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 reduce the financial benefits of going solar and decrease the number of solar installations in the state. 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 one of the most important ways solar panels save you money. It works by ensuring that each excess kilowatt-hour (kWh) of electricity your solar panels produce offsets 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: On November 10th, 2022, the CPUC released its latest proposed decision (PD) in the NEM 3.0 rate case. We say “latest,” because the November PD is actually the second time the Commission has published such a document. The first PD came in January 2022 and would have nearly destroyed the solar industry in California. Thankfully, the CPUC returned to the drawing board, and the new one isn’t nearly as bad.

Still, Californians who add solar panels to their homes would see greatly diminished financial returns from installing solar if the proposal is approved. The new PD replaces NEM with a program called the Net Billing tariff, which would reduce the credit paid to new solar owners for energy their systems export to the grid.

The PD will be debated in oral arguments between the parties on November 16th, and possibly voted on by the Commissioners as early as December 15th. If this timeline holds, the new version of NEM could be implemented for people who go solar in April 2023. That means two things:

  • There is still time to install solar and get NEM 2.0 for 20 years (much better than Net Billing)
  • If you want solar but have to wait until after New Billing takes effect, there is a lot to learn

Below, we’ll discuss the proposed Net Billing decision in detail, breaking down what it might mean for every person who has or wants to have solar panels on their California home. 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 CPUC’s proposed decision (PD) would replace NEM with the “Net Billing tariff” for all customers of PG&E, SCE, and SDG&E who install solar after implementation.
  • Net billing would require customers to switch to specific Time of Use billing plans with very high peak electricity prices, reduce compensation for excess energy sent to the grid, and measure energy exports in real-time, as opposed to the current practice of reconciling exports and imports on an hourly basis.
  • To ease the transition from NEM to Net Billing, the PD includes small incentive payments for each kilowatt-hour of solar electricity that residential customers of PG&E and SCE export to the grid for the first nine years. Each year after implementation these incentive amounts would decrease for new customers, disappearing after 5 years.
  • The Net Billing tariff was designed so the average homeowner would be able to recoup their investment in a solar installation after 9 years. Our analysis confirms a 9-year payback under Net Billing, even for systems with paired storage, despite the added cost of a battery.
  • If you already have solar panels under NEM 1.0 or 2.0, nothing changes for you. Existing solar owners keep the version of NEM that was in effect at the time their system was interconnected for 20 years, even if they add a battery to their system at any time in the future.
  • People who want to get on NEM 2.0 before the Net Billing tariff takes effect must have an installer submit a complete, non-deficient interconnection application within 120 days of the decision being adopted. This will likely be April 14th, 2023.

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, and the PD as it exists today does not closely resemble any single party’s plan.

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 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 lower savings on their electricity bills 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 lists one TOU rate from each of the three main utilities that currently meet the criteria. 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 must also switch to these highly differentiated rates.

Here’s a table showing all the proposed changes:

Utility company Rate name Lowest off-peak rate Highest on-peak rate
PG&E E-ELEC $0.258/kWh $0.529/kWh
SCE TOU-D-PRIME $0.214/kWh $0.539/kWh
SDG&E EV-TOU-5 $0.102/kWh $0.653/kWh

Reductions to energy credits 

Under the current NEM 2.0 rules, 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 would go down to just 4.7 to 5.8 cents, on average. The credit for this energy would be called the “retail export compensation rate.”

The PD calls for utilities to base their export compensation rates on the state’s Avoided Cost Calculator (ACC), which is a complex tool used to determine the value that each kWh of energy produced by distributed solar (like home installations) adds to the grid.

Under Net Billing, each utility would have its own retail export compensation rate for every hour of each weekday and weekend day during a month. For example, the export compensation rate would be the same between 1 PM and 2 PM on every weekday in March but would be different on Saturdays and Sundays. The rates would change every month.

Part of each ACC is a schedule of estimated avoided costs in the future, attempting to predict what the avoided cost will be for many years. The Net Billing tariff would use this schedule to determine the first 9 years of export rate credits for a new solar customer, calling that time “the legacy period.” The CPUC says that this certainty of the value of exported energy will allow new solar customers to be sure of the potential returns on their investment.

This probably sounds quite complicated—and it is—but if you take away one thing about hourly retail compensation rates it should be this: export compensation rates follow a similar schedule to retail energy prices under a time-of-use rate. They are generally lower at night and midday than in the evening, and also lower during the winter compared to the summer. So generally, noon on a Saturday in January would have a low export rate, and 7 pm on a Tuesday in August would have a very high one.

Like the switch to highly differentiated TOU rates, this low credit for energy sent to the grid when the sun is shining is intended to push solar owners to add batteries. If you can store all your solar energy in batteries rather than sending it to the grid, you don’t have to worry about earning pennies on the dollar for excess energy. With an adequately-sized battery, all your solar energy goes to reducing your bill by the retail rate.

Temporary incentives

The CPUC admits that the switch to Net Billing would make it difficult for new solar owners to see adequate utility bill savings in 2023, so its proposal offers a small additional monetary incentive for each kWh of solar energy sent to the grid by customers of PG&E and SCE who sign up for the Net Billing tariff.

The Commission calls this bonus “ACC Plus” and it would apply equally to every kWh of electricity exported by a solar installation. Together with the 9-year legacy period of ACC values, it says the incentive is designed to allow new solar owners to hit a 9-year solar payback period. But they only offer this deal to the customer who originally causes the system to be installed.

That means if you sell your house before the 9 years is up, the legacy period and ACC Plus credits do not carry over to the next owner. Instead, the new owner would get whatever export credit rate is defined by the current ACC, and that rate will change each time a new ACC is released.

The CPUC says SDG&E customers would not receive the ACC Plus, because solar in SDG&E territory already has a better-than-9-year payback due to electricity from the utility costing so much. Commercial customers in all areas would also not be eligible for the ACC Plus payments.

In order to support low-income homeowners on the CARE and FERA programs (which provide discounted prices for electricity service), the CPUC proposes a larger ACC Plus adder, once again targeting the 9-year payback period for these customers who would already pay a lower rate on their energy bills.

Here’s a table of the proposed initial values of the ACC Plus:

Customer Segment PG&E SCE SDG&E
Residential Non-CARE $0.018 $0.040 $0.00
Residential CARE $0.087 $0.093 $0.00

The proposed credits listed above are available to customers who sign up for Net Billing in the first year of the program and are added to their export compensation rate for 9 years following installation. At the beginning of each calendar year after implementation, the value of the credits would decrease by 20% for new Net Billing customers.

The CPUC says that adding these credits provides a “glide path” for the solar industry by preventing Net Billing from scaring too many customers away from installing solar and allowing the industry to acclimate to the changes over time.

Increases in monthly fixed charges 

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.

Here’s a table showing all the proposed changes that would be in effect in year one of the Net Billing tariff:

Utility company Current value of NEM 2.0 credits ($/kWh) Average value of proposed credits including Non-CARE ACC Plus ($/kWh) Proposed monthly fixed charge increase*
PG&E $0.277 $0.068 $15
SCE $0.224 $0.087 $12.18
SDG&E $0.340 $0.049 $16

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

Annual true up

Under NEM 2.0, solar owners receive a monthly bill that lists their year-to-date charges, credits, and total amount due, but they only have to pay once per year at the annual true-up.

Net Billing would retain the annual true-up for energy credits but would require customers to pay the amount due on their bill every month. This would include the minimum monthly charge (shown in the above table), and any other energy charges for the month. Any credit leftover at the end of the month would carry over to the next month.

A solar customer would be allowed a one-time change to the date of their annual true-up, so they can maximize their use of energy credits during the year.

System oversizing

Traditionally, solar systems in California must be sized to produce as much electricity as the homeowner used in the previous year. Under Net Billing, customers of all three utilities would be able to oversize their systems as long as they attest that they plan to increase their usage of electricity in the next year; for example, by adding an electric car.

Our estimates show that the average driver would need an additional 2.5 kW of solar to charge an electric vehicle from solar panels at home.

Changes to NEM 1.0 and NEM 2.0

There are no changes to NEM 1.0 and 2.0 in the PD. People with earlier versions of NEM get to keep that billing arrangement for 20 years from their original date of interconnection.

In the first PD, the CPUC wanted to cut the eligibility period for NEM 1.0 and 2.0 subscribers from 20 years down to 15, affecting everyone who had already installed solar panels up to this point. That idea really made a lot of people angry, but we no longer have to worry about it!

In an additional gesture of goodwill, the CPUC’s Net Billing proposal contains a nice bonus for current solar customers: If you’re already on NEM 1.0 or 2.0, you can add a battery to your system in the future without triggering a jump to the new tariff. That’s some smart policy from the Commission, considering one of its goals is to transition to a market where all solar installations come with storage.

How to get on NEM 2.0 before the deadline

Remember, the 20-year eligibility period is available to anyone who signs up for NEM 2.0 before the deadline. 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 20 years.

The next CPUC voting meeting is December 15th, 2022. If the Commission were to adopt the Net Billing tariff on that date, and if that 120-day deadline period holds true, a customer would need a complete, non-deficient interconnection application filed by April 14th, 2023 to stay on NEM 2.0 for 20 years.

If you don’t have solar and you want NEM 2.0 (and you should), you need to get in gear now. You don’t even need to have the panels installed in 2023. Any solar installation for which the installer submits a complete interconnection application by the April deadline would get to keep NEM 2.0 for 20 years, as long as the application is deemed complete and non-deficient. That’s hard to pass up.

The exact language in the bill is as follows (emphasis added):

“No later than 120 days after the adoption of this decision, the Commission will implement the NEM 2.0 tariff sunset marking the end of the Sunset Period, at which time no additional customers will be permitted to take service under the NEM 2.0 tariff. Joint Utilities recommend establishing the eligibility for inclusion in the Sunset Period based on the interconnection application date. The Commission adopts this policy.

“(T)he interconnection application date is defined as the submission date of an application that is free of major deficiencies and includes a complete application, a signed contract, a single-line diagram, a complete California Contractors License Board Solar Energy System Disclosure Document, a signed California Solar Consumer Protection Guide, and an oversizing attestation (if applicable).”

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. Solar installers across the state are going to be very busy submitting interconnection applications between now and April 14th, 2023. Get in line soon.

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 who gets solar panels installed in California would save significantly less than someone who goes solar today.

According to our calculations, a PG&E customer who installs a 5 kW solar system on their roof under NEM 2.0 would see an average monthly savings of $145, and their system would pay back its cost in about 6.5 years. Under the first year of the Net Billing tariff, that same customer would see savings of $95, with those savings increasing slightly as the ACC values progress along their 9-year schedule. If the homeowner stays in the home for 9 years, the system would pay itself off during that time.

How about homeowners who get battery storage with their systems? Those folks would still save the full retail amount for energy their panels generate that gets stored in the battery and used to power the home at night. With currently-available incentives under California’s Self-Generation Incentive Program (SGIP), we estimate a homeowner in PG&E territory who takes service under the net billing tariff would indeed see a payback of 9 years with paired battery storage.

That means under Net Billing, the payback period for the average solar installation with a battery would be nearly identical to the payback period for a standalone solar system if all other costs are equal. That’s exactly what the commission was going for with this plan, and our own calculations confirm that the proposed design of Net Billing would do what the commission set out to do.

Unfortunately, what happens after that 9-year period would be very different from what currently exists. Under NEM 2.0, a system owner continues saving at nearly-retail rates for 20 years, racking up a huge amount of savings. Over the 25-year lifetime of a solar installation, a California homeowner can see a huge return on their investment.

Under Net Billing, the savings after the first 9 years would likely be extremely low for standalone solar systems, because the retail export credit will revert to whatever the current ACC says. At the very least, this takes away the ability to accurately predict future solar savings, at least for systems without batteries.

Solar without storage in California would no longer be a good financial investment, even though it would likely still pay back its cost in a reasonable amount of time. Luckily, nothing about the Net Billing tariff would prevent someone from installing a battery in some future year and increasing their ability to save.

Potential caveats

The numbers above are based on the Commission’s estimated cost of solar of $3.30 per watt. The cost for an individual homeowner to install solar varies based on their specific needs and could increase or decrease depending on many factors, including the size and orientation of the roof, whether the customer needs a main panel upgrade, and more. That said, at costs below $3.30 per watt, Net Billing wouldn’t be a very bad deal at all, if it was all you could get.

But, a couple of things coming down the line could temper our assessment of the reasonableness of Net Billing. First, the Commission repeatedly refers to Rulemaking 22-07-005 in the text of the PD. It says this proceeding will “broadly restructure the way fixed costs are collected, moving from volumetric charges to an income-graduated fixed charge on all residential customers.”

If that restructuring is done in such a way that it affects existing solar customers, Net Billing (and NEM, for that matter) could be completely upended.

Furthermore, the ACC could end up becoming a political battle every couple of years. Solar advocates will fight to get social benefits like better health and improvements in air quality included in the calculations, but it will be an uphill battle. If the ACC continues to leave important benefits of distributed solar uncounted, it could mean a solar installation without an expensive battery remains a bad financial choice for the majority of homeowners.

On the other hand, if a future version of the ACC would produce better financial results for Net Billing customers, they can opt-out of the 9-year legacy period and switch to whatever export compensation rate is established at the time.

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 on or after December 15th, 2022 (most likely on). The CPUC has been working on this program design for two years, and they seem ready to be done.

The solar industry and advocates around the state are doing all they can to improve some of the numbers within the proposed decision, but in general, we’re encouraged that this new PD isn’t a worst-case scenario for the industry or Californians who want solar panels for their homes.

If you want to have a word with the CPUC, file a public comment on the CPUC proceeding and get involved at the places we mentioned above.

Find out how much solar panels can save you
 - 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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