California is wrestling with electricity prices – here’s how to design a system that covers the cost of fixing the grid while keeping prices fair

(The Conversation is an independent and nonprofit source of news, analysis and commentary from academic experts.)

Yihsu Chen, University of California, Santa Cruz and Andrew L. Liu, Purdue University

(THE CONVERSATION) Small-scale solar power, also known as rooftop or distributed solar, has grown considerably in the U.S. over the past decade. It provides electricity without emitting air pollutants or climate-warming greenhouse gases, and it meets local energy demand without requiring costly investments in transmission and distribution systems.

However, its expansion is making it harder for electric utilities and power grid managers to design fair and efficient retail electricity rates – the prices that households pay.

Under traditional electricity pricing, customers pay one charge per kilowatt-hour of electricity consumption that covers both the energy they use and the fixed costs of maintaining the grid. As more people adopt rooftop solar, they buy less energy from the grid. Fewer customers are left to shoulder utilities’ fixed costs, potentially making power more expensive for everyone.

This trend can drive more customers to leave the system and raise prices further – a scenario known as the utility death spiral. One 2018...