Big changes on the horizon for California net metering in 2021
Net energy metering (NEM) - the utility billing arrangement under which solar owners earn credit for energy they send to the grid during the day and then use that credit to offset energy they draw from the grid when the sun isn’t shining - has been the law of the land in some form or another in California since 1995. The longstanding program is now up for review and the changes could affect the viability of future solar projects throughout the state.
The matter of the so-called “successor” to net metering is now being considered by the California Public Utilities Commission (CPUC), with comments and input from groups representing every conceivable interest, including utility companies, ratepayer advocates, the solar industry, and even AARP. The results of the CPUC decision will have a huge impact on the solar industry in California and anyone who wants to install solar panels on their home.
As consumer and solar policy advocates here at SolarReviews, we think it’s important to let people know what to expect as the CPUC works through the process of crafting the successor program. Read on to learn about the details of what’s been proposed so far, the likely outcomes, and how you should react to this news, whether you already have solar panels, want to install solar someday, or would like to add your voice to the discussion.
If you’re strapped for time, here’s the vital information you should know:
- The current program, NEM 2.0, provides kWh credits for excess solar energy that can be used to offset kWh drawn from the grid at a later time. NEM 2.0 differs from the original NEM program because the kWh credits are reduced slightly to ensure solar owners pay the fraction of the retail energy price that funds low-income assistance and energy efficiency programs. NEM 2.0 also requires solar owners to be on a time-of-use (TOU) billing rate plan. It’s not perfect, but it works well to save solar owners money on their electric bills.
- Changes in NEM 3.0 could include decreases in the credit paid to solar owners, new fixed monthly fees on solar owners’ electric bills, or in the worst-case scenario, a “buy-all, sell-all” situation, where any new solar installation would feed directly into the grid and solar owners would be paid a fixed sub-retail price for their solar energy without the ability to use any of it themselves.
- Anyone who signs a “permission to operate” agreement with their utility for a home solar system before the successor program is finalized will get to stay on NEM 2.0 for 20 years. If you’ve already installed solar on your home, you’re covered for 20 years from your interconnection date.
- If you think you want to install home solar soon and are averse to risk, consider installing solar in time to sign a final interconnection agreement under NEM 2.0 before November 2021.
- If you’re a citizen who wants to get involved in direct action to advocate for smart solar policy in California, sign the petition to Save California Solar, join with the Solar Rights Alliance or Vote Solar and look for opportunities to add your voice to thousands of citizen solar advocates in California and nationwide. If you work in the solar industry, join CALSSA to work together on advocacy issues with hundreds of other companies in the industry.
And now, the rest of the story…
On this page
A very brief history of California net metering
Net energy metering (NEM) was first introduced to California in 1995, with Senate Bill 656. The original bill came about as a “way to encourage private investment in renewable energy resources,” and included a system size limit of 10 kilowatts (kW), and a very small total net metering cap of 0.1% of peak load (about 53 megawatts [MW] statewide). Bills in 2001 and 2002 increased the system size limit to 1 megawatt (MW) and the toal cap to 0.5% of peak load.
In 2006, SB-1 increased the net metering cap to 2.5% of peak load and created the California Solar Initiative (CSI), a program designed to rapidly grow the solar market and reduce costs by providing subsidies to lower the cost of building solar installations large and small. The CSI ran for about 10 years, and combined with the federal government’s solar Investment Tax Credit program, was wildly successful in meeting its goals.
The total system cap was raised again in 2010 to 5%, but by 2013, there was little political will to raise it further without some changes to the program. That year’s AB-327 set a deadline of July 1, 2017 for the end of full retail rate net metering and directed the CPUC to come up with a “successor” program that would apply to the state’s large investor-owned utilities (IOUs). In 2016, the CPUC came up with a program called “NEM 2.0.”
In January, 2016, the CPUC came down with its NEM 2.0 decision, written out over 141 action-packed pages. Despite the document’s length, the changes codified within it didn’t actually change that much of the way NEM worked in California.
Under NEM 2.0, solar owners get credit for all the energy their systems send to the grid, but the amount of that credit is reduced by around 2-3 cents per kWh to ensure that solar customers pay their fair share of certain “non-bypassable charges” related to important low-income assistance and energy efficiency programs. If you’re curious, read more about NEM 2.0 here.
NEM 2.0 was seen as a pretty major win for the solar industry, and it also temporarily appeased the utility companies, who got to force all new solar owners to sign up for time-of-use billing, under which the value of electricity changes based on the time of day in which it is consumed, thereby saving utilities money. The utilities also got the promise that the CPUC would revisit the NEM rules in 2019, making the second version of policy more of a stopgap than a true future proposal.
Why the CPUC is making changes now
Throughout its 2016 decision, the CPUC asserted that a review of NEM 2.0 and the design of another successor would be undertaken in 2019. That review was delayed first by the wildfires and PG&E bankruptcy of the 2019 season, and then by the coronavirus pandemic of 2020, but is now in full swing.
The 2019 date wasn’t an accident. At the end of that year, the federal solar tax credit stepped down from crediting homeowners 30% of the costs to install solar panels to 26%. The CPUC reasoned that because the feds were acknowledging that solar might need less subsidizing in the 2020s, it might be time for them to look at updating compensation for solar energy, too.
Another reason to update net metering: an increasingly-popular argument that paying solar owners retail rate credits for their excess solar energy creates a so-called “cost shift.” The basic logic behind this argument is that people with solar panels produce energy for their own use, then rely on the utility grid to distribute their excess energy, all while avoiding paying the upkeep costs for the grid that non-solar customers pay through fractions of the price of their retail energy rate.
The cost shift argument is not without merit, but nearly all studies of the value of solar energy show that when distributed solar energy resources represent a small percentage of total energy generation, they add more value to the grid that their owners take in payment for their excess energy. Truthfully, though, California is no longer a place where distributed solar is small potatoes.
The NEM 3.0 proceeding is set to determine the degree to which distributed solar energy is still of value to the grid and all ratepayers in California. The CPUC’s job now is to come up with an effective policy that recognizes that value, now and in the future, and design a framework under which the state’s electric utilities will interconnect with and pay solar owners for their excess energy.
What changes might the CPUC make in NEM 3.0?
Way back in 2016, the CPUC heard plenty of arguments from the utilities about the changes they’d like to see in an NEM successor program. The big three IOUs (PG&E, SCE, and SDG&E) and their allies collectively asked for, but didn’t get:
- Reductions in compensation for their customers’ excess solar energy, down to just over wholesale cost
- Increased monthly fixed charges on solar customers
- “Grid access” charges based on system size (i.e. $3-$10 per kW of solar panels installed)
- Reducing the length of time customers could receive NEM 2.0 to 10 years
- A “gross metering” arrangement (also known as “buy-all, sell-all”) under which no solar owner could use any of their own energy, instead connecting their systems directly to the grid and receiving a payment for all the energy produced
It’s almost certain that the above list will be pushed again during the NEM 3.0 proceeding. Here’s what to expect:
Export credit reductions
Although the CPUC has shown no willingness to single out specific strategies to address a cost shift before the “resolution of contested issues of fact and law,” the most likely outcome of the NEM 3.0 proceedings is a reduction in the amount paid to solar owners for their excess energy.
As far as fairness to both solar and non-solar customers is concerned, it seems like the easiest way to proceed would be to let solar customers continue to consume their own energy behind the meter and reduce compensation for energy they send to the grid.
Importantly, this would spur adoption of storage technologies that would allow solar owners to use more of the energy their panels produce. This growth of storage could allow for a special rate paid to battery owners who are willing to let the utility company draw power from their storage systems during times of peak usage, to reduce the need for costly power from gas “peaker” power plants.
The CPUC will hear arguments from many groups stating that reducing excess generation rates isn’t enough, because those very same storage systems will mean solar customers may pay even less of the per-kWh costs to keep them grid-connected. Those arguments will point to fixed charge increases as a possible solution.
Fixed and bulk charge increases
Fixed charges are the monthly connection fees all utility customers pay to keep their connection live and their account active. Bulk charges are dollar amounts added to the bills of solar owners based on their energy usage or the size of their solar system.
Earlier versions of California’s NEM rules guaranteed that people who owned solar systems would pay the same fixed charges as any other customer, and wouldn’t be assessed additional bulk charges in any way. The utility companies have argued (and will continue to argue) that those guarantees are no longer smart policy. We argue otherwise.
One utility company proposal during the 2015 NEM 2.0 proceeding included a $20 per month fixed charge increase on residential customers. Another proposal sought a bulk charge of $3-$10 per kW of installed solar power. Finally, some proposals included charges based on a customer’s highest demand during any 15-minute period during a month.
Let’s look at those last two now.
One of the blunt-force tools utilities have tried to use to make solar less financially viable for homeowners is the capacity charge. Under this scheme, a customer is charged a certain amount of money for each kW of solar panels they have interconnected with the grid. The logic is that the additional fee is necessary to cover the utility company’s costs to upgrade the grid in places where many solar installations are feeding energy back along its infrastructure.
In reality, solar installations add value to the grid by reducing the need for expensive transmission projects to carry energy from faraway generation sources. In addition, there are rules in place to allow the utility companies to recoup the costs of transmission upgrades from their ratepayers, so any improvements necessary as a result of more local solar energy should be covered under the same provision, especially since they’re more cost-effective.
Nevertheless, look for the utility companies and their allies to ask the CPUC to allow these punitive charges as part of their NEM 3.0 proposals.
The next kind of bulk charge is related to a customer’s highest power demand during a certain period of time within a billing cycle. These “demand charges” rely on careful minute-by-minute metering of a customer’s usage.
Utilities that use demand charges look at the 15-minute period of highest usage during peak time, and assess a dollar amount charge per kW of demand. When solar panels stop producing electricity as the sun sets, the customer’s usage can spike, and solar panels are mostly dormant during the peak energy usage period, usually between 5 and 9 pm.
These charges are needlessly punitive, overly complicated for homeowners to understand, and not a part of any smart residential ratemaking policy. Imagine accidentally leaving your clothes dryer running when the A/C came on and your refrigerator’s compressor was running—just once in a month—and having $50 to $100 added to your monthly bill because of it.
This kind of charge will drive people to either skip going solar altogether by making it less economical, or to pay extra to install solar with battery storage to draw energy from during peak times and make sure they never have to pay a demand charge.
If the utility companies are looking for a smart solution, they should put their money and their ideas into making storage more affordable and more integrated with the grid. The reason they would propose demand charges in the first place is because buying additional power during peak times is expensive as heck for them.
Why not propose a smart solar program that helps people get grid-connected solar+storage systems that can be set to send energy to the grid during peak times and help reduce costs for all ratepayers? California already allows storage systems that charge exclusively from solar to send energy onto the grid during peak times and earn full peak retail prices (sometimes $.45/kWh or more) for doing so. A smart policy would build on this kind of relationship for the benefit of all Californians.
Gross metering, or “buy-all, sell-all”
Gross metering is the granddaddy of all terrible ideas when it comes to solar. It goes like this: all solar installations should be treated like little mini power plants and required to be hooked directly into the grid. The utility company should buy the electricity from the solar owner at basically wholesale prices, and the homeowner buys all their electricity from the utility at retail prices. That’s why they call it “buy-all, sell-all.”
While gross metering could be called the simplest possible relationship between a solar owner and the utility company, it’s also the least realistic, most detrimental, and frankly, least American solar billing idea ever.
Think about it: you own your home and the property you keep on it. If you install solar panels on that property, you have a right to use the energy they produce for your own consumption. And although California doesn’t statutorily recognize that right, allowing the utilities to require gross metering would completely deny it to you.
You absolutely have that right—in fact, it’s been assumed you have that right throughout the history of California solar laws. As Jon Wellinghoff, a former chair of the Federal Energy Regulatory Commission and Steven Weissman, a former administrative judge at the CPUC argue, solar laws are nearly always facilitative in nature rather than permissive, which makes it obvious that state governments have long recognized a fundamental right to self-generation.
In their paper on the right to self-generate, published by UC Berkeley’s Center for Law, Energy & the Environment, the aforementioned authors assert that “much of the state legislation supporting the development of new generating facilities is only effective if individuals have a right to self-generate” (emphasis added). In comments filed in the NEM 3.0 proceeding on January 25th, 2021, a group of Community Choice Energy Authorities submitted an even more compelling argument that the rights of Californians to self-generate and consume electricity has a long and well-defined history in state and Federal law.
We already consign a great deal of authority over our lives to utility companies. They operate as regulated monopolies, able to charge their customers directly for a seemingly endless number of “improvements” to their assets, and even the money they spend lobbying regulators. And when they get caught causing wildfires and untold damages to the state’s people and natural resources, they declare bankruptcy and try to shirk the responsibility for paying for their transgressions. It is beyond reason that utility companies should be encouraged to propose taking away people’s fundamental right to their own property.
Where the NEM 3.0 process currently stands
Now that we’ve covered the backstory, it’s time to discuss what’s coming. Here’s an overview of the timeline the CPUC decision will follow:
|Milestone||Dates (2021)||What it is|
|NEM 2 Lookback Study||January 21||As the name implies, this study looks back at NEM 2.0 to determine whether that program was successful in providing value to all customers and the energy grid. It will help guide the CPUC decision throughout the process. A copy of the report is available here.|
|E3 Whitepaper||January 28||A study commissioned by the CPUC from Energy and Environmental Economics, Inc. (E3). E3 uses this study to explore “the existing misalignment between the bill savings NEM customers receive and the corresponding impact or value of this generation to the utility” and propose solutions to fix that misalignment. It is transparently anti-residential solar. A copy of the report is available here.|
|Final CPUC Guiding Principles||February||Based on the rules guiding the NEM 3.0 proceeding, a CPUC judge has developed a set of proposed guiding principles that must be used by the parties as they design their proposed successors to NEM 2.0. A vote on the final version of the guiding principles is expected on February 11. The judge’s proposed decision can be found here.|
|Final proposals from the parties||March 15||Following the adoption of the Guiding Principles, parties will draft and submit their proposals for an NEM 2.0 successor by March 15.|
|Testimony||April||Based on the proposals, the CPUC will hear testimony from the parties about the proposals and their impact.|
|Hearings||June||Once all the testimony has been given, the CPUC will hold evidentiary hearings to establish the facts they will use to judge the successor proposals.|
|Decision||November||After establishing the facts of the case and hearing testimony, the CPUC will come to a final decision in November. This may be the deadline for final interconnection agreements to be filed in order to be eligible for NEM 2.0.|
|Implementation||Q2 2022||The successor program will be implemented some time in Q2 of 2022, and will apply to all future net-metered systems in the state.|
You can follow the decision-making process at the CPUC website, or, if you don’t like reading through hundreds of legal filings trying to dig out the details, you can watch the SolarReviews blog for coverage of important future events.
What to do about NEM 3.0, depending on your situation
Ok folks, here’s where you come in, sort of. Short of filing with the CPUC to become a party and participating in the proceeding, you can’t do much to directly affect what the regulators decide. But you can help!
First, advocate for smart solar policy whenever you can—everyone should do that. The group that ordinary citizens can get involved with is called Vote Solar. You can sign up with them to get alerts about specific actions they need help with in your area.
If you already have solar panels installed
If you’ve already gone solar, you’re golden! Whether you’re on NEM 1.0 or NEM 2.0, you’ll be able to stay on your current plan for 20 years after your interconnection was finalized. At this point, enjoy the sun, and advocate for others!
If you want solar panels for your home
If you think you’ll want to install solar panels on your California home, it is pretty important to consider getting it done before November 2021. Nobody knows what’s coming next, but we can be certain it won’t be as good as NEM 2.0 for homeowners. You might have until the NEM 3.0 program is implemented in 2022 to go solar, but we urge you to not take that chance.
As long as you have final permission to operate (PTO) from your utility company before the CPUC decides to switch everyone to NEM 3.0, you’ll get the NEM 2.0 rates for 20 years, at which point you’ll switch to whatever the current offering is. Because that too is unknown, look at solar as a 20-year investment to decide if it pencils out for you.
Then again, in 20 years, batteries might be so cheap or vehicle-to-grid tech might be so good that you’ll never need to worry about getting a raw deal from the power company. You might even be able to disconnect from the grid entirely, or participate in a local microgrid instead.
If you’re part of the solar industry
If you own a solar company, you should get involved with the California Solar and Storage Association (CALSSA), which is a party in the NEM 3.0 proceeding and needs your support to fight for the sustainable growth of the solar and storage industry in California.
Outside of California, you can join SEIA (also a party to the proceeding, working together with Vote Solar). What happens next in California will likely influence state governments and PUCs nationwide, so it behooves us all to take action.
No matter who you are, you should have a say in this matter. The solar industry doesn’t want its products to create an ever-widening gap between rich and poor people by creating a cost shift, but they do want to keep growing solar in California sustainably and smartly.
We do that by allowing people to install solar panels on their own property and use the energy those panels provide. We do that by ensuring that low-income households can benefit from solar energy by getting free solar panels from programs like SASH and MASH, buying into community solar farms, or purchasing solar energy from a community choice provider.
We can’t do any of that without smart policy and the committed people who are willing to fight for it. That’s where you come in.
Author: Ben Zientara | Solar Policy Analyst and Researcher
Ben is a writer, researcher, and data analysis expert who has worked for clients in the sustainability, public administration, and clean energy sectors.