What Did California Miss with Its Recent Slashing of a Key Solar Incentive?

Two major problems confront California’s energy policy. The first is that California is not on track to meet its climate goals because policymaking is still heavily shaped by the fossil fuel industry. Second, California’s energy laws and business models are rooted in injustice. The economic benefits they provide continually miss the communities that need these benefits the most because governments have structurally excluded them in the past. We need to design solutions that address these crises head on as what happens in California tends to travel outward and set the precedent. But that’s not what’s happening now.

These two major problems are perfectly illustrated in the passage of Net Energy Metering 3.0, or NEM3. Net energy metering is a policy that compensates households with solar panels for the extra energy they give back to the grid and, in turn, helps lower their utility bills. The year-long NEM3 debate ended in late 2022 with the California Public Utility Commission voting to approve a proposal that slashed solar incentives for most customer-generated power. This decision marks the third time the policy has been adjusted. NEM3 further slows the growth of solar adoption and sets California further back from achieving its climate goals.

This policy decision was complicated. The debate extended beyond the utility and solar industry as many environmental and consumer protection organizations got involved. Some organizations ended up siding with the energy utilities in slashing these key solar incentives; others saw the passage of NEM3 as a major blow to environmental justice communities.

Understanding the harmful narrative of the cost shift argument as it travels to energy utility regulatory cases across the country will be key to minimizing the risk it poses to solar adoption everywhere.

And although the debate was supposed to be framed around equity, no environmental justice organizations had their views registered as formal parties to the CPUC regulatory court case—a process that can be very resource-intensive, time-consuming, and inaccessible, which meant their perspective was not considered in the final decision.

The Cost-Shift Argument Is a Red Herring

For example, California has been at the forefront of establishing energy efficiency standards for appliances and for establishing renewable energy targets, two foundational environmental policies now common across many states. Therefore, understanding the harmful narrative of the cost-shift argument as it travels to energy utility regulatory cases across the country will be key to minimizing the risk it poses to solar adoption everywhere.

The argument, backed by the utility industry and its supporters, essentially says: electricity payments for solar haven’t been distributed fairly, so . . . the program should end for everyone. This cost shift argument presents a false narrative of equity. It pushes the belief that wealthy solar owners are disproportionately benefiting from solar incentives and therefore increasing bills for everyone else, including middle- and lower-income ratepayers, without considering the full value being contributed to the grid through private investments in solar energy. CPUC’s modeling did not consider benefits such as those specific to environmental justice communities, like reduced health harms from fossil fuel energy, decreases in transmission and distribution costs, increased system reliability and resiliency, and local economic and job benefits that NEM incentives create.

Customer-owned energy generation also reduces utilities’ potential to invest in more profit-generating infrastructure, like long-distance transmission power lines.

The cost-shift argument also overlooks the fact that cross-subsidies—the practice of charging a uniform rate even though some customers cost less to service (urban customers often subsidize rural customers who cost more to service)—are pervasive throughout all energy resources covered on our bills, including energy efficiency.

And it obscures the real motive—securing utilities’ profits as they make a return on their investment in utility-owned clean energy. Customer-owned energy generation also reduces utilities’ potential to invest in more profit-generating infrastructure, like long-distance transmission power lines that require more maintenance, especially in the face of increased wildfire risks—a cost that is put on utility bill-payers. This is where NEM3 became a power struggle between the energy companies, the solar industry, and communities—with the utilities, the current energy suppliers, coming out ahead. The NEM3 decision allows utilities to keep more money in their pockets as they can compensate ratepayers significantly less for any energy that is sent back to the grid. Ultimately, the decision cut the export rate in California from $0.30 per kWh to $0.08 per kWh effective April 15, 2023.

Yet even if the cost-shift argument is true, cutting these benefits without addressing the solar inequities they premised to address only exacerbates existing disparities. For example, we know that solar has been deployed inequitably by race and income and other underlying structural inequities, such as decades of redlining and unjust housing policy that have created major racialized wealth gaps. Cutting these benefits is a lazy and unhelpful way to claim equality when there are countless other policies and investments that could rectify this gap, none of which were adopted in NEM3.

The Utility Playbook — Pitting Communities Against Each Other

In her book, Revolutionary Power, An Activist’s Guide to the Energy Transition, Shalanda Baker details how the utility industry and those with deep roots in the fossil fuel business have masterfully deployed a racially divisive playbook to slow solar adoption.¹ The playbook pits solar owners (often from wealthier white communities) against non-owners (often from lower-income or communities of color). This frame is what the fossil fuel industry is using to gut NEM programs across the country. The energy industry is strongly influenced and supported by the American Legislative Exchange Council, a conservative legislative think tank.

While ALEC and the energy industry have seized on this debate frame with veiled references to “equity” and “fairness,” it’s clear their interests are disingenuous when you realize that these same parties are not advocating for equity or fairness for any other energy resource. Equity and fairness are nowhere to be seen when ratepayers are put on the hook to pay for wildfire damages or rising gas costs. ALEC and the energy industry are completely silent on the huge historical debt owed from the utility and fossil fuel industry and its regulators to communities of color, lower income folks, and frontline communities, who for decades have been exposed to health harms.

Instead, the CPUC designed a NEM decision that only expands the income wedge by grandfathering in wealthier White solar owners who get to benefit even more as NEM3 will most likely not apply to them. Instead, NEM3 is ending the opportunity for new solar adopters, a greater percentage of whom are now coming from the middle and working class.

Notably, there was a last-minute additional exception to NEM3 rates made for very low-income households, disadvantaged communities (as legally designated in California), and tribal communities. However, the decision eliminated a $600 million equity fund to offset upfront costs for these households which would have made solar more accessible, and instead deferred to prospective state-funded program offerings subject to annual budget fluctuations.

Efficiency and Economic Optimization Are Not Our Gods

In addition to the red herring of the cost-shift debate, the utility playbook is rife with technocratic economic optimizations prioritizing efficiency as a governing value over equity.

To put it simply, avoided costs have become a tool that utilities can manipulate to their advantage. Regulators also use this framing to the exclusion of other societal values—including justice.

These system-wide cost calculations and optimization models exclude environmental, health, social values, and damages owed due to past and ongoing racial inequities. They also ignore questions of who benefits and who is harmed in driving toward a seemingly neutral system-wide outcome.

The “avoided cost” frame is one such purportedly “neutral” approach. The concept of avoided cost can be traced to the federal Public Utility Regulatory Policies Act of 1978. PURPA was enacted in the 1970s during an energy crisis (namely, the Western world faced petroleum shortages) that required utilities to buy power from smaller independent energy companies as it would cost the utilities less than if they were to generate the energy themselves. To guarantee utilities were buying the energy for less, the legislation established an “avoided cost” metric for the utilities. Avoided costs are the costs that an electric utility can avoid when another service option exists—like an independent energy generator.

PURPA became the basis for establishing an avoided cost, a numeric economic value that utilities now attempt to calculate to their advantage. This economic value has now become top priority over considerations of climate, equity, and health. To put it simply, avoided costs have become a tool that utilities can manipulate to their advantage. Regulators also use this framing to the exclusion of other societal values—including justice.

Avoided cost and the concept of the “value of solar” is also part of the utility playbook, which Baker outlines as follows²:

1. It urges regulators to reduce the exchange rate for rooftop solar customers to align it with the wholesale, or avoided cost, of energy (the average price a utility would incur to purchase new energy at the margins).
2. It increases fixed charges on bills—a regressive economic burden as it applies to all ratepayers despite their income level.
3. It further narrows the avoided cost value to a technology specific “value of solar” that excludes solar’s social and environmental benefits.

If a metric on “costs” is to exist, we need to embed longer-term “social costs” or “reparative costs” as metrics that are recognized in federal law. Basing decisions on short-term horizons is what got us in this climate mess to begin with.

The Climate Crisis Demands More Investments, Not Less

Throughout the NEM regulatory court case, not to mention other efforts to extend gas plants to balance variable renewables, the CPUC and utilities seemed fixated on limiting distributed solar even though California agencies’ own analysis shows that we need to triple the build rate of solar and wind and dramatically increase investments in energy storage to meet our 2045 climate goals.

Just this year, Governor Newsom, with support from the state legislature, suspended environmental controls and authorized new fossil resources via AB 205, which makes it easier for state officials to buy electricity from beachfront gas plants and diesel generators. The bill also extended the life of aging and inefficient gas and nuclear power plants, just to keep the lights on during the times of day when energy is used the most.

If we really cared about the state’s climate goals, we’d put at least half as much energy into making fossil fuels uneconomic while increasing efforts to equitably invest in zero carbon resources—including solar, energy storage, energy efficiency, and demand response programs or technologies that incentivize households to adjust their energy use at times when the electric system is nearing its maximum capacity.

What Solar Justice Demands

If we are to achieve solar justice and affordable utility bills for middle- and working-class and low-income communities, here are some constructive policies a united front could build in California and across the country:

Bill Affordability

• End utility shutoffs.
• Increase energy bill subsidies to 100 percent of utility bill coverage from 30 percent and increase the income threshold to cover all households that are eligible for affordable housing.
• Create progressive utility rate structures instead of maintaining the regressive status quo, which results in lower income people paying a greater percentage of their income on energy than higher income people.

Renewables and Shared Economies

• Fully fund rooftop solar for lower income residents (one could add such funding to low-income energy efficiency programs and authorize larger budgets).
• Allocate investments for the upfront costs of community solar.
• Establish labor standards for distributed solar and storage, manufacturing, and installation to expand economic benefits.

Reparative Policy

• Create a reparative fund that reflects the size of the damages wrought by the utilities and fossil fuel companies and prioritize environmental justice communities with clean energy and resilience measures.
• Prioritize solar panels and storage in environmental justice communities and restrict public incentives in other non-burdened communities until, at minimum, parity has been achieved(as suggested by Baker’s Revolutionary Power).

May this tangled web around NEM help us clarify what we truly need from a just utility system across the country.

Notes

1. Shalanda Baker, Revolutionary Power: An Activist’s Guide to the Energy Transition (Washington and Covelo: Island Press, 2021)
2. Shalanda Baker, Revolutionary Power: An Activist’s Guide to the Energy Transition (Washington and Covelo: Island Press, 2021).