California’s electricity bills are already about 5% higher than the national average, and rising. Rate hikes went into effect in January and Southern California Edison proposed another 4.4% increase that would be effective this summer.
California has also become the largest solar market in the United States, seeking clean and affordable energy alternatives, and has been among other states trying to increase the value of clean energy assets with net energy metering (NEM).
The first two iterations of California’s NEM program greatly incentivized the adoption of solar, but NEM 3.0, which was approved unanimously by the California Public Utilities Commission (CPUC) in December, is about to roll that value back. NEM 3.0, which takes effect on April 15, could significantly alter California’s solar landscape.
Let’s dive into the history behind California’s NEM program, and what developers need to grapple with as this new policy is implemented.
How did we get to NEM 3.0?
California’s NEM 1.0 policy ran on a 1-to-1 incentive ratio, meaning for every one kilowatt-hour (kWh) of energy generated from solar, customers were given one kWh of utility-generated credit that could be applied to their energy bills.
In 2017, the CPUC replaced that with NEM 2.0, which redesigned the incentive program to include non-bypassable charges, which were additional charges determined by the amount of kWh of electricity customers consumed from the grid. These additional charges were used to fund important low-income and energy efficiency programs. Although non-bypassable charges decreased the value of solar, credit for exported solar energy was still offered based on retail electricity rates.
When California made the decision to switch from NEM 1.0 to NEM 2.0, few imagined that the state would soon pass another overhaul of the incentive program. Now the landscape is set to shift again.
What changes are coming with NEM 3.0 — and why?
The most significant change under NEM 3.0 is that the value of credits for excess solar exported to the grid will be reduced by roughly 20% to 40% from what is currently being received under NEM 2.0, further decreasing the value of solar. Additionally, under NEM 2.0, customers could lock in retail rates for 20 years, but with NEM 3.0, customers can only lock in rates for nine years. After those nine years, the rate is calculated each year via the Avoided Cost Calculator (ACC) – essentially, customers will get credited the avoided cost, or the wholesale rate of energy at that specific time that the utility would have otherwise paid a supplier for.
Why the changes? For one, the CPUC believes that NEM 2.0 negatively impacts non-participating ratepayers — particularly those with lower incomes. Furthermore, NEM 3.0 could be seen as a vehicle to encourage the adoption of storage. Currently, the solar power produced during the day does not correspond to the periods of peak electricity demands that come at night when customers are home, resulting in the higher consumption of traditional energy sources during peak hours. Since California offers time-of-use rate structures, which are required to participate under NEM 3.0, electricity costs during these peak periods will be very high, but storage can save solar energy generated during the day and use it to power homes and businesses during peak demand.
With the decreased value of solar coming under NEM 3.0, implementing storage to offset the lost value will be a natural next step for customer-generators. This allows customers to avoid paying exorbitant electricity rates that come at peak hours, and lowers their usage of fossil fuels, helping the state meet its goal of slashing carbon emissions to 48% below 1990 levels by 2030.
How should you prepare for NEM 3.0?
Commercial solar customers that don’t already participate in NEM 2.0 have an opportunity to avoid the changes in NEM 3.0: If they submit an interconnection application for the program by April 14, they can be grandfathered into NEM 2.0, locking in retail rates for the next 20 years. If the application is approved, projects must be built and operational within three years to receive NEM 2.0’s benefits.
Those looking to participate need to act fast, getting necessary paperwork together and interconnection applications submitted to ensure they are processed and approved in time. However, commercial customers and some smaller developers may not have the resources and time to get the necessary documentation, such as detailed design documents and project drawings, across the finish line. Therefore, enlisting expertise from more experienced developers or partners who are familiar with the process can be a wise choice.
The chance for customers to retain higher value for their solar projects will create a rapid influx of projects looking to come online under NEM 2.0. With this in mind, developers and customers must be aware of the possible roadblocks that could arise during implementation — there could be interconnection queues or permitting delays. Developers need to apply the right planning on the back end to account for unanticipated roadblocks, as well as ensure they have the necessary labor and materials to build the projects, especially considering potential labor shortages and current supply chain disruptions the industry is facing.
For customers who don’t qualify, or don’t get an application submitted in time, developers need to be ready to implement more solar and storage projects down the line. In the short-term, NEM 3.0 will impact solar adoption, but with time the market will adjust and customers will shift focus to solar-plus-storage deployment to achieve the best value. Even though customers are getting reduced credits for their system under NEM 3.0, adding storage can help balance the overall cost impact on electricity bills. Even implementing things like EV charging infrastructure can be leveraged for vehicle-to-grid charging applications, providing power back to the customer from an EV battery during peak electricity demand periods.
California is at the crossroads of significant electricity related challenges such as high energy costs and grid constraints, and a transition to clean energy. Ultimately, adding storage capabilities could incentivize businesses to go solar, and significantly change the nature of projects across California while also meeting climate goals and increasing grid reliability. A solar-plus-storage market is already a norm in places like San Diego, and developers should be ready for that trend to continue across the state.
Pari Kasotia is senior director and head of policy at DSD Renewables, a solar developer that has hundreds of projects nationwide, and tripled in growth since 2019.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
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Very much appreciate this description. Very useful where we are headed…the fact that utility scale corporatte developers – require – and assume the inevitability of only this model of solar, highlights all the reasons NEM will stop flipping, and become moot. Advantages and already surpassing competetiveness of compact modular, Microgrid – more reliably affordable, more effective, efficient, flexible “always there” power – literally – already retired
utility scale version in comparison. Forwards.
Building an off-grid, stand-alone micro grid at one’s home is the future of solar in California. NEM 3.0 is going to affect every rooftop soar system ever built, in California, over the next 20 years and build new or existing systems with batteries and non-grid connecting it using pure sine wave inverters will keep contractors busy for the next 25 years. Installing Batteries, a transfer switch and a self-islanding solar inverter(s) will be the first step to pull the plug on the greedy utilities and be able to keep all the power one produces on site and at full value. The utilities pay only 3 cents for the electricity one puts onto the grid and then charges 30 cents to buy it back. ” The rate is calculated each year via the Avoided Cost Calculator (ACC) – essentially, customers will get credited the avoided cost, or the wholesale rate of energy at that specific time that the utility would have otherwise paid a supplier for. That rate is currently 3 cents per Kilo Watt Hour. It is what they currently pay at true up on NEM 2.0. The good news is that lithium batteries are not the only choice out there for storage. I used Deep Cycle lead acid RV/Marine batteries and pro rates at about $100.00 per month with 2 Six-year cycles where the same size Lithium battery system pro-rates, over 12 years, at $208.00 per month. Other chemistries will give customers more choices and the competition should drive down prices over time.
It is clear that NEM 3.0 customers have incentives to add batteries. Are there financial incentives for NEM 2.0 customers to add storage batteries to an existing solar system.?
PG&E has said it is working on some for the future. Tesla made a deal for power walls that when the State independent system operator CAISO called for an emergency situation that Power wall owners could get $2.00 per kilo watt hour for power sent during the emergency in 2022. It would be interesting if the 75% discount could be waived from 4:00 PM to 9:00 PM to get more storage from homeowners applied to the grid during the critical summer months. My system generated an extra 300 kilo watt hours during peak hours from June 1 to September 30, 2022, without batteries and because of daylight savings time just from sunlight alone. Can you imagine what an extra 2 kilo watts per hour over 5 hours per day could produce from batteries shifting the on-grid contribution from early to late afternoon could do to help? 122 days times 10 could turn the 300 kilo watt hours into 1520 kilo watt hours of summer peak time energy, from the existing NEM 2.0 – 1.4 million rooftop homes with batteries, equals 2,128 mega Watt Hours of stored peak time energy and should be worth something. The homeowner would need 2 Power Walls costing $15,000.00 that will last 12 years in order to give the 10 kilo watt hours extra to the grid and still keep enough to power the home overnight. For the utility to split the battery cost, they would need to give back a $7,500.00 energy credit for future wintertime purchases of energy from the grid. and that would have to be $.52 for each kilo watt hour take from the power walls during summer peak hours. .52 X 10 hours per day; X 122 summer days; X 12 years of battery life = $7,612.80. Anything less and homeowners under NEM 2.0 or NEM 3.0 would lose money adding batteries.
So the plan is to make the residential solar provider spend 10 plus $1,000 more to add batteries to their house. The screwing those households with the cost of building out storage capacity, the PG&e should be accountable to build and maintain. I wonder how much the board members got paid off?
Unbelievably disappointed in CA. While I am in agreement storage is key, the price tag is still keeping most consumers out of the market. Between inflation, and price increases on panels and battery materials this is going to potentially destroy the market.
Hopefully, they get them selves together and realise the harm they are causing- and stop lining their disgustingly greedy pockets
I am from the original solar tax state, Alabama. The PSC has utilities pay a pittance of the residential rate for net energy to the grid. And they allow per-kw capacity charges to make your own power. It’s obscene.
Our PSC/utilities spew the same nonsense about impacting the poor, just like we are hearing–surprisingly–now in California. (Except our greedy lying PSC and power companies were the OGs.) It’s greedy nonsense, and it makes me wonder if we can have nice things like grids–grids to help those poor and underserved. Because if the power companies and state commissions succeed in turbocharging fully independent (disconnected!!!) microgrids with these sort of policies, their only customers will be the poor.
So, I am still trying to understand all of this transitioning, living in California. Is it best to secure Solar for our home, or better to wait to see how it goes with all the planned restructuring? I understand time is running out for NEM 2.0, but is it best to wait for everyone to catch up?
No. The best thing is to get a plan submitted and approved by the utility before April 14, 2023, or plan to go totally off grid with batteries after that date doubling the cost and doubling the time to get payback. Batteries are also an ongoing expense since they have to be replaced periodically and do not last as long as the solar panels do. Batteries will only get the tax credit on the first install of the system and not on replacements so adding more solar panels, rather than batteries could do more to carry one through the winter months than just adding batteries. After NEM 3.0 takes effect, any added solar panels would automatically disqualify the previously installed panels from NEM 2.0, but batteries could be added later and get both the NEM 2.0 grandfathered benefit and also the first install IRA tax credit from the Federal government.
1. Submit design and get utility approval and acceptance to be on NEM2.0 before April 14,2023.
2 Have the maximum solar panels the roof or yard can hold installed and working before April 14, 2025.
3 Add batteries before the IRA benefits end in 2032.
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