State electricity rates add $600 per year to the cost of an electric vehicle.
Forgive the obvious, but if you want to sell a new product, make it affordable. Electricity isn’t new, but the effort to electrify much of our world — essential to decarbonization — is. In order to convince people of mediocre means to swap their petrol car for a battery-operated car, for example, it is not only necessary to make electric vehicles affordable, but also the electricity to charge them.
But California, at the forefront of net-zero, which recently announced a ban on the sale of new gas-guzzlers by 2035, isn’t making it easy. The state not only has the second highest average residential electricity rates in the US, but also the most regressive.
Severin Borenstein, Meredith Fowlie and James Sallee of UC Berkeley’s Energy Institute in Haas just published an analysis of detailed billing data for more than 11 million California households, in partnership with Next 10, a nonprofit. They found that electricity rates there are two to three times the ‘social marginal cost’. That is the actual cost to the utility of producing and delivering an extra kilowatt hour of electricity to an existing customer, including the assumed social costs of emissions. These were modeled at about 8-9 cents per kilowatt hour in 2019 compared to an average state housing rate of 19 cents.
Most electricity bills consist of a fixed amount and an amount that varies according to the electricity consumption. In theory, the fixed rate covers costs that do not change regardless of use, such as installing and maintaining the grid. In practice, all utilities recover part of their fixed costs through this variable fee. This is always a mismatch because fixed costs are fixed no matter how long you leave the lights on.
The distortion is greater in California for two reasons. First, monthly bills there have the lowest fixed costs in the US, meaning more fixed costs are included in the variable price. Second, the variable price also includes other costs that are not related to the cost of providing additional electricity, such as financing compensation for victims of wildfires or easing the burden of high electricity prices on poor residents (remember the latter ).
The extra costs are an effective tax on electricity, in that they drive up costs and thereby deter consumption. The economists at UC Berkeley estimate that this “tax” adds an average of about $600 to the annual operating cost of an electric vehicle in California. To put that into perspective, that costs about a quarter of the money saved by not buying gas for a regular car and instead investing in a Tesla Inc. car or Hyundai Motor Co. EVs. or Ford Motor Co. adds $600 in annual costs for households switching to electric heating from gas, even as the state takes steps to ban gas-fired heating and water heaters by 2030.
In addition, these costs hit California’s poorest households harder, the analysis shows, representing 2-3% of annual income for households on the lower end of the scale, versus less than 1% for those earning $200,000 or more. This disparity is exacerbated by the greater prevalence of solar panels on the roofs of wealthier households, as it reduces the amount of electricity they get from the grid.
Socializing costs through electricity prices is embedded in California’s DNA. Exhibit A: The state’s idiosyncratic “reverse sentencing” laws that pass the costs of grid-related fires through bills regardless of a utility’s actual debt. But driving up the cost of incremental power in this way reduces demand, regressively. Possible solutions include higher fixed costs associated with household income and shifting some state-level costs, such as for energy efficiency programs or wildfire mitigation programs, to general taxes. Without such reform, California risks praising its own citizens of the future that the lawmakers want to create.
Liam Denning is a Bloomberg Opinion columnist on energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’ Lex column.