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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