Re: "...a customer who installs solar panels on her roof brings generation closer to demand and can produce some of her own electricity, reducing her energy bills. But she still needs to be connected to the grid for when the sun does not shine, and therefore should be contributing to the infrastructure costs."
Here is my most recent bill from Houston Texas:
Base charge: $14.95
Energy Purchased (1420 kWh x $0.127) $180.34
Energy Sent Back to the Grid (457 kWh x $0.127) -$58.04
Transmission and Distribution Utility charge: $61.77
TOTAL $199.02
So although my panels allowed me to generate and use 1580 kwH (not depicted on my bill) during the month and save additional expenses of $200.66, I am still paying to support the grid. I would never dream of using more energy if rates were lowered such that the fixed charges were even more significant. A penny saved is a penny earned. The easiest way to make a dollar is to save a dollar.
Here I am not completely convinced. Economics tells us that if you make something cheaper, people tend to consume more of it, and vice-versa. You might be an unusual economic agent in this respect. If you are right, however, your argument invalidates the entire case for carbon pricing, because raising the price of fossil fuels would have no impact on their consumption.
Your example of how you are paying to support the grid, on the other hand, is exactly as it should be.
This has been a recurring theme for you Marco! It's all very well to talk if renewable energy as the way forward but people really do not know the cost. Perhaps the best thing to do is to shift to bicycles and walk!
It would help Bobby, and not just to conserve energy. I keep harping on this theme not because I'm against renewables -- I love clean air and hate pollution. But if we keep telling people that free and ample energy is just around the corner while costs keeps rising, then we get an inevitable backlash.
Thank you Marco for this fair and informative post - I was not familiar with the situation in California. Indeed the grid is a major item for the transition, and as you say the starting point is further worsened by decades of underinvestment - as far as I'm aware that's the case in most countries, really. Improving the grid is going to be about one third of the total cost of the transition.
One thing though is important so that we get the framing right. Florida or the rest of the country has cheaper electricity prices given that it uses mostly fossil fuels for generation. But that just means that the negative externalities from burning ff are not in the price. As you and I have discussed many times here and elsewhere, carbon pricing is essential. Framed in this way, the fact that the nominal price of electricity in a ff-based system is below the price of a system with a relatively high share of renewables and that has some carbon pricing isn't terribly surprising: the economics becomes skewed without carbon pricing.
A final thought is on equity. It is clear we are talking about significant costs. These must be borne by the middle and high incomes.
Thanks Spyros. Your point on the need for carbon pricing is correct, and you know we agree on this. Lack of carbon pricing helps explain why the price level in Florida is lower than in California. It does not explain, however, why the increase in price was much steeper in California than in Florida. The opposite should have happened, as Florida's greater reliance on fossil fuels left it more exposed to the global shock to gas prices.
You have a good point also on who should bear the cost. The tricky thing here is...middle incomes is where the votes are...so let's see.
If you tie the costs to consumption instead of income, you can achieve your desire to associoate the costs to middle and high incomes without having to position it in such a way that incites class warfare. Assuming your rationale is that middle and high income citzens use more electricity than low income citizens, the transition will be paid for as you desire.
Makes sense Scott, but there are a couple of wrinkles that I would want to take a closer look at if I were a policymaker. First, in general a consumption tax is regressive: people with lower incomes spend a greater fraction of their income, so they suffer more; I suspect the same might be true for energy. Second, I would worry about the impact at the ballot box as the middle class suffers the impact of higher energy bills.
I reject the premise that lower income citizens spend more on electricity than the wealthy. My guess is that you will prove me wrong in an upcoming issue. If anything, some rates are geared so that as consumption increases, the cost per kWh increases. As a result, energy pigs pay through the nose. IMHO, the only progressive tax we should have is the income tax. Income tax can balance the scales. Eveything else should be equal even if some consider it regressive because of percentage of income. The additional income that the wealthy have is called "disposable income" for a reason.
Scott, I think we are arguing partly about semantics. In pedantic economics terminology, "disposable income" = income - taxes + subsidies and transfers. So it's the income you can choose how to spend, whether you are reach or poor. "Regressive" is a tax that eats a bigger percentage share of income at lower income levels than higher ones. Completely agree with you that a progressive income tax is the most effective way to achieve equity goals, or balance the scales as you put it.
Also agree that the wealthy spend more on electricity than the poor, in $ terms. But usually the opposite is true as % of income. To take an extreme example, an average blue collar workers will have to allocate a higher share of his income to electricity (and food, and gasoline, and mortgage payments) than the CEO of a Fortune 500, simply because the latter's disposable income is so much higher. So high inflation on food and energy tends to hurt the poor more than the rich. But as you point out, have electricity rates that ratchet up with consumption helps to address this problem - it mimics a progressive income tax. Bottomline is I think you and i have no major disagreements on this set of issues.
What I am trying to say is that the fact that a blue collar worker has to pay a higher percentage of his income for goods and services should not affect the prices of those goods and services. Everyone should pay the same amount for goods and services. My fear is that in the future I will have to pay more for my first kWh than a blue collar worker's first kWh because I have a decent 401K that the blue collar worker lacks. I don't think that's fair since the increased income taxes that non blue collar workers pay already addresses their wealth advanatge. This is in response to trying to make the wealthy pay more for the transition. I want to distribute the transition costs equally, regardless of income.
True about CA vs FLA price dynamics although it isn’t clear to me to what extent past underinvestment/legal claims contributed and to what extent factors related to renewables.
We agree on middle incomes being the “problem” in a political economy sense. Here in Germany when energy prices surged the oh-so-hawkish FinMin put in place a gasoline rebate - fabulous for middle class commuters with large SUVs.
Also, my post was not meant as an argument against the green transition. As I pointed out, a lot of investment is needed regardless of what fuels one chooses for generation. I just think it's important, from a macro perspective, to realize there are a number of factors that will most likely contribute to higher energy costs for a while. Eventually, renewables will provide cheaper energy, but the near-term picture is challenging. Since so many people stress renewables aa a cheap energy source, and since California is at the forefront of the transition, I wanted to highlight that you can put in place a lot of renewable generation and still find yourself paying twice as much for electricity. It does not mean you should not move ahead with the transition, but it does mean you need realistic expectations on energy costs.
Re: "...a customer who installs solar panels on her roof brings generation closer to demand and can produce some of her own electricity, reducing her energy bills. But she still needs to be connected to the grid for when the sun does not shine, and therefore should be contributing to the infrastructure costs."
Here is my most recent bill from Houston Texas:
Base charge: $14.95
Energy Purchased (1420 kWh x $0.127) $180.34
Energy Sent Back to the Grid (457 kWh x $0.127) -$58.04
Transmission and Distribution Utility charge: $61.77
TOTAL $199.02
So although my panels allowed me to generate and use 1580 kwH (not depicted on my bill) during the month and save additional expenses of $200.66, I am still paying to support the grid. I would never dream of using more energy if rates were lowered such that the fixed charges were even more significant. A penny saved is a penny earned. The easiest way to make a dollar is to save a dollar.
Here I am not completely convinced. Economics tells us that if you make something cheaper, people tend to consume more of it, and vice-versa. You might be an unusual economic agent in this respect. If you are right, however, your argument invalidates the entire case for carbon pricing, because raising the price of fossil fuels would have no impact on their consumption.
Your example of how you are paying to support the grid, on the other hand, is exactly as it should be.
This has been a recurring theme for you Marco! It's all very well to talk if renewable energy as the way forward but people really do not know the cost. Perhaps the best thing to do is to shift to bicycles and walk!
It would help Bobby, and not just to conserve energy. I keep harping on this theme not because I'm against renewables -- I love clean air and hate pollution. But if we keep telling people that free and ample energy is just around the corner while costs keeps rising, then we get an inevitable backlash.
Thank you Marco for this fair and informative post - I was not familiar with the situation in California. Indeed the grid is a major item for the transition, and as you say the starting point is further worsened by decades of underinvestment - as far as I'm aware that's the case in most countries, really. Improving the grid is going to be about one third of the total cost of the transition.
One thing though is important so that we get the framing right. Florida or the rest of the country has cheaper electricity prices given that it uses mostly fossil fuels for generation. But that just means that the negative externalities from burning ff are not in the price. As you and I have discussed many times here and elsewhere, carbon pricing is essential. Framed in this way, the fact that the nominal price of electricity in a ff-based system is below the price of a system with a relatively high share of renewables and that has some carbon pricing isn't terribly surprising: the economics becomes skewed without carbon pricing.
A final thought is on equity. It is clear we are talking about significant costs. These must be borne by the middle and high incomes.
Thanks Spyros. Your point on the need for carbon pricing is correct, and you know we agree on this. Lack of carbon pricing helps explain why the price level in Florida is lower than in California. It does not explain, however, why the increase in price was much steeper in California than in Florida. The opposite should have happened, as Florida's greater reliance on fossil fuels left it more exposed to the global shock to gas prices.
You have a good point also on who should bear the cost. The tricky thing here is...middle incomes is where the votes are...so let's see.
If you tie the costs to consumption instead of income, you can achieve your desire to associoate the costs to middle and high incomes without having to position it in such a way that incites class warfare. Assuming your rationale is that middle and high income citzens use more electricity than low income citizens, the transition will be paid for as you desire.
Makes sense Scott, but there are a couple of wrinkles that I would want to take a closer look at if I were a policymaker. First, in general a consumption tax is regressive: people with lower incomes spend a greater fraction of their income, so they suffer more; I suspect the same might be true for energy. Second, I would worry about the impact at the ballot box as the middle class suffers the impact of higher energy bills.
I reject the premise that lower income citizens spend more on electricity than the wealthy. My guess is that you will prove me wrong in an upcoming issue. If anything, some rates are geared so that as consumption increases, the cost per kWh increases. As a result, energy pigs pay through the nose. IMHO, the only progressive tax we should have is the income tax. Income tax can balance the scales. Eveything else should be equal even if some consider it regressive because of percentage of income. The additional income that the wealthy have is called "disposable income" for a reason.
Scott, I think we are arguing partly about semantics. In pedantic economics terminology, "disposable income" = income - taxes + subsidies and transfers. So it's the income you can choose how to spend, whether you are reach or poor. "Regressive" is a tax that eats a bigger percentage share of income at lower income levels than higher ones. Completely agree with you that a progressive income tax is the most effective way to achieve equity goals, or balance the scales as you put it.
Also agree that the wealthy spend more on electricity than the poor, in $ terms. But usually the opposite is true as % of income. To take an extreme example, an average blue collar workers will have to allocate a higher share of his income to electricity (and food, and gasoline, and mortgage payments) than the CEO of a Fortune 500, simply because the latter's disposable income is so much higher. So high inflation on food and energy tends to hurt the poor more than the rich. But as you point out, have electricity rates that ratchet up with consumption helps to address this problem - it mimics a progressive income tax. Bottomline is I think you and i have no major disagreements on this set of issues.
What I am trying to say is that the fact that a blue collar worker has to pay a higher percentage of his income for goods and services should not affect the prices of those goods and services. Everyone should pay the same amount for goods and services. My fear is that in the future I will have to pay more for my first kWh than a blue collar worker's first kWh because I have a decent 401K that the blue collar worker lacks. I don't think that's fair since the increased income taxes that non blue collar workers pay already addresses their wealth advanatge. This is in response to trying to make the wealthy pay more for the transition. I want to distribute the transition costs equally, regardless of income.
True about CA vs FLA price dynamics although it isn’t clear to me to what extent past underinvestment/legal claims contributed and to what extent factors related to renewables.
We agree on middle incomes being the “problem” in a political economy sense. Here in Germany when energy prices surged the oh-so-hawkish FinMin put in place a gasoline rebate - fabulous for middle class commuters with large SUVs.
:). indeed...
Also, my post was not meant as an argument against the green transition. As I pointed out, a lot of investment is needed regardless of what fuels one chooses for generation. I just think it's important, from a macro perspective, to realize there are a number of factors that will most likely contribute to higher energy costs for a while. Eventually, renewables will provide cheaper energy, but the near-term picture is challenging. Since so many people stress renewables aa a cheap energy source, and since California is at the forefront of the transition, I wanted to highlight that you can put in place a lot of renewable generation and still find yourself paying twice as much for electricity. It does not mean you should not move ahead with the transition, but it does mean you need realistic expectations on energy costs.