Dr. Severin Borenstein: Rooftop solar incentives
SciLine conducts interviews with experts and makes the footage available to journalists for use in their stories.
What is Experts on Camera?
Expert on Camera
The federal Inflation Reduction Act includes a tax credit for installing rooftop solar panels; many states and localities offer them as well.
On May 15, 2024, SciLine interviewed: Dr. Severin Borenstein, a professor of business administration and public policy at the University of California, Berkeley. See the footage and transcript from the interview below, or select ‘Contents’ on the left to skip to specific questions.
Journalists: video free for use in your stories
High definition (mp4, 1280x720)
Introduction
[0:00:19]
SEVERIN BORENSTEIN: I am Severin Borenstein. I’m an economist and a professor at UC Berkeley’s Haas School of Business, and I’m faculty director of the Energy Institute at Haas. I’m also a member of the board of governors of the California Independent System Operator, which is the grid operator in California. I mostly study energy economics these days and energy policy. I work on everything from gasoline pricing to electricity rate design, wholesale markets, and other issues in decarbonizing our economy.
Interview with SciLine
How do rooftop solar panels integrate into electrical grids?
[0:01:02]
SEVERIN BORENSTEIN: Customers of the electricity company in every area can put solar panels on their roof that will generate electricity. Once you put those solar panels on your roof, though, they are part of the grid, meaning that they are part of that whole network of wires that delivers electricity to everyone’s houses. When you are using electricity at the same time the panels are generating, they will channel the electricity into your house. If there’s more electricity being produced than you’re using, it will go back into the grid and will go to other consumers in the system.
What is net metering?
[0:01:04]
SEVERIN BORENSTEIN: Net energy metering means that when you produce electricity on your rooftop and it goes into your house, you don’t have to pay the retail price for electricity. But also if you produce electricity, and it goes into the grid, because you don’t need it right, then you can later net it out from the electricity that you do consume. Effectively, that means you’re saving the retail price of electricity when you generate the power on your rooftop. And that’s very different from, for instance, grid scale solar, those big solar farms. They get paid a wholesale price. In parts of the country those aren’t that far apart. But in the really expensive markets, like California, the retail price is many times higher than the wholesale price. And so it’s a very big subsidy to rooftop solar when you have net energy metering, and that’s part of why nearly half of all the rooftop solar in the country is in California and Hawaii, the two places with the highest electricity rates.
How does net metering impact the budgets of electrical utilities?
[0:03:08]
SEVERIN BORENSTEIN: The idea behind net metering—that you get to net it out from your retail consumption—means that you save the retail price. But the utility is typically only saving the wholesale price—a lower number. The difference between the retail and the wholesale is going to pay for utility costs. And those costs by and large are fixed. They don’t change much if you generate electricity on your rooftop. For instance, those wires that go down the street and the poles, all of those are still needed. Unless everybody’s going to disconnect entirely from the grid, you still need to have all those connections. So those costs still need to be paid. How are those costs paid? Well, they raise the price for everybody else for all the other kilowatt hours that people are consuming in order to still have enough money to cover those fixed costs.
What equity issues arise when utilities raise prices to compensate for net metring-driven shortfalls?
[0:04:13]
SEVERIN BORENSTEIN: The equity issue arises—well, there are two equity issues that arise. First of all: Is it fair that people who don’t have solar should have to pay for all that grid infrastructure, and people who do have solar shouldn’t have to pay for it, regardless of how wealthy they are? And I think that’s one real equity question. The second is the income distribution of the people who are actually installing solar. So, you’re not going to see much solar on rental property. And lower-income people are disproportionately renters. The landlord generally isn’t interested in investing, and then the tenant has no incentive. They don’t know if they are going to stay there. And you generally see very little investment in rooftop solar on the part of low-income homeowners because it’s a big cost. It generally will cost $20,000 or more to put in a rooftop solar system. And that’s not money than most low-income families have, even if in the long run, it might pay off for them. So, if wealthier people are the ones who are putting in solar, and all the evidence is that that is the case—more than low-income people. Then when they do that, they’re raising the price for all other customers because they’re not paying that difference between the wholesale and retail price. And as a result, a disproportionate share of the burden of paying for all that grid infrastructure is shifted on to other customers, and those other customers tend to be lower income than the people who are putting in solar. So, that has raised a real equity issue about the way we treat rooftop solar in the billing system.
In recent years, what factors have exacerbated inequities tied to net metering in California?
[0:06:09]
SEVERIN BORENSTEIN: As recently as 10 years ago, rooftop solar was only generating 2% of residential consumption. Whereas today in California, it’s generating more than 20% of residential consumption. So, it’s really taken off. So, this issue of the cost shift really wasn’t a problem 10 years ago. It was really in the noise in the revenue requirements. And over the last 10 years, that’s really changed as we’ve seen rooftop solar take off. At the same time, the costs in California’s electricity system have just skyrocketed. Mostly this is being driven by what climate change is doing to California. We are having massive wildfires due to climate change, and those wildfires are creating huge costs in two ways. One is, when utility equipment starts a fire, they are then liable to pay for the costs of that fire. Even if they’re not negligent—even if they have not been found to be negligent—under California law, they are still required to compensate the people harmed by the fire. And when we say the utilities have to compensate the people harmed, what we really mean is the ratepayers have to compensate because the utilities are allowed to pass that through in rates. And so that has raised costs. And now in response to that we’re making a lot of changes in the California grid to try to reduce wildfires.
How could governments make paying the costs of adapting to climate change more equitable?
[0:07:56]
SEVERIN BORENSTEIN: We’ve been loading a lot of costs of dealing with climate change into the cost you pay for each kilowatt hour of electricity, including dealing with all of the wildfire risk in California. And similar things are now happening across the West. And of course, the Eastern U.S. is dealing with floods and stronger weather events and so forth. Moving those onto the state budget and onto federal budgets would be a great way to make it more equitable. Because when you raise the price of electricity, our research shows that that is essentially an electricity tax that is far more regressive than a tax on income or a tax on sales even. So, I think that that’s a great lesson to recognize that we shouldn’t be paying for the energy transition through higher electricity rates. Those costs should come out of government budgets.
Why is it important to continuously monitor the outcome of policy choices?
[0:09:05]
SEVERIN BORENSTEIN: When you create policies, good or bad, private companies create business models around those policies. And they aren’t thinking about: Is this great for society? They’re saying: Can I make money doing X, Y, or Z given what the policies are? So then when you go to say, whoa, this isn’t a good policy. It turns out it’s incentivizing the wrong behavior. They’re going to fight you. So, and what that means is, you gotta be scrutinizing these policies every year. You can’t wait until they are a huge problem and then say: Oh, we got to change this. Because by then, a lot of the stakeholders have really made investments based on those policies, and when you change the rules, they are going to fight you. And we have seen that in California.
A feed-in tariff is an alternative to net metering. How has this mechanism worked in Australia?
[0:10:07]
SEVERIN BORENSTEIN: There when a customer puts rooftop solar on, all of the power is measured at the site of the generation on your roof. And you’re compensated for it at some price. And then all of the power that the customer actually uses, they pay the retail price. So, that’s really treating rooftop solar like a generator on the grid and paying them a certain price. Now, originally, that price in Australia, for instance, was very, very high in order to incentivize more rooftop solar. They now have probably more rooftop solar than the grid can easily handle, and they very much lowered the incentive for new rooftop solar through their feed in tariff.
