Assessing California’s Climate Policies—Residential Electricity Rates in California

AN LAO REPORT Assessing California’s Climate Policies— Residential Electricity Rates in California GABRIEL PETEK | LEGISLATIVE ANALYST | JANUARY 2025 SUMMARY Residential Electricity Rates Are High and Growing. California’s electricity rates are among the highest in the country. On average, residential electricity rates in California are close to double those in the rest of the nation, mostly driven by high rates charged by the state’s three large investor-owned utilities (IOUs). California electricity rates also have been increasing rapidly in recent years—not only growing faster than inflation but also outpacing growth in other states. These trends currently are on track to continue. Various Reasons for High and Growing Rates. Although the specific reasons for California’s relatively high rates have not been precisely quantified, some of the key factors include: significant and increasing wildfire-related costs, the state’s ambitious greenhouse gas (GHG) reduction programs and policies, and differences in utility operational structures and services territories. Many of these factors are particularly significant for customers of IOUs (as compared to those served by publicly owned utilities [POUs]). Additionally, within a given utility, the rates that residential customers pay can vary widely. This is largely due to California’s relatively robust cost-reduction programs for low-income households and rooftop solar customers, which are subsidized by other ratepayers who do not qualify for those discounts. High Electricity Rates Put Strains on Residents and Impede Efforts to Meet Climate Goals. High and increasing electricity rates add cost burdens to ratepayers across the state. Many residents who earn lower incomes or live in hotter regions of the state are feeling these growing costs even more acutely. High electricity rates also impede the state’s efforts to meet its ambitious climate goals by discouraging households from pursuing electrification through switching out their fossil fuel-powered cars and appliances. Legislature Faces Difficult Choices Around Electricity Rates. Various emerging issues have the potential to affect residential electricity rates in California. These include the increasing stringency of the state’s GHG reduction goals, growing demands for electricity in the state, and increasing wildfire-related costs. To the extent that these factors raise electricity rates, that will increase already high cost burdens on Californians and make meeting the state’s ambitious climate goals through electrification even more difficult. Accordingly, the Legislature likely will confront difficult decisions about how to approach electricity rates in order to best support its varied goals, including balancing the desires to both mitigate and adapt to climate change as well as preserve affordability. www.lao.ca.gov 1 AN LAO REPORT INTRODUCTION Report Addresses Key Questions About related to both climate change and affordability. Residential Electricity Rates. California’s Because this report is intended to serve as an initial electricity rates are among the highest in the “primer” for developing a common understanding country. On average, residential electricity rates around how rates work and related issues, it in California are close to double those in the rest does not include an in-depth analysis of those of the nation. California electricity rates also have issues and their potential impacts, nor specific been increasing rapidly in recent years and are policy recommendations. projected to continue to outpace inflation over Report Meets Statutory Requirement. This the next few years. In this report, we explore key report is submitted pursuant to Chapter 135 of questions that frequently emerge around residential 2017 (AB 398, E. Garcia), which requires our office electricity rates in California, discussing issues such to report annually on the economic impacts and as why electricity rates are high in the state and benefits of the state’s GHG emissions reduction some resulting implications, including for the state’s targets. Consistent with the statutory direction, this climate change-related goals. report discusses the potential economic impacts Report Intended to Provide Basic and benefits of the state’s GHG targets, focusing Information, Develop Common Understanding. on residential electricity rates. The report also This report is intended to help the Legislature and describes certain other important issues related others better understand the basics of electricity to residential electricity rates, such as explaining rates, including their relationship to climate policies. the structure of rates and factors apart from the This information can, in turn, help provide context state’s GHG emission targets that contribute to the to the Legislature as it considers its policy options amounts that Californians pay for electricity. for addressing its multiple goals, including those WHAT ARE THE MAIN COMPONENTS OF THE ELECTRICITY SYSTEM? A basic familiarity with the electricity system is key to understanding electricity rates. As discussed Figure 1 below, the electricity system includes the infrastructure that generates electricity and delivers Main Components of the Electricity System it to customers. Electricity System Includes Three Main Transmission lines Components. The primary components of the carry electricity long distances electricity system are shown in Figure 1 and summarized below: • Generation. Most electricity is generated Distribution lines carry electicity to houses at large power plants (such as natural gas, Generation occurs at power plants and renewable energy coal, or nuclear power plants) or “renewable generation sites like solar fields energy” generation sites (such as wind farms or solar fields). (Renewable energy typically includes sources of energy that are replenished naturally and regularly, such as by the sun, wind, or water.) Some electricity 2 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT generation also occurs at a smaller scale, • Distribution. Generally, electricity is such as solar panels installed on the transferred from high-voltage transmission rooftops of residences or businesses lines to low-voltage distribution lines before it (known as “rooftop solar”) or in other is delivered to customers. Distribution lines are community locations. often visible on wooden poles that run through • Transmission. Electricity generated at power cities and neighborhoods but sometimes they plants and renewable energy generation sites are placed underground. is transported through high-voltage power lines known as transmission lines. WHICH ENTITIES PROVIDE ELECTRICITY SERVICES? A wide variety of Figure 2 entities—both public and Most of California Is Served by Investor-Owned Electric Utilities private—play roles in operating the electricity system and providing services to households PacifiCorp across the state. Publicly owned utilities Load Serving Investor-owned utilities Entities (LSEs) Procure Electricity and Deliver It to Customers. LSEs are responsible for PG&E generating or purchasing Liberty electricity and ensuring it is delivered to households SMUD through the transmission and distribution systems. Historically, utilities have been the primary LSEs and have been granted nearly exclusive authority to provide electricity within designated areas (known SCE as service territories). Figure 2 shows the service LADWP Bear Valley territories of the various utilities that provide service throughout the state. As shown in the figure SDG&E and discussed below, the state’s utilities fall within two main categories: IOUs ª California contains more than 40 publicly owned utilities. Due to space constraints, we only label the largest of these utilities. and POUs. PG&E = Pacific Gas and Electric; SMUD = Sacramento Municipal Utility District; LADWP = Los Angeles Department of Water and Power; SCE = Southern California Edison; and SDG&E = San Diego Gas and Electric. www.lao.ca.gov 3 AN LAO REPORT Most Californians Served by IOUs. IOUs are service territories. Most notably, state law private companies that typically are overseen by authorizes the establishment of CCAs, which are corporate boards. As such, IOUs have fiduciary local government-run entities that buy electricity for responsibilities to their owners—such as their customers. CCAs are responsible for the generation shareholders—to maximize their profits. California portion of the electricity provided to customers, is home to three large IOUs—Pacific Gas and while the IOUs continue to be responsible for Electric (PG&E), Southern California Edison (SCE), the transmission and distribution parts of the and San Diego Gas and Electric (SDG&E)—as well system. IOUs also provide meter reading, billing, as three smaller ones noted in the figure. Roughly and maintenance services for CCA customers. three-quarters of statewide electricity is distributed CCAs have grown in recent years as more local in IOU service territories, which cover the bulk of communities have sought to expand consumer the state’s land area. choices available to their residents; 25 now operate Many POUs Also Serve Californians. In in various regions of the state. Currently, nearly addition to IOUs, various POUs also provide 40 percent of the electricity consumed in IOU services in the state. POUs are public agencies territories is purchased through CCAs. that are governed by locally elected or appointed Various Entities Generate Electricity. officials. As such, POUs are owned by their A number of different entities generate the customers, and their focus is maximizing value for electricity that LSEs sell to customers. In some those they serve. The largest POUs in the state cases, LSEs own and operate their own power are the Los Angeles Department of Water and plants and renewable energy generation sites. In Power (LADWP) and the Sacramento Municipal other cases, private companies own these types Utility District (SMUD). In addition to these large of facilities and sell the electricity they produce entities, more than 40 smaller POUs provide service to LSEs. Notably, small-scale solar installations across the state. Together, POUs provide roughly within communities, such as rooftop solar, usually one-quarter of statewide electricity. (In addition are owned by the property owner or a third-party to IOUs and POUs, a few nonprofit cooperatives company that installs the generation source. operate in California, but these entities are California Independent System Operator small in number and provide service to relatively (CAISO) Oversees Electricity Reliability for few households, so we do not discuss them in Most of the State. CAISO serves as the electricity this report.) “balancing authority” for much of the state, and is Community Choice Aggregators (CCAs) Are responsible for allocating space on transmission Another Type of LSE That Serves Customers in lines, maintaining electricity operating reserves in IOU Territories. The state allows for competition order to meet reliability standards, and matching with utilities in some limited forms within IOU electricity supply with demand. WHAT DO ELECTRICITY RATES PAY FOR? LSEs charge customers for providing electricity the generation, transmission, and distribution services. In this report, we generally refer to these components. This is true for customers of all charges—regardless of how they are structured—as LSE types. rates. As we discuss below, electricity rates support IOU Rates Also Support Various Other the main components of the electricity system, as Activities. In addition to supporting the well as various other activities. main components of the electricity system, Electricity Rates Pay for the Main revenue generated through electricity Components of the Electricity System. Electricity rates also pays for various other activities rates pay for the construction, maintenance, that generally are not directly related to and operation of the electricity system, including providing electricity services. Most notably, 4 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT the state and IOUs use revenue generated from that revenue into the Energy Resources Programs electricity rates to support various state-mandated Account (ERPA). The state uses this account to public purpose programs. These programs pay for various energy programs and planning have goals such as increasing energy efficiency, activities—mostly staff and operations at the expediting adoption of renewable energy sources, California Energy Commission (CEC). supporting the transition to zero-emission vehicles POU Rates Also Support Some Other (ZEVs), and providing lower-income customers with Activities, but Typically at More Modest Levels. financial assistance. For example, the largest public Notably, POU customers pay for only a subset purpose program is California Alternate Rates for of the above costs paid by IOU customers. For Energy (CARE), which provides discounts targeted example, while POU customers support ERPA at lower-income customers. (We discuss the and often pay local utility taxes, they generally CARE program in further detail later in this report.) do not pay for the public purpose programs Additionally, electricity rates support various discussed above. In some cases, POU ratepayers other costs, such as related to decommissioning do pay charges for similar types of programs. nuclear facilities. Figure 3 provides a breakdown For example, POUs typically operate their own of the relative magnitude of the activities that rates programs to promote energy efficiency and provide supported for the three large IOUs in 2023. discounted rates to lower-income customers Electricity Bills Include Some Additional within their service territories. Under the statewide Charges. Electric utility bills often reflect a number requirements imposed by Proposition 26 in 2010, of other state and local taxes and charges. however, POUs are limited in their ability to support For example, many local jurisdictions impose utility new or expanded programs and activities that are taxes that are used to support local programs, not directly related to providing electricity services, such as fire response and parks. Also, the state such as expansions to programs that provide assesses a charge on electricity use and deposits discounts based on income. Costs of Many of the Activities Funded Through Rates Are Fixed. Many of the costs Figure 3 recovered through rates—particularly those Main Components of the Revenue associated with the transmission and distribution Requirements for the Large components of the electricity system, as well as Investor-Owned Utilities in 2023 many of the public purpose programs—are “fixed” in that they do not vary based on the amount of Total Revenue Requirement: $39 billion electricity used. Estimating precisely which utility costs are fixed can be challenging and depends on the time horizon under consideration. However, Other Public in a 2021 report, economists at the University of Purpose Programs California at Berkeley (UC Berkeley) estimated Generation and that roughly two-thirds to three-quarters of the Energy Procurement costs that IOUs recover through rates are fixed, Transmission with the precise share depending on the utility. The high fixed costs of building and maintaining the transmission and distribution portions of the electricity system are a main reason why utilities Distribution historically have been granted nearly exclusive authority to operate in designated regions, as it would be costly to have multiple providers run parallel transmission and distribution lines to a Source: 2023 California Electric and Gas Utility Cost Report: AB 67 Report to the given area. Governor and Legislature, California Public Utilities Commission, April 2024. www.lao.ca.gov 5 AN LAO REPORT HOW ARE ELECTRICITY RATES SET? In this section, we discuss how the government— portion of electricity rates, as transmission including at the local, state, and federal levels— infrastructure can cross state lines. controls and oversees electricity rates to ensure the Electricity Rate-Setting Processes Include revenue they generate is sufficient to allow LSEs to a Few Key Steps. The rate-setting process for adequately fund their systems and the other costs electric utilities is complex. The process generally discussed above, while protecting consumers from includes the following main steps: unreasonable charges. • Step 1: Determine Revenue Requirement. Government Oversees Electricity Rates to Typically, the first step that rate-setting entities Ensure Reasonableness. Since the government take is to determine the amount of money the grants utilities nearly exclusive authority to utility should be allowed to recover through operate in designated areas of the state, it also rates to support the main components of the plays an important role in ensuring they do not electricity system and other activities. This take advantage of their market power to charge is known as the revenue requirement. CPUC unreasonable rates. The processes that the sets IOUs’ revenue requirements such that government uses to ensure reasonableness differ they can recover the value of their capital across IOUs, POUs, and CCAs. investments multiplied by an authorized rate • IOU Rates Set by the California Public of return. (The rate of return is a key factor Utilities Commission (CPUC). CPUC—a affecting the level of profit the IOU is able state-level agency—is the primary entity to generate for its shareholders.) CPUC is charged with overseeing electricity rates for charged with setting a rate of return that IOUs, a role it carries out through various compensates shareholders at a level that is types of proceedings. For example, every consistent with the returns they would receive four years, CPUC authorizes a utility’s rates on investments of similar risk. Additionally, through what is known as a General Rate IOUs are allowed to recover an amount that Case proceeding. CPUC also conducts a reflects the depreciation on their capital variety of other types of proceedings, such investments. Finally, IOUs are allowed to pass as to determine the rate of return a utility through certain other costs to ratepayers (but is authorized to receive (known as a Cost not receive a rate of return on these costs), of Capital proceeding) and how much it including their maintenance and operation should be compensated for purchasing fuel costs, electricity procurement costs, and and power (known as an Energy Resources the costs of the public purpose programs Recovery Account proceeding). discussed previously. • POU and CCA Rates Set by Local • Step 2: Determine How to Allocate Governing Boards. In the case of POUs, the Costs to Residential and Nonresidential utility itself is a government agency—thus, Customers. The second step in the process the state government does not regulate POU is to determine the portion of the revenue rates. Rather, governing boards which consist requirement that should be generated through of local elected officials set POU rates. Under rates paid for by households (known as a similar rationale, local governing boards residential rates) versus those paid for by other typically oversee the rates that CCAs charge groups of customers such as businesses. This their customers for electricity generation division generally is intended to align with the and purchases. costs of serving each group. (Currently, we estimate that about 40 percent of the revenue Notably, the Federal Energy Regulatory requirements for all California utilities are Commission—rather than CPUC or local elected recovered through residential rates.) officials—generally oversees the transmission 6 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT • Step 3: Determine How to Structure This third step also includes decisions on the Residential Rates. The third step generally level and structure of fixed and volumetric includes determining how to structure the charges, including across different groups rates for residential customers to generate the of customers. (As we discuss in more detail required revenues. This includes determining below, most IOU customers with solar how much of the money should be generated panels and/or who are low income generally from fixed charges versus from volumetric have different rates from other groups of charges. (Fixed charges are amounts customers.) In some cases, CPUC’s actions assessed on each service connection that are on how to structure portions of IOU rates the same for all customers within specified are guided by explicit direction from the categories, whereas volumetric charges are Legislature. For example, statute specifies the amounts that vary based on the amount of range of discounts the CARE program must electricity a particular customer uses.) provide and, as we discuss further below, provides some direction on how fixed charges should be assessed. HOW ARE RESIDENTIAL RATES CURRENTLY STRUCTURED? In this section, we discuss how electricity Historically, some POUs have had some modest rates currently are structured as a result of the fixed charges in addition to volumetric charges. rate-setting processes discussed above. For the For example, SMUD assesses a monthly fixed remainder of the report, we focus on residential charge of $24 and LADWP assesses a monthly rates rather than rates paid by businesses. fixed charge of $12. Until recently, however, state For illustrative purposes, Figure 4 on the next page law has prohibited IOUs from assessing fixed shows a simplified sample bill for an IOU customer charges of more than $10 per month. In practice, with various charges and credits. A POU bill would CPUC historically has not authorized IOUs to look similar, but omit some of the specific charges impose any fixed charges, in large part due to or credits. This is because, as noted earlier, not all concerns that they could discourage electricity POUs participate in the types of ratepayer-funded conservation. The limited use of fixed charges programs that IOU customers are required to in California contributes to the need to charge support. (We note that some consumers also get relatively high volumetric rates to meet utility energy from natural gas—for which charges could revenue requirements. appear on the same bill as electricity—but we do Recent Legislation Requires CPUC to not discuss natural gas in this report.) Authorize IOUs to Collect Fixed Charges. Most Costs Are Collected Through Volumetric Chapter 61 of 2022 (AB 205, Committee on Charges Rather Than Fixed Charges. As Budget) modified state law to repeal the $10 limit mentioned above, a key decision for CPUC and on fixed charges and required CPUC to authorize POU boards when they are structuring rates is how fixed charges that vary by income for residential much of the revenue requirement to recover from electricity rates. In accordance with Chapter 61, fixed charges (a set amount per month) versus CPUC issued a decision in May 2024 that will volumetric charges (an amount based on how much impose some fixed charges on IOU customers electricity the customer uses). To date, even though starting in late 2025 or early 2026. Notably, the most of the costs of providing electricity are fixed, magnitude of these charges—roughly $24 per California electricity rates have been structured to month for non-CARE customers and $6 per month collect most revenue through volumetric charges. for CARE customers—is roughly in line with the amounts charged by various POUs in the state. www.lao.ca.gov 7 AN LAO REPORT Figure 4 Illustrative Example of a Monthly Electricity Bill for an IOU Customer Participating in CAREª ENERGY STATEMENT Account Number: 123456789 Electricity usage is charged based on how Service For: Total Amount Due: $163.45 many kWh are used Mary California each month. This pays 123 Bear Street This customer does not for costs of generation, Golden Poppy, CA 90000 have rooftop solar panels. transmission, and If she did, she would distribution, as well as receive credits for the certain public purpose Category Charge Total Cost kWh of electricity she programs. generated. The size of the credits would depend Electricity Charges on when the solar system Electricity used during (Based on 500 kWh usage) was installed. 'peak' hours is charged at a higher rate than Peak 100 kWh @ $0.50 $50.00 energy that is used during 'off peak' hours. Off Peak 400 kWh @ $0.45 $180.00 Some lower-income Alternatively, customers customers qualify for a can choose a tiered rate CARE Discount -$80.50 discount of 30 percent to structure that is not 35 percent on their bills based on time of use but has different costs based New Fixed Charge $6.00 through the CARE program. on total amount of use. CEC Surcharge $0.0003 per kWh $0.15 The state uses this for CEC CPUC recently approved regulatory and planning a fixed charge that is City Utility User Tax 5 percent of total bill $7.80 activities. Revenue flows standard across into the Energy Resources customers regardless of Programs Account. how many kWh they use. Total $163.45 This charge will start in late 2025/early 2026 and Many local jurisdictions will be lower for CARE impose utility user taxes customers than other to fund their general customers. operations. Tax rates vary by locality. ª This customer does not purchase electricity generation through a Community Choice Aggregator (CCA). If she did, her bill would reflect some alternative charges, including a per-kWh rate from the CCA and a credit for the generation portion of the IOU’s electricity charges. IOU = investor-owned utility; CARE = California Alternate Rates for Energy; kWh = kilowatt-hour; CEC = California Energy Commission; and CPUC = California Public Utilities Commission. However, these new fixed charges are more modest volumetric charges depending on the total amount than those originally proposed to CPUC by the of electricity used by the household, with the IOUs, which would have been as high as $128 per per-unit charge increasing as a household uses month for some higher-income households. more energy. This type of rate plan is intended to Level of Volumetric Charges Often Varies by promote conservation by charging more for using When or How Much Electricity Is Used. Electric substantial amounts of electricity. utilities typically offer residential customers various Rooftop Solar Customers Receive Credits options for rate structures, such as time-of-use for the Electricity They Generate. Under a rates and tiered rates. A time-of-use rate plan statewide program called net energy metering includes volumetric charges that vary according (NEM), customers who have installed solar panels to the time of day and season, with higher charges on their homes typically receive credits on their during “peak” hours when electricity is relatively bills for the electricity those panels generate. As scarce and lower charges “off peak” when we discuss in the box on page 11, the structures of electricity is relatively plentiful. This type of rate such credits generally vary depending on whether plan is intended to discourage households from the customers get electricity from an IOU or using electricity when it is comparatively difficult POU, as well as on when they installed their solar and costly for LSEs to purchase. (In the nearby box, systems. Under NEM, however, the state historically we discuss how electricity availability can vary.) has not required solar customers to pay for their In contrast, a tiered rate plan assesses different full share of the fixed costs of the electricity system. 8 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Balancing Electricity Supply and Demand Is Important—and Difficult A key challenge facing those who operate the electricity system in the state is how to precisely balance electricity supply and demand at all times given that both fluctuate over the course of a day and across different seasons. To Avoid Significant Disruptions, Electricity Supply Must Always Meet Demand. Electricity is different from other commodities in a variety of ways. For example, the amount of electricity that the grid supplies must always equal the level demanded by households and other electricity users. If this balance were not maintained and demand were to exceed supply, consequences might include disruptions to the grid, brownouts, and potentially even blackouts that could spread throughout the electricity system. Electricity Cannot Be Easily Stored. Another key difference between electricity and most other commodities is that—unlike water or food, for example—electricity cannot be readily and cheaply stored. While it is possible to use a variety of technologies—such as batteries or pumped hydropower (which uses electricity to pump water to a higher elevation for future power generation)—to convert electricity into other forms of energy for later use, these technologies typically are expensive to deploy. Electricity Demand and Supply Also Vary… Supply and demand for electricity each vary by time of the day, season of the year, and short-term weather patterns. Typically, electricity use is highest in the evenings when household members return home from work and use electric appliances, particularly during summer months when many households seek to keep their homes cool. In contrast, electricity production—particularly from solar panels—usually peaks in the middle of the day (especially in summer months) and declines in the evenings just as demand rises. (The figure shows an illustrative example of how supply and demand for electricity can vary over the course of a day.) Electricity Supply and Demand Vary During the Course of a Day In Megawatts (Thousands) 25 When supply exceeds demand, the difference must be exported, curtailed, or used to charge Demand batteries. 20 When demand exceeds supply from renewable sources and nuclear, other sources such as 15 in-state natural gas, batteries, and imports must make up the difference. 10 Supply From Renewable Sources and Nuclear 5 12am 1 2 3 4 5 6 7 8 9 10 11 12pm 1 2 3 4 5 6 7 8 9 10 11pm Hour Source: California Independent System Operator for May 8, 2022. www.lao.ca.gov 9 AN LAO REPORT Balancing Electricity Supply and Demand Is Important—and Difficult (Continued) …Which Can Create Challenges. Such temporal variations make balancing the supply and demand for electricity more difficult. In some cases, large amounts of solar generation can lead to an oversupply of electricity during certain times and days. This can result in a need to export electricity to other states or to curtail, or shut off, some of the electricity generated from renewable resources to maintain grid stability. In other cases, high demand for electricity— such as during the evenings of long summer heat waves—can make finding adequate supplies challenging. For example, in August 2020, California and other western states experienced a heat wave for several consecutive days, which triggered the California Independent System Operator to implement rotating power outages that affected hundreds of thousands of electricity customers across the state. Price Signals Can Be Used to Help Address Imbalances. One approach to address the challenges with balancing electricity supply and demand is using price signals to help influence customers’ usage. Time-of-use rates are one way to do so, since they assess higher volumetric charges during hours when electricity typically is relatively scarce and expensive, which can help reduce demand during those times. Utilities also use prices in more targeted ways to encourage households and businesses to modify their electricity use patterns. For example, the state’s investor-owned utilities and many of its publicly owned utilities run demand response programs that pay customers for reducing electricity use during times of grid stress. The state also has employed other demand management approaches such as issuing notices asking customers to voluntarily reduce their usage during critical periods, known as “Flex Alerts.” As such, some of this cost burden has been shifted reduction in rates for eligible lower-income to other customers (often referred to as the solar customers. The costs of the programs that provide cost shift). rate relief to lower-income customers generally are Certain Low-Income Customers Receive passed on to other customers through higher rates. Discounts. As mentioned previously, utilities CCA Customers Have Different Procurement generally operate programs that provide discounted Charges. CCA customers also have bills that differ electricity rates to certain groups of customers, somewhat from other customers. Specifically, they including lower-income households and those that still receive bills from their relevant IOU but are participate in certain public assistance programs. charged for the CCA’s electricity generation costs For example, under the CARE program, eligible instead of the IOU’s generation costs. (They still customers of the large IOUs receive discounts of pay other IOU costs, including for transmission and between 30 percent and 35 percent. Approximately distribution.) Also, CCA customers typically pay a 30 percent of IOU customers participate in CARE. charge intended to prevent higher costs for other POUs generally operate similar types of programs, remaining IOU ratepayers when customers switch although they often do not provide as large of a to CCAs. subsidy as CARE. For example, LADWP administers a program that provides a roughly 20 percent 10 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Recent Changes to Net Energy Metering (NEM) Aimed at Mitigating Solar Cost Shifts California Public Utilities Commission (CPUC) Recently Modified Structure of Solar Credits Provided to Investor-Owned Utility (IOU) Customers. Customers of IOUs who contracted for solar installations before April 2023 participate in programs called NEM 1.0 or 2.0. Under these programs, customers generally are credited for the electricity that they generate at the IOU’s retail volumetric rate. In effect, the IOU pays customers the same rate per kilowatt hour for generated electricity as it charges for consumed electricity. IOU customers who contracted for solar systems to be installed after April 2023 are under a new system known as NEM 3.0 (also referred to as Net Billing Tariff), which compensates customers at a notably lower rate. Many publicly owned utilities also offer NEM programs, but the policies are adopted by their individual boards (rather than CPUC) and thus vary. Adoption of NEM 3.0 Intended to Mitigate Projected Increases in Solar Cost Shift. The main explanation for why NEM 3.0 provides a lower amount of credit to solar customers compared to the previous NEM programs is that the new structure credits customers only for the costs the utility avoids by not having to buy electricity elsewhere to serve them. In contrast, because the credit in the earlier NEM programs was based on retail volumetric charges, the credits that customers received also essentially included some amount of utilities’ fixed costs— despite the fact that these customers continued to benefit from the infrastructure and activities those costs support. Consequently, CPUC’s primary rationale for adopting NEM 3.0 is that under NEM 1.0 and 2.0, customers without rooftop solar were effectively subsidizing those with solar. This is because when solar customers do not pay for fixed costs (as generally was the case with NEM 1.0 and NEM 2.0), the costs do not go away. Instead, those fixed costs typically must be built into the volumetric electricity rates that are paid by other (non-solar) customers. CPUC’s estimates of the costs of the NEM program to non-solar IOU ratepayers range from roughly 10 percent to 20 percent of an average non-California Alternate Rates for Energy customer’s monthly electricity bill depending on the utility—accumulating to over $200 to $400 annually per customer. Furthermore, CPUC anticipated these costs would increase substantially over time, given the trends toward higher fixed costs in electricity rates and a growing share of ratepayers installing rooftop solar. At the same time, the rooftop solar industry has raised concerns that NEM 3.0 could discourage rooftop solar adoption by making it less financially attractive and has argued that greater solar adoption is important for helping the state achieve its climate goals. www.lao.ca.gov 11 AN LAO REPORT HOW DO ELECTRICITY RATES IN CALIFORNIA COMPARE? In this section, we explore how electricity rates displayed in the figure, PG&E’s residential electricity compare to other states, as well as how rates differ rates for a typical non-CARE customer are more than within California for different utilities and customers. double SMUD’s rates—so customers in Sacramento California Has the Second Highest Electricity pay notably less for a comparable level of service Rates in the Nation. On average across all utilities compared to their neighbors in nearby Davis. and residential customers, electricity rates in the Similarly, in the southern part of the state, SCE’s state are high relative to those in the rest of the residential electricity rates for a typical non-CARE country, as shown in Figure 5. Specifically, California customer are more than 70 percent higher than has the second highest residential electricity rates LADWP’s rates. Accordingly, customers in the after Hawaii, with average rates that are close to portions of Culver City that are served by LADWP double the national average. As discussed in more pay significantly less for electricity than those who detail below, these trends largely are driven by the live in the portions of the city served by SCE. relatively high rates charged by the state’s three Electricity Rates Have Increased Notably large IOUs; the average rates charged by POUs in in Recent Years. In general, average residential the state are closer to the national average. electricity rates in California have grown faster than Electricity Rates Vary Between California inflation in recent years, rising by about 47 percent Utilities, With Relatively High Rates in Large IOU over the four-year period from 2019 through 2023 Territories. As shown in Figure 6, Californians’ compared to overall growth in prices of about residential electricity rates vary widely across the 18 percent. This is particularly true for the state’s state, depending on which utility provides their three large IOUs. Specifically, over the same service. On average, California IOU electricity rates four-year period, PG&E, SCE, and SDG&E average are more than 50 percent higher than rates charged rates have increased by between 48 percent and by POUs. In some cases, the differences in rates 67 percent. Additionally, although electricity rates between individual utilities are quite stark, even in California have exceeded the national average within similar geographic areas. For example, as for many years, the gap has grown substantially in recent years. As shown in Figure 7, the rates charged by Figure 5 California’s three large IOUs have California Has Relatively High Residential grown significantly faster than the Electricity Rates Compared to the Rest of the Nation average electricity rates in the rest of the nation. 10 to <15 cents/kWh 15 to <20 cents/kWh 20 to <25 cents/kWh 25 to <30 cents/kWh >30 cents/kWh Source: United States Energy Information Administration data from August 2024. kWh = kilowatt-hour. 12 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Figure 6 Residential Electricity Rates Vary Across Utilities in Californiaa a Rates estimated for a non-CARE customer consuming 500 kWh per month and account for both volumetric and fixed charges. Within a Given Utility, Some Customers Pay Substantially More for Electricity Than Others. Within a given utility, the rates that residential customers pay can vary widely. For example, as mentioned above, lower-income customers who participate in CARE pay significantly discounted rates—typically 30 percent to 35 percent lower. Additionally, solar customers receive credits for the energy they generate, which reduces the amount that they pay for electricity services. www.lao.ca.gov 13 SMUD Liberty PacifiCorp LADWP Bear Valley SCE PG&E SDGE $0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 Utility Source: Fowlie, Meredith, Callaway, Duncan, Not All of California’s Electricity Prices Are High, Energy Institute Blog, UC Berkeley, July 10, 2023. kWh = kilowatt-hour; IOUs = investor-owned utilities; POUs = publicly owned utilities; SMUD = Sacramento Municipal Utility District; LADWP = Los Angeles Department of Water and Power; SCE = Southern California Edison; PG&E = Pacific Gas and Electric; SDG&E = San Diego Gas and Electric; and CARE = California Alternate Rates for Energy. )hWk/$( etaR IOUs POUs Figure 7 California IOU Residential Electricity Rates Have Grown Faster Than the National Average (Dollars Per kWh) $0.50 SDG&E 0.40 SCE 0.30 PG&E 0.20 National Average 0.10 2014 2016 2018 2020 2022 IOU = investor-owned utility, kWh = kilowatt-hour; SDG&E = San Diego Gas and Electric; SCE = Southern California Edison; and PG&E = Pacific Gas and Electric. Source: California Public Utilities Commission Public Advocates Office. AN LAO REPORT WHY ARE CALIFORNIA’S ELECTRICITY RATES HIGH? In this section, we explore possible explanations Ambitious GHG Reduction for why California’s electricity rates—especially Programs and Policies average rates charged by the three largest IOUs— As discussed in the box on page 16, the state are relatively high, as well as why they have grown has implemented various policies to reduce GHG relatively quickly in recent years. In our review of emissions from the electricity sector. The state’s available research, we did not find a comprehensive efforts to reduce its GHG emissions have helped analysis quantifying all of the various contributing establish California as a leader in climate policy elements that result in the relatively high rates. and contributed to environmental benefits such However, as we discuss below, some of the key as improvements to air quality. However, these categories of factors that likely are driving these efforts have come with costs, some of which have higher rates are: wildfire-related costs, GHG increased electricity rates. We are not aware of any reduction programs and policies, and differences in research that comprehensively compiles the costs utility operational structures and services territories. that California ratepayers bear as a result of the Many of these factors are particularly significant for state’s efforts to meet its climate goals. However, IOUs (as compared to POUs). we discuss some of the contributors to ratepayer Higher Wildfire-Related Costs costs below. We were able to identify estimated costs for some—but not all—programs and policies. California Utilities, Particularly IOUs, Face Taken together, we think the state’s GHG reduction Higher Wildfire Costs. California ratepayers— efforts have contributed notably to the state’s and especially its IOU ratepayers—typically pay higher electricity rates, but they certainly are not the more costs related to wildfires than other utility only factor. As discussed elsewhere in this report, a customers. Prior to 2019, only a negligible portion number of other important causes are driving high of the rates the three large IOUs charged were electricity rates as well. for wildfire-related costs, but this has grown to Ratepayers Pay Additional Costs Associated between 7 percent and 13 percent of average With Transitioning to Cleaner Sources of non-CARE bills. Some reasons for this include the Electricity. Electricity rates reflect the costs of state’s relatively high wildfire risk and its somewhat implementing various policies to encourage utilities unique legal standard for apportioning liability for to use cleaner sources of electricity. For example, utility-sparked wildfires. (Under California’s liability one of the key programs aimed at shifting the standard, POUs and IOUs are liable for all the costs state’s mix of energy sources is the Renewable associated with a utility-caused wildfire, regardless Portfolio Standard (RPS)—which requires utilities of whether they are determined to have acted to provide a certain percentage of retail electricity negligently.) The magnitude of the damages and sales from renewable generation. While the costs risks from utility-sparked wildfires have increased of generating electricity from renewable resources substantially in recent years. Correspondingly, have declined in recent years, this transition still has IOUs have spent unprecedented amounts in recent added costs for ratepayers. In our January 2020 years on wildfire mitigation-related activities to try report, Assessing California’s Climate Policies – to reduce the likelihood of future utility-caused Electricity Generation, we found that RPS costs wildfires, with the associated costs often passed resulted in an almost 5 percent increase in overall along to ratepayers. Furthermore, California IOUs retail rates for IOU customers, which was generally and their ratepayers pay for insurance against future consistent with national studies of RPS programs in wildfires, including contributing to the California other states. (We note, however, that nearly half of Wildfire Fund. This fund, established by Chapter 79 states do not have an RPS.) of 2019 (AB 1054, Holden), helps cover the costs of certain utility-sparked wildfire damages. 14 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT In addition to contributing to somewhat higher Cap-and-Trade Not a Major Driver of Rate generation costs, renewable sources of electricity often Increases. The state’s cap-and-trade program require additional investments in other infrastructure affects the costs of various sources of energy. for transmission and reliability, which can be costly. For However, it has not been a driver of net electricity example, utility-scale renewable generation sites rate increases for most households. This is frequently are located in remote areas that require primarily because the program is structured to new or upgraded transmission lines to reach. provide utilities with “free” allowances to help Additionally, renewable sources of electricity often them generate revenue they are then required are more intermittent than fossil fuel-powered to pass along to ratepayers in the form of a bill sources, and sources such as solar often generate credit. Thus far, the total amount of this credit electricity at times when it is relatively plentiful. generally has more than offset the increase in Accordingly, as the share of electricity generated costs associated with the utilities’ cap-and-trade from these sources has increased, the state program compliance. has had to take steps—such as preserving the Differences in Utility Service Territory availability of natural gas-powered plants to operate and Operational Structures when needed and increasing investments in A number of other factors that vary across battery storage—to ensure that adequate electricity different types of utilities could account for supplies are available to meet demand at all times. differences in rates within California and in The amount that the costs of these activities have comparison to other states. We discuss two of contributed to rates is uncertain. these factors—operational structures and services Ratepayers, Particularly Those Served territories—below. by IOUs, Also Pay for Other State Programs Operational Structures Differ. Another Aimed at Helping the State Meet GHG potential contributor to the difference in rates that Reduction Goals. California ratepayers not only exist within California is the operational structure of pay for activities associated with shifting to more its LSEs. Specifically, IOUs are operated with the renewable sources of electricity, but also bear goal of generating returns for their shareholders. other costs related to supporting the state’s efforts This, in turn, could lead to higher costs because—in to meet its GHG targets. For example, consistent contrast with POUs—electricity rates must pay for with statutory direction contained in SB 350 in shareholder profits. Additionally, IOUs generally 2015, CPUC has authorized IOUs to implement cannot benefit from tax-exempt borrowing sources a variety of ratepayer-funded programs to help that are available to POUs, which could increase support statewide adoption of ZEVs, including their operating costs in comparison. Also, some installing publicly available charging stations. research—including a recent report by researchers Senate Bill 350 further directed CPUC to authorize at the United States Department of the Treasury ratepayer-funded energy efficiency programs to and the London School of Economics and Political meet a goal of doubling energy efficiency savings Science—has found that the rate of return that by 2030. As a result of this and other legislation, utilities are authorized to earn is persistently higher IOU ratepayers are now supporting a range of than what would be expected for investments of ZEV, energy efficiency, and other climate-related comparable risk. To the extent that this is the case, programs through the public purpose charges on it could, in turn, encourage IOUs to spend more their rates. For 2023, we estimate about 4 percent on capital projects (for which they can generate a of average rates for the large IOUs is used for rate of return) than is optimal, thus putting upward supporting climate-related activities (equating pressure on rates. to about half of the funding dedicated for public purpose programs). While many other states operate ratepayer-supported energy efficiency programs, on average, we estimate that Californians contribute a notably greater share of their rates to such programs than is typical across the country. www.lao.ca.gov 15 AN LAO REPORT California Has Adopted Ambitious Climate-Related Goals Which Affect the Electricity Sector State Has Established Ambitious Greenhouse Gas (GHG) Reduction Targets. Chapter 488 of 2006 (AB 32, State Met 2020 GHG Target Early, but Núñez) established the goal of limiting 2030 and 2045 Targets Are More Ambitious GHG emissions statewide to 1990 levels Million Metric Tons of GHGs Emitted by 2020. In 2016, Chapter 249 (SB 32, Pavley) extended the limit to 40 percent 600 below 1990 levels by 2030. Chapter 337 500 of 2022 (AB 1279, Muratsuchi) further Target extended the limit, setting a goal of at least 2020 400 85 percent below the 1990 level as well Electricity as achieving zero net carbon emissions 300 Target by 2045. As shown in the figure, the 2030 state has been successful at decreasing 200 Other emissions since AB 32 was enacted and it achieved its 2020 goal ahead of schedule. 100 Target However, the level of reductions needed 2045 to reach the subsequent targets is much 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 greater. Pursuant to Chapter 547 of 2015 (SB 350, de León), the California Air GHG = greenhouse gas. Resources Board also established specific 2030 GHG targets for emissions from the electricity sector. State Has Implemented Various Goals and Policies Aimed at Reducing GHGs From Electricity. Over the past couple of decades, the state has implemented a variety of goals and policies intended to reduce GHG emissions from electricity generation and help the state meet its larger climate goals. For example, in 2003, the state implemented a Renewable Portfolio Standard, which generally requires load-serving entities (LSEs) to provide a minimum percent of retail electricity sales from qualifying renewable generation. Since then, various statutes and regulations have set specific targets, including Chapter 312 of 2018 (SB 100, de León) which requires 60 percent renewable generation by 2030 and 100 percent zero-carbon electricity by 2045. Additionally, Chapter 361 of 2022 (SB 1020, Laird) set interim targets to this goal, requiring that zero-carbon sources make up 90 percent of statewide electricity sales by 2030 and 95 percent by 2035. The state also has established various programs aimed at encouraging rooftop solar specifically, including net energy metering. Another major GHG reduction policy that affects the electricity sector in California is the state’s cap-and-trade program. Under this program—first enacted in 2006 and currently authorized through 2030—in-state electricity generators and electricity importers, among other entities, must obtain permits through the purchase of “allowances” or offsets to cover their GHG emissions. 16 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT This adds costs to higher GHG-producing sources of electricity (such as natural gas power plants) and thus encourages a shift toward lower-carbon sources (such as wind and solar). In order to ensure that the various activities undertaken by LSEs in response to these myriad programs and policies are adequate to enable the state to meet its climate-related goals, LSEs must engage in a regular planning process known as Integrated Resource Planning. State Policies Have Contributed to GHG Reductions From the Electricity Sector. As highlighted in the figure, the electricity sector has been the primary driver of statewide GHG emission reductions since the state established its AB 32 goals. Annual emissions from the electricity sector have declined by nearly 40 percent over the past decade, compared to much more modest changes in the transportation, industrial, and other sectors. Over this time period, electricity use has been relatively stable. Thus, reductions mostly have been due to a change in the mix of resources used to generate electricity—primarily large increases in renewable sources such as solar, as shown in the figure below. As we discuss in our January 2020 report, Assessing California’s Climate Policies—Electricity Generation, we have not identified any studies that have comprehensively estimated how much of the state’s overall emission reductions are a result of state policies versus other factors, such as federal policies and technological innovation. However, when taken together, the state’s policies likely have played an important role in achieving the observed reductions. Sources of Electricity Generation in California Have Changed Over Time Statewide Annual Electricity Generation in Gigawatt Hours 200,000 Zero-Emission 150,000 Sources 100,000 Biomass Geothermal Wind Nuclear 50,000 Hydro Solar Other Natural Gas 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 www.lao.ca.gov 17 AN LAO REPORT Service Territories Vary. Differences in utilities serve. For instance, in contrast to SMUD, service territories may also explain some of the PG&E serves not only relatively dense, urban rate differences that exist within California and and suburban areas, but also vast areas that are compared to other states. For example, some relatively rural. A more rural region could have states that have relatively low rates—such as higher wildfire-related costs, as well as higher Washington—benefit from proximity to relatively average fixed costs associated with distributing cheap sources of electricity generation such as electricity to homes because they are more hydropower. Also, within California, a wide variation spread out. exists in the characteristics of the territories that WHY DO SOME IOU CUSTOMERS PAY MORE THAN OTHERS? As mentioned previously, a wide variation in with wildfire-related costs and public purpose rates exists across different customers even within programs—contribute to substantially higher rates a given utility in California. Much of this disparity for nonsolar, non-CARE IOU customers. is explained by two major IOU programs: NEM NEM Program for Customers With Rooftop for solar customers and CARE for low-income Solar. As noted, solar customers in California have households. As we discuss below, both programs historically received large credits for the electricity shift costs between different types of customers— they generate, which has shifted more of the burden whereby some customer groups pay lower rates for covering fixed costs to (and correspondingly and other customer groups pay higher rates. raised rates for) nonsolar customers. These As shown in Figure 8, NEM and CARE—along financial incentives have led to widescale rooftop solar adoption in recent years, exacerbating the cost shift impacts Figure 8 for customers who have not—or could not—take the same action. Solar Cost Shifts, Public Purpose Programs, and (California has among the highest Wildfire Costs Are Substantial Contributors to Average Electricity Bills for IOU Customers rates of rooftop solar adoption and proportionally more solar customers Average Monthly Bill in 2022 for Non-CARE Customers than almost any other state.) Figure 9 illustrates the degree $180 to which solar cost shifts have 160 increased in recent years according 140 to an analysis by an economist from 120 UC Berkeley—more than doubling 100 since 2020. This is because (1) the 80 fixed costs of the electricity system 60 have grown over time (increasing the 40 amount of the costs that are shifted) 20 and (2) the number of customers with rooftop solar has increased PG&E SCE SDG&E markedly (magnifying the impacts by Solar Cost Shift Wildfire CARE Non-CARE Public Other Purpose Programs spreading the costs across a smaller Source: California Public Utilities Commission. 2023 Senate Bill 695 Report. number of nonsolar customers). IOU = investor-owned utility; CARE = California Alternate Rates for Energy; PG&E = Pacific Gas and CPUC estimates that solar cost Electric; SCE = Southern California Edison; and SDG&E = San Diego Gas and Electric. 18 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT shifts contributed between 11 percent and 20 percent to non-CARE Figure 9 non-solar customers’ bills in 2023, Growing Portion of IOU Electricity Rates up from between 8 percent and 17 percent just a year earlier. Attributable to Solar Cost Shifts (Contributions to CARE nonsolar Estimated Residential Roofop Solar Cost Shift, 2024 (In Billions) customers’ customer bills were generally similar.) $2.5 CARE Program for Low-Income PG&E 2.0 Households. Customers who qualify for CARE or other low-income bill 1.5 assistance programs have notably SCE lower rates than those who do not. 1.0 On the other hand, customers who do not qualify for these programs face SDG&E 0.5 higher costs both from the lack of discount and from paying to subsidize the costs of the program. CPUC 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 estimates that CARE contributed between 2 percent and 4 percent to Source: Borenstein, Severin. “California’s Exploding Rooftop Solar Cost Shift” Energy Institute Blog, April 22, 2024. non-CARE customer bills in 2022. IOU = investor-owned utility; PG&E = Pacific Gas and Electric; SCE = Southern California Edison; (We estimate that, on average, and SDG&E = San Diego Gas and Electric. California ratepayers contribute a greater share of their rates to low-income bill-assistance programs than most other states.) WHAT ARE POTENTIAL IMPLICATIONS OF HIGH ELECTRICITY RATES? In this section, we cover some of the key …But If Rates Are Too High, They Can implications of California’s relatively high residential Discourage Beneficial Electricity Use. Electricity electricity rates, including on affordability and on is needed for many different types of essential— statewide efforts that rely on electrification as a and desired—activities in modern life. If volumetric strategy to reduce GHG emissions. charges are too high, however, they can discourage High Rates Can Encourage Efficiency and electricity use even when such use would otherwise Conservation… High electricity rates—particularly make sense for households, as well as for society volumetric charges—make it costlier for Californians as a whole. In recent research, economists at to use electricity. This has the potential to UC Berkeley have empirically estimated that encourage Californians to conserve electricity, such this is the case in California. The implications of as by wasting less and potentially switching to more high volumetric rates are varied. For example, efficient appliances. This, in turn, has environmental households might seek to save costs by avoiding benefits since electricity generation often results running their air conditioners during hot days. in environmental impacts, including the emission This could lead to uncomfortable conditions in a of GHGs. home and, in more severe cases, increase the risk of heat stroke or other negative health effects. www.lao.ca.gov 19 AN LAO REPORT High Rates Can Also Be Burdensome, High Electricity Rates, Particularly Particularly for Certain Types of Customers. When Assessed Volumetrically, Can Affect The costs associated with high electricity rates Electrification. Along with shifting the state’s also can make it more difficult for customers to electricity grid to more renewable sources, afford other goods and services. These costs the state’s GHG reduction plans also include can be particularly burdensome for lower- and electrification of a substantial portion of other moderate-income residents. While programs such sectors. For example, the California Air Resources as CARE exist to help lower-income customers Board’s (CARB’s) 2022 Scoping Plan for Achieving afford electricity (by shifting costs to other Carbon Neutrality assumes that 80 percent of customers), they still typically spend a larger new heating, ventilation, air conditioning, and share of their income on electricity. For example, water heater sales will be electric by 2030, in according to data from the federal Bureau of Labor both residential and commercial buildings. It also Statistics, California households in the lowest assumes that all in-state sales of new passenger quintile of the income distribution typically spend vehicles will be zero-emission by 2035. However, about 6 percent of their before-tax incomes on consumer decisions about whether or not to electricity, compared to less than 1 percent for the adopt these alternative technologies depend, in highest-income quintile of households. Notably, part, on electricity rates. High electricity rates high electricity rates also can impose burdens on can discourage households from investing in moderate-income earners, since they also pay a electrification because they increase the operating larger share of their household incomes toward costs of electric-powered cars and appliances, electricity than their higher-income counterparts making it harder for Californians to justify spending but typically are not able to qualify for bill more on typically higher up-front purchase costs assistance programs. High electricity rates can also for such goods. This dynamic could slow progress be disproportionally difficult for certain households on the state’s climate goals. For example, recent located in inland areas who tend to use more research by a UC Berkeley professor found that electricity for air conditioning than those who live in household decisions on home heating technology milder coastal climates. are highly sensitive to energy prices, with a 10 percent increase in electricity prices estimated to decrease the choice to adopt electric sources of home heating (versus natural gas furnaces) by about 4 percentage points. WHAT ARE EMERGING ISSUES THAT MAY AFFECT RATES? In this section, we discuss some issues on Accordingly, these issues have the potential to raise the horizon related to residential electricity various—and potentially difficult—policy choices for rates. We summarize these issues in Figure 10. the Legislature. While the precise impacts of these issues still Increasing Stringency of GHG Emission are uncertain, they have the potential to affect Reduction Requirements for Electricity Grid. future electricity rates—including the level and/ As the state’s carbon reduction goals for electricity or the structure—in meaningful ways. To the become more ambitious, they could impact extent that they raise electricity rates, that will rates for consumers. For example, as the share increase already high cost burdens on Californians of renewable resources on the grid increases, and make meeting the state’s ambitious climate the state likely will need to significantly increase goals through electrification even more difficult. its efforts to (1) prioritize renewable sources that 20 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Figure 10 Key Emerging Issues That May Affect Electricity Rates and Legislative Decisions 9 Increasing Stringency of GHG Emission Reduction Requirements for Electricity Grid. • Key decision: how to balance the state’s ambitious GHG reduction goals against the inevitable costs that will result for ratepayers. 9 Accommodating More Electricity Demand From Electrification. • Key decision: how to pay for the costs of the infrastructure required for electrification in ways that balance the state’s various goals. 9 Growing Demands for Funding to Pay for Programs Aimed at Supporting State Climate Policies. • Key decision: how much of needed funding to meet statewide electrification goals should come from electricity rates versus other sources of state revenues (such as tax revenues). 9 Continuing Wildfire-Related Costs. • Key decisions: how to balance the goals of reducing wildfire risks against costs to ratepayers, how to ensure utilities undertake the appropriate level and types of wildfire mitigation activities, and how wildfire mitigation activities should be funded. 9 Trade-Offs Related to Fixed Charges for Investor-Owned Utility Customers. • Key decisions: how to design rates in a way that encourages beneficial electricity use while limiting the cost burden on certain households, and what level of authority to grant to CPUC. GHG = greenhouse gas and CPUC = California Public Utilities Commission. provide reliable electricity when it is relatively In the coming years, the Legislature likely will scarce, even if those sources are more expensive face questions about whether it is comfortable with than other alternatives, and (2) invest in solutions the administration’s and LSEs’ energy procurement to help store electricity for when it is needed. plans and the potential effects on ratepayers, or The CEC/CARB/CPUC 2021 SB 100 Joint Agency whether it would prefer an alternative approach. Report: Achieving 100 Percent Clean Energy This could include an assessment of what options— Electricity in California: An Initial Assessment and associated costs to ratepayers—are available estimates that the state will require six gigawatts for meeting the state’s statutory renewable energy (GW) of new solar, wind, and battery storage goals and whether less costly approaches than resources annually over the next 25 years to meet those the administration plans to pursue might statutory renewable energy goals. This would be more prudent. Fundamentally, however, the represent a roughly tripling of the rate at which the Legislature may also be faced with a frank decision state has built solar and wind historically, and an about how to balance the state’s ambitious even larger increase in the rate of construction of GHG reduction goals—and all of the associated battery storage. Moreover, the administration has benefits—against the inevitable costs that will result established a planning goal of 25 GW of offshore for ratepayers. wind from the California coast by 2045, and Accommodating More Electricity Demand currently is undertaking a procurement of up to From Electrification. In recent decades, electricity 7.6 GW on behalf of LSEs. (Available data suggests usage has been relatively stable in the state. that offshore wind may be more expensive—at least However, CARB’s 2022 Scoping Plan for Achieving in the near term—than some alternative generation Carbon Neutrality projects that electricity demand sources, and that adding substantial offshore wind will increase by more than 75 percent by 2045. to the grid will require very large investments in port This anticipated growth is fueled by the state’s and transmission infrastructure.) The net effect of ambitious goals for electrification—including a the state’s increasingly ambitious renewable goals greater shift to ZEVs and electric appliances such on rates will depend heavily on the future trends as heat pumps—as well as by other factors such as in the costs of renewables, battery storage, and growing demands from data centers and artificial other technologies. intelligence. As electricity demand increases, so will the costs associated with building new sources of www.lao.ca.gov 21 AN LAO REPORT generation, as well as for the new distribution and purchase ZEVs likely is not the most cost-effective transmission infrastructure that will be needed to approach to increasing overall ZEV adoption rates, bring the new generation to electricity users. The but such an approach would support the goal extent to which these and other costs associated of promoting equitable access to ZEVs across with meeting additional electricity demand affect different groups of Californians. The Legislature residential electricity rates will depend on various also will face choices about how much of the factors. For instance, a key determinant will be funding to meet statewide electrification goals whether the growth in demand also brings an should come from electricity rates versus other expanding customer base over which fixed costs sources of state revenues (such as tax revenues). can be spread. While relying on electricity rates can be attractive Over the coming years, a key question facing the as they do not require the Legislature to dedicate Legislature will be how to pay for the costs of the funding from new or existing taxes, an overreliance infrastructure required for electrification in ways that on rates can contribute to already-high electricity balance the state’s various goals, including related rates and further burden lower-income households, to technology adoption and electricity affordability. among others. For example, the state will continue to face choices Continuing Wildfire-Related Costs. about how the costs to build infrastructure needed Wildfire-related costs are likely to continue to be to support additional ZEV adoption—both at a driver of increases in electricity rates, at least individual homes and businesses, as well affecting in the near term. This is in part because utilities the broader grid—should be split across individual plan to undertake more wildfire “hardening” ZEV purchasers versus general ratepayers or state activities over the coming years, such as placing and federal taxpayers. Notably, while requiring ZEV power lines underground. The three major IOUs purchasers to pay for these costs could impede alone have proposed spending roughly $9 billion ZEV adoption, having general ratepayers cover annually to be recovered—often along with a rate them would contribute to already high electricity of return to compensate shareholders—through rates, which likely would make future ZEV adoption electricity rates. Additionally, regardless of the less attractive for many consumers. wildfire hardening activities that utilities undertake, Growing Demands for Funding to Pay for preventing all utility-sparked wildfires is not feasible. Programs Aimed at Supporting State Climate While the state has taken actions to insulate utilities Policies. As mentioned previously, the state has and ratepayers from some of these costs—such as adopted goals for broad-scale electrification, such the passage of AB 1054 and establishment of the as the expansion of ZEVs and electric appliances. California Wildfire Fund—ratepayers still face some Achieving these goals will not only require additional financial exposure in the event of a major wildfire investments in the electricity system to support sparked by utility infrastructure. the additional demand, but also spending in other The Legislature will face decisions about how areas, such as to construct public ZEV charging to ensure that utilities undertake the appropriate infrastructure and to help residents—particularly level and types of wildfire mitigation activities while those who earn comparatively lower incomes—to balancing the often-competing goals of reducing replace their vehicles and appliances. wildfire risks with maintaining reasonable costs In the coming years, the Legislature will face for ratepayers. Additionally, the Legislature will decisions about how much funding the state encounter choices about how to fund whatever should contribute to support activities in pursuit of wildfire mitigation-related activities it deems are statewide climate goals versus how much private appropriate—such as through fixed or volumetric or other public parties should pay. In making these electricity charges, state tax revenues, or decisions, the Legislature likely will face trade-offs other sources. related to its various priorities, such as equity Trade-Offs Related to Fixed Charges for IOU and cost effectiveness. For example, providing Customers. As residential electricity rates continue significant incentives for lower-income residents to to increase, the issue of rate design likely will 22 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT continue to be important. Under existing statute, could also have significant effects on electricity bills CPUC has the authority to make future changes for certain households—meaning some households to the fixed charges that it recently authorized for would see an increase in monthly bills while others IOUs. For example, other proposals discussed would see a decrease. during CPUC’s recent proceeding included more In the coming years, the Legislature will face steeply graduated fixed charges that differentiate decisions about whether it is comfortable with across multiple household income categories. CPUC’s current authority and decisions related to While CPUC ultimately decided against adopting fixed charges or would prefer a different approach. such proposals this year, it could consider similar To the extent that the Legislature would like to types of changes in the future. Adopting larger modify CPUC’s authority, it will face choices fixed charges could make it possible to reduce about how it would like to do so, whether that be volumetric charges, which could encourage directing CPUC to increase fixed charges, returning beneficial electricity use (such as more air to a statutorily defined cap on fixed charges, or conditioning in areas where it is needed) and pursuing another alternative. support the state’s electrification goals. However, depending on the level of these fixed charges, they CONCLUSION Electricity rates are an increasingly important more acutely. High electricity rates also impede issue facing California. Electricity is a modern the state’s efforts to meet its ambitious climate necessity, essential to keeping our homes cool goals, discouraging households from pursuing and food from spoiling, maintaining basic human electrification by switching out their fossil hygiene, and—with increasing prevalence— fuel-powered cars and appliances. In the coming powering our transportation. Yet electricity rates years, the Legislature likely will confront difficult in California are relatively high and have been decisions about how to approach electricity rates increasing rapidly, putting growing strains on in order to best support its varied goals, including ratepayers across the state. Many residents who balancing the desire to both mitigate and adapt to earn lower incomes or live in hotter regions of climate change as well as preserve affordability. the state are feeling these growing costs even www.lao.ca.gov 23 AN LAO REPORT LAO PUBLICATIONS This report was prepared by Helen Kerstein, and reviewed by Rachel Ehlers and Ross Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 24 LEGISLATIVE ANALYST’S OFFICE