Response to Claims that Rooftop Solar Creates Net Benefits for Non-Solar Customers

Introduction
Recently, the California Solar & Storage Association funded a study, conducted by M.Cubed, to challenge data presented by the Public Advocates Office. Our data shows that rooftop solar creates an $8.5 billion annual cost shift to utility customers without rooftop solar. M.Cubed’s analysis, however, demonstrates a fundamental lack of understanding regarding what comprises the cost shift and overlooks key findings from the California Public Utilities Commission’s (CPUC) Net Billing Tariff decision, which adopted program reforms. Due to this, the study artificially inflates the perceived benefits of solar production and ignores the reality of cost shifting to non-solar customers.

Explaining the Cost Shift
The cost shift occurs because the incentive provided to rooftop solar customers is based on the full retail electric rate. This rate includes utility costs unrelated to electricity generation – such as implementing measures to reduce the risk of utility-caused wildfires, grid access after sunset when solar systems do not generate electricity, and social benefit programs like rate discounts for vulnerable customers.  By crediting a solar customer at the full retail rate, utilities effectively purchase energy at prices far above its actual value. This additional cost is then passed on to customers without solar in the form of higher rates.

Understanding the Net Energy Metering (NEM) Program
California’s Net Energy Metering Program (NEM) is a billing mechanism that allows customers to receive credits for the electricity they generate through rooftop solar. Because NEM compensation is tied to electricity retail rates, any increase in retail rates increases the subsidies to all NEM customers. However, the benefits of solar production have not kept pace with these escalating retail rates.

The Public Advocates Office’s $8.5 billion cost shift figure represents the total cost shift to non-NEM customers for 2024. This figure is derived by subtracting the value that solar generation provides to the grid – measured as avoided costs¹ – from the total compensation provided for NEM solar generation. Since the retail rate includes costs far beyond the value of the energy provided by rooftop solar during daylight hours, customers without solar are projected to pay an extra $8.5 billion.

The CPUC agreed in its Net Billing Tariff decision that basing retail export compensation rates on retail import rates results in NEM compensation that is orders of magnitude² higher than the benefits these systems provide to the grid. To address this imbalance, the CPUC reformed NEM by using the avoided cost values to determine compensation for energy exported to the grid, rather than retail rates. This change aligns the cost of energy more closely with its actual value and has led to a significant increase in residential energy storage installations by customers installing rooftop solar, which provides greater benefits to the grid.³

Addressing M.Cubed’s Faulty Analysis
The Public Advocates Office addresses the incorrect assumptions and conclusions of M.Cubed’s analysis below.

• Inaccurate Assessment of Solar Compensation Rates
  M.Cubed misconstrues our calculation of solar compensation, leading to inaccurate conclusions in its analysis. It fails to accurately reflect the difference between what rooftop solar customers are charged for the energy they receive from the grid and the average compensation rates for the energy they provide to the grid.
  
  The Public Advocates Office calculates the total cost shift using the average compensation rate, which depends on the hourly solar production profile and the corresponding retail rate at each hour. Since NEM compensation is tied to retail rates, any increase in retail rates results in higher compensation rates for solar customers.
  
  Additionally, the vast majority of NEM customers are not enrolled in the low-income program, California Alternate Rates for Energy (CARE). This means the average compensation rate paid per kilowatt-hour (kWh) of solar generation is higher than average rates paid by all customers. Our cost shift calculation assumes all installed solar capacity is from non-CARE customers, which has a negligible impact on the total cost shift figure because CARE customers make up less than 10% of the total residential⁴ NEM customer base.
  
  By overlooking these factors, M.Cubed's analysis inaccurately represents the true financial dynamics of solar compensation and the resulting cost shift to non-solar customers.

• Ignoring Fixed Costs in Self-Generation Calculations
  M.Cubed’s analysis includes a misguided critique of the Public Advocates Office’s accounting of the electricity that customers generate and use from their own solar panels in the cost shift calculation. The consultant overlooks a crucial aspect of how current electric rates are structured. Beyond the cost of energy itself, current volumetric rates are designed to recover fixed infrastructure expenses and system maintenance costs, and fund public purpose programs.
  
  When solar customers self-generate and consume their own electricity, they effectively avoid paying these costs that are embedded in the volumetric rates.  Self-generation does not reduce the necessity for utilities to maintain the grid or the costs associated with public purpose programs. As a result, the fixed costs that self-generating customers avoid are redistributed to non-solar customers, who must pay more to cover these essential activities and functions.

• Incorrect Inclusion of Historic Utility Savings
  M.Cubed erroneously incorporates historic utility savings into an analysis that focuses exclusively on the projected cost shift for 2024. The Public Advocates Office’s cost shift figure reflects a forecast of the annual cost shift for only 2024. Past cost shifts and associated benefits have already occurred and are irrelevant when forecasting future cost shifts.
  
  Because ratemaking is inherently forward-looking, only future deferrable costs should be considered in deriving the cost shift. We have already accounted for avoided transmission, distribution, generation and other costs when calculating the grid benefits provided by solar power.  This methodology aligns with the approach adopted by the CPUC in the Net Billing Tariff decision (D.22-12-056).
  
  If one were to evaluate the entire history of costs and benefits under NEM, it would be necessary to consider all past cost shifts as well. M.Cubed’s analysis employs an asymmetric approach by ignoring programs costs from prior years, while attempting to credit the program for past benefits. This selective accounting skews the results and does not provide an accurate picture of the current cost shift dynamics.

• Misrepresenting the Impact of Displaced CARE Subsidies
  M.Cubed incorrectly suggests that reductions in the CARE subsidy should be considered benefits that offset the cost shift. It posits that any decrease in the CARE surcharge when CARE customers install solar should be subtracted from the cost shift calculation.
  
  However, when CARE customers install solar panels, there may be a decline in the overall CARE subsidy due to their reduced energy consumption, there is a simultaneous increase in the cost shift because these customers contribute less toward the fixed infrastructure and policy costs embedded in volumetric rates. This scenario leads to an overall increase in the total subsidies that must be recovered from other customers. 

• Misconception About the Role of Customer Bill Payments in Cost Shifts
  M.Cubed incorrectly includes customer bill payments in its analysis, revealing a fundamental misunderstanding of how cost shifting operates. It claims that the Public Advocates Office’s calculations ignore the utility bills that solar-equipped customers pay.
  
  In reality, the NEM cost shift calculation specifically isolates the portion of customer bills attributed to solar generation. The cost shift represents the amount that NEM customers are not currently paying but should be, in addition to their existing bills. What a customer currently pays is not relevant to calculating the cost shift.

Other Notable Issues
M.Cubed sidesteps critical findings in the CPUC’s Net Billing Tariff decision concerning the quantification of benefits associated with solar generation. The CPUC was decisive in its findings that the ACC appropriately values these benefits.  By introducing a valuation that is five to six times higher than the ACC’s results, M.Cubed inflates the perceived benefits of solar generation.

Conclusion
It is crucial for policy decisions to be grounded in accurate data and a clear understanding of the economic dynamics at play. Unfounded overstatements of the benefits of rooftop solar or lapses in understating the associated costs can lead to unfair financial burdens on non-solar customers and hinder the development of equitable energy policies. By addressing and correcting these misconceptions, we can work towards a more balanced and sustainable energy system that fairly distributes costs and benefits among all utility customers.

[1] The avoided costs are derived from the CPUC-approved avoided cost calculator (ACC) model and includes among others, avoided generation energy, generation capacity, distribution, and transmission costs. 

[2] 3.8 to 5.4 times higher when calculated in 2020. With retail rates much higher in 2024, this cost benefit disparity is even more pronounced.

[3] As noted by the Lawrence Berkeley National Laboratory (LBNL), the fraction of PV installs paired with storage has risen to roughly 60% under California’s Net Billing Tariff. This contrasts strongly from the roughly 10% of solar installations paired with storage observed under the NEM tariffs.  One Year In: Tracking the Impacts of NEM 3.0 on California’s Residential Solar Market, LBNL, May 2024.

[4] There is also a negligible number of non-residential customers on CARE program as the CARE program is limited to food banks.