household solar energyFalling solar energy costs and non-competitive pricing threatens PG&E’s future.

"We're an energy company. We install solar systems for free, and we sell the electricity at a lower rate than you can buy it from the utility. So given the option of paying more for dirty power or paying less for clean power, what would you take?" – Lyndon Rive, CEO, SolarCity

Make no mistake about it, solar competes with utilities for sales at the point of use. The customer decides, do I buy from the utility or from a solar company? SolarCity is clear about the competition.

Pacific Gas and Electric (PG&E) serves most of northern California, except for the sparsely populated Oregon border, the northern part of the Nevada border, small areas served by municipal utilities and the large municipal utility around Sacramento. It is the seventh largest investor-owned electric utility by market value, and number one in terms of number of retail customers.

PG&E’s marginal prices cannot compete with solar. Large residential customers pay 31¢-35¢/kWh, the same prices that cause the solar revolutions in Hawaii and Australia. Even worse, according to PG&E, “By 2022, PG&E’s top residential rate could reach 54 cents." Residential customers represent about 40% of PG&E’s retail electric revenue.

Commercial customers experience high rates too. Unlike residential customers, who need a commercial third party to own the solar panels to take advantage of the accelerated depreciation, commercial customers can keep that advantage for themselves, making solar more financially attractive. Commercial customers represent about 46% of PG&E’s retail electric revenue.

In addition to these high marginal prices, under state law PG&E has a net metering program. This program allows the customer to carry over kWh credits in perpetuity, or to get cashed out for any excess once every 12 months based on average wholesale prices for the hours 7a – 5p.

PG&E cannot even fix its problem even though their marginal prices do not reflect their costs, which on average are much lower. PG&E has an increasing block rate structure (each block of consumption is priced higher than the one before.) A state law, passed several years ago, limits rate increases for the lowest two blocks, so that most costs associated with a rate increase go to the top two blocks. It also effectively prohibits fixed customer charges even though most of the cost of the distribution system is a fixed cost that does not vary with volume.

The state law does not recognize that electricity is no longer a monopoly. Once there are alternatives to a product, how you price really matters to your competitive position. Worse, once customers go solar, PG&E loses the sales forever, exacerbating the smaller sales / higher price cycle.

It is unlikely that any changes will be made to address these problems in the time frame needed. By the time things become so bad that legislators need to do something to change the law, it will be too late. Residential rooftop solar net installed unit costs will continue to fall by about 10% per year until they meet DOE’s 2020 SunShot goal of $1.50/Wp. Depending on return requirement assumptions, this works out to 10-15¢/kWh in San Francisco, far below PG&E’s marginal prices and on par with its current average costs of 15¢/kWh.

There is nowhere else in the U.S. with the same confluence of events: High and rising marginal prices, good sunshine, and inability to respond to changed competitive circumstances. If ever an electric utility was set up to fall to solar, it is PG&E.