARE) and the Family Electric Rates Assistance (FERA) that help low-income customers pay their utility bills, and the myriad clean energy programs aimed at reaching the state's decarbonization goals.

Under AB 205, the idea is to separate the costs of many of those programs not directly related to the price of electricity and put them into a fixed charge that customers would pay each month.

At the same time, the per kilowatt-hour rate for electricity that customers pay would be lowered. San Diego Gas & Electric estimates the current average rate of about 47 cents per kilowatt-hour would drop to 27 cents — a reduction of 42.6 percent.

By separating out those costs, supporters of creating a fixed monthly charge such as Severin Borenstein at the Energy Institute at the Haas School of Business at UC Berkeley, say a fixed charge based on household income will help low-income customers.

And a lower rate per kilowatt-hour, the thinking goes, would make it more financially attractive for all ratepayers to adopt clean energy options such as installing electric heat pumps in their homes and buying electric vehicles that can be charged in their garages.

"The system we have right now is disproportionately forcing low-income people to shoulder these costs" because high utility bills impact people who have less disposable income more than wealthier ratepayers, Borenstein said. "And at the same time, (the current system) massively distorts the price of electricity."

Customers would pay the fixed charge each month, in addition to the electricity component of their bill (which equals the amount consumed multiplied by the rate per kilowatt-hour).

Borenstein acknowledges the net effect will be higher utility bills for many customers, which won't make them happy. "But a large share who you won't hear from unless you go out and find them will say, ‘This is great. I’m paying less," Borenstein said. "And then the people who are thinking about getting a heat pump water heater are going to see that it actually pencils out now and it didn't before."

The fixed charge would be set according to the income level of each household.

Collecting and verifying the annual income data from each of the 11 million households served by the investor-owned utilities in California could be a problem. SDG&E officials have said they don't want to take on that extra responsibility and some customers will doubtless raise questions about privacy.

Supporters of AB 205 say details can be hammered out by working with existing state agencies including the Franchise Tax Board to coordinate the data while at the same time ensuring customer confidentiality.

What would be the size of the fixed charges? That crucial question will ultimately be determined by the CPUC.

According to the language of AB 205, it's up to the commission to "establish reasonable fixed charges," which gives the commission a lot of latitude regarding the exact amounts, as well as other specifics. The law instructs the CPUC to make a decision by July 1 of next year.

Seeking input, the CPUC recently instructed the utilities, environmental organizations and others to submit proposals as to how a fixed charge system would work and at what price points. The commission told the parties their proposals had to include at least three income tiers.

The proposals ran the gamut.

The three big investor-owned utilities — SDG&E, Southern California Edison and Pacific Gas & Electric — have long supported creating a fixed charge and they submitted a joint proposal. In the SDG&E service territory, the brackets break down like this:

Among the proposals, the Natural Resources Defense Council and The Utility Reform Network (TURN) suggested fixed charges ranging from $5 per month for low-income households in San Diego to $60 per month for those earning more than $150,000.

The Sierra Club's proposal goes as low as zero fixed charges for SDG&E customers on CARE and FERA to $145 per month for upper-income households.

The Solar Energy Industries Association's proposal to the CPUC calls for fixed charges ranging from $7.43 per month to $13.14 in SDG&E's service territory.

The solar industry wants low fixed charges, arguing residential utility customers have already spent tens of thousands of dollars to install solar systems on their rooftops — not only to contribute cleaner forms of electricity across the state but also to drastically reduce their monthly electric bills by generating energy from the sun.

Adding a high fixed charge to solar customers "would make it very difficult for customers to be able to pay back their solar systems," Powers of Stellar Solar said. "The whole idea for incentivizing clean energy was that there's a return on investment. That's always been the case."

Ahmad Faruqui, an economist who's worked for years on rate design, is more blunt, calling AB 205's income-based fixed charge "a terrible idea."

Faruqui does not think the numbers and changes in consumer behavior will be realized.

"It's like a shell game," Faruqui said. "I lower the volumetric charge but I raise the fixed charge. For many customers, it will be ignored. They would just see their total bill ... and if the total bill doesn't change much, they’re not going to buy a heat pump."

The discussion on how the CPUC will implement AB 205 comes as the rules have changed regarding the compensation rooftop solar customers receive when their systems send excess electricity back to the grid.

The most recent iteration of Net Energy Metering, colloquially called NEM 3.0, went into effect at midnight on Friday.

Rather than being credited at the retail rate of electricity, NEM 3.0 customers will get paid at the "actual avoided cost," which is lower during the daylight hours when the sun is out and solar energy is abundant and cheap. Solar industry advocates say the new rules will reduce the average compensation rate by 75 percent.

Customers who had their systems installed under the first and second rounds of Net Energy Metering rules will still get compensated at the retail rate for 20 years from the time their systems were installed before getting switched.

For example, a current NEM customer who had a system installed in 2018 would still get credited at the retail rate until 2038. But after that, the customer would be credited at the avoided cost.

The creation of income-based fixed charges will not alter NEM 3.0 rules. But implementing AB 205, combined with stricter compensation rules for net metering, Faruqui said, "is like a double whammy" for solar customers.

Among Faruqui's suggestions is carving out an exception to the fixed charge for Californians who have installed rooftop solar.

"We have roughly 1.5 million customers with solar and their investment will go to waste because ... more than half of the savings will disappear," Faruqui said. "It's like confiscation of property."

Borenstein says a solar carve-out or setting a fixed charge that is too low across all income brackets is a non-starter.

"That's the equivalent of saying, let's not do anything and continue the status quo," Borenstein said. "We (in California) have the most aggressive low-income program in the country. We have spent the most on R&D and early stage renewables in the country. We have the biggest wildfire costs and compensation costs in the country. Somebody's gotta pay for that."

Powers of Stellar Solar isn't pushing the panic button yet.

"There's going to be some argument about what the amount of the fixed charge is," Powers said. "I’m not going to say it's not going to happen but I think when the state tries to implement all the facets of this, like basing it on income level, I think it's going to be really unwieldy. And you know what? The Legislature meets every year."