The government’s electricity tariff adds $600 annually to the cost of operating an electric vehicle.
Forgive the truism, but if you want to sell a new product, keep it on hand. Electricity isn’t new, but the effort to electrify a large part of our world—necessary for decarbonization—is. Convincing people of the medium means, for example, that replacing their gasoline-powered car with a battery-powered one requires not only making electric cars more affordable but also electricity to charge them.
However, California, at the forefront of net zero, which recently announced a ban on gas-guzzling new gas sales by 2035, isn’t making it easy. The state sports not only the second-highest average residential electricity tariff in the United States, but also the lowest.
Severin Borenstein, Meredith Fowlie and James Sallee of the University of California, Berkeley’s Energy Institute in Haas have published an analysis of detailed billing data for more than 11 million California households, in partnership with Next 10, a nonprofit organization. They found that the electricity tariff there is two to three times the “social marginal cost”. This is the actual cost of facilities to produce and deliver an additional kilowatt-hour of electricity to an existing customer, including the assumed social cost of emissions. They are designed at around 8-9 cents per kilowatt-hour in 2019 compared to the state’s average residential tariff of 19 cents.
Most electricity bills consist of a flat fee and a fee that varies depending on the amount of electricity we use. In theory, a fixed fee covers costs that do not change regardless of use, such as building and maintaining the network. Practically all utilities recover some of their fixed costs through those variable fees. This is always a mismatch since fixed costs are fixed, no matter how long you leave the lights on.
Distortion is greater in California for two reasons. First, the monthly bills there are among the lowest in the US, which means that more fixed costs are placed within the variable rate. Second, the variable rate also includes other fees that are not related to the cost of providing additional electricity, such as funding to compensate bushfire victims or easing the burden of high energy prices on poorer residents (think of that last for a minute).
Additional costs are an effective tax on electricity, meaning that they inflate the cost and thus prevent consumption. Economists at UC Berkeley estimate that this “tax” adds about $600 to the annual operating cost of an electric vehicle in California, on average. To put that into perspective, this takes up roughly a quarter of the money saved by not buying gasoline for a regular car and instead investing in a Tesla Inc. Or EVs from the likes of Hyundai Motor Co. or Ford Motor Co. It adds $600 in annual costs for households switching to electric heating from gas, even as the state moves to ban gas heating and boilers by 2030.
Furthermore, these fees hit poorer California households, the analysis found, equating to 2-3% of the annual income of households at the bottom of the scale versus less than 1% for those earning $200,000 or more. This disparity is exacerbated by the high prevalence of solar panels on the rooftops of wealthier homes, as they reduce the amount of electricity they draw from the grid.
The costs of socializing through electricity prices are an integral part of California’s DNA. Figure A: Twisted state “reverse conviction” laws that channel network-related fire costs across billing regardless of the facility’s actual liability. However, inflating the cost of increased energy consumption in this way limits demand, and leads to a decline in that demand. Potential solutions include higher flat fees linked to household income and the transfer of some state-level costs, such as energy efficiency programs or forest fire mitigation, to general taxes. In the absence of such reform, California risks pricing its citizens out of the future that lawmakers seek.
Liam Denning is a columnist for Bloomberg Opinion covering energy and commodities. A former investment banker, he was the editor of the Wall Street Journal Heard and a reporter for the Financial Times’ Lex column.
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