California’s NEM 2.0 vs NEM 3.0: A Comprehensive Comparison

At a Glance

In the evolving landscape of California's Net Energy Metering (NEM) policies, the transition from NEM 2.0 to NEM 3.0 introduces profound implications for solar energy users. NEM 2.0, characterized by its Time-of-Use (TOU) rates and the 20-year grandfathering provision for existing solar customers, set a precedent in how solar generation was credited. NEM 3.0, however, which came into effect on April 15, 2023, introduces more nuanced changes, including reduced compensation rates for solar energy fed back into the grid, aiming to address grid management challenges and the cost shift concerns raised by utilities. In this context, energy storage emerges as a critical solution under NEM 3.0.

California, with its sun-soaked landscapes and progressive energy policies, has long been a beacon for renewable energy initiatives in the United States. Central to this green energy revolution is the state's Net Energy Metering (NEM) program, a dynamic policy designed to incentivize businesses and homeowners to adopt solar energy. As the energy landscape evolves, so too do the intricacies of these policies. In this article, we embark on a deep dive into the nuances of California's NEM 2.0 and NEM 3.0 programs. From understanding the foundational principles of NEM to unraveling the key features and changes introduced in each iteration, we aim to shed light on the broader implications for solar adopters, the energy market, and the state's unwavering commitment to a sustainable and equitable energy future. Drawing from a wealth of expert insights, this article is crafted to serve both newcomers to the solar scene and seasoned energy enthusiasts eager to grasp the latest shifts in California's solar landscape.

What is Net Energy Metering (NEM)?

Graphic explaining how net energy metering works from gathering sunlight to converting the energy into AC for practical usage and storage with BESS

Net Energy Metering (NEM) is a billing arrangement that allows homeowners and businesses with solar photovoltaic (PV) systems (or other renewable energy systems) to receive credit for any excess electricity they generate and feed back into the grid. Here is a more detailed breakdown:

  • Generation vs. Consumption: When a solar PV system produces more electricity than the home or business uses at any given moment, the excess electricity can be sent back to the local electricity grid.
  • Credit for Excess Generation: The electricity meter tracks the net amount of electricity consumed from the grid and the amount of excess electricity sent back to the grid. When excess electricity is fed back into the grid, the meter effectively "runs backward," providing a credit against electricity consumed at other times.
  • Billing: At the end of a billing period, the customer is billed only for the "net" energy used, which is the difference between the energy consumed from the grid and the energy sent back to the grid. If a customer generates more electricity than they consume over a billing period, they may receive a credit or compensation for that excess electricity, depending on local regulations and utility policies.
  • Benefits: NEM provides an incentive for homeowners and businesses to install solar panels or other renewable energy systems. By receiving credit for excess electricity generated, system owners can reduce their electricity bills and even earn a positive return on their investment in renewable energy.

While 42 states currently have mandated state-wide NEM policies, California remains a leader in the country’s clean energy momentum. Even though NEM specifics can vary by state and utility company, the core principle remains consistent: to encourage the adoption of renewable energy by providing financial incentives for excess energy generation.

Key Differences Between California’s NEM 2.0 & NEM 3.0

Graphic explaining the benefits of implementing Battery Energy Storage to solar projects under NEM 2.0 vs. NEM 3.0

NEM 2.0: An Overview

Net Energy Metering (NEM) 2.0 is the successor to California's original NEM program. Introduced by the California Public Utilities Commission (CPUC) in 2016, NEM 2.0 brought several changes to the state's solar billing and compensation structure. Here is an overview of NEM 2.0 and its key features:

  • Grandfathering of NEM 1.0 Customers: Customers who installed solar under the original NEM 1.0 program were grandfathered into that program's rate structure for 20 years from the date of their original interconnection. This meant that they would not be immediately affected by the changes introduced in NEM 2.0.
  • Non-Bypassable Charges (NBCs): One of the significant changes in NEM 2.0 was the introduction of Non-Bypassable Charges. Under NEM 2.0, solar customers are required to pay NBCs for all the electricity they consume from the grid, regardless of their solar generation. This was a departure from NEM 1.0, where solar customers could offset these charges with their solar production.
  • Time-of-Use (TOU) Rates: NEM 2.0 introduced mandatory Time-of-Use (TOU) rates for solar customers. This means that the value of the electricity they generate and consume varies based on the time of day. TOU rates are designed to reflect the actual cost of generating electricity at various times, with higher rates during peak demand periods and lower rates during off-peak times.
  • Interconnection Fees: Under NEM 2.0, some customers might be required to pay a one-time interconnection fee, depending on their utility and the size of their solar system. This fee covers the utility's cost of connecting the solar system to the grid.
  • System Size Limitations: NEM 2.0 maintained the system size limitation, where customers can install a solar system up to 1 MW (megawatt) in capacity and still participate in the NEM program.
  • Virtual Net Metering: NEM 2.0 continued to support virtual net metering, allowing multi-tenant properties, like apartment buildings, to distribute solar generation credits among individual tenants.
  • Transition to NEM 3.0: NEM 2.0 was designed as a transitional program, with the understanding that the CPUC would evaluate its effectiveness and make further changes, leading to discussions about a potential NEM 3.0.

In essence, while NEM 2.0 maintained many of the incentives that made solar attractive in California, it introduced changes that reflected the growing maturity of the solar market and the state's evolving energy landscape.

Control Your Battery Energy Storage System at the Cell Level.
Control Your Battery Energy Storage System at the Cell Level.

NEM 3.0: The Next Evolution

After years of policy discussions and revisions, California has ushered in a new era for solar with the introduction of Net Energy Metering (NEM) 3.0. This new billing structure, which took effect for the state's three investor-owned utilities on April 15, 2023, brings significant changes for solar adopters.

Key Features of NEM 3.0:

  • Reduced Export Rates: The most notable change is a 75% reduction in export rates, which are the values assigned to excess electricity that solar systems feed back into the grid. This reduction impacts the overall savings from solar, extending the payback period for solar investments.
  • Encouragement for Battery Storage: The design of NEM 3.0 encourages commercial and residential users to integrate battery storage with their solar installations. This not only makes facilities and homes more energy self-sufficient but also contributes to a more resilient electricity grid.
  • Continued Savings: Despite the reduced benefits compared to its predecessors, NEM 3.0 still offers Californians substantial energy cost savings, especially when solar is paired with battery energy storage. The export rate for customers with energy storage is about 1.5 cents per kilowatt-hour (kWh) higher than for customers without storage, meaning that customers with energy storage can earn more money for the energy they sell back to the utility company, making their solar-plus-storage system more cost-effective.

Understanding NEM 3.0:

  • Solar Billing: NEM 3.0, also termed the Solar Billing Plan, came into effect on April 15, 2023, and applies to customers of Pacific Gas & Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E). Importantly, it's not retroactive, meaning systems installed under NEM 1.0 or NEM 2.0 will retain their current policies for 20 years from their Permission to Operate (PTO) date, and solar hosts who have missed the Interconnection Application deadline of April 14, 2023, will now be automatically placed under NEM 3.0 policies.  
  • Financial Implications: Under NEM 3.0, the payback period and savings for solar owners will be affected. For instance, a cash purchase of an average 7.6 kW system that offsets 100% of energy usage would have a payback period of 6.5 years under NEM 3.0, compared to 4.6 years under NEM 2.0. However, even with these changes, the return on investment for solar in California remains among the best in the US.
  • Utilities' Perspective: Utilities have expressed concerns about potential cost shifts from solar to non-solar customers. They view NEM 3.0 as an incentive for customers to integrate storage with their solar systems, promoting a more balanced and resilient grid.

Key Takeaway from the Shift Between NEM 2.0 vs. NEM 3.0

The transition from NEM 2.0 to NEM 3.0 in California marks a significant shift in solar energy policy, primarily by reducing the compensation for excess solar energy sent back to the grid. This change significantly increases the value of battery energy storage systems like the Exro Cell Driver™, as it incentivizes solar system owners to store excess energy for later use rather than exporting it at lower rates. The adaptation to Time-of-Use rates under NEM 3.0 further enhances the financial benefits of energy storage, allowing consumers to avoid higher electricity costs during peak times. This shift is expected to encourage the adoption of integrated solar-plus-storage systems, aligning with broader goals of energy independence and grid sustainability, even though it might initially slow down the adoption of solar systems due to reduced direct financial incentives for solar generation alone.

Implications for Solar Customers

The shift from California's NEM 2.0 to NEM 3.0 marks a significant turning point for both current and prospective solar customers. Here’s an in-depth look at the potential impacts:

Financial Impact:

  • Longer Return on Investment: The reduction in export compensation means that the financial returns from solar investments will accrue more slowly. Under NEM 3.0, the payback period for solar systems is expected to be longer, as the credits earned for excess energy are substantially lower.
  • Increased Non-Bypassable Charges (NBCs): Higher NBCs under NEM 3.0 will further eat into the savings from solar, as these charges apply to all energy consumed from the grid and are not offset by energy exported.

Adoption Rates:

  • Potential Decrease in Solar Installations: NEM 2.0 has been credited with significantly boosting solar adoption in California. With the reduced incentives under NEM 3.0, there's a possibility that the rate of new solar installations could decline as the immediate economic benefits become less pronounced.
  • Market Response: The solar industry may respond to these changes with increased innovation, potentially offering more cost-effective solutions or enhanced technologies that could mitigate some of the financial impacts for consumers.

Legal and Regulatory Landscape:

  • Ongoing Discussions: The implementation of NEM 3.0 may not be the end of the conversation. Legal challenges and policy debates are likely to continue as stakeholders assess the long-term impacts of these changes on California's renewable energy landscape.
  • Monitoring and Adjustments: Regulators may need to monitor the outcomes of NEM 3.0 closely and be prepared to make adjustments to ensure that the policy continues to support the state's clean energy goals without placing undue burdens on specific customer groups.

Battery Storage Incentivization:

  • Shift Towards Energy Storage: NEM 3.0's structure is seen as a push towards the adoption of battery energy storage systems. By storing excess energy instead of exporting it, businesses can maximize their use of solar power and lessen reliance on the grid, which could become more financially advantageous with the new billing structure.
  • Resilience and Independence: The pairing of solar panels with battery storage not only provides greater energy independence for homeowners but also enhances resilience against power outages and grid instability.

In conclusion, while NEM 3.0 aims to address the sustainability of solar energy incentives and the equitable distribution of grid maintenance costs, it introduces a complex set of challenges and considerations for solar customers. These include longer payback periods, potential equity issues, and the likelihood of altered adoption rates. The new policy may also spur innovation within the solar industry and lead to increased interest in battery storage solutions, reshaping the future of California's energy system.

Energy Storage as a Solution Under NEM 3.0

The advent of NEM 3.0 has brought about a paradigm shift in the solar energy landscape of California. With the new net metering policy reducing the financial benefits of exporting solar energy back to the grid, energy storage emerges as a strategic solution to maximize the utility of solar investments. Here's how energy storage systems (ESS) align with the objectives of NEM 3.0 and how companies like Exro Technologies are at the forefront of this transition.

Adapting to NEM 3.0 with Energy Storage:

Graphic explaining how to maximize energy value with Battery Energy Storage under NEM 3.0
  1. Maximizing Self-Consumption: Under NEM 3.0, the financial logic tilts towards using as much of the solar-generated electricity on-site as possible by incorporating energy storage systems to solar projects to lower compensation rates for the exported energy during high-demand periods. Energy storage systems allow businesses and homeowners to incorporate load shifting and peak shaving strategies by storing excess solar power generated during peak sunlight hours and use it during the evening or other times when solar production is low, thus maximizing self-consumption and reducing reliance on the grid, making energy storage a key component for improving the ROI of solar projects under the new tariff.
  2. Mitigating Reduced Export Rates: With the significant reduction in the rates paid for excess solar energy exported to the grid, storing energy instead of exporting it becomes economically advantageous. This stored energy can be used during peak demand times when electricity from the grid is most expensive due to time-of-use rates.
  3. Enhancing Energy Independence: Energy storage provides a buffer against power outages and energy price fluctuations. By maintaining a reserve of stored energy, businesses can enjoy a continuous power supply even when the grid is down, enhancing their energy independence.

Exro Technologies' Role in Energy Storage

As California's solar landscape adapts to the realities of NEM 3.0, Exro Technologies emerges as a pivotal player by offering innovative solutions that align with the new policy's emphasis on energy storage. Exro's Cell Driver™ Commercial and Industrial Battery Energy Storage System is particularly relevant under NEM 3.0, as it enables solar customers to optimize their energy usage and maximize the economic benefits of their solar systems. This technology allows for more efficient storage and usage of solar-generated electricity, mitigating the impact of reduced export rates by storing excess energy for later use when solar production is low, or grid prices are high. By integrating Exro's advanced energy storage solutions, solar customers can enhance their self-consumption, reduce reliance on the grid, and navigate the financial landscape of NEM 3.0 with greater confidence and efficiency. Exro's role in this transition underscores the growing importance of energy storage technology in ensuring the viability and sustainability of solar investments in the era of changing net metering policies.

Building a Sustainable Future

As California navigates the complexities of NEM 3.0, the future of solar energy and storage is set to become more intertwined. The evolution of Net Energy Metering will likely continue, with policies adapting to balance the growth of solar adoption, grid stability, and equitable energy costs. This dynamic policy landscape will serve as a catalyst for innovation, driving advancements in battery technology and smarter energy management systems. Energy storage solutions will become more sophisticated, offering greater efficiency and integration with smart grids, enabling homeowners and businesses to optimize their solar investments. The synergy between evolving NEM policies and cutting-edge storage technologies like those developed by Exro Technologies will be crucial in shaping a resilient, sustainable, and cost-effective energy future.

Maximize NEM 3.0 savings with Exro's Cell Driver

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