The California Public Utilities Commission (CPUC) is proposing to update the net metering policy, commonly referred to as NEM3.0. You can read more about the proposed changes here, and see what we have done to support modelling these changes here. We have summarised the proposed changes for you here:
1. Change from Net Energy Metering to a Net Billing Policy
Historically the export compensation of solar in California, and in many other states in the US is based off a Net Energy Metering (NEM) Policy. Both NEM1.0 and NEM2.0 were under this compensation mechanism. With Net Energy Metering, when a system owner is generating more electricity than they are consuming, the excess energy is exported back to the utility grid and the customer receives a credit equal to or slightly less than the full-retail rate. This credit can then be applied to offset electricity consumption within the current billing cycle (i.e. monthly) or in future billing cycles before expiring annually at some specified month (known as the true-up period).
With NEM3.0, the system owner is now compensated based off a "Net Billing" policy which works quite different the Net Energy Metering (NEM). Hence, we really shouldn't be calling the newly proposed solar compensation policy as "NEM3.0", as it is NOT at all Net Energy Metering (NEM)! With Net Billing, exports are metered and credited at a predetermined sell rate generally much less than the retail rate that the system owner buys at. The netting also occurs in real-time (i.e. instantaneously) with periods when there is net export (generation > consumption) and net consumption (consumption > generation) needing to be measured separately. This means that a smart meter, or two separate unidirectional meters is required. The export rates proposed will be based on the Avoided Cost Calculator (ACC) that you can download on this page (click on the Full Model link). The export rate based on the averaged hourly values per month, with differentiated by weekday (Monday to Friday) and weekend (Saturday and Sunday). Meaning in total there are in total 12 months x 24 hours = 288 different export rates for weekdays and another 288 export rates for weekends.
2. Adding New Monthly Fee Based on Installed Capacity of PV System (Grid Participation Charge)
If changing the export compensation mechanism from Net Energy Metering to Net Billing doesn't already hurt the financials of installing solar. The CPUC is also proposing to add a monthly charge based off the size of the interconnected PV system, called the Grid Participation Charge. We believe in the long-term this will be the most damaging change as it is an unavoidable fixed monthly charge that increases with your system size.
To give some perspective, installing an average system size of 5kW in California will now cost you $40/month and a total of $480 per year just to have solar on your rooftop!
3. Adding a Market Transition Credit
Similar to the Grid Participation Charge but instead it is a credit based off the size of the installed system. This credit is pretty much next to nothing when compared to the charge imposed by the Grid Participation Charge and is ONLY available for solar customers in the first four years of NEM3.0 tariff implementation. Here are some other significant details about this credit:
- Customers will receive this credit for a 10 year period from the date of interconnection.
- The credit amount that the customer is locked into will decrease by 25% each year until reaching 0 after the four year when this credit is phased out.
- Available only to residential and low-income customers.
4. Grandfathering of NEM2.0
Solar installers will have four months to get customers on NEM2.0 during the sunset period after the adoption of NEM3.0 expected to occur in first quarter of 2022. This means that there is still a small-window to get customers onto the more desirable NEM2.0 before NEM3.0 kicks in. All new and existing NEM2.0 residential customers will have their 20-year eligibility period reduced to 15 years before they are forced onto NEM3.0. Note that existing NEM1.0 will also have their 20-year eligibility period reduced to 15 years.
What we think are the impacts of these changes?
It is no surprise that the financials of solar will get hit and the payback period of PV systems will increase with the proposed NEM3.0 changes. But how will this might impact how you sell solar today vs when NEM3.0 gets implemented? Here is a key point that we believe our users should start thinking about when selling solar under NEM3.0:
"How to Maximise Self-Consumption to Minimise Export."
I assume most people reading this will understand what self-consumption means, but for those that might not; self consumption is when energy generated by a PV system is directly used by the load (i.e. appliances and equipment in a building or household). Self-consumption is the inverse of energy export, meaning that as you increase self-consumption you minimise export which is what we want to achieve.
Under NEM2.0, we notice that most installers try to size their systems based on achieving 100% consumption offset (i.e. total annual generation = total annual consumption) as it maximises the total bill savings under the Net Energy Metering policy, and often gives the best financial outcome. However, with NEM3.0 under a Net Billing policy this is no longer viable due to the lower export compensation rate. Hence, we need to shift our focus to maximising self-consumption and minimise export instead.
Here are a few ideas to maximise self-consumption:
- Reduce proposed system size - a smaller system size generally means that more of the energy generated by the system will be directly used up.
- Energy Storage - allows any excess generation that otherwise would have been exported to the grid to be stored and used in the evening during peak electricity pricing.
- Demand Response - modifying energy demand to better match supply (in this case solar generated from the PV system). For example installers might also help solar customers install an electric hot water storage tanks that uses electricity generated by solar to heat water during the day and store that hot water to be used later. Other ideas include EV chargers, installing time-controlled devices for pool pumps, dryers and washing machines.
Installers that will be able to get creative and make this shift will likely have a competitive advantage in this new solar market following the NEM3.0 changes! Our team at OpenSolar will be supporting you on this journey to ensure your continued success in this constantly evolving solar market.