Question:
I have seen several articles claiming that the rapid movement of residential electricity consumers towards rooftop solar PV systems is causing traditional electricity generation providers to raise their prices. In fact, I believe this argument is having policy effect in states like CA. The argument is that with fewer customers relying on the traditional suppliers, a smaller group of consumers is covering the generators fixed costs, and thus they are raising prices as a result.However, a more basic econ 101 approach might posit that with more supply of electricity introduced into the market, that prices should be reduced. Or another way to think about this is that the demand from the rooftop solar customer is reduced.
I believe that the basic fundamental economics model should still hold true, especially when considered in the long run, provided that proper market competition is allowed. Why?
Suppose one electricity generation company is forced to raise their costs to remain afloat. That does not mean that there are no generators that can not hold prices steady or reduce prices to attract consumers due to the reduced demand. And when the companies that are able to reduce prices do reduce prices, that one company that was not structured well enough to compete will lose its business to the ones that can. If the company goes under, presumably, the companies generation equipment would be purchased and run by the more efficient company.
Answer:
Thanks for this question. First, I would like to point out that the electric rates are regulated. In the California example you mentioned, the California Public Utilities Commission has to approve the electric utility prices charged to the customers and the rate of return the utilities can earn. You can find the historical data on the rate of return here: https://www.cpuc.ca.gov/industries-and-topics/electrical-energy/electric-costs/historical-electric-cost-data/rate-of-return. Second, utilities are a classic example of natural monopolies (their average cost declines with output) that face price regulations like the one described above. Holding fixed the production technology and the rate of return, the utilities would then charge a higher price with lower demand. In your thought experiment, you seemed to have implicitly assumed that the utilities were initially operating as monopolists without price regulations; in that case, the entry of alternative electricity generation would introduce competition for utilities (no longer monopoly) and lower prices in the market.
https://www.cpuc.ca.gov/industries-and-topics/electrical-energy/electri…
