California slashes incentives for new rooftop solar, promotes batteries to shift grid costs

California Public Utilities Commission subsidy cuts for new Net Energy Metering customers don’t go as far as utilities wanted, but too far for solar industry

The California Public Utilities Commission on Thursday overhauled its rules for rooftop solar power, slashing subsidies for new solar installations while providing incentives for customers to add battery storage to their systems.

Commissioners approved a complicated new 260-page framework on a 5-0 vote, saying the changes will shift costs from non-solar users and promote grid reliability.

At issue is NEM, or Net Energy Metering — the rules that determine the size of the credits customers receive on their utility bills when their rooftop solar systems generate more energy than they consume. Roughly 1.5 million customers in the state have installed rooftop solar on their homes and businesses.

California’s NEM rules had not been updated since 2016. Solar advocates said the state needs to continue offering strong subsidies to encourage the transition to clean energy. Critics said the existing rules unfairly burdens non-solar customers — especially lower-income residents — with the rising costs of maintaining the power grid.

“This decision is about encouraging solar and storage but also, fundamentally, about the right way to charge NEM customers for use of the grid,” said Alice Busching Reynolds, president of the utilities commission, known as the CPUC for short.

The new rules — known as NEM 3.0 — include $900 million in upfront incentives for customers to pair solar with battery storage systems, with $630 million set aside for low-income customers. The CPUC estimates the new rules will save average residential customers with solar-plus-storage at least $136 a month on their utility bills.

No one’s happy

But neither side was happy with the CPUC’s decision.

Solar advocates warn the new rules will undermine solar’s rapid growth in California. Existing rooftop systems are capable of generating about 12,000 megawatts of electricity, according to the CPUC, almost six times what the Diablo Canyon nuclear power plant generates.

“The proposal is a step backwards when we really need to be moving forward with solar and battery storage,” Bernadette Del Chiaro, executive director of the California Solar & Storage Association, said in a statement. “It is a dark day in California when the utility regulators try to block out the sun.”

Power companies say the framework does not go far enough.

“This final decision was a missed opportunity that will prolong the harm to low-income Californians and renters for decades to come,” said Kathy Fairbanks, spokesperson for Affordable Clean Energy for All, a coalition of groups funded by utilities.

One of the key provisions alters the way rooftop solar owners are compensated for the excess electricity their systems send back to the grid.

Instead of being credited at the retail rate of electricity, customers will get paid at the “actual avoided cost.” That figure is lower than the retail rate during the daylight hours, when solar energy is abundant and cheap, but it’s higher during the evening hours — when solar production ramps down to practically zero when the sun goes down and California’s electric grid is under the most stress.

The California Solar & Storage Association has estimated the average compensation rate would drop from 30 cents per kilowatt to 8 cents, a reduction of 75 percent.

Since solar installations can run into the tens of thousands of dollars, the group argues that the lower compensation will extend the payback period to such a degree that customers will have less incentive to make an investment in rooftop solar. Del Chiaro called the new rules “a loser for California on many levels.”

Backing batteries
Matt Baker, director of the Public Advocates Office, the independent arm of the CPUC that is tasked with keeping ratepayer costs low, says the new rules bump up compensation rates during the evening hours. Pairing batteries with rooftop installations will allow customers to store solar during the day and then discharge those electrons at night.

Baker’s office estimates that during the evening hours, rates for San Diego Gas & Electric customers with solar plus storage would be as high as 74 cents per kilowatt-hour. That would translate into a payback period of about four years.

“We need solar,” Baker said. “It has helped turn California into a clean energy world leader. But we need to do more. Clean energy use during the day must be extended into the evening. Solar with batteries does exactly that. It’s the next step toward a clean energy future that will improve the air we breathe, the communities we live in and our overall quality of life.”

The CPUC estimated that under the new rules the payback period would take about nine years, although commissioners said the time frame could prove to be lower.

The update will go into effect in 120 days, or April 15, and will affect new solar customers.

As for its potential effect on existing rooftop customers, that’s a bit complicated.

Solar customers who had their systems installed under the first and second round of Net Energy Metering rules will still get compensated at the retail rate for 20 years from the time their systems were installed before getting switched to a system that would be based on lower, avoided costs.

For example, a current NEM customer who had a system installed in 2018 would still get credited at the retail rate until 2038. But after that, the customer would be credited at the avoided cost.

Paying for the wires

Utilities have long complained about California’s NEM rules, saying the growing number of installations leaves customers who don’t have solar paying an unfair share of the fixed costs that come with maintaining the electric system — things like wires, substations and transformers. This cost shift, they say, leads to non-solar customers paying more on their monthly bills and disproportionately hurts low-income Californians.

Prior to Thursday’s vote, the Natural Resource Defense Council, energy academics such as Severin Borenstein at UC Berkeley and The Utility Reform Network and the Public Advocates Office consumer groups have said the cost-shift issue needed to be corrected.

Mark Toney, TURN’s executive director called Thursday’s vote “a small step in the right direction” but said the decision “fails to significantly reduce the rapidly growing portion” of rates that all utility customers pay.

“These costs will instead be disproportionately born by the 45 percent of Californians, and two-thirds of low-income customers, who rent their homes, cannot install solar and will be left to pick up the tab,” he said.

The CPUC issued a proposed decision in December 2021 that included a provision to create a “grid participation charge” of $8 per kilowatt on residential solar systems. With typical rooftop installations being 5 to 6 kilowatts, that would come to about $40 to $48 per month.

Utilities favored the provision but it received furious push back from solar advocates and was withdrawn last month when an updated proposal was issued.

The solar industry, environmental and consumer groups have argued the effects of a cost shift are exaggerated, saying the megawatts generated by rooftop solar reduce stress on the state’s electric grid and avoid the needing to build more energy infrastructure such as distribution and transmission lines.

“We are beyond disappointed about the CPUC’s decision to make rooftop solar more expensive for all Californians,” environmental groups SanDiego350 and Hammond Climate Solutions Foundation said in a joint statement, adding the decision “will erode the economics of going solar” and slow “the rollout of new rooftop solar installations across the state.”

137 phone calls

In an indication of the intensity surrounding NEM 3.0, CPUC commissioners fielded 137 phone calls for three hours during Thursday’s public comment period.

“How can you sit there and plan to destroy solar growth and punish Californians, churches, schools and businesses?” said Barbara Morton, a rooftop solar owner in San Diego. “Your proposal will stop them from buying solar systems by putting solar out of their fiscal reach.”

Commissioner John Reynolds (no relation to CPUC president Busching Reynolds) predicted the new rules will not undermine solar’s growth in California. He said when the rules were updated six years ago, there was a decline in the number of solar systems connected to the utility grid but the numbers rebounded and reached a record high this year.

“All of this is to say there will be some measure of decrease after this decision that is absolutely to be expected,” Reynolds said, “but it will not signal the death of the industry or the rooftop solar market.”

The new rules also increases the allowable size of rooftop solar systems to cover 150 percent of a customer’s electricity usage to accommodate future electrification of appliances and vehicles.