Understanding NEM 3.0 In California

The California Public Utilities Commission (CPUC) approved the proposed NEM 3.0 changes that make going solar less beneficial for most Californians. Renewable energy advocates say this decision could dramatically impact the nation’s most successful marketplace, which has more than 1.5 million solar-powered homes in California alone and employs approximately 68,000 people.

So what is NEM 3.0, and what changes occurred in April 2023 when it took effect? This guide explores NEM 3.0 in California and provides high-level details, deadlines, and other important information your customers should know.

What Does NEM Stand For?

NEM stands for “net energy metering.” This electricity bill structure allows homeowners with grid-tied photovoltaic (PV) systems to earn credits for excess energy their solar panels generate.

Utility companies track how much electricity customers with solar arrays generate compared to how much they pull from the grid. Many utility companies also use time-of-use (TOU) billing, which charges more for any electricity used during peak hours.

California’s previous net metering laws allowed homeowners to receive the retail rate for excess solar energy generation. NEM 3.0 is a drastic departure from these older laws.

What Is NEM 3.0 in California?

NEM 3.0, or Net Energy Metering 3.0, is the third iteration of California’s net metering policies, implemented in April 2023. Solar customers who apply for interconnection after this date are subject to NEM 3.0, which reduces the compensation for surplus electricity sent back to the grid.

Utility Companies Impacted By California NEM 3.0

Investor-owned utility (IOU) companies affected by NEM 3.0 include:

• Pacific Gas and Electric Company (PG&E): Serving Northern and Central California.

• San Diego Gas & Electric (SDG&E): Serving San Diego and southern Orange County.

• Southern California Edison (SCE): Serving Southern California.

Publicly owned utilities, like Sacramento Municipal Utility District (SMUD) and Los Angeles Department of Water and Power (LADWP), have not adopted NEM 3.0 and continue to operate under their existing net metering rules. This means customers in these areas are not yet subject to the changes made under NEM 3.0, allowing them to benefit from previous net metering policies. However, these utilities may consider adopting NEM 3.0 in the future, potentially shifting their solar policies to align with the new framework.

NEM 3 Cuts The Value Of Customer-Generated Solar Power

Under previous NEM policies, homeowners in California were credited with the full retail rate for the electricity they generated. For example, if a utility company charged 25 cents per kilowatt-hour (kWh), solar customers would receive the same 25 cents for each kWh they produced.

These net metering policies, in place since the late 1990s, were key factors in California’s rise as a leader in solar adoption. However, critics of NEM 1.0 and 2.0 argued that these arrangements overcompensated solar owners, contributing to concerns about cost-shifting to non-solar customers.

With NEM 3.0, solar customers are now credited based on an “avoided cost calculator,” which calculates the savings the utility company experiences by using alternative energy sources, such as rooftop solar. The export prices, or the amount a customer is paid for excess electricity, are also influenced by Time-of-Use (TOU) rates.

These rates are typically higher during peak demand hours, such as in the morning and evening, reflecting the increased cost of electricity during those times. As a result, the value of customer-generated solar power has significantly decreased under NEM 3.0.

What Are NEM 3.0 Export Rates?

NEM 3.0 rate plans significantly reduce the compensation California solar homeowners receive for excess electricity. As of April 14, 2023, when NEM 3.0 took effect, the export rates saw a drastic 75% reduction, dropping from an average of 30 cents per kWh to just 8 cents per kWh, according to PV Magazine.

Under NEM 3.0, the value of credits for excess solar energy sent back to the grid is determined using an Avoided Cost Calculator (ACC), a shift from the retail electricity rates used in NEM 1.0 and NEM 2.0. As a result, the new export rates are generally much lower.

These rates vary based on the time of day, season, and the specific utility. However, for customers of PG&E and SCE, there are additional export rate incentives available during the first five years of NEM 3.0. These adders start at 2.2 cents per kWh for PG&E and 4 cents per kWh for SCE in the first year, gradually decreasing each subsequent year. These incentives aim to encourage early solar adoption under the new framework.

Key Technical Requirements for NEM 3.0 Interconnection Approval

Here’s an overview of the key technical requirements for NEM 3.0 interconnection approval:

• Advanced Inverter Functions: Solar systems must include smart inverters with grid-support capabilities such as reactive power control and voltage ride-through to maintain grid stability.

• Anti-Islanding Protection: Solar systems must feature anti-islanding protection that automatically shuts down the system during a grid outage, ensuring safety for utility workers.

• Compliance with IEEE Standards: Systems must meet IEEE 1547 standards, which establish grid interconnection requirements for distributed energy resources, ensuring safe and reliable integration with the grid.

• Energy Storage Compatibility: Systems that include battery storage must meet specific guidelines to ensure seamless integration between the solar array, storage, and the grid, enhancing energy management.

• System Monitoring and Communication: Solar systems must include real-time monitoring and communication features, allowing utilities to track performance and ensuring compliance with regulatory requirements.

• Dynamic Grid Support: Solar systems must be capable of adjusting to grid conditions to support voltage regulation and frequency stabilization, helping to maintain overall grid stability under NEM 3.0.

Disadvantages of NEM 3.0 Rates

There are numerous drawbacks to NEM 3 in the solar power industry.

• Lower electricity bill savings: With lower compensation rates, solar owners may experience reduced savings on their electricity bills compared to previous net metering structures.

• Transition period: The transition to NEM 3.0 may create uncertainty and challenges for solar installation companies due to decreased business and market uncertainty.

• Impact on solar payback period: The longer payback period for solar systems due to reduced compensation rates can make it less financially viable for some homeowners to invest in solar energy.

• Slower solar panel adoption in California: The reduced compensation rates under NEM 3.0 are decreasing the demand for solar installations in the state.
  

Benefits of Net Metering 3.0

Although there are numerous drawbacks to California NEM 3.0, there are some advantages.

• Financial Benefits of Pairing Solar Panels With Batteries: The financial benefits of pairing solar energy with batteries have increased significantly under NEM 3.0.

• Grandfathering Provisions: Existing solar owners are grandfathered into the NEM 2.0 program and can continue receiving its benefits for 20 years from the date they received Permission to Operate from the utility.

• Adding Energy Storage to Existing Systems: Solar owners who join NEM 2.0 before the designated deadline may be able to add solar batteries without losing their NEM 2.0 status.

When Did NEM 3 Take Effect?

The new NEM 3.0 policies apply to rooftop solar power systems installed on or after April 14, 2023. However, solar systems installed before then are grandfathered into NEM 2.0 policies.

Individual utility companies may also have certain requirements unique to their business. For example, SCE requires that homeowners’ solar installations match the size of their expected usage, and each system must use a compatible meter.

However, NEM 3.0 increased the maximum size of the systems to allow for the generation of 150% of the customers' electricity needs. This is to allow for future electrification, such as charging electric cars or converting from gas to electric appliances. Californians should check with their utility company for system size limits.

How NEM 3.0 Affecting the California Solar Market

NEM 3.0 has significantly impacted the California solar market. Following the regulatory decision to reduce the compensation for solar panel energy exported back to the grid, the rooftop solar industry in California experienced job losses and a decline in sales.

NEM 3.0 Impact on California Solar Installations

Despite installing a commendable 6.2 GW of new solar capacity, recent regulatory decisions by the California Public Utilities Commission have significantly harmed the state's rooftop solar sector. Consequently, the overall solar market in California is projected to decline by 36% across all solar energy market segments in 2024.

NEM 3.0 Impact on Solar Jobs

The implementation of NEM 3.0 resulted in sweeping solar industry job cuts, with a survey by the California Solar and Storage Association reporting that state solar and storage companies planned to cut down on 17,000 jobs by the end of 2023. This represents 22% of all solar energy jobs in the state, and a majority of contractors surveyed anticipate further layoffs in the future.

The California Public Utilities Commission's decision had a significant and far-reaching impact on the solar power industry, with uncertain futures for many businesses. Rooftop solar sales were reported to be down significantly compared to the previous year, and residential solar and storage contractors expressed concerns about the industry's overall outlook. The California solar energy market is expected to continue experiencing layoffs and negative effects, both in the residential and commercial sectors.

NEM 3.0 Impact on Solar Homeowners

Solar customers with battery storage could be compensated more during evening hours, when electricity demand is highest. CPUC believes that customers who store electricity in the daytime and discharge it when demand is highest will stabilize the grid and improve their payback period. The CPUC also estimates solar-plus-storage payback at 9 years.

FAQs on California NEM 3.0

Here are a few questions that homeowners may have about NEM 3, which has been highly controversial in the California solar energy market.

How long are solar systems grandfathered under NEM 2.0 after NEM 3.0 takes effect?

Solar systems approved under NEM 2.0 are typically grandfathered for 20 years from the interconnection approval date. This ensures that customers who installed their solar panels before NEM 3.0 continue to benefit from the more favorable terms of NEM 2.0, such as higher compensation rates for excess energy. However, any significant modifications to the system could terminate this grandfathered status, requiring the system to meet the updated NEM 3.0 rules, which include reduced compensation rates for solar energy.

Can clients add to their system capacity without losing their NEM 2.0 status?

You clients may be able to increase their PV system capacity without losing NEM 2.0 status, but it depends on the scale of the solar system upgrade. Minor capacity increases might not trigger a switch to NEM 3.0, while significant expansions could push the project into NEM 3.0. However, adding energy storage, like a battery system, typically doesn’t affect NEM 2.0 eligibility, allowing customers to maintain their grandfathered status in NEM 3.0.

Does NEM 3.0 require a solar battery?

Although solar system owners in California aren't required to have a battery storage system, like the Tesla Powerwall or Fortress Power eVault, they benefit from greater energy bill savings with one. NEM 3.0 compensates more for power during times of peak energy demand, so having a solar battery makes this more feasible.

What inverter and grid-stability standards must solar installers meet under NEM 3.0 for interconnection approval?

Under NEM 3.0, solar installers must meet specific inverter requirements and grid-stability standards to ensure solar interconnection approval. Inverters must be certified under UL 1741 SA standards, which include advanced grid support functionalities like voltage and frequency ride-through, and the ability to perform autonomous responses to grid conditions.

The Bottom Line: California NEM 3.0 Is A Mixed Bag

NEM 3.0 has significantly changed the California solar market, leading to job losses and a decrease in sales. While there are challenges ahead, experts believe that the distributed solar industry, driven by high retail electricity rates across the country and the California Solar Mandate, still has potential for growth. Although the national solar energy market is strong, the California market has experienced significant setbacks due to NEM 3.0.

California remains the largest solar market in the nation, with 46.9 gigawatts of installed capacity, enough to power nearly 14 million homes. California state leaders must step up to encourage more solar and storage adoption in the near and long term if California is going to meet its 2030 clean energy goals.

If your business operates in California, be sure to discuss with your clients how NEM 3.0 is impacting them. Work with GreenLancer for help with solar system design, interconnection applications, engineering wet stamps, and PV permitting.