University of California Energy Institute

CSEM WP-173

Electricity Rate Structures and the Economics of Solar PV:
Could Mandatory Time-of-Use Rates Undermine
California’s Solar Photovoltaic Subsidies?

Severin Borenstein

Abstract:
In May 2007, a Los Angeles Times newspaper article reported that the California Solar Initiative (CSI), commonly called the “million solar roofs” program, was being hobbled by a requirement that recipients of the solar PV subsidies go on time-of-use (TOU) rates.  TOU rates charge higher prices for electricity at peak demand times (primarily weekday summer afternoons in California) and lower prices at off-peak times than the more common flat-rate tariff, which imposes the same price for a kilowatt-hour (kWh) of electricity at all times.  The LA Times story reported that orders for solar installations had dropped 78% since January 1, 2007 when the TOU-mandate went into effect for solar-rebate recipients.  By June, California regulators had eliminated the TOU mandate. I examine data from a sample of 274 medium- to high-use residential customers of Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) to see if the TOU mandate makes the solar rebate program less attractive financially. Among PG&E customers, I find that the vast majority would be better off on TOU than on a flat rate tariff.  For SCE customers, however, the effect of a switch to TOU is complicated by the fact that SCE’s flat rates are tiered (ie, increasing marginal electricity price with greater total level of monthly consumption), but its TOU rates are not.  Thus, even though solar PV production is greatest during TOU peak periods, many customers’ value from the system is maximized on a flat-rate tariff.  I then examine the overall economics of installing a solar PV system for these customers. The financial return to solar PV depends very much on how retail rates will change over the 20-30 year life of the panels, a very difficult path to predict.  If inflation-adjusted rates were to remain at current levels, however, I find that a solar PV installation might generate a positive financial return for up to half of PG&E’s medium- and high-consumption residential customers, but not for any of the SCE customers, regardless of whether they are on TOU or flat rates.  Together, these results suggest that the TOU mandate is unlikely to have been a significant cause of declining demand for solar PV installations.  Finally, returning to the claims in the newspaper article that demand for solar installations declined after January 1, 2007, an examination of California’s solar rebate databases indicates that there was a large dropoff in orders early in 2007, but it had already rebounded before public discussion of the repealing the TOU mandate even began.

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