What Do California’s Big Residential Rate Changes Mean for Solar?

Learning about utility ratemaking is enough to make plenty of people want to take a long summer afternoon nap. But despite the complexity, the way electricity prices are structured is hugely important for rooftop solar, because rate design drives the bill savings for solar customers. On Friday, the California Public Utilities Commission voted unanimously to support a decision redesigning residential rates for California’s big three major utilities: PG&E, SCE and SDG&E. The decision was set in motion by AB 327, and is the culmination of a years-long, arduous effort by the Commission to “make rates more understandable to customers and more cost-based, and to encourage residential customers to shift usage to times of day that support a cleaner more reliable grid.”

The decision adopted on Friday redesigns residential rates in big ways, increasing rates for those households who use less energy and putting the state on a path to time variant pricing for most residential customers, but also avoiding unfair new fixed charges. Here are some of the important takeaways: 

1) No new fixed charges, $10 minimum bill adopted instead:

Each of the utilities had proposed a new fixed charge of $5 per month for residential customers beginning in 2015 in this proceeding, increasing quickly to $10 by 2017. Vote Solar and other clean energy advocates argued that fixed charges are regressive and discourage customers from installing solar or otherwise reducing their energy purchases from utilities. We argued that a minimum bill would be better than a fixed charge, maintaining the price signal to conserve and avoiding impacts to most low-use customers while also ensuring that all customers pay some amount every month to help maintain the grid.

The Commission decision rejects the utilities’ proposed fixed charges, stating that “the IOUs failed to articulate a clear and consistent methodology to identify and calculate fixed costs” and noting evidence that most California customers are strongly opposed to new fixed charges. The Commission instead adopts a minimum bill of $10 per month starting no later than November 2015, states that fixed charges “may be appropriate” in the future and leaves the door open for the utilities to file new fixed charge proposals in their rate design windows in 2018. (PG&E already has a residential minimum bill of $4.50 per month, while SDG&E has a minimum bill of about $5 per month and SCE has a minimum bill of less than $2 per month).

The earliest the Commission would adopt any new fixed charges would be 2019 or 2020, after the implementation of default time of use rates. You can bet that fixed charges will be the subject of plenty of further debate at the Commission.

2) Migration from 4 inclining block rate tiers to 2 tiers, plus a high-user surcharge:

Currently, California’s major utilities have a 4-tiered rate structure as the default for residential customers, intended to provide a signal for conservation, with a kilowatt hour in the highest tier costing customers roughly 2 and a half times as much as a kilowatt hour in the lowest tier. The steepness of those tiers was partly due to legislation enacted during the state’s energy crisis, which limited rate increases in the lower tiers. Policymakers were concerned that, as a result, customers in hot inland areas and others that are high users have been paying much more than it costs the utilities to serve them.

The new rate structure reduces the difference between the first two tiers to just 25%, and adds a “super user electric” (SUE) surcharge starting in 2017 for the very high energy users who consume 400% above base electric consumption, estimated to apply to the highest-using 2-10% of residential customers, and therefore not applying to many more average-use customers who currently consume in Tier 3 at least once a year. The SUE surcharge rate per kilowatt-hour will reach 219% of the Tier 1 rate by 2019. The Commission specifically intends the SUE surcharge to send a clearer signal on utility bills that customers are using far more than the average household and should conserve.

3) Default time of use rates starting in 2019:

Vote Solar and many other groups have argued in this proceeding that over the long term, it makes sense to have most customers on time of use (TOU) rates, where the customer pays more to consume on-peak, when electricity is most expensive to produce, and less to consume during low-use times. The Commission agreed, directing the utilities to file specific proposals for default time of use rates no later than Jan 1, 2018, to be implemented in 2019. “Default” in 2019 means that customers would automatically go on TOU rates at that time, but customers could still opt out of TOU and choose the inclining block tiered rate instead.

4) Protections for customers currently on optional time of use rates: The three utilities proposed to eliminate some of their existing optional TOU rates and replace them with less solar-friendly optional TOU rates. (SCE’s proposal was superseded by a recent decision, D.14-12-048, which approves a settlement offering a menu of TOU options to customers.) Vote Solar argued that the existing TOU rates should be preserved to ensure that customers have a menu of rate options, and pushed for at a minimum for allowing customers currently on TOU rates to be grandfathered onto those rates if they are closed.

The Commission agreed with us that “the impact of changing or closing TOU tariffs should be mitigated” and adopted a five year grandfathering period for both PG&E’s E6 rate and SDG&E’s DR-TOU rate, starting on Jan 1, 2016. The decision also notes that any customers who request to take the PG&E E6 rate before Jan 1, 2016 must be allowed on the rate. Thus, the Commission has provided some additional bill savings certainty for customers who chose to install solar in conjunction with going onto an optional TOU rate. Additionally, customers on E-6 as of the date of the decision (July 3, 2015) will be served on the same time-of-use periods for the five-year transition period.

Well, that was a mouthful. You might be wondering what all these changes will mean for rooftop solar customers in California. Since it’s rate design, it’s not a simple answer. Solar customers who are high but not super-high users will likely see their bill savings go down as a result of Friday’s rate changes. However, going solar will make more economic sense for some lower use customers, since their rates will increase. And super-high users who have solar, those who will be subject to the SUE surcharge, may not be impacted greatly by the rate changes.

In addition, starting by November 2015, all IOU residential customers, including solar customers, will pay a minimum bill of $10 per month, regardless of how much their meter runs backwards when their solar array generates more energy than they consume. That means that California utilities that oppose the growth of rooftop solar will have to acknowledge that everyone is paying to help maintain the grid going forward.

Now that residential rate changes have been adopted, all eyes will be on the Commission’s upcoming decision about whether to extend net metering for customers who go solar after the utilities hit their net metering caps in 2016 or 2017. The rooftop solar industry in California already faces big challenges in the years ahead, adapting to these rate changes as well as weathering a likely sudden decline in the federal investment tax credit at the end of 2016. If the Commission throws out net metering or assigns unfair new fees to solar customers later this year, that would be a ‘triple whammy’ of policy changes that could do serious and lasting harm to the state’s impressive solar momentum. However, the Commission has a proud tradition of solar leadership that we hope will continue. We are optimistic that the Commission will maintain fair compensation for solar customers and continue to steadfastly steer toward the clean, reliable, resilient grid of the future.