🔍 What is California NEM 3.0?
After spending much of 2022 debating the issue, on December 15th the California Public Utilities Commission (CPUC) voted to support a revised state policy designed to fix the state's overall grid imbalances. This net energy metering policy update, commonly referred to as NEM 3.0, significantly alters the compensation structure for customers who produce and export excess energy to the grid and is designed to incentivize building onsite energy storage.
Current compensation rates under NEM 2.0 are based on the retail cost of electricity. The new NEM 3.0 rate structure is tied to what the utility determines is the “Avoided Cost” of producing that amount of energy at that time. The key takeaway here is that the avoided cost value is much lower than the retail value of electricity.
Whether you agree with the decision or not, the passage of NEM 3.0 has triggered a 120-day countdown for solar projects to file for interconnection if they want to be considered eligible for the NEM 2.0 rate structure. In this post, we cover the details of the new NEM 3.0 policies and recommendations for how you can act to take advantage of the current policy.
📈 Overview of traditional Net Energy Metering
Net energy metering tracks your ‘net’ onsite energy production by taking your total energy produced (via onsite solar) and deducting your usage. States with Net Energy Metering in place permit you to send the excess energy production back to the grid at a specified compensation rate through the utility lines and poles attached to your property.
Energy prices follow basic supply-and-demand principles, so time significantly alters the value of a kilowatt-hour (kWh). In other words, the energy produced during periods of high solar production depress real-time prices. Then, when solar production slows down, the need to fill the demand increases the rate.
Historically, net metering compensation has done little to account for this fluctuation (beyond incentivizing customers to change to Time-of-Use rate plans). NEM 3.0 is correcting this by adjusting the price of exported energy based on the value of that energy when it is exported, hour-by-hour.
This new rate structure will undoubtedly impact a solar project’s payback period since each kWh of exported energy is compensated at a fraction of the current retail rate. Consequently, this change will also influence the way future behind the meter solar projects in California are sized given the export rate will significantly impact the total system value over the period of ownership. In a post-NEM 3.0 world, customers will look to size their solar systems to optimize for onsite usage.
1. (RED) Represents demand that cannot be fulfilled by solar while the sun is not shining.
2. (BLUE) The amount of excess energy generated by solar above the facility’s demand.
3. (GREEN) Energy demand fulfilled by onsite solar (rather than the utility or 3rd party energy supplier).
Under NEM 3.0, the blue “2” area will be compensated at the lower reduced avoided cost rate. As a result, solar owners under NEM 3.0 will want to size their system to reduce this blue area so that they are not paying for a system that overproduces during this less valuable time frame.
By adjusting policy to reduce this blue area, California is attacking the overproduction of solar during mid-day periods, which will reduce overall stress on the grid (see next section for more details).
⚡ Why is NEM 3.0 happening?
California is looking to fix the demand ‘duck curve’, or overproduction of solar at key points of the day that leads to an artificial grid spike. As more solar has been introduced to California’s grid, demand for energy dips greatly during a sunny day. Then, as the sun sets or when a cloud cover arrives, solar production drops quickly, demand increases, and utilities have to ramp up or deploy demand response programs to compensate, thereby creating stress on the grid.
Like many other global markets that have hit saturation points, California is adjusting the price signals to accommodate for these realities. California grid operators are moving to a model that requires pairing a behind-the-meter storage asset with your solar array to get the best value for the excess energy you create.
This adjustment to NEM policy was matched with an additional $900 million in Self-Generation Incentive Program (SGIP) funding starting July 1, 2023, that now qualifies storage to receive 30% ITC from the Inflation Reduction Act (IRA). This pricing structure encourages building owners and operators to appropriately size their solar array to a battery storage asset to avoid the issue of exporting power during times of overproduction and ‘flatten’ the overall load curve.
🏃What should California solar buyers do?
As with all policy changes, there are opportunities that emerge. Here are the ones we’ve identified:
1. You still have until April 14, 2023 to submit an interconnection application and give your business the opportunity to secure NEM 2.0 rates.The interconnection application date is firm and requires the following items:
- Application that is free of major deficiencies
- Single-line diagram of your building
- Oversizing attestation (if applicable)
2. If you don’t have the information or expertise needed to file an interconnection application, get help to secure the necessary requirements to apply.
3. Consider whether solar + storage is the right fit for your use case
For some, the urgency to secure NEM 2.0 rights is not as important as the resiliency that solar + storage brings to operating their business. Evaluate your building or portfolio for solar opportunity and collect solar + storage quotes to see if the opportunity makes sense.
4. Explore technology alternatives that monitor usage and maximizing self-consumption.
Explore load-control technologies paired with storage to minimize net exports and maximize self-consumption, making the most of the solar you install.
TAKE AWAY: If you want NEM 2.0 rates, you must submit an application for interconnection by April 14, 2023.
Station A makes it easy to discover your options.
Request a Portfolio Review at stationa.com. Your portfolio review will include a report with the clean energy technology and financing options available at each building address sorted by state. Our team can then help you file for interconnection with your best California projects and collect competitive bids from our marketplace of 2000+ vetted EPC providers.