Rationalizing California’s Residential Electricity Rates

“While evidence that IBP [increasing-block pricing] incents energy efficiency is absent, the evidence is clear that IBP is a key driver behind the distributed solar PV movement in California.

In fact, solar PV installers “work with” customers to optimally design systems so they 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. With federal subsidies that pay nearly half the cost of PV — and net metering that pays the residential customer for electricity supplied to the grid at the retail rate rather than the wholesale rate that other renewable generation sources receive – solar PV can beat the high-tier prices of IBP. That’s why solar PV installers are the most vocal opponents of rational rate reform that would call a kilowatt-hour a kilowatt-hour regardless of how many other kilowatt-hours you consume during the month.”

California is finally talking seriously about changing the way utilities price electricity for residential customers.  In particular, as a result of recent legislative actions, the CPUC now has some flexibility to modify the extreme increasing-block pricing (IBP) schedules that were adopted after California’s 2000-01 electricity crisis.  IBP means charging more for additional kilowatt-hours as a household consumes more over the billing period.  Pacific Gas & Electric’s current residential rate schedule, shown in the figure below, illustrates how IBP can charge drastically different prices for an additional kilowatt-hour (kWh) depending on how much the customer is consuming. (The rates of Southern California Edison and San Diego Gas & Electric look pretty similar.)

PGErates2014August

 PGE’s current increasing-block residential electricity rate structure

This extreme form of IBP violates one of the basic tenets of utility price setting: cost causation. Prices should reflect the cost of serving a customer.  The cost of providing electricity…

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