The summer driving season is underway. We’re hearing a lot about the high cost of gasoline, nationally and in California. In relative terms, electricity to charge electric vehicles can look like a bargain. But if you dig into the numbers, utilities’ rates may be much higher than they need to be. Getting the rates right needs to be an important part of the state’s plan if consumers are to meet the California’s zero-emission vehicle target by 2030.

To start with let’s compare electricity and gasoline prices today using a recent briefing note from the International Council on Clean Transportation (ICCT).  An electric vehicle owner in southern California who charges at home and has signed up for a time-of-use rate plan pays 12 cents per kilowatt-hour at night. The ICCT argues that the cost to fuel an electric vehicle should be compared to the sort of highly efficient gasoline vehicle that the driver most likely would have purchased. Following their guidance, the southern California electric vehicle owner is paying the equivalent of just $1.85 per gallon. Things are looking pretty sunny for this driver.

While it may look like California electric vehicle drivers are getting a great deal, they aren’t necessarily. The prices paid by California’s electric vehicle drivers are higher than they should be. This is likely slowing electric vehicle adoption.

The California Public Utilities Commission Tackles Rates

The state’s utilities regulator, the California Public Utilities Commission (CPUC), is not traditionally an agency focused on transportation policy. However, the agency is taking a turn behind the steering wheel to help the state accelerate towards an electrical transportation system. The CPUC is starting by focusing on charging infrastructure. Last month the CPUC approved utilities’ requests to invest over $700 million in electric vehicle charging infrastructure.

The CPUC is now taking a look at the prices that consumers pay to charge up their vehicles in their homes and at commercial facilities. This review kicked off at a forum earlier this month, starting a process that will be very important to watch, for consumers and the power system more broadly.

Forum presenters described how the prices that households and businesses pay for electricity are set through decades-old, complex regulatory processes overseen by state utility regulators. The recipe involves financial analyses, equity considerations, policy priorities and politics, which are all stirred and mixed until, voila, out comes a set of retail rates.

Economic principles are sometimes sprinkled in during the process, but are hard to discern in the final concoction. Most troubling, the process results in a wide gap between the prices that households pay for electricity and the cost to produce the electricity.

Hourly system marginal energy prices (2017).
The blue, yellow and green lines show the averages of the hourly prices across every day in 2017. Prices tend to follow shape of daily demand, net of renewable energy production, shown in red. SOURCE: CAISO, 2017 Annual Report on Market Issues & Performance

According to data reported in June by the California Independent System Operator (CAISO), wholesale electricity prices averaged a just $43 per megawatt-hour ($0.66 per gallon equivalent) in 2017. Nighttime prices were even lower, as shown below in a chart from the CAISO. That means southern California electric vehicle drivers were paying at least triple the cost of producing electricity.

Illuminating new research by Severin Borenstein and James Bushnell, presented at the Energy Institute’s 2018 POWER Conference analyzes the gap in detail across the entire US. They point out that a full comparison between wholesale and retail prices needs to also consider the environmental damage caused by power generation. California’s power plants are not very polluting, so this doesn’t add much to the wholesale costs. They emphasize that the analysis also needs to account for electricity that is lost during the electricity delivery process. These costs are important, but aren’t big enough to justify the existing large gap.

The gap is actually much larger than triple for many consumers. At the forum, we heard that an estimated three-quarters of electric vehicle owners haven’t even enrolled in a time-of-use rate that lets them pay lower prices at night. Instead they are on the standard residential pricing plan. For customers of the two largest utilities these standard plans charge between 25 and 28 cents per kilowatt-hour, that’s equivalent to $3.85 to $4.35 per gallon. It’s even more extreme in San Diego where households that use more than 130% of a baseline amount could be paying as much as 48 cents per kilowatt-hour or the equivalent of $7.42 per gallon. The low adoption of the less expensive time-of-use rate shows the downside of depending on optional rates.

How California Sets Rates

Why are retail prices so much higher than wholesale electricity prices? At least two reasons. First, the utilities collect a lot of revenue to pay for all of their costs. These include the costs to build, operate and maintain its infrastrastructure, interest to lenders and a rate of return to shareholders. The costs of state-mandated programs — such as energy efficiency, subsidies for low-income households, and some early investments that were made in new renewables technologies — are also significant in California.

Second, California’s policymakers have decided that for residential customers, virtually all of the revenue will be collected from each customer in proportion to their electricity use. The alternative would be to collect some of the revenue through a fixed monthly fee.

Many other services that households depend on such as garbage and recycling collection, home internet and streaming music take the opposite approach. Customers pay a fixed monthly fee for a certain size garbage bin or level of service, but aren’t charged per pound of garbage, per Gigabyte downloaded or per song listened to. Curiously, policymakers have taken the opposite approach for electricity.

Electric vehicles highlight the downside of the way California sets residential electricity rates. Households are paying far more to charge their vehicles at home than it costs to generate and deliver the incremental electricity, even when the additional pollution is priced in. This disconnect has the potential to slow electric vehicle adoption or, at the very least, raise the cost of meeting the state’s electric vehicle goals.

Closing the Gap

Broadly speaking there are two ways to close the gap between retail and wholesale prices. One is to lower the utilities’ revenue needs. The other is to restructure rates by increasing fixed monthly charges and lowering the amount collected for each kilowatt-hour consumed. Both would be difficult.

Any move to restructure rates will need to pay attention to distributional impacts and fairness. As prior Energy Institute analysis has shown, subsidies for electric vehicles are heavily skewed toward the wealthy. Regulators should keep these considerations in mind.

While challenging, rate reform could generate big returns for the state’s environment and economy. It’s encouraging that the CPUC is looking at this issue.


 

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