Today, going solar in California just makes sense. The Golden State’s reputation for pricey power along with solar’s cost-saving nature have resulted in over 1.7 million homes and businesses having solar panels in some form or fashion!
These solar-powered cost savings, however, are largely dependent on the state or utility’s net metering (NEM) policy, a set of rules that dictate how solar owners can earn credits on their electric bills for any excess solar power they share with the electricity grid. These programs incentivize solar ownership and help states meet their climate goals.
In the past, California’s net metering programs have helped the state make historic progress in clean energy adoption, ranking first for the most solar capacity installed. Effective April 2023, the California Public Utilities Commission (CPUC) voted to change its NEM policy to address shifting concerns—specifically when the sun goes down and solar stops producing power. Consequently, utilities are forced to rely on fossil fuels to meet these “grid reliability shortfalls.” The new Net Billing Tariff guidelines, nicknamed NEM 3.0, are designed to address these shortfalls in hopes of revolutionizing California’s residential solar market yet again!
By encouraging smarter energy usage during high-demand periods with Time of Use rates and incentivizing battery storage, NEM 3.0 offers California homeowners the chance to go solar and begin saving on energy costs sooner rather than later. Below we cover NEM 3.0 in greater detail, explain how it works, and offer insight into future payback times for various scenarios and setups.
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This content is for informational purposes only. All content mentioned does not constitute professional advice and is not guaranteed to be accurate, complete, reliable, current, or error-free. Please consult your own tax, legal, and accounting advisors.
NEM 3.0 Key Points
- NEM 3.0 is California’s new Net Billing Tariff policy for solar that dictates how excess solar energy is credited to homeowners.
- Consuming solar immediately in the home rather than exporting to the grid, and avoiding 4 to 9 p.m. on-peak usage, maximizes savings value under NEM 3.0.
- NEM 3.0 aims for an approximate payback period of nine years with or without a battery. This will vary depending on your system size, consumption habits, and system cost.
- NEM 3.0 only applies to California’s three main utilities: PG&E, SCE, and SDG&E. Municipal and cooperative utilities may adopt their own policies. LADWP continues to offer 1-to-1 net metering.
What is net energy metering?
Net energy metering (NEM) is a type of billing setup that allows solar system owners to earn credits from their utility provider for the excess solar energy their panels generate and add to the electric grid. These credits are often used later to offset the cost of electricity that solar owners pull from the grid when they need more power than what their panels produce, like at night. NEM and other programs are what allow homeowners to earn energy savings with solar!
While the value and structure of net metering programs vary by state and utility, both solar owners and utility providers benefit from this structure by allowing homeowners to save on their monthly electricity bills and allowing utilities to sell the excess electricity to neighbors, reducing demand for traditional power generation.
Under NEM 3.0, the policy is now technically net billing; though, it’s similar to net energy metering in that any solar power produced and consumed immediately in the home avoids having to buy electricity from the utility at the high retail rate.
How California homeowners can earn electric bill credits with NEM 3.0
NEM 3.0 can seem overwhelming, but once you break it down, it’s easy! Let’s explain a few key concepts so you can feel more confident about your energy options in California.
Net billing, not net metering
Under NEM 3.0, California’s three main investor-owned utilities—PG&E, SCE, and SDG&E—will no longer offer “net metering” in the traditional sense; rather, solar customers will be eligible for net billing.
Similar to net metering, net billing is a bit different in that your excess energy is “sold” to the utility at specified export credit rates. Under California’s NEM 3.0, the export credit is valued at the hourly avoided-cost rate—or price the utility would otherwise pay to produce the same power itself, or to purchase it from a power plant.
Net billing provides a dollar value based on the wholesale rate of electricity for the month and hour the solar energy is sent to the grid. In California, the avoided-cost rate is on average 75% lower than the average retail rate (the price consumers pay for electricity from their utility) of over 30 cents/kWh in 2023. This makes sense given wholesale prices for goods are almost always lower than their retail prices. The utility provides a service by powering the home every moment solar is not producing and, for that reason, is unable to credit exports at retail prices.
NEM 3.0 was not applied retroactively, meaning homeowners who have already gone solar under NEM 1.0 and 2.0 will retain their current net metering structure. (This is called ‘grandfathering’.) Should they wish, NEM 1.0 and 2.0 customers may also purchase a battery or choose to modify their solar system by up to 1 kW or 10%, whichever is less, and stay within their current rate structure. Anything above a 10% change will push customers into NEM 3.0.
Hourly Export Credits and Adders
Under NEM 3.0, all exports to the grid (i.e. excess solar) will be priced using an Avoided Cost Calculator (ACC). In a nutshell, every hour, day, week, and year, the avoided-cost rate changes in price, averaging around 4 to 8 cents/kWh. It can range from as high as $3.50/kWh to as low as $0/kWh. Average export rates in the ACC will gradually increase over time just as retail rates and wholesale prices of power do.
There’s also ACC Plus Adders, which are bonus adders to the export credits for California customers who go solar within the first five years of NEM 3.0. Essentially, the ACC Plus Adders offers more cents per kWh to solar customers to achieve the CPUC’s targeted payback period of nine years. These boosted rates will gradually decline over the next five years, and customers who install solar within this timeframe should have these boosted rates reflected on their electricity bills for the next nine years after they go solar.
In PG&E, the ACC Plus Adders for those who interconnect (i.e. are granted permission to operate from their utility) in the first year of NEM 3.0 is 2.2 cents/kWh, SCE is 4 cents/kWh, and SDG&E is zero. SDG&E customers are excluded from the adders, because with reasonable pricing and production assumptions, the payback is already shorter than nine years without adders. Low-income residents, which includes CARE, FERA, tribal, and disadvantaged communities, will receive higher adders.
Differentiated time-of-use (TOU) rates
To further reduce grid shortfalls and reliance on fossil fuels, NEM 3.0 also uses “high differential” TOU rates—also called electrification rates. These are still time-of-use rates, but different in that they have much higher prices during times of high demand on the grid, and much lower prices during periods of low demand.
This is in an effort to promote home electrification and the use of battery storage to shift the time when most homes use a majority of their electricity, smoothing out the demand curve. These rates include a monthly Grid Participation Charge of around $14 to $16 rather than the traditional Minimum Monthly Bill.
Currently, the TOU rates eligible with NEM 3.0 are:
Each TOU rate has on-peak hours of 4 to 9 p.m. every day. In order to maximize solar savings, NEM 3.0 customers will want to consider shifting some of their consumption to the morning and early afternoon when solar is likely producing excess energy. Shifting consumption of controllable loads will reduce the on-peak charges and minimize solar exported to the grid. Some controllable loads include dishwashers, clothes dryers, electric vehicle charge, and pool pumps.
One unique benefit to NEM 3.0 is the ability to install a solar system for up to 150% of your total electricity usage over the past 12 months if you plan to increase your consumption. The idea is that creating an oversized system incentivizes homeowners to electrify their homes by replacing fossil fuel-based appliances like gas stoves, water heaters, and even vehicles with electric alternatives—all of which happen to be incentivized through the Inflation Reduction Act of 2022.
What does NEM 3.0 mean for the future of solar?
California leads the nation in solar power, and NEM 3.0 will serve as a litmus test for other states looking to reduce their greenhouse gas emissions and expand clean energy programs.
Although battery storage devices are incentivized under the Inflation Reduction Act of 2022, adoption has consistently lagged—with recent estimates revealing only 6% of residential solar systems include battery storage. NEM 3.0 will demonstrate how willing customers are to adopt this newer technology.
Early industry analyses reveal solar without storage at typical prices, excluding financing, in SCE an approximate six-year payback under NEM 2.0, and estimates an approximate nine-year payback under NEM 3.0. Customers purchasing solar battery storage can expect a similar nine-year payback under NEM 3.0 even though the upfront cost is higher because energy storage can be programmed to store excess energy during off-peak hours and export during on-peak hours.
Curious how much you could save on energy in California?
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