California’s NEM 3.0: Everything You Need to Know About it

Below is the transcription of our main discussion.

Kerim: Hi, everyone. This is Kerim, Kerim Baran, with SolarAcademy. I have with me, Adam Gerza, of Energy Toolbase, again, this week. Adam, welcome.

Adam: Hey, Kerim. Good to be back.

Kerim: Yeah, big week with a NEM 3.0 proposal coming back. So we had said that we would talk about commercial solar plus battery economics this week. But I think this is so important that we should really talk about NEM 3.0.

So you’ve been really involved with this as part of CalSSA. Tell us, what’s the news?

Adam: Yeah. Definitely, big news. Definitely, big week, much anticipated. Remember the context is, the last proposed decision we saw on the NEM 3.0 proceeding was December of last year. So it’s been a full 11 months.

Kerim: Yeah. Yeah.

Adam: That one, again, just to summarize that, it was really, really soundly rejected, and we were marching in the streets because that proposal and everything in there, would have absolutely decimated the market. It is not an exaggeration or sounding alarmist by any stretch. 

I actually usually, and you know me, try to take a really objective view on this and certainly, the December PD from 11 months ago with the grid benefits charges, i.e. the solar tax really crushing the value of exported energy. And also, there was language in there that was really, really rejected around changing the rules on existing NEM 1 and NEM 2 customers and removing their grandfathering protections.

Kerim: Retroactively, going back.

Adam: That’s right, that’s right.

Kerim: Into their 20-year benefits. Yeah. Yeah.

Adam: So this decision which came out last week is, in a lot of ways, getting compared against that because in a lot of ways the PUC did go back to the drawing board. A lot of the reporting has said that a lot of this has been done in conjunction with the governor’s office.

They’ve been at the table reworking this new proposed decision that we’re looking at now. And, yeah, certainly happy to talk through kind of the broad strokes of what was in there. Everybody has opinions on what it’ll mean for the market.

Kerim: Yeah. So give us the highlights. So what are the good things? What are the bad things? How you think it’s going to affect the market in California and beyond.

Adam: Yeah. Lots of big questions there. I’d said, “Let’s start with the good news.” There was a lot of good news if you’re in the solar industry or you’re with the solar trade association, who’s been working on this, CalSSA, SEIA, Vote Solar. There are a lot of really good things about this relative, compared to the December PD of last year. Number one, for sure is the removal of the grid access fee, grid benefit charge.

Kerim: In which they wanted 60 bucks a month to be connected to the grid.

Adam: That’s right. I think that the December PD had it at like $9 per kilowatt of solar capacity. So yeah, you’re multiplying that by your whatever, six or seven KW system and getting to that fee. So that came out entirely. That was a really big deal. I would say that was probably the number one, fall on our sword, would have just killed it. And there were all these various arguments around, is that even legal? It’s very discriminatory. So that came out.

Another really, really big one that was removed was these non-bypassable charges being levied on usage behind the meter. So that was also removed. I don’t think many people are talking about that because it gets pretty nuanced and really kind of geeky, but that was a really, really big…

Kerim: Is that solar PV or battery or both?

Adam: That was, effectively, it would almost have been like a double-dip tax on your exports because we’re already – and I’m going to get to the bad news in a minute. Exports are now valued based on the avoided cost calculator and the value of exports just got slashed 75%, is a way to summarize it.

Kerim: Yeah.

Adam: The NBCs would have been in addition to that. So the good news was, that came out. And then I think the other really big one that everybody’s talking about is, there were originally in December PD, changes being proposed on existing NEM 1 and NEM 2 customers – retroactive changes where it would take away grandfathering protections they thought they had. And, that was also removed in the PD last week. So those were the big three –

Kerim: Positives.

Adam: Yeah, exactly, the big broad strokes, or certainly, the biggest positives. In terms of – I don’t want to call – you call it negatives. You can refer to it however you want. I’ll stay away from making any opinions on the fairness of this.
Definitely, the big centerpiece of the NEM 3 PD, and by the way, we’re all going to be referring to this now as net billing. Right?

Kerim: Right. That’s the meaning, right?

Adam: Bingo. Where net metering, and for all intents and purposes, really is kind of over. And, we’re moving to this net billing framework. The key difference there is when you export energy to the grid, how that gets valued is completely independent from energy you use and take from the grid. Those are just two very, very different numbers that are derived differently.

And, in that sense, it really truly is like a buy all, sell all. When you buy, you buy at a certain rate. When you sell back, i.e. export to grid, there is another rate, and that rate is based on – and this is identical to the December PD and frankly, this is what I expected to stay, was the exports are going to get valued based on this avoided cost calculator methodology that the PUC updates and puts out each year.

Effectively, also, the other big piece there that really changes things, it’s done on an hourly basis. So instead of when you export, it’s based on whatever time-of-use window you’re exporting in. Now, it’s really based on an average hourly compensation value.

Kerim: Right. So that’s it? Is that a dynamic price that is not predetermined?

Adam: Great question. I will actually throw this up because a picture’s worth a thousand words. I hope CalSSA is just comfortable with me just sharing this slide. I could have done it in Excel format. So again, this will get updated annually, is my understanding, and this is predetermined in that sense, Kerim. So 2023 avoided cost calculator values in – we’re looking at the SCE values.

Kerim: Monthly, by hour of the day. Is that…

Adam: Bingo. It’s hourly-monthly and they actually have a weekday and a weekend rate separately, but that’s correct. It’s an hourly average in each month, and you can see where some of the really, really big ones jump out like in the summer, in September at six o’clock or seven o’clock P. That’s when the grid is most strained and most in need of resource. And, you can see what the export value is.

Kerim: And is that, the green ones there, is that $2.5 per kWh?

Adam: These are all kilowatt hour values.

Kerim: I mean, are they cents, or what?

Adam: That’s dollars. If you look at the entirety of the table…

Kerim: Oh, wow. That’s the…

Adam: Oh, yeah. Yeah. No. And that’s one that I think will get a lot of people’s attention like those…

Kerim: So if you have a west-facing solar system at 6:00 PM in September, you could be producing some good value, essentially.

Adam: If, remember, and you’re not using, so that’s the other catch. These are all export values.

Kerim: Right. And, if you’re net exporting.

Adam: That’s the thing. That’s correct. And that’s a difficult thing to do. And then I know we’re going to talk a lot about storage and batteries and attachment rates.

Kerim: And let’s also talk of viewers’ advantage, like benefit. What is it? So how was it in net metering 1.0, 2.0, and now with 3.0 or net billing with this new name? How did all of this change?

Adam: NEM 1.0 was very simple.

Kerim: Let me try to say and you correct me if I’m wrong. So 1.0…

Adam: Yes.

Kerim: You would get credit for all your production at whatever was your highest consumption rate, essentially.

Adam: It’s called full retail, NEM 1.0 full retail value.

Kerim: Full retail.

Adam: If you send a kilowatt hour to the grid, it’s the same value.

Kerim: And the first kilowatt hour you produced would be subtracted from your most expensive kilowatt hour that you paid for, no matter what time you produced it, no matter what time you consumed it. Right?

Adam: More or less and that you threw up on a 12-month billing cycle. That’s right. So, yeah. And, you net out throughout the year. If you ran a credit balance in the summer, and you produced more than you used because you were gone on vacation, all of those credits you banked at full retail.

Kerim: Exactly. And then…

Adam: That’s NEM 1.

Kerim: 2.0 was similar but it was matched to the hour you produced and whatever was the full retail rate at that hour that you produced. Is that…

Adam: The big pieces in NEM 2 were basically, they also mandatorily required you to go on to time used base rates. That was a big piece of it. So they really tried to move to these time of use frameworks.

Kerim: You could have stayed in the TOU pricing, which was probably more beneficial.

Adam: If you had a NEM 1 grandfathering protections, but for everybody going for solar, subsequently, was mandated to be on TOU rates. And then the other piece of it, there was a small haircut on exports. That was the NBC,non-bypassable charge component. That was the best way we like to explain it at Energy Toolbase. That basically said, “Hey, if you’ve exported a kilowatt hour to the grid, you would be getting the retail rate in whatever time of use period you’re exporting, less, let’s call it 2.5- 3 cents, roughly.”

Kerim: Right.

Adam: So there’d be a small haircut. And that haircut and the mechanism for doing that was this non-bypassable charge component.

Kerim: Yep. Got it. And now with 3.0, or with net billing, with this new name?

Adam: Correct.

Kerim: You are getting essentially these much lower rates for your net exports.

Adam: So, and absolutely throw out the book on NEM 1 and NEM 2. This looks very, very different. That is just gone and this is an entirely new framework that says, “Hey, look.

Exporting energy is valued based on avoided cost calculator values.” You can see, if you look at the rest of the table, we’re looking in the 0.5 cent, 1-cent, 2-cent, 5-cent range.

Kerim: Right.

Adam: So there’s been a lot of reporting on this and I directionally agree. I think folks said, “The export rate is getting slashed to about 75%.”

Kerim: Yeah.

Adam: It’s about right. That squares with when we run the numbers, if you look at the average export rate, and it’s also, the other big piece is now it’s happening on an hourly basis. So those…

Kerim: And of course, all your production, if you’re consuming during time of production behind your meter, that’s all good. You’re getting full credit for that. I mean…

Adam: Absolutely. Just like if you turned off a light.

Kerim: Yeah.

Adam: And did some energy efficiency measure, you reduced usage. That is absolutely correct. What you do…

Kerim: Yeah. So what do you think will happen with this? Now, a lot of people will opt for batteries and a certain percentage of production, probably something between 10-50%, would be fair to say, is going to be stored in these batteries during the day and then used at night in, at least in California. That should probably pan out to make some economic return, I’m assuming. But…

Adam: Yeah. That was all along, going back a year and a half. I think that was the prevailing wisdom on what would come out of NEM 3 is it’s really going to be a solar plus storage market now, and at storage attachment rates, are expected to rise quite a bit because by slashing the value of exported energy, you’re effectively creating a very strong price signal, an opportunity for a battery to come in, prevent those exports, let the homeowner self-consume and basically capture value through the battery. That’s certainly in a residential setting. That’s what I expect to happen.

Kerim: Yes.

Adam: And I think the market will think…

Kerim: And commercial settings too, probably?

Adam: Commercial setting as well. We’ve run a lot of analysis there. As you know, Energy Toolbase, our business is really, in a lot of ways now, centered around C&I. We have very strong market share there with regards to modeling C&I projects. The effect is, it’s a little bit more muted there because the key point is, Kerim, you know this. In a residential setting, it’s very, very common for solar installers and salespeople to size a system to meet 100% of load. I think it’s probably the most common default option.

Kerim: Sure.

Adam: When you’re sizing in solar to offset a load over a 12-month period, you’re exporting a lot of energy. About half your energy, it turns out, is exporting to the grid and you’re going to be really feeling the pain of that in an NEM 3 world, which is why you’ll be motivated to add the battery. In a commercial setting, 100% offset is not, is certainly not, the most common case. It happens, but you’ve got to have the roof space. And there’s a lot of facilities where – I was doing commercial projects 14 years ago. It was not, and it still is not the default. And therefore, when you export less, these effects become a little bit more muted. So in commercial, we’ll see a lot higher storage attachment rates, but I don’t think it’s as really sharp, as you’ll see on the resi side just because of the quantity of exports.

Kerim: Makes sense, makes sense. Going back to the pluses and the minuses, so what else can we talk about there?

Adam: Yeah. There’s a lot in there. I’ll probably just keep this to broad strokes. Oh, yeah. They’re also mandating folks to move on to, again, very specific. This is on the residential side, very specific rates, electrification rates that have pretty wide differentials. Let me see if I can throw this slide up.

Kerim: Electrification rates, what do you mean by that?

Adam: So effectively, time of use rates in a residential setting that have pretty wide differentials between on and off peak energy. So we’re seeing again a summary of those three rates in each respective territory. That was similar to NEM 2, right? They mandated you on the TOU rates. Now, they’re even getting more prescriptive and saying, “Hey, look, you have to go to this specific rate.”

Kerim: Look at those. Look at that “on peak” summer rate, 64 cents?

Adam: Yep. Yep. Those really jump out. It’s not as necessarily severe in the winter. These are definitely different. The SDG&E one is quite a bit different than the PG&E one. It really jumps out to me. The winter differentials on PG&E are not nearly as extreme.

Kerim: Yeah. Look at that. Winter peak is 30 versus 49 and this is all resi, right?

Adam: These are all resi. That’s right. On the commercial side, you’re not getting mandated onto rates, specific rates. And also, there’s a whole another – we probably shouldn’t even go down that path, talking about demand charges and just the makeup and complexity of commercial rates are very different than resi rates. So there’s that.

Let’s see. What else? The other big one, listen. Nobody’s talking about this. It’s pretty material. And this is this concept of instantaneous netting. Basically, what that says is, the PD explicitly said, “Okay. The way net metering has always worked in California, a lot of people might not know these specifics, but it’s averaged over an interval, either 15 minutes or 60 minutes. Okay, now we’re moving to an instantaneous netting model.” This is actually a really cool slide. This is from…

Kerim: Wow. Instantaneous, meaning? Per second?

Adam: Per – there are two channels of data. There’s a channel that reads imported kilowatt hours from the grid to you, and there’s a channel, a separate channel that measures exported energy. You see this kind of red line.

Kerim: Right. Right.

Adam: Within a 60-minute interval, you could absolutely have small exports that are now getting counted.

Kerim: Wow.

Adam: Whereas, if you looked at a 60-minute average of that interval, maybe you were a net importer.

Kerim: Sure. Yeah.

Adam: But when you count it on an instantaneous basis, you certainly…

Kerim: So what does this instantaneous mean though? Is it like per second, millisecond?

Adam: It means two chans… just completely independent, two channels of data. You download a green button file. We’re all used to seeing these and this is your net data. There’s one stream of data.

Kerim: But that’s – your green button you used to come in 15-minute intervals.

Adam: That’s correct. Perfect. Use that as an example. It still does, in a commercial setting. Right? So 15-minute data and it’s one column of data, Kerim. It’s the net. Right? So maybe there was an interval. There was a 15-minute interval at 9:00 AM this morning. The net, that the average was zero. But within that 15-minute interval, you very well may have exported a bit.

Kerim: Right.

Adam: And then imported to offset that. You may have exported 9 kWh and exported a 9-kilowatt, and it nets. Well now that – those actual channels of exports are getting counted separately. So that’s…

Kerim: So they’re going to report the exports and the imports separately.

Adam: Correct. And, most importantly, they’re going to count the exports, instantaneously rather than net it over an interval. It’s a pretty nuanced topic. We’re actually doing a lot of studying of how much effect we think this has. There’s actually, even internally, we got really smart people here that have been in the weeds on this stuff for 10 years. And we’re even arguing internally. I don’t know right now. I actually need to look at bigger data sets to really, we think in a sense.

I know the PUC has reported, they believe that by counting instantaneously, maybe on the order of 6% more exports. I’m not sure if I believe that. I’m not saying it’s wrong. I think there’s going to be a range, no matter the case, because it’s really dependent on the shape of the load, if you have a load that’s coming offline and restarting.

But it’s something we need to look into further. It’s another piece that ‘s worth mentioning – instant netting. And let’s see. I think the last one I would just mention, and I’ll just kind of breeze over this, but there were NEMA, net metering aggregation and VNEM, virtual net metering. These were pretty contested items within the Proposed Decision. And those both got proposals.

Also, I don’t want to discount this. There’s certainly been a lot of discussion on, for low-income customers and the adder, in a lot of cases, that they would get. That’s the other piece I should have mentioned. Actually, I should have mentioned this right behind the ACC value. They did, you know, the CalSSAs and the SEIAs of the world fought really hard to get a glide path, right? They don’t want to go bombast. The minute NEM 3 gets implemented, they don’t want the market to fall off a cliff.

Kerim: Yeah.

Adam: And have massive job losses. So they were saying, “Hey look, let’s phase this in over a period of time.” And in this revised Proposed Decision, they did implement a glide path. It’s pretty weak. I think it’s saying it nicely in terms of how they phase you in. I’ll throw up the slide right here. It’s right here, whereby they’re going to give you a bit of a kicker for the first five years. So in addition to that, ACC value. I should say, if you’re NC-SCE you also get 4 cents. If you’re SCE Care, low income, you’d get…

Kerim: 0.093.

Adam: Exactly.

Kerim: Okay. All right. I mean, for care, it’s pretty, pretty high. But for non-care, it’s at least something.

Adam: Yes, that’s correct.

Kerim: And so when does this all go into effect?

Adam: That’s the other big piece. And, the earliest it could go into effect, and I think everybody’s assuming, you have to assume, if you’re a solar installer right now or you’re the utility, I think we’re all assuming, mid-April because there’s a big PUC meeting on, I believe, it’s December 15th or 16th, where this could get voted out. Right now, it’s a proposed decision. The earliest it could get voted out is December 15th. I just checked. And then 120 days later it would go into effect, which lands us into mid-April. Call it April 15th.

The other key piece there, and you’re probably going to ask this next. Okay. Well, so there’s going to be this big, huge surge and rush to get in before the deadline, especially once that deadline gets set in stone. And that to qualify for NEM 2 to lock in the NEM 2 rules like we have today. They did have really explicit language. I commend the PUC for being very explicit here.

Basically, they said you just have to have a completed interconnection application. So that’s everything. That’s a signed contract. That’s usually a single-line diagram. It usually represents a sole project that’s…

Kerim: Yeah. That’s going to create business like crazy now. Okay.

Adam: It really is. There’s no question. There’s going to be a big run in sales. Solar sales people will have a good four-month run, for sure, leading up to the cut over date.

Kerim: Yeah. How is this going to affect other states and other utility districts? I mean, this is essentially for the three majors in California.

Adam: Right.

Kerim: And what’s going to be the implications for the rest of the country?

Adam: Right now you’re getting into opinion questions, and I’ll give you Adam’s opinion. I have to tread lightly here. I’m on the board of CalSSA, and frankly, it’s just one person’s opinion. On the PD, we can really just go through it and say, “Well, this is what they decided.” In terms of the effect this has on the market, we’re all speculating to some extent, but I think for sure, it’s going to set some precedent.

California’s always been the biggest state by a wide margin, and a lot of other states have been looking and watching this proceeding closely and saying, “Okay, how did they come down and make a final ruling?” So it’s certainly going to have some effect on other states, especially as those states hit higher penetration rates.

Kerim: Right.

Adam: Of rooftop solar. They’re going to be looking to say, “Well, that’s what California, the biggest and best state, did.”

Kerim: Right.

Adam: “Maybe we can replicate that.”

Kerim: I mean, one way to think about it is, most of these other 48 states, except Hawaii, are not at the penetration levels that California is at, and they’re probably using a net metering rule closer to our net metering 1.0 or 2.0. And the question is, will they skip that and switch to our 3.0 or net billing method sooner than, when they reach 10-15% penetration we’re at, in California? So that’ll be interesting to watch.

Adam: It will, and some of that’s already happened. There’s already been tons and lots and lots of successor tariff rulings throughout the country, at the state level, at the PUC level, at the utility level. There’s been a whole range of decisions. Our senior content manager, Erin Christensen, wrote a really good piece, just documenting a half dozen examples over the last couple of years, and they’re all over the map.
So there’s not a lot of uniformity, honestly, if you really look at it, and just look at some of these various decisions and proposals. They’re all over.

Kerim: Hundreds, thousands of other utility districts. It’s a hard thing to track all of them, I’m sure.

Adam: For sure.

Kerim: Yeah. Well, thank you very much for this summary of Net Metering 3.0 that is upon us. And, we said we would talk about commercial battery economics, but we’ll do that next time. And, anything else you want to share as parting thoughts?

Adam: Really interesting and I’ll just keep watching this closely, over the next 30 days. I know there are some oral arguments coming up in a couple of weeks. It’s very, very interesting to see what happens, if this is still, right here, right now, it is a PD, it is a proposed decision. This is not yet finalized. The question we’re getting a lot right now is “Well, how baked is this? Is this going to look like the final decision?” And this is, I guess, my personal opinion, I feel like it’s pretty well-baked right now.

Kerim: Right.

Adam: I’d be surprised if there were major changes. I know we’re going to fight for some – there are certainly some things on the solar side that we – there are some inequities within there, in the fine print. And I’m sure if you asked, if you’ve interviewed the IOUs or the IBW, they would have some opinions on the other side, as well.
So it’ll be really interesting to see what happens over the next 30 days, and if this version gets voted out and goes into effect or if it changes, we’ll just have to see how that shakes out.

Kerim: Great. Well, Adam, thank you very much for sharing all this and we’ll continue.

Adam: Thank you, Kerim. Always good to chat.