The solar PV industry has achieved an important milestone by becoming a competitive source of electricity generation in California. Policies that include the federal solar investment tax credit (ITC), California Solar Initiative and net energy metering (NEM) have worked together to transform the solar PV market into a scaled up, globally competitive source of electricity. Today, in California, over 400,000 solar PV projects are spread throughout the state, adding up to nearly 3.5 gigawatts of capacity. On a sunny spring day these "distributed" solar systems are capable of meeting ten percent or more of the entire state's daytime electricity demand.
All of this great news on solar in California comes with one caveat, however. The rapid solar PV technology cost decreases of the last few years have not translated to lower reported prices in the fastest growing segment of the solar PV industry in the state: residential rooftop solar. It is a result of the current "1.0" version of NEM policy preventing California consumers from benefitting from lower solar costs. (By way of definition, NEM is a billing arrangement by which a customer gets utility bill credit when a rooftop solar system is delivering electricity into the local electrical distribution utility grid.) In addition NEM 1.0 does not provide incentives for minimizing grid impacts or installing storage. And it is a problem that, although manageable in the vast majority of states and utilities throughout the country with considerably less rooftop solar than California, has scaled up enough in California that it merits careful review and informed change. California NEM 2.0 needs to more precisely reflect the specific costs imposed on the grid system as well as the specific benefits it provides. Evolving NEM is part of our larger goal to ensure that we can continue to rapidly deploy cost-effective and sustainable forms clean energy, including rooftop solar, storage, demand response and energy efficiency, in order to drastically reduce carbon emissions and other forms of pollution from our energy system.
NRDC NEM 2.0 proposal
A diverse number of parties, including us, in the CPUC proceeding authorized by AB 327 have suggested specific reforms that evolve the current NEM mechanism to fairly compensate new distributed customer-owned renewable generation while ensuring that compensation is sustainable for all customers. Our proposal includes three key elements to evolve NEM in CA.
First, the new minimum bill approved last month, which will apply to all residential customers, cannot be "credited out" through NEM. This is to assure that all utility customers are contributing to the basic utility service and upkeep costs that are required to keep the grid safe and reliable as well as to fully fund public purpose programs.
Second, our proposal includes a variable demand charge that would be based on the transmission and distribution grid service costs, which represent the investments that utilities have to make in order to reliably deliver service. Demand charges have been used for decades by numerous utilities to provide incentives for higher grid capacity users to manage on-site load "peakiness." We think demand charges are a good and reasonable fit for NEM customers because they use existing local grid capacity for both export of their unused on-site generation and import when the on-site system cannot fully meet demand. For example a brief passing cloud can cause a rooftop solar customer to rapidly go from exporting unused electricity to importing needed electricity form the local grid. NEM solar customers can thus create a broader capacity "swing" than non-NEM counterparts. In keeping with the intent of NEM to be simple to administer and provide cost certainty for customers, we propose that the demand charge be assessed as part of the new NEM tariff in a manner that groups customer demand into three buckets (0-3 kW, 3-6 kW and 6 kW and above) with each bucket having an assigned monthly charge attached to it ($5, $10 and $15, respectively).
Third, we propose that NEM 2.0 include a seasonal time-of-use (TOU) rate. A TOU rate more precisely reflects the seasonal and daily patterns of electricity market demand that today's flat rate design does not reflect. CA consumers across the three investor-owned utilities can elect TOU rates today as an alternative way to assess their electric utility rate. Our proposal would strongly mimic these TOU rates already in effect. It would specifically entail two seasons (e.g. winter-spring and summer-fall) that lock-in three "hourly block" periods per day with subsequent assigned rates, reflecting the average electric service capacity and "fuel" cost for each hourly block in a given season. The TOU rate, in addition to a demand charge, is an important step toward achieving a more economically efficient rate design by rewarding NEM customers who choose to intelligently manage their on-site electricity production and consumption in ways that reduce grid and "fuel" costs for the benefit of all utility customers.
Our proposal will continue to lead very strong growth for rooftop solar PV in California
Positively unique to this proceeding in comparison to other NEM reform proceedings around the country is the process by which stakeholders had the ability to shape and hone a single analytical tool that all stakeholders assessed their proposals against. Having attended the series of education and tool development and feedback forums over the past year to build the tool, I can attest that the process was fair and transparent. Known as the "Public Tool" developed by consulting firm E3, all stakeholders were required to model their NEM proposals against six "bookend" base policy cases from 2017 to 2025 to scope the potential impacts on NEM customer market growth as well as customer allocation of utility cost of service recovery. The Public Tool is not perfect, but it accurately applies existing policy drivers (both state and federal) and ongoing market transformation trends like the continued decline in solar technology cost in calculating system economic impacts (including the broader grid system and the NEM customer systems) under a variety of NEM proposal design scenarios with a sufficient level of precision.
The figure below, based on one of six bookend case Public Tool modeling runs from our NEM 2.0 proposal, shows very strong solar market growth - nearly tripling today's total with over 10% annual compounding growth -- in California out to 2025. (Note the blue vertical line showing today's cumulative NEM capacity and the green line showing where the Public Tool modeling begins in 2017.)
NEM 2.0 will continue to grow California's solar market and clean economy
Our proposal will help to drive down the cost of solar for customers, provide incentives for installation of storage, fairly allocate costs, and promote continued strong growth of the industry. We look forward to working with other stakeholders to evolve what is a driving force policy that is furthering California's ability to reach its flagship climate and clean energy goals.