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How California’s New Policy (NEM 3.0) Impacts Future Solar Owners

An electric meter alongside styled text that says "NEM 3.0: What Californians need to know"

Going solar in California is pretty common. In fact, more than 1.6 million homes and businesses in the Golden State have already made the switch—partly because of the state’s reputation for pricey power and the cost-saving nature of solar.

These solar-powered cost savings, however, are largely dependent on the state or utility’s net metering policy, a unique billing arrangement that works by crediting solar owners' electric bills for any excess solar power they give back to the electricity grid. And California has historically had a strong net metering program. 

The state’s latest—nicknamed NEM 2.0—has allowed for thousands of Californians to make the switch to solar and has an approximate six-year payback period (i.e. when the solar system pays for itself). With power that lucrative, it’s easy to see why going solar in California just makes sense. However, critics claimed solar owners weren’t paying their ‘fair share’ and caused rates for non-solar owners to rise and for utilities to rely on fossil fuels at night.

Regardless of fact or farce, the California Public Utilities Commission (CPUC) is changing its net metering structure to address these concerns. They’re calling it net billing—or NEM 3.0—and it lessens the average credit solar owners will receive for their extra energy. Ultimately, the new billing structure will add about three years to payback times, going from six years to nine.

That said, California homeowners can still qualify for NEM 2.0 before it disappears. As long as you submit an error-free interconnection application (i.e. ask permission from your utility to connect your solar system to the grid), you can still be grandfathered into NEM 2.0 and benefit from the current policy! Any and all new applications received after April 13 will be relegated to NEM 3.0. 

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In this article, we cover NEM 3.0 in greater detail, including how we got here, how the new policy works, and important deadlines to consider if you’re still debating whether to go solar now or in the future. 

NEM 3.0 Key Points

  • NEM 3.0 is California’s new policy for solar that dictates how excess solar energy is credited to homeowners. 
  • NEM 3.0 incentivizes battery storage by devaluing standalone solar systems. 
  • Beginning April 13, 2023, all new solar customers in California’s three main utilities—PG&E, SCE, and SDG&E—will be subject to NEM 3.0’s lower rate structure. Municipal and cooperative utilities may adopt their own policies.
  • Solar systems under NEM 3.0 can be oversized up to 150% of the customer’s historical energy consumption. 
  • Current solar customers and anyone who submits a successful interconnection application by April 13, 2023 will be grandfathered into NEM 2.0, the current rate structure.

What is net energy metering? 

Net energy metering (NEM) is a type of billing setup that allows rooftop solar owners to earn credits from their utility provider for the excess solar energy their panels generate and add to the electric grid. Because this electricity offsets what the utility would otherwise have to generate or purchase themselves, they credit the homeowner’s utility bill for what they produce—generally at or around the retail rate—or the price at which customers pay for electricity. 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. 

For example, solar customers in California’s three main investor-owned utilities, Pacific Gas and Electric (PG&E), San Diego Gas and Electric (SDG&E), and Southern California Edison (SCE), who qualify under NEM 2.0, can sell any excess generation sent to the grid and get credited at the full retail value of power at that time, minus a non-bypassable charge of around 2 cents/kWh. So, if rates are 30 cents/kWh at 3 p.m. on a weekday, any excess production sent to the grid at that time would be valued at roughly 28 cents/kWh.

While the value and structure of net metering programs vary by state, city, 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 reduce pressure on the grid during times of peak demand. 

Brief timeline of net metering in California

In 1996, California enacted its first net metering policy, NEM 1.0, a landmark program that credited customers at the full retail rate of power. Eventually, it was replaced in 2017 by NEM 2.0., requiring new NEM customers to switch to time-of-use (TOU) rates and adding a few “non-bypassable” charges that the utility uses to maintain grid infrastructure and pay for certain programs, which cannot be covered by net metering credits. NEM 2.0 is the current policy for California’s three main investor-owned utilities, PG&E, SDG&E, and SCE, and is considered a strong incentive that helps lower the total cost of electricity for California residents. 

However, as more of the grid began to rely on solar during the day and grid power at night, this became a problem as utilities often used fossil fuels to meet nightly demand. Additionally, some critics claim this daytime production, nighttime shortage model created an unfair advantage between those with solar and without—with non-solar customers supposedly being forced to pay more for power during peak demand hours.

That’s where NEM 3.0 entered the conversation—a solution proposed by the CPUC to remedy these pitfalls by lowering the value of standalone solar panel systems and offering low-income households greater opportunities to lower their energy bills and go solar. However, the biggest point of contention with NEM 3.0—certainly among the solar industry—is whether or not this provides a sustainable growth path for all solar owners. 

By lowering the value of solar-only systems, will this new payment structure truly accomplish what it intends? Let’s go over the key changes of NEM 3.0, so you can make an informed decision for yourself. 

Key changes happening under NEM 3.0

NEM 3.0 brings big changes to California solar—some better than others. Here’s a look at the biggest changes occurring and how they’ll affect California homeowners.

Net billing, not net metering

If you’re wondering whether California’s getting rid of net metering, the answer is partially yes—partially no. Let us explain. Under NEM 3.0, California’s three main investor-owned utilities will no longer offer “net metering” in the traditional sense; rather, solar customers who submit an interconnection application after April 13 will be eligible for net billing

Similar to net metering, solar produced and consumed immediately in the home avoids purchases at the retail rate. However, net billing works differently by “selling” your excess energy 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. Rather than crediting homeowners at the retail rate, 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 of about 30 cents/kWh. 

Luckily, NEM 3.0 will not be applied retroactively, meaning homeowners who have already gone solar under NEM 1.0 and 2.0 will retain their current net metering structure. Additionally, if you submit an interconnection application by April 13, 2023, you will be grandfathered into the current rate structure and have up to 3 years to complete your solar installation and submit a final permit. 

NEM 1.0 and 2.0 customers may purchase a battery, should they wish and stay within their current rate structure. They may also modify their solar system by up to 1 kW or 10%, whichever is less, and stay within NEM 1.0 and 2.0 called ‘grandfathering.’ Anything above a 10% change will push customers into NEM 3.0 rates.  

Where it gets complicated is calculating the avoided cost, which will be determined by an Avoided Cost Calculator (ACC).

Avoided Cost Calculator (ACC) and ACC Plus Adders

Under NEM 3.0, all exports to the grid (i.e. excess solar) will be priced using an Avoided Cost Calculator (ACC)—a series of complex calculations nearly as controversial as NEM 3.0 itself. In a nutshell, every hour, day, week, and year, the avoided-cost rate changes in price, averaging around 4 to 8 cents/kWh. Although, the price fluctuates literally every hour from as high as $3.50 to as low as $0.

There’s also ACC Plus Adders, another calculator for California customers who go solar within the first five years after NEM 2.0 eligibility ends on April 13, 2023. Essentially, the ACC Plus Adders provides a few additional cents/kWh to solar customers so they can still achieve the CPUC’s targeted payback period of nine years. The so-called “adders” gradually decline over the course of five years. In PG&E the ACC Plus Adder for those who interconnect in the first year of NEM 3.0 is 1.8 cents/kWh, SCE is 4 cents/kWh, and SDG&E is zero. Low-income residents will receive higher adders, which includes CARE, FERA, tribal, and disadvantaged communities. 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.

Differentiated time-of-use (TOU) rates

Another requirement of NEM 3.0 is the use of “high differential” TOU rates—also called electrification rates. These are different than time-of-use rates 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 $12-$16 rather than the traditional Minimum Monthly Bill. 

Oversizing systems

One unique benefit to NEM 3.0 is the ability to install a solar system 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

When will NEM 3.0 take effect? 

A preliminary version of NEM 3.0 was proposed in December 2021 with high fees for having solar, dubbed a “solar tax.” However, it was thrown out following a highly contentious debate. A different version of NEM 3.0 was released on November 10, 2022, and on December 15, 2022, the CPUC approved the new version of NEM 3.0 with a few minor changes, which includes everything described above and no “solar tax.” NEM 3.0 will go into effect on April 14, 2023, 120 days after it was approved.

To be grandfathered into NEM 2.0, customers must have their interconnection applications submitted by April 13, 2023, and applications must be free of deficiencies. A complete electrical design is required with interconnection application submissions.

What does NEM 3.0 mean for the future of solar? 

Because California leads the nation in solar power, 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 and whether devaluing the price of solar promotes—or inhibits—sector growth. 

Early industry analyses reveal solar 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 packback 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.

Now is the time to go solar

The clock is ticking. If you’re considering solar in California, now is the time to be grandfathered into the current rate structure before it sunsets on April 13, 2023. Electricity isn’t getting any cheaper, and the decision to go solar (with or without a battery) has never been more time-sensitive. 

As a leading U.S. solar company, Palmetto works exclusively with the top panel, inverter, and storage manufacturers in the industry. Our selective product and performance standards ensure that every solar energy solution promises peak performance, efficiency, and reliability for years to come. 

To take advantage of NEM 2.0 savings, calculate your home’s solar potential and confirm your information to receive a risk-free, competitive quote that includes a preliminary system design. Get started today → 

Disclaimer: 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.

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