Understanding Electrification and Downward Pressure on Rates

California is at a turning point in its energy transition. The state has set ambitious goals to reduce carbon emissions, including widespread electrification of buildings and transportation. These efforts will significantly increase electricity demand over the coming decades, requiring substantial investments in the grid to support the transition.

A key concern is whether these necessary grid upgrades will lead to even higher electricity rates for Californians, who are already burdened with some of the highest rates in the country. The Public Advocates Office has analyzed this issue and found that, under the right conditions, electrification can actually help mitigate rate increases by spreading infrastructure costs across more customers and electricity sales – creating downward pressure on rates.

In 2023, we forecasted the costs of upgrading the distribution grids of California’s large investor-owned utilities (IOUs) through 2035 and compared them to expected increases in electricity sales. Our findings, outlined in the Distribution Grid Electrification Model Report, show that increased electricity usage could offset grid upgrade costs, potentially lowering the rates customer would otherwise pay. Since then, “downward pressure on rates” has become a central concept in discussions about electrification and grid investments.

Before diving into how this works, let’s clarify what we mean by “downward pressure on rates.”

What is Downward Pressure on Rates?

Downward pressure on rates does not mean rates will necessarily decrease. External factors like wildfire mitigation costs or inflation could still drive rates up. Instead, downward pressure on rates means that, all other things being equal, rates would be lower than they would have been without this additional benefit.

The concept hinges on how utility capital costs – such as infrastructure costs to upgrade the grid – are shared. Here is a simplified example:

Example A: A grid costs 12 units and serves two customers. Each customer pays 6 units worth of the grid costs.

Example B: As electrification occurs, another customer is added without expanding the grid.  Each customer now pays only 4 units, reducing costs for everyone.

Example C: Now, suppose that instead of the situation in Example B, in order to connect the third customer, more grid has to be built. This will cost an additional 3 units, bringing the total cost to 15 units. While this increases the grid’s cost, each customer still benefits by only paying only 5 units.

As can be seen, the key driver of downward pressures is increased utilization of the grid. Adding the additional customer (adding load) has reduced the fraction of fixed costs that every customer must bear. While the optimal outcome is Example B – where new load is added without having to increase the size of the grid - Example C also represents a win for ratepayers compared to Example A because the benefit to all ratepayers of the additional load outweighs the costs of expanding the grid to support the new load.

What Could Prevent Downward Pressure on Rates?

Not all electrification scenarios result in downward pressure on rates. Consider Example D:

Starting from the same grid setup as Example A, connecting a third customer requires a disproportionate 9 units of additional infrastructure, bringing the total cost to 21 units. Each customer now pays 7 units – more than in Example A.

This situation results in upwards pressure on rates.

Our 2023 Distribution Grid Electrification Model report outlined several factors that could hinder the achievement of downward pressure on rates. These challenges primarily stem from costs to support new load being higher than necessary, as illustrated in Example D. For instance:

• Overbuilt Infrastructure: Utilities constructing unnecessary grid infrastructure or building grid infrastructure in suboptimal locations.
• Peak Load Increases: Should new loads, such as EVs, charge primarily during peak times, it could require costly upgrades to manage higher demand.
• Program Costs: Expenses for additional electrification programs, such as new EV charging infrastructure, being passed to ratepayers.

• Unrealized Load Growth: Investments made for anticipated load that doesn’t materialize, leaving ratepayers to cover stranded costs.

Other cost drivers include increased costs for rooftop solar incentives, transmission, and wildfire mitigation.

How Can We Ensure Downward Pressure on Rates?

If we want to achieve downward pressure on rates, we need to focus on strategies that enhance the utilization of the grid and minimize unnecessary costs.  For instance:

• Strategic Siting: Encouraging electric vehicle (EV) charging stations in areas where there is surplus grid capacity.
• Load Management: Promoting off-peak charging or other practices to avoid increasing peak demand, which can drive up grid upgrade costs.

By aligning new load with existing grid capabilities and managing usage patterns, we can optimize grid expansion and reduce costs for ratepayers.

Conclusion: Why Smart Electrification Planning Matters

Downward pressure on rates is achievable when the cost of upgrading the grid is outweighed by the benefits of adding new load. In this discussion, we have specifically focused on how distribution grid upgrades and load growth can contribute to this outcome by increasing grid utilization, minimizing unnecessary infrastructure costs, and carefully managing new load patterns.

However, downward pressure on rates is a broader concept that extends beyond distribution upgrades and electrification. Other strategies, such as improving utility cost controls, reducing wildfire mitigation expenses, and addressing inefficiencies in energy programs, also play a role in keeping rates lower than they would otherwise be. (To read more about our policy recommendations on addressing rising electricity rates, please see our policy memo here.)

Electrification is a cornerstone of California’s climate and energy goals and ensuring that it benefits ratepayers requires thoughtful planning and execution. By aligning distribution grid investments with actual needs and optimizing grid use, California can make progress on electrification while keeping rates as low as possible.