California's Solar Subsidy Pullback Isn't So Bad

California's Solar Subsidy Pullback Isn't So Bad

California is where solar advocates go for good news. So the latest headlines came as a bit of a shock:

But solar fans should take a breath: The news isn’t so bad. The California Public Utilities Commission released proposed reforms to the state’s net-metering standards. Net-metering is a subsidy for rooftop solar systems whereby homeowners are paid for any spare electricity they export to the grid. Today, they’re paid almost the full retail rate in California — which is high. The average household tariff is more than 23 cents per kilowatt-hour, two-thirds more than the national average. 

There are two problems with this. First, rooftop power that’s sold to the grid isn’t worth anything close to the retail rate, especially when much of the excess power is generated in the middle of the day, when the state has a surplus of electricity. The second problem flows from the first: If rooftop systems are overcompensated for their power, then someone else has to pick up the tab. And since solar panels are generally found on the homes of higher-income families, that tab is being picked up disproportionately by the less well-off. This cuts against the social equity objectives now often embedded in energy-transition policies.

This inherent flaw makes the current net-metering arrangement unsustainable. You can’t market renewable power on the premise that its costs are becoming ever more competitive while simultaneously demanding subsidies that don’t match the economics. And although high-flying solar stocks such as Sunrun Inc. took a hit Tuesday morning, the industry ultimately needs a sustainable business model, not untenable subsidies. Fixing this is painful but necessary.

Is the CPUC’s proposed fix perfect? Come on, this is utility regulation. On the positive side, it’s right to move away from simple net-metering to an “avoided cost” standard. This is the value created by enabling grid owners to supply less power. The proposal also seeks to incentivize the deployment of solar-plus-storage rather than standalone panels. This makes sense in a state saturated with midday sunshine that sometimes resorts to high-emissions generators to keep the lights on in the evening.

There are plenty of problems with the CPUC proposal. The question of how to calculate avoided cost is already the subject of ferocious debate, sharpened by the increasing sophistication of grid modeling. California is now definitely the main battleground in the fight between large utilities and proponents of distributed energy resources. Meanwhile, the CPUC’s proposal to retroactively shrink the duration of net-metering subsidies for existing rooftop systems is unfair; those homeowners made their decisions under the state’s old rules.

The biggest fight will probably concern the CPUC’s proposal to set a grid charge of $8 per kilowatt for rooftop systems. Like the avoided-cost proposal, it’s hard to argue against this concept; the vast majority of households with panels still rely on the grid, and it has to be paid for. But the charge looks high. At $48 a month for a typical system, it’s equivalent to more than 40% of the current average monthly bill in California. If the CPUC is actually serious about wanting to foster rooftop solar, the charge will have to be smaller.

After all interested voices have been heard, the final rule will undoubtedly differ from what’s just been unveiled. Yet a bigger problem will remain: California has long expected too much from its electricity prices. One reason the state’s power prices are so high is that they cover not only the marginal cost of supply but also a lot of other things, including energy efficiency programs, subsidies for poorer households and, lately, wildfire-related compensation.

As Severin Borenstein at the University of California’s Energy Institute at Haas has pointed out, these extra costs are regressive and send a distorted signal to consumers in a state whose ambitious climate goals demand more electrification of transportation and other things. Beyond net metering, therefore, California must find new ways to socialize the costs of energy-adjacent things rather than just hiding them in utility bills. 

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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