What to Know About The Evolving Economics of Clean Energy Under California’s NEM 3.0

Key Takeaways

• California’s current net energy metering (NEM) policy, NEM 2.0, offers favorable rates and long-term predictability for new solar systems.
• California is preparing to enact a new market structure, NEM 3.0, which introduces a new set of economics for solar that may necessitate the integration of battery storage and/or intelligent electric vehicle (EV) charging technologies.
• To secure NEM 2.0’s rates and long-term predictability for the next 20 years, applications need to be submitted now to have a chance to be completed by the April 14, 2023 deadline.
• Whether you want to invest in clean energy under NEM 2.0 or take advantage of market-based pricing under 3.0, Catalyze is your energy development partner that will jointly develop, finance, and operate these assets for optimal returns.

What is NEM / net energy metering?

Net energy metering, or NEM, is a billing mechanism that allows utility customers who generate their own solar power to receive a financial credit on their electric bills for excess energy fed back to the grid. For many customers, solar power exported to the grid offsets much of the cost of using utility power, and these savings help in paying off the cost of the solar system installation itself.

On December 15, 2022, the California Public Utilities Commission (CPUC) approved a new set of net energy metering policies, nicknamed NEM 3.0 (also referred to as net billing), which will replace the current rules for new metering, NEM 2.0. The policy will be implemented starting April 15, 2023.

How is NEM 3.0 different from NEM 2.0?

The main difference with NEM 3.0 is that solar export rates will change, becoming much more complicated and requiring increasingly complex strategies and calculations to ensure profitability. On average, the export rate for solar energy could be reduced to a quarter of its current price per kWh.

Under the current NEM 2.0, utility customers who generate their own solar power and sell what they can’t use back to the grid receive payment at the same, full retail rate that they pay their utility for power. Throughout the year, there are only six different rate periods that need to be considered, allowing for simple, long-term calculations concerning the expected payback time for solar projects.

Under NEM 3.0, the rate that California utilities will pay to people and companies for their excess solar power will be much more variable. There will be 576 different price rate periods throughout the year, determined by different hours, months, and days of the week. These rates will be re-adjusted every other year. As a result, calculations concerning the payback time for solar projects will be much more difficult to plan around, and on average, rates will be significantly lower.

How will my rates be calculated under the new NEM 3.0 structure?

Based on the new rules, the price paid for the export of solar energy will vary based on time of delivery. Rates will be determined by the average hourly Avoided Cost Calculator (ACC), a formula devised by the CPUC and their consulting firm, E3. The CPUC defines avoided cost as the “marginal costs a utility would avoid in any given hour” if a distributed energy resource provided power instead of the utility. This formula takes into account various factors such as wholesale energy price, transmission and distribution grid costs, and reduced carbon emissions. The ACC’s hourly rates are updated every two years.

As the chart below shows, the price paid for a kWh of solar electricity will now vary by hour based on the ACC formula. Electricity exported during the middle of the day, when sunshine and solar power are abundant, will be worth less than electricity exported in the evening, when demand is higher and supply lower. The chart also shows that export price will now be lower than what customers pay to import electricity from the utility, as opposed to the current rate in NEM 2.0, where you buy and sell energy at the same price per kWh.

For commercial building owners who install solar under NEM 3.0, there will be a nine-year period during which export rates for excess solar energy will remain under the same ACC structure. Following the first nine years, customers will face a new set of rates determined by the ACC every two years. This adds a new layer of long term uncertainty when planning for the payback of solar projects. Note that the CPUC has not made a final determination on a new tariff for multi-family properties, so those will continue to receive the existing VNEM tariff for nine years in they apply after the April 15 cut-off date.

How does NEM 3.0 affect my plans to install solar, storage, and/or EV solutions?

If you have plans on installing solar for your commercial building, there is a strong incentive to secure it prior to NEM 3.0 rates coming into effect on April 15, 2023. Current solar systems, as well as those who submit their interconnection paperwork by this date, will be able to lock in the current NEM 2.0 rates for 20 years. This would allow for long term planning around simpler, higher export rates, increasing the profitability of solar installations and reducing payback periods. A finalized interconnection application will require a complete application free of any major deficiencies, a signed authorization to act on a customer’s behalf, a Single Line Diagram (SLD) and, if applicable, an oversizing attestation. The systems will need to be built within three years to keep NEM 2.0 eligibility.

For those who plan on installing a solar energy generation system under NEM 3.0, there will now be a strong incentive to install battery storage as well. By storing excess solar energy, utility customers will be able to export this energy at times when it is most financially advantageous, such as peak demand hours during summer nights. Commercial customers may also take advantage of battery storage to reduce demand charges and participate in other revenue generating programs. Also, building owners who already secured NEM 2.0 rates will be able to install battery storage and take advantage of these benefits without sacrificing their locked-in rates.

There is also an added incentive to utilize more of the energy generated on-site (behind the meter) instead of selling it back to the grid. Because excess power produced on-site will be worth less when sold back to the grid under NEM 3.0, it is advantageous to use more of it on-site, purchasing less of the more expensive energy from the grid. For example, cold storage facilities who typically do not have excess power to sell back to the grid due to the large energy load of their operations will not feel the impacts of NEM 3.0 as much, as their behind the meter energy use benefits remain. Similarly, if buildings were to install EV charging stations on-site, and power them using their self generated solar power, this will be advantageous under NEM 3.0, as this is a more efficient use of this electricity than to sell it back to the grid at the new, lower rates.

While battery storage and EV charging technologies will allow commercial buildings to continue to make profitable use of the solar power they generate, the complexity of these strategies will be much more difficult to navigate under NEM 3.0. As electric power moves towards dynamic economics and away from fixed payments, the required calculations for clean energy upgrades will require expertise, experience, and the resources to secure the best fitting solution for each building’s characteristics. It will be more important than ever to have a trusted partner for your clean energy solution implementation.

In some ways, NEM 3.0 plays to Catalyze’s strengths. We do the following on behalf of our real estate partners:

• Design, procure, finance and build renewable energy and EV charging systems tailored for this new regulatory world;
• Operate and optimize them for maximum property, tenant and owner benefit;
• Pay rents or reduce operating costs for our partners and increase the value of their properties and products by powering them with renewable energy.

Our experts are ready to help you navigate this process quickly and profitably.
Reach out to us today at https://catalyze.com/contact/