NEM 3.0 in California: What homeowners need to know about net metering

Updated

TAKE ACTION: The article below describes changes proposed by the California Public Utilities Commission that would greatly reduce the number of solar installations in the state. If enacted, this decision would make it harder for people to go solar and take away net metering from customers who already have it. You can make a difference! After you read the article, click here to go to the CPUC website, then click the “Add Public Comment” button to make your voice heard!

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, covering all customers of the state’s three largest utilities—PG&E, SCE, and SDG&E. It’s currently on its second version, NEM 2.0. The California Public Utilities Commission (CPUC) is nearing the end 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.

The latest news: In early February 2022, CPUC Administrative Law Judge Kelly Himes told all the parties involved in the NEM 3.0 proceeding that a final decision was being delayed “until further notice”, and that two recently-seated commissioners needed time to read and understand the record so far. That pause ended on May 9th, when Judge Himes introduced a new order that re-opened the record and invited the participants to respond to new questions raised by the Commissioners.  

Previously, the Commission released its proposed decision on December 13th, 2021. The proposal contains provisions that (among other things) reduce compensation for solar energy sent to the grid, add new monthly fees to the electricity bills of future solar owners, and reduce the amount of time people on NEM 1.0 and NEM 2.0 can receive bill credits under those programs.

The May ruling doesn’t go so far as to changing anything about the proposed decision, but it does ask some questions about changes the Commissioners are considering that indicate how the Commission might be leaning. Respondents and parties of the proceeding have until June 10th to submit their opening comments in response to those questions, and June 24th to submit reply comments. 

Below, we’ll discuss the proposed NEM decision in detail, breaking down what it might mean for every person who has or wants to have solar panels on their California home, and indicating where the possible changes indicated in the May ruling might affect the outcome. It’s important to note that this is a proposed decision, not a final one. It’s also important to acknowledge that this is a very complex issue in the middle of getting worked out, and therefore might be very difficult to understand. We’ll do our best to make it as clear as possible, and we urge everyone to learn as much as they can and submit public comments to the Commission. 

As mentioned above, the NEM 3.0 decision is not yet final. People in the industry can get involved by sending a message to the Governor through the California Solar and Storage Association (CalSSA) website. Individuals can also check out savecaliforniasolar.org and votesolar.org for information on upcoming events.

Key takeaways

  • The proposed decision (PD) of the CPUC renames NEM as “net billing” and covers all customers of PG&E, SCE, and SDG&E who install solar after implementation. The PD requires customers to switch to specific Time of Use billing plans with very high costs of electricity during peak times and low costs during off-peak times. Additionally, it reduces compensation for excess energy sent to the grid, and measures that energy in real-time, as opposed to hourly, like NEM does.
  • It also adds a monthly Grid Participation Charge of $8 per kilowatt (kW) of solar to the bills of all people who go solar after implementation of the new rules, costing the average homeowner almost $600 per year, or $15,000 over 25 years.
  • In order to reduce the impact of such a drastic change, the PD contains small incentives called Market Transition Credits that reduce the Grid Participation Charge by small amounts for a customer’s first 10 years on net billing. Low-income homeowners do not have to pay the Grid Participation Charge and get larger Market Transition Credits.
  • The PD retroactively reduces the period of eligibility for NEM 1.0 and NEM 2.0 from 20 to 15 years, meaning existing solar owners will be affected if the PD is implemented as written.
  • According to the California Solar & Storage Association, payback times for the average homeowner would increase to as many as 12.2 years for non-low-income customers, and up to 18.6 years for low-income customers.
  • The latest ruling from the CPUC seems to indicate the Commission is interested in replacing the Market Transition Credits with per-kWh monetary credits, which could temporarily improve the economics of solar, but ultimately leave Californians in the same predicament as the current proposed decision.

Breaking down the proposed decision 

During the course of the NEM 3.0 proceeding, the CPUC received 18 different proposals from stakeholders, which included the solar industry, utility companies, natural resources groups, and ratepayer advocates, among others. The proposals varied widely, based on the interests of the individual groups. 

Ultimately, the CPUC decided to craft its proposed decision (PD) using parts from each of the proposals, but the PD as it exists today is closely aligned with what the utility companies proposed.

Here are the important ideas contained within the proposed decision:

The switch to new Time of Use plans 

Under the PD, people who want to install solar on their California home would be required to sign up for a “highly differentiated” Time of Use (TOU) rate, a special rate plan under which electricity is very expensive during the times of the highest grid usage, and much less expensive at other times.

Essentially, this was included in the PD in order to prompt people who install solar panels to add battery storage. A TOU rate with high per-kWh charges in the peak evening hours would cause solar owners to see much fewer savings unless they install batteries that can store excess power during the day and discharge at night when the homeowner uses appliances and things like air conditioning. 

The PD includes one TOU rate from each of the three main utilities, as shown below. It also allows the utilities to come up with new rates that meet its definition of “highly differentiated”. Importantly, people with lower income who qualify for the California Alternate Rates for Energy (CARE) program can choose ANY available TOU rate on which to take service.

Here’s a table showing all the proposed changes:

Utility company Rate name Lowest off-peak rate Highest on-peak rate
PG&E EV2-A $0.176/kWh $0.499/kWh
SCE TOU-D-PRIME $0.186/kWh $0.482/kWh
SDG&E EV-TOU-5 $0.082/kWh $0.547/kWh

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 PD, the credit for excess generation will go down to just 4.7 to 5.8 cents, on average.

The PD calls for utilities to base their rates on the state’s Avoided Cost Calculator (ACC), which is a complex calculation of the value that distributed solar (like home installations) adds to the grid. The calculator produces this value for each of the three major utilities during every hour of the day, every month of the year. 

Like the switch to highly differentiated TOU rates, this reduction in credit for energy sent to the grid is intended to push solar owners toward adding batteries. If you manage to self-consume all your solar energy, you don’t have to worry about sending electricity back to the grid for pennies on the dollar you would have paid. 

Solar advocates have pointed out that the ACC does not take into account many important benefits of solar energy, including environmental and social benefits. This is one area that will see the solar industry and its allies pushing back hard. 

Increases in monthly fixed and capacity charges 

Lest you think that adding a battery to your home solar system would eliminate the problems of the net billing program, the CPUC is here to add some fees that you cannot avoid. First, switching to the currently-approved TOU plans will result in an increase in monthly fixed charges for SCE and SDG&E customers, and PG&E is finalizing a new rate plan with increased fixed charges. 

Second, the PD adds a monthly charge of $8 per installed kilowatt (kW) of solar to a customer’s bill. For the average customer who installs a 6 kW system on their home, this will mean a charge of $48 per month, which will directly reduce their savings from installing solar panels, without any way to decrease the charge. That’s $14,400 over the 25-year life of a home solar system. Low-income customers who qualify for CARE rates are not subject to the $8/kW charges.

Here’s a table showing all the proposed changes:

Utility company Current value of NEM credits (c/kWh) Average value of proposed credits (c/kWh) Proposed monthly fixed charge* Proposed monthly Grid Participation Charge
PG&E 27.7 4.7 $0 $8/kW
SCE 22.4 5.8 $12.02 $8/kW
SDG&E 34.0 4.9 $16 $8/kW

*Fixed charges associated with the eligible TOU rate plans as listed in the PD

Temporary incentives 

The CPUC admits that the changes to compensation and fees would be extremely difficult for the solar industry to bear, so its initial proposed decision includes a temporary system of incentives called “Market Transition Credits” (MTCs), which are small monthly payments based on the kW of system size, for customers of two of the three main utilities.

These credits would provide a so-called “glide path” for the solar industry, making it so that the great reductions in the value of energy credits and increases in fees don’t all hit at once, allowing the industry to acclimate to the changes over time.

The proposed MTCs are available for people who sign up for net billing in the first four years of the program. They start at $1.62/kW for PG&E customers and $3.59/kW for SCE customers. SDG&E customers do not earn MTCs, because electricity rates there are so high that the Commission alleges it isn’t necessary to stabilize solar savings in the same way as the other utilities have to.

Potential changes to the incentives indicated by the May ruling 

In the May ruling, the Commission “seeks comments from the parties on another glide path approach” that they call “ACC Plus” (referring to the Avoided Cost Calculator mentioned above).

Under this new glide path approach, the Commission proposes that people who get solar systems installed in the first several years after the decision takes place would receive a fixed dollar amount per kWh of electricity their systems export to the grid. The ACC Plus approach would take the place of the Market Transition Credits. 

After outlining the broad strokes of the ACC Plus approach, the ruling presents several questions it wants the parties to provide an answer to. These questions seek input on whether the parties would support the ACC Plus approach, how they should determine the value of energy credits, who gets the credits, and how the credits would differ based on the characteristics of each solar system and the incomes of the system owners.

Low-income incentives 

Under the proposed decision, low-income households would earn larger MTCs; $4.36/kW in PG&E territory and $5.25/kW in places served by SCE. Still nothing for SDG&E. In the May ruling, the Commission asks the parties to weigh in on whether the proposed ACC Plus approach would include increased payment amounts for low-income solar owners.

Combined with the fact that these households aren’t subject to the $8/kW Grid Participation Charge, these incentives represent a fairly good opportunity for savings. However, considering many low-income households cannot take advantage of the federal solar tax credit, the proposed incentives do not make solar a very easy investment without additional programs.

But there might be some good news on that front, actually. Another section in the PD creates a fund of $150 million per year for four years, earmarked for a low-income incentive program that is yet to be defined. The CPUC is asking for the utility companies to come up with ideas that will help to speed solar adoption in low-income areas.

The end of NEM 2.0 

Two important things regarding NEM 2.0 appear in the PD. First, all current solar owners that earn NEM 1.0 and 2.0 credits will have the term of their NEM agreement reduced from 20 to 15 years. This changes the deal that Californians thought they were getting when they signed up for NEM. Only one other state has ever taken net metering away from people who had already signed contracts, and that decision was rescinded in short order.

The second important thing to know about NEM 2.0 is that the PD sets a deadline of 120 days after the decision is adopted for people to sign interconnection agreements and still get NEM 2.0 for 15 years. The first CPUC voting meeting after June 24th is July 14th. If the Commission were to adopt NEM 3.0 on that date, and if that 120-day period holds true, a customer would need a complete, non-deficient interconnection agreement filed by November 11th, 2022 to stay on NEM 2.0 for 15 years

That doesn’t leave a lot of time. If you think you want solar panels on your California home, the time to get quotes is right now.

See what local solar installers are charging for solar panel systems

What NEM 3.0 could mean for solar savings 

Under the proposed changes outlined above, a homeowner choosing solar in California would be in for a much different experience going solar. 

Currently, under NEM 2.0, a homeowner choosing a 6 kW solar system and getting service from PG&E would see an average monthly savings of $183, and their system would pay back its cost in just over 6 years.

Under the proposed design of NEM 3.0, CalSSA estimates the payback time for that same customer would increase to 11.6 years. Furthermore, the payback time for a low-income customer would be 16 years, due to the fact that they couldn’t claim the federal tax credit. There is reason to believe the Commission is looking for ways to make the difference in payback time not so harsh (for at least the first few years after NEM 3.0 is implemented), but the contents of the May ruling seem to show the Commission isn’t interested in changing the worst parts of the proposed decision.

With expected numbers like these, residential solar installers in California will have a much harder job of showing their potential customers that solar can be a good investment. And that’s just the way the utility companies want it. They want people to continue relying on their grid that’s made up of the wires that are the source of their profits and carry power from industrial-sized generators to the public. When people install solar panels on their homes and businesses, it disrupts that profitable system.

What happens next 

As we mentioned above, we don't know when the CPUC will vote on whether to make the proposed decision its final word on NEM 3.0. We do know it will come sometime after June 24th, 2022; most likely in July or August. The solar industry and advocates around the state are doing all they can to make sure the CPUC knows that this decision would kill the residential solar industry, including small businesses and jobs worked by nearly 70,000 Californians

If you have or want to have solar panels, or want the CPUC to design a better program that protects solar businesses and creates equitable opportunities for low-income Californians to take advantage of solar power, make a public comment on the CPUC proceeding and get involved at the places we mentioned above.

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 - 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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