What is NEM 3.0 and How Will it Impact California Solar Owners?
Updates regarding legal action seeking to overturn NEM 3.0: On May 4, 2023, three environmental groups filed a lawsuit claiming the CPUC failed to consider the full benefits of rooftop solar. The lawsuit seeks to overturn NEM 3.0 and have the CPUC devise a new solar billing policy. On September 14, 2023, California Appeals Court Presiding Judge Tucher agreed to hear oral arguments for this lawsuit. A date has not been set for oral arguments Please check back for updates.
Following years of policy skirmishes, revisions, and a mad dash to grandfather systems into the previous net metering plan, a new solar billing structure — known as NEM 3.0 — is in effect for California’s three investor-owned utilities.
NEM 3.0 features a 75% reduction in export rates (the value of excess electricity pushed onto the grid by solar systems), thereby reducing the overall savings and increasing the payback period of home solar. This new policy was designed, in part, to encourage homeowners to pair battery storage with their solar panels to become more self-sufficient and contribute to a more resilient electricity grid.
While NEM 3.0 is undoubtedly less favorable to solar-only customers than previous net metering policies, it’s important to note that NEM 3.0 solar systems in California will still largely provide greater energy cost savings than in any other state, especially when paired with home battery storage.
NEM 3.0 key takeaways:
- Solar systems placed in service prior to April 15, 2023 will remain under their existing net metering policy for 20 years from their interconnection date
- Solar systems under NEM 3.0 billing will earn, on average, 75% less for the excess electricity they push onto the grid
- Under NEM 3.0, the payback period for solar and battery storage systems will be roughly equal to the payback period of solar-only systems
In this article, we’ll break down:
- What is NEM 3.0 solar billing?
- What does NEM 3.0 mean for solar in California?
- The utilities’ perspective
- When will NEM 3.0 take effect?
- Frequently asked questions about NEM 3.0
Let’s dive in with a quick review of how net energy metering works.
What is Net Energy Metering (NEM)?
Net Energy Metering describes a billing structure between utilities and homeowners with solar. Under net metering, solar owners earn credit for the excess electricity they push onto the grid when their panels produce more electricity than their home uses. This credit is used to offset the cost of the electricity they pull off the grid when the sun isn’t shining.
Net metering policies have traditionally had a one-t0-one offset. That means the price of a kilowatt-hour (kWh) of electricity pushed onto the grid was equal to the price of a kWh pulled off the grid.
Under this structure, solar owners with systems designed to produce the same amount of electricity as the household consumes essentially replace their utility electricity bill with a lower monthly payment on their solar equipment. Over the 25-year warrantied life of a solar system, this leads to energy cost savings in the tens — or hundreds — of thousands of dollars.
NEM 3.0 — also known as the Solar Billing Plan — is a new version of the net energy metering policy that took effect on April 15, 2023. It applies to utility customers in the territories of California’s three major investor-owned utilities (IOUs):
It’s important to note that NEM 3.0 is not retroactive. So, solar systems installed under NEM 1.0 or NEM 2.0 will remain under their current policy for 20 years from the date they received permission to operate (PTO).
NEM 2.0 vs NEM 3.0
NEM 2.0 was the previous net metering policy offered by California’s investor-owned utilities.
The biggest change between NEM 2.0 and NEM 3.0 is the value of export rates — i.e. the price of excess electricity produced by solar systems. Under NEM 2.0, the value of solar exports is based on retail rates, so a kWh of electricity pushed onto the grid was worth the same as a kWh of electricity pulled off the grid. Under NEM 3.0, residential solar export rates will be based on an “Avoided Cost Calculator” and are closer to wholesale rates for electricity (what utilities pay for electricity).
We’ll explain how this works in a moment, but the big thing to know is, on average, NEM 3.0 export rates are around 75% lower than the export rates for NEM 2.0.
Lower export rates mean longer payback periods and less bill savings for solar owners under NEM 3.0. Here’s how that looks based on actual bids generated on the solar.com marketplace.
Payback period and savings under NEM 2.0 vs NEM 3.0
Scenario 1: Cash purchase of an average 7.6 kW system with 100% offset
|Solar under NEM 2.0||Solar under NEM 3.0|
|Monthly energy bill (previously $250)||$18||$96|
|Payback period||4.6 years||6.5 years|
Scenario 2: 12-year loan for an average 7.6 kW system with 100% offset
|Solar under NEM 2.0||Solar under NEM 3.0|
|Monthly energy bill (previously $250)||$162||$239|
Scenario 2: 20-year loan for an average 7.6 kW system with 100% offset
|Solar under NEM 2.0||Solar under NEM 3.0|
|Monthly energy bill (previously $250)||$123||$200|
While the lifetime savings can be substantially lower for solar-only systems under NEM 3.0 billing, it’s worth noting that $60,000 to $75,000 is still among the best — if not the best — return on investments for home solar in the US.
There are 5 basic takeaways for California IOU customers regarding NEM 3.0 solar billing.
- It features a major reduction in the net metering value of solar electricity
- There are no new charges or fees, commonly known as “solar taxes”
- Pairing solar with battery storage will be more beneficial under NEM 3.0
- Solar owners that are grandfathered into NEM 2.0 will be able to add battery storage later and remain on NEM 2.0
- Home solar is still worth it under NEM 3.0 solar billing
The first and most critical point is the changing rate structure that will reduce the value of solar energy.
Lower solar export rates
The biggest change from NEM 2.0 to NEM 3.0 is the rates at which solar owners are compensated for the excess electricity they put on the grid (known as export rates).
Under most net metering policies, including NEM 2.0, solar owners are credited for the full retail value of each kWh of electricity they put on the grid. However, under the NEM 3.0, the value of solar exports is no longer based on retail rates. Export prices are based on the “Avoided Cost Calculator” and vary by month, day, and hour.
Since this structure is even more complicated than it sounds, here’s an example of how people will be compensated for their excess solar production. The gray bars indicate what homeowners pay per kWh for grid electricity and the black bars indicate the rate at which they’ll be credited for excess solar production under NEM 3.0.
Clearly, they are not the same, and the price of exports is much lower than the price of imports.
“The solar industry and clean energy supporters are still reviewing the CPUC’s proposed decision, but based on an initial analysis, it would cut the average export rate in California from $0.30 per kilowatt to $0.08 per kilowatt and make those cuts effective in April 2023, resulting in a 75% reduction in the value of exports,” the California Solar and Storage Association (CALSSA) said in a release.
No new solar taxes
There is a shred of good news in the version of NEM 3.0 adopted by the California Public Utilities Commission (CPUC). A series of charges and fees for solar owners — casually known as “solar taxes” — did not make it into the approved version of NEM 3.0.
These fees were, at one time, expected to add around $60 a month to solar owners’ utility bills. They are now off the table.
A push for pairing solar and battery
A major theme in the NEM 3.0 policy text is a push for pairing solar with battery storage. That’s because generating solar electricity in California isn’t the issue; the problem is storing and using it since peak solar production doesn’t align with peak energy consumption.
If we go back to our handy import/export price graph, you’ll see that export prices skyrocket from 7-8 pm because energy demand is peaking while solar generation is winding down for the night — which is a problem throughout the state.
In fact, the NEM 3.0 export rates can be as high as $3.32 per kWh during peak demand hours in September. According to an analysis by solar.com, homeowners with battery storage under NEM 3.0 can earn ~$200 per week by storing solar electricity generated during the day and exporting it to the grid during these high-value windows.
In July 2023, Electrum (which powers the solar.com marketplace) released calculations for two new battery discharge modes specifically designed to maximize savings in NEM 3.0 billing. These industry-leading calculations show that many homeowners can in fact achieve 100% electricity bill reduction (aside from certain non-bypassable charges) by pairing solar and battery storage. Furthermore, many homeowners have the potential for Day 1 savings, in which their monthly solar and battery payments are lower than their average electric bill.
An analysis of binding quotes on the solar.com marketplace revealed that IOU customers who purchase solar and battery systems with cash can expect bill offsets of 70-90% and payback periods between 5-7 years under NEM 3.0. That’s far greater savings potential and a shorter payback period than almost any other place in the country.
In addition to the 30% federal tax credit, there will be an additional $900 million in funding available for the Self Generation Incentive Program (SGIP) available in 2023. SGIP provides battery storage rebates for SCE, PG&E, SDG&E, and SoCalGas customers.
NEM 2.0 customers can add battery storage later
Another important nugget of the NEM 3.0 decision is that NEM 2.0 customers can add battery storage and retain their NEM 2.0 status.
There are two common scenarios where this comes into play:
- If you currently have a solar system in California, you won’t be transitioned into NEM 3.0 if you add battery storage after April 14, 2023
- If you grandfathered a new system into NEM 2.0 before the April 14, 2023 deadline, adding battery storage later will not change your NEM 2.0 status
There are several advantages to pairing solar and battery in California, so being able to add energy storage later and remain in NEM 2.0 is a big win for Californians.
Home solar is still worth it with NEM 3.0 solar billing
Now that NEM 3.0 is in effect, many Californians are wondering if home solar is still worthwhile.
And the answer is that home solar is still absolutely worthwhile and there are strategies to increase the savings of a NEM 3.0 system. In fact, even under NEM 3.0 billing, solar systems in California will still largely provide more energy cost savings than systems in any other state. The Golden State is essentially going from being the best state for solar by a longshot to being the best state for solar by a somewhat close margin.
It’s also important to note that energy cost savings are not the only benefit of home solar. There is also:
- Increasing your home value
- Reducing carbon emissions
- Contributing to a more resilient grid
- Providing backup power for outages (if you have battery storage)
- Setting a good example for your friends, family, and neighbors
If anything, NEM 3.0 exposed just how expensive grid electricity is in California. Because even after the drastic reduction in export rates, home solar is by far the more affordable way to buy electricity.
Utilities are responsible for providing reliable, safe, and affordable energy to all users of the electric grid. They have been concerned with potential cost shifts from solar customers to non-solar customers including many low-income customers who are less financially capable of adopting distributed energy resources including onsite solar and energy storage.
Further, utilities cite their proposal as an incentive for customers to pair storage with their home solar system.
As outlined in their initial proposal, NEM 3.0: “Provides a storage incentive through non-tiered cost based TOU rates and ensures customers pay for costs incurred to serve them through a customer charge.”
In practice, this means that customers who add a battery storage system will be able to avoid some of the higher rates associated with pulling power from the grid in the evening when time of use rates are higher.
Related reading: The Pros and Cons of Going Solar
IOU customers that submitted interconnection applications on or before April 14, 2023 can be grandfathered into NEM 2.0 for 20 years. Customers that submit interconnection agreements on or after April 15, 2023 will be billed under NEM 3.0.
The NEM 3.0 timeline proceeded as follows:
California Public Utilities Commission (CPUC) released the draft proposal on November 10, 2022 The release kicked off a minimum 30 day public comment period CPUC voted to approve NEM 3.0 on December 15, 2022 The vote kicked off a 120-day grandfathering window for NEM 2.0
- NEM 3.0 took effect in April 15, 2023
Did NEM 3.0 Pass?
Yes, on December 15, 2022 the CPUC unanimously voted to approve NEM 3.0, also known as the Solar Billing Plan. The policy took effect on April 15, 2023 following a 120-day grandfathering period.
The decision followed a public commenting period that lasted more than three hours and featured heavy public disapproval over NEM 3.0
You can read a recap of the NEM 3.0 public comments here:
They are currently taking public comments via 1-minute calls.
— Samuel Wigness (@SamuelWigness) December 15, 2022
Cleantech educator Nathan Perry’s exhaustive analyses of NEM 3 contributed to this article.
NEM 3.0 solar billing is a complicated policy. Here are some commonly asked questions about it.
Can I change installers after submitting my interconnection application and still be grandfathered into NEM 2.0?
Once you submit an interconnection application to reserve your spot in NEM 2.0, you may be able to change installers before the system is installed. However, this depends on your utility provider and your contractor.
PG&E customers may change contractors, but you will need your original contractor to willingly pass on the job and login information for the application portal so a new contractor can take over and submit the final building permit.
SCE customers may also switch contractors given the original contractor provides written authorization to transfer the application.
SDG&E customers may not switch contractors without withdrawing the interconnection application which, at this point, would forfeit NEM 2.0 status.
Does NEM 3.0 affect LADWP customers?
No, NEM 3.0 does not apply to homeowners who get electricity from the Los Angeles Department of Water and Power. As of April 2023, NEM 3.0 solar billing only applies to customers of California’s three investor-owned utilities: PG&E, SCE, and SDG&E.
However, LADWP electricity rates have increased rapidly in recent years and it is possible for municipal utilities to adopt NEM 3.0 in the future.
Will NEM 3.0 be overturned?
On May 4, 2023, three environmental groups filed a lawsuit claiming the California Public Utilities Commission (CPUC) acted illegally in passing NEM 3.0. The lawsuit argues that the CPUC failed to consider the totality of benefits from rooftop solar and disregarded legislative instruction that the new solar billing policy ensures that solar adoption “continues to grow sustainably.”
The lawsuit asks the California Court of Appeals to overturn the CPUC’s NEM 3.0 decision and devise a new policy from scratch. In September 2023, Presiding Justice of the California Court of Appeal Alison Tucher agreed to hear oral arguments in the NEM 3.0 lawsuit. The environmental groups are expected to argue that NEM 3.0 violates a statute that requires the CPUC to oversee that “customer-sited renewable distributed generation continues to grow sustainably.”
A date for oral arguments has yet to be set. Check back for updates.
Is NEM 3.0 retroactive?
No, NEM 3.0 is not retroactive. This new net metering policy only applies to homeowners that submit their solar interconnection applications after April 14, 2023. Homeowners that submitted a complete interconnection application prior to NEM 3.0 taking effect can be grandfathered into NEM 2.0 for 20 years.
Has NEM 3.0 been approved?
Yes, on December 15, 2022, the California Public Utilities Commission (CPUC) voted unanimously to approve NEM 3.0. The new policy took effect on April 15, 2023 following a 120-day sunset period for NEM 2.0.
What does NEM 3.0 mean for solar?
NEM 3.0 reduces the export rate for residential solar electricity by around 75%, from an average of 30 cents per kWh to 8 cents per kWh. Lower export prices will increase the payback period for solar owners under NEM 3.0 and decrease the overall savings. This effectively increases the value of pairing battery storage with solar. Under the new rate structure, the return on investment for solar and battery is similar to that of solar only, but with the added benefits and independence of having a backup power source.
It’s worth noting that home solar systems will still provide substantial energy costs savings, even under NEM 3.0 solar billing.