Net Energy Metering - Reforms to Advance Rooftop Solar Equitably and at the Lowest Cost. 

The Public Advocates Office (Cal Advocates) supports NEM reform that ensures all Californians can be part of a clean energy future.  Cal Advocates' goal is to help achieve the state's climate goals by balancing the needs of rooftop solar customers with the needs of all other customers and sustainable development of rooftop solar.  We have worked with environmental organizations, labor interests, renewable energy industry associations, and consumer advocacy groups to develop joint recommendations that provide customers who want to install rooftop solar substantial bills savings while reducing the $3.4 billion cost burden imposed on customers who do not participate in NEM. Our recommendations are designed to ensure the sustainability of rooftop solar and are paired with storage in a manner that promotes equity, affordability, and choice while continuing to meet the challenge posed by climate change. 

What is NEM?

Since 1995, California law has required that electric utilities provide bill credits to customers with small customer-owned renewable generation facilities, such as residential rooftop solar, for the net excess power generated when their systems generate more electricity than the customers need for their own use.  This program is called the Net Energy Metering (NEM) program.

Under the NEM program, a customer with a rooftop solar system sells their excess energy to their electric utility.  The electric utility is required to buy this electricity at the same retail rate that the customer would have paid the utility if they did not have rooftop solar.  During times when electricity from the customer's solar system is not available (e.g. cloudy days, nighttime), the customer uses electricity purchased by the utility, which is transmitted using the utility's distribution and transmission systems. As part of the NEM program benefits, the customer also pays far less than their responsibility of charges that fund programs that provide broad societal benefits, such as for low income assistance programs (CARE program) and energy efficiency. 

Initial updates were made to the NEM program in 2015 in the CPUC's NEM 2.0 proceeding. Consistent with the Legislature's requirement to re-evaluate the NEM Program, in 2020, the CPUC initiated a proceeding to consider:  1) how participants in the program can pay their full and fair cost for receiving electric service, and 2) how to identify and address any undue subsidy that places cost burdens on customers who are not participating in the program. The current NEM 3.0 proceeding is continuing this reform work.

Electric rates and bills are already high, and they are rising unsustainably. 

Our analysis shows:

  • NEM increased bills for customers without rooftop solar by $3.37 billion in 2021, and without reforms this burden will double over the next 10 years. This cost burden falls disproportionately on those who cannot afford rooftop solar.  A significant portion of non-rooftop solar customers' utility bills goes toward overpaying for the energy produced by solar customers compensated through the NEM program.  The compensation that NEM customers receive is greater than the value of the NEM energy, even after accounting for all the benefits NEM provides by reducing GHGs, avoiding generation, distribution and transmission costs, as well as other benefits.  Specifically, California has reached a point in solar adoption where supply of renewable energy can exceed demand in the middle of the day and renewable resources are forced to curtail production to avoid causing electrical grid issues or the unneeded energy must be sold to other states sometimes below the cost of producing the energy.  Because standalone rooftop solar only produces energy during the middle of the day, simply installing more standalone rooftop solar will not reduce GHGs.  We need a balanced approach that incorporates storage so that rooftop solar energy can be used after the sun has set.   
  • The NEM subsidy comprises approximately 20% of a SDG&E residential customer's average bill, even though the vast majority of customers do not have rooftop solar systems.  In fact, residential NEM customers comprise just 11%, 8%, and 15% of total residential customers in PG&E's, SCE's, and SDG&E's service territories, respectively. Correcting this inequitable cost-shift will enhance affordability for customers in vulnerable communities.  Additionally, customers should be incentivized to install solar and storage to capture the clean energy produced during the day (when there is already excess energy) in storage systems so the energy is available in the evening.
  • Customers need relief for increasing energy bills. Too often Californians, especially older adults, lower income customers, and communities of color, are being forced to choose between energy and other necessities.
  • NEM increases electricity rates, which threatens the viability of all our climate goals. High electric rates have already started to make the transition away from greenhouse-gas emitting energy such as natural gas to the electrification challenging, particularly for building and transportation electrification.  Our concern is that the energy sector will not continue to decarbonize if electricity rates continue to outpace inflation.

Changes to NEM must include the following elements to advance California's equity and environmental policy goals, while ensuring continued rooftop solar adoption:

  • NEM customers should be fairly compensated for the value they provide the energy system. 
    • Your electric utility should buy any excess energy from a rooftop system at a fair price, based on its value.  The simplest way to do this is to compensate customers that export NEM electricity in a manner which accounts for all the costs that rooftop solar installations actually avoid.  The CPUC's most recent Avoided Cost Calculator does just that.
    • Retail electricity rates do not represent the cost of producing energy from rooftop solar systems. It is unsustainable and unnecessary to have the incentive for rooftop solar be the same as the utility's rapidly increasing retail electricity rates. 
     
  • NEM customers should pay their fair share of grid, wildfire, and other related costs. 
    • Customers with rooftop solar depend on the electric distribution and transmission systems (grid) to use electricity when their rooftop solar systems are not generating electricity, i.e., due to weather impacts or times of day when the sun is not shining. A reasonable fixed charge is a simple and appropriate mechanism to ensure a NEM customer makes a nominal payment to offset their share of distribution and transmission costs.
    • NEM customers should pay their fair share of wildfire and other non-electric service-related costs that support a safe and reliable grid.
     
  • Comprehensive reform should include all NEM customers. 
    • Customers who installed rooftop solar years ago and have earned enough credits from the utility to have the systems pay for themselves should be encouraged to switch to a more accurate and equitable compensation rate. Current utility rates are so high that typical rooftop solar systems pay for themselves in under 5 years (in 2014, studies noted by the Commission showed payback periods of between 8 to 12 years).  After the system is paid off, a rooftop solar customer's bills are paid by non-NEM customers for as long as the panels continue to generate electricity.  With rates continuing to increase, and rooftop solar costs decreasing, systems will pay for themselves even more quickly, leaving renters and those who are not able to afford rooftop solar to foot the bill.
     

Cal Advocates has been actively engaged in the current NEM 3.0 proceeding, submitting testimony, comments, and legal briefs to present proposals for meaningful reform.  Key documents in the proceeding and related to our policy positions can be found HERE.

Q&A FORUM: ASK THE ADVOCATES!

  1. What is the current status of changes to NEM 3.0?

On December 13, 2021, a CPUC administrative law judge issued a Proposed Decision to reform NEM based on the evidence presented in the proceeding.  A final decision will be issued following an opportunity for parties in the proceeding to present oral arguments.  An oral argument, where parties present their points in favor of or against various proposals, was scheduled for January 2022, but was postponed, and has yet to be rescheduled.     

  1. What does the CPUC's proposed decision do?

The Proposed Decision primarily produces the following outcomes:

  1. Continues to provide a subsidy to rooftop solar customers and encourages them to pair their solar systems with storage.
  2. Ensures that rooftop solar customers will receive sufficient bill savings to recover the upfront costs of their systems within 10 years. ¹
  3. Addresses the historic inequity in rooftop solar adoption by lower-income customers and communities of color by establishing a $600 million fund to improve access to distributed energy resources among these customers.
  
  1. Does Cal Advocates have recommendations for changes to the Proposed Decision?

The Proposed Decision recognizes many of the concerns Cal Advocates has raised about the current NEM program and includes needed reforms to the current NEM policy to reduce the cost shift, address inequities, and align incentives with California's role as a leader in paired rooftop solar and storage energy systems.  The structure of the reforms is similar to what Cal Advocates has proposed.  However, Cal Advocates has several recommendations to improve the Proposed Decision:

  1. The Proposed Decision allows customers who have already installed rooftop solar to be compensated for the excess energy their systems generate, according to the terms of the NEM 2.0 program, for 15 years. We recommend shortening the timeframe to 8 years, given the shorter payback periods under NEM 2.0.  This way, all customers with existing rooftop solar systems will have recouped the cost of their systems before their NEM incentive is reset to the levels enjoyed by customers with newer panels.
  2. To encourage more storage adoption, the Storage Evolution Fund should be available to NEM customers for a longer period of time.  Increasing the proportion of rooftop solar systems paired with storage will make dramatic improvements in reducing greenhouse gasses emitted during the "ramp period" (when the sun is setting and "quick-start" polluting electric generation resources are used to keep the lights on).
  3. The Equity Fund should not include contributions from low-income customers who are participating in the NEM 1.0 and 2.0 programs. 
  4. The Equity Fund should not expire after 4 years.
  5. NEM customers should pay their fair share of the costs associated with programs designed to provide public benefits and reduce safety risks. ²
  6. The list of non-bypassable charges that should also apply to NEM customers should be expanded (to include the costs for Reliability Services, New System Generation, Investor-Owned Utility securitization costs related to wildfires, the PUC Reimbursement surcharge, and the Power Charge Indifference Adjustment) since the costs of these public benefits programs are intended to be recovered from all customers. 
 
  1. Will electric utilities profit from these NEM reforms?

Utilities will not profit from reforming the NEM program.   The utilities are required by law to implement the program, and the costs of the program are passed on to customers through electric rates.  Quite simply, the incentives paid to rooftop solar costs are added to the rates paid by customers who do not have rooftop solar and any changes to those incentives will not change utility profits.  Effective changes to the NEM program will lead to decreased electricity rates for all utility customers, which will go a long way toward achieving California's important environmental goals through measures such as electrification of transportation and buildings.

A diverse array of organizations supports meaningful NEM reform.  Cal Advocates has partnered with environmental and renewable energy interests, labor unions, and other consumer advocates to craft a compromise proposal that balances the interests of all customers and reflects our shared interest in promoting the State's environmental goals and equity among customers.  

  1. How can the state meet its clean energy goals if NEM 3.0 provides a smaller incentive for customers with rooftop solar?

The Proposed Decision still includes generous incentives for rooftop solar.  Also, the State's mandates for rooftop solar installations on new buildings will ensure that the resource will continue to grow.

However, the State will not meet its clean energy goals if NEM continues to drive up electric rates.  Our shared climate goals will require electrifying more industries, such as transportation through greater adoption of electric vehicles and moving away from natural gas in buildings.   However, this transition toward clean energy becomes less affordable as electricity becomes more expensive.

Rooftop solar is six times as expensive as larger scale renewable resources like wind, hydroelectric power, yet both resources provide green energy.  Thus, renewable energy resources in addition to rooftop solar paired with storage are key components of any climate policy. 

California needs to transition to rooftop solar paired with storage rather than continuing to provide oversized incentives for standalone rooftop solar.  As discussed earlier, California has reached a point in solar adoption where supply of renewable energy can exceed demand in the middle of the day and renewable resources are forced to curtail production to avoid causing electrical grid issues or the unneeded energy must be sold to other states sometimes below the cost of producing the energy.  Because standalone rooftop solar only produces energy during the middle of the day, simply installing more standalone rooftop solar will not reduce GHGs.  We need a balanced approach that incorporates storage so that rooftop solar energy can be used after the sun has set. This will avoid costly and polluting generation that fills in when solar production falls at the end of the day.  The reforms in the Proposed Decision will encourage storage adoption and provide price signals to incentivize customers to change their production and consumption in ways that will meaningfully reduce GHGs. 

  1. Is the proposed Grid Participation Charge a "tax" on rooftop solar?

No.  The Grid Participation Charge helps ensure that NEM customers pay some of the costs of providing electric service to customers with rooftop solar, including the costs of maintaining the electric distribution and transmission systems and paying for other public interest programs.  Like the highway and water systems, the grid is a common resource that everyone who uses it should help maintain.  The way the Proposed Decision has calculated the Grid Participation Charge takes in to account the benefits provided by rooftop solar. Even so, the Grid Participation Charge still does not recover all the costs necessary to serve NEM customers (after accounting for rooftop solar benefits), so there will still be a cost shift to non-participating customers.  Yet, without such a mechanism, California would continue to effectively charge an unfair and regressive sales-tax on all customers without rooftop solar.   

  1. What is a "cost shift"?

A cost shift occurs whenever a customer pays less than the cost of delivering reliable, safe energy to them. When a NEM customer does not pay the full cost associated with their service, the remaining costs are passed on to non-NEM customers. Instead, California law allows utilities to raise the price of electricity for all other customers to ensure the utility's overall costs associated with providing service are recovered. Cal Advocates estimates that in 2021, the cost shift from NEM was $3.37 billion.  If there is no reform, Cal Advocates conservatively estimates that the cost shift will increase to $6.9 billion per year by 2030 in today's dollars ($2021).  NEM is essentially a regressive tax on low-income households (see Cal Advocates' testimony for more information). 

To put this in perspective, in 2019, the average PG&E, SCE and SDG&E low-income customer who does not have rooftop solar paid $106, $67, and $128 (respectively) on their annual bills to subsidize NEM customers.  Indeed, the NEM subsidy alone comprises approximately 12%, 10%, and 20% of PG&E's, SCE's and SDG&E's average residential bills, respectively. ³

Subsidies for NEM from Non-participants in 2019  

 

PG&E

SCE

SDG&E

Average low-income customer subsidization of NEM

$106

$67

$128

Approximate Percentage of average residential bills used to subsidize NEM

12%

10%

20%


  1. Shouldn't the CPUC focus more on the costs of transmission and wildfires, not rooftop solar?

Cal Advocates takes a strong stance against excessive transmission and wildfire costs.  However, the costs of NEM are also an excessive burden on customers who are not able to participate in the program.  Currently, electricity rates are so high we cannot ignore the consequences of the current NEM policy, especially the undue burden it creates on renters and lower income customers. 

Rooftop solar also does not negate the need for new transmission lines: when the sun doesn't shine, customers without storage (currently only 6% of NEM customers have storage) rely on the electrical grid and connected energy resources to keep the lights on.    

  1. Don't energy efficiency incentives also create a cost shift?  Why should we reform NEM and not energy efficiency? 

Energy efficiency programs have limited budgets and requirements that ensure that their costs equal their benefits.  NEM does not have a fixed budget and is not required to be cost-effective.  Analysis provided in the CPUC's NEM 3.0 proceeding shows the current NEM program is not cost-effective, and demonstrates the need for reform. 

 

 

 

 

 

 

 

 

Footnotes

  1.  By contrast, the current NEM subsidy typically allows system payback periods of 3-8 years.
  2.  These costs are typically collected through "non-bypassable charges" that all customers pay.  
  3.  R. 20-08-020, Public Advocates Office Prepared Testimony, p. 2-22.
  4.  R. 20-08-020, Public Advocates Office Prepared Testimony, p. 2-22.