The battle over net metering 3.0 in California: Energy equity and the future of rooftop solar

Utilities and solar groups are fighting over the cost shift. But both agree the next stage in policy must bring low-income customers and fundamental grid needs into balance.

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As California takes aim at amending its solar net metering policy for the coming decade, the public relations battle over the future of rooftop solar is taking on an apocalyptic aspect.

One side (comprising utilities, ratepayer advocates and some community and environmental groups) says today’s net metering regime unjustly shifts costs from those who can afford solar to those who can’t. That could lead to runaway rate increases that not only will hit lower-income Californians the hardest but could also undermine the state’s long-range zero-carbon goals, they claim.

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The other side (comprising solar industry advocates and many environmental groups) says utilities are overhyping the same arguments they’ve made against net metering for decades to devalue customer-owned generation. That could hinder the state’s booming rooftop solar market, which is itself a key piece of reaching California’s clean energy targets.

But in between these dueling advocacy efforts, a consensus is emerging that a fair and effective rooftop solar policy must share its benefits with low-income and disadvantaged communities that have been left out so far. There’s also agreement that the next phase of net metering policy must encourage batteries in order to make solar more valuable for the grid, as well as encouraging electric vehicles and heating electrification.

Both of these dynamics were on display during a two-day California Public Utilities Commission workshop in March that featured a host of plans to replace the state’s current net energy metering tariff. Whichever plan the CPUC chooses will set the course for California’s rooftop solar industry for years to come and serve as a guide for other states looking to the country’s solar leader for what works and what doesn’t.

Retail rates, utility costs and solar’s role on the grid

The CPUC last altered net metering in a 2016 decision that retained full retail-rate payments for every kilowatt-hour of solar generated beyond a customer’s self-consumption. The same decision denied utility proposals to add charges to make up for the lost revenue. Since then, rooftop solar in the state has grown to an estimated total of 1.2 million systems, or nearly one in 10 households in California. What’s more, the pace of growth is adding roughly 1 gigawatt per year, reaching 9 gigawatts, or roughly 11 percent of the state’s total generation capacity, as of last year.

But this regime allows solar-equipped customers to pay much lower monthly bills in a state with some of the highest electricity rates in the country. And according to a February CPUC report, those rates are set to rise quite a bit faster than inflation over the next decade.

Those increases will be driven mainly by the tens of billions of dollars needed to harden power grids against wildfires and build transmission to meet the state’s aggressive clean energy goals, the CPUC report found. But it also determined that the rooftop solar’s benefits are outweighed by the costs imposed on non-solar customers, who tend to be younger and poorer and are more likely to be renters.

At the same time, California is often awash in excess midday solar, while also facing peaks in grid demand in the evening when that solar power fades away. Last summer’s rolling blackouts were an early warning of the grid-balancing challenges the state will face in the decades ahead.

California’s power-grid-sparked wildfires and fire-prevention blackouts have made batteries an important piece of grid resiliency as well as a tool to balance the grid. While existing time-of-use rates have made batteries a valuable addition to net-metered solar, future net metering policy will need to boost battery adoption, as well as encourage electric vehicles and heating to align with hour-by-hour grid needs — all without pushing electricity rates so high as to discourage the shift to electric cars and heating in the first place.

California’s challenges on this front foreshadow those faced by other states trying to decarbonize quickly enough to forestall the worst impacts of climate change. “[This] is probably the most important proceeding regarding the future of distributed energy and customer-side resilience in the U.S.,” said Michael Wara, head of Stanford University’s Climate and Energy Policy Program and a member of Gov. Gavin Newsom’s Wildfires Blue Ribbon Commission, in a tweet introducing the proposals for how to amend the CPUC’s net energy metering 3.0 policy. 

What utilities and ratepayer advocates want from NEM 3.0

The opening of the CPUC’s NEM 3.0 proceeding has sparked an epic public relations battle. The state’s big three investor-owned utilities, Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric, have gathered a coalition of business, community and environmental justice groups, dubbed Affordable Clean Energy for All, and launched a Fix the Cost Shift” media campaign to back their plan.

The utility plan would cut solar export compensation to avoided-cost” rates that are about one-quarter of the retail rates net-metered customers are given today, which they say more accurately reflects the value of energy on the grid. It would also add monthly customer charges and a grid benefits charge” of about $7 to $11 per kilowatt of solar system size per month, which would amount to an average of $54 per month for a PG&E customer with a 5-kilowatt system, Erica Brown, senior manager of commercial policy at PG&E, said during the March workshop.

These grid benefits include transmission and distribution grid costs, the costs of hardening the grid against wildfires, and, for PG&E, the costs of decommissioning the Diablo Canyon nuclear power plant, she said. These are the kind of fixed utility costs that aren’t being covered by the reduced payments from net-metered customers.

The CPUC’s Public Advocates Office, which represents ratepayer interests, offered a proposal that would take steps similar to those outlined in the utility plan. But it would go even further by moving existing NEM customers to its lower replacement rates over the next five years — albeit with incentives for them to add batteries to reduce bill impact and shift exported energy to more grid-friendly times of the day.

Alec Ward, senior analyst with the Public Advocates Office, said during the March workshop that the plan would cut in half the estimated $45.4 billion in cost shifts over a 20-year period that his office has calculated will result from the current version of the NEM policy. Rooftop solar power is also more expensive than power from utility-scale solar and other large-scale renewables, which means continuing to reward it at full retail rates has started to conflict with our state’s equity and [greenhouse gas] goals,” he said.

The battle over net metering cost-shift calculations

Solar groups and many environmental advocates have a lot of arguments against the cost-shift paradigm described above. The simplest is the argument that utilities are simply trying to protect their monopolies over how energy is generated, consumed and paid for.

California ratepayers have suffered deadly wildfires, repeated blackouts, and rising energy bills, and now the utilities want the government to penalize them for adding solar to their roof, all in the name of lowering energy bills,” Bernadette Del Chiaro, executive director of the California Solar and Storage Association (CALSSA), said in a February statement.

CALSSA is part of another group, Save California Solar, that’s conducted its own public opinion polls that show most Californians oppose efforts to roll back net metering. Indeed, many support expanding it to reach more working-class and middle-class neighborhoods.

Rooftop solar companies have a clear interest in protecting their markets. But they also contend that undermining their work will impede California’s clean energy progress.

Tom Beach, principal consultant at Crossborder Energy and a consultant to the Solar Energy Industries Association, pointed out during the March workshop that the utility and Public Advocates Office (PAO) plans would extend the payback period for rooftop solar systems well beyond today’s four to six years and out to 10 to 15 years. This could drastically reduce the uptake of rooftop solar, he said.

Groups that see a cost-shift problem in today’s net-metering regime also recognize this problem. The Natural Resources Defense Council and The Utility Reform Network have both proposed reducing net-metering compensation, but they are also promoting a market transition credit” to pay upfront incentives to ensure solar paybacks of 10 years or less.

Solar groups also challenge utility and PAO cost-shift assumptions for failing to capture the multiple benefits that rooftop solar provides, from reducing transmission costs and land-use limitations to build utility-scale solar, to valuing the resiliency that on-site solar and batteries can provide.

You should not ignore the non-energy benefits,” Brad Heavner, CALSSA’s policy director, said in a March interview.

The CPUC’s Avoided Cost Calculator serves as the measurement system of record for NEM proposals in terms of valuing these benefits. But the underlying research from consultancy E3 that utilities and PAO are using to value rooftop solar uses values set at 2020 levels, which fails to capture their future benefits, Heavner said.

That’s led to some seemingly excessive estimates of the costs net metering imposes, like an estimate that each customer would need to pay a fixed rate of $177 per month to cover them, he said. How do you have a fixed charge that’s higher than the average bill?”

What solar industry groups want from NEM 3.0

Instead of moving quickly to reduce net-metered exported energy values, solar industry groups have proposed ramping down existing retail-rate compensation over time to mitigate the impact on utilities and their broader customer base. CALSSA proposes reducing rates as certain solar and battery installation targets are met, while the Solar Energy Industries Association (SEIA) and the nonprofit advocacy group Vote Solar have proposed a stepdown of the export rate that occurs gradually from 2023 to 2027.

SEIA and Vote Solar also propose a shift to net billing,” with customers paying standard rates for the electricity they use from the grid, as well as being paid for the solar they return to the grid at avoided cost. They also call for utilities to offer all net-metered customers time-of-use rates designed to encourage electrification of transport and heating, which will incentivize systems that focus on avoiding overloading the grid in the late evenings and exporting energy when it’s most needed.

We’re really trying to transition to solar-plus-storage systems,” SEIA consultant Beach said at the CPUC’s March workshop.

At the same time, SEIA opposes reducing compensation for NEM 1.0 and 2.0 customers, or any future policy that could reduce certainty for the solar customer going forward,” he said.

The problem with this approach, PAO’s Ward said in response, is that it won’t reduce cost shifts fast enough to mitigate upward pressure on utility rates. Beach conceded that the goal of SEIA and Vote Solar is to get to a place in five years [where] there is no rate impact on non-participating ratepayers, considering the full costs and benefits.”

But if compensation is reduced too quickly, he said, the impact on the industry is…going to be substantial — and that’s not going to be a good thing to meet our long-term goals.”

Bringing distributed energy’s benefits to low-income customers

The proposals discussed so far — and the highly polarized debate over them — are focused on mainstream residential customers. But utilities, ratepayer groups and solar advocates are in agreement that low-income customers need more from the next generation of net metering than what it offers them today.

Net metering doesn’t work well for multifamily or rental properties, where the relationship between the costs of installing solar and the benefits that flow through reduced electricity bills are complicated by landlord-tenant relationships.

It also doesn’t work well for customers with lower electricity bills, even if those bills are a higher portion of total income for disadvantaged customers. In fact, the California Alternative Rates for Energy (CARE) program for low-income customers, which offers a discount of 30 to 35 percent on electric bills, inadvertently undermines the net-metering value proposition by reducing the scale of the bills that solar can roll back.

Many of the plans before the CPUC, including those from the Public Advocates Office, would exempt CARE customers from most of the net-metering changes proposed for the general market. Others would go further, creating special programs to bridge the existing gaps.

Take the plan from Vote Solar, the Sierra Club and Grid Alternatives to address environmental justice and social justice issues. First, it would help individual low-income customers by keeping them on their lower retail rates but offering them standard-rate compensation for the power they export to the grid.

Second, it would help low-income ratepayers who don’t live in places suitable for rooftop solar by allowing community solar systems to lock in existing net-metering benefits for the next 20 years. That could help open up a low-income community solar market that two existing programs, the Disadvantaged Communities-Green Tariff and Community Solar Green Tariff programs, haven’t yet, said Steve Campbell, Grid Alternatives policy and business development director, at the March workshop.

The Coalition for Community Solar Access has proposed another avenue to boost community solar: a net value billing tariff.” This would allow solar developers to build systems of up to 5 megawatts in size and enroll low-income and disadvantaged customers as buyers of the energy, with an Environmental Justice-Low Income market transition credit to boost its value.

A similar net value billing tariff” proposal from the California Solar and Storage Association would also allow community solar projects of up to 5 megawatts to receive credits that can be applied to the bills of customers that can’t participate in traditional net-metering programs.

Looking beyond utility rates to fund California’s energy transition

Finally, several proposals take on the role of utility rate structures to drive the state’s clean energy and electrification goals. Mohit Chhabra, senior scientist for The Natural Resources Defense Council’s climate and clean energy program, highlighted the environmental group’s proposal for a separate clean energy equity fund to provide rooftop solar, energy efficiency and electrification support directly to low-income residents.

PG&E’s Erica Brown noted that utilities are targeting battery incentives to low-income and medically vulnerable customers under the state’s Self-Generation Incentive Program and EV charging infrastructure investments toward low-income and disadvantaged communities.

The Energy Institute at UC Berkeley’s Haas School of Business has a more radical proposal that would require state legislation: dramatically lowering the per-kilowatt-hour charges for electricity and tying the fixed costs of maintaining and expanding the grid to customers’ incomes.

While this may be impractical both politically and administratively, CALSSA’s Heavner said, it does highlight the fact that rate structures are regressive and the California tax structure is very progressive. And reducing greenhouse gas emissions is very expensive. We should not be doing it on the backs of the rate structure.”

(Article image courtesy of Downtowngal) 

Jeff St. John is the editor-in-chief of Canary Media. He covers the technology, economic and regulatory issues influencing the global transition to low-carbon energy. He served as managing editor and senior grid edge editor of Greentech Media.