Utilities were big winners in the California solar + storage market in mid-December, convincing the California Public Utilities Commission (CPUC) to slash the value of solar energy returned to the grid by 75 percent, or as little as a nickel/kWh, effective mid-April 2023. This ruling — Net Energy Metering (NEM) 3.0 — under contentious study for two years, will drag out the amortization timetable for both solar and storage system adoption for residential and commercial customers alike.
The measure was nominally aimed at encouraging residential storage adoption for solar homes, but does so by lessening the value of solar systems through higher Time of Use rate changes. Thus, the incentive for new storage is primarily cost avoidance.
“Many of the updates we see in NEM 3 are designed to prioritize the adoption of energy storage with solar by making them clearly more profitable for solar consumers who can generate energy, store it, and sell back excess energy to the grid at peak times when time-of-use prices are at their highest,” stated Aurora Solar CEO Chris Hopper. “NEM 3 is trying to accelerate homeowner energy storage adoption to make up for the lack of grid storage capabilities.”
The California solar + storage market is huge and its impact on the grid is just as big. California now has some 12 GW of distributed solar generation installed, equal to nearly 25% of peak demand in the state. Furthermore, California has more than 80,000 customer-hosted batteries connected to the grid, with a 900 MW potential, according to a September study by CALSSA.
“It is important that everyone understands that with this (change), a battery system is still more expensive under NEM 3 than NEM 2. So, all the hullabaloo about this decision being about storage is half spin. Yes, we’ll build more storage under the decision because it essentially punishes stand-alone solar systems, but it doesn’t exactly move us forward on storage,” surmises Bernadette Del Chiaro, the executive director of state trade group California Solar & Storage Association (CALSSA).
As a result of the new NEM 3.0 rules, the California solar + storage market may enter a boom-bust cycle.
“Enphase Energy states, ‘Based on data from other states, cutting (the) solar value proposition by more than half — four months from now — will lead to a deluge of installation requests in the first quarter of 2023, followed by a precipitous curtailment. This will not only fail to sustainably grow the solar market, but it also risks debilitating it, exacerbating supply chain issues, disrupting small business cashflows, and jeopardizing roughly 65,000 California solar jobs.’”
“More solar installers are going to need to start offering energy storage as part of their offerings in order to offer systems that provide the best ROI possible,” Hopper says. “The average price of installations sold is likely to go up because of this as well.”
Distributed storage vs. Traditional utility spending
The bottom line message of the opposition to the NEM 3.0 terms may be that California solar + storage capacity movement simply has become bigger than the interest of any one utility.
“The biggest battery in the world is located in garages around California, and they are helping keep the lights on for everyone,” said Del Chiaro in early September, when the state suffered a heat wave.
“CALSSA estimates that California utilities, purchasing electricity on the spot market on Tuesday (Sept. 6), spent an extra $450 million compared to a ‘normal’ hot day the previous week. $450 million spent on consumer batteries instead would be an investment in a resource that lasts 10-15 years, as opposed to one day,” Del Chiaro pointed out.
Supporters of the new ruling do exist though, and they see a way for the bittersweet terms of NEM 3.0 to inspire more storage adoption to save the solar day in California.
The decision provides small extra electricity bill credits to residential customers who adopt solar or solar paired with battery storage in the next five years. The credits are set by a mechanism called the Avoided Cost Calculator (ACC) that is used to calculate the cost a utility avoids for each kilowatt-hour of electricity it doesn’t have to buy from the wholesale market when rooftop solar panels provide the energy instead. Customers are guaranteed these extra bill credits for nine years.
Under the new tariff, average residential customers who install solar are expected to save $100 a month on their electricity bill, and average residential customers who install solar paired with battery storage are expected to save at least $136 a month, the CPUC reckons. With these savings on their electricity bills, new solar and solar + battery storage customers should fully pay off their systems in nine years or less, on average, the CPUC calculates.
To address energy justice, there also is an additional $630 million in state funding set aside by the California legislature for residential low-income solar + battery storage adopters.
“In the short run, NEM 3.0 will make solar energy less lucrative to California residents and it will give the appearance that state utilities are not environmentally friendly,” warns Elad Goldberg, VP of projects and engineering at Kuubix Construction Group. “But in the long run, if NEM is done correctly in the future, privately placed home storage batteries will make consumers more aware of their energy needs and consumption patterns, educating them to conserve energy, use it wisely, and reduce their overall energy footprint.”
By encouraging more storage, “NEM has the potential to almost completely liberate Californians from the centralized electrical grid, zeroing their electrical bills while increasing their power resiliency during periods of blackouts and fires,” Goldberg argues.
Proponents of this drastic change point, long-term, to how Hawaii changed its export incentives to encourage battery adoption and self-consumption.
Point-By-Point issues raised
Regardless of the how effective the rule may be at netting more battery storage on the grid, was it logical to do so mostly at the expense of solar itself?
“The change in pricing structures is going to have a much larger impact on low-income households that were interested in solar adoption but no longer will see the returns needed to make it a viable option, nor have the financial flexibility to also invest in storage solutions,” posits Hopper.
Analysts continue to point out the flawed logic underpinning the basis for the rate changes in NEM 3.0. Here’s a summary of the key points in contention filed in the CPUC hearings on Dec. 5 by the Clean Coalition’s Policy Manager Ben Schwartz:
- The Proposed Decision (PD) underestimates the benefits of NEM and overestimates the costs.
- The PD should mandate annual collection of NEM statistics and allow for swift reform, if necessary.
- The PD does not go far enough to incentivize deployments for renters.
- Environmental Working Group (EWG) raises an important point about aggregated distributed generation providing value that is on par with utility-scale generation.
- The oversizing allowance for NEM systems should be 75% not 50%.
- The payback period for non-export systems should be used as a litmus test to evaluate the Net Billing Tariff.
- The commission should wait to pass a Successor Tariff until a full up-to-date analysis is completed.
“The Proposed (now final) Decision relies entirely on cost-effectiveness and cost-shift metrics to justify the value of transitioning from NEM 2.0 to the Net Billing Tariff, a frame of reference that does not consider any empirical analysis on the impact that the PD will have on market growth,” wrote Schwartz.
While NEM 3.0 may settle one short-term rate issue in the relationship between investor-owned utilities in California and their customers, many other pressing rate issues remain.
“Given the commission’s focus on affordable rates and preventing cost-shifts, we hope to see swift action on the real drivers of electric rates: transmission spending, wildfire mitigation costs, insurance costs, and victim funds California ratepayers are footing the bill for (despite legal rulings finding the utilities at fault),” Schwartz writes. “Up to this point, the sole focus on NEM appears to be scapegoating distributed generation as the cause of high electric rates, when all the data says otherwise.”
Opponents to the new ruling suggest that the CPUC was wearing blinders to the current cost structure in the energy market.
“Utilities claim solar makes the energy bills of non-solar customers more expensive. But in reality, utility profits, infrastructure investment, transmission lines, and paying for their bad planning and the fires they cause are what drives energy rates up. Californians are not fooled, and real equity champions know energy fairness is about making rooftop solar panels and batteries more — not less — affordable for working families and lower-income Californians,” laments Del Chiaro.