Net metering 3.0 in California: What homeowners need to know

Updated

Net energy metering (NEM) is the #1 way solar panels save you money. It works by ensuring that each excess kilowatt-hour (kWh) of electricity your solar panels produce goes to offset a kWh you consume from the grid when the sun isn’t shining. 

NEM has been the law of the land in California since 1995, and is currently on its second version, NEM 2.0. The California Public Utilities Commission (CPUC) is in the midst of designing NEM 3.0, and the changes that have been proposed could greatly reduce the financial benefits people can get by owning solar panels or subscribing to community solar.

When all is said and done, California will likely not have a true net metering system, with reduced compensation and increased monthly fees on solar owners changing the financial picture of going solar. 

This article describes some of the proposed changes and the effect they could have on the financial viability of home solar in the Golden State. One important thing to note is that current solar owners will continue to receive the version of NEM under which they signed up for 20 years after their final interconnection date. Additionally, people who install rooftop solar panels before the final NEM 3.0 decision will get NEM 2.0 credits for 20 years.

Key takeaways

  • The NEM 3.0 proceeding is underway at the California Public Utility Commission (CPUC), with the final decision due in January of 2022.
  • Once the decision is made, it is virtually guaranteed that new solar owners will receive less compensation for their solar energy than they would if they installed under the current NEM 2.0 program - meaning, if you’re considering installing solar, now is the time to do so.
  • People who install solar panels and receive final permission to operate before the decision is implemented will receive NEM 2.0 credits for 20 years, and anyone who has already installed solar will continue to participate in net metering for 20 years after their interconnection date.

Why the CPUC is considering NEM 3.0 

The original NEM program was put into place in California in 1995, and was extended a couple of times until 2013 when an Assembly bill was passed that required a review of the program and the design of its successor. 

NEM 2.0 was introduced in a 2016 CPUC decision, and began taking hold across the state as the three big investor-owned utilities, PG&E, SCE, and SDG&E, reached a cap of 5% of their peak load coming from solar power.

NEM 2.0 wasn’t much of a change in the way things were done. Under the program, which remains in effect for now, solar owners still get credit for all the energy their systems generate, though those credits are reduced by a fraction of the retail energy price that represents important low-income assistance and energy efficiency programs. As part of the NEM 2.0 decision, the CPUC promised to study the effects of the program and come up with NEM 3.0.

Since 2017, it has become popular for the utility companies and their allies to claim that net metering of rooftop solar systems represents a “cost shift.” They claim wealthy homeowners use solar panels and reduce the amount they pay for grid upkeep, while continuing to rely on the grid to deal with their consumption and excess energy. The utilities claim this leaves other utility customers to pay extra costs for upkeep of that grid. 

The cost shift argument relies on some pretty shady math, which usually doesn’t recognize the hard-to-quantify benefits of rooftop solar like improved air quality, land use benefits, and other environmental factors. They also conveniently leave out that rooftop solar threatens their business model, which relies on being able to pass the costs of capital improvements like new power plants and transmission lines along to ratepayers so the utility can earn a guaranteed 10% rate of return on their investments.

Still, the CPUC agreed to take on the NEM 3.0 proceeding, and that’s where we find ourselves today. 

If you want a more in-depth history of California NEM and how we got to this point, take a look at our article about the big changes that could result from these proceedings. Otherwise, read on to see what the parties have proposed and how it could affect people who want solar panels in the future.

Current proposals for NEM 3.0 

In March, 2021, a total of 17 proposals were submitted to the CPUC by the parties to the proceeding, which included representatives of the solar industry, the utility companies, and various other organizations. The proposals included a wide variety of ideas for ways California’s biggest utility companies would pay solar owners less for energy and charge them more to connect to the grid. 

Here are the important ideas contained within the joint utility companies’ proposal:

Reductions to energy credits 

Under NEM 2.0, current solar customers in California save an average of between 22 and 36 cents for every kilowatt-hour (kWh) of electricity generated by their panels. Under the joint utilities’ proposal, the credit for excess generation will go down to just 5.6 to 5.8 cents.

It’s important to note that the utilities’ proposal calls for monthly netting of energy production and consumption, meaning you would still earn full retail savings on all your solar energy up to your consumption for a month. Unfortunately, that would still mean that only about half of all solar energy your panels make will get credited.

Under this proposal, only excess electricity generated during a month would be credited at the new lower rate. However, the utilities are also proposing an increase in two other monthly charges that would reduce solar savings.

Increases in monthly fixed and bulk charges 

The joint utilities have proposed that a new monthly fixed charge of $12.02 to $24.10 depending on the utility, should be applied to the bill of all residential solar customers. They have also proposed a bulk solar fee called a "grid benefits charge" that would add $7.39 to $11.09 per kilowatt (kW) of solar panels a customer owns.

Here’s a table showing all the proposed changes:

Utility company Current value of NEM credits (c/kWh) Proposed value of NEM credits (c/kWh) Proposed monthly fixed charge Proposed monthly grid benefits charge
PG&E 27.7 5.6 $20.66 $10.93/kW
SCE 22.4 5.8 $12.02 $7.39/kW
SDG&E 34.0 5.8 $24.10 $11.09/kW

What NEM 3.0 could mean for solar savings 

Under the proposed changes outlined above, a homeowner choosing to install solar panels on their home would be in for a much different experience going solar. We ran some calculations to determine the differences.

Under NEM 2.0, a homeowner choosing a 7.8 kW solar system and getting service from PG&E would see an average monthly savings of $198, and their system would pay back its cost in just over 5 years.

Under the proposed design of NEM 3.0, our calculations indicate that the same consumer would save just $70 per month, and their system payback time would increase to over 15 years. Perhaps more importantly, the internal rate of return for this investment would go from 26% to -3%, meaning that an investment in home solar in California would be worse from a financial standpoint than shoving thousands of dollars into your sock drawer.

What happens next 

The numbers above are based on assumptions from just one of the proposed NEM program designs, but considering it came from the state’s three largest utility companies, it’s fairly likely that the CPUC will end up choosing something like this. The solar industry and other groups have also submitted their own program designs, and we may end up somewhere between all of them when the final decision is made.

The key point is there is great uncertainty about what the CPUC will do, and uncertainty is not good for saving money. NEM 2.0 represents certainty. If you want solar panels on your California home, start by calculating the potential savings for your home below, and make sure your installer can get a final interconnection agreement signed before the NEM 3.0 decision is final in January 2022. 

Find out how much you can save by installing solar on your home this year
 - Author of Solar Reviews

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.

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