California will not achieve its climate goals without incentivizing more rooftop solar installations and redesigning electric rates to accelerate electrification

As noted by Alejandro Lazo in CalMatters, California is not on track to meet its climate goals. These goals were by Governor Newsom, who wants the state to reach Net Zero emissions by 2040. Here are the goals:

To achieve these goals, the governor has taken several steps. One of these was embodied in an Executive Order that calls for the state to end the sale of non-electric vehicles by 2035, just a decade out.

To achieve Newsom’s goals, electrification of homes and transportation has to proceed at a rapid clip. However, there has almost been no movement toward the electrification of homes. And while the number of electric vehicles (EVs) in California has reached 2 million, there are indications that the growth in EV sales has stalled.

Many analysts have stated that a primary barrier to electrification is the high cost of electricity. Rates keep on rising, year after year. They have doubled in less than a decade.

Electric rates have been trending upwards for a long time

Unfortunately, the state’s energy policy makers continue to blame rising electric rates on Californians who install solar panels on their roofs. That is very unfortunate. California’s electric rates have exceeded the US average ever since 1979, according to data on the US Bureau of Labor Statistics’ website. This chart compares electric rates in the San Francisco Bay Area with the US average.

In the last several months, California’s energy policy makers and legislators have been conducting hearing after hearing on the alleged cost shift between households with solar panels and other households, implying that it is a type of Robin Hood in reverse, with the wealthy stealing money from the poor.

Do solar customers create a cost shift?

The presumption is that solar households are the primary driver of rate increases in the state. Even if one accepts the argument that solar customers end up subsidizing other customers because they don’t pay their full share of the grid’s fixed costs by using so much less energy, the fact remains that many solar customers were large customers for years if not decades before they installed solar panels. The narrowly-defined cost shift ran in the reverse direction. Over their lifetime, most solar customers have been subsidizing other customers.

I address this issue here. This figure shows that on a lifetime basis, solar customers create a negative cost shift of $4,800 versus a positive cost shift of $3,750 that low use customers create.

Evaluating the Public Advocate Office (PAO)’s cost shift argument

How valid are the numbers that have been put forward by the PAO? Dr. Richard McCann has published a detailed analysis of the PAO report. After reviewing his analysis, eleven energy experts and I wrote to Governor Newsom in December 2024 to discard the PAO’s findings on the solar cost shift. It’s clear that households with solar panels on the roof don’t cause rates to rise for other households. In fact, they provide benefits to everyone living in the state.

Rising electric rates have caused some customers to install solar panels. It is not the other way around, that customers who install solar panels cause rates to rise.

Why are electric rates rising? There is no simple answer. They are rising for a whole host of reasons, including utility bankruptcies, inflated utility overhead rates, managerial inefficiencies, regulatory failures and, lately, wildfires.

Rate design is riven with cost shifts

They are also rising because of several other cost shifts in rate design. Here is a partial list.

1. If a customer relocates to another service area, utility revenue drops. To recover their preordained revenue, through a “decoupling mechanism” that was approved decades ago by the CPUC, utilities raise rates and that creates a cost shift. 
2. If a customer downsizes their house, usage drops, and utility revenue drops.  To recover their preordained revenue, through the same “decoupling mechanism,” utilities raise rates and that creates a second cost shift.
3. If a customer replaces old and aging HVAC systems and appliances, thereby lowering their electric usage, that creates a third cost shift.  
4. If low income customers get a discount, as they do in California through the CARE program which gives them a 35% discount on their electric bill, that creates a fourth cost shift since rates are raised for all other customers to fund the discount. It is estimated that a quarter to a third of all customers are on the CARE discount.
5. If a customer uses a lot of energy during the expensive peak period, they impose a bigger cost on the grid than other customers who less energy during the peak period, creating a fifth cost shift.
6. There is a sixth cost shift between rural and urban customers, since the former are more expensive to serve.
7. There is a seventh cost shift between apartments and single-family homes.

Yet none of these cost shifts make the news. The only cost shift in the news is the solar cost shift, which is being promoted by the utilities, the regulators, and a few stakeholders.

Policy Recommendations

This vilification of rooftop solar needs to end. California should take steps to make solar affordable for all customer segments. It should seek to reduce the cost of installing solar panels. It should cap the income graduated fixed charge at $24.15, and it should make sure that the Net Billing Tariff is not applied retroactively to customers who installed solar panels under Net Energy Metering 1.0 and 2.0. 

In order to achieve California’s Net Zero goals, Californians have to reduce and ultimately eliminate the use of fossil fuels. This means that they have to electrify their homes and their transportation.

In order to electrify their homes, they will have to replace their natural gas water heaters and gas furnaces with heat pumps. However, at current electric rates, heat pumps are not cost effective for most customers.

As more than one contractor has told me, if you don’t have solar panels, and you install either a heat pump water heater or a heat pump for space cooling and heating, your electric bills will shoot through the roof.

The economics improve dramatically if the state makes solar affordable for all customers, instead of endlessly harping about the solar cost shift. The time has come for Governor Newsom to end his war on Californians who install rooftop solar panels. Otherwise, California will not reach its Net Zero goals. He should realize that solar is the gateway to electrification.

And it’s not just about heat pumps. Even EVs look less and less attractive at California’s high electric rates, as seen below.

The biggest barrier to EV adoption, which does not make the news, is the rising cost of electricity to charge them.

Working with the legislature, Governor Newsom should take steps to make solar affordable to all customers. In addition, he should ask the CPUC to examine the role that marginal cost pricing targeted at electrification loads can play in accelerating the adoption of heat pumps and EV. An approach for designing such rates is outlined in this paper. Operating costs will fall dramatically, perhaps by a third, finally making electrification of homes and vehicles  affordable to most Californians, and ensure that the Golden State will realize its Net Zero goals in the next decade and a half.