There has recently been a lot of “chatter” on the news and in advertisements concerning how “unfair” electricity rates (tariffs) are for residential users that don’t have “rooftop” solar. The contention is that somehow the low income users of electricity are subsidizing the rates for those “wealthy” users that have invested in PV solar on their homes. Perhaps there is some truth in that claim, and perhaps there is none – it all depends upon what costs are included in the determination of relative values. It is perhaps worth noting that there has never been an attempt to make energy rates “fair” for all users. There are more than one hundred different electricity rate schedules in California, each with widely different rate details. These rates are intended to promote special interest groups to meet political agendas. The idea of achieving “fairness” among users isn’t, and never has been, an important issue for setting tariff schedules. Since the chatter seems to only be addressing the “fairness” for residential users, I am going to limit my considerations to that topic. However, there are similar questions of “fairness” versus societal “importance” across all of the tariff schedules.
The proposed new rate schedule is known as NEM3 (the existing schedule is called NEM2). The proposal for the new schedule is based on the idea that since solar users get credit for over-production of electricity when the sun shines that can be used to offset the use of electricity at other times, there is a potential for using the services of the grid without having to pay for them. This occurs because the costs of the infrastructure (wires, poles, substations, and associated maintenance) are charged as part of the cost of a kilowatt-hour (kWhr) of energy. If a solar user achieves “net zero” there is no overall use of energy and hence no charge for the infrastructure. (Net zero means that as much power is sent to the grid during times of high solar production as taken from the grid at times of lower (or no) production.) Because the energy provided or used is evaluated upon kilowatt-hours, rather than dollars, kW-hrs of energy are “lent” to the utilities and returned at the current retail rate. Charges for the annual difference are paid as an annual “true up” bill.
The reason that rates for those that install solar power seem “unfair” is that the entire residential rate structure is inherently unfair. The residential rate system is an out-of-date billing model that doesn’t work well with the new reality of getting a significant amount of power from small, distributed, energy sources such as rooftop solar. The current rate structure does not reflect the physical structure of the grid and therefore cannot be made “fair” to everyone. The solution to achieving “fair” rates among residential users is to change the approach to setting rates.
Currently all of the costs for electric power are combined into the cost of a unit of energy. However, the costs of services reflected in the tariffs are actually made up of the combination, or bundling, of three very different “services”, only one of which is related to electrical energy. The cost of operating a utility and providing electricity to homes is made up of three broad categories: (1) the cost of the delivered energy (kWhr), (2) the cost of the delivery system (transmission and distribution infrastructure), and (3) various mandated “social” costs including forest fire recovery, decommissioning of nuclear power plants, community education, and more. The rate structure bundles these costs together in a single charge as if they are each related to the amount of energy purchased. This is physically not the case and therefore never results in a “fair” or equitable cost structure. It does not match reality, and is inherently unfair. The three categories of costs should be reflected separately in the rate schedule for electricity to ensure that each is treated fairly for all customers. The “cost of energy” (in terms of dollars per kWhr) should be a separate charge from the cost of providing the infrastructure required to deliver that energy.
The cost of delivering electricity (the transmission and distribution infrastructure) depends upon the cost of that infrastructure and is not related to the amount of energy actually delivered. The costs of power lines, substations and maintenance are the same whether or not any electricity is actually delivered; it only depends upon how much might be required at one time. Transmission and distribution costs are based upon the maximum amount of power demanded (kW) rather than volume (kWhr) delivered over time. To achieve “fair” rate schedules, customers should be charged for the size of their electrical service separately from the amount of energy being delivered. (This is not a “new” idea, almost all of the rates except for residential rates have “demand changes” separate from “energy” charges.)
The third cost in an electricity bill is for the “social” costs covering socially mandated costs. These are similarly not directly related to the amount of energy used. There should be a flat rate covering these “social” costs for each user of the system. These costs are not related or associated with the cost of electricity. They should be shared equally among users of the grid system.
Electricity rates should have three separate parts for energy (kWhr), power demand (kW) and social purposes. The energy portion is the only variable for a given installation (service), the others should be the same for everyone based upon the size of their service and political decisions of how much we should cover as a “social” common good. This approach would be “fair” in that everyone would pay for the amount of energy they use and for the cost of providing the service that they require. Everyone would pay for their energy use plus a flat rate for their service based upon size of their main service breaker (50 amp, 100 amps, 200 amps, other) plus a mandated fixed amount for the common good.
This approach allows for the creation of solutions to encouraging efficiency improvements as well as energy on-site energy storage systems (using batteries, hydrogen fuel cells, elevated weights, pumped water, etc.). Energy efficiency is encouraged because it is directly tied to the amount of energy used, and therefore encourages investments in return for lower energy costs. Since the “demand” aspect of the charge is based upon peak usage, there is a potential savings by investing in storage capability to store energy during periods of low usage to lower the peaks. These approaches could reduce both the demand for electricity (kW) as well as the actual usage (kWhr), thus reducing energy use (and costs) while achieving State energy and sustainable energy goals. It is interesting to note that both of these approaches are available and cost effective with or without solar. Installing solar can augment both of these approaches by encouraging affordable investments toward achieving global goals of reduction of energy use as in a sustainable, environmentally appropriate way while providing a sustainable, eco-friendly source of electrical energy.
Some solar users might opt for a very small main service breaker (20 amps or so) because they are “self-sufficient” enough to require very little interaction with the utilities –resulting in reduced “demand” charges along with reduced energy costs. Perhaps they wish to accomplish some of this by installing energy storage devices to store their excess energy for later use rather than depend upon the utilities.
There remains at an additional question to be answered, “At what location in the system should the cost of energy be based upon?” Power plants located a long distance from the users require long, inefficient, transmission lines to move the energy from the power plant to the local (community) distribution system. Typically, more than half of the power produced at a power plant located at a distance from the load is lost during transmission. Therefore, the amount of energy produced by the power plant is not the same as the amount of energy that is available for use. For example, a 90% efficient gas powered power plant becomes a 45% efficient power source at the user end of the transmission line. A 100% efficient solar array in the desert becomes a 50% efficient power source as compared with one that is located on a rooftop (with essentially zero loses in transmission).
Because there are no transmission loses, a kilowatt-hour of solar produced on a rooftop in a community is worth around two kilowatt-hours of solar electricity made in the desert or by a distant power plant. The “cost of electrical energy” should be determined at the end of the transmission lines nearest the user, where the transmission lines connect to the distribution lines, rather than at the power plant. This is an important consideration when determining the relative value of locally produced power versus that created at a distance.
The average wholesale price of electrical energy in California is about $0.10 per kWhr. Because of transmission loses, the cost of power delivered to the distribution system is often twice that, or about $0.20 per kWhr. Power produced within the distribution system (such as roof top solar) should be valued at the cost at the distribution system, not at a distance source. A kilowatt-hour of electrical energy at the point of distribution system is worth $0.20, not the wholesale price of $0.10 paid at the power plant or “hub”.
In addition to the compensating the utility for the direct cost of providing power there are very large “indirect” costs that are not included in the price of power, but are instead paid for by society at large. During its deliberations over the proposed NEM3, the PUC (Public Utilities Commission) decided against considerations of indirect “societal” costs when evaluating the value of rooftop solar. The reason given is they don’t have information on that topic because they haven’t funded the necessary studies. It seems that the real reason may have been because they found that it would create answers that they didn’t like. The indirect (“societal”) costs should be included because they are costs that are directly related to the cost of power but paid by all citizens of the State (and world) by means other than directly for the cost of power. These indirect costs include things such as the impacts of greenhouse gas created global warming due to greenhouse gases, pollution, habitat destruction, loss of “open space”, problems created by mining, fracking, destruction of free flowing rivers, damage to fish habitat in impounded rivers, etc. While these are all real and actual current and future costs, they are not captured or included in the price of electricity. They are paid by everyone, but not included in the true cost of electricity.
The reason that this is important is that while these types of “indirect” costs apply to the production of energy from traditional energy sources, there are clear and important benefits received from those who are willing to invest in making their homes more efficient and/or adding rooftop solar, both of which have small environmental footprints and thus result in decreasing the negative footprint of energy production and use. The State of California, as well as the United States and many countries around the world have expressed their intent to reduce the negative impacts of power production. They all agree that reducing residential impacts are important to achieving those goals. Incentives and subsidies at the individual resident level are necessary to ensure that the costs to homeowners for investing in a “clean” future are repaid– thus rooftop solar and efficiency improvements should receive a subsidy for the clean power that they produce (or “dirty” power they avoid). There should be substantial subsidies/incentives for the cost of installing, energy storage systems, and achieving lower energy use through design and efficiency measures. This is all required in order to achieve a “fair” and “equitable” sharing of energy costs for all residential users.