Small-scale solar power, also known as rooftop or distributed solar, has grown considerably in the U.S. over the past decade. It provides electricity without emitting air pollutants or climate-warming greenhouse gases, and it meets local energy demand without requiring costly investments in transmission and distribution systems.

However, its expansion is making it harder for electric utilities and power grid managers to design fair and efficient retail electricity rates – the prices that households pay.

Under traditional electricity pricing, customers pay one charge per kilowatt-hour of electricity consumption that covers both the energy they use and the fixed costs of maintaining the grid. As more people adopt rooftop solar, they buy less energy from the grid. Fewer customers are left to shoulder utilities’ fixed costs, potentially making power more expensive for everyone.

This trend can drive more customers to leave the system and raise prices further – a scenario known as the utility death spiral. One 2018 study calculated that two-thirds of recent electricity distribution cost increases at California’s three investor-owned utilities were associated with the growth of residential solar.

With abundant sun and solar-friendly policies, California has 36% of U.S. small-scale solar capacity, much more than any other state. And the state is engaged in a heated debate over pricing electricity in ways designed to make energy less expensive for low-income households.

We study energy markets and public policy affecting energy and the environment, and have analyzed various retail electricity rate structures and their economic impacts on power producers and consumers. Our key finding is that an income-based, fixed-charge rate structure of the type that California is currently considering offers the most efficient and equitable solution – if it is designed correctly.

The debate over fixed charges began in 2022, when the California Legislature enacted an energy bill that ordered state regulators to study income-based fixed charges and decide whether to adopt them by July 1, 2024. Then the state’s three largest utilities – Southern California Edison, Pacific Gas and Electric, and San Diego Gas & Electric – submitted a proposal to the state Public Utilities Commission in mid-2023 that would separate retail bills into two parts: a fixed charge and a variable charge.

The fixed charge would be a preset monthly fee, independent of energy usage but tied to income levels, so wealthier customers would pay a larger share of grid maintenance costs. The variable charge would be based on the amount of electricity consumed and would cover the actual costs of electricity production and delivery.

Historically, these actual costs have typically ranged between 4 to 6 cents per kilowatt-hour. Today, the average residential rate in California often exceeds 30 cents per kilowatt-hour because it covers fixed costs as well as electricity use.

A two-part billing system that separates fixed costs from variable usage charges offers potential benefits for both consumers and utilities.

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