Tiered pricing ends up subsidizing solar panels for the rich

Tiered pricing ends up subsidizing solar panels for the rich


Tiered electricity pricingIn a new development for energy conservation, it turns out charging more for electricity, the more juice is used, could be bad for the environment. This “tiered pricing” is also called Increasing Block Pricing.

IBP is pushing some homeowners into installing uneconomic rooftop solar panel installations. IBP is not set by “Big Oil,” but is a policy set by the state Legislature and the Public Utilities Commission. IBP charges more for using additional kilowatt-hours over each billing period.

That’s why Severin Borenstein, head of the University of California, Berkeley’s Energy Institute, is calling for an end to IBP for residential electricity rates by state regulators, which also would cut wasteful subsidies for residential rooftop solar installations.

His reasons: IBP harms heavy-using low-income households, doesn’t lead to conservation, and ending it wouldn’t shift an unfair share of costs from the wealthy back onto non-wealthy electricity consumers.

Borenstein adds another reason to end IBP: It’s “the key driver behind the distributed solar PV (photovoltaic) movement in California.” He means solar-panel companies work with homeowners to “just shave off the high-tier usage without touching the low-tier usage where the price is way too low for PV to save customers money.”

One of the major criticisms of policies that promote residential rooftop solar energy panels in California is that they are mainly another tax subsidy for the rich.  A preliminary study conducted by CalWatchdog.com found California residential solar rooftop panel subsidies mainly go to the wealthy, contrary to the solar energy industry’s claim that they mainly go to the middle class.

What the solar industry doesn’t say is that such subsidies mainly benefit high-end users of electricity, no matter what income class they are in. The poor in California are already protected from high rates by signing up for CARE (California Alternate Rates for Energy), which requires an income means verification test.

But why would wealthy homeowners irrationally want pricey solar electricity that, even with subsidies, still costs about 12 cents per kilowatt-hour, compared to zero to 5 cents per kilowatt-hour for energy-efficiency measures?  Moreover, why would any smart, wealthy homeowner want solar energy at nearly double the price for only one-third of the day — when the sun shines — compared to reduced-polluting gas-fired power for about 6.4 cents per kilowatt-hour (including transmission line costs)?

The answer lies in stepped-up electric rates mandated by law.

An energy crisis is a terrible thing to waste

Borenstein explains that, before the California Energy Crisis of 2001, there were only two rate tiers for electricity:

  • Tier 1 at about 10 to 11 cents per kilowatt-hour;
  • Tier 2 at about 12 to 13 cents per kilowatt-hour.

But after the 2001 Energy Crisis, California was stuck with paying off $42 billion from unpaid bonds on old, dirty mothballed power plants along the California coast. So California legislators added three new price tiers (see graph above):

  • Tier 3 at about 18 cents per kilowatt-hour;
  • Tier 4 at about 23 cents per kilowatt-hour;
  • Tier 5 about 25 cents per kilowatt-hour.

This meant that, by 2012, the wealthier ratepayers solely paid off the $42 billion in bonds from the California Energy Crisis of 2001. The crisis over, the three higher tiers should have been repealed. But it’s hard for governments to let go of revenues and the top three electricity rate tiers remained.

Green agenda

Keeping in place the top three tiers also advanced the state’s green agenda of switching to solar and other renewable fuels. And the higher tiers helped the state reach the goal of reducing greenhouse gas emissions 25 percent from 1990 levels by 2020, as mandated by AB32, the Global Warming Solutions Act of 2006.

A top rate of as much as 25 cents per kilowatt hour looked attractive to encourage conservation from the McMansion homes sprouting up in the state, stuffed with gigantic flat-screen TVs, computers, video-game consoles, electric stoves, air conditioning and heating. The 25-cent cost for regular electricity was the “stick,” with the “carrot” being the tax and other subsidies that brought the cost of rooftop solar power down to 11.8 cents per kilowatt hour.

Thus, in 2006 the Legislature enacted the California Solar Initiative, also called the Million Solar Roofs Initiative. It was companion legislation to AB32.

But there was a Catch-22: Somebody had to pay for all the subsidies. That somebody was the 97 percent of ratepayers, including the poor and middle-class, who didn’t dwell in McMansions with solar rooftops.

Green agenda

Despite that, aren’t all the solar panels good for the environment? Not necessarily, because of the subsidy structure for the wealthy, who mainly live along the foggy coast.

As Steve Sexton explained on Freakonomics.com:

“[E]nergy policy that relies on distributed generation has its drawbacks. Perhaps most notably, it forsakes economies of scale. It also places infrastructure investment decisions in the hands of homeowners, who, as this space has suggested, may not make socially optimal — or even individually rational — choices.

“Early evidence from California suggests that because of these drawbacks, relying on tiny decisions is no silver bullet to a green energy future — and it could be a big mistake.”

In other words, if a solar solution is needed, instead of the tax subsidies — encouraged by tier pricing — for rooftop solar panels along the coast, a better idea would be more large solar-panel farms placed inland.

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