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Clouds Lift on California Solar

November 29, 2022

Read Time 3 MIN

California’s revised net energy metering proposal is more favorable towards solar homeowners than its previous proposal and may create a stronger incentive for adopting solar plus storage.

The passing of the Inflation Reduction Act (IRA) in August cemented a key piece of federal regulation—one that has the power to spur technological innovation as a pathway to continued growth across sustainability sectors. We believe another noteworthy policy development is likely to set an example for how the U.S. evolves in renewables development on a state and local level.

For nearly a year, a California legislative proposal has threatened the growth of residential solar in the state and, given California’s leadership in renewable energy adoption, placed the direction of policy-making for similar solar growth states under scrutiny. A significant redo of the proposal was introduced on November 10, 2022, and the industry breathed a sigh of relief, as the proposed policies were meaningfully less punitive to solar growth.

What Is NEM, and Why Does It Matter?

NEM stands for net energy metering and describes how homeowners with solar pay their utility bills. Homeowners with solar are both independent power producers as well as customers of the grid. If a homeowner’s solar system generates more electricity than the home consumes, the homeowner can sell the excess electricity back to the grid.

In California, the NEM policy is set by the California Public Utility Commission (CPUC). Previous NEM policies (NEM 1.0 and 2.0) were designed to spur solar adoption. They included incentive structures that paid solar homeowners handsomely to send electricity back to the grid – while not paying “tolls,” or fees, for using the electric grid. Utilities argued that under these policies, solar customers were using the grid for free. The structure has come under increased scrutiny over the past few years, as California’s solar generation increased significantly, now standing at 25% of the energy mix (well above other leading states, whose solar generation is >6%1).

Last December, the initial proposal for NEM 3.0 by the CPUC was published. It levied a fixed fee of $8/kW or ~$60/month, known as the “grid access charge,” on each solar homeowner. At nearly half the cost of an average homeowner’s monthly utility bill,2 this would have effectively killed rooftop solar. The utilities’ argument for such severe fees was to disincentivize homeowners from choosing solar standalone, as solar electricity was a high enough part of the energy mix where incentives were no longer needed to encourage adoption. (Furthermore, assumptions used in the proposal for solar cost and project payback periods were highly debatable, casting doubt to the accuracy of the final figures and proposed fees). The initial proposal faced heavy backlash, and a decision was pushed off for nearly 11 months, until now.

Impact and Outlook on Solar Demand

The CPUC proposed a new version of NEM 3.0 on November 10, 2022.3 This draft eliminates the much-scrutinized grid access fee and incorporates a sunset of resale rates to encourage continued solar adoption, while adjusting the economics such that solar plus storage becomes a much more attractive option for homeowners going forward. While NEM 3.0 is still a proposal and is subject to changes by the regulatory committee before being signed into bill mid-December, precedent suggests that revisions made to the policy should be minor in detail.

We expect continued strong demand for solar through the beginning of next year, as customers look to lock in more favorable incentives from NEM 2.0, which will sunset in April 2023. However, the adoption of NEM 3.0 does not imply demand falls off a cliff following implementation. Combined with the IRA’s 10-year extension of the Investment Tax Credit at 30%, supply chains and input costs may finally have an opportunity to normalize as consumers will not need to rush to have systems installed before a looming deadline. In addition, while the subsidies toward solar standalone are lower under NEM 3.0, it creates a stronger incentive for pairing solar plus storage, so homeowners could use the electricity they generate instead of sending it back to the grid. Ultimately, this is a win for consumers and a win for utilities.

We examine some of the prevalent trends and how it impacted the Environmental Sustainability Strategy in our latest commentary.

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DISCLOSURES

1 National Renewable Energy Laboratory, Spring 2022 Solar Industry Update, 2022.

2 https://www.eia.gov/electricity/sales_revenue_price/pdf/table5_a.pdf

3 California Public Utilities Commission, Net Energy Metering Revisit - Rulemaking (R.) 20-08-020, 2022.

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