Hunting for Energy Hogs, with Severin Borenstein

Notable quotes:

• Households perceived as consuming too much energy are termed “energy hogs” and may be penalized: “That’s what really got my attention. This characterization of customers who consume a lot of electricity being energy hogs, knowing that there are lots of reasons that people consume a lot of electricity that would not be considered imprudent.” (5:46)
• Other forms of energy are not regulated according to usage patterns: “My suspicion is that the reason we see this judgment-based pricing in electricity, and to some extent in natural gas, is those are the areas where the regulator can actually see all of your consumption of that good … in many other industries, we actually see the opposite. We see quantity discounts, loyalty bonuses, and so forth that encourage people to consume more of the good.” (14:19)
• States can reach economic and environmental goals without targeting specific consumers: “What I think we can do … is price electricity to reflect the full social marginal cost. Then, if there are additional costs that need to be borne, treat them like public goods—like the way we pay for roads, police, and fire departments, which is through taxation rather than through just raising the rates for electricity.” (20:07)

Top of the Stack

• “Energy Hogs and Energy Angels: What Does Residential Electricity Use Really Tell Us about Profligate Consumption?” by Severin Borenstein
• Infrastructure: A Guide to the Industrial Landscape by Brian Hayes

The Full Transcript

Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future (RFF). I’m your host, Daniel Raimi. Today we talk with Professor Severin Borenstein, faculty director of UC Berkeley’s Energy Institute at Haas School of Business and chair of the board of governors for California’s Independent System Operator.

Severin has recently written about policies designed to punish “energy hogs”—households perceived as wasteful and excessive users of electricity. In today’s conversation, I’ll ask Severin whether these hogs are really that “hoggy,” or whether other factors explain why some households use more electricity than others.

We’ll talk about other options for pricing electricity, and which approaches are best for aligning economic realities with environmental and social goals. Stay with us.

Severin Borenstein from UC Berkeley, welcome back to Resources Radio.

Severin Borenstein: Nice to be with you again.

Daniel Raimi: I was looking through our archive and realized that it’s been more than four years since you were last on the show. I think we were talking about public safety power shutoffs in California, so it’s been a while. Can you remind our audience how you got interested in working on energy and environmental issues?

Severin Borenstein: Certainly. As a child, I did things like backpacking and camping, and enjoyed the environment. But actually, my career in economics started out [with me] working on industrial organization and competition policy in the airline industry, at first.

Then, I got interested in gasoline pricing—actually from an afternoon when I was filling up my tank and started talking to the owner of a gas station about how he priced gasoline. From there, [I] did a lot of work on energy.

At the time, I was at UC Davis, and I ended up being appointed the director of the University of California Energy Institute just as California was entering its electricity restructuring phase. So, I very quickly had to learn a lot about the electricity industry, because I was called to testify in the state legislature and so forth, and spent most of the late ’90s and early aughts doing research on electricity markets.

From there, California (right around in the mid-aughts) started moving toward adoption of their carbon-reduction policies—including a cap-and-trade program—and did a lot of work on that.

So, I came into environmental economics through first studying competition and markets in the energy side. Then, as California transitioned its policy toward more focus on climate change, [I] got more interested in that area.

Daniel Raimi: That’s really interesting. Yeah, it’s funny, if you start off working on energy, you’re going to end working on the environment, and vice versa.

Severin Borenstein: Yeah. These days, there’s just no way you can ignore the environmental impacts—both for environmental reasons, but also for their impacts on the markets themselves.

Daniel Raimi: Yeah, for sure. So, we’re going to talk about electricity today. Specifically, we’re going to talk about how electricity gets priced for household consumers, like folks listening at home—we’ll talk about your electricity bill, essentially.

We’re going to be focused on this question of whether households that use more electricity should be charged at higher rates than those that use less electricity. This is a concept that you’ve termed “energy hogs.” So, we’re going to talk about energy hogs.

Even if you don’t agree with the rationale, What would be the argument for why one might want to charge higher electricity rates to the energy hogs?

Severin Borenstein: Let me first say, I didn’t invent the term—and I actually object to the term “energy hogs.” In some ways, that was the impetus for this work.

For a long time, electricity regulators have looked for ways to raise revenue, particularly by balancing the revenue burden on households that consume a lot of electricity. They have done this through one approach called increasing block pricing (that I’m sure many listeners are familiar with), in which, as you consume more electricity over the month, the cost of an additional kilowatt-hour goes up for you. Even though the actual cost of supplying that additional kilowatt-hour for the utility is not any different, they charge you more if you’re a heavier consumer.

The other way that’s less obvious is that most states have some fixed charge on your bill and collect some of the revenue through fixed charges and some through a volumetric charge. Those fixed charges tend to be very small, and most of the revenue is collected through volumetric charges, far higher than is actually warranted through standard economic analysis of the marginal cost, including pollution costs of consuming more electricity. So, by really raising that volumetric cost above the cost of supplying an additional kilowatt-hour, we’re once again penalizing heavier users.

Politically, how this has played out is regulators and politicians often justify this saying, “Well, if you’re a prudent user, we’re not going to charge you that much.” But if you’re a hog—suggesting if you’re not careful—then you’re going to bear more of the burden.

And that’s what really got my attention. This characterization of customers who consume a lot of electricity being energy hogs, knowing that there are lots of reasons that people consume a lot of electricity that would not be considered imprudent.

Daniel Raimi: Right, for sure. We’re going to talk more about that. But before we do (and you’ve already started this a little bit), Can you give us an example or two of how this idea has actually played out in the real world, maybe in California or elsewhere?

Severin Borenstein: Well, I’ll tell you most recently how it’s played out in California. There was a lot of debate about how California electricity bills should be structured after somebody inserted, in the California budget bill in 2022, a requirement that the California Public Utilities Commission implement what are called income-graduated fixed charges.

This is actually something that came out of work that I did with Meredith Fowlie and Jim Sallee—and I think you had Meredith on the show, and she talked about it at one point. The idea was to increase fixed charges, which are essentially zero in California, and base them on the household income. And that has actually been adopted and will go into effect for two of the three big investor-owned utilities later this year, and for the third sometime next year.

So, when the debate over fixed charges was going on, the idea was of course [that] you collect more of the revenue through fixed charges, and you lower the volumetric charge. Many of the opponents said, “Well, this is just going to benefit energy hogs, and it’s going to punish people who are more prudent consumers.” And this just took me back to the California electricity crisis in 2000–2001, when we had the same debate over increasing block pricing, where the state decided that they were going to raise rates quite a bit (like, double them) for households that consumed large quantities of electricity.

Even back then, I thought, “Wait a second, we’re not really controlling for all of the reasons people consume a lot of electricity—most importantly, and obviously, households that have a lot of people living in them.” So, I thought, nobody’s really done a study asking, What is it that’s driving large electricity consumption across homes?

Daniel Raimi: Yeah. Well, let’s get into that. I mean, you’ve published a series of blog posts, working papers, and academic articles to answer those questions. So, why don’t you tell us, Are the hogs really hogs? Are they wasteful over consumers, or are there other more benign factors that explain why some households use more than others?

Severin Borenstein: Yeah, so we can’t really see whether people are being wasteful in that they are using power they don’t really value. But we can see these benign factors that we would generally not want to penalize, such as how many people live in the house; whether they live in a hotter area; or (in California, importantly) whether they have rooftop solar, because rooftop solar doesn’t make you a more prudent consumer of electricity—it just means that you’re also producing as part of the grid from your rooftop. And those are the three major factors that I control for.

I start out by saying: We have this net electricity consumption that people get billed for. Let’s put it on a per capita basis. Then saying: Well, let’s add back in rooftop solar, since that’s just production; that’s not consumption. And let’s adjust for the differences in average consumption in the hotter climates in California—which can be quite a bit hotter than the coastal regions, which are quite temperate. And then ask, well, How different are consumers after you make those adjustments? And I also make some other adjustments for things like whether there are senior citizens or kids in the house (because they tend to use more electricity), whether they use electric heating and dryers, and so forth.

But the major three factors are how many people live in the house, the climate zone you live in, and whether you have rooftop solar. And the effect was actually much larger than I had anticipated.

If you look at the difference between the half of customers who are above median and the half of customers who are below median consumption, about 75 percent of the difference between the mean consumption in those two groups disappears when you control for the number of people, put it on a per capita basis when you add back in rooftop solar, and directly control for the average difference in consumption in these different climate zones.

That suggested to me that most of what we’re talking about when we talk about energy hogs is not things we actually want to judge as imprudent at all. It’s just differences in the way people live. And of course, ironically, the thing we are penalizing the most is having more people in your household, which, in pretty much every form of prudency and environmental impact, we would probably think of as something we want to encourage.

Daniel Raimi: I’m tempted to ask a question about degrowth, but I’m going to steer away from that and stick with our topic!

So, Severin, you had some great data, actually, that you were able to leverage to do this analysis. Tell us for a second about the data, and then we’ll keep going.

Severin Borenstein: I was very lucky that California actually does a survey of electricity consumers every five years, a very large survey. So, I had over 30,000 households from the three big utilities in California—where they not only collect information on energy use, but on demographics of the household, the type of appliances they use, whether they have an electric vehicle, and all sorts of other factors. That’s what made it possible for me to do this detailed dive in California.

Daniel Raimi: That’s great. And you also had a great term for the opposite of an energy hog. What’s the opposite of an energy hog?

Severin Borenstein: Yeah, “energy hog” is not my term. That is something that politicians and policymakers have introduced. But yeah, I needed to come up with something to describe people who were at the bottom of the distribution. And so, we called them energy angels—also meant ironically. I characterized the energy hogs as the people in the top 20th percentile of the distribution, and energy angels in the bottom.

Daniel Raimi: I was just doing some Googling to see if the internet could tell me if there’s an opposite animal from a hog, like a duck or something, but there’s no clear opposite animal from a hog … So, “angel” works really well.

You also argue in these pieces that it’s just weird to charge households different rates for electricity based on their consumption pattern, because we don’t do the same thing for most other forms of energy, right? If you go to the gas station, you don’t pay a different amount per gallon based on how many gallons you consume; you pay the same amount. So, can you say more about that?

Severin Borenstein: It is interesting that we see this (what I would call judgment-based pricing) in electricity and in natural gas, and not in many other areas. And those are the two areas that are regulated utilities, where not only the company can see pretty much all of your consumption of that good, but the regulator can, as well.

We only have one provider of those goods, typically. They know your full consumption of your, for instance, residential electricity as opposed to your consumption of food, furniture, travel, or all the other things we buy—which are spread out among different companies and don’t have regulators.

My suspicion is that the reason we see this judgment-based pricing in electricity, and to some extent in natural gas, is those are the areas where the regulator can actually see all of your consumption of that good. We don’t see it in other energy sources like gasoline, and we certainly don’t see it in all of the other things we consume that also use energy and create greenhouse gas emissions like travel, consumption of goods, deliveries, and so forth. In fact, in many of those other industries, we actually see the opposite. We see quantity discounts, loyalty bonuses, and so forth that encourage people to consume more of the good.

These two products really stand out as being priced in a very different way than most areas of consumption.

Daniel Raimi: That’s really interesting. I hadn’t thought about the loyalty discount. I always bristle when I go to the gas station and there’s an opportunity to save 10 cents on your gallon of gasoline. I always think that we should be paying more, rather than less, for gasoline—but that’s another conversation, I suppose.

So, Severin, one question that I was thinking about as I was reading this work was connected to the idea of “electrify everything.” As our listeners will know, there’s been this phrase “electrify everything” that’s been going around for a long time—that one of the key ways to deal with climate change is to clean up the electricity grid, and then electrify as much of the end-use sectors as possible like transportation, home heating, cooking, and all those things.

I think there’s a tension here between the way that certain policies treat energy hogs and the desire to electrify everything. Can you reflect on that?

Severin Borenstein: Yeah, there really is a tension when we start trying to increase the price of electricity well above the actual marginal cost of supplying it. Yet, at the same time, we want people to substitute electricity for things like gasoline and natural gas. Again, if we’re going to start penalizing people for more electricity use through this “energy hogs” approach, then I think we’re going to really undermine the transition to a cleaner energy source.

And California, unfortunately, is at the forefront of that. We have extremely high rates, and most of those rates are not collecting anything you would call marginal cost, including the emissions from generating more electricity. California has an extremely clean grid, but in work with Meredith Fowlie and Jim Sallee, we’ve estimated that way over half of what you’re paying for in your electricity bill has nothing to do with the actual marginal cost of supplying it.

Daniel Raimi: Right. We’re not going to get into depth on this, but I’m just curious if you can say what are some of those other things that people are paying for when they’re buying electricity in California?

Severin Borenstein: These days, unfortunately, one of the biggest things is responding to things that climate change is doing to the state—particularly wildfires. We have had to spend a huge amount of money on wildfire prevention, including undergrounding lines, covering insulating lines, and reducing the risk that lines start fires when they do have some problem, such as a tree falling on them.

We also are spending money on things like trying to reduce greenhouse gases—like [electric vehicle] charging stations, subsidies for rooftop solar, and investing in new energy sources before their costs have really come down. Then we also, in California, have the largest program for low-income customers in the country, and that is paid for by raising rates for everyone else.

So, all of those factors are driving up rates in California significantly without actually raising the full marginal cost, including the pollution of generating additional electricity.

Daniel Raimi: Really interesting. So, we’ve been talking about some of the major problems with electricity pricing in California and elsewhere. I’d love to ask you to maybe share an example or two of good news stories. Are there some places that you would point to that exist in the real world that you think of as approaching best practices when it comes to setting the prices right?

Severin Borenstein: I think that we are seeing a greater movement in places toward using fixed charges, but unfortunately, even that is hard to really characterize as best practice.

The goal here should be to set electricity rates so they reflect social marginal costs. That is the marginal cost of generation plus emissions, and there are very few areas that actually do that.

Unfortunately, the ones that are closer are closer because they have very high social marginal costs because of all the pollution they’re putting out. For instance, [for] some of the Midwest, that price is pretty close to social marginal costs. It’s because the cost is very high due to the greenhouse gas and sulfur dioxide emissions from generating in coal plants. That’s probably not something I want to characterize as best practices.

What I think we can do, and it’s hard to find any real good examples of this, is price our electricity to reflect the full social marginal cost. Then, if there are additional costs that need to be borne, treat them like public goods—like the way we pay for roads, police, and fire departments, which is through taxation rather than through just raising the rates for electricity.

That has not been a common practice. In fact, even areas where there are municipal utilities, the flow of funds generally goes in the other direction. The utility, actually, is generally raising funds for the city, rather than the opposite.

Daniel Raimi: Right; really interesting. So,

Severin, before we go to Top of the Stack, I would love to ask just one final contextual question. We’ve been talking about residential electricity consumption primarily on the show today, but that’s only a small part of the ways in which people use energy. Can you talk a little bit about how you see the bigger picture here?

Severin Borenstein: As we talked about before, other forms of energy consumption, direct and indirect, don’t get priced this way. If you look at the US Energy Information Administration’s energy flow diagrams, what is immediately obvious is that home residential consumption is a very small share of the energy we use.

Electricity consumption in households is about 15 percent of the entire consumption that we have in the country, and residential households are responsible for all of that, eventually. And we don’t price all of the other things that are energy consumption indirectly in the same way.

At the end of the paper, I actually do a comparison that I thought was pretty telling. I look at the difference between energy hogs and energy angels, as I characterize them in the paper, and say, “How does that stack up, for instance, against flying?” And because I’ve done a lot of work in the airline industry, as well, I do some calculations of the carbon intensity of flying.

I find that one round trip between San Francisco and Boston, in terms of carbon emissions, is about equal to the entire difference between the 25th percentile consumer of electricity and the 75th percentile after you do these adjustments that I mentioned for number of people in the house, and so forth.

So, it’s unfortunate that we really focus on home energy consumption when people are doing things like travel, consumption of goods, and so forth that also have huge energy impacts, and we don’t ever implement this judgment-based pricing.

Daniel Raimi: That’s really interesting. So, one cross-country flight essentially flips you from an angel to a hog.

Severin Borenstein: That’s right. In fact, one flight from San Francisco to London and back is the equivalent of the difference between a 10th percentile consumer and a 90th percentile consumer after you make these adjustments.

Daniel Raimi: Wow, really interesting. One conversation I would love to have on this show would be the marginal emissions from flying given the markets of airlines, because whether or not you get on that flight from San Francisco to Boston, that flight’s still going to go. But your getting on that flight probably changes the prices for other people who get on the flight. I wonder if you’ve done research on that topic. It’s kind of a whole different conversation, but that’s what I always think about.

Severin Borenstein: I think the premise isn’t quite right, because airlines are incredibly good at adjusting the number of flights. If you look at load factors, the number of seats that are occupied over a business cycle, they actually changed the number of seats pretty quickly so that the actual long-run impact of you getting on that flight is that they are more likely to keep flying that flight.

As a result, the best estimate of your impact is essentially the average consumption per passenger-mile—and that, it turns out, is incredibly high. In fact, the number I use in the paper is just the carbon dioxide content from burning the fuel.

If you read the literature on air travel, there is a disagreement of the size, but there’s no disagreement that the impact is much larger than that, because airlines are emitting black carbon and other greenhouse gases at high altitudes that have much higher impact.

Now, how much higher ranges from up to more than double. I don’t use those numbers, but if that’s the case, then flying has definitely changed the way I think about getting on a plane.

Daniel Raimi: I know. I remember because I saw you by happenstance in Ann Arbor, Michigan, when you were meeting with our mutual friend Katie Hausman.

Severin Borenstein: That’s right.

Daniel Raimi: We talked about the carbon costs of flying, and how much it’s affected the way that you’ve decided about traveling to conferences and stuff like that.

Severin Borenstein: Yeah, it’s really given me pause about travel and, unfortunately, it’s also the case that we’re probably further from a sustainable air travel than we are from pretty much any other form of travel. Sustainable aviation fuels are still very expensive, and they’re really not that sustainable either. They’re biofuels that don’t really cut the greenhouse gas emissions by very much.

Daniel Raimi: Yeah, I know we’ve done an episode on that actually with our colleague, Nafisa Lohawala.

Well, Severin, we could keep talking for hours about airlines, electricity, and so much more, but I’d love to ask you now the last question we ask all our guests, which is to recommend something that you’ve read, watched, or heard that you think is really great and that you think our listeners might enjoy. So, what’s at the top of your literal or your metaphorical reading stack?

Severin Borenstein: Well, this is actually on my literal stack. It’s a book that I was given by my friend and former graduate student, Ryan Kellogg (whom you’ve had on the show), which is called Infrastructure: A Guide to the Industrial Landscape by Brian Hayes.

It is on all sorts of infrastructures, so it’s got everything from a section on power plants to a section on airports, shipping, communications, and all the towers in each of these industries. It describes what the infrastructure is, what it does, and how it works, and also gives you a sense of scale of how big these things are physically, of how much land they take up, and so forth.

I found it just a fascinating read to understand and appreciate all of the different types of infrastructure that we have in the country. It even has a section on recycling centers. So, Ryan got this book, and he said he really enjoyed it, so he got me a copy of it, and I thought that would be something that would be great to share with your audience.

Daniel Raimi: This looks totally up my alley. Oh my gosh, this looks fantastic. It’s definitely going to be on my coffee table within a few days.

Great. Well, Severin Borenstein from UC Berkeley, thank you so much for coming onto the show. Thank you for recommending this awesome looking book, and for sharing information with us about energy hogs, energy angels, flying, and so much more.

Severin Borenstein: Thank you.

Daniel Raimi: You’ve been listening to Resources Radio, a podcast from Resources for the Future, or RFF. If you have a minute, we’d really appreciate you leaving us a rating or a comment on your podcast platform of choice. Also, feel free to send us your suggestions for future episodes.

This podcast is made possible with the generous financial support of our listeners. You can help us continue producing these kinds of discussions on the topics that you care about by making a donation to Resources for the Future online at rff.org/donate.

RFF is an independent, nonprofit research institution in Washington, DC. Our mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. The views expressed on this podcast are solely those of the podcast guests and may differ from those of RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.

Resources Radio is produced by Elizabeth Wason with music by me, Daniel Raimi. Join us next week for another episode.