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NEM 3.0 California: When It Will Come Into Effect And What You Need To Do To Prepare

NEM or Net Energy Metering has played a very important role in making California the leader in solar power in the US. NEM offers incentives to solar customers so that they realize savings on their utility bills and can even generate some income through solar arbitrage if they are being smart about it.

NEM has been in effect since 1996 and has resulted in nearly 1.3 million households installing rooftop solar power with a total capacity of over 9 Gigawatts, which amounts to 11% of total energy production in California (80 GW). The California Public Utilities Commission (CPUC) has been pushing for reforms in solar energy and the NEM 1.0 and NEM 2.0 plans have created a thriving solar industry and a surge in clean energy in the state.

However, the honeymoon period for the solar market seems to be coming to an end with the proposed decision to implement NEM 3.0. The revised proposal for the program contains several measures which would impact solar owners who have already installed rooftop solar panels and are thinking about installing solar systems.

In this blog, we will attempt to cover the various aspects of NEM 3.0 and how this will impact Californians who are relying on renewable energy to supplement their electricity bills.

A Brief History of NEM

NEM came into effect in California in 1996 as a part of an initiative aimed at increasing private participation in renewable energy and diversifying the energy production in the state. NEM allowed homeowners with rooftop solar installations to be paid full retail tariffs for the excess electricity they produce and send to the grid. With falling prices of equipment and other solar incentives including federal and state tax credits, the solar adoption in California soared.

NEM also had set caps for solar installations at 5% of peak electricity demand. The three utility service providers in the state San Diego Gas & Electric (SDG&E), Southern California Edison (SCE), and Pacific Gas & Electric (PG&E) hit this cap in early 2016. CPUC revised the NEM program to update the schemes and incentivize the growth of solar and came up with NEM 2.0 in 2016.

NEM 2.0 essentially preserved most of the provisions in NEM 1.0 and gave users full retail tariff per kWh of electricity that they export to the grid. NEM 2.0 also provisioned that the customers will be switched to a Time of Use (TOU) plan which had differential rates based on the electricity demand. It also allowed for upfront fees in the form of grid access fees and interconnection fees.

NEM 1.0 and 2.0 was central to making solar projects cost-effective by ensuring that the payback period was restricted to around 6 years. These programs also included a clause that means that the users who availed of the NEM 1.0 or NEM 2.0 schemes would be eligible to avail of the tariff rates and benefits for 20 years which assures this payback period and further cost savings.

NEM 3.0- What Are the Changes?

CPUC proposed NEM 3.0 as the next phase in the NEM program. According to the proposed legislation, it will be called Net Billing. There are several major changes proposed in NEM 3.0 as compared to NEM 2.0. Some of these are below

  • Lower payments per KwH of energy exported to the grid.
  • Reduces the 20 year period for which NEM 2.0 can be availed by existing customers to 15 years
  • Monthly fees in the form of grid participation charge at $8 per KwH of installed capacity
  • Real-time monitoring of energy as opposed to per hour monitoring in NEM 2.0

With these proposed changes, residential customers will not enjoy as many benefits and incentives as NEM 2.0 customers enjoy. The reason behind the proposed changes is that the cost of production of solar energy is not of equal value as the market electricity rates because it does not take into account a lot of infrastructure needs and the market costs. Using an avoided cost calculator, the utility companies are calculating the value for the excess electricity being fed into the grid by solar owners at around 4-5 cents per kWh as opposed to the 22-36 cents that the users save now.

Another side of the argument is the excess fee that low-income households are having to pay to offset the cost of NEM 2.0. The solar incentives are majorly being availed by high-income households and the cost of electricity is also increasing which is being borne by the low-income households currently. NEM 3.0 proposes to balance this disparity. NEM 3.0 is also a way to push more residential and business users to install battery storage to reduce the dependency on the grid during peak hours after sundown.

Additionally, the grid participation charge is going to add a huge amount to the utility bills. Taking an average installation size of 5 KwH, the grid participation charges come to $40 a month and $480 a year. This is in addition to the installation cost and the initial fee. Together, the payback periods for new solar installations will go up to around 12 years for high-income families.

NEM 3.0 also proposes a market transition credit (MTC) program for the initial years to make sure that the disparity does not put people off solar installations altogether. The MTCs proposed are at $1.62/kW for PG&E customers and $3.59/kW for SCE customers. The lower-income segments will receive a larger amount as MTCs to ease the transition ($4.36/kW for PG&E and $5.25/kW for SCE).

Additionally, to encourage more solar adoption in such low-income segments a $600 million incentive fund is also provisioned which will help community solar projects and low-income households adopt solar.

When Will NEM 3.0 Come to Effect?

CPUC is currently making the final decisions regarding NEM 3.0. The initial proposed decision was released in December 2021. In February 2022, the CPUC decided to hold off on further proceeding for an indefinite period. As per the latest news, the CPUC is set to make its final decision in July or August of 2022.

In the current phase, the commission has been consulting with the various stakeholders including the utility companies, the consumers, climate change and renewable energy activists, and parties. The commission has released a set of questions regarding the proposed changes and the parties have been asked to submit their replies to the questions.

How Has the Community Responded to NEM 3.0

The proposed decision was released in December i=t of ire from the community. Mostly. the changes reduce incentives for people to adopt solar power as the savings come down and payback periods go up considerably. Incentives have been key in pushing California’s net solar power production to 9 GW. These incentives are likely to end with the net billing plan.

Several Californians, renewable power evangelists, and activists took to the streets to protest the proposed changes under the banner of the California Solar and Storage Association (CALSSA). There have also been reactions from other stakeholders and employees in the solar industry. There are several campaigns underway attempting to change the proposed decisions to continue incentivizing solar power. The protestors are claiming that the legislation does not consider the indirect benefits of solar power such as reduced dependency on fossil fuels, lesser emissions, and other such impacts.

How Should You Prepare for NEM 3.0?

Given how radical the proposed changes are if you are thinking of installing rooftop solar panels, the best time is now. Given that NEM 2.0 scheme is still available and you will be eligible for these tariffs for 15 years even when the new tariffs come into effect, it would make sense to install solar now and make use of the rebates available.

Another way to go is by thinking about larger community solar projects rather than individual solar projects. The new legislation has not made changes to community solar programs that generate above 1 Mw of electricity and this investment in these would also be a smart idea.

Lastly, the best way to deal with NEM 3.0 is to make sure that you reduce the dependency on the grid as much as possible. Energy storage systems using batteries allow you to offset the usage of solar power from the moring and mid-day times to peak times post sundown. So by planning your electricity consumption around this, you will be able to reduce the amount of electricity you are taking off the grid thereby saving costs effectively.

Closing Thoughts

NEM 3.0 has been a major source of debate for a few months now. Given the extent of changes being proposed, it is natural to assume that this would massively reduce the benefits rooftop solar owners enjoy today. There are arguments on the other side too as to why the changes make economic sense.

The reality is that the current solar policy has its drawbacks but it has its benefits too. The changes that are proposed intend to balance the scales a bit. But disincentivizing solar is probably not going to help in the long term when there is a dire need to push for more renewable energy adoption everywhere. NEM 3.0 is currently in deliberation and is likely to come into effect later this year. While there are supporters and protestors, the ultimate effect of the program will rely on what final form it takes.

All You Need to Know About the Net Energy Metering 2.0 to 3.0 Transition

Have you always wished that you could have energy sustainability in your home? Then net energy metering is your viable option in California.

What is NEM?

Net Energy Metering is a solar incentive framework that allows you to store energy in the electric grid. Essentially, when your solar system generates more energy than consumed, the owners have the ability to sell the excess production back to utilities and receive credits to their monthly bills. 

Then, at night or other times when your solar panels are under producing, you pull energy from the grid and use these credits to offset the costs of that energy.

Isn’t that amazing, having to invest in solar and it in turn earns you money? It’s the dream of every homeowner. 

So, how does net metering work in California?

What-net-metering

(Source: SEIA)

The Net Metering Energy program is eligible to California’s Customers who install small solar, biogas, wind, and fuel cell generation facilities to serve all onsite electricity.

Net metering 2.0 in California is significant. It allows residents with solar energy to serve their energy needs directly on-site and receive financial credit on their electric bills for any surplus energy fed back to their utility bill generator.  

As a person looking to invest in solar energy, you should know that your participation in the NEM does not in any way limit your eligibility for any other rebate, incentive, or credit provided by an electric utility. 

The current NEM 2.0 program was adopted by the California Public Utilities Commission (CPUC) on January 28, 2016, and is available to customers of PG&E net metering, SCE, and SDG&E. The program often provides customer-generators full retail rate credits for energy exported to the grid. However, it requires them to pay a few charges that align NEM customer costs more closely with non-NEM customer costs. 

In this article, we look at the transition from NEM 2.0 to NEM 3.0 and what it means to the customers and California residents. 

Let’s examine:

  • What is NEM 3.0?
  • The Background of NEM
  • The Concern for NEM 3.0
  • Expected structure and Impact of NEM 3.0
  • Elements expected to be considered for NEM 3.0
  • Exported Energy Rate Solar System 
  • The structure of the tariff
  • Impacts of NEM 3.0 on Solar PV Generated Energy Value

What is NEM 3.0?

NEM-Solar-Value

(Source: Renewable Energy World)

Net Energy Metering (NEM) 3.0 remains likely to result in a steep reduction in the value of energy produced by residential and commercial solar PV systems in California, to the order of 40 to 80 percent.

The people who experience the impact will include current solar customers under NEM 1.0 or 2.0, who will bump to NEM 3.0 while their systems still have life. Customers that want to expand their systems could bump them to NEM 3.0; and all future customers. Anything that significant will only add to the industry’s challenge from the step-down in the federal solar tax credit

If you have any planned California solar project, you should do everything possible under the current NEM 2.0 rules. Since May, the California Legislature has voted down Assembly Bill 1139 (Gonzales), which would have had a significant impact on the NEM 3.0 proceeding currently underway at the California Public Utilities Commission and solar PV customers under NEM 1.0 and NEM 2.0. 

California Public Utilities Commission (CPUC) can still make the decisions; however, as the transition from NEM 2.0 to 3.0 is on track for sometime next year for customers of the three regulated utilities, Pacific Gas & Electric (PG&E) program, Southern California Edison (SCE), and San Diego Gas & Electric (SDGE).

The Background of NEM

How-net-metering-works

(Source: Energy Sage)

NEM has existed in California since 1995 and has undergone various revisions over time. The most significant revision of NEM occurred in January 2016, when the California Public Utilities Commission (CPUC) created NEM 2.0, which was rolled out to utility customers in late 2016 and early 2017. Both NEM and NEM 2.0 customers have been under those tariffs for 20 years from when their solar PV system or another form of on-site generation first went into operation.

NEM 2.0 is identical to the original NEM except that customers do not receive bill credits for the “non-bypassable” rate tariff components on the energy exported. Non-bypassable rate components are currently the Wildfire Fund Charge, Competition Transition Charge (CTC), Nuclear Decommissioning (ND), and Public Purpose Program (PPP) charges, which add up to approximately two cents a kilowatt-hour ($0.02/kWh). This change to NEM 2.0 reduced the value of exported energy by roughly 10-20% of exported energy value, depending on the customer’s rate tariff.

The NEM 2.0 decision is an interim solution by the CPUC, allowing the commissioners more time to study the impacts of NEM systems on electricity grids and other utility customers. In addition, there is considerable action on the Net Metering front across the country, with several states moving away from accurate net metering to various forms of export compensation. 

The Concern for NEM 3.0

The main concern in California’s NEM 3.0 proceeding is whether homeowners with solar panels are receiving more value for it than they contribute to the grid as the utilities claim. 

Between the cost of service, equity issues, and the fact that electricity generation is getting cheaper, compensation for onsite, behind-the-meter energy generation is likely to decrease in real dollars over time. 

On the other hand, the cost of purchase and installation of solar-plus-storage systems is coming down faster than the decreasing value of the electricity they generate.

Expected Structure and Impacts of NEM 3.0

It is hard to ultimately tell what NEM 3.0 will look like and how it will impact the current homeowners with solar and future solar PV NEM customers. 

However, from the NEM 2.0 proceeding in 2015-16, the expectation is that the utilities and other interested parties such as environmental groups and consumer advocates will continue to fight hard on the details. 

Elements Expected to be Considered for NEM 3.0?

Importance-of solar

(Source: Medium)

Exported Energy Rate Solar System 

From recent studies of PG&E, SCE, and SDG&E on the cost of energy and the value of the solar system, and Sage’s analyses, there is a reasonable idea of the value of solar during various time-of-use (TOU) periods under the current policy. 

Combining that information with the results of previous studies on the impacts of NEM 2.0 customers on utilities and non-NEM customers, it shows that the value of solar PV energy in California is about 11 cents a kilowatt-hour (~$0.11/kWh). 

It varies significantly between utilities and customer types. The most recent version of the CPUC’s Avoided Cost Calculator shows significant reductions in this value.

The Structure of the Tariff 

There are many tariff structures possible. Given the principles put forward by CPUC and the intention to control the value of solar PV energy in California, we believe that a Feed-In Tariff (FIT), also known as Buy All, Sell All, or Net Billing will be mandated, along with a Grid Benefits Charge (GBC). 

Feed-In Tariff (FIT) 

FITs, or buy-all, sell-all arrangements, usually separate the customer’s energy usage from solar system energy generation. In this scenario, the customer’s PV system is connected in front (on the utility side) of their electric meter; the customer cannot consume the electricity produced by their PV system. 

What happens is that all energy the customer consumes is metered at their retail tariff rate. All generated electricity is exported to the grid through a separate meter and valued typically at a fixed price. 

It is not net energy metering. Therefore, this type of interconnection would not easily apply, and billing would not be easily applied to existing NEM interconnections with PV systems connected behind the customer’s utility meter on their property. It could, however, be mandated for future NEM 3.0 interconnections. 

Net Billing 

Net Billing is a possible form of NEM 3.0. Here, the solar system is connected on the customer side of the meter and offsets the customer’s electricity usage. 

Any exported energy from the PV system is valued at a fixed price. However, the fixed fee may differ across seasons and TOU billing periods, as proposed by the Joint Investor-Owned Utilities, i.e., PG&E, SCE, and SDG&E. 

Net Billing arrangements typically settle up monthly; exported energy credits are shown and accounted for on each monthly billing statement. Therefore, customers would not bank these accumulated bill credits from exported energy and true up at the end of the billing year, as is done with annual NEM. 

Net Billing is not a true Net Energy Metering like a FIT but remains a likely candidate for the NEM 3.0 policy. 

Grid Benefits Charge (GBC) 

Another component for NEM 3.0 is a GBC or a monthly charge for all solar customers that is not dependent on the rate of consumption of the customer. 

The charge is expected to scale with the installed system size of the solar PV and differ by rate tariff. These charges could amount to about $75 per month in fees for residential generators and $800-$3,400 per month for a 250-kW system for commercial generators. 

Impacts of NEM 3.0 on Solar PV Generated Energy Value

NEM 3.0 could result in a mild to a dramatic loss in solar PV energy value. That depends on the final structure of the NEM 3.0 tariff and the customer’s existing rates. The current proposal shows that commercial customers with a solar PV system sized to offset 90% of their load, a typical target system size, would see a loss in the value of solar in the range of 40%-80%.

The proposed structure attempts to incentivize solar-plus-storage systems by reducing the value of any energy exported to the grid rather than consumed onsite. However, this means that solar-only systems will have to be smaller to maximize the value of solar, which is at odds with the higher installed costs by negating cost efficiencies of scale.

There You Have It. You Now Understand All About the Transition from NEM 2.0 to NEM 3.0 and What to Expect

Net Energy Metering has been of great help in the establishment of the solar value. It is to be noted that NEM 2.0 will face some drastic changes that could reduce the export compensation and add grid benefit charges to all the new systems. It will add additional fees depending on the size of the system.

Remember that your solar provider should be able to explain in detail net metering for your understanding.

You must learn about what is NEM 3.0 and how it is expected to work. As a homeowner looking to invest in solar power in California, you are eligible for the good incentives available in the region. 

Energy storage is important as it helps to have a surplus to use at night when there is no production. It also helps you earn extra from the energy exported to the grid.

Enlightened Solar is a solar installation company in Orange County, California. We can advise you on NEM, including PG&E net metering. Net metering in solar energy is an important aspect to consider for every homeowner looking to go solar!

Contact us today for your solar energy needs.