What is NEM 3.0 and how it affects California Solar for Residential Homeowners?

On December 15, 2022, The California Public Utilities Commission (CPUC) passed Net Energy Metering (NEM) 3.0, significantly reducing the value of solar production which will put solar out of reach of many homeowners.

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What is NEM 3.0 and how it affects California Solar for Residential Homeowners?

NEM 3.0 Updates

Recent Developments in the Legal Challenge Against NEM 3.0: On May 4, 2023, a coalition of three environmental organizations initiated a legal case, arguing that the California Public Utilities Commission (CPUC) neglected to fully evaluate the advantages of rooftop solar in their decisions. This lawsuit aims to invalidate the NEM 3.0 policy and compel CPUC to establish a revised policy for solar energy billing. On September 14, 2023, the Presiding Judge of the California Appeals Court, Judge Tucher, consented to review the case and listen to the oral arguments presented. The schedule for these arguments is yet to be determined. Future updates will be provided as they become available.

Key Takeaways

  • Solar systems activated before April 15, 2023, will continue under their current net metering agreements for 20 years from the date they were connected.
  • Systems under the NEM 3.0 structure will generally receive 75% less compensation for surplus electricity fed into the grid.
  • The investment recovery time for combined solar and battery storage systems under NEM 3.0 is projected to be similar to that of solar-only systems.

In this resource, we’ll review:

History of Net Metering 1.0 and 2.0

We all use energy every day in the form of kilowatt-hours (kWh). Solar panel systems produce energy (kWh) during the day and much of the time the solar panels on a home will generate more energy than a home needs. Under NEM policies, each kilowatt-hour (kWh) a solar customer produces is valued at the same market rate as the kilowatt-hours the customer purchases from the utility. Under Net Metering a solar customer can produce excess energy during the day, receive a credit for sending it to the grid from their utility, and then use that credit to pay for the energy they purchase at night.

California’s original Net Metering (NEM 1.0) policy allowed homeowners to stay on the tiered rate plans but had some limits on the number of homeowners who could participate.

In 2017, the regulatory body governing California investor-owned utilities, the California Public Utilities Commission or CPUC, enacted an update to Net Metering Policy, NEM 2.0. NEM 2.0 brought a few changes.

  • A very small portion of the electricity charges that a NEM 2.0 customer incurs for buying electricity could not be reversed by future production.
  • A NEM 2.0 customer were compensated at a very slightly lower rate for the energy they sell to the grid.
  • All new NEM customers must enroll in a Time of Use rate if one is available.
  • There was a small one-time interconnection fee (around $150) for new installations.

Overall, these changes were minor and allowed for a one-to-one exchange of value between daily solar overproduction and home energy consumption at night.

Under NEM 2.0, if a solar project could generate 100-110% of someone’s historical energy needs, that homeowner would most likely cover ALL of their energy charges every year and be left with paying a simple 10-15$/month base customer charge.

Growth in California's Solar Market

This program, along with fast increases in utility rates, led to the rapid deployment of residential solar projects all throughout the state. CA residential solar market makes up over 50% of the US residential solar installed capacity!

Rooftop solar “has added jobs, brought new investment, and created greater resiliency for the grid and for emergencies.” said Mary Leslie, president of the Los Angeles Business Council.

What is NEM 3.0?

NEM 3.0 is a new version of the net energy metering policy approved by the CPUC on December 15, 2022. NEM 3.0, alternatively referred to as the Solar Billing Plan, was implemented on April 15, 2023.

NEM 3.0 is not retroactive. Solar systems installed under NEM 1 or NEM 2 will remain under their current policy.

5 things to know about NEM 3.0

  1. 👎Major reduction in the value of solar electricity sent to the grid during the day.
  2. 👍There are no new base charges or fixed fees
  3. 🔋 Solar + Storage (battery) projects will continue to make sense economically under NEM 3.0
  4. ⌛ Homeowners who had their interconnection application submitted before April 13, 2023 were grandfathered into NEM 2.0 for 20 years
  5. 🔋 Solar homeowners that are grandfathered into NEM 2.0 will be able to add battery storage later and remain on NEM 2.0

The first and most critical point is the changing rate structure that will reduce the value of solar energy.

NEM 3.0 is Buy High and Sell Low for Homeowners.

The biggest change from NEM 2.0 to NEM 3.0 is the rate at which solar homeowners are compensated for the excess electricity they put on the grid.

The credits for self-generated solar energy exported to the grid (“Export compensation”) are estimated to be reduced by 75%. Export compensation rates will be Time of Use (TOU) based, with different rates for each hour/week/month of the year.

Here's a chart to summarize how people will be paid for their excess solar production. The gray bars indicate what homeowners pay per kWh for grid electricity and the black bars indicate the rate at which solar owners are be credited for excess solar production under NEM 3.0.

Example Day of Electricity Import and Export Prices

It’s easy to visual the major difference, import and export prices are not the same.

“The solar industry and clean energy supporters are still reviewing the CPUC’s proposed decision, but based on an initial analysis, it would cut the average export rate in California from $0.30 per kilowatt to $0.08 per kilowatt and make those cuts effective in April 2023, resulting in a 75% reduction in value of exports,” the California Solar and Storage Association (CALSSA) said in a release.

To help visualize this, imagine the red line below is a typical homeowner in California. They wake up, use some power, drive to work, then come home in the evening and turn on their lights, make food, and wash dishes.

Clearly, the energy demand increase also correlates with the price increases for “Imports”.

Example Day of Electricity Import and Export Prices

Now, imagine that homeowner has solar panels installed. This green line in the image below shows how there can be a major difference between the demands of a home and the solar energy production.

Example Day of Electricity Import and Export Prices

Under NEM 2.0 this wasn’t so bad. The area between the green solar production line and the red home demand line shows the “Exports” to the grid during the day. Under NEM 2.0, these exports were valued at a blend of the retail off-peak and on-peak prices which are very high. These energy credits then were used in the evening during on-peak hours or off-peak hours.

With this visual, we can see how damaging these reduced “Export Prices” are for solar economics. Exactly when the panels will be exporting power the most is the time when the value generated will be the lowest.

At least the utilities didn’t get their proposed Monthly Settlement, which would have disabled the ability to carry forward credits month to month. Under NEM 3.0, the charges will be settled on an annual basis which is more favorable to solar homeowners.

No new fixed fees

The new NEM 3.0 rate structure will reduce solar savings and extend payback periods for solar investment by 2 to 5 times longer than under NEM 2.0.

The only good news is that there is no additional fixed monthly charge for going solar. The utilities proposed reducing solar energy credits and adding a fixed “interconnection fee” based on the solar system.

These additional interconnection fees were removed from the final approved NEM 3.0 version.

Solar + Storage (battery) projects

The new NEM 3.0 provides a major push for adding a battery to solar by the CPUC.

To understand why the CPUC has created a structure to incentivize battery installations, we have to understand the current state of power supply and demand in California.

Due to near-exponential growth in utility and commercial solar projects, There is an excess of total solar power being produced during the day and not enough buyers at that exact moment. This phenomenon is known as the “Duck Curve” in energy demand.

The Duck Curve

Adding storage systems will enable a homeowner to store power in their home battery, instead of exporting it to the grid, and using that power when the sun goes down and residential power demand traditionally goes up. The hope is that more batteries will help “level” the demand and make the grid more “efficient”.

But there is another component to this battery conversation. BeforeThe Inflation Reduction Act, the only way a homeowner could receive the 30% Federal Investment Tax Credit for a battery would be if it was 100% charged by a renewable energy system. This required solar installers to install storage systems in a way that would not allow for importing or exporting power directly to the grid.

One could power their home, but could not export power to the grid directly from their battery.

The Inflation Reduction Act extends to stand-alone energy storage a tax credit that covers 30% of the size of the investment. Previously, the tax credit was limited to energy storage paired with solar energy, which meant that there was limited incentive available to build out battery storage systems for grid services.

Now, solar installers are able to connect the storage systems in a way to allow for direct import and exports to the grid which opens up a new value for adding a battery to a solar project. NEM 3.0 structure is design to take advantage of this new installation approach.

Example Day of Electricity Import and Export Prices

In fact, the new export rates can be as high as $3.32 per kWh during peak demand hours in September. Compare this to $0.03 per kWh during noon in the summer.

By adding battery storage, homeowners under NEM 3.0 could store solar electricity generated during the day and push it onto the grid in the evening when export prices are at their highest.

As the export rates vary over time, we can imagine the value of a battery system attached to a solar panel system will only increase as the grids use these economic levers to manage grid stability.

That’s on top of the great peace of mind that comes with having battery backup for power outages.

Batteries with Solar under NEM 2.0:

  • Slight increase in savings through a time of use rate arbitrage.
  • Provide individual home energy security

Batteries with Solar under NEM 3.0:

  • Maintain NEM 2.0 savings
  • Provide individual home energy security
  • Incentivized economically to help with grid stability

Sounds great, but what’s the catch? Adding a reasonable, reliable battery system can add $12,000 - 30,000 to a project!

There is some good news, NEM 3.0 includes $900 million in new funding for the Self Generation Incentive Program (SGIP), which provides battery storage rebates for SCE, PG&E, SDG&E, and SoCalGas customers.

20-year grandfathering for NEM 2.0

An important decision in NEM 3.0 was to provide a 20-year grandfathering for NEM 2.0. There was discussion about removing grandfathering altogether, but luckily those terms were removed.

This also gives great peace of mind to those who installed solar during 2017-2022 and secured NEM 2.0 rates.

This grandfathering means that solar homeowners that submit a complete interconnection application prior to the April 13th, 2023 cutoff will retain NEM 2.0 benefits.

A complete interconnection application includes a:

  • Signed contract
  • Single Line Diagram (SLD)
  • Contractors State License Board disclosure (CSLB)
  • Consumer protection guide
  • Oversizing attestation (if applicable)

Typically a homeowner in CA who decides on a solar project will have a physical site survey to confirm feasibility, and then their installer will develop an official single line diagram and submit a completed interconnection application. This site survey step is important as any changes to their application after the cutoff could push the homeowner onto NEM 3.0.

Homeowners will not be required to have their systems installed or interconnected by this deadline, and are given three years to submit the final building permit signoff and maintain their NEM 2.0 status.

To qualify for NEM 2.0, the interconnection application must be submitted by April 13, 2023, and cannot contain any mistakes or deficiencies. If deficiencies are found, the qualification to participate in NEM 2.0 will be forfeited, and the homeowner will be required to enroll in NEM 3.0.

NEM 2.0 customers can add batteries after April 13, 2023

Part of the new NEM 3.0 policy ensures that homeowners can add batteries to their NEM 2.0 solar projects and retain the NEM 2.0 status.

It’s hard to say what will happen with battery prices after the NEM 2.0 cutoff, but it’s safe to say that securing the NEM 2.0 with solar only is worth it.

After NEM 3.0 comes into effect, It is likely that battery prices will increase due to an increase in demand and a limit of supply.

When Will NEM 3.0 Take Effect?

The CPUC unanimously voted to pass NEM 3.0 on December 15, 2022. This kicked off a 120-day sunset period for NEM 2.0. This gives utility customers until April 14, 2023, to submit interconnection paperwork and be grandfathered into NEM 2.0.

The NEM 3.0 timeline:

  1. The Proposal for Net Energy Metering version 3 (NEM 3.0) was released on November 10, 2022.
  2. The California Public Utilities Commission voted and approved NEM 3.0 on December 15, 2022.
  3. The NEM 3.0 rate plan went into effect on April 15, 2023.

Note: Solar PV systems do not need to be installed by the deadline to be grandfathered into NEM 2.0, just the submission of a complete and accurate interconnection application.

NEM 3.0 frequently asked questions (FAQs)

Has NEM 3.0 been approved?

Yes, on December 15, 2022, the California Public Utilities Commission (CPUC) voted unanimously to approve NEM 3.0. The policy will take effect on April 14, 2023, following a 120-day sunset period for NEM 2.0. Solar homeowners can still be grandfathered into NEM 2.0 during this period by submitting a complete interconnection application.

Is NEM 3.0 retroactive?

No, NEM 3.0 is not retroactive. This new net metering policy will only apply to homeowners that submit their solar interconnection applications after April 13, 2023. Homeowners that submit a complete and accurate interconnection application prior to NEM 3.0 taking effect will be grandfathered into NEM 2.0 for 20 years.

What does NEM 3.0 mean for solar?

NEM 3.0 reduces the export rate for residential solar electricity by around 75%, from an average of 30 cents per kWh to 8 cents per kWh. Lower export prices will increase the payback period for solar owners under NEM 3.0 and decrease the overall savings.

This effectively increases the value of pairing battery storage with solar. Under the new rate structure, the return on investment for solar and battery is similar to that of solar only, but with the added benefits and independence of having a backup power source.

Does NEM 3.0 apply to municipal utilities like the Los Angeles Department of Water and Power (LADWP)?

The new NEM 3.0 does not directly apply to the municipal utilities in the state of California, but it does set negative precedents for reducing solar “export” value and changing rate plans. Municipal utilities like LADWP and SMUD may develop new NEM plans in the future with increasingly worse incentives for residential homeowners looking to save money with solar energy.

How will NEM 3.0 affect me if I live in another state?

We’ll see the impact over time. The power supply and demand problem that NEM is trying to “solve” in California are not as troublesome in most other states. California leads the US market for the amount of solar (primarily utility-scale solar projects) which creates this day-time over-production of energy. It’s unfortunate that regular, working-class homeowners faced with rising inflation are having to pay for this solution. The precedence in CA is not a great thing however for changing policy conversations in other states. For now, we imagine most other states and jurisdictions are going to wait and see what happens.

Is NEM 2.0 transferable if I sell my home?

Yes, NEM 2.0 rates are transferable to a new owner for 20 years from the date of original Permission to Operate. That means a homeowner who secures NEM 2.0 before the sunset date, April 13, 2023, and is interconnected to the grid on July 1st, 2023 would be able to sell their home and transfer this special NEM 2.0 rate plan for 20 years. That homeowner would be able to transfer the ability to pay the minimum base NEM 2.0 customer charge ($10-15/month) with great net metering. A homeowner who misses this deadline would not have the same ability to see a lower cost of living due to reduced power bills under NEM 3.0.

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