California’s high electricity rates impede transition off fossil fuels

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In California’s fight against climate change, we have a single, indispensable tool that will be key to building a healthier, more resilient future in the coming decades. That resource is clean electricity. 

Our state’s climate targets hinge on our ability to produce, store and distribute renewable energy, and then put that electricity to work cutting pollution from our transportation systems as well as homes and buildings.

But to achieve this vision for a decarbonized future, California must overcome a significant barrier: electricity prices that are currently among the highest in the nation. 

In research undertaken by the Energy Institute at the UC Berkeley Haas School of Business, on behalf of Next 10, we found that California households are paying retail electricity prices that are two-to-three times the cost to produce additional electricity. This is not only disproportionately impacting low- and middle-income earners – it’s also impeding the state’s ability to hit upcoming climate targets.

There’s no question that we need to power buildings and transportation with California’s abundant clean electricity – the climate and health benefits will be enormous. The question is, how can we change the unsustainable and ultimately regressive way we currently pay for electricity?

Data show that the state’s three largest investor-owned utilities charge residential electricity customers much higher prices than are paid in most of the country – and prices that are also much higher than the true marginal cost of producing electricity. This is the result of large fixed costs – covering much of the generation, transmission and distribution fixed costs, as well as energy efficiency programs, subsidies for houses with rooftop solar and low-income customers, and increasing wildfire mitigation costs – that are bundled into kilowatt-hour prices and passed on to customers. 

But Californians are not bearing the weight of these costs equally. Low-income households increasingly spend a larger share of their incomes on electricity. As wealthier households transition to rooftop solar, the fixed costs are distributed through a smaller volume of kilowatt-hours delivered, raising the costs even more for remaining, lower-income customers. This is particularly concerning given the COVID-19-induced economic recession which has further exacerbated economic inequality in California. 

There is a better way. With urgent rate reform, we can create a much more equitable system of paying for electricity, while increasing greater access to and adoption of clean electricity for everyone. We encourage California policymakers and regulators to consider solutions that recover system costs through more progressive means – including through sales or income taxes, or an income-based fixed charge. 

By dramatically lowering the price per kilowatt-hour Californians pay to represent the true cost of producing electricity, and then moving to recover fixed costs through an income-based fixed charge, policymakers can simultaneously keep energy bills affordable for all families and ensure that all those that use California’s electricity system contribute to it fairly. 

In this model, wealthier households would pay a higher monthly fee in line with their income, while lower-income households would pay a smaller monthly fee, or no monthly fee at all.

Lawmakers could direct the California Public Utilities Commission to work with other agencies to pursue this income-based fixed charge based on three criteria: Set prices as close to cost as possible, recover the full system costs and distribute the burden of cost recovery fairly. 

Another step to increase equity would be to move the cost of wildfire mitigation and energy efficiency programs that Californians currently pay for through their electricity bills onto the state budget, which is funded through a more progressive, income-based tax system.

Ultimately, a much more fair and efficient solution exists for electricity pricing in California. We have led the nation in developing pioneering energy policy to green our electricity grid and created a pathway to use this clean electricity to begin the transition off of fossil fuels. 

Now, it’s time for us to lead the nation again by enacting rate-reform that will ensure all Californians can cash in on the benefits of the clean, electric technologies with just, progressive electricity rates.