The California Public Utility Commission’s (CPUC) Net Energy Metering (NEM) 3.0 decision passed on December 16, 2022 after two years of debate and fierce opposition from the solar industry across the state. The CPUC’s decision is expected to have a significant impact on residential solar projects. But what does it mean for commercial & industrial (C&I) solar developers and solar + storage projects moving forward?
What is Net Energy Metering 3.0?
Originally passed in 2014, Assembly Bill (AB) 327 requires the CPUC to develop a NEM policy that is cost-effective for all customers while ensuring that rooftop solar continues “to grow sustainably.” AB 327 did not, however, define what “to grow sustainably” meant. The CPUC was tasked with defining this term through the NEM 3.0 proceeding and ultimately focused their final decision around grid reliability, incentivizing storage, and putting controls on electricity costs for California residents.
A key part of the solar industry’s success in California has been widespread adoption of rooftop systems by homeowners, C&I businesses, enterprises, and public-sector organizations. Given that new technologies can be initially expensive, utility customers were incentivized to adopt rooftop solar through NEM rates. This would allow solar systems to export excess energy back to the utility at the full retail electricity rate. In effect, a solar customer’s monthly utility bill would be based only on the net energy consumed.
Utilities and some ratepayer advocates have argued that solar customers are not paying their fair share for access to the grid and that NEM leads to cross subsidization. Essentially, this suggests that those customers who cannot afford rooftop solar are paying for grid services on behalf of those who can afford solar. The changes to these tariffs and export rates mostly impact residential customers, as they tend to export much more of their solar capacity to the grid than C&I customers.
The Impact on C&I Solar + Storage
This final version of the NEM 3.0 decision has some substantial changes from previous proposals, most notably, the elimination of a proposal for non-bypassable charges and the removal of retroactivity to existing projects. The decision allows grandfathering of 1.0 and 2.0 tariffs for existing solar customers who add a battery for 20 years. Otherwise, the sunset date for interconnection submission for new solar plus storage projects to be grandfathered in under NEM 2.0 would be April 15, 2023. Under NEM 3.0, the system will have a much lower export rate, and C&I customers are not eligible for any avoided cost adder on top of the base avoided cost calculations.
NEM 3.0 decision is highly controversial and is expected to halve the residential solar market, according to analysis from Wood Mackenzie. However, the C&I market is less impacted as neither the solar nor storage asset is required to pay the Grid Participation Charge, and the decision adds no new funds for commercial Self-Generation Incentive Program (SGIP) applications. So while the decision doesn’t necessarily help the C&I solar industry, it doesn’t hurt it much either once you consider alternate uses of the asset beyond export.
While the value of the export credit is significantly reduced, the majority of production at C&I sites is not exported and is instead used for onsite consumption. Solar self-consumption is likely to increase if a smart energy storage system is added, which is one of the main objectives of the order in the first place. When Stem conducted preliminary analysis of the previous proposed decisions utilizing the same Avoided Cost Calculations, we found that solar savings on NEM 3.0 are lower vs NEM 2.0 for all solar system sizes. Additionally, as solar system sizes increase, the difference between solar savings on the two tariffs becomes larger. This aligns with what we expect because solar exports are valued less on NEM 3.0 tariffs and so larger solar systems with more energy for export would be more negatively impacted, incentivizing solar self-consumption. Stem is currently analyzing the ways this decision will affect different load profiles and system sizes to gain a better understanding of how developers may want to consider projects moving forward.
Although the C&I sector will be less impacted as a whole relative to the residential sector, there will be specific C&I solar projects that have lower returns under NEM 3.0. For relevant C&I projects, energy storage can mitigate the impact of NEM by storing solar generation that would have otherwise been exported and shifting it to more favorable time periods. This is part of the intent of the CPUC decision: to incent new storage development.
How can C&I solar developers prepare for NEM 3.0
C&I solar developers should consider pairing energy storage with all of their solar projects since energy storage is the best solution to future-proof solar investments. NEM 3.0 is the latest chapter in an ongoing trend of utility rates becoming less and less favorable for distributed solar. A few years ago, SCE, PG&E, and SDG&E shifted their peak time periods to evening hours when solar is less productive, which reduced solar value. Today, the proposed NEM decision will significantly reduce export compensation. Policies will continue to evolve while utilities typically implement significant rate changes every 3 to 5 years. Storage is the key to ensuring solar continues to deliver value, regardless of how NEM 3.0, or any other future rate structure, is implemented.
Stem is the most experienced C&I storage provider in California, and our Athena AI-driven energy software is the industry’s leading platform for optimizing across all of these various value streams including solar self-consumption. C&I storage systems can deliver value under NEM 3.0, while also providing many other value streams, such as demand charge management, demand response participation, EV charging fleet management, the new federal storage ITC and solar PTC, SGIP compliance, and GHG reduction.