Newswise – Every time a California resident turns on a light or toasts, they’re helping pay for wildfire damage across the state.
In fact, between half and two-thirds of the electricity bills paid by Californians subsidize costs beyond providing the electricity itself. Some of these costs are closely related to electricity, such as infrastructure maintenance or investments in energy efficiency, while others are more indirect, such as forest fire mitigation and victim compensation. .
“The price we pay for electricity does not reflect the cost of providing that electricity,” says Severin Borensteinprofessor of the doctoral school of the Haas School of Business and co-director of the faculty of the Energy Institute at Haas. “And, most importantly, all of these programs that we fund through our electricity bills disproportionately fall on low-income households. This amounts to a regressive tax.
In a new report released todayBorenstein and his colleagues at the Energy Institute Meredith Fowlie and James Sallee—both professors in the Department of Agriculture and Resource Economics at UC Berkeley—analyze the impact of this hidden “electricity tax” on Californians. They recommend two important policy reforms to ease the burden on low-income households and stimulate consumer interest in adopting electric vehicles, heat pumps and other electric technologies.
The researchers suggest shifting some of the system-wide costs to the state budget, which is funded by less regressive forms of taxation: income and sales taxes. The remaining costs of the system could be paid for using a monthly flat rate on electricity bills linked to income, and therefore more progressive.
The report, “Paying for Electricity in California: How Residential Rate Design Impacts Equity and Electrification,” was commissioned by next 10, a non-profit, non-partisan research organization. It is based on the findings of a previous study released last year.
Accounting for invisible costs
The state’s three largest investor-owned (IOU) utilities – Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric – combine to serve more than 11 million people. The researchers compared the electricity consumption of these customers with census data to paint a picture of how much households of different incomes were paying for charges beyond the cost of electricity. These costs include network maintenance as well as policy objectives such as wildfire mitigation, compensation for past wildfire victims, investments in renewable technologies and subsidies for solar power on roofs, energy efficiency programs and low income customers.
The report reveals that in 2019, IOU’s residential customers paid an effective electricity tax that averaged $678 per year. The effective electricity tax was $809 for typical PG&E customers, $512 for SCE customers, and $786 for SDG&E customers during the study period.
They found that the lowest-income households, earning $25,000 or less per year, spend on average more than 3% of their income on these additional electricity charges. Households earning more than $200,000 a year, on the other hand, spend half a percent or less of their annual income.
“As a proportion of their income, low-income households pay more than three times what wealthier households pay,” says report co-author Fowlie, co-director of faculty at the Haas Institute of Energy. . She also explained that as California invests more money in climate change adaptation and mitigation measures, and extreme heat becomes more common, “it’s a good bet that those costs will increase.” , pushing prices even higher. We should be even more concerned about this relative regressivity in the future.
In addition to this inequitable distribution of costs, the current electricity rate structure discourages many of the actions California needs to meet its climate change goals. The researchers estimate that these additional charges on utility bills reduce the adoption of electric heat pumps by about a third and electric vehicles by 13% to 33%. “This is particularly noteworthy given California’s recently passed rule requiring 100% of new vehicles sold by 2035 to be zero-emissions.
“When people go to buy an electric vehicle or a heat pump, if they think carefully about not just the upfront costs but also the running costs, then the amount that California charges those consumers is just a barrier to ‘adoption,” says Borenstein. . He noted, however, that the price of natural gas is roughly equal to the true cost to society and that the price of gasoline is below its true cost. “If we massively overprice electricity while underpricing or correctly pricing these other more carbon-intensive alternatives, we’re undermining everyone’s incentives.”
A better way to pay
Two propositions emerged from the analysis. The researchers advocate shifting some of the system costs for grid and policy goals out of the purview of electric utilities into the state budget. To cover the remaining costs, they offer a monthly plan based on income.
In the example the authors present for PG&E, e. Households in the middle of the income distribution would pay $70 to $80 a month in additional fees. Those at the top of the income distribution would pay around $150 in fees. Borenstein acknowledges that this sum is not insignificant, but points out that the concomitant drop in the price consumers pay for electricity would mean that even customers in the highest income bracket would see their overall bills increase by less than $40. per month.
“Although economists are playing the role of the wet blanket, bringing bad news, I actually think it’s good news,” Fowlie says. “Policymakers have the levers and instruments at their fingertips to address this issue.”
Interestingly, the strongest opposition to this work comes from the solar industry, as high electricity prices make solar installations more attractive. But, as the report makes clear, residential solar adoption is occurring primarily among high-income customers. As these customers install panels and consume less of the grid, the current rate structure becomes even more inequitable, further shifting costs to lower-income consumers.
Researchers are optimistic. Just this year, California Senate Pro Tempore President Toni Atkins proposed legislation to transfer some of these costs to the state budget; and California’s latest budget (AB205) requires the California Public Utilities Commission to implement a fixed income-based charge. It remains to be seen what the magnitude and progression of this charge will be.
Borenstein sees this as significant progress. “Even two years ago, a lot of people were saying that high electricity prices are a good thing because they force people to save,” he said. “A lot fewer defenders and politicians now talk that way, so the work we’ve done has moved the ball forward. They know the current system just doesn’t work.
RESOURCES
Read the full report:
Paying for Electricity in California: How Residential Rate Design Affects Equity and Electrification
By Severin Borenstein, Meredith Fowlie and James Sallee
Ordered by Next 10. Read the press release.
About Energy Institute at Haas:
The energy institutete at Haas helps create a more economically and environmentally sustainable energy future through research, education and political engagement. The Energy Institute produces research and analysis backed by rigorous empirical evidence and the frontiers of economic research so that energy and environmental policies and business decisions are based on sound economic and business principles.
About NEXT 10:
Next 10 is an independent, nonpartisan, nonprofit organization that educates, engages, and empowers Californians to improve the state’s future. With a focus on the intersection of economy, environment and quality of life, Next 10 employs research from leading experts on complex state issues and creates a portfolio of educational materials nonpartisan to foster a better understanding of the critical issues affecting California.