A Four Point Guide to California's Net Metering Update

The California Public Utilities Commission (CPUC) is evaluating proposals and deliberating what California’s next solar net energy metering policy (NEM 3.0) should be. At the heart of this policy debate lie the questions: what should rooftop solar customers be paid for the electricity they generate? And how should the costs of the electric system that we all depend on be shared among customers with and without rooftop solar?

A proposed decision is expected by mid-December.

Susan Bilo via NREL, 21410

As we’ve explained: Current NEM is a simple policy that was designed to encourage early market adoption of solar and reduce carbon. However, as the solar market has boomed in California and solar costs have dropped, it is time to update this policy to avoid inequitable impacts that if left unchecked will make it harder to achieve California’s climate and air quality goals. Do read that blog first if you're new to this issue.

A solution is possible that values the contribution of rooftop solar to California’s clean energy future, while more fairly sharing electric system costs among all customers.

As a NEM 3.0 proposed decision looms, here are four key-points to consider:

  • Rooftop solar customers are pushing electric system costs onto non-solar customers
  • NEM benefits have largely gone to wealthier customers
  • It is vital to equity and climate progress to ensure affordable electric rates
  • Smart policy can support the continued growth of rooftop solar while achieving more equitable outcomes

Rooftop solar customers are pushing electric system costs onto non-solar customers

Currently, NEM overpays for rooftop solar by up to four to six times the value of the electricity these panels generate. See the example of San Diego in our previous blog. This is after accounting for climate benefits of clean electricity, and the benefits of reduced need for electric grid investments – transmission and distribution – due to rooftop solar. Investor-owned utilities in California simply pass through the costs of electricity that they purchase or generate, so any excess payments for rooftop solar get passed onto other utility customers.

Because these overpayments are largely paid by customers who don’t have solar, they increase electricity rates and bills for these customers. A recent Next 10 report estimates that non-solar customers pay anywhere between $60 to $200 more per year than they should be due to NEM overpayments. This issue is most pressing in San Diego where the report estimates that more than 15% of residential rates are due to NEM overpayments. NRDC’s own analysis produced very similar estimates.

Multiple other experts conclude the same. Haas Energy Institute at UC Berkeley has extensively written about this issue; Massachusetts Institute of Technology released a podcast on how and why NEM causes these inequities; California’s consumer advocates – The Utilities Reform Network and the Public Advocates Office – arrived at similar conclusions and are advocating for NEM reform alongside NRDC; the CPUC identified NEM overpayments as one of a few prominent reasons for rising electricity rates. And most recently, the Sierra Club has also explained that NEM overpayments are covered by those “who do not, or cannot, adopt rooftop solar themselves.”

NEM benefits have largely gone to wealthier customers

Solar adopters are disproportionately wealthy and white according to recent data. In California, the bottom 40% of earners account for only about 13% of NEM customers. Although there has been a slight improvement in adoption trends by income class in the last few years, adoption trends are still nowhere close to being equitable. NEM is overly benefiting the wealthy at the expense of the poor.

Current NEM policy also doesn’t overcome many of the barriers disadvantaged communities face to adopt solar. It’s expensive upfront to install even though solar panel costs have been declining, installing solar can require roof repair and additional electric upgrades that can add costs, and many lower-income Californians are renters who don’t have a say in major upgrades. This issue hasn’t gone unnoticed. Environmental justice advocates have issued a statement acknowledging that their “communities have experienced structural barriers in accessing and benefiting from NEM. Data shows that NEM disproportionately benefits wealthier, white, single-family homeowners.”

The CPUC’s recent paper identifies “revenue shifts to lower-income non-participants from Net Energy Metering (NEM) and other DER” as something that must be actively managed for vulnerable customers.

It is vital to equity and climate progress to ensure affordable electric rates

Overpaying for rooftop solar is raising overall electric rates. Because lower income people pay more in utility bills as a percentage of their income than wealthier people, higher electricity rates are a significant burden. Coming out of this pandemic induced recession, vulnerable Californians are already facing an electricity affordability crisis: there is more than one billion dollars in utility debt among vulnerable communities.

Higher electric rates are also a problem for decarbonizing our economy. 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.

Smart policy can support the continued growth of rooftop solar while achieving more equitable outcomes

To attain our clean energy goals, we need more solar electricity. But we need to do this the right way so that rooftop solar benefits all Californians, not only the wealthy. To that end, NEM 3.0 needs to be based on the actual benefits rooftop solar provides, support solar development where it most benefits the grid, encourage pairing solar with storage, and prioritize subsidies to lower income customers.

NRDC’s proposal aims to address these needs by adjusting NEM payments to their true value, implementing an up-front subsidy that allows solar adopters to make back their investment within ten years, providing extra NEM benefits to low-income customers, and creating an equity fund to buy-down solar and other clean energy upgrades for disadvantaged communities.

NRDC also supports Joint Recommendations developed through negotiations with the Public Advocates Office, The Utility Reform Network, labor representatives, California Wind Energy Association, and the Independent Energy Producers Association.

There are two main differences between these recommendations and NRDC’s proposal. The Joint Recommendations contain a time-limited “transition” NEM rate, which splits the difference between current policy and NRDC’s proposal to give the solar industry time to transition to a NEM 3.0 policy. And the Joint Recommendations also ask for a managed transition for existing NEM customers to NEM 3.0. Both NRDC’s proposal and the Joint Recommendations focus on the residential sector.

These proposals take a holistic view of how to make renewable energy more affordable for all Californians. They will also help California get to its economywide decarbonization goals in a more timely and equitable manner. This is the balanced solution that the state needs.

About the Authors

Mohit Chhabra

Senior Scientist, Climate & Clean Energy Program

Julia de Lamare

Clean Energy Advocate, Climate & Clean Energy Program

Merrian Borgeson

Director, California Policy, Climate & Clean Energy Program

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