Solving California’s energy affordability crisis can help the whole nation

Ric O’Connell is executive director of GridLab, and Michael O’Boyle is senior director for policy and strategy at Energy Innovation.

Rising electricity bills are crushing customers and household budgets — and America’s energy affordability crisis is most acute in California.

The state's prices are now double the national average and the second highest in the country. It’s no wonder 80% of Californians say lowering utility bills should be a top priority for lawmakers.

The impact of California’s expensive electricity bills extends beyond families and businesses. Confusion and misinformation about what’s causing the problem threatens electrification as an affordability strategy. While clean energy policies are not the cause of bill increases, California’s inability to bring bills under control has become catnip for fossil fuel interests.

Gubernatorial candidate Xavier Becerra, currently leading in statewide polling, responded by proposing a rate freeze and two hours of free power mid-day when solar power is highest. These moves would certainly bring welcome relief, however, they won’t ultimately solve the underlying problems.

Confronting California’s affordability crisis requires going beyond temporary bill relief to solve the underlying regulatory, financial and operational factors driving electricity costs. Pressure can create diamonds – and the state’s government officials should see this crisis as an opportunity to protect its consumers and lead the country on lasting bill reduction policies.

California needs lasting affordability solutions

California’s wildfire situation is uniquely difficult. But the other underlying reasons bills keep rising in California mirror problems found around the country: utility capital bias, falling grid utilization, regulatory complexity, overall inflation, inequitable rate design and growing climate change risk.

One of the primary drivers of rising grid costs in California has been distribution costs — now the largest part of consumer bills. These doubled over the last two decades, skyrocketing in 2019 after catastrophic wildfires triggered massive utility spending to reduce future fire risk. Transmission expenditures tripled over the same time period, though transmission still only represents about 10 percent of the bill. Generation costs increased less dramatically – about 40% over 10 years.

When compared to other states, California’s cost trends are similar, only magnified. Comparable utilities in other states have seen increased distribution and transmission costs over the same period. However, wildfire expenditures have caused California investor-owned utility (IOU) distribution costs to rapidly outpace most of their peers since 2019.

So how do we fix this?

GridLab and Energy Innovation started by convening more than 20 California power sector experts to identify actionable policy solutions that address the scale of the challenge. We turned those lessons into a policy roadmap to first stabilize and then reduce electricity rates for California’s incoming governor, the California Public Utilities Commission, the state’s legislature and utilities, so California can sustain its clean energy leadership.

Simplifying regulation isn’t simple

Talk to any public utilities commissioner or staffer and you’ll hear a familiar refrain: They are stretched thin. Rapid technological change makes regulators’ core job – ensuring just and reasonable rates – increasingly complex.

For example, storage and other customer resources increase pressure on the utility business model and regulators to adapt. Data center demands add burdens on processes for interconnection, planning and cost allocation.

But regulatory complexity has become extreme in California. Attempts to embrace emerging technology and best practices is layered atop PUC mandates to oversee research programs, public purpose programs, specific technology implementation, increasingly complex resource planning, transportation electrification, and wildfire planning and cost oversight. Each requires developing new skills and fractures agency attention.

Meanwhile, the costs driving up rates keep getting harder to wrangle into coherent cost-of-service regulation to improve affordability. Despite efforts to improve cost transparency, the proliferation of “tracking accounts” and single-issue rate applications place much of the expenses overseen by the CPUC into separately adjudicated proceedings, making it harder for ratepayer advocates and staff to track spending. UC Berkeley’s Center for Law, Energy and Environment reports these accounts increased from $86 million in 2018 to $2.4 billion in 2024.

Effective regulatory systems depend on accessibility and transparency for regulators and other intervenors, particularly consumer advocates, to contribute. Complexity creates high barriers to entry. California can unify its fragmented cost oversight apparatus, if regulators have space to make reforms, while the legislature examines what it can do to simplify the CPUC’s mission and structure.

Modernizing electricity rates

California can also find ways to modernize electricity prices. The state’s volumetric rates mean cost increases make consuming additional power more expensive, with the biggest burden falling on low-income customers. California’s IOUs also don’t give customers much control over their costs – time-of-use rates only provide modest savings for our most astute penny pinchers.

Legacy net energy metering policies further limit the tools to collect growing costs from all customers. Many solar customers can nearly zero-out their bills even though they are still dependent on the grid. Fixed charges are one way around this, and California has pioneered scaling these by income to equitably allocate costs among residential customers. Higher fixed charges would reduce volumetric charges, which increase savings when people upgrade to electric vehicles and heat pumps.

Changing how California pays for wildfire mitigation can stop spiraling rate increases. Utility wildfires and the damages they cause are preventable through investment, but there are other ways to pay other than rates that don’t place such a large burden on people who can least afford it, and who aren’t responsible for the fires, droughts or ignitions.

California already passed legislation to allow low-cost utility financing of wildfire costs through securitization, but this was a drop in the bucket for long-term costs. This can be expanded, as utilities should not earn twice on investments that also lower their cost of capital.

Taxpayers can cover large one-time expenditures that benefit the entire state. This also helps homeowners who can’t afford insurance: State support for local hardening can bring those insurance costs under control, further improving affordability.

Put utilities on a budget to improve system efficiency

Upgrading the grid and adapting to grid stress costs money, but how can consumers trust that utilities have their interests in mind when their incentive is to spend more? Utilities have a capital bias, but realigning these incentives toward the most affordable service is a major long-term project.

To regain public trust, California must put utilities on a budget, promoting higher returns when service and affordability improve, while restricting excess profits when these are not achieved.

This also aligns utilities with customers who want more control over their energy costs and usage. Like most of the country, California’s grid utilization has fallen, now around 48% from a high of about 60%. Using the existing grid more efficiently through customer flexibility can reduce system costs and avoid unnecessary investment. Leveraging flexible grid connections can attract new large customers that should also improve system utilization.

A new governor and state legislature provide fresh opportunities to first slow down the spiraling rate increases, then cut them over time. It's time for California to solve its affordability crisis and start leading the nation, once again