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.
