California’s Exploding Rooftop Solar Cost Shift

In 2024, residential PV will shift nearly $4 billion onto others’ bills, more than double the 2020 amount.

By Severin Borenstein. He is professor at UC Berkeley.

"There’s a lot of anger in California right now about rising electricity prices. Since 2020, residential rates of the two largest investor-owned utilities – PG&E and Southern California Edison – have risen, respectively, by 38% and 40% after adjusting for inflation. Inflation adjusted rates of San Diego Gas & Electric, the third largest, have only risen 11% during that time, but SDG&E was already the most expensive in 2020. The prices of all three are now more than double the national average. (There are going to be a lot of numbers in this post. If you want the details behind them, this link has a data appendix with the data and code for my calculations.)

There’s also been a lot of finger-pointing about the cause of these increases.  Some have said it’s the greedy utilities. Others have pointed to the huge costs of addressing the impacts of climate change on California, particularly increased wildfire risk. Still others suggest that a major part of California’s strategy to slow climate change – decarbonizing our grid – is turning out to be exorbitantly expensive, though there is scant evidence of this.

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A rate increase multiplier

Regardless of what is driving utility costs higher, their impact on rates is multiplied when customers install their own generation and buy fewer kilowatts-hours from the grid. That’s because those households – whether they are customers of the utility or of a community choice aggregator  – contribute less towards all of the fixed costs in the system, such as vegetation management, grid hardening, distribution line undergrounding, EV charging stations, subsidies for low income customers, energy efficiency programs, and the poles and wires that we all rely on whether we are taking electricity off the grid or putting it onto the grid from our rooftop PV systems. 

Since those fixed costs still need to be paid, rates go up, shifting costs onto the kWhs still being bought from the grid. This will be less true for systems registered after last April when compensation for new systems was made somewhat less generous, but that applies to almost none of the systems installed before 2024, which are the ones I am studying here.)

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A decade ago, this was a small concern, because rooftop solar was barely a blip in the total supply picture. In 2014, the homes served by these three IOUs got less than 2% of their electricity off their roofs. Today they get about 20%. As fewer kWhs are sold from the grid, retail rates must rise even more in order to recover the fixed costs of the system.

The problem has become particularly acute in the last four years. During that time, solar capacity on houses has more than doubled at the same time that the utilities’ fixed costs have escalated dramatically due in large part to wildfires and the need for grid hardening against them.

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Figuring the rooftop solar cost shift

What has this done to rates? That takes a lot of calculations, which I detail in the available data appendix. But it turns out that three numbers are the major determinants: the total revenue the utility is permitted to collect from residential customers to cover its operating and fixed costs (known as the revenue requirement), the utility savings from selling a customer fewer kWhs (known as the avoided cost), and the amount of solar on rooftops that is leading to those lower sales.  

Since 2020, the real (i.e., inflation-adjusted) revenue requirements of the utilities have increased about 25% for residential customers and rooftop solar has grown 114%, but the avoided cost from each kWh coming off those panels has hardly changed. So, as higher and higher electricity prices have meant customers would save more and more for each solar panel installed, the system hasn’t been saving any more money per panel when they do, and those extra costs have been shifted onto customers who don’t have solar.

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Compared to the case in which residential rooftop solar were treated like actual producers and paid the competitive value of their generation, my analysis concludes that PG&E residential customers with solar in 2024 will shift slightly more than $2 billion of costs to customers paying the utility for their power. For Southern California Edison, it’s around $1.3 billion, and for SDG&E the cost shift will be about $0.5 billion. My findings are largely in line with a separate analysis done by the independent Public Advocates Office of the CPUC. (Their headline number – $6.5 billion for the total cost shift – differs largely because they include commercial and industrial (C&I) customers’ solar, which makes up about one-third of distributed solar capacity, and because I use a somewhat more generous avoided cost than their analysis does.)

The cost shift impact on rates

While it might be tempting to compare these astonishing figures to the revenues collected from residential customers, that would implicitly assume that all of these costs are shifted onto the residential price of electricity. In reality, some costs are shifted onto C&I customers. How much? That’s hard to know. It depends on which costs are allocated to specific customer classes (e.g., the cost of distribution lines in residential neighborhoods) and which are considered systemwide costs (e.g., the cost of billing systems, transmission lines, etc.).

One thing we do know is that residential rates have increased faster than C&I rates in the last decade. In 2014, PG&E residential rates averaged about 7% above C&I, but by 2024, they were 15% higher. SCE went from a 15% differential to a 47% differential over the same time period, while SDG&E’s differential jumped from 2% to 19%. This suggests that the costs that have been going up lately, and the increasing cost shift from distributed solar, have been allocated in higher proportion to residential customers. That’s not surprising given that a lot of the cost increases in the last few years have been defensive investments to harden distribution systems – which are disproportionately associated with residential customers – and because homes have two-thirds of the distributed solar.

To get a feel for the impact, let’s assume that 60%-80% of the cost shift from residential solar goes onto the bills of other residential customers. If so, then 5.7-7.0 cents of the price of each kWh (for customers not on the CARE low-income rate), or 12%-15% of PG&E’s full residential price in 2024, is due to the rooftop solar cost shift. For SCE it is 3.2-4.0 cents or 9%-11% of the price. And for SDG&E it is 7.4-8.8 cents or 19%-22% of the price.

In 2018, Lucas Davis wrote a blog post titled “Why Am I Paying $65/year for Your Solar Panels?” The question is still with us today, except now it’s more like “Why Am I Paying $300/year for Your Solar Panels?”

Getting to a sustainable energy system

I’m not presenting this analysis in order to demonize solar adopters or to make them feel guilty about their choice. It’s not their responsibility to do this sort of analysis. People are busy and utility bills are a burden for many. I don’t blame them for jumping at an opportunity to save money, without working through where those savings come from. The problem is not in our household decision makers, but in our policies. The 2023 change in how new solar installations are compensated was a small step in the right direction, but not a solution.

Nor is the solar cost shift the only problem facing California’s electricity system. Adapting to increased wildfire risk and other impacts of climate change, challenges of maintaining reliability with increased renewables, dysfunctional regulation, inefficient utility operations, and excessive returns on capital investments are all contributing to increased rates. All of these issues – including the exploding solar cost shift – need honest discussions among legislators and policymakers if California is going to successfully navigate today’s unsustainable rate trends."

Competition Can’t Be Perfect

By Michael Munger.

"We all like competition. Adversarial contests bring us better candidates in elections, more just outcomes in courtrooms, and beauty and excitement in sports.

In commercial society, competition disciplines market actors, encouraging low prices, good quality, and constant innovation. As an economist at the US Federal Trade Commission, early in my career, I researched ways competition benefits consumers, and helped enforce the rules that keep competition healthy.

In the past five years, there has been a strange, and misguided, wave of academic writings and legal trench warfare. The authors of these revolutionary proposals, mostly well-meaning people trained in law rather than economics, are harming the US’s competitive position as a leader in productivity and innovation.

If you’ve ever taken an intro economics class, you’ve heard of the idiotic concept of “perfect competition.” The idea is that no firm has any market power, and is forced to accept the “competitive” price. One sign that competition is “perfect” in this way is zero profits. Since if something is perfect, it must be desirable, a new generation of attorneys is attempting a wholesale takeover of antitrust enforcement. They are being led by advocates such as Lina Khan of the FTC, and Timothy Wu of Columbia Law School, who is hailed by some as the “architect” of the Biden administration’s competition policy.

The problem is that competition in commerce, just as in elections, courtrooms, and sports, requires considerable resources and organization. The participants must practice, prepare, and put forth their best effort for the process to work. In commerce, this means that firms can operate at sufficient scale to invest in research, to develop new products and processes of manufacture, and can coordinate the activities of complex supply chains and technical requirements. New firms, and entire new industries, can spring up overnight, offering competition in areas that only a short time ago seemed like hidebound monopolies.

Walmart was once seen as the destroyer of worlds, forcing the closure of main street shops across the country. The fear was that once all the competition was destroyed, Walmart would raise its prices. Except, that didn’t happen. In fact, prices have continued to fall, in real terms, and consumers have benefitted. Unexpectedly, an upstart online bookstore started to sell products and deliver them directly to consumers. Amazon, a giant, started competing with Walmart, another giant. Both were able to set prices, which was clearly not consistent with perfect competition. But since they kept setting lower and lower prices, consumer reaped huge rewards.

Of course, both companies are profitable; doesn’t that mean their prices are “too high”? This is the heart of the matter, and it’s the central reason why the new competition policy militants in the Biden administration are doing great harm. 

Under perfect competition, with many small, inefficient firms, it is true that no one makes a profit, because costs are high and firms cannot operate at a scale sufficient to drive those costs down. Prices paid by consumers in “perfect” competition are actually higher, and probably much higher, than prices paid in a system with real competition, contests for profits fought by large firms able to design new and cheaper ways to serve customers.

In just the past month, we have seen how contradictory, and frankly harmful, the new perfect competition paradigm can be. The logic of antitrust enforcement is to take the “industry” as a narrowly defined set of firms all in the same business, and then to imagine breaking up those firms into smaller subparts, to create more choices for consumers. That logic catastrophically precludes actual increases in the real kind of competition — new firms strong enough to offer a real fight.

Senator Elizabeth Warren recently argued that the Biden administration, through the FTC, should block the acquisition of Discover by Capital One. Her logic has been “perfect competition,” two small firms are better than one medium-sized firm. Yet one need only take a look at the larger industry, where Visa, Mastercard, and American Express control fully 98 percent of credit-clearing transactions, to realize the folly of that approach. If the Capital One-Discover marriage can be consummated, there will be more competition in the industry, not less. The newly formed entity would have the financial power, and the scale of transactions, to force the credit card industry out of its anachronistic ways.

The current infrastructure was built to clear transactions in an era where a card with raised letters was placed in a machine, and run “Ka-CHUNK” over by a press to create carbon paper copies, which could then be processed. The level of fees is too high, and the technical aspects of clearing transactions are cumbersome and wasteful.

To be fair, there are other problems with the industry, but those are most often created by regulators, and a strange judicial concern for “fairness.” The two biggest problems are the 2018 Supreme Court case that requires retailers to accept all credit cards, and the financial regulator’s bizarre restriction on charging more for cards that charge higher fees. This is actually patently unfair, since it means that most of us subsidize the “money back” provisions for the largest, and wealthiest, card users. The combination of a requirement that all cards must be accepted, and the regulatory prohibition on price competition, create the real threat to competition.

But in the meantime, and also over the longer term, adding a new player to this contest — especially a player with the financial punch of a combined Capital One/Discover, creates an environment where rapid change could take place, in directions that will quickly reduce costs and speed up transaction clearing. It’s time to put the misleading definition of competition back on Econ 101 blackboards where it belongs, and bring real competition to the financial services industry. "

Steel Tariffs and the Race to Be Protectionist in Chief

Biden sees Trump’s levies on metals imports and raises them to damaging effect

WSJ editorial. 

"Didn’t President Biden promise a better trade policy than his predecessor? Well, he now appears to be in a race with Donald Trump to be Protectionist in Chief. Witness his pitch for new tariffs at a campaign stop on Wednesday in Pittsburgh.

Speaking at United Steelworkers headquarters—where else?—Mr. Biden promised to crack down on Chinese imports. “Chinese policies and subsidies for their domestic steel and aluminum industries means high-quality U.S. products are undercut by artificially low-priced Chinese alternatives produced with higher emissions,” the White House said in a statement.

The Trump Administration tried to leverage tariffs on Chinese goods to get Beijing to reform its mercantilist policies. It didn’t work. Yet now Mr. Biden is proposing to triple the 7.5% tariff under Section 301 on certain Chinese steel and aluminum imports. He also teed up a trade investigation into Chinese shipbuilding in response to a petition by the union.

While Mr. Biden has scrapped nearly every Trump policy, he has maintained most of his predecessor’s tariffs despite their economic harm. The Detroit Free Press reported in 2019 that Ford worker profit-sharing checks would be 10% higher if not for Mr. Trump’s 25% tariffs on steel and 10% on aluminum.

An analysis by the Peterson Institute for International Economics found that each job “saved” by Mr. Trump’s steel tariffs cost consumers and businesses more than $900,000. Employment in iron and steel mills has fallen by about 3,000 since the Section 232 tariffs took effect in 2018.

China’s mercantilism is a special trade problem, but Chinese steel makes up only 2% of U.S. imports and 0.6% of consumption, largely owing to Mr. Trump’s tariffs and antidumping duties. Piling on more tariffs will raise costs for U.S. manufacturers that use particular grades of Chinese steel without alternatives.

In any case, neither candidate plans to limit his protectionism and industrial policy to China. Mr. Trump has proposed a 10% tariff on all imports. Mr. Biden on Wednesday reaffirmed his opposition to Nippon Steel’s purchase of U.S. Steel, though the Japanese company has promised to honor labor agreements and invest $1.4 billion to upgrade factories.

Mr. Biden also teed up plans on Wednesday to use tariffs to protect U.S. businesses burdened by his climate agenda. “American companies must lead the future of more sustainable steel,” the White House said. It’s not fair that “U.S. products have to compete with artificially low-priced alternatives produced with higher carbon emissions.”

Steel making is energy-intensive, and Mr. Biden’s green energy agenda threatens to make U.S. companies less competitive. U.S. Steel is challenging the Environmental Protection Agency’s “good neighbor” rule that requires it to make costly upgrades to reduce ozone in distant states. The Supreme Court is considering whether to block the rule.

Meantime, the Administration touts billions in subsidies for “green” manufacturing. Last month the Energy Department awarded steelmaker Cleveland-Cliffs $575 million for “two decarbonization investments” in Ohio and Pennsylvania. Cleveland-Cliffs’ workers are represented by the United Steelworkers and it lobbied the White House to block the Nippon Steel deal.

Cleveland-Cliffs wants to buy U.S. Steel, which it says will benefit workers. Doubtful. In February it closed a factory in West Virginia that employed 900. Tariffs and subsidies may prop up uncompetitive companies for a time, but they harm countless forgotten men."

Could Fossil Fuels Re-Elect Biden?

Oil and gas are doing more for the economy than his climate dreams

WSJ editorial. 

"Despite President Biden’s best efforts, U.S. fossil-fuel production continues to grow, and it’s supporting the economy he touts. That’s one notable finding from the Bureau of Economic Analysis’s recent report on state GDP growth in 2023 that is always instructive about regional and industrial economic trends. 

The U.S. economy last year expanded by 2.5%, and while the rest of the press missed it, fossil-fuel producing states led the way. These include North Dakota (5.9%), Texas (5.7%), Wyoming (5.4%), Oklahoma (5.3%), Alaska (5.3%), West Virginia (4.7%) and New Mexico (4.1%). Mining contributed about two to three percentage points to GDP growth in these states.

GDP growth in most other states was sluggish, especially those in the Northeast like New York (0.7%) and New Jersey (1.5%) and the Great Lakes region. Mr. Biden boasts about a Midwest manufacturing boom, but folks aren’t feeling it in Wisconsin (0.2%), Ohio (1.2%), Illinois (1.3%) Indiana (1.4%) and Michigan (1.5%).

Mining contributed 0.31 percentage points to U.S. GDP growth last year compared to 0.06 points for manufacturing and 0.04 points for construction. In most of the Midwest, reduced manufacturing output subtracted from growth. That’s not surprising since overall business investment last year was lackluster. One exception was oil and gas development.

U.S. oil production last year hit a record 13.3 million barrels a day while natural gas output surged to a record 45.6 trillion cubic feet. Most has occurred on state and private lands, which the federal government has little power to stop. This is why government revenue in Texas from oil and gas royalties and taxes last year soared to $26.3 billion.

Mr. Biden will never admit it, but privately financed fossil-fuel production is doing far more to boost the U.S. economy than his hundreds of billions of dollars in spending on electric vehicles and green energy. The latter may even detract from economic growth by causing a misallocation of capital to less productive uses.

Two exceptions to the fracking boom were Ohio and Pennsylvania, where natural gas production last year was roughly flat. A big culprit is a persistent shortage of pipeline capacity to transport gas, which owes to permitting obstacles by the feds and Northeast states. Mr. Biden’s pause on liquefied natural gas export projects has also added business uncertainty.

Even so, the U.S. gusher of fossil fuels has kept energy prices lower than they'd otherwise be. Natural gas prices reached an all-time low of $1.49 per million Btu last month, which along with a mild winter has reduced heating costs for tens of millions of Americans. Manufacturers have also benefited from lower natural gas prices. Global oil and U.S. gasoline prices have recently climbed amid geopolitical uncertainty, but they would be significantly higher if not for surging U.S. oil production.

Illinois Gov. J.B. Pritzker, a climate-change obsessive, nonetheless tweeted last month that “thanks to the Biden Administration’s vision and leadership, the US has achieved energy independence for the first time in 40 years!” He highlighted a chart showing that the U.S. recently became a net exporter of oil, natural gas and coal while China’s net fossil-fuel imports have grown. Cognitive political dissonance, thy name is Pritzker.

Mr. Biden deserves no credit for America’s fossil-fuel boom, but he’s surely benefiting from it, much as Barack Obama did in 2012. The President’s biggest economic success is something he has done everything in his power to thwart."

Nwe York law limits how much of cost renovations a landlord can pass on in rent increases and 20,000 rent-regulated units have become vacant since 2019

See New York Is Passing a Big Housing Deal. Everyone Is Grumbling: The deal includes ‘good cause’ eviction protections in exchange for more new developer tax breaks by Jimmy Vielkind of The WSJ. Excerpts:

"Ann Korchak’s family owns two 10-unit apartment buildings on Manhattan’s Upper West Side. About 40% of those units are already rent-regulated, and she sees the new good-cause provisions as an unfair form of universal rent control.

“The free-market apartments really cover the lion’s share of the expenses for the building,” she said. “They’re really tying our hands.”

One of the rent-regulated units in her family’s portfolio has been vacant since 2021 after a single tenancy that lasted more than 50 years. Korchak said it would cost $200,000 to renovate the apartment so it could be rented again, but a law enacted in 2019 only allows a landlord to pass on $15,000 of that cost in rent increases.

The current proposal would raise that amount to $30,000 for rent-regulated units that become vacant, and $50,000 for units that were occupied for 25 years or longer. There are around 20,000 rent-regulated units that have become vacant since 2019 but aren’t on the market because the needed renovations are cost-prohibitive, said Jay Martin, executive director of Community Housing Improvement Program, a landlord trade group.

“It’s woefully inadequate to address the long-term insolvency issues we have,” he said of the current package. “This does not allow landlords to catch up.”"

Medicare’s Bureaucracy vs. Doctors

The government ignored its own medical experts on transplant tests

WSJ editorial. 

"We’ve told you about the organ transplant patients whose Medicare coverage was restricted for blood tests that pick up early signs of organ rejection. It turns out the decision to limit the tests contradicted the recommendations of the government’s own panel of medical experts.

That news comes from a Freedom of Information Act (FOIA) request by CareDx, one of the companies that produces the blood tests. Noridian, a Medicare administrative contractor that covers California, fought the FOIA and had to be sued to comply. No wonder: The documents show government contractors ignored the advice of their own handpicked expert clinicians who supported the use of the tests.

The controversy began in 2023 when MolDX, a program run by Medicare contractor Palmetto GBA, reduced its coverage for molecular diagnostic tests that can detect early signs of rejection of kidney, liver, heart and lung transplants. While Medicare initially covered the tests for routine monitoring of post-transplant organ health, a 2023 coverage decision said the tests could only be used in lieu of biopsies.

The tie to biopsies was a dumb metric because the tests were designed to be used before symptoms of organ rejection (like fever) are detected and thereby protect patients from organ damage. MolDx claimed it had clarified existing policy, but the shift was government healthcare rationing to stop what it considered overutilization of a new technology. The blood tests cost less than biopsies but can be used more frequently.

The rollback certainly wasn’t based on outcomes. Polling results from the transplant clinicians released through the FOIA show broad agreement that the tests most commonly used by doctors are a valuable tool for medical surveillance. Asked if there is sufficient evidence on the clinical context in which the blood tests could be used for kidney patients, five of six clinicians said the “evidence clearly indicates for-cause and surveillance use” for the most commonly used blood test. Five of the six also said the tests have proven clinically beneficial for surveillance.

All six clinicians agreed that use of the test for kidney monitoring would preclude the need for biopsies in patients without symptoms of rejection. Instead of subjecting patients to repeated biopsies that are uncomfortable and can damage an organ over time, the government’s panel of clinical experts said the blood tests were a valuable diagnostic tool.

That also happens to be what Medicare contractors said about the blood tests before the 2023 rationing took hold. When MolDx established coverage for Allosure for kidney patients, it approved coverage for routine surveillance after transplants. After MolDx suggested tying coverage to biopsies in a 2020 draft coverage policy, it backtracked after public comments. MolDx noted in 2021 its policy was “not intended to rescind coverage for tests used for low-risk patients using such tests for surveillance.”

The science is clear and so is the politics. Noridian fought the FOIA request because denying coverage your own experts endorse isn’t a good look. Mr. Biden’s Centers for Medicare and Medicaid Services has evaded questions about the coverage changes and claims patients can still access the blood tests “when medically appropriate.” Transplant patients would disagree, and this is the future of American medicine when government rations care."

Biden, Cfius and the U.S. Steel Acquisition

Are his remarks empty rhetoric or an attempt to subvert the law?

By Thomas P. Feddo.

"President Biden weighed in last month on Nippon Steel’s proposed acquisition of U.S. Steel. “It is vital,” he said in a statement, for the latter “to remain an American steel company that is domestically owned and operated.” Soon after, the United Steelworkers endorsed the president. This may be an empty election-year promise. If it isn’t, it’s a pledge to subvert the law and cripple a vital national-security tool in the process.

The only obvious way to stop the acquisition is through the Committee on Foreign Investment in the U.S., or Cfius, a nearly 50-year-old interagency panel that scrutinizes cross-border deals to determine whether they could harm national security. The two steel companies had filed for Cfius review a week before the president’s statement.

Cfius is composed of nine cabinet officials and led by the Treasury secretary. Its work is confidential, rigorous and fact-based, and its statutory remit concerns only national security. Congress mandates Cfius conduct its analysis in secret and precludes the president from dictating its decisions. Mr. Biden’s statement didn’t mention Cfius or national security, but it’s reasonable to suspect he hoped to influence the committee.

But an adverse ruling from Cfius would clearly be improper. Under the committee’s statutory analytical framework, Nippon Steel’s acquisition of U.S. Steel poses no national-security risk to the U.S. The committee primarily considers a foreign investor’s intent and capability to harm U.S. security, together with the character of the work done by the U.S. business that could be exploited. Nothing in this steel-making transaction risks compromising cutting-edge technology, critical infrastructure, sensitive data or the defense industrial base’s supply chain.

Nippon Steel’s investment in U.S. Steel promises to enhance American production capacity and strengthen geopolitical ties between the U.S. and Japan in the face of Chinese aggression. Japan is of indispensable strategic importance, not least because of its supporting U.S.-led export controls and collaborating on regional defense matters. Last month the U.S. Navy secretary urged Japanese industrial companies to invest in America’s shipyards.

Under the law, Mr. Biden can take action to stop the acquisition only if the committee refers the matter to him and he finds “credible evidence” that the transaction “threatens to impair national security.” If Cfius refers this transaction to the White House, a presidential prohibition would signal that national security is whatever the president says it is, making Cfius a secretive, arbitrary and capricious tool for the party in power.

If that happens, global investors would be right to wonder whether America is open for business, while special interests would have gained a new lever of power and lobbyists a new cash cow. American allies would have another reason to worry about how special their relations with the U.S. really are. And the legitimacy of a vital national-security tool would be compromised.

Mr. Feddo served as assistant Treasury secretary for investment security, 2019-21. He is founder of The Rubicon Advisors LLC."