California leads the nation in fighting climate change because of state policies that have accelerated clean energy investment. As clean energy blooms in California, these policies need to mature and evolve to continue to be effective. That’s the case with a policy called solar net energy metering (NEM), which compensates utility customers for electricity that their rooftop solar panels produce.
California’s NEM policy has been incredibly effective at growing the rooftop solar market; now we need a policy that keeps doing that and more. We need a policy that is responsive to California’s changing clean energy needs, like electrifying cars and buildings, and one that delivers affordable solar energy to low- and moderate-income customers.
Through this blog we explain NEM, why California’s current policy needs to evolve, and share NRDC’s proposal in the California Public Utilities Commission’s NEM 3.0 proceeding. Our proposal is intended to support sustainable growth in the solar industry while increasing access to rooftop solar systems to those who can least afford it.
NRDC supports net metering in establishing and building a market for rooftop solar and has pushed for net metering policies in many states. The issues we address here are a result of the enormous success California has had with rooftop solar and the need for sustainable growth in that market while decarbonizing the entire economy.
NEM Helped Spark California’s Clean Energy Transition
Currently under NEM, utilities are required to pay customers for the electricity that their solar panels generate at the retail rate; which is the same price the customer pays for importing electricity from the grid. When rooftop solar panels generate electricity, NEM customers don’t have to buy it from the grid. And any excess solar electricity can be exported to the grid for credit on their electricity bill. Their bill is based on net energy consumption—i.e., electricity imported from the grid (at night when the sun doesn't shine for example) minus electricity exported to the grid. As a result, most NEM 2.0 customers can* see a total bill of around $10 to $20 a month, much less than their previous bills which could be $200 a month or more.
NEM has done wonders for the rooftop solar industry in California (and beyond). When it was first implemented in the 1990s, there was hardly any local solar generation in California. Today, there are approximately 1.2 million rooftop solar installations that amount to 9 gigawatts (GW) of clean energy capacity—about 11 percent of California’s total electricity production capacity (80 GW). California’s success in bringing solar and other renewables online also has made wholesale electricity cheaper; midday prices in the spring and fall are half of what they were in 2012. Along with producing clean electricity and making the electric system stronger, rooftop solar makes clean energy tangible, creates local clean energy jobs, and serves as a reminder of the need to transition to clean energy and fight climate change.
California’s NEM Success Means It Needs an Update
In San Diego Gas & Electric (SDG&E) territory, the average residential retail rate—the amount NEM customers are credited for the electricity their solar panels generate—was approximately 30 cents per kWh last year. This average retail rate includes the costs of wholesale electricity, longer term electricity contracts, costs to maintain and build out the electric grid, and other policy driven expenses such as the costs to fight climate change and the costs of reducing the threat of wildfires.
On the other hand, the average value of solar electricity generated from a San Diego rooftop is now around 5 to 6 cents per kilowatt-hour (kWh) according to separate analysis by both NRDC and the California Public Utilities Commission (see slide 8 here). This value of electricity from rooftop solar accounts for the fact that rooftop solar reduces the need for the utility to generate or buy electricity from the wholesale market, it reduces carbon emissions, it reduces strain on grid infrastructure, and it reduces the need to build more poles and wires. This value would’ve been higher had solar, rooftop and utility scale not contributed toward reducing midday wholesale electricity prices.
This means that solar customers in California are now paid up to six times what electricity generated by solar panels is worth to the grid and to reduce carbon. This difference between the value of rooftop solar and how much we pay for it will grow in the future because electric rates will keep increasing at a pace faster than inflation for a whole host of reasons; paying for 1.2 million rooftop solar systems at a high premium is one of those reasons. The responsibility to make up this difference, between how much solar customers are paid and how much the electricity they generate is worth, falls on those customers who don’t have rooftop solar.
NRDC estimates that SDG&E’s residential electric rates are around 4 cents per kWh higher, or around 16 percent, than they would be if we could keep the benefits of rooftop solar but avoid this overpayment. A recent CPUC paper and research by Next10 separately estimate that this impact could be even higher—around 5 cents per kWh.
In other words, the success of rooftop solar means that if we leave NEM the way it is, it will reduce the affordability of electricity in CA. More expensive electricity makes meeting our climate goals harder, because we need to provide clean electricity to power our transportation and buildings to meet our decarbonization goals. Next, we look at these issues in more detail.
California’s NEM Needs to Evolve
First, all Californians need to be able to afford to transition to clean energy. This is especially important as we start a slow and arduous recovery from the pandemic. The CPUC estimates that under the current NEM policy, the lowest-income Californians (who are least likely to benefit from NEM) could save around $80 to $100 a year if we didn’t over pay for rooftop solar; this estimate is corroborated by California’s Independent Emissions Market Advisory Committee.
Second, 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 14 and 15 here) that electric rates are already making electrification a tougher proposition than it should be.
These impacts are compounded by the fact that rooftop solar adopters tend to be disproportionately wealthy. Lawrence Berkeley National Laboratory found that around half of the state’s solar adopters are in the highest 20 percent of earners, while only 4 percent come from the lowest 20 percent. California solar policy needs to correct this disparity.
To be fair, NEM policy isn’t the only thing that needs to change. The way retail rates are set also needs updating to be better aligned with the state’s climate and equity goals. NRDC hopes to make progress on that front as well in the future.
NRDC’s Proposal to Fix Net Energy Metering and Enhance Equity
NRDC is proposing a three-part solution:
1) Reform NEM to fairly compensate solar customers for the benefits from exported energy without unduly raising rates;
2) Implement an up-front incentive that allows potential adopters of solar to make back their investment within ten years, ensuring rooftop solar continues to grow in California; and
3) Develop a clean energy equity fund to provide clean energy benefits directly to Californians with lower incomes.
This new NEM policy, NEM 3.0, would apply to all new solar customers and to existing customers after 20 years of their current NEM rate.
Under NRDC’s proposal, solar customers will be paid for the total value that their panels provide. This value includes the market value of electricity, carbon pollution reduction benefits, and reducing stress on the grid’s infrastructure. This export value would vary hourly; the value will be lower in the middle of the day when clean energy is cheap and abundant (thanks to solar!) and the export value would be higher after sundown when the grid most needs cheap and clean electricity. This would provide solar customers with incentives to install battery storage (New York and Minnesota have adopted similar approaches to credit rooftop solar). NRDC’s proposal couples this export payment with a grid benefit charge that addresses the benefits that solar customers’ get from being connected to the grid: affordable and reliable electricity.
Layered on to this is an upfront cash incentive to install rooftop solar. It will ensure that new rooftop solar customers can make back their investment within ten years. Rooftop solar systems last for at least 25 to 30 years, so customers could make money while furthering Californians’ clean energy goals and protecting the environment. An upfront incentive plus the fact that California’s building codes require solar panels on new homes will help rooftop solar steadily grow for the foreseeable future.
The incentive should change to reflect any decreasing cost of solar panels and installation. It could be funded from sources other than energy bills, such as through cap and trade revenue. It could be higher in communities where rooftop solar is most needed.
Finally, NRDC’s proposal includes an equity fund to provide clean electricity benefits—rooftop solar, energy efficiency, electrification—directly to low-income Californians. This fund would be developed by levying a modest charge on rooftop solar owners’ existing NEM rates who have already recouped their initial investment and stand to make a substantial return on it. This fund would yield approximately $130 million annually to reinvest in communities that haven’t yet reaped enough benefits from the clean energy transition. NRDC recommends the CPUC convene a process that includes environmental justice advocates and community groups to figure out how to spend the fund in way that most benefits vulnerable Californians and supports clean energy.
The Time to Evolve NEM Is Now
California’s Senate Bill 100 and E.O. B-55-18 set goals of getting to zero-carbon electricity and a carbon neutral economy by 2045. We need sophisticated policy solutions to reach California’s clean energy goals in a timely, equitable, and cost-effective manner. NEM helped not only establish the rooftop solar industry in California, it also helped Californians participate in the clean energy transition. Now, we need this policy to evolve to complement our equitable clean energy transition goals. NRDC’s proposal does just that and will keep the clean electricity revolution moving ahead.
* Note - word in italics added on 9/22/2021 to clarify that this sentence is based on illustrative high level calculation using the CPUC's NEM 2.0 Lookback Study