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."