What Is Energy Equity And Why Is It So Important?

• Energy equity is the idea that all members of society should be able to afford and have access to a necessary and basic amount of energy
• The reason it has become so important lately is that more and more consumers are tempted to leave the grid, which has the effect of driving prices ever higher
• It remains unclear whether subsidies or price limits can solve this issue, but it is clearly a problem that won’t go away any time soon

“Energy equity” sounds like a cross between a financial engineering concept and a new social entitlement program like Medicare. But to us, it is a concept that we expect the energy industry to hear more of, insofar as it involves genuine economic and social concerns. Basically, this term “energy equity”, and the advocates who employ it, are saying that all members of society should be able to afford and have access to a necessary or basic amount of energy for ordinary living. That does not mean generous subsidized energy allowances but enough to keep the apartment warm in winter, cool in summer, provide hot water, keep the lights on, and, of course, all the devices fully charged. Not a big deal you say? Think otherwise. Classical economists would argue that people who cannot afford a product can cut their consumption to make the purchase fit the budget, or reduce consumption of something else in order to pay for the product. But energy is both price and income inelastic, meaning that consumers cannot adjust demand that easily, and also a necessity. For example, if electricity prices for heating are extremely high in a cold December, it does consumers little good to know that electricity will be plentiful and cheap in April. Almost everyone needs a minimum amount of energy no matter the price or their income level. As we’ve stated previously, access to and enjoyment of the benefits of electricity is almost the definition of what it means to live and participate in modern society. Stated differently, if someone today can’t afford the electricity bill even for heat, the prudent course is to keep the heat (or summer A/C) on and address the financial consequences later.

Anyway, what is the real problem? Total energy expenditures probably account for 7-8%of the median family budget. Of that, electricity accounts for 2% and natural gas 1% on average with the remainder for gasoline. So even if electricity prices rise, as they have been doing, that increase probably only constitutes a financial inconvenience to most families. 

But while families in the median income group are unlikely to struggle with rising energy costs, families in the lowest income quintile spend closer to 18% (almost one-fifth) of family income on energy. Stated differently, families in the bottom economic quintile used roughly half as much energy as the median family, but they earned only one-fifth as much. The picture is worse when only considering the consumption of electricity and natural gas, which are true necessities. The families in the lowest quintile, who earn 20% of median family income take only one-third less electricity and gas per family. They do not have much room to reduce their consumption, given that so much of the electricity and gas consumption goes for uses like space heating, refrigeration, air conditioning, and other basic necessities. Getting rid of the wall-sized flat screen and the game console does not make much difference. 

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In the past few decades, energy prices have risen slowly, inflation has been low, and families in high-income levels have enjoyed rapid income growth, while those in the low-income groups have seen little improvement. If the country enters a period of inflation, higher energy prices (which we would argue are needed to bring in new sources of production), and no improvement in the income earned by low-income families, we could end up with a political backlash against energy companies.

The state of California this week offers an interesting lesson in precisely this type of equity issue. The state’s PUC was reviewing its net metering policy which had provided fairly generous subsidies to those early adopters who invested in residential, rooftop solar. But now, according to utilities, these subsidies were distorting and impairing their revenues. Interestingly, the state’s Consumer Advocate, which focuses in part on concerns of the less well off, aligned itself with the state’s three main investor-owned utilities to end the state’s generous net metering policy. The result was a new $8/kw fixed charge for residential owners of rooftop solar which amounts to about $1,000 per year along with a reduced rate for selling power back to the grid. Needless to say, California’s solar advocates are livid. The state in effect is proposing to end a subsidy for middle and upper-income residential solar customers while seeking to redistribute some of these benefits to those economically less well off. The new “grid participation charge” is designed to “capture residential adopters’ fair share of costs to maintain the grid and fund public purpose programs.”

Ending a subsidy is the financial equivalent of ripping off a bandaid, painful but seldom serious. But what’s most interesting here is that the state PUC’s new policy is sufficiently punitive to provide economic incentives for its residential solar PV utility customers to install batteries and leave the grid entirely. If large numbers of rooftop solar owners elect to “cut the cord” and leave the grid, they will no longer contribute anything at all to grid maintenance, and these fixed expenses will have to be distributed among remaining utility customers. This is the economic logic behind the so-called utility death spiral—high utility fixed costs must be distributed among an ever-dwindling number of customers. If California’s regulators are aware of this concern it's clear they don’t care. Right now their concern seems to be energy equity.

We are not sure where energy equity will go, overall, but it is hard to see politicians ignoring the issue, from either side of the political spectrum. Price goes up. A significant portion of the population gets squeezed when buying a necessity. California chose to end a subsidy to the well-off in order to relieve pressure on the balance of consumers. Other politicians might want to put a lid on prices, which will affect supply, or subsidize low-income consumers. But politicos who oppose price lids also oppose consumer subsidies, by and large. So, how about subsidies to producers to reduce prices?  The lobbyists are undoubtedly mulling over the alternatives. Watch the issue. Energy equity will not go away. 

By Leonard S Hyman and William I Tilles for Oilprice.com

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