California's new net metering rules (NEM 3): frequently asked questions

A much anticipated ruling on net metering by the California Public Utilities Commission (CPUC) came down on December 15, to the disappointment of many in the solar industry.

The 260 page decision by CPUC effectively ends net metering in California for new solar customers, replacing it with a “net billing” scheme with lower payments.

It’s a major change for solar in California, which first enacted net metering back in 1996. Prospective and current solar homeowners in California will certainly have many questions about the new rules. I’ll do my best to answer them in this article.

Does NEM 3.0 kill rooftop solar in California?

No. While the changes do reduce the financial benefits of rooftop solar, homeowners who have south-facing roofs without any shading and who are able to do some time-shifting of their electrical use will still typically see a substantial financial benefit from adding solar panels to their home.

However, homeowners with sites that are marginal for solar under the current NEM 2.0 rules - say, homes with estimated solar payback periods of perhaps 15 years or more - may be deterred by the new rules. Homes that would fall under this category are those with excessive shading, small or very steep roofs, those with little southern exposure, homes with roofing materials that are difficult to work with (ie. clay or lightweight concrete tile), and households that do not use much electricity during daylight hours and are unable to shift their usage to during the day.

Under NEM 3.0, these marginal households may have payback periods that are too long for solar to be a good financial investment. Of course, those who are interested in the positive environmental impacts of solar may still want to go solar, regardless of the costs.

What is net metering 3.0?

If you don’t know what net metering is, be sure to check out our introductory article on it first.

The first set of net metering rules in California - also known as NEM 1.0 - simply credited homeowners at the retail rate for excess solar electricity they sent back into the grid. This was revised in 2016, under rules known as NEM 2.0, to require homeowners to have a time-of-use plan. It also added a one-time interconnection fee of between $75-145, depending on the utility.

Since 2016, utility companies have continued to lobby for further changes to net metering. The latest rules were passed on Dec 15, 2022 and are known as NEM 3.0.

The decision is 260 pages long, but here are the essential changes:

• Customers will no longer be credited at the retail rate for excess solar electricity they return to the grid. The exact payments will be determined by a complicated formula and will actually vary hour-by-hour, but the California Solar and Storage Association estimates that the average payment will drop by 75%.
• Customers will be required to adopt time-of-use rates that have the maximum differences between on- and off-peak pricing. For example, SDG&E customers will need to adopt the EV-TOU-5 rate. This rate currently has a summer Super Off-Peak rate of 15.4 cents/kWh and an On-peak rate of 81.6 cents/kWh.

Who do these rules apply to?

These net metering rules apply to customers of three investor-owned California utilities: Pacific Gas and Electric (PG&E), San Diego Gas & Electric (SDG&E), and Southern California Edison (SCE).

Other utilities are not covered by CPUC’s NEM 3.0 rules, which means that they can determine the rate they pay for solar electricity provided by homeowners. Some may offer partial credits, while others may offer full net metering. For example, the Los Angeles Department of Water and Power (LADWP) currently offers full net metering to residential customers.

What happens to existing solar homeowners (NEM 1.0 and NEM 2.0)?

If you are a current solar homeowner, your existing net metering contract, which is 20 years in duration, will continue. These rule changes won’t affect you.

How will customers be compensated under NEM 3.0?

NEM 3.0 is a net billing rather than net metering plan. This means that if you are generating more solar electricity than your house needs at any point in time, your home will “export” that electricity to the grid, and you will receive a credit from your utility. Because NEM 3.0 is net billing rather than net metering, that credit will be less than the price you pay for electricity from the utility.

The amount of the credit isn’t easy to determine. According the rules, this credit is called the Retail Export Compensation Rate and varies by the hour. The formula is determined by the CPUC Avoided Cost Calculator and differs by weekdays, weekends, and holidays.

The California Solar and Storage Association estimates that the value of the credit will be cut by 75% on average. That’s obviously a huge reduction, but the exact impact on any household will depend on the pattern of their electricity usage.

To help lessen the blow of the transition, the first five years of the transition to NEM 3.0 includes an additional credit called an “adder”. This adder is available to PG&E and SCE customers only, and includes a larger credit for low income customers. SDG&E won’t receive an adder because, according to CPUC, those customers will already receive a more advantageous rate.

CPUC uses the term “glide path” with this adder because the value of the adder will decrease by 20% annually until it disappears. Low income customers will get a higher adder. Here’s the value of the adder in the first year:

According to CPUC, low-income is defined as the following:

(i) residential customers enrolled in California Alternate Rates for Energy and the Family Electric Rates Assistance programs; (ii) resident-owners of single-family homes living in disadvantaged communities (as defined in Decision (D.) 18-06-027); and (iii) residential customers who live in California Indian Country (as defined in D.20-12-003)

With NEM 3, will an investment in home solar pay for itself?

In their ruling, CPUC calculated the financial payback for a single-family household that uses 7,500 kWh per year with a typical “load profile”.

Load profile means the daily and seasonal patterns of electricity usage of a home. For example, a typical household where people go to school or have a 9-5 jobs will tend to use more electricity in the morning and early evening, and less in the middle of the day. California homes also generally use more electricity in the summer for air conditioning. This load profile matters because it affects the amount of off-peak, on-peak, and super-peak electricity used, with the latter being the most expensive.

According to their analysis, a household that purchases a solar system that generates 100% of their 7,500 kWh usage will pay back their investment in 9 years if they are a PG&E or SCE customer and 6 years if they are a SDG&E customer. (This reflects the different rates charged by the utilities.) If you are a California Alternate Rates for Energy Program (CARE) customer, the estimated SDG&E payback extends to 8.5 years because of the lower cost of electricity.

However, this analysis is disputed by some in the industry because it’s based on a cost of solar of $3.30 per watt. However, Berkeley Lab says that the median cost of solar in 2021 was $3.80 per watt, with a low estimate (20th percentile) of $3.00/watt and a high estimate (80th percentile) of $4.60/watt.

This means that CPUC’s 9 and 6 year estimates are probably a little on the optimistic side. Ultimately, it will depend on the price you get from the installer. If you use installer-provided financing, your costs can be significantly higher due to dealer fees.

Time-of-use plans are required

A time-of-use (TOU) plan is required with net metering in California. This isn’t new, but the change with NEM 3.0 is that you must choose have the rate plan with the largest differential between peak and off-peak pricing. The utilities want to encourage homeowners to consume more of their own solar electricity - which is generated in the middle of the day, during off-peak hours - and minimizing their usage of on-peak electricity in the evening when solar electricity has tailed off.

The purpose of this is to flatten the duck curve, which refers to an abundance of solar electricity during the day and a shortage in the evening. One strategy to minimize the duck curve is TOU pricing, which encourages people to use less electricity when the grid is under stress.

Here are the time-of-use rates for each utility that NEM 3.0 customers will need to adopt:

Here’s the prices for each of these rates at the time of writing:

The PG&E winter season is October to May, and the summer season is June to September.

The SDG&E winter season is November to May, and the summer season is June to October.

The SCE winter season is October to May, and the summer season is June to September.

Do batteries make sense with NEM 3.0?

Because of net billing with NEM 3.0 - that is, you’ll receive a low rate for solar electricity you send into the grid - solar homeowners should try to use as much of their own solar electricity as possible.

One way to accomplish this is to install a home battery. With a battery, you can store solar electricity that you would otherwise export to the grid. In the late afternoon when on-peak rates begin, you can have your house automatically switch to using power from your battery instead of the grid.

Modern home storage batteries are “smart” and include software that is aware of utility pricing and can automatically switch your home to use electricity from the grid or the battery to maximize your savings.

Consumers have many choices when it comes to batteries, such as the Tesla Powerwall, Enphase IQ Battery, and Generac PWRCell. The Inflation Reduction Act clarified that batteries are eligible for a 30% tax credit, helping to offset the significant upfront cost.

In addition, some California homeowners may be eligible for additional battery rebates if they live in a high fire threat district, are low income, or are on a medical baseline program. Check out my article on the California SGIP rebate to learn more.

Because of these factors, CPUC’s analysis is that adding a battery to a home solar system will shorten the payback period considerably, to about 6.5 years for PG&E and SCE customers and less than 5 years for SDG&E customers. This is based on a battery price before incentives of $1,764 per kW (AC) of power output. (Note that this figure is based on power output rather than storage capacity. Power output in measured in kW while storage capacity is measured in kWh.)

What can California homeowners do to make NEM 3.0 work for them?

The latest net metering rules in California make it harder for California homeowners to recoup their investment in solar.

The main impact of the changes is that you will be paid significantly less for solar electricity that you send to the grid. This means that you should try to “self-consume” as much of your solar electricity as possible, otherwise you will end up paying a reduced credit for any electricity that you export.

Installing a battery is the simplest way to do this because the software in the battery can automatically manage when you use stored solar electricity or grid electricity. However, even though there are tax credits and other incentives available, adding a battery comes with a significant upfront cost that not all homeowners are able to take on.

However, there are lower cost and lower tech solutions that most homeowners can adopt to shift their electricity usage and get the most value out of their solar investment. These tips are based on the fact that for most homes, just a few appliances are responsible for the majority of electricity use. These include air conditioners, heat pumps or electric furnaces, pool heating, electric car charging, and electric stoves.

The easiest step for many people to take is to use a programmable or smart thermostat to make their home a few degrees extra cooler or warmer when the sun is shining.

For example, if it’s summer, you might set your thermostat to be three or four degrees colder than normal starting around 10:00 a.m or earlier. This will cause your central air conditioner or heat pump to kick on, which will consume a few thousand watts of electricity on average. If the sun is shining, you’ll self-consume solar electricity that might otherwise be exported to the grid. You’ll want to program your thermostat to return to its normal temperature (or even warmer) starting at 4 p.m. to avoid using on-peak electricity when your solar panels are no longer producing.

Because of the thermal mass of your building, your pre-cooled home will tend to stay cool for hours. This is especially true if you’re careful to operate your window blinds to minimize solar heat gain.

While some homes are intentionally designed with extra thermal mass, this principal will work with an ordinary home too. It’s why your house stays stubbornly warm on a hot summer night, even after the outside air temperature has dropped.

If you use electricity for heating, you can take the same approach in the winter and make your home a little warmer when the sun is shining.

Pre-cooling and heating your home is an easy step, especially if you’re not home during the day or aren’t discomforted by the change in temperature.

Shifting other electricity uses might also be possible, depending on your home. For example, if you own an electric car and you’re home during the day, you can set it to charge while the sun is shining.

When will net metering rules change?

CPUC’s decision set a deadline of 120 days to implement the new rules. This means that interconnection applications received until April 13, 2023 will be under the existing NEM 2.0 rules and be locked in for 20 years. Applications received after that will get the new NEM 3.0 rules.

This means you only need to get a complete application submitted - the solar system doesn’t need to be installed or turned on. According to CPUC, a complete application consists of:

...an application that is free of major deficiencies and includes a complete application, a signed contract, a single-line diagram, a complete CSLB Solar Energy System Disclosure Document, a signed California Solar Consumer Protection Guide, and an oversizing attestation (if applicable).

After all these changes, should I still go solar?

The changes to net metering make it harder for homeowners to recoup a financial investment. Even so, homeowners who have a sunny roof and an uncomplicated installation (eg. you don’t have a clay tile roof) should see a net financial return with a decade (on average). Solar panels should continue to work for up to 25 years or even longer, which means that you’ll get a decade or more of free electricity after your initial investment is paid off.

To recap, here are some measures you can take to make sure that an investment in solar works for you:

• Understand if your home is good for solar. This means a sunny roof with minimal or no shading, and a roof that preferably faces south or west. Clay and lightweight tile roofs can make an installation more expensive.
• Get multiple quotes to make sure that you get a fair price.
• Shift your electricity use to avoid on-peak hours. For example, make use of a smart thermostat to pre-cool or pre-heat your house when your solar panels are generating electricity, or charge your electric vehicle.
• If time-shifting your electricity use isn’t feasible, consider installing a battery if you can afford it.
• Avoid financing from the solar installer, especially leases. If you need a loan, getting a conventional loan from your bank will help you avoid dealer fees.