California NEM 3.0 Proposal: CPUC set to impose highest solar tax in the country

It happened: the California Public Utilities Commission issued a proposal that will create the highest solar tax in the country and hugely reduce the bill credit solar customers get for selling electricity back to the grid. The proposal will be on the CPUC’s January 27, 2022 Voting Meeting agenda.

All solar advocates from the Solar Energy Industries Association (SEIA) on down say this decision will deter many Californians from installing rooftop solar and storage and slow clean energy deployment.

UPDATE: Here is an updated analysis on how drastically this proposal would devalue residential solar.

“We believe the solar-only fees [on average about $700 per year] are in violation of Public Utility Regulatory Policies Act of 1978 (“PURPA”); and if adopted, the proposal will likely cost tens of thousands of jobs, especially among the thousands of solar companies not yet engaged with battery technology,” says Walker Wright, VP of Public Policy at Sunrun. “We look forward to working with key stakeholders in the coming weeks to rework the proposal into one that is consistent with the needs and interest of Californians before a final decision is reached.”

The CPUC, on the other hand, says the Proposed Decision “adopts more accurate price signals that will promote greater adoption of customer-sited storage.” The proposal …

• Allows Net Billing customers to “oversize” their systems by up to 150 percent of the customer’s historical load to allow for future vehicle and appliance electrification.
• Requires Net Billing customers to take service on rates with high differentials between peak and off-peak prices on order to incent energy conservation or the use of stored solar energy during the net peak window of 6 p.m. to 9 p.m.
• Adopts a monthly residential Grid Participation Charge of $8 per kilowatt (kW) of installed solar (some low-income and tribal households, will get an exemption from the Grid Participation Charge.)
• Creates a four-year glide path for the industry through a monthly Market Transition Credit of up to $5.25 per kW for residential solar plus storage and solar-only systems. Customers will lock this amount in for 10 years. During the four-year glide path, the credit will step down 25 percent a year for prospective customers, who will also lock in their amount for 10 years.
• Establishes a Storage Evolution Fund to provide storage rebates to existing NEM 2.0 customers who transition to the Net Billing Tariff within the next four years, so that they can add storage systems to their homes to support the grid and become more resilient to wildfires and natural disasters.
• Transitions residential NEM 1.0 and 2.0 customers (except for low-income customers) to the Net Billing Tariff after 15 years of being interconnected to the electric grid

Within the proposal is the establishment of an Equity Fund with up to $600 million “to help scale up low-income access to distributed clean energy. There would be a stakeholder process to determine the allocation of funds, which could go toward upfront incentives for distributed storage, community solar in low-income and disadvantaged communities, or other low-income clean energy programs with strong consumer protections.”

Viewed today, at the end of 2021, for the solar industry, it’s hard to see anything other than a huge blow to the value of solar, solar installation business models and the most successful residential solar market in the country. The reduction to the grandfathering time period for previous customers is another tough pill to swallow.

“The PUC has proposed significantly lengthening the payback period for rooftop solar in California, especially for residential customers,” says Tom Williard, CEO of Sage Energy Consulting. “They have also proposed reducing NEM grandfathering to 15 years from the date of the final decision for customers who qualify for grandfathered NEM. Sage is actively helping clients understand the proposed changes and ensure that systems are grandfathered under more favorable rules.”

See Sage Energy’s Five Critical Questions to Ask from last week.

“Only the wealthiest Californians will be able to afford rooftop solar, shutting out schools, small businesses, and the average family from our clean energy future,” said Abigail Ross Hopper, president and CEO of SEIA. “The only winners today are the utilities, which will make more profits at the expense of their ratepayers. We urge Governor Newsom to act quickly to change this decision — at risk are 65,000 solar jobs, the security of our electricity grid, and the health of California residents and our planet.”

Before today’s decision, about 40% of all rooftop solar installations in California were going to low- or middle-income homes in California, but SEIA calculates the new costs and fixed fees will drain most of that value proposition.

“The last thing we need is to go backward on our climate goals,” Hopper said. “California is now on the wrong path, and without intervention, California won’t be able to benefit from federal actions to extend the solar Investment Tax Credit and expand solar adoption.”

Most every major California newspaper agrees with that sentiment as well:

Key issue: The disincentive to export

Edward Fenster, Sunrun’s co-Founder and co-Executive Chairman, wrote a lengthy response to the draft proposal, in which he focused on how, in his reading, the draft proposal does not achieve one of the CPUC’s top objectives: encouraging the export of energy from home solar + storage systems to the grid — a potentially path forward for California’s grid especially.

Evening exports are paramount because on a “good day” that’s when fossil fuel use and power cost is highest and on a “bad day” there isn’t enough power from any source to meet demand. Evening power is expensive in part because California has nine gigawatts of capacity — about the size of 40 typical natural-gas peaking power plants — that operate less than 5% of the time. Home solar and storage systems can dispatch power into this challenge and retire these polluting plants. With the coming launch of bidirectional electric vehicle chargers, the large size of EV batteries will turbocharge these advancements.

However, in order to achieve this future, two simple things must be true: (1) the export rate for evening power must be greater than the overnight retail (i.e., import) rate, and (2) the benefits of exporting must more than offset the fixed fees assessed for the right to export. If the first condition is not met, solar+storage customers will in the evenings consume from their batteries only enough power to offset usage, consuming the rest of the battery overnight and into the following morning. If the second condition is not met, solar+storage customers will not elect to pay the fixed fees — in this case about $700/year — that entitle them to export power in the first place.

While the proposed decision says it is designed to encourage the “export [of] electricity onto the grid when carbon-intensive electricity is at the margin,” it will unfortunately fail to do this because it fails to meet both conditions above. No rational customer installing a solar and storage system would take service under the proposed rate structure because it significantly reduces compensation for exported electricity and imposes high monthly fees. A rational customer will instead elect to avoid the draconian fees in this rate tariff by choosing a 1 non-exporting rate tariff and self-consuming their solar-generated power from their batteries overnight and into the morning, instead of sharing it with the grid in the evening when it’s most needed. Other customers may not interconnect their solar and storage systems at all, operating their homes either from solar+storage or from the grid, but never both simultaneously. More may go off-grid entirely.

To Fenster, that all means more blackouts, slower peaker plant retirements, and so on.

Rather than just have consumers share excess battery capacity with the grid, utilities want to bilk Califorians for
the cost of duplicative batteries plus a guaranteed after-tax return of more than 10%. Hawaii made this same
policy mistake in 2016, when it effectively banned power export to the grid. After five years of encouraging
Hawaii residents to build self-consuming solar and storage systems, Hawaii reversed course and created
structures to encourage evening exported power and is now relying on distributed solar to replace power from a
coal-fueled plant.

Community solar delayed

The CPUC also declined to adopt a specific successor program for community solar. The Coalition for Community Solar Access (CCSA) had proposed  a “Net Value Billing Tariff” (NVBT)  that would compensate subscribers to community solar projects based on the value of a project’s generation at the time it’s provided to the grid. 

“Today’s proposed decision by CPUC is deeply disappointing as it once again delays action on developing a workable community solar program in California and undermines the state’s distributed energy market,” says Charlie Coggeshall, Senior Analyst and Regional Director for Coalition for Community Solar Access. “Distributed energy – including a viable third-party community solar program – will be crucial to meet the state’s ambitious clean energy goals and create a resilient, low-cost grid that works for all Californians.  We urge the Commission to reconsider and reassess the benefits a thriving community solar program can bring to California before it issues a final decision.”