Net Metering (NEM 3.0) and 2022 IOU Rate Increases

What is California’s net energy metering policy?

Businesses can use California’s net metering to receive bill credits for the excess electricity that their solar panels produce, as long as the system is less than 1,000 kilowatts (1 MW). With the help of net metering in CA, electric utility customers who install solar typically save tens of thousands of dollars on their electricity costs over the lifetime of their solar panels.

California’s first net metering policy set a “cap” for the three investor-owned utilities in the state: Pacific Gas & Electric (PG&E), San Diego Gas & Electric (SDG&E), and Southern California Edison (SCE). Total solar installations in each utility’s territory were capped at five percent of total peak electricity demand. As a result of explosive solar growth in the Golden State, all three utilities were approaching their caps by the end of 2015. To ensure that solar would continue to succeed, the California Public Utilities Commission (CPUC) created a next-generation program known as “Net Metering 2.0” (NEM 2.0) that extends California net metering benefits for years to come.

NEM 2.0: California’s net metering policy

The original policy for net metering in California was simple: for every kilowatt-hour (kWh) of solar electricity you feed into the grid, you get a bill credit for one kWh of utility-generated electricity. When your solar panels produce more than you need, you “bank” the excess to use when your panels don’t produce enough to meet your monthly use. If your system is the right size, net metering makes it possible for you to cover your electricity use for the entire year with solar.

Net Metering 2.0 made a few minor changes to California’s original net metering policy, but it preserves the key element that makes solar economical for California residents: retail rate bill credits. Homeowners and businesses that install solar will be subject to NEM 2.0, and will still receive per-kWh credits for their solar electricity that are equal to the value of a kWh of utility electricity. This means that the economics of solar are still very favorable under NEM 2.0.

In 2019 the CPUC started looking at establishing a new program that is designed to account for the benefits of solar in different locations and at different times. This is called NEM 3.0 and is discussed below. But first, a discussion on the aspects to be aware of in NEM 2.0, and potentially NEM 3.0:

There are three main differences between the original California net metering policy and Net Metering 2.0: time-of-use rates, interconnection fees , and non-bypassable charges . The California Solar Energy Industries Association (CalSEIA) estimates that the combined impact of these changes are approximately $10/month compared to the original policy.

Time-of-use (TOU) rates

TOU rates are designed to align your electricity costs with demand across the electric grid. Electricity is most expensive at times of high demand, like late afternoon and early evening, which means that your utility will charge you more per kWh during those “peak hours.” It also means that net metering credits will be worth more for electricity you send back to the grid during peak hours.

Under NEM 2.0, every property owner who installs a solar energy system will automatically be switched to TOU rates for their electric bills. What you pay per kWh will depend on your utility. Solar panel systems operating under NEM 2.0 can be just as economical as traditional net metering with the right system design. In general, TOU rates are highest in the afternoon and evening during the summer, and lowest during nights and weekends in the winter. Property owners with solar systems on NEM 2.0 can maximize net metering credits by locating panels on the west side of the roof so that they capture the late afternoon sun.

Non-bypassable charges

Non-bypassable charges (NBCs) are per-kilowatt hour charges that are built into utility electric rates. They add up to approximately 2-3 cents per kWh and go towards funding energy efficiency, low-income customer assistance, and other related programs.

In the original net metering policy, system owners did not have to pay NBCs on the electricity that they bought from the utility on a month-to-month basis. Under NEM 2.0, new system owners have to pay NBCs, but only for the kWh of electricity delivered by the utility. None of the solar electricity generated and used on site will be subject to NBCs.

SDG&E, PG&E, and SCE net metering in California

NEM 2.0 enrollment for PG&E, SCE, and SDG&E is currently ongoing. All new projects who install solar are enrolled in NEM 2.0.

NEM 3.0

NEM 3.0 is a policy proposition posed to make a substantial impact on future solar installations in the state. The proposal as it stands today, would grandfather in existing net metering customers at the current rate, but any new installations after a specified date would have to be placed on a “declining block” tariff. This means that the per kWh value of credits given to solar customers for energy exported to the grid would decrease each year as more people install solar. This is the most recent proposal for "NEM 3.0," but delays based on significant blow back from many industries are impeding the progress of this significant change.

In order to protect against the value degradation of solar in California, a simple design of a solar system can be submitted to the utility, which is called an Interconnection Application. After a submitted interconnection application is approved, the solar system can move forward under NEM 2.0. This process can be used to save a place in line in NEM 2.0. This option will remain open until the final NEM 3.0 policy is released and approved by the California Public Utilities Commission. The final ruling was expected on December 31, 2020, but continues to be delayed.

Rate Increases: What You Need to Know

Why Utilities Request Rate Increases

Every utility has to increase rates periodically to cover increasing grid maintenance and service costs. The grid, like any network of equipment, goes through wear and tear, and therefore, rates have to increase to cover the increasing costs of paying employees, buying new equipment, etc. to keep it up to date.

• In SCE’s recently released notice, they state that the reason for the rate increase is to “set rates that customers pay to fund SCE’s day-to-day operations, including maintenance for its equipment and electricity grid upgrades.” The increases are there to cover the anticipated costs in the coming four years, from 2021 to 2024.
• Utilities like SCE have had increased scrutiny over the past few years as a result of the 2018 Paradise, CA fires that resulted in many deaths. These fires were found to be caused by neglect on Pacific Gas & Electric’s par t , due mostly to outdated and shoddy electrical equipment. So with this increased scrutiny on all utilities in California has come increased regulation, which means that the utilities are having to put more money into maintenance.

Why You Should Maintain Skepticism of Increases

• The three big utilities, PG&E, SCE and SDG&E are "investor-owned utilities" (IOUs) and as such, they are publicly traded companies. But this means they are incorporated to provide a substantial return on investment (ROI) to their shareholders, not their customer base. So while they do have to have money to keep these elements maintained, they also have to be profitable to appease their shareholders. So while we can give them the benefit of the doubt that some of the increases are absolutely necessary to keep the grid running properly, it is also necessary to maintain healthy skepticism of the amount of the increases.

The Effect on Baseline Rates

Baseline rates are affected more significantly than any other rates. For those that don’t know, a "baseline" of electricity consumption is an amount of electricity, measured in kilowatt hours (kWh), that satisfies a substantial amount of electrical use of the average residential customer in a given area. The baseline statute was established by The 1976 Warren-Miller Lifeline Act (CAL PUC Code § 739) as a response to significant energy cost spikes in the 70’s. Baseline rates are set at a lower rate and are meant to cover 50-70% of average consumption - but are the most susceptible to large increases when rate changes are requested.

The History of SCE Baseline Rates

• Baseline rates have risen much more significantly since 2009 than those of the general residential rates. Even in SCE, where rates in general have not risen like that of SDG&E and PG&E, baseline rates have risen 48% since 2009. See below:

Baseline rate analysis, courtesy of Stellar Solar

SCE Application for Rate Increase 2021

• SCE has again filed an application for a rate increase in 2021 and increases over the next consecutive three years. These rate cases have been shown to increase a District’s bill by over 24% in a single year. The rate case implemented in April 2022 was the culprit!

How You Can Avoid these Increases by Going Solar

• If you’re a business or District in SCE territory, you may be worried about these impending rate increases. If your usage is higher than average, you will be faced with much higher bills, that, especially in the summer. At the end of the day, you can add all the efficiencies you want (VFDs, etc), but you will still be susceptible to high rates. In reality, there is only one answer: you should go solar.
• By installing solar panels and producing your own power, you can create enough power to offset most or all of the power that you pull from the grid. Through net metering, end users can sell the extra solar power their panels create during the day back to the power company for “credits” that can be used at night when the solar is not producing.
• By eliminating electric charges, businesses and Districts who install solar can shield themselves from the future increases by SCE, by creating their own power instead of having to rely on power from the utility. By doing this, they will no longer have to worry about rate increases, and as rates increase, the return on investment of the solar actually increases, as when rates increase, savings from solar increase.

Save Even More by installing Battery Energy Storage

• With the new “Time of Use” rate structures that have been implemented in SCE territory, electricity costs more or less based on the time of day it is used. It is most expensive in the “On-Peak” times, which are typically in the afternoon / early evening, as during these times, more people are at home using power, and therefore the power company charges more, as the higher demand puts strain on the grid. For many Districts, the increased rates at these times mean they will be spending much more than before Time of Use was implemented, as they are typically increasing pumping or facility usage to support the increase in water usage and wastewater generation from people getting home from work.
• If you install solar and add battery energy storage, you can offset these Time of Use charges by charging your battery with the extra solar power you create during the day and using it during on-peak times. Instead of pulling power back from the grid when the sun starts to go down and the solar produces less, you can set up your solar + battery system such that you can pull power from the battery during this on-peak times. That way, you don’t have to use the expensive power from the utility, and can save a ton by using the extra power you created during the day.