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CPUC’s proposed changes to net metering with NEM 3.0
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The latest on how net metering changes in California will affect solar PV system payback

A much-anticipated NEM 3.0 proposal from the CPUC will affect net metering benefits and drastically reduce the ROI from installing solar PV in the state. What changes are coming?

It is becoming more and more likely that drastic changes to California net metering will happen. In a move that will define the future California solar market, the California Public Utilities Commission (CPUC) recently announced its proposed decision for NEM 3.0 – the next iteration of net metering in California. In this decision, the CPUC has decided to side with the utility companies and significantly reduce the benefits that net metering offers individuals and organizations installing solar PV in California.

In a previous blog post, we presented the initial NEM 3.0 recommendations from California’s investor-owned utilities (IOUs) – PG&E, Southern California Edison, and Sempra Gas Company (who owns San Diego Gas & Electric). We discussed how these recommendations would impact existing and future solar customers in the state:

  • Slashing solar credits from net metering
  • Implementing substantial monthly charges based on solar PV system size (the larger the system size, the larger the monthly fee)
  • Changing the True-Up period from annual to monthly, which would prevent solar customers from rolling over unused credits into the next month

How did the CPUC respond?

The CPUC’s proposed ruling for net metering with NEM 3.0

The CPUC received widely-varying proposals from various stakeholders throughout the NEM 3.0 proceeding – the solar industry, utility companies, natural resources groups, and ratepayer advocates, to name a few.

While the CPUC included some parts of these proposals in their proposed decision, it ultimately appears that they are aligning with the utility companies in their recommendation. Here is how the CPUC responded to requests from the IOUs:

Slashing solar credits – Residential and non-residential solar customers will face a severe decrease in solar credits.  The changes proposed by the CPUC will slash the estimated value of net metering solar credits from an average of $0.15/kWh to $0.05/kWh – a 75% reduction in value.

Injecting uncertainty with variable net metering credit values – In addition to lowering the value of net metering credits, the CPUC has proposed the value of the credits will be reassessed on an annual basis via a third-party consulting firm. Net metering customers will only receive a credit rate lock for the first five years of their solar PV system’s operation.

Monthly charges based on solar PV system size – Thankfully, the CPUC’s proposed plan does not include implementing monthly charges for non-residential solar customers as the IOUs would have liked. These monthly charges could have cost organizations thousands of dollars per month. Unfortunately, the CPUC is still recommending significant monthly fees for residential solar customers.

Changing the True-Up period from annual to monthly The CPUC maintains that the True-Up period will remain annual. With this decision, organizations can continue to maximize their credits by carrying unused credits forward to future months within a 12-month billing period.

Changing the term length and grandfathering rules – The term would be reduced from 20 years for NEM 2.0 to 15 years for all NEM 3.0 customers. Shortening the term length is problematic because it does not align with PPA terms or the typical lifespan of a solar PV system, creating rate uncertainty. NEM 2.0 non-residential solar customers will be grandfathered into NEM 3.0 at 20 years – unfortunately, NEM 1.0 and NEM 2.0 residential solar customers will face a retroactive reduction to 15 years.

A recap on why net metering is so valuable for solar PV systems

Net metering has been one of the most crucial policy mechanisms for driving the solar market’s growth in California over the past decade, incentivizing organizations across the state to install solar because of the financial benefits it provides.

When organizations install a solar PV system on their rooftop, ground space, or parking lot, there are times when their system generates more electricity than they need on-site. Organizations can utilize this excess energy in two ways:

  1. Net metering – send excess solar electricity back to the grid. The solar customer receives payment from their utility company for this extra solar energy in the form of bill credits applied to their monthly electric utility bill, lowering their future energy costs and operating expenses.
  2. Energy storage – store excess energy for later use in a battery energy storage system paired with the solar PV system.

Net metering is especially valuable because, unlike one-time solar incentives – like tax credits – net metering delivers a continuous stream of credits month after month for the lifetime of a solar PV installation, lowering future electricity bills from the grid. As a result, solar PV system ROI is higher, and payback periods are shorter.

While payback periods vary by customer, our analysis of the NEM 3.0 proposed ruling from the CPUC is showing increases to simple payback of between 2 and 10 years for most commercial solar customers. In California, typical solar payback is about 4.5 years, so NEM 3.0 will push the payback out to somewhere between 6.5 years and 14.5 years.

Maximize your solar PV investment with NEM 2.0

How can you ensure you lock in NEM 2.0 status before NEM 3.0 is implemented? Our checklist can help – follow this guide to maximize the ROI from your solar investment by ensuring you secure the more lucrative NEM 2.0 rates and benefits before they expire.

Is all hope lost under the NEM 3.0 proposal?

The CPUC’s decision will have a drastic impact on the solar industry in California – it’s clear that their proposal benefits the IOUs over solar customers. However, even if NEM 3.0 is implemented in its current state, that should not deter organizations from installing solar PV systems under NEM 3.0. There are still clear benefits to going solar.

First and foremost, other solar incentives like the solar ITC will still be in effect to reduce the upfront cost of going solar. The ITC is currently at 26% of all solar PV system expenditures until the end of 2022, before it ramps down to 22% in 2023. However, suppose President Biden’s Build Better Act is signed into law. In that case, the ITC increases to its originating 30% amount – and there are adders if American materials are leveraged in the solar PV installation.

Second, solar will remain a great on-site renewable energy generation option to help organizations become economically and environmentally sustainable. It will still enable organizations to generate electricity on-site instead of drawing electricity from the grid. As the Biden Administration has set ambitious goals for a decarbonized grid by 2035 and a net zero carbon economy by 2050, we absolutely must be continuing to install renewable energy technologies like solar PV not just in California but throughout the United States as a whole.

Third, organizations can compensate for the net metering credits lost under NEM 2.0 and maximize the value of their solar energy by re-focusing their efforts on self-consumption instead of exporting electricity to the grid. Installing a battery energy storage system and pairing it with their solar PV system enables organizations to tackle both parts of their energy bill – kWh energy costs and kW demand charges. Battery storage for solar is a future-focused decision, and it’s where we see the industry trending in order to help decarbonize and stabilize our energy grid while helping organizations lower their energy spending further. By installing a battery energy storage system, organizations can store excess solar energy on-site and dispatch the battery during times of peak demand to reduce costs during those periods.

Secure the most value from your solar PV system with NEM 2.0

It’s important to note that the CPUC’s decision is just a proposed decision, not a final one. They are scheduled to vote on February 10, 2022, at the earliest. If approved, NEM 3.0 would take effect 120 days after – estimated for June 10, 2022.

The fact remains that despite the solar benefits we described in a NEM 3.0 world, the economic value of going solar in California is much more substantial under NEM 2.0 than it will be NEM 3.0. Our goal is always to help our customers drive the most value from their energy infrastructure. If you can enroll under NEM 2.0 before the value of solar credits drops by 75%, we highly encourage you to do so to secure the most economic benefit from going solar.

Timing is essential if you want to secure your NEM 2.0 status. It’s important to consider solar for your organization now so you can enroll in NEM 2.0. Our team can help you navigate this opportunity for your organization. To help, we’ve put together a guide that provides a checklist along with key dates – to ensure you lock in NEM 2.0 rates and benefits before they expire. Download your copy below.