California’s rooftop solar policies threaten progress on climate

When California undercut its own rooftop solar market one year ago, it surrendered a crucial tool for achieving its ambitious climate goals.

For the last two decades, California set the national standard for clean energy policy. Governor Arnold Schwarzenegger, a Republican, jumpstarted the rooftop solar industry in 2006 with his Million Solar Roofs initiative, and championed binding carbon-reduction goals with AB32, which guides the state to this day. Successor Jerry Brown, a Democrat, signed into law a deadline to switch to a zero-carbon electricity system by 2045. Now the state is working to cut the fossil fuels it relies on for nearly 40 percent of its electricity, especially when the nation’s largest solar fleet goes to sleep for the night.

Solar forms the tip of the spear for California’s climate agenda; it’s the largest source of new energy construction in the state, just as it is for the nation as a whole. Until one year ago, California supported both forms of solar development: the large or utility-scale variety, which connects huge fields of panels to the utility-run grid, and small or distributed solar, which customers add to their homes and businesses to save money and supplement the grid’s clean energy supply.

Then, on April 15, 2023, Governor Gavin Newsom’s (D) handpicked utility regulators at the California Public Utilities Commission (CPUC) officially stripped away the net-metering policy that had helped incentivize the small-scale solar buildout thus far. They replaced it with NEM 3.0, a new policy that slashed compensation for the solar power that individual customers delivered to the grid by upwards of 70 percent and pegged the much diminished rewards for that power to a novel and inscrutable metric called the avoided-cost calculator.

The calculator ​“is so convoluted, the average customer and the average solar contractor can not easily figure out what the impact would be, whether the customer’s bill will go down,” said rate-design expert Ahmad Faruqui, a vocal critic of the commission’s decision.

Since then, California’s distributed solar industry has reported plummeting sales and widespread job losses. New sales in January were the lowest for that month since 2014, said Bernadette Del Chiaro, executive director of the California Solar and Storage Association industry group (CALSSA).

In other words, California’s climate governor has overseen a reversal in fortune for the once-favored rooftop solar industry just when the state needs all the clean energy it can get.

“The long-term damage that we’ve sustained now is what this has done to California’s trajectory for meeting our clean energy goals, meeting our climate goals, keeping the lights on as we electrify and keeping costs down,” Del Chiaro said.

Now the rooftop market is in freefall, putting the state at risk of becoming more dependent on a centralized, utility-driven buildout that is already plagued with backlogged infrastructure upgrades and ballooning grid costs for customers.

Small-scale solar became a big climate solution

It’s true that large-scale solar has far cheaper unit prices, thanks to economies of scale. It costs less to mobilize a work crew and erect solar panels as far as the eye can see than it does to go rooftop to rooftop. Both types of solar ultimately produce an identical product: clean electricity in the hours when the sun shines. 

Monopoly utilities and their allies seized on this fact to suggest that rooftop solar subsidies are unfair to the rate-paying public: They argued that the whole customer population, including everyone who can’t access their own rooftop solar, was forced to pay solar owners more for their excess production than it was worth to the grid. By railing against this purported ​“cost shift,” the utilities that charge among the highest rates in the country cast themselves as crusaders for the poor families struggling to pay their bills.

The wonky fight over whether rooftop solar forces unfair costs onto those without it has raged for years. Suffice it to say, running an electrical grid across varied terrain requires the socialization of any number of costs, which happens every day without protest so long as the results serve some social good. Since the Schwarzenegger era, California policymakers have agreed that lots more rooftop solar is a good thing for the state. It would create jobs and help individual households control their energy costs while pushing the whole state toward its climate goals.

The numbers bear out that theory. The national Solar Energy Industries Association shared data with Canary Media showing that utility-scale adds up to 55 percent of California’s total 45,605 megawatts of installed solar capacity, as measured by the end of 2023; rooftop, commercial and community solar, known collectively as distributed generation, make up the remaining 45 percent. All those little rooftops put together rival the might of the enormous solar fields blanketing the Central Valley and the Mojave.

The pace of deployment matters greatly, since California must install big numbers of panels every year for the next two decades to achieve carbon neutrality by 2045. It turns out, distributed solar has a consistent track record here, too. Distributed solar installers built more megawatts than their utility-scale counterparts in three of the last 10 years (2017, 2018, and 2021). In two other years (2019 and 2022), utility-scale eked out a win by less than a percentage point. In 2023, large-scale solar beat distributed solar by just 2.5 percentage points.

Crucially, solar is the main engine of California’s carbon-free energy growth. New nuclear isn’t happening, new wind has been mostly stalled for years, offshore wind in deep Pacific waters requires navigating a thicket of regulatory and technical hurdles. California’s near-term clean energy growth depends on solar, and in recent years, distributed solar has proven itself roughly coequal to utility-scale in sheer megawatts placed into service.

For a ballpark sense of just how much more work needs to be done, a California Air Resources Board study from 2022 notes that the state needs to add 72 gigawatts of utility-scale solar by 2045, and 29 gigawatts of distributed solar, to hit its clean electricity target. That would entail well more than doubling the total current installed small-scale solar capacity.

Newsom’s hand-picked utility regulators didn’t drop a proverbial anvil on a clean energy sideshow, but on one of their two headliners.

Rooftop solar is in freefall, but Newsom’s CPUC sees it differently

When California’s utility regulators voted to end net metering, they gave the industry just four months notice to prepare for the seismic shift, precluding a measured transition. That violated the principle of gradualism that should apply when the government attempts to restructure an entire industry, Faruqui said.

The results were both predictable and predicted. As customers retreated from the new uncertainty, California’s distributed solar and storage industry shed about 17,000 jobs, 22 percent of its California workforce, through the end of 2023, according to estimates from CALSSA late last year (a new survey is currently underway).

“The job losses have been huge and wide ranging,” Del Chiaro told Canary Media. ​“There’s barely a company in California that hasn’t been touched by job layoffs and other cost controls.”

The Newsom administration, in contrast, insists the new solar rules aren’t a problem. The governor’s press team referred Canary Media to CPUC spokesperson Terrie Prosper, who said in an email that the new policy is effective at incentivizing solar installations.

“California has done more for the solar industry than any other state in the nation by providing billions in rebates and incentives since 2006 to drive adoption,” Prosper said. ​“Now, we’re focused on modernizing programs and policies to promote solar and battery storage, strengthen grid reliability, and curb electricity costs for all Californians.”

Prosper cited data that solar sales rose in 2023 compared to 2022. This is true: rooftop solar hit its high water mark the year net-metering died, to the tune of about 2.3 gigawatts per the SEIA data (commercial solar added another 640 megawatts). But 2023 included the three-month scramble when customers raced to buy their solar panels before the old rules went away and new, less lucrative ones kicked in. The year’s record numbers were driven by the last gasps of the old solar rules.

That lingering presence still colors the numbers from January, the most recent month with publicly available data. California’s three major utilities hooked up 155 megawatts of new distributed solar in January, which looks like the second biggest January for the market after 2023. The problem is, 104 of those megawatts were sold under the old rules before NEM 3.0.

Of course, backlogged sales from the old regime are a vanishing breed; the new installations under NEM 3.0 only amounted to 51 megawatts in January. That’s equivalent to the lowest January installations since 2014, when the far more juvenile market delivered 48 megawatts.

Data from the CPUC also show that the percentage of solar systems adding battery storage has surged since the NEM 3.0 rules took effect, given that adding batteries can shorten the payback time for customers. This is good for the grid, as it means customers have tools to shift their solar to the more valuable evening and nighttime hours.

Del Chiaro affirmed that the attachment rate of solar systems that add batteries has indeed surged. But she says the volume of new sales has dropped so much that the total megawatts of distributed storage getting installed hasn’t actually grown. The industry installed 22 megawatts of storage under NEM 3.0 in January, compared to 23 megawatts alongside a much larger amount of solar in January 2022, she said.

Betting on big solar, despite the risks

The CPUC followed its decision to reduce incentives for rooftop solar with another decision sidelining shared solar for multifamily housing. Then, in March, a new proposal from the commission conjured a novel legal theory to invalidate a new community solar program, which was created by the state legislature and modeled after structures that have worked for years in many other states.

Taken together, these steps weaken California’s distributed solar as an engine of clean energy deployment. All else held equal, the state will need more utility-scale solar to fill in the missing megawatts required to hit its climate targets.

That presents a number of potential problems.

To begin with, there is already an alarming backlog for the grid upgrades needed to connect utility-scale plants. The number of applications to hook up a new power plant in California has hit levels triple the annual average over the last decade, per reporting by Utility Dive. The grid operator CAISO has launched an effort to reform its interconnection process in order to keep up with the unprecedented quantity of applications, but it will take time for the situation to improve.

California’s famously high real-estate costs and stringent permitting regime further complicate efforts to develop clean power plants there. It’s no coincidence that Texas, which lacks much of any climate policy but makes it easy to build things, recently surpassed California in the amount of large-scale solar installed in its wholesale market, and is expected to build more grid batteries than California this year.

Besides the risk of delays, relying too much on utility-scale solar could expose Californians to the ballooning costs that utilities say they are trying to avoid. Once CAISO signs off on an interconnection, it falls to the monopoly utilities to perform the upgrades to the grid needed to connect the new power plants and transmit that power to all their customers. Utilities don’t make money on the kilowatt-hours of electricity their customers buy, but they do earn a guaranteed profit for their shareholders based on capital expenditures for grid upgrades. If these improvements should take longer and cost more, ratepayers are the ones who foot the bill.

Utility costs are already surging in California. A neglected corner of PG&E’s grid started the deadly fire in Paradise in 2018, which prompted many billions of dollars of new upgrades to harden the grid against future calamities. The Newsom-endorsed goal to shift most vehicles to electric has triggered some staggering proposals, like Southern California Edison’s suggestion that the state spend $370 billion to prepare the grid for a clean, electrified future.

The state is ​“really leaning heavily on utility-scale getting built,” Del Chiaro said. ​“If your focus is solving climate change and keeping the lights on, you absolutely can’t get there without distributed generation, you just can’t.”

What comes next?

California is at a crossroads in its climate efforts.

The state hit its 2020 greenhouse-gas reduction goals years early, said Terry Tamminen, who served as chief policy advisor to Schwarzenegger when those targets were set. That first phase, though ambitious when Schwarzenegger adopted the goals in 2006, proved very achievable. The rise of highly efficient LED bulbs helped, as did the plummeting cost of solar panels and the proliferation of new financing models to make rooftop installations more accessible to customers.

Now California faces a tougher phase of its clean energy growth spurt.

“When you’re a child, you grow very fast, but then you get to be an adolescent and, you know, … becoming an adult is hard. That’s kind of where we are now” in California’s energy transition, Tamminen told Canary Media. ​“When you’re a teenager, you’re going to make a lot of decisions that you later regret. That experience teaches you, you could have done things differently … And one example of that would be what the PUC did with net metering. I think that was a huge mistake.”

California could still course-correct. Legislators have proposed a handful of bills to nudge the CPUC into re-centering distributed energy in the state’s climate strategy, as Canary Media recently reported.

And the governor himself could change direction. He’s done it before, when circumstances called for it.

Before Newsom came into office, utility PG&E had signed an agreement with groups like NRDC to shutter the state’s last nuclear plant, Diablo Canyon. Environmentalists had long targeted the nuclear plant, but it produced more carbon-free electricity than anything else on the California grid, with the added benefit of running all day and night. Its closure seemed to be a done deal, but Newsom intervened in 2022 to keep the plant open, citing California’s pronounced need for firm, clean capacity.

That decision showed Newsom was willing to expend political capital to support a politically controversial carbon-free energy source, for a simple reason: California needs all the clean energy it can get.

The politics of rooftop solar are quite different: It’s popular with many Californians, though some worry about the cost of subsidizing it, as the CPUC likes to emphasize. For the monopoly utilities and their unions, two forces to be reckoned with in Democrat-controlled California state politics, rooftop solar represents an obstacle to some of the money they could make from decarbonizing and electrifying the California economy.

For now, that threat has been tamped down. But if or when the utility-led grid transition lags too far behind schedule, or the summer electricity demand outstrips the pace of new power plant construction, rooftop solar will reemerge as an option that has been proven to work at gigawatt scale. Quibbles over subsidy pricetags tend to subside when the status quo becomes untenable. Just look at Oahu, Hawaii, where a much-delayed utility-led solar buildout forced a landmark program to pay households for storing solar power in batteries and sharing it with the grid.

“It’s very hard to kill the solar industry,” Del Chiaro said. ​“It’s hard to keep a good idea down.”

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