California’s electricity bills are already about 5% higher than the national norm, and this trend is expected to continue. Rate increases went into force in January, and Southern California Edison(SCE) proposed another 4.4% increase for this summer. California has also become the largest solar market in the United States, with residents seeking clean and cheap energy alternatives, and has joined other states in attempting to increase the value of renewable energy assets through net energy metering. (NEM).

The first two iterations of California’s NEM program greatly subsidized solar adoption, but NEM 3.0, which was unanimously authorized by the California Public Utilities Commission (CPUC) in December, is about to reverse that value. NEM 3.0, which goes into force on April 15, has the potential to significantly alter California’s solar landscape.

NEM 3.0: How did we get here?

According to California’s NEM 1.0 policy, customers received one kWh of utility-generated credit to be used toward their energy expenses for every one kilowatt-hour (kWh) of energy produced from solar power.

NEM 2.0, a redesign of the incentive program that included non-bypassable charges (additional fees based on the number of kWh of energy customers consumed from the grid), was put in place in 2017 to replace NEM 1.0. These extra fees went toward supporting significant low-income and energy-efficiency initiatives. Solar energy’s worth was reduced by non-bypassable fees, but credit for exported solar energy was still provided based on retail electricity prices.

Few anticipated that California would shortly pass a second revision to the incentive program when it decided to move from NEM 1.0 to NEM 2.0. The situation is about to change once more.

What modifications are being made with NEM 3.0, and why?

The biggest change in NEM 3.0 is that the value of credits for extra solar energy exported to the grid will be roughly 20% to 40% lower than what is presently being received under NEM 2.0, further lowering the value of solar. Additionally, customers could lock in retail prices under NEM 2.0 for 20 years,  but with NEM 3.0, customers can only lock in rates for nine years. After those nine years, the rate is calculated each year via the Avoided Cost Calculator (ACC) – essentially, customers will get credited the avoided cost, or the wholesale rate of energy at that specific time that the utility would have otherwise paid a supplier for.

Why the adjustments? According to the CPUC, NEM 2.0 has a negative effect on non-participating ratepayers, especially those with lower incomes. NEM 3.0 may also be viewed as a tool for promoting the use of storage. Because peak electricity demand periods currently occur at night when customers are at home and solar power production is not able to keep up, conventional energy sources are used more frequently during these times. Electricity costs will be very high during these peak times because California provides Time-of-Use rate structures, which are necessary to participate in NEM 3.0. However, solar storage battery can save solar energy produced during the day and use it to power homes and businesses during peak demand.

Implementing solar battery storage to make up for the lost value will be a logical next move for customer-generators as the value of solar decreases under NEM 3.0. Customers can avoid paying exorbitant peak-hour energy rates and reduce their use of fossil fuels as a result, which helps the state reach its target of reducing carbon emissions.

How can you get ready for NEM 3.0?

Commercial solar customers can opt out of the adjustments in NEM 3.0 if they aren’t already NEM 2.0 participants: They can be grandfathered into NEM 2.0 and lock in retail rates for the following 20 years if they file an interconnection application for the program by April 14th. To profit from NEM 2.0, projects must be constructed and operational within three years of the application’s approval.

Participants who are interested in taking part must move quickly to prepare the required documents and submit interconnection applications so that they can be processed and authorized in time. Commercial clients and some smaller developers, however, might not have the time or resources to complete the required paperwork, such as detailed design documents and project drawings. As a result, it may be smart to enlist the help of partners or more experienced developers who are acquainted with the procedure.

Developers must be prepared to move forward with additional solar and storage projects for clients who don’t meet the requirements or don’t file an application in a timely manner. NEM 3.0 will have an immediate effect on solar adoption, but over time, the market will adapt and customers’ attention will shift to solar-plus-storage deployment in order to get the greatest value. Even though NEM 3.0 customers receive fewer system credits, adding solar battery storage can offset the overall cost effect on electricity bills. Implementing EV charging infrastructure, for example, can be used for vehicle-to-grid charging applications, which give customers power from an EV battery during times of high energy demand.

The transition to renewable energy and major electricity-related challenges like high energy costs and grid constraints are converging in California. In the end, adding storage capacities could encourage companies to adopt solar energy, fundamentally alter the scope of projects across California, help the state achieve its climate goals, and improve grid reliability. In cities like San Diego, the solar-plus-storage market is already the norm, and developers should be prepared for this tendency to spread throughout the state.

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