Since 2021, California utility rate hikes have outpaced inflation, significantly impacting residential customers with higher-than-average rates. As Californians grapple with escalating utility costs, a trend that is expected to increase further in the near term, the California Public Utilities Commission (CPUC) is actively addressing the drivers behind these rising energy costs to fulfill their core mission: “to empower California through access to safe, clean, and affordable utility services and infrastructure”.
Consequently, in May 2023, the CPUC released Senate Bill 695, outlining measures to limit utility costs and rate increases over the next year for Investor-Owned Utilities (IOUs) in line with the state’s energy and environmental goals. Since 2013, the increases in the bundled system average rates (SAR) of PG&E and SDG&E have been outpacing inflation, and since 2021, SCE rate increases have started to follow a similar trend.
This upward trend is expected to continue. Looking at the bundled residential average rates (RAR), the average rates are forecasted to increase annually from the first quarter of 2023 to the last quarter of 2026 as follows: PG&E: +10.4% ; SCE: +6% ; SDG&E: +10.4%
While residential rates are anticipated to rise, a similar trend is also expected in the other customer class rate schedules based on the past historical trend.
This blog post will dive into why these utility price increases are happening and what Commercial and Industrial (C&I) businesses can do to shield themselves from volatile energy costs and protect their bottom line.
Why Are These Price Hikes Happening?
The root causes of these energy cost increases are multifaceted, stemming from climate change intensifying the frequency of severe weather events and extreme temperatures, leading to a higher risk of wildfires, geopolitical events, and limited storage options as the grid decarbonizes with intermittent renewables. The following summarizes key points from Senate Bill 695 regarding reasons for the projected rise in electricity and natural gas rates and costs.
Wildfire Risk Reduction and Risk Mitigation Spending Expected to Increase Electricity Rates through 2026
As the climate crisis worsens and record-breaking wildfires continue to burn through California, wildfire risk mitigation spending for large electric IOUs is projected to reach $26.2 billion from 2023-2025, compared to $20.7 billion from 2020-2022 (as outlined in their Wildfire Mitigation Plan). This budget includes expenses related to vegetation management, wildfire liability insurance coverage, and future capital expenditures for wildfire mitigation.
The operating expense and capital costs for these risk management spending need to be recovered through the rates as part of the IOUs’s revenue requirements. Operating expenses are recovered entirely while capital-related costs are depreciated over a period of time, allowing to earn a rate of return.
Today, the fixed costs are entirely recovered through the volumetric rates, ie, pay for what you use. However, not all fixed costs can be correlated to energy consumption by the end user. CPUC is addressing this fixed cost allocation challenge.
In the future, wildfire mitigation capital expenditure, such as installing covered conductors or underground portions of a distribution system, may also become a primary driver in electricity rate hikes as this capital is part of their total rate revenue requirement. For example, in 2022, the wildfire-related portion of the total revenue requirement for each utility was substantial, with PG&E at 23%, SCE at 12%, and SDG&E at 9%.
Natural Gas Rates Projected to Increase Due to Escalating Safety-Related Program Costs and High Commodity Prices
The future scenario is similar for natural gas, with utility prices also projected to rise in the near term. Volatile commodity prices, high maintenance and safety costs, and geopolitical events have led to a considerable spike in natural gas costs since 2020. At the end of 2022, wholesale natural gas prices skyrocketed due to increased U.S. exports of liquified natural gas (LNG), below-average winter temperatures, interstate transmission pipeline outages, and limited storage options in Southern California, causing an early-season drawdown of gas storage inventory.
In 2023, utility revenue requirements in rates increased by 2.7% for PG&E, 0.5% for SDG&E, and 2.5% for SoCalGas, compared to the previous year, to further enhance the safety and reliability of natural gas infrastructure (i.e., transmission pipelines, storage facilities, and distribution mains). Additionally, as California continues its efforts to decarbonize the grid, thus leading to reduced natural gas usage, there is also added pressure on natural gas transportation rates.
How EaaS Solar and Storage from GreenStruxure® Can Help
As the CPUC strategizes on how to keep utility prices low, take matters into your own hands with Energy as a Service (EaaS) Solar and Storage. By locking in rates for 20-25 years, businesses can achieve energy independence, greenhouse gas (GHG) reduction goals, and financial stability with predictable utility costs. EaaS is an outcomes-based contract. As the energy service provider, GreenStruxure® handles everything from project management, financing, engineering, construction, operations, and maintenance in exchange for a monthly EaaS fee. This fee payment starts once you receive the energy supply and services. This strategic solution eliminates the need for upfront capital or debt and frees up additional human resources so you can focus on your core business.
In this challenging landscape, be one step ahead with EaaS Solar and Storage to take control of your energy future and be proactive against the uncertainties of utility price fluctuations. Contact GreenStruxure today to explore how Energy as a Service can align with your business needs and keep your energy expenses in check for the foreseeable future.