Will rooftop solar drive up the cost of electricity, particularly for low income households?

The latest battleground for clean energy adoption is taking place on your roof.

As US households with rooftop solar recently passed the 2 million milestone, some electric utilities are rolling out the big guns to try and slow the adoption. One of the most compelling and widely used arguments against customer-owned solar is that the increasing adoption eventually leads to higher-priced electricity for everyone else — particularly for people already struggling to pay their bills, like low-income households.

The Edison Electric Institute, the electric utility industry’s trade group, formally lodged their concerns as part of a submission to the US Department of Energy:

“The costs of the [net metering] subsidy are shifted from private solar customers to those customers who do not have, do not want, or in some cases cannot afford [to] install private solar generation.”

So, is this a real issue? Will non-solar customers be subsidizing their solar-powered neighbors? Or are low-income customers a red herring, used to limit customer choice and maintain rigid monopolies?

To answer these questions, we need to understand a bit about the inner workings of the industry. Let’s start by looking at the economics of electric monopolies.

Utility economics 101 and the importance of fixed costs

Many people are surprised to learn that electric utilities are quite different from ordinary businesses. They are government-granted monopolies with exclusive rights to sell electricity in their assigned regions. They have no competitors and most of their customers have no choice on providers. Their profits are pre-determined and largely guaranteed thanks to government regulators. To ensure these electric utilities don’t abuse their monopoly power, the regulators oversee nearly every aspect of the utilities’ business. Most utilities are regulated via the “cost of service” model which means their profits are directly linked to the assets they own — the more plants and power lines they build, the higher their profits. Gretchen Bakke describes this humorously in her book, The Grid,

“The electricity business is the only one in which you can make a profit by redecorating your office.”

Roughly half the utilities’ costs, and half of our electric bills, go towards “variable costs” — purchasing coal, uranium and natural gas as well as other costs that vary with the volume of electricity sold. The other half of utility costs are “fixed.” These costs must be covered regardless of how much electricity is actually sold. Fixed costs include building, and operating large assets like power plants and power lines.

How could rooftop solar drive up costs to low-income customers?

The utilities’ argument against rooftop solar goes something like this:

Rooftop (“distributed”) solar is a triple-whammy on utility profits. First, customers with panels buy less electricity because they are generating it themselves. This reduces utility revenues. Second, utilities are also forced to buy back excess solar in most states through programs called “net metering.” This reduces profits. And, third, because the utility doesn’t own the customers’ panels, they can’t include them in their assets when regulators are calculating their overall profits.

In the world of business, if your core product is facing a newer, better, cheaper alternative, you have little choice but to match that price or offer an even better product. As you react to the new competition, it is likely your profits will decline and your shareholders will get upset, at least until you have adjusted to the new market dynamics. Just think back to how mainframe computer vendors responded when personal computers emerged as a cheaper, more personal alternative. The mainframe vendors scrambled. They lowered prices, improved their functionality, offered better services, and invented creative new ways to compete.

But this is not how it works with the electricity business. Instead, many utilities told their regulators that customer-owned solar had the potential to lower their profits over the long term. They argued — successfully in a surprising number of cases — that rooftop solar owners should pay extra fees that would both slow the adoption of customer-owned solar and provide extra cash flows so utilities’ profits wouldn’t decline.

Yes, this is really what is happening.

(To be entirely fair, the utility industry is not like ordinary businesses and it does warrant different approaches, but not to the degree that is being argued).

But what does this have to do with low-income customers? Back to the utilities’ arguments:

Since rooftop solar compresses utilities’ profits, they have less money to cover their fixed costs. That leaves them little choice but to raise their rates on non-solar customers to make up the difference (called “cost shifting”). And since low-income customers are less able to afford their own rooftop solar as a way of offsetting these increased prices, the utilities argue that the higher rates disproportionately impact the most economically vulnerable groups.

Busting the myth of rooftop solar and low-income customers

If the argument above makes sense, you are not alone. Utility executives have been successfully using it to persuade regulators that extra fees and restrictions should be levied on customers with rooftop solar.

The problem is the argument is simply not true.  Low-income customers are not, and do not need to be, negatively impacted, particularly at the current and projected levels of rooftop solar.

There are three ways to bust this myth:

1. The real impact of customer-owned solar on utilities’ costs
2. History lessons from AT&T and LEDs
3. Emerging options for solar that makes it affordable for all income levels

Let’s dive into each one of these.

1. Rooftop solar doesn’t increase utilities’ cost. It can actually lower them. Seriously.

The utilities’ argument only works if every unit of electricity they sell costs the same, when in fact, the cost to generate a kilowatt hour varies tremendously across each day.

During hot summer days, when everyone cranks up their air conditioners, the grid hits “peak load,” forcing utilities to tap very expensive reserve electricity sources (“peaker plants”) to keep up with demand. This is such an expensive problem for utilities that they pay billions of dollars to their large customers each year to temporarily reduce their electricity consumption just to keep peak loads from getting too high (called “demand response”). Since solar generates the most power during those very same peak summer hours, solar can actually reduce utilities’ reliance on expensive peaker plants and demand response programs. Even better, any excess solar power is available to nearby homes that don’t have panels, reducing the need for costly upgrades to transmission lines and substations.

Backed by research. Research studies and real-world data confirm this. At today’s low 2% penetration of rooftop solar, groups like the California Public Utility Commission (CPUC), Lawrence Berkeley National Laboratory (LBNL) and the Brookings Institute have found no increase in their cost of electricity and, in some situations, utilities’ costs actually go down. Even at penetration rates well above 2%, the impact of cost-shifting is negligible. A report by LBNL calculated the worst-case impact of cost-shifting to be about 1% of an electric bill in 2030, or about one-tenth of a cent ($0.001) per kilowatt hour for the average American electricity customer.

What if it really takes off? What if the 2 million solar households in 2019 suddenly jumped to 40 million? A quick back-of-the-envelope analysis shows that the price of a kilowatt hour would increase just seven-tenths of a cent ($0.007) to continue covering the fixed costs of the distribution and transmission grid. Even at 50% penetration of rooftop solar, the cost of grid upkeep only takes a kilowatt hour up 1.4 cents. Admittedly, these numbers gloss over the true complexity of the grid pricing but the point is these increases are nowhere near the apocalyptic social impacts that utilities have raised concerned about. LBNL sums it up nicely:

“For the vast majority of states and utilities, the effects of distributed solar on retail electricity prices will likely remain negligible for the foreseeable future. [It] will continue to be quite small compared to many other issues.”

(As an example of “other issues,” even these unrealistic price increases are no more than the extra fees Georgia Power customers are already paying for the overruns of the state’s still-unfinished nuclear power plant.)

2. History lessons from LEDs and AT&T show that cost-shifting concerns are exaggerated

Singling out rooftop solar and low-income households obscures the fact that shifting costs from one set of customers to another is as old as the power industry itself. For example, densely packed urban households require far fewer miles of expensive power lines per customer than people in less populated suburban areas. In many situations, both customers are served by the same utility and are charged at the same rate. The urban customers, many of whom are low-income households, are paying more than their share for the distribution grid, effectively subsidizing electricity prices for the wealthier suburban households.

LED bulbs. The social equity of rooftop solar is an important issue but it’s not the first or even the largest threat to the utilities’ financial growth. Consider the incredible adoption of energy-efficient LED light bulbs. While rooftop solar owners reduced their utility bills by an estimated $2.1 billion in 2018, the adoption of LED bulbs reduced US consumer electric bills by a much larger $5 billion that same year. There is even a similar demographic skew with the adoption of more expensive LED bulbs being much smaller in low-income households.

Another regulated monopoly. Cost-shifting is not limited to the power industry. Decades ago, the telecom industry was much like today’s electric utilities — a tightly regulated, government-granted monopoly. In May 1976, AT&T’s CEO, John D. deButts, warned an audience at Fordham University about the perils of competition from new technologies and how they would harm low-income customers.

“Were the telephone companies deprived entirely of the contribution to common costs that revenues from their more discretionary services provide, they would face the necessity of increasing the average residence customer’s bill for basic service as much as 75%”

Like electric utilities, deButt’s concerns over cost-shifting were rooted in a worldview that did not include new technologies or competitive business models. Despite AT&T’s resistance, and many tumultuous years of transition, competition did emerge and the results changed the world. Freeing telephony resulted in long-distance communications costs falling to practically nothing. The cost of bandwidth dropped just as far. More than 50% of Americans have “cut the cord” on their telephone landlines altogether, replacing them with far more convenient and powerful mobile phones. Seven billion people have mobile phones.

Rather than disappearing, the various parts of AT&T have come back together and actually thrived in a competitive world. Revenue from long distance and equipment rental has been replaced with revenue from internet access, mobile phones, and digital content — products that deButts couldn’t have imagined when he was giving that speech four decades ago.

3. Solar is becoming affordable for everyone

Even if cost-shifting were a near term issue, the need for utilities’ to protect low-income households may be overstated as this group of customers has a growing number of options to affordably install their own rooftop solar. Admittedly, many of these programs are not available nationally, and awareness of them is low, particularly among the low income households that need them the most. Fortunately, the modest adoption rate of solar rooftop means these programs will have plenty of time to grow and raise awareness well ahead of any potential cost-shifting impacts on low-income households.

• California now requires all new homes to be built with solar rooftops. This means the solar equipment becomes part of the initial mortgage which immediately and permanently lowers the monthly costs to households of all income levels.
• Non-profit organizations like GRID Alternatives are finding creative ways to help low-income communities get solar. They offer job training for people in the community and use that labor to install affordable rooftop installations.
• Community solar programs like Florida’s SolarTogether let customers own or rent a small piece of a larger and less expensive shared solar farm (however most other utilities don’t yet pass along the lower costs to their customers).

Utilities have better options than fighting rooftop solar

Arbitrary fees and taxes on solar owners will only delay the inevitable growth of rooftop solar. Fortunately, a handful of forward-thinking utilities are embracing the future and pioneering new regulations, technologies, and market opportunities. These organizations are proving that the coming changes are not only survivable but offer an opportunity for leadership and growth.

• Regulatory innovations are being tested across the US. Hawaii is one of the first states shifting from cost-of-service based rates to performance-based rates. Other utilities are using minimum bills to ease the cost-shifting challenge.
• Residential and grid-scale batteries will further reduce the size of peak load, lowering the fixed costs of utilities by allowing more power plant retirements and reducing transmission and distribution upgrades
• Electric vehicles will drive up electricity consumption considerably, often beyond the capacity of even the largest home rooftop solar installations. Ironically, EV purchasers tend to be the same people who own solar panels, largely offsetting the reduction in their utility bills from rooftop solar.

Wrap up

Most of the utility executives I’ve met have a deep sense of obligation to serve all the customers in their region with affordable, safe, and reliable power. Even if they want to innovate, they are under constant pressure by regulators and citizens groups to reduce risks and lower costs. The utility executives are understandably reluctant to embrace wholesale changes to a business model that has served them so well for so long.

That being said, arguing that rooftop solar adoption should be taxed or slowed to avoid somehow harming low-income families is at best an indictment of regulators’ resourcefulness, and at worst, it’s a disingenuous diversion from a truly important issue that warrants real analysis and debate. If cost-shifting eventually becomes a problem, it can be readily addressed through new electricity pricing models (“rate designs”).

The real issue is that the utilities’ century-old business model needs to be updated, substantially. While we will continue to need the grid and organizations to operate it, the asset-centric, cost-of-service model simply does not reflect the modern reality of cleaner, cheaper, and more reliable distributed solar+battery technology. Unsurprisingly, many utilities want to maintain the status quo because the transition will be hard for them. But, as telecom and many other historic monopolies have learned, people’s desire for choice, particularly when cheaper technologies are available, will always prevail.

It is essential that we avoid unfairly raising prices on the most economically vulnerable members of our society. But the growing adoption of rooftop solar is not even close to the largest issue that threatens to impact their electricity prices. Let’s urge our regulators to shift the discussion back towards the real issue of outdated business models and grid architectures so we can ensure that the grid remains safe and economically viable for all members of society.

Additional reading

The concept of cost-shifting and its impact on disadvantaged communities is widely debated but there are several thoughtfully researched articles that get at real data and are worth reading.

• The  Lawrence Berkeley National Laboratory (LBNL) paper cited in this article, Putting the Potential Rate Impacts of Distributed Solar into Context
• A deep review of the issues around net metering and cost-shifting that cites several large research studies (Utility Drive, Research spotlight: Solar cost shift negligible, DER valuation efforts advancing slowly).
• A great article by the previous head of the Federal Energy Regulatory Commission (FERC), Jon Wellinghoff, arguing that the debate over cost-shifting to low-income customers has turned ugly and distracts from much larger and more important issues  (Utility Drive, A common confusion over net metering is undermining utilities and the grid).
• The watchdog group, the Energy and Policy Institute, summarized multiple studies and linked to a leaked document from the Edison Electric Institute internal slide deck (EPI, Report: Natural Gas Prices and Utility Infrastructure Spending Have High Impact on Bills; Solar Negligible)
• Real-world issues facing rooftop solar in Georgia written by executives at a regional installer, Creative Solar (PV Magazine, Utility barriers to rooftop solar in Georgia)
• This article argues cost-shifting is a real problem but new rate (prices) design can address it (The Hill, The problem with metering solar energy customers).