The controversies at the heart of California’s solar net-metering fight

California’s net-metering regime has helped the state become the undisputed leader in rooftop solar in the U.S. over the past decade. Now state regulators are on the verge of deciding what the future of net-metered rooftop solar in the state will look like for the coming decade.

The debate over ​“net metering 3.0,” as California’s latest iteration of this key clean energy policy is known, has pitted two sides against each other in a bitter battle. For background on this fight, read our piece from earlier this year on NEM 3.0 (NEM = net energy metering).

In one camp: the state’s biggest utilities and a roster of allies both expected and unexpected. In the other camp: the rooftop solar industry, plus its own array of various supporters.

At issue is how much solar-equipped homes should be paid for the electricity they export to the grid, and how much they should be required to pay to support the broader utility system they rely on when they’re not generating their own power.

A year-long policy discussion has been accompanied by a political and public-relations battle. Democrats allied with utilities and utility workers unions got a vote this summer in the state legislature on a bill that would have dramatically reduced the value of net metering, but it failed in the face of opposition from solar, environmental and community groups. Each side accuses the other of harming the state’s low-income and disadvantaged residents to pursue their own financial interests.

Now the endgame is approaching. The California Public Utilities Commission is expected to publish a proposed decision next week. That decision may be followed by publication of an alternative proposal, a step the CPUC sometimes takes with particularly controversial decisions. Then the commission will vote to decide on a final policy as early as January.

“It’s time for this incentive to move into its next phase,” said Rob Rains, an analyst with Washington Analysis who’s researched how various net-metering proposals before the CPUC could affect rooftop solar companies such as Sunnova, SunPower, Sunrun and Tesla. ​“What does its next phase look like? How do we properly compensate for the value that rooftop solar will continue to provide, while also accommodating the shifting requirements of the electric grid in 2022 and beyond?”

California has long been a U.S. vanguard for rooftop solar and distributed energy, and it remains the most important market for solar companies. That makes the CPUC’s decision important not just for the state’s residents, but for the U.S. solar industry as a whole.

The opposing camps

In this battle, Camp A, as we’ll call it, is pushing for substantial changes to today’s net-metering rules.

At its heart are the state’s three major utilities: Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric. They argue that the current regime rewards those who can afford rooftop solar systems with increasingly low electricity bills, but pushes fixed costs and rate increases onto everyone else, including, crucially, those who can least afford it. They contend that this ​“cost shift” is unfair and unsustainable.

The utilities are supported to various extents by utility workers unions; consumer advocates at the CPUC’s Public Advocates Office and The Utility Reform Network; the Natural Resources Defense Council, an influential national environmental group; and a collection of community groups, many of them recipients of utility contributions.

The parties within Camp A have a number of proposals for net-metering reform that they’ve submitted to the CPUC, which differ in many ways, but they share some key goals. Their proposals would markedly lower rates paid to homeowners for solar sent back to the grid and charge upfront fees to people who install new solar systems, moves they say can counteract the cost shift that benefits wealthier solar adopters at the expense of other Californians. While some of the proposals would exempt existing net-metered solar systems from changes, allowing them to receive the current, more lucrative net-metering rates, the Public Advocates Office’s proposal would make them retroactive to existing customers.

Camp B is calling for much less dramatic changes to the net-metering scheme.

It includes solar industry groups; environmental groups including the Sierra Club; supporters of solar for low-income customers such as Grid Alternatives; and a coalition of hundreds of cities, environmental justice organizations and community groups.

This camp argues that making big cuts to the value of net-metered solar will crash the market for rooftop systems, potentially dooming California’s plans to decarbonize its grid over the next two decades. They also say that utilities have undercounted the positive impacts that rooftop solar brings to the state as a whole.

And they contend that utilities have vastly overstated the cost-shift impact of net-metered solar on lower-income residents. They say rooftop solar needs to be expanded to serve more low-income customers, not made even less affordable.

The groups in Camp B have submitted their own variety of proposals to the CPUC. They acknowledge that California’s net-metering policy must be updated and that the rates paid for rooftop solar power sent to the grid will have to go down to some extent, though they propose that rates would change only for new systems, not existing ones. Their proposals would bring rates for exported solar down gradually over the next five to seven years — a ​“glide path” that would avoid shocking the market.

This approach, they say, would balance the need to adjust net-metering values with the need to maintain a healthy and growing market not just for rooftop solar, but for the batteries, electric vehicles and all-electric appliances needed to reach California’s broader carbon-reduction goals. The Camp B contingent also flatly rejects calls for upfront fees on new rooftop solar systems.

The stakes for California and its climate goals

The CPUC is charged with balancing these competing views as it crafts a new net-metering regime that will both be fair to all customers and maintain sustainable growth of the rooftop solar industry in the state. Those mandates are set by AB 327, the 2013 law that originally established the state’s net-metering policies. But the picture has grown much more complicated since the CPUC’s last net-metering decision in 2016, known as NEM 2.0, which kept in place a policy that pays solar homeowners the full retail rate for power they export to the grid.

California now has extremely aggressive climate goals and must deploy massive amounts of clean energy to meet them. A 2018 law, SB 100, set the state on a path toward 60 percent renewable energy by 2030 and 100 percent carbon-free energy by 2045. Not only does California need massive and unprecedented growth in utility-scale solar, wind, batteries and other carbon-free resources; it also needs to continue recent trends of adding about a gigawatt of distributed solar per year.

Additionally, the state needs homes and commercial buildings that have rooftop solar to add many more batteries to store and shift their energy from when it’s produced in excess of grid demand to when it’s needed to cover evening demand peaks, like those that have caused grid instability and even led to rolling blackouts during a 2020 summer heat wave.

And as California seeks to shift to electricity to power vehicles and heat buildings, regulators must keep electricity rates in check while also giving customers a cost-effective way to install solar and batteries to cover their increasing electricity needs.

Cost shifts and payback periods: The nuts and bolts of net-metering compensation

Today, solar-equipped residential customers in California earn full retail rates for the power they send to the grid, meaning the price customers pay for consuming a kilowatt-hour of electricity is the same price they can earn by selling a kilowatt-hour back. While the amount of rooftop solar that ends up flowing back to the grid rather than being consumed on-site varies according to the size of the solar system and the underlying loads, on average about 50 to 60 percent is exported to the grid.

Forty-one other states also have net-metering structures of one kind or another. These allow owners of rooftop solar systems to not just reduce their energy bills but also earn money that can help them pay back the costs of their solar systems more quickly than they’d otherwise be able to do.

But as the number of net-metered customers in California has grown to more than 1.3 million over the past decade, the balance between promoting rooftop solar and covering broader utility costs has begun to shift, say opponents of the current net-metering regime.

The arguments over how to rebalance the system are complex and driven by different approaches to collecting and analyzing the underlying data. But they are focused primarily on two factors. These are payback periods, or how quickly owners of rooftop solar should be able to pay off their installation costs, and what’s called the cost shift, or how much of the total cost of maintaining California’s power grid and energy generation mix should be borne by the rest of a utility’s customers.

The charts that follow show how 10 different NEM 3.0 proposals would affect payback periods and cost shifts, as assessed by E3, a consultant hired by the CPUC to analyze the differences between the proposals. While the precise calculations reflected in the charts are under dispute by some groups, the fundamental trends are clear: Utilities and their net-metering allies, whose proposals are represented in the top half of the two charts, want lower cost shifts and are willing to accept longer payback periods. Rooftop solar industry groups and their supporters, represented in the lower half of the charts, want shorter payback periods to keep rooftop solar economically viable.

Utilities and their net-metering supporters have focused on the cost shift, which is an issue not just of fairness but of keeping the utility system properly funded. Between two-thirds and three-quarters of the costs of running California’s utilities are fixed costs that don’t directly relate to how much energy customers use. If enough customers reduce their bills by sending solar power back to the grid, those fixed costs will need to be recovered by raising rates on other customers.

“We’re a big believer in distributed generation,” Pedro J. Pizarro, president and CEO of Edison International, the parent company of Southern California Edison, told Canary Media in an October interview. ​“We agree that it deserves to have appropriate incentives.”

“But the incentives today, and frankly for the prior versions of net metering, have simply been excessive,” he said. ​“Today there is a $3-billion-a-year cost shift from solar customers to nonsolar customers.”

Solar industry groups and their allies say the $3 billion cost-shift estimate is completely out of line and unsupported by the evidence. They point to an analysis by consultancy Verdant and E3 of the existing NEM 2.0 system’s cost-shift impacts, known as the Lookback Study, which estimated annual cost shift at a much lower figure of $618 million.

In filings with the CPUC, the California Solar and Storage Association (CALSSA) claims that utilities have used flawed and outdated data to yield cost-shift values well in excess of reasonable estimates.

“We’ve made clear that some modifications to net metering is a good thing,” said Bernadette Del Chiaro, executive director of CALSSA. ​“Making storage more attractive to consumers is a good thing, [and] you can modify net metering to make it even more attractive to low-income customers.” But ​“we don’t buy into the cost-shift math.”

CALSSA also argues that utility analyses have failed to calculate the value of rooftop solar in deferring investments in grid equipment, reducing greenhouse gas emissions and air pollution, and promoting other important benefits that are less tangible than electricity prices.

For example, the gigawatt-scale growth of rooftop solar has certainly played a role in helping the state avoid building new natural-gas-fired power plants over the past decade, Del Chiaro said. The savings from that avoided buildout have ​“been in the billions of dollars.”

Tom Beach, principal consultant at Crossborder Energy who worked with two Camp B parties, the Solar Energy Industries Association industry group and nonprofit group Vote Solar, on their joint net-metering proposal, noted in his testimony for the CPUC that California’s utilities have acknowledged many benefits of net-metered solar to date. These include $72 billion in private investment in 9.4 gigawatts of distributed solar PV generation capacity in the three big utilities’ service territories as of early 2021 — clean energy that’s helping the state meet its carbon-reduction goals.

Beach also stated that previous generations of net-metered solar have provided an estimated $4.3 billion per year in societal benefits ​“that also should be considered when evaluating ​‘cost-shift’ claims.” Those benefits range from fewer asthma hospitalizations and deaths because of reduced power plant emissions to lower rates of damage from climate change.

Rooftop solar and rising electricity rates

There’s also a lot of debate over how much net-metered solar has increased electricity rates. The CPUC has identified net-metering payments as one driver behind rising rates.

But solar groups have pointed out that utility transmission charges, which pay for existing and new high-voltage grid infrastructure, have cost California utility customers approximately $2.3 billion per year since 2007, nearly four times the annual net-metering cost shift identified in the Lookback Study.

Rates will continue to be driven up by future investments in building transmission to connect gigawatts of utility-scale solar, wind and battery projects and hardening power grids against sparking wildfires, regardless of the impact of net metering.

Groups seeking to reduce net-metering compensation say that the cost shift will get worse over time as the proportion of solar-equipped customers grows, however. That could further shift the burden of meeting the state’s clean energy goals onto customers who can’t afford rooftop solar, they say.

Net-metering proponents are ​“really arguing for trickle-down benefits — that it’s OK to give them extra money because they’re giving us the extra benefits,” said Mohit Chhabra, a senior scientist with the Natural Resources Defense Council’s science and clean energy program — and a member of Camp A. He believes the state should go with clean energy options ​“that don’t include poorer people paying richer people.”

Rooftop solar backers counter that making net metering less economically attractive will only stifle the trend that’s emerged in the past few years of more lower-income customers adopting solar. In California, the bottom 40% of earners account for only about 13% of NEM customers, according to NRDC, but recent data shows that lower-income customers are increasingly representing a larger share of new rooftop solar customers, Del Chiaro said.

“There’s no foundation” for the argument that low-income customers are harmed by net metering, she said. “[We saw] five times more people go solar in low- and moderate-income brackets than the super-wealthy in 2019 alone.”

Payback periods and export rates 

A key measure of the viability of the rooftop solar industry is how quickly a homeowner’s investment in rooftop solar can be paid back. 

Under today’s NEM 2.0 regulations, typical paybacks fall in the five- to seven-year range, according to E3 analysis and industry data. California’s utilities have proposed a dramatic drop in how much customers are paid for their exported solar power, as well as new fixed charges and a ​“grid-access charge” to recover costs for maintaining the whole electrical system, which together could push those payback periods to 15 to 20 years, analysts say.

Utilities say these lengthy paybacks are justifiable due to the costs net-metered solar imposes on the remainder of their customers and claim they can be partly counterbalanced by falling costs for solar PV systems.

Edison International’s Pizarro noted that a rooftop solar system can generate power for more than 20 years. ​“Let’s get a payback,” he said. ​“Let’s not get it three times over.” 

Camp A members Natural Resources Defense Council, The Utility Reform Network and the CPUC’s Public Advocates Office have proposed similar export value reductions and grid charges that would reduce paybacks to between 10 and 20 years. NRDC’s plan to achieve a 10-year payback for net-metered solar achieves a ​“balance between keeping this lucrative enough and covering enough costs,” Chhabra said.

But solar groups challenge both the idea that paybacks of more than a decade can keep the state’s rooftop solar market healthy and the math that’s gone into their opponents’ estimates. 

“Our goal is to maintain the sweet spot of a seven-year payback,” said Brad Heavner, CALSSA policy director. He accuses utilities and their allies in this fight of ​“pretending that their proposals will not kill the market.“

First, these proposals have used ​“a fictitious price of solar,” he said, set by E3’s analysis at $2.30 cents per installed watt for residential systems. The true price of installing rooftop solar in California is closer to $3.80 per watt, he said, as demonstrated by data collected by the U.S. Department of Energy’s Lawrence Berkeley National Laboratory in its Tracking the Sun report.

Using an artificially low price for installed solar leads to underestimations of how long it will take to pay back installation costs, he said. Using more realistic solar costs pushes the payback period for the utilities’ proposed net-metering structure out to as much as 30 years, according to CALSSA’s analysis.

The payback calculations also don’t take financing costs into account, Beach of consultancy Crossborder Energy said. The vast majority of residential solar systems are installed using loans or under lease agreements with major providers such as Sunnova, Sunrun and Tesla.

Those financing costs can add as much as 40 percent to costs that need to be paid back, Beach stated in CPUC testimony. Solar installations with paybacks longer than 10 years are ​“unlikely to attract significant customer interest.”

A glide path to ease the harm to rooftop solar markets

While solar groups are proposing a glide path that would gradually reduce payments for rooftop power fed into the grid, the utilities and their net-metering allies want to abruptly cut them from today’s retail rates to a much lower rate known as ​“avoided cost,” equating to what that power would be worth if it were generated by a utility-scale power plant. (I’ll dig in on avoided-cost rates in a future article.)

The utilities have proposed a variety of ​“bad” tweaks to the current net-metering system, Heavner said. ​“But if you set those aside and talk about export compensation, the biggest question is, what will the glide path be?”

CALSSA has proposed ​“an eight-year stepdown, and the final [net-metering rate] will be pretty darn low,” he said, with prices at the end of that period approaching the avoided-cost rate.

“We feel like we’re stepping up to the plate, making a legitimate stab at a proposal that will encourage energy storage and reform the market,” Heavner said. ​“If you reduce benefits, you’re going to reduce the market. […] If you have nongradual [reductions], then you have big negative impacts.”

The Solar Energy Industries Association and Vote Solar have proposed a similar glide path that reduces compensation for net-metered solar by a percentage of the retail rate of electricity over time and eventually approaches a range of 7 to 10 cents per kilowatt-hour. That’s well below the full retail rates for net-metered solar today, which can range from 20 to 30 cents per kilowatt-hour, but still above the avoided-cost rates for distributed energy in the state.

In arguing for their glide-path plans, solar groups point to the damage done to solar markets in states that abruptly reduced net-metering compensation. Both Hawaii and Nevada saw solar installations drop precipitously after state regulators eliminated retail-rate net metering in 2015, for example.

Nevada saw its rooftop solar market rebound after it passed a law in 2017 that reinstated net metering with a stepdown mechanism similar to those being proposed by solar groups in California. But Hawaii’s market has remained in the doldrums, a fact the solar industry blames on the complex and less-lucrative tariffs the state created to replace net metering.

“Hawaii is a classic example of how they did not move gradually to a successor tariff,” said Adam Gerza, vice president of business development for solar software platform provider Energy Toolbase. ​“That industry more or less crashed overnight. Permit applications went off a cliff.”

Energy Toolbase has modeled the potential impacts of different net-metering changes for California’s market. Experiences in other states indicate that regulators should be careful not to ​“kill the market,” he said.

Merging solar economics with broader electrification 

Solar groups are also asking the CPUC to link new net-metered solar systems to the ​“electrification rates” being developed by the state’s big three utilities — rates that are intended to spur electrification of appliances and heating systems that are now powered by fossil fuels. In simple terms, these rates are beefed-up versions of the time-of-use rates that all new net-metered customers have been put onto since the state’s last revamp of the policy in 2016. They give power a higher value during ​“on-peak” late afternoon and evening hours when solar power is scarce and a lower value during ​“off-peak” mornings and midday hours when solar is plentiful.

Rooftop solar systems by themselves aren’t as valuable under these rates, but adding batteries allows customers to store off-peak solar power and use it to offset their consumption or send it back to the grid in afternoons and evenings when prices are higher. That’s good for customers seeking to buy batteries to keep the lights on amid the state’s increasingly common wildfire-prevention grid outages.

But it’s also good for a state grid that’s struggled to supply enough power during heat waves over the past two summers and is forecasting a multi-megawatt shortfall in grid supply over the coming summers.

“Solar needs to be the financial driver of batteries to get those economies of scale,” CALSSA’s Del Chiaro said.

Grid charges: A nonstarter for rooftop solar?

Solar groups are willing to see the value of net-metered exports decline over time and be tied to electrification rates. But they’re strongly opposed to the utilities’ plan for a ​“grid-benefits charge” on all new solar systems.

The idea behind such a charge is to pay for a portion of the utility costs that go uncovered when solar-equipped customers reduce their consumption of electricity from the grid, NRDC’s Chhabra said. Utility rates ​“bundle in all transmission and distribution costs of service” and cover a variety of other costs, from supporting lower-income customers with special rates to paying for the decommissioning of nuclear plants. ​“We need some additional component to get at that,” Chhabra said.

But solar groups say the grid-benefits charge treats solar-equipped customers as if the energy they save is a burden to society, in a way that isn’t applied to customers who make their homes more energy-efficient or otherwise reduce their demand.

What’s more, the grid-benefits charges that utilities have proposed could mean that the costs of new solar systems never get recouped, according to CALSSA’s Heavner. Even if the CPUC imposed lower grid-benefits charges than the utilities want, they could still ​“cause market collapse,” he said.

Gerza agrees. He says that California’s rooftop solar industry could survive an abrupt drop in the value of exported solar energy at the rates utilities have proposed, but adding a grid-benefits charge ​“would be a death knell.”

That’s why solar industry analysts are predicting that the CPUC won’t include a grid-benefits charge in its final net-metering policy. ​“It’s not a nonstarter, but it’s pretty close to it,” Rains said.

Sean Morgan, vice president and equity research associate at Evercore Group, suggested in a December policy brief that imposing such drastic costs could encourage solar installers and customers to opt out of net metering altogether.

Instead, they could install larger solar systems with batteries to avoid buying grid power except when it’s cheapest — a move that would be available only to wealthy homeowners, and one that would further disconnect solar customers from serving the state’s grid needs.

Common ground: Expanding solar to low-income communities

But not everything at stake in the net-metering debate is a point of contention. Utilities, consumer advocates and solar industry groups alike have said they support a system that will encourage customers to buy electric vehicles and replace fossil-fueled heaters and appliances with electric models. And all say they’re aiming for a rate structure that will encourage more solar-equipped customers to add batteries to their systems, to shift what’s becoming a surplus of midday solar to the evening hours when California’s grid is under the greatest stress.

Importantly, all parties also want to help low-income customers access the benefits of solar. All of the net-metering proposals before the CPUC contain programs to do just that. Those range from special rates and incentives for low-income homeowners to community solar options that allow renters to earn credits from solar built elsewhere — a nod to the challenge landlords have in justifying solar installations that benefit tenant electricity bills without earning money for property owners.

“There is an energy access issue in renewable energy, where many low-income communities and communities of color have been left out of the renewable energy economy,” said Steve Campbell, policy and business development project manager for Grid Alternatives. The nonprofit group joined the Sierra Club and Vote Solar in submitting a set of proposals that would allow low-income and disadvantaged communities to earn retail rates from their exported net-metered solar, as well as expand access to shared community solar options.

Broadly speaking, a ​“combination of options that mitigate upfront costs while providing consistent, meaningful bill savings is what’s going to help low-income communities adopt solar,” he said.

Expanding the scope of distributed energy beyond single-family homes to community solar could also help support lower-income residents and renters seeking to make the switch to electric vehicles and landlords trying to financially justify the switch from natural gas to electric-powered heating, Del Chiaro noted. ​“We’re not opposed to community solar,” she said.

Distributed solar vs. utility-scale solar 

Though they’re supportive of new programs to make solar more accessible, solar industry groups are wary of allowing them to undermine a successful mainstream net-metering regime, Del Chiaro said. California’s previous attempts to create community solar programs have been unsuccessful, with complicated rules and convoluted incentive structures that have discouraged customers and solar developers, she said.

Net metering, by contrast, has been a predictable structure that has helped residential and commercial customers alike supply additional solar electricity. This will be particularly important going forward as households and businesses look to switch to electric vehicles and appliances without drastically increasing their electric bills, she said. ​“Many commercial customers are financing and [paying for] our electrification enhancements in their buildings via the savings that come from solar.”

Not all clean energy boosters are convinced that bolstering the economics of rooftop solar-battery systems is the best way to meet the state’s needs, however. NRDC’s Chhabra highlighted the fact that utility-scale solar is significantly cheaper than rooftop solar — trending toward 3 cents per kilowatt-hour compared to up to 20 to 30 cents per kWh currently being paid to net-metered solar customers.

Rooftop solar groups counter that it’s unclear whether California can add enough utility-scale solar to meet the state’s demand, plus the batteries required to make solar a reliable resource when the grid needs it most, quickly enough to meet the aggressive climate targets set forth in SB 100.

In fact, California’s current energy roadmap forecasts the need for at least 1 new gigawatt of rooftop and distributed solar per year through the rest of the decade to meet its 2030 goals, Beach states in a SEIA/​Vote Solar filing with the CPUC. The chart below shows the growing role that this ​“customer solar” plays in meeting clean-energy targets over the coming decade.

Because the economics of rooftop solar increasingly favor batteries being added to rooftop systems, this anticipated growth in rooftop solar is expected to help add 4.6 GW of distributed battery capacity by 2030, which will aid in balancing the grid, Beach says in the filing.

“California cannot rely solely on utility-scale electric resources to meet its 2045 clean energy goal,” he writes. ​“A significant portion of our clean energy needs must be sited in the built environment.”

CPUC is wading into politics, whether it wants to or not

Net-metering policy intersects with a much broader set of clean energy and decarbonization policies California is struggling to set for the coming decade. But few if any of those policy decisions have come with as much political strife as this one.

The fighting over net metering has risen to a fever pitch. This week, pro-rooftop-solar group Save California Solar rallied at the state capitol in Sacramento and submitted 120,000 public comments to the CPUC protesting the utility plans for net metering. Meanwhile, Affordable Clean Energy for All, the alliance of community groups that have aligned with utilities and their net-metering allies, has continued to press its case in newspaper opinion pieces.

Whether the CPUC’s upcoming decision will defuse these tensions or lead to further challenges is unclear. Some states, such as North Carolina, have seen utilities reach settlements with solar and environmental groups on how to amend net-metering policies. Elsewhere, net-metering changes have led to legal battles, ballot initiatives and major disruptions to solar markets.

“The CPUC is moving methodically, and they have to be delicate in how they settle in on a new policy,” Rains said. ​“You can try to be nuanced and non-political, but it’s going to be impossible to ignore the politics of this.”