By Kennedy Maize
Demand side management, or “DSM”, was a hot topic in the electric business in the 1990s. It was often seen as a magic elixir for how to reduce pollution, greenhouse gas emissions, and other bad “externalities” without burdening customers with either higher prices or reduced supply. DSM was often seen as no-cost, shorthand for moving energy load from a disfavored source to a favored flavor, an entirely enticing idea.
Today, the issue of the impact of rooftop solar, which many advocates see as a prime way to save on electricity, reveals the real innards of DSM: load shifting. It’s a topic the always clear-eyed economist Severin Borenstein at the University of California Berkeley’s Hass Energy Institute is examining.
In a new blog post, Borenstein comments, “Every electricity demand reduction is a cost shift.” He adds, “That’s not an ethical judgment, just simple math.”
In solar-centric California, the impact of rooftop solar enthusiasm quickly raised complaints from those who don’t switch that their monthly electric bills are going up in return. Borenstein notes that DSM advocates invariably complain that “by that logic, anyone who buys a more efficient refrigerator or installs LED lighting or turns up the A/C setpoint to use less electricity is imposing a cost shift on other customers.”
Borenstein responds, “That’s right! Practically anyone who takes an action to reduce their electricity use creates a cost shift.” It also applies to the uses of natural gas and to the conversion from gasoline cars to electric vehicles.
Focusing on utility basics, Borenstein notes that cost-based fixed rates set by regulators “change little or not at all when customers change their consumption. Such fixed costs include most costs of transmission and local distribution lines, hardening those lines against wildfires, vegetation management around those lines, compensation to past wildfire victims, subsidies for technology R&D and EV charging stations, subsidies to low-income customers, and more.”
In California, the fixed costs can be “much more than half of a customer’s bill.” That’s where costs shift when a customer reduces how much they use.
Borenstein creates a fictional customer, Max, who uses 750 kilowatt hours/month, at 35 cents/kWh, for $245/month. Assume “that 8 cents covers the incremental cost of buying electricity from the wholesale market as well as the line losses of getting it to his house. The other 27 cents go to paying the system’s fixed costs.”
Max then scraps his old, inefficient refrigerator that uses 100 kWh/month for a shiny, new fridge that only uses 40 kWh/month. That saves him $21/month. “But it was costing the utility only 8 cents to provide each of those incremental kWh, so the utility’s costs only go down by $4.80 per month.”
What can the utility do? “It makes that up by raising the rates for everyone on the system. That’s it. No clever tricks. No accounting gimmicks. Just unavoidable math when the retail price is much higher than the incremental cost.”
Max isn’t a miscreant. “He knows that the more efficient refrigerator will save him money.” That’s his only concern. “The same story applies if Max installs LED lights, turns up the A/C setpoint, or installs rooftop solar. In each case, Max is saving more on his electricity bill than the utility is saving on its costs.”
But not all cost shifts are created equal, Borenstein points out. It’s complex.
“Let’s say that the super-efficient refrigerator costs a bit more to manufacture, and that difference works out to 5 cents per kWh saved over the life of the appliance,” says Borenstein. “Max’s purchase of the super-efficient fridge still shifts costs, but it also lowers the total cost of refrigeration, because the extra cost of the efficient fridge (5 cents per kWh) is less than the incremental cost of the electricity it displaces (8 cents per kWh). Overall, society has saved resources by using more steel, insulation, labor and other refrigerator production costs, but then using less electricity (and the associated pollution) to run the fridge. That makes society’s consumption pie larger.
“On the other hand, if producing a more efficient fridge costs 15 cents per kWh that is saved over the appliance life, Max would still save money personally, but it would not be a societal savings. Society would be paying an extra 15 cents in production cost for each kWh saved, much more than the 8 cents that the electricity cost to produce, including the cost of the associated pollution. Max saves money but society’s overall pie becomes smaller.”
The bottom line? “Luckily, many (though not all) energy efficiency improvements have saved society costs overall.” Not so much for rooftop solar. Borenstein says that “US costs of residential solar have been declining very slowly for the last decade. In California, the 2025 average so far is $5.19/watt, which translates to 15-20 cents/kWh over the life of the system. When society pays 15-20 cents to generate a kWh that was previously being produced at a cost of 8 cents that makes the pie smaller.”
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