Haas School of Business report finds Californians pay up to triple for cost of producing electricity

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High energy costs often come as a result of energy providers having to cover fixed costs for electricity. These fixed costs include rooftop solar, which could lead to consumers having hesitations about using nontraditional, decarbonization energy methods.

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A report published Tuesday from the Energy Institute at Haas found that Californians pay up to triple for what it costs to produce electricity.

Commissioned by the nonpartisan organization Next 10, the report was written by Energy Institute at Haas faculty directors Meredith Fowlie and Severin Borenstein and research associate James Sallee. The report sought to analyze the causes of high energy costs, identify the communities who are most impacted and offer potential solutions.

“I have seen it estimated that, in California, close to 5 million customers are in arrears on electric bills,” Fowlie said in an email. “Low income households spend much more on utility bills as a share of income. So rising electricity prices are particularly hard on lower income households who are already struggling.”

Borenstein said a key reason for high energy costs is because energy providers have to cover several fixed costs. These costs include maintaining the transmission grid, clearing vegetation to reduce wildfire risks and subsidizing rooftop solar, among others.

These costs are borne by the consumers, Borenstein added. According to the report, up to 77% of what consumers pay goes toward covering these fixed costs, regardless of how much each individual uses, which often results in much higher costs.

Average PG&E residential rates per kilowatt-hour are almost 80% higher than the national average, according to the report. Southern California Edison rates were about 45% higher and San Diego Gas & Electric residential rates were almost double.

Borenstein explained the implications of these fixed costs for equity. Over the last decade, wealthier households have transitioned to using rooftop solar panels as an energy source instead of electricity.

“It just shifts those fixed costs onto other customers,” Borenstein said in the email. “As a result, those costs (…) are increasingly being paid for by poorer families who are less able to afford it.”

Fowlie added that these high energy costs hamper decarbonization efforts by making consumers reluctant to switch from using more traditional forms of energy such as gas.

The report provided alternatives for paying the costs of electricity in California, which would ensure wealthier households pay a larger share of the costs aligning with their income level. This includes raising tax revenue for the wealthy and incorporating a new energy cost model with an income-based fixed charge.

The report also calls for energy providers to be transparent with wildfire mitigation costs, which are expected to further increase the costs of energy in the future.

“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,” said F. Noel Perry, founder of Next 10, in a Haas School of Business press release. “The question is, how can we change the inequitable and unsustainable way we currently pay for electricity?”

Contact Chris Ying and Annika Constantino at [email protected].

Due to misinformation from a source, a previous version of this article incorrectly stated that close to 9 million customers are in arrears on electric bills. In fact, close to 5 million customers are in arrears on electric bills.