Debunking Myths Surrounding California's Net Metering Reform
Net metering is a critical policy to advance rooftop solar, and it has been incredibly effective in California. So effective, that it has driven down the wholesale cost of electricity in the middle of the day. However, because it allows customers to effectively turn their meters backwards if they have excess solar power, it gives credit at the retail rate, which has roughly doubled in the last decade. The result is a growing gap between the value of solar generated at homes and the credit given to those customers with solar. That gap is now in the billions and must be paid for by customers who do not have solar. The California Public Utilities Commission (CPUC) recently proposed a major update to the state’s net energy metering (NEM) policy. Please see this blog for more details.
The recent proposed decision (PD) has given rise to a number of myths and misinformation around what the proposal would do to the market for distributed solar, our broader clean energy goals, and whether this proposal is fair. We think it is valuable to set the record straight to allow for a fair judgement on the merits of the proposed decision, so this blog responds to some (but not all) of the myths.
Myth: The current NEM 2.0 policy is cost-effective and analyses that conclude otherwise do not account for societal benefits
The studies underlying the PD conclude that NEM customers are paying substantially less than the cost of the services they receive from the grid. Critics of these studies claim that these analyses don’t correctly value societal impacts, such as air pollution and climate impacts. If these analyses were to accurately account for these impacts, the claim goes, rooftop solar would be more than cost-effective.
The truth is that these studies include a detailed evaluation of all significant benefits from distributed solar, including avoided costs of carbon intensive and polluting gas power plant use. NEM customers do provide clean electricity to the grid mid-day when the sun is up, and that helps lower the need for additional fossil generation; but NEM overpays for rooftop solar compared to other forms of clean energy which provide the same benefits of reducing carbon and air pollution. If the same solar panel was placed on the grid side of the customer’s meter (not on the rooftop but a few steps away from the customer's property, for example) instead of behind the consumer’s meter, it would be paid at least five times less (yes - that’s how cheap average renewable contracts are now!) and provide the same zero-carbon electricity. This is why the current NEM policy is not cost-effective under analyses that accounts for societal benefits.
Myth: Continuing current NEM 2.0 policy will reduce the need for costly distribution and transmission buildout and upgrades
Another claim is that NEM reduces the amount of transmission and distribution infrastructure that is necessary to deliver electricity, which would stop utilities from earning a profit on building this infrastructure.
Grid costs are driven in large part by peak energy demands. Unplanned distributed solar installed without storage doesn’t reduce demand at system peak in California, which is now in the evening, and therefore has only a minor impact on future grid infrastructure costs. Moreover, solar is located wherever customers decide to install it, rather than in the locations that it is most needed to deflect grid infrastructure.
To defer transmission and distribution investments, necessary amounts of distributed solar and storage need to be located at the right place and be operated in a manner that best benefits the grid. Neither is the case with California’s NEM 2.0 design, and that is why it provides only modest savings in grid infrastructure costs. This rooftop solar benefit which accrues from reducing demand at times of constraint is already accounted for by the CPUC in estimating of the value of unplanned distributed solar.
A recent study by Vibrant Clean Energy (VCE) showed that distributed solar and storage might be able to significantly reduce grid infrastructure costs. The VCE study showing major cost savings assumes that solar and storage are paired and intentionally located in the places that they are most needed and intentionally operated so as to provide the greatest system benefits. They assume that this optimal approach is accounted for when building out the grid. Moreover, the study does not model the rate impacts of NEM when it estimates future costs to all utility customers, it assumes that the electricity for these resources is paid at their market price. In sum, the study itself is great, but it does not apply to the current NEM debate in California. In fact, the PD moves net metering policy in California slightly closer to this ideal VCE plan by encouraging paired solar and storage.
Myth: The proposed decision will increase utility profits.
Utility revenue is decided through legal proceedings at the CPUC; once total revenue is determined, then the utility collects it from all customers through their electric bills. Investor-owned utilities in California aren’t allowed to make a profit on electricity that they sell or generate; they are simply a conduit between generator and customer. Any excess payments for rooftop solar get passed on to other utility customers. The result is that NEM drives up rates but does not change their profits much because, as explained above, it doesn’t reduce transmission or distribution buildout much.
Myth: The proposed decision gives utilities what they asked for.
The utilities proposed to radically reduce the credits provided under NEM. NEM increases retail rates, and higher retail rates get a lot of attention and put pressure on utilities. The Proposed Decision does not get even close to the utilities’ proposal. For example, while the PD provides a 10-year payback period, the utilities’ proposal has a payback period of 21 years (see E3 analysis for simple payback period for a 2023 residential non-CARE adopter in PG&E’s service territory).
Myth: There will be major retroactive cuts to the value of solar for existing NEM 1.0 and 2.0 customers.
Pre-existing NEM customers get to keep their deal for fifteen years from the time they installed their solar panels. Those who would like to voluntarily transfer to the new tariff will be provided an incentive on pairing their solar systems with storage.
Myth: The new rate doesn’t offer incentives for solar adoption and may make the solar on new homes mandate uneconomic.
The proposed decision adopts an approach that will support sustainable growth for rooftop solar. The proposed tariff means that new NEM residential customers will be able to recoup the cost of their systems in around 10 years and will then continue to reap the benefits of that investment for the remaining 10-20 years of the life of their system. In addition, the proposed decision creates a fund of $600 million to drive investment among low-income homes and communities where resources have been lacking.
Moreover, California’s recently adopted building code means that solar will be installed on all new homes across the state. Because installing solar on new homes is much cheaper, around half the cost, of installing solar on existing homes, any proposal for existing homes that is cost-effective from a customer’s point of view will be more than cost-effective from the perspective of solar on new homes. Moreover, the California Energy Commission (CEC), when it approved the new solar homes mandate, tested cost-effectiveness from the perspective of homeowners in a range of scenarios. Even the most extreme case considered, one that would meter all solar production and pay at avoided costs, is borderline cost-effective.
Myth: Maintaining California’s NEM 2.0 policy is essential to drive electrification.
Advocates for continuing current NEM argue that a high subsidy residential solar adoption would encourage customers to invest in electric cars. Although it is true that customers with solar panels on current NEM rates have strong incentives to drive electric cars, current NEM 2.0 makes electrification a harder economic proposition for the majority of Californians who don’t have or won’t ever be able to install solar panels.
This is because NEM 2.0 raises electric rates and bills for customers without solar. Transitioning from fossil fuel-guzzling cars, and gas-burning furnaces and water heaters to those powered by clean electricity are key tenets of fighting the climate crisis. If electricity becomes more expensive than fossil fuels, then it’ll become harder for Californians to electrify their vehicles and homes. Research shows (see slides 11 and 12 here) that electric rates are already making electrification a tougher proposition than it should be. As NEM adoption grows on current rates, these rate pressures will keep increasing.
Myth: The PD will reduce energy affordability for low-income households by taking solar away.
We’ve already explained that California’s current NEM 2.0 policy inordinately raises rates on non-solar customers who tend to be poorer on average. Fixing this as the PD recommends is the first step toward an equitable solution. The PD also creates a $600 million equity fund to install solar on low-income households. This addresses the barrier most low-income households face in adopting solar: the high first cost. This equity fund could also be used for community solar and storage to provide clean electricity and resiliency solutions to an entire neighborhood at a fraction of the cost of rooftop solar and behind the meter storage (that benefit individual customers).
Under current NEM structure in California, not only do low-income households have less solar, more than half of the low-income households (that qualify for electricity discounts) with solar panels don’t own their solar panels. They lease them. Data in the NEM proceeding further show that these households only see half of the benefits from NEM, the other half flow to private lease owners. The PD’s proposal improves upon this model by helping low-income households own their own solar; it also provides qualifying low-income households more lucrative NEM tariff than wealthier households.
Myth: The new Grid participation charges in the PD are a discriminatory “solar fee”.
Non-solar customers pay their share of transmission and distribution system costs via volumetric rates (i.e., rates set per kilowatt-hour of consumption) on their full electricity consumption. NEM customers can generate a sizable portion (about 40 percent on average) of their electricity needs. So, they don’t pay into the transmission and distribution infrastructure for the portion of electricity they self-consume even though the grid needs to be maintained to fulfil their peak demand needs.
Moreover, NEM customers depend on the grid almost every second of every day. Apart from those serendipitous moments when electricity generated from a solar panel exactly equals the amount of electricity these customers consume, they either use the grid to import or export electricity. As a result, NEM customers avoid paying their fair share of the transmission, distribution, and other system costs.
Rates in California also recover costs for societal programs that are independent of electric generation, consumption, or delivery; these societal programs include low-income electricity discounts, energy assistance programs, nuclear decommissioning costs, and more. Under NEM 2.0, NEM customers do not fully pay into these costs either.
As noted above, carefully located rooftop solar with storage could reduce the cost of investments in the grid. However, for the current location agnostic NEM, the grid participation charge remedies the inequity by making sure that NEM customers contribute toward their share of transmission and distribution costs and non-bypassable charges.
Under CA’s proposed NEM update, a grid participation charge for NEM customers does not cause discrimination against such customers, but is a necessary remedy for discrimination against non-NEM customers who are otherwise forced to bear an unfair and disproportionate share of grid costs. Put another way, from the perspective of non-participating customers it is the absence of a grid participation charge that causes discrimination.
Myth: Arizona recently eliminated the grid access charge for solar customers, so California should do the same.
The Arizona Corporation Commission (equivalent to the CPUC) recently decided to reject the Arizona Public Service (APS) proposal to apply specific charges to solar customers because “the record contains no such evidence that might justify treating DG solar customers differently.” This decision does not directly apply to the case before the CPUC because the rates, grids, solar markets, and intent of the charge are dramatically different in the two states. The only extent to which the decisions are similar is in that both regulators have rejected efforts by the utilities to radically reduce the deployment of rooftop solar. Recall that while the PD includes a grid participation charge for fairness, it is just one part of a package of policy mechanisms that provide enough bill savings to ensure a payback of about 10 years for new solar systems.
In addition to the solar market being much less mature in Arizona, the details of the two state tariffs also highlights how different they are. The earnings from power consumed on-site are approximately 8-13 cents/ kWh. In California, customers earn 20 to 30 cents for power consumed on-site. Customers in California, therefore, are currently paid 2 to 3 times more for solar power consumed on site than customers in Arizona even though California has much higher solar penetration.
Finally, the Commission decision rejected APS’ solar customer charge on the grounds that APS did not provide necessary evidence to institute this charge; not because it was unlawful or discriminatory (see decision at 358). The CPUC, on the other hand, made a fair decision based on a year-long proceeding to develop a balanced new NEM tariff.
Myth: The average NEM 2.0 customer bill is significant and adequate.
There’s been debate on how much NEM 2.0 customers pay on average each month and whether that is sufficient. The problem with this debate is that what really matters is the difference between how much current NEM customers pay and how much they cost or benefit the system.
On the other hand, if you were curious about bills that customers pay, here is the complete picture. Last year, using high level data from a CPUC evaluation of NEM 2.0 customers, we estimated that most NEM 2.0 customers pay around $20 per month, which is far less than the cost of their share of grid services. More detailed data from the CPUC proceeding show that our estimate wasn’t far off.
Using distribution of sales provided through the proceeding by IOUs and solar trade groups, and through data on the number of customers on NEM 2.0, I estimate that approximately 53% of total NEM 2.0 customers (around 340k) pay under $30; 44% of total NEM customers pay around $20 or less. This includes any small monthly fixed charge of around $10 that NEM 2.0 customers may be obligated to pay. See this spreadsheet for calculation details.