California slashes payments to new rooftop-solar customers

California, by far the country’s leader in rooftop solar, will soon become a far less lucrative market for rooftop-solar companies and the homeowners and businesses they serve. 

On Thursday, the California Public Utilities Commission unanimously approved a plan that will radically reduce the amount of money that customers can save and earn by installing new solar systems in the territories of the state’s three big investor-owned utilities, Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric, which serve about three-quarters of California’s population.

The changes, which include reducing the compensation for solar power that customers export to the grid by an average of 75 percent from today’s levels, will start to go into effect for most customer classes installing new solar systems as soon as April 2023. Current owners of rooftop solar won’t be subject to the changes; they’ll remain under the state’s net-metering structure.

Solar industry groups fear this abrupt reduction to what customers can earn from installing solar will lead to an equally abrupt drop in the industry’s growth, as happened in other areas where solar compensation was steeply cut, including Hawaii, Nevada and other utility territories in California.

The negative effects will be wide-ranging, Bernadette Del Chiaro, executive director of the California Solar and Storage Association trade group, warned in a Wednesday statement after the CPUC’s final decision was publicly released.

“For the solar industry, it will result in business closures and the loss of green jobs,” she said. ​“For middle-class and working-class neighborhoods where solar is growing fastest, it puts clean energy further out of reach. For our grid reliability needs, it fails to promise robust growth in battery storage. And for California’s race to clean energy, it puts us behind our goals and out of step with the national pro-solar agenda.”

Thursday’s decision, which is largely the same as the draft released in November, won’t do as much harm to rooftop-solar economics as last year’s proposal from the CPUC would have. That proposal would have added a monthly charge for solar-equipped customers — about $40 to $50 for typical systems — on top of reducing compensation for the solar power they exported to the grid. It was met with outrage and protests by solar, environmental and community groups and drew criticism from celebrity climate activists and politicians including Governor Gavin Newsom (D), U.S. Senator Dianne Feinstein (D) and former California Governor Arnold Schwarzenegger (R).

The final plan dropped this monthly charge, which opponents had dubbed a ​“solar tax.” But it retained many other changes that will make rooftop solar less valuable and more challenging to finance.

Why rooftop solar won’t be worth as much 

Currently, homeowners who install rooftop solar earn back the cost of their systems in two ways: by lowering the amount of power they buy from the grid and by selling excess power to the grid. Each of those streams is now responsible for about half of the ​“payback,” according to CALSSA.

But under the CPUC’s new plan, the payback opportunities will change dramatically, vary a lot depending on different circumstances and be difficult to predict.

Most notably, the new plan drops the net-metering structure, under which solar owners are paid retail rates for the electricity they export from the grid, and replaces it with what’s called a ​“net-billing” structure. The new structure will instead compensate for exported energy based on an ​“avoided-cost” rate that’s meant to better represent the energy’s value to the grid based on when and where it’s generated, essentially how much it helps the grid system avoid costs.

That’s a much more complicated formula, but in a nutshell, it makes exported solar far less valuable than it is today during almost all hours of the year. The exception will be a handful of hours on summer evenings when electricity is most expensive and the state’s grid is under the most stress; during those times, compensation for exported solar will be higher than it is today.

Rooftop-solar advocates have accepted the premise that export value in general should be reduced from full retail rates. But they pressed the CPUC to adopt various ​“glide-path” mechanisms that would have gradually reduced these export values over several years to avoid a sudden and drastic cut that would tank the market for new solar installations.

The CPUC rejected those plans. Instead, it’s offering new residential rooftop-solar owners a slightly higher compensation rate for exports over the first five years of a solar system’s operation — an ​“adder” on top of the new base rate.

But as this chart from CALSSA indicates, compensation rates for exported solar will still drop dramatically under the new system.

With its new plan, the CPUC aims to allow all customers to earn enough money from their rooftop-solar systems to pay back the cost of installing them within nine years. That’s a longer payback period than the average of five to seven years under the current net-metering scheme.

But solar groups and some consumer advocates say that the CPUC’s calculations are flawed, and that the complexities and uncertainties of the new net-billing structure could push payback periods beyond that nine-year target. They also warn that companies that finance solar installations will be leery of lending to projects under the new regime, potentially restricting the market even further.

In a memo last week, pro-rooftop-solar group Save California Solar highlighted how dramatic the reduction in export values would be for customers of California’s three big utilities compared to reductions adopted in recent years in other states. 

California will be imposing the biggest reductions ever seen in the U.S. In Nevada and Hawaii, much less drastic reductions led to residential solar installations falling by more than half, Save California Solar noted. Nevada ended up rolling back its 2015 cuts in an attempt to reinvigorate the market, while Hawaii took other steps to encourage more rooftop-solar adoption in the wake of its 2015 reductions. Installations have declined by more than 50% in the territories of public utilities in California that reduced net-metering compensation between 2015 and 2017.

“The failure to adopt a more gradual transition to net billing risks putting solar out of reach for millions of residents across the state,” Sean Gallagher, vice president of state and regulatory affairs for the Solar Energy Industries Association trade group, said in a Wednesday statement.

Rooftop solar accounts for nearly 13 gigawatts of generation capacity in California, nearly one-quarter of the peak electricity demand on the grid served by state grid operator CAISO. Undercutting the growth of such a big portion of the state’s potential clean energy portfolio could stymie progress toward its long-range climate goals, just as ​“climate-related disasters continue to intensify and the electric grid remains vulnerable to aging infrastructure and volatile global energy markets,” Gallagher said.

At the Thursday meeting where the CPUC voted to approve the new policy, many members of the public echoed those concerns in more stark terms. ​“How can you sit there and plan to destroy solar growth and punish California’s churches, schools and businesses?” San Diego resident and solar owner Barbara Morton asked commissioners. ​“Your proposal will stop them from buying solar systems by putting solar out of their fiscal reach.”

“The more solar there is, the more everyone benefits,” Morton said. ​“The excess goes to the grid at lower cost than having to build costly power lines. The federal government is promoting solar, and here the CPUC, representing California, wants to kill it.”

Big questions about batteries

One of the biggest uncertainties surrounding the CPUC’s changes is whether they’ll successfully encourage far more customers to add batteries that can store solar power and then export it when the grid needs it most. Finding ways to store excess solar generated at midday and save it for hot summer evenings, when California faces increasing risk of grid shortfalls, has become a central part of the state’s clean energy policy for utility-scale solar as well as distributed solar.

That’s a much different set of challenges than when California’s net-metering policy was first enacted in 1995, CPUC President Alice Reynolds said at Thursday’s meeting. ​“During the daytime, the electric grid is now powered largely by renewable systems both large and small,” she said. ​“There are even moments when we need to curtail” — or order large-scale solar systems to stop producing power — ​“because we have too much on the grid at once.”

The CPUC’s new structure is meant to make batteries more valuable than solar alone and enable solar-plus-battery installations to earn back their costs in between eight and nine years, slightly less time than solar-only installations. Exports of solar power to the grid during high-demand evening hours in summer months will be compensated at levels higher than current retail rates, providing battery owners an opportunity to speed up payback.

The CPUC’s decision will also require all new rooftop-solar owners to enroll in ​“electrification rates” that charge far more for electricity during peak hours and far less during hours when grid demand is lower. (The rates are intended to encourage people to electrify their homes and stop using fossil gas, hence the name.) Batteries could allow solar-equipped homes to take advantage of these highly differentiated hourly rates, so they can buy from the grid when rates are low and use their own stored rooftop power when rates are high.

But solar advocates warn that reducing the underlying value of rooftop solar as steeply as the CPUC’s plan does will undermine the primary economic driver for customers to install batteries. Today, the vast majority of batteries installed in homes and businesses are done in conjunction with rooftop solar. Weakening the economic case for the latter will harm the adoption of the former, they say.

Nationwide solar installers Sunrun, Sunnova and SunPower have already been offering customers batteries alongside rooftop-solar systems, and solar inverter providers Enphase and SolarEdge and battery vendors such as Tesla, LG Energy Solution, Panasonic, sonnen and Generac are active in the solar-plus-battery market as well. California remains by far the fastest-growing market for solar-battery systems in the country. Many customers want batteries to provide backup power during extreme weather events and the wildfire-prevention power outages that California utilities have imposed over the past several years. Those batteries have already been helping some homeowners save money under time-of-use electricity rates, and in some cases, they can be tapped to help support the grid.

But only 15 percent of new rooftop-solar installations today are accompanied by batteries in California, CALSSA noted in its Wednesday statement. ​“With high costs, supply-chain constraints, inflation, and permitting and interconnection delays and challenges, it will take years before the storage market can match the solar market.”

How to help disadvantaged customers save money on energy? 

CPUC commissioner Clifford Rechtschaffen highlighted the ​“competing priorities” the commission had sought to balance in crafting its rooftop-solar policy. Under state law, ​“we want to make sure that distributed generation grows in a sustainable manner,” he said. But the CPUC must also ​“make sure that the benefits to all customers and the grid are approximately equal to the cost,” that continued growth ​“doesn’t unduly burden ratepayers, and that we expand access of low-income customers to rooftop solar.”

The CPUC’s decision largely sided with California utilities and allied environmental groups and consumer advocates that argued today’s net-metering regime allows solar-equipped customers to avoid paying their fair share to maintain the grid and support other fixed utility costs, which are bundled into the per-kilowatt-hour rates that all customers pay. Utilities claim this ​“cost shift” has led to billions of dollars of costs being forced onto customers who don’t have rooftop solar.

Proponents of this analysis believe that the CPUC’s decision doesn’t go far enough in correcting this imbalance. The CPUC’s Public Advocates Office, which is tasked with protecting the interests of utility customers, has called for the CPUC to reduce export compensation not only for new solar systems but also retroactively for existing net-metered customers — a proposal that drew harsh criticism from solar groups and politicians and wasn’t included in the final decision.

Looking toward 2030, the costs for people who don’t own solar under the CPUC’s new system ​“are still expected to increase by $2.8 billion a year to $7.6 billion,” Matt Baker, the office’s director, said during a November hearing on net-metering reform. ​“This is largely the result of subsidies to current customers.”

But these cost-shift arguments have been roundly rejected by rooftop-solar groups, their allies in environmental-justice and consumer-advocate organizations, and many energy economists. For one, utilities consider the energy savings that solar-equipped customers achieve as a burden on other customers, a claim that’s not applied to energy efficiency or conservation, they point out.

They also highlight that the CPUC’s calculations fail to incorporate many of the values provided by rooftop solar, such as reducing air pollution, lowering demand on grid circuits, and providing resiliency during outages and grid emergencies.

On the other hand, those who have pushed to lower compensation for rooftop-solar power contend that distributed solar costs more than utility-scale solar, so it would be more cost-effective to invest in utility-scale resources.

“The question is not whether we’re going to decarbonize the grid,” Matt Freedman, staff attorney for The Utility Reform Network, an advocate for California residential utility customers, said during November’s CPUC workshop. ​“It’s how we’re going to get there, how much it’s going to cost and who’s going to pick up the tab.” His organization called for reforming the system to give less favorable treatment to rooftop solar.

But rooftop-solar advocates respond by pointing out that solar farms and other large-scale renewables face significant challenges to growth. It’s difficult to find enough land for them and to build enough high-voltage transmission infrastructure to carry their power to population centers. They argue that huge amounts of rooftop solar will be needed on top of huge amounts of utility-scale solar.

Rooftop-solar advocates also maintain that utility-scale solar does not offer Californians a way to take control of their own energy costs amid rapidly rising electricity rates. That’s particularly troubling for low-income homeowners and renters in disadvantaged communities who’ve been largely locked out of the state’s rooftop-solar opportunities, and who may now face even greater challenges affording solar systems under the CPUC’s new paradigm.

Thursday’s final decision did differ from November’s proposal in a few ways, notably making changes sought by advocates for disadvantaged communities. For one, the final decision postponed proposed changes to structures for virtual net metering and net-energy-metering aggregation, calling for further study.

Virtual net metering allows multifamily properties to install solar and allocate its value to multiple tenants; it’s been one of the only ways for rental properties to make rooftop solar pencil out economically. Net-energy-metering aggregation allows customers with multiple meters on the same property to receive credits from a single solar installation; it’s mainly been used by agricultural properties. Advocates of both customer classes had cautioned that proposed changes to those structures could undermine their value, and the CPUC heeded their warnings.

The final decision also makes a concession to advocates who had argued that low-income and disadvantaged communities should be paid more for their exported solar power. The CPUC’s November proposal included an adder for customers enrolled in utilities’ rate-subsidy programs for low-income customers, which would increase their export compensation above the base rate and above the rate for other residential customers. Advocates argued that the adder should be available to a wider number of disadvantaged people. The CPUC agreed and extended the adder to residents of state-designated disadvantaged communities and tribal communities.

But ​“these two very minor changes still leave energy justice hamstrung,” Sachu Constantine, executive director of nonprofit Vote Solar, said in a Thursday interview. The CPUC was offered multiple proposals from advocacy groups on how to reduce barriers to solar adoption for lower-income Californians but declined to take them up, he noted.

While there are many efforts across the state to expand access to solar and batteries for disadvantaged communities, ​“this decision narrows the pathways to them,” he said. ​“There’s a lot of innovation out there. I’m just disappointed that this decision makes it harder to make it happen.”