Below is the transcript of this conversation:

Kerim: Hi, everyone. This is Kerim, Kerim Baran, with Solar Academy. I have with me Adam Gerza, of Energy Toolbase. Adam, welcome back again. Thank you.

Adam: Good to be back, again.  

Kerim: Yes, and today, we’re going to talk about NEM 3.0 and what it means for the commercial and industrial, the C&I market. We’ve done a session on what it means for the residential market, a couple of months ago. And today, we’re going to dive a little bit deeper into all the details of NEM-3 for C&I and where the proceedings are. When it’s going into effect, and other details like that. Adam, thank you again. 

Timeline & implications of NEM-3 going into effect

Kerim: So can you tell us a little bit about, where is NEM-3 ruling now, for non-residential customers in California? 

Adam: Yeah. So the same place as the residential. You know, there’s no distinction on resi or non-resi for you know, the implementation. I think the date that everybody is looking towards now is, I believe it’s April 13th, somewhere right around there 13th, 14th. Again, which was like 120 days after that decision got finalized in mid-December. So that date is incredible, how close that is, if you stop and think. I mean, less than three months away. That will be again the cutoff date whereby if you don’t get your completed, submitted interconnection application filed, you will not have a NEM-2 status. So that’ll be the date to lock in your NEM-2 status. Anything after that, you’re in a NEM-3 world. 

Kerim: So is it crazy out there right now? Is it just a flurry of activity? What are you seeing in the market? 

Adam: I’ve been on calls like all day today with you know, industry folks, developers, a distributor. I’m always asking that same question. I think it has to be. I don’t really have as much visibility on the ground because I’m not out there in front of like end customers, but I think Q1 will be very strong, leading up to that cutover date because, you know, certainly, salesmen right now, are in very, you know, validly saying hey, look. You really are especially in a solar only application, way better off doing this now, locking in NEM-2 status. 

Kerim: Right. Right. 

Adam: So Q1 should be strong. 

Summary of the key aspects of NEM-3 for C&I Solar

Kerim: And so can you summarize to us the key aspects of NEM-3 for the non-resi customers? Are there any elements that are different from resi? Or is there you know, are the storage affected going forward, or any other considerations? 

Adam: Yeah. The key, key aspect, the first and foremost most important one that we’re all going to be really intimately familiar with is the hourly export model. CalSSA has published some tables. We cited them. We had a big webinar a couple of weeks ago. We had over a thousand attendees just talking of NEM-3 and the implications. But the big, big one, of course, is the fact that, you know, net billing and exported energy will be based on an hourly value. Hours are set for each month of the year, 24 hours in a day, and they also even have different hours for a weekday and a weekend. That is going to determine the amount, I’m sorry, the value of exported energy to the grid.

Kerim: Right. 

Adam: So that applies to both resi and commercial. These tables are actually the same.  

Kerim: Oh, same rates for resi and commercial. 

Adam: It’s interesting, same rates. And each IOU has their own, you know, unique tables, but you know, the SDG&E avoided cost calculator values are the same for resi and commercial for those hourly exports. You know, the one thing that residential did get was for two of the utilities, they had those glide path adders. The idea there is like you know, to phase in and transition so we don’t just fall off a cliff going to NEM-3, there are these, for some period of time, adders and  commercial does not have that. So the big one is certainly the export value. There’s a lot of other little ones that we can get into. Instant netting is worth mentioning. But really, really, the big, big piece is all about that new net billing hourly export framework. And yeah. We’ve been working a lot on that at Energy Toolbase and just having, you know, the ability to model those really precisely.

Kerim: Got it. 

Financial impact of NEM-3 on C&I PV-only projects

Kerim: And so as an overall high-level calculation, what would be – what’s the high-level financial impact to a simple payback calculation, for example, in the context of C&I with NEM-3 versus NEM-2?

Adam: Been running a lot of those analyses, and always kind of really, the webinar that we ran a couple of weeks ago, we were just digging in on a few of these case studies. Let’s kind of start by just thinking in a solar only world.   

Kerim: Yeah.

Adam: Okay. So here’s a, let’s call it typical commercial project in the PG&E territory, the B-19 tariff, solar only. Everything else is equal. The only thing that’s changing is the, you know, net metering tariff that you’re connecting under. And you can just kind of see the impact here on how much erosion of savings we’re seeing. In this case maybe for year 1 bill savings, maybe about 25%. You were saving 400,000. Now you’re saving 300,000. And you can see how that affects, if you, you know, a lot of people look at this in terms of some project economic metric, payback, net present value, internal rate of return. And you can see how those are influenced. So a big, big influencer on how much pain you’re going to feel going from NEM-2 to NEM-3 is, how much energy did you export to the grid? So this particular case study, this is just one run that we ran. Now, this did assume, the solar system was sized at 100% of annual consumption. Almost 50% of production is exported to the grid. And again, I should have mentioned this earlier, the number everybody wants to know as a kind of a “back of the napkin” number. Okay, we can look at these tables all day. How much, on average, is exported energy worth? Actually, I’ve got a good slide for it even. It’s right here and the answer is, in or around I think the good “back of the napkin” number to use is $0.04. It’s incredible how low that is. And I think a lot of you, when you look at these tables initially, you know, you see some big values out here. But you can pretty much ignore all those because all of the exported energy is really going to occur in that, for the most part, tend to – window. And again, when we ran that and derived that going to the average. 

Savings/value proposition of Storage in a NEM-3 world

Kerim: So in that one slide where you’re showing the payback period going from 4.8 years to 6 years or so, 6.1, you have approximately a 25% decrease in the financial return. This is still PV only, right? There’s no storage baked into this. 

Adam: Correct.    

Kerim: Got it. And how does this value proposition change if you put storage in the solution as well, from a payback period, from the IRR? 

Adam: Good segue. We needed to find this. That was my next slide. And that’s exactly how frankly, developers and installers and sales people are thinking about it. It’s like, okay. I understand this. And that square looks like you know, what CalSSA has been telling me. Now, okay, I want to add the battery and really, I think, Kerim, starting in three months’ time this is the only comparison that matters. Because starting in mid-April, NEM-2 is gone, and we’re really not going to be talking about it much. And when you’re in front of a customer, you’re going to be talking about, we’re on a solar only project. Here’s what sort of savings we can achieve, and what sort of payback you’re looking at. 

Kerim: Right.

Adam: Or comparatively, a solar plus storage project. And so here’s a good comparison of that. This is kind of in that same case study. So you can really see, of course, this is influenced by the assumptions I used on the size.     

Kerim: Oh, of this case study, which is a particular usage or consumption behavior too.  

Adam: Another big piece of puzzle as well. The load pattern, the load profile of that customer, absolutely will influence this analysis. There are some load profiles that are more conducive to adding storage, especially in a commercial application.

Kerim: Right.

Adam: This one here, I think is just kind of middle of the road. This is kind of what you’re looking at. I can certainly cherry pick and find you some better ones for storage. Really, really makes a ton of economic sense. And then there are other ones based on the load profile, where adding storage might not be as accretive, but here’s the bottom line. Okay, so solar only, we’re saving $300,000. Adding a 500 Kw two-hour battery, 1,000 kilowatt-hours. We’re getting another $110,000 in savings. I think the numbers that a lot of folks will be looking closely at is, okay. Well, what would my comparative economics be in terms of whatever metric you like to look at, net present value? 

Kerim: Payback.  

Adam: And this is really interesting. I think this is actually pretty indicative of what a lot of these comparisons will say, which is, on a project economic basis, it’s very, very comparable. For the third time, you know previously, in a NEM-2 world, solar only was honestly considerably better if you were to use reasonable market assumptions versus solar plus storage. It just is. But now they’re very, very, I’d say comparable. I think the one selling point where you’re likely going to want to add storage is just how much more bill savings you can achieve by adding storage. This is good, kind of indicative. 

Kerim: Yeah. And then gain more independence by doing that. 

Solar+Battery attachment rates today in CA. Payback economics. PV+ESS attachment rates in a NEM-world 

Kerim: So I’ve got one more question for you then. So what do you think is your estimate on current attachment rates in residential and then in commercial C&I of PV plus storage? And what do you think that will be after April?   

Adam: Yeah. I’ve been asking that same question when I keep talking to a lot of, you know, folks that have been in the industry for ten years. I have my opinion. I’m going to share it with you. Let’s start with this. We just went back and polled data. We didn’t actually distinguish between C&I or resi. We just said, show me every project in California, what sort of attachment rate have we seen? And this is obviously on the modeling side, right? These are people running proposals. 

Kerim: Right. [cross-talk] Using your platform, Energy Toolbase.  

Adam: This is our platform. This is platform-wide in California, I should say. You’re seeing attachment rates for projects modeled on Energy Toolbase in the last three years between 15% and 20%. And you can see it’s grown. Certainly, if you were to trace this all the way back to like 14, 15, 16, you know, it’s steadily grown, and then it’s frankly, leveled off a bit.

Kerim: Yeah.

Adam: Okay. So the big question is and it’s one I’m thinking about a lot. What is a realistic expectation a year from now? Where will the attachment rate be? I’d say very, very, a lot higher. This is a cool service. We really like these guys on analytics. They scrape data all over the country.

Kerim: Yup. Chris Collins. 

Adam: Bingo.  

Kerim: My first video interview on Solar Academy was with Chris Collins, actually. 

Adam: This is a great guy and with a lot of value, one of my tools right now. This is actually more powerful than the chart I just showed you because this is actual, permitted or interconnection, full-day. These are actual projects. The takeaway here if you look at, what is this? The blue line that’s on the left axis. You know, California. Like call it somewhere between, I’m just eyeballing here, maybe 8% and 14% over the last couple of years. 

Kerim: Okay. So what is the y-axis on the right side of the chart? 

Adam: Great question. That is where I’m going to point to next, which is, well, that’s the y. That’s the gray line. And that is, for sure, the closest comparison that we have really, of what NEM-3 is about to look like just in terms of the exported value of energy in Hawaii. It’s very close to zero. Depending on the chart you connect on, there’s some kind of nuance to that. But the Hawaii data, this is actual interconnected permitting data. If you look at the last three years, you know, fluctuating between 80%, in some cases north, of 90%. So incredible. We’re talking eight or nine out of ten projects in the state of Hawaii are solar plus storage.

Kerim: Got it. So the axis on the left is Hawaii only. And the axis [cross-talk]

Adam: This is everything else. 

Kerim: Got it. What a difference. So, California, okay, then California is 10%-ish. 

Adam: Eight to ten, eight to twelve.

Kerim: Is this resi or commercial?

Adam: This, my understanding is, a very fair question and he didn’t make a distinction. So my assumption is this is all permitted. 

Kerim: More resi. Chris’ focus is more resi. 

Adam: Probably, and also he just did by sheer count of permits and applications of owners. 

Kerim: Yeah, exactly. Commercial will be like – 

Adam: – 30 X more, resi projects. So this should probably have a skew with heavy resi.

Kerim: Wow! 

Adam: Okay, so back to your question. Again, Hawaii is the best, you know, analog we have and if you ask me a year from now, I would be very surprised if we’re not north of 75%. Which seems like a crazy – 

Kerim: Really, for California?

Adam: For California, straight away. Let me show –

Kerim: That’s like you’re 7 X. But do we even have the supply for that?

Adam: So Kerim, that’s the next question to be asked and is the industry ready? Have the vendors got the supply? 

Kerim: Yeah.

Adam: Well, the nice thing is there. Don’t forget. There’s this big huge rush to get in and get NEM-2 status. So there’s a big backlog building.

Kerim: Sure, yeah. 

Adam: I think any installer would tell you their backlog is two or three X longer than it normally would be just because there’s a lot of sales. So that’ll take some time to work through. I don’t think you’re even really installing NEM-3 projects until Q4 of this year.

Kerim: For sure. 

Adam: So that makes sense. One other thing. Let me go back here. Again, I know we’re talking commercial. This is a really crazy comparison here. Yeah. This is one example. This is resi. But I just think the resi attachment rate, I will be shocked if it doesn’t go. I think it’s going to be very, very difficult in the state of California to sell solar only a year from now. Not to say it won’t happen because the value proposition is still good. It’s not terrible, but I think it’s just that there are so many advantages. You were able to capture so much more bill savings. 

Kerim: Wow! But it is going from like – I mean, hey, I installed solar in San Diego, what? Four, six years ago? Probably five, six years ago, with a three-year payback. Now, it’s going to eight your payback.

Adam: It is. 

Kerim: Maybe it’s possible to do seven or six, if you negotiate. Right? But, yeah. That is a change. That is a big change. 

Adam: So this will be a key one to watch. Let’s say, it’s an open question. I feel like somebody should do a poll out there in the industry to kind of take that a year from now. I think it’ll be quite high. There will still likely be some solar only. On the commercial side, it might not be quite as high because if you’re sizing, let’s say, you have a warehouse. And oftentimes, you’re not sizing a hundred percent offset system just because you don’t have enough space on the roof. You don’t feel the pain of NEM-3 as much. In situations, again, it really hinges a lot on this. Well, how much is exported to the grid? But you’re sizing a system that only offsets 50% of annual consumption. Well, that might only be offsetting, exporting, 25% to the grid. 

Kerim: I mean, but that asset might have a three-year payback on itself. It might not offset all our consumption, but it still is going to be a very attractive financial return. 

Adam: That’s true. 

Kerim: Just size it for that midday consumption. Got it.

Expected fall-off after the transition to NEM-3

Kerim: So do you think this will affect the solar industry in California to fall off in any way or shape after the transition in April?  

Adam: It’d be, I mean, there has to be some, especially knowing that there’s this big surge leading up to April, where everybody’s racing to lock in their NEM-2 status and even during the proceeding, you know, the CalSSAs and the SEIAs and all the solar advocates of the world were arguing very hard and reasonably that hey, look. Without a good glide path or transition plan, you’re just going to see this really sharp industry fall off. I don’t have predictions for how much we’re going to see there. But I think for solar only, there has to be some.

Kerim: I mean, in terms of sales or in terms of deals sold, signed, I see the fall off, but I wonder if the number of projects completed and installed, that’ll probably be a smoother line. And then if you compare year over year, 2022 to 2023, I wonder how numbers would look.  

Adam: That’s a good question. Because again, there are big backlogs building right now. 

Kerim: Right. 

Adam: If you’re a solar company and it’s doing strong business, I don’t think you’re really wrestling, hiring crews right now. I think you’re building your backlog. You’re going to install those all and do a really good job on those and hopefully, come Q4, you’re in a NEM-3 world. Your business is going to be transitioned a bit. You’re doing more solar plus storage.

Kerim: Yeah, and hopefully we’ll have more storage supplies by then.

Adam: Absolutely. That’s another point. And honestly, there are better experts out there on that question than me, I think. At Energy Toolbase, we do a ton of work on the commercial energy storage side of the business. We’re excited, we’re ready. We’re working with tier-1 vendors. Our commissioning ad Ops team is getting a lot more efficient at deploying these things and operating them. So we’re going to all be forced to mature quickly and we’re excited for it. In a lot of ways, we’re ready for it. And we’ve been looking forward, frankly, to this day, as we are excited to be deploying more storage.

Kerim: Nice.

Energy Toolbase’s other key takeaways from NEM-3 

Kerim: Any other key takeaways from NEM-3, Adam? 

Adam: You know, I think the one other one that’s coming up a lot, actually, I’ll even show you my template, really quick if I have it up. We’ve been building some super cool templates in Energy Toolbase to better communicate the economics of storage, and this is really cool. I’ll keep this short and sweet right here.

Kerim: Yeah, it’s definitely a complicated challenge to communicate the value of storage along with PV.

Adam: It is and just, you know, the mechanics of NEM-3 and this concept of net billing. So we spent a lot of time building out this template. This is live at our Gallery. Just kind of a little explainer on all the specifics of NEM-3. So let me just walk you through this. It’s pretty short and sweet. We’re just really transparently showing a customer what their current usage and current bill is. A lot of people like to think in terms of blended values. I like looking at this, especially in a commercial setting, the breakdown between energy and demand costs. Okay. Now, we’re stepping into our solar project. We’re really, really excited for this proposal document template that our team built and we just recently launched. I think a lot of contractors and developers are really going to appreciate and value this. The whole idea here is to just let them clearly communicate the mechanics of NEM-3, of net billing to their end customer and what the savings of the project is. Starting with a little primer, NEM-3 explained. But here’s really the meat of it. So we just start with a page that’s just showing the customer their historical usage and cost of energy. It’s nice to at least kind of have a blended value.

Kerim: Yeah.

Adam: Of course, very specific to their load profile, their rate tariff. This is very customer-specific. Okay, now we’re into a – this is a really useful way and folks are going to get familiarized thinking in these terms, which is, okay. I size the solar system. This is a residential project for this one, I just have to bring it up. How much of that energy, that’s solar production, exports to the grid? That’s on type 1. In this case, almost 60% of production, exports to the grid, whereas 41% reduces exports. 

Kerim: Or, 41% is consumed, as is produced.

Adam: That’s exactly right. That’s the way to think about it. And then separately, this is a really nice thing, you know? Okay. Now, we’re looking at adding storage. And okay. When I originally did this system with solar only, only almost 60% of my production exports to the grid. I’m adding a battery here. This is just one, I believe, power wall on this particular case study. How much host storage is exported to the grid? And then, you know, just having a good breakdown to see.

So back to your question, what are the other big takeaways? This is the other really big takeaway for me which is, if you were to draw a pie chart of where the total savings of a project comes from, for this particular run, it was $3,900 in year 1. In a NEM-3 world, storage captures a lot more of that pie chart of savings. In this case, it’s like literally 55%, 45%. Okay? In a NEM-2 world, storage was, I want to say an afterthought, but it was small.

Kerim: It was 10-20%.  

Adam: Exactly. 

Kerim: There was a peace of mind thing.

Adam: That is exactly correct. 

Kerim: Now, it will show you an economic value.

Adam: Now it is front and center as an economic thing, and it’s like, wow, without it, you just can’t reduce that bill much. So I think that’s one of my other big takeaways. This applies for residential projects, commercial projects. I think storage captures a lot more of the bill savings. And again, we’re bullish for storage. We’re bullish for attachment rates. It’s a big takeaway.

Kerim: One more question, Adam. I remember when we talked about the residential case study, the dollar per kWh rate we used for the storage was quite high. It was over $1,000 I think, we were using. What is that approximate cost in a commercial setting? Like in your models, in your case studies?

Adam: Great question. In my case study, and we modeled this conservatively for the 500 kW, 1,000 kWh. That’s a pretty good sized commercial battery.

Kerim: So that is a megapack, actually, 1 megawatt-hour.

Adam: That’s roughly around a mega packet, 500 kW, two-hour, a thousand-kilowatt hour. We had that modeled at $1100 per kilowatt-hour Installed.

Kerim: I think that’s expensive.

Adam: I’m glad you think that because I would love for that value to you know, somebody feels, install that at $900 per kilowatt-hour installed and still make money as a developer, installer EPC. Because economics will be that much better. And certainly, I don’t know when because there’s, you know, we’re still facing the supply crunch on the – storage prices are not dramatically dropping right now. But you play that out of the mid- or long-term, of course, those come down. And that makes the economics more compelling to the end-customer, which, that’s always what I’m optimizing for and what I hope to see. 

Kerim: Sure. Yeah. Great. Okay. Well, thank you very much for this, lots of information, Adam. Thank you very much for your time.

Adam: Thanks for having me as always, Kerim.