California net-metering proposal would decimate rooftop solar market, industry says

California regulators have proposed a dramatic overhaul of the state’s net-metering program for rooftop solar. The new plan would reduce payments for solar power fed into the grid and impose the highest fixed fees in the nation on rooftop systems installed in the future. Solar industry groups warn that the policy could turn the country’s leading market into the country’s costliest for new adopters of rooftop solar, potentially decimating a thriving sector and undermining the state’s clean energy goals.

Monday’s proposed decision from the California Public Utilities Commission would be far more damaging to rooftop solar economics than most industry analysts had predicted. In fact, industry groups contended on Monday that its impacts would be so severe that they see little chance of it being approved by the CPUC next month in its current form.

It’s possible that the CPUC’s appointed commissioners could issue an alternative proposal that differs significantly from Monday’s proposal, which was written by CPUC Administrative Law Judge Kelly A. Hymes. The commission has opted for a similar approach with other controversial policy decisions in the past.

With the threat of a major disruption to the market looming, solar groups have vowed to press California Governor Gavin Newsom (D) and the commissioners to put forward an alternative decision in the next 30 days. Monday’s proposal, as well as any alternative proposals that emerge, could be voted on by the CPUC’s five commissioners as early as January 27, 2022.

It’s not clear if that process will include Martha Guzman Aceves, the CPUC commissioner who has managed the net-metering proceeding over the past year. The CPUC announced last week that she will depart her post at the agency on Dec. 20 to become administrator of the U.S. Environmental Protection Agency’s Region 9.

“We’re calling on the other four commissioners and the governor to correct the ship,” Bernadette Del Chiaro, executive director of the California Solar and Storage Association trade group, said in a Monday interview. ​“It’s devastating to the industry to have this even proposed.”

Meghan Nutting, executive vice president of regulatory and government affairs for residential solar company Sunnova, said in a Monday interview, ​“I think there’s a zero percent chance this passes as written.” At the same time, she said, ​“It sets out a framework that I worry will become the basis of the ultimately adopted decision.”

Cost-shift debates in the country’s biggest rooftop solar market

The proposal largely embraces the arguments made by the state’s three big investor-owned utilities, Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric, along with a handful of allied advocacy groups. Those arguments hold that California’s existing net-metering program unfairly burdens utility customers who can’t afford rooftop solar with excessive costs in order to support wealthier customers who can afford it.

Similar ​“cost-shift” arguments have played a role in net-metering policy battles across the country. They hinge on the fact that solar-equipped customers feeding electricity to the grid can reduce their monthly bills to little or nothing. This leaves unpaid their share of the fixed costs that utilities bundle into the per-kilowatt-hour charges they assess on customers. Those fixed costs include maintaining and building new grid infrastructure and paying for power plants and solar farms built or contracted by utilities in previous years.

As the number of customers with rooftop systems increases, this imbalance could grow to a point that forces utilities to raise rates on all customers to make up the difference, leading to an unfair burden on nonsolar customers and an unsustainable utility system.

Pro-rooftop-solar groups in California have been locked in a yearlong policy and public relations battle with utilities and their allies over these arguments.

Utility-allied groups have accused the rooftop solar industry of profiting on the backs of lower-income residents. Kathy Fairbanks, spokesperson for the utility-allied Affordable Clean Energy for All coalition, praised the CPUC’s proposal in a Monday statement, saying that it would ​“modernize a policy that has forced nonsolar customers to bear an unfair burden of the expenses associated with the electric grid and mandated public policy programs.”

“Currently, Californians who don’t have solar panels are paying about $245 more each year in electric bills to cover the costs for those who do have rooftop solar,” she said, a burden that could grow to $555 per year by 2030.

But solar industry groups dispute those estimates. They and their allies say utilities have dramatically overstated the scope of the cost shift from net-metered solar and the impact it has had on increasing utility rates. They note that the costs of building new transmission lines and hardening the state’s grid against wildfires are increasing utility bills by a considerable margin.

Solar groups also warn that harming the economics of net-metered solar could undermine the state’s progress in reducing its carbon emissions by 70 percent by 2030 and achieving zero carbon emissions by 2045, as required by the 2018 law SB 100. CPUC modeling indicates that meeting these targets will require continuing to add about a gigawatt of rooftop solar installations annually, which is on pace with trends over the past few years.

State law requires the CPUC to rework net-metering rules in a way that both reduces the burden on nonsolar customers and also maintains ​“sustainable growth” in the state’s rooftop solar market.

The proposed decision states its intent to maintain this balance, but it also says that ​“the growth of the market should not come at the undue and burdensome financial expense of nonparticipant ratepayers.”

Solar groups, however, say that the CPUC’s proposal assigns far too much blame to rooftop solar for rising electricity rates and that its proposed remedies would leave the state’s rooftop solar industry in a shambles.

“This brings the marketplace to a screeching halt,” Del Chiaro said. 

Major fixed costs, lower and less predictable revenue 

Out of a host of policies included in the proposal, the one that garnered the harshest criticisms from solar groups is the ​“grid participation charge.” That’s the new name for the ​“grid-benefits charge” proposed by California’s big three investor-owned utilities. Few industry observers had predicted that the CPUC would include it in the proposal.

It would add a monthly charge of $8 per kilowatt of solar production capacity onto bills for owners of new rooftop solar systems, totaling an extra $40 to $50 per month in fees for typical systems.

“We’ve been through many of these cases in many states across the country in the last 10 years,” Walker Wright, vice president of public policy at leading U.S. residential solar provider Sunrun, said in a Monday interview. ​“We don’t think there are rooftop solar markets anywhere in the world that have this level of punitive fees.”

That’s certainly true in the United States, according to analysis from EQ Research. It found that only 2 percent of U.S. investor-owned utilities had imposed fixed charges that apply solely to solar-equipped customers. The highest in the country — $5.41 per kilowatt from Alabama Power, which serves a state with almost no rooftop solar market — is well below the fee CPUC is proposing.

The following chart shows the country’s highest existing or planned charges on solar customers in gray. In yellow it shows charges that would be adopted by California’s big three utilities under a proposal from CPUC’s Public Advocates Office and the Natural Resources Defense Council. Monday’s proposed decision from CPUC would include fees roughly in line with the yellow bars.

“Not only is the solar community in California shocked, my phone is blowing up from calls around the country shocked at the size of these fees,” Wright said. ​“This case started as a net-metering case, and it has morphed into a discriminatory-charge case against solar and storage customers.”

This grid charge may also render the CPUC vulnerable to legal challenges, Wright noted in a Monday statement. Imposing fees on solar customers to the exclusion of all other customers may violate the federal Public Utility Regulatory Policies Act, which requires utilities to offer customers payment for energy delivered to the grid based on nondiscriminatory guidelines.

Beyond these grid fees, the proposal’s new ​“net billing tariff” would reduce how much money solar customers earn from power they export from the grid. Instead of continuing to pay customers the full retail rate for that power, utilities would pay them an ​“avoided-cost” rate — aiming to reflect how much the rooftop solar defrays a utility’s costs in providing power.

While the methodology for determining that avoided-cost rate would have to be worked out over the coming months, solar groups and analysts estimate it would average about 5 cents per kilowatt-hour, much lower than the 20 to 30 cents per kilowatt-hour that most customers earn today. (Canary Media will soon be publishing a deep dive on the ​“avoided-cost” issue.)

Solar industry groups and their allies had proposed that export compensation be reduced gradually over five to seven years to ease market disruptions. But instead, the CPUC’s proposal would institute its new policies and slash compensation rates as soon as May 2022, giving the state’s solar developers and financing partners very little time to reconfigure their offerings.

These reduced export credits on top of the added monthly fees would make it next to impossible for customers to save money on electric bills by installing solar, solar groups say. 

In an effort to ease this disruption, the CPUC’s proposal would create a new ​“market transition credit.” For most residential customers, this would amount to a monthly payment of $3.59 per kilowatt of solar system size in Southern California Edison territory, $1.62 per kilowatt in Pacific Gas & Electric territory and nothing in San Diego Gas & Electric territory, which has the most net-metered customers of the three. That credit would be available for the first four years of a solar system’s lifetime and the first 10 years for systems that include batteries.

The goal of the market transition credit is to ensure that customers would be able to pay back the costs of their systems within a decade. The payback period is considered an important metric of the cost-effectiveness of rooftop solar installations.

But solar groups argue that the credit is not nearly enough to compensate for the other changes. They say the CPUC has failed to accurately calculate how quickly solar systems can earn back their costs and that payback periods under the utility plans that most closely match Monday’s proposal might stretch into the 20-year range.

Sean Gallagher, vice president of state and regulatory affairs for the Solar Energy Industries Association, says the proposal would also ​“retroactively impose costs on existing customers.” That’s because it proposes to shorten from 20 years to 15 the exemption period for customers who installed solar under the state’s previous net-metering regimes, during which they keep their former, more lucrative compensation before being forced to move to the newly created system.

These types of clauses have been a standard part of most states’ net-metering reforms since they’re seen as an important way to protect customers from having the financial calculus of their initial investment altered after the fact. Shortening the exemption period ​“completely changes the economics for current solar customers,” Gallagher said.

Unclear benefits for grid resiliency and lower-income customers

Solar groups also challenged the CPUC proposal’s assertions that it would help boost adoption of batteries to store and shift solar power from when it’s generated to when the grid needs it most. California leads the country in batteries in homes and businesses, the vast majority of them installed alongside solar systems. It also faces the threat of rolling blackouts in summertime resulting from peak evening grid demands that daytime solar generation can’t cover. The CPUC has made storing solar power for those evening peaks a key part of its clean energy policy.

The CPUC’s proposed decision would require all new solar customers to sign up for utility rate structures that reward customers for reducing grid consumption and increasing solar export during hours of peak demand and shifting more electricity demand to ​“off-peak” hours when solar is more plentiful. This dynamic could incentivize the installation of batteries to store and shift solar-generated power.

Solar groups had proposed similar rate structures as a way to encourage adoption of batteries. ​“We proposed time-of-use rates; we proposed lowering the credits that customers receive for excess generation,” Sunnova’s Nutting said. ​“Those are things we are on board with if implemented in a reasonable manner with a reasonable glide path.” A ​“glide path” is the solar industry’s term for gradually reducing export compensation instead of dropping it suddenly. The CPUC’s proposal does not include a glide path.

But beyond stating that its proposed policies should allow solar paired with batteries to achieve a 10-year payback period, the CPUC’s proposed decision offers little guidance on how its new structures would encourage adoption of batteries.

It would offer customers currently enrolled in the state’s existing net-metering program a rebate for batteries if they switch to the proposed new export compensation rates and grid charges. But it’s unclear whether the rebate would outweigh the economic losses from shifting to the new rate structure.

The proposal also rejected the Solar Energy Industries Association’s plan to offer a ​“resiliency adder” for batteries paired with solar systems. This incentive was meant to represent the value of customers investing in batteries that can help them keep the lights on during wildfire-prevention grid outages, a major problem in California.

Solar groups warn that drastically reducing the value of rooftop solar would also hinder the market for distributed batteries. ​“At a time when wildfires and power shutoffs are an ongoing problem, today’s proposed decision would leave many Californians in the dark,” Suzanne Leta, head of policy and strategy for solar installer SunPower, said in a Monday statement.

Wright said the proposal could also undermine efforts by companies like Sunrun to sign customers up for megawatt-scale aggregations of solar-battery systems to help balance the grid, as well as potentially dissuading customers from buying electric vehicles and offsetting the resulting increase in power demand with rooftop solar.

“We need to be having a conversation [about] what distributed energy resources can do for the grid in the next 10 years,” he said. In Wright’s view, the CPUC’s proposal is not fostering that conversation.

Nor is it clear how the CPUC’s proposed decision would help more lower-income customers afford their own rooftop solar systems. The two primary policies offered on that front include exempting lower-income and disadvantaged communities from the grid participation charge it would impose on other customers and ordering utilities to create rules for spending $150 million per year over four years on an equity fund to assist lower-income customers with solar adoption.

But the CPUC declined to adopt multiple proposals advanced by environmental justice and community groups to increase the compensation that lower-income customers would receive for their exported solar. It also failed to take up multiple proposals to create new community-solar programs for lower-income homeowners, renters and other groups that can find it challenging to tap the benefits of net-metered solar today.

“Today’s proposed decision by CPUC is deeply disappointing as it once again delays action on developing a workable community solar program in California and undermines the state’s distributed energy market,” said Charlie Coggeshall, regional director for the Coalition for Community Solar Access, one of the groups that proposed a community solar program as part of the net-metering proceedings, in a Monday statement.