California has lost its way on the road to electrification

California has strayed from its electrification path not just once but twice. The state has been talking about electrification for years but the talk has not translated into action. 

The California Public Utilities Commission knows the biggest barrier to electrification is the high cost of electricity in the state. Yet it keeps on raising electric rates, year after year, decade after decade.

In 1979 — the last time California's rates matched the country’s average — they began an inexorable rise. The energy crisis of 2000-2001 catapulted them upwards further, and other, smaller crises have nudged them up even further in the years since.

Faced with public anger, and looking for someone else to blame, the CPUC decided to put the blame on customers who had installed solar panels. Via a draft proposed decision in 2021, it said that solar customers were forcing utilities to raise rates for all other customers, creating a cost shift from the poor to the rich.

But California got cause-and-effect backwards. For years, it was in fact the customers who consumed more than the average amount of electricity and overpaid for their share of fixed costs who would eventually decide they could take it no longer and install solar panels. Their own bills went down as a result, but they were in no way stealing money from the poor. 

The CPUC also argued at the time that energy from solar panels on customer roofs was more expensive than energy from large scale solar panels located hundreds of miles away, and thus rooftop solar was inefficient. And that was also not true, because utilities sold power to customers at several multiples of the cost of large-scale solar. 

Nevertheless, armed with these two misunderstandings, the CPUC ended net energy metering on April 15, 2023 and reduced export compensation dramatically. That decision was its first wrong turn on the road to electrification.

Arguing that rooftop solar panels were both inequitable and inefficient, the CPUC aimed to make solar an unattractive option for customers. It succeeded in large measure because solar installations dropped precipitously. Now only the very wealthy can afford to install solar and pair it with battery storage.

Then came the second wrong turn. After a heated statewide debate that lasted more than a year, the CPUC, on May 9, 2024, imposed an income-graduated fixed charge on monthly electric bills, claiming it was required to do so by state legislation (AB 205).

For most customers, that meant tacking on a flat fee of $24.15 per month to their electricity bill, alongside the slight lowering of per-kilowatt-hour energy charges. This was designed to make solar an unattractive option for existing solar customers, and to also penalize all other frugal or efficient customers who used less than the average amount of electricity.

While this fixed charge is currently a lot lower than the amounts initially proposed by utilities, which averaged around $100 a month, there is no cap on how high it can be raised in the future. In fact, it is likely to increase if utilities feel their revenues are eroding. Furthermore, it is the second-highest fixed charge in the country, based on a 2023 survey of 171 investor-owned utilities.

As advertised, this approach is unlikely to incentivize electrification. The savings in customer bills, even for those who realize them because they are either very large users of electricity or because they are extremely low-income customers, will not be sufficient to incentivize the purchase of a heat pump or an electric vehicle.

If the state is serious about electrification, it needs to lower electric rates by forcing utilities to lower their overhead rates. In addition, it should price electricity at marginal cost for incremental uses of electricity associated with electrification — such as for charging a new EV — while pricing it at average cost for existing use. That way efficient users of electricity will not be harmed, nor will inefficient users be rewarded. 

Ahmad Faruqui, an economist, has worked on energy issues for more than four decades on all six continents. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.

This opinion piece reflects the insights that Faruqui presented for Pioneer Community Energy’s board of directors, on June 20 in Rocklin, California.