Gavin Needs to Take Charge of His Public Utilities Commission

March 20, 2024

Climate change is among the most dangerous threats facing humanity and future generations, and time is running out. In August 2022, the federal government passed the Inflation Reduction Act (IRA) as a tool to meet the United States’ obligations to lower global emissions and fight climate change. Early indications show that the public is embracing the IRA: twice as much clean energy is now expected to be installed than before its creation. The legislation was working… until late November of last year, when five appointees of Governor Gavin Newsom on the California Public Utilities Commission (CPUC) unanimously voted to essentially destroy critical rooftop solar energy incentives provided by the law.

By undermining the Inflation Reduction Act, the Commission both crippled the ability for California to meet its climate goals and increased the cost of energy for many Californians. The mechanism for this dismantling is simple: force operators of solar power systems to sell their own solar-generated power to utility monopolies like PG&E at low rates, and force customers to buy back the very same power at much higher rates – around seven times higher, in fact. The California Public Utilities Commission decision cements a form of reverse arbitrage for consumers that solely benefits for-profit utility companies, and is shrouded behind a veil of consumer protection claims. In reality, the ruling comes down to intense lobbying efforts from the power companies with financial incentive to sabotage the necessary rise of solar energy, who posit that solar power systems drive up electricity prices for low-income demographics that cannot afford to install their own solar power systems. These same power companies, however, only seem concerned about electricity rates for consumers when faced with existential competition from solar, as PG&E was granted a 13% electricity rate hike from the California Public Utilities Commission on the very same day as the vote to destroy solar. This rate increase represents only half of the 26% increase that was requested by PG&E, making even more apparent that lobbying against solar is nothing more than a protectionist move to shield an aging business model from the impending danger posed by technological advancement. Regardless of PG&E saying one thing and doing another, the claim by utility companies that solar drives up energy rates is widely disputed by many environmentalists and advocate groups, and ultimately misses the point. The California Public Utilities Commission vote to gut solar incentives is completely antithetical to the decarbonization efforts of the Inflation Reduction Act, and fails to grasp an opportunity to refine the relationship between utility companies and solar power in a way that is equitable for both the underprivileged and the environment

Many pieces discussing this ruling will focus on the fact that disincentivizing the installation and use of solar energy systems, which already generate ~11% of California’s electricity and help alleviate a dependency on fossil fuels, will have an adverse impact on the environment. Unfortunately, the decision of Newsom’s appointees have further-reaching consequences and bleed into another matter paramount to the well-being of California and its citizens: affordable housing.

Riaz Capital is a Bay Area developer dedicated to fighting the housing crisis by building for the “missing middle” – moderate-to-low-income working professionals that represent the largest overlooked demographic impacted by the housing crisis. Soon after the codification of the Inflation Reduction Act, the company formulated an innovative structure utilizing the solar energy provisions of the legislation: install a distributed solar system across a portfolio of 23 multifamily buildings that will produce 3.4 million kilowatt hours annually, offset almost 90% of the energy usage at the properties, and sell back the generated power at a discount to over 1,500 tenants. The majority of these tenants are considered low-income, meaning they make less than 80% of Area Median Income (below $78,550 for a one-member household in Alameda County as of 2023). A discount program that provides over $476k in total discounts over the first five years would be a meaningful financial benefit for an already underserved community. For a given qualifying low-income resident, this discount would provide over $600 in energy savings over five years, as illustrated by the table below:

There is a baseline 30% tax credit to offset the cost of installing these clean energy solar systems. However, simply being located in a low-income census tract provides the installer with a 10% booster over this baseline. Installing solar panels on a multifamily building with a low-income tenant composition and offering discounted power to these tenants grants a 20% booster over this baseline. The fact that there is an additional bonus for serving underprivileged communities, and that the highest bonus available is specifically geared towards low-income housing, indicates that aiding this population is the highest priority of the law, in this regard. The Inflation Reduction Act, if used as intended, is already accounting for what the California Public Utilities Commission claims they are trying to protect with their decision.

Acting as an early adopter, Riaz Capital spent over a year creating a framework that is easily replicated by other affordable housing owners, industrial operators, or anyone else that wants to adopt solar energy. There is nothing within this framework that cannot be done by others: it entails partnering with an existing solar installation company, financing the working capital with a bank, and structuring a sale-leaseback of the solar systems such that minimal capital is tied up in the system, once operating. Further, Riaz Capital hired a technology partner, Ivy Energy, to accurately allocate the energy usage between common area meters and individual resident meters. This is a template, simply leveraging the Inflation Reduction Act and other readily available infrastructure, to decarbonize apartment buildings in low-income communities. It is equitable to the environment and to tenants of low income housing. It is also, now, no longer possible.

Essentially, the ruling from Newsom’s appointees established that for solar systems installed before February 2024, operators of both residential and commercial buildings would be paid full retail rates for nine years for the power generated by their systems. After this nine-year timeline, operators are forced to sell the power their systems generate at steeply reduced wholesale rates, and buy back the exact same power for use at full retail rates. For solar systems installed after February 2024, operators of residential systems receive the same nine-year treatment, but commercial systems are immediately forced into the cycle of reverse arbitrage wherein they must sell their solar-generated power to the grid at low rates, and buy back the same power at much higher rates from utility companies. The below table summarizes the modeling of executing and operating the Riaz Capital solar energy structure on a sample 49-unit building, and clearly shows that, under the new rules, using the Inflation Reduction Act to install these clean energy systems on low-income housing is no longer viable.