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Sunsetting California’s NEM 2.0: What NEM 3.0 Means for Commercial Solar Projects

February 7, 2023 Empower Energies

Net energy metering (NEM), commonly referred to as net metering, is a policy that allows business owners or residents with solar systems to earn full retail credit on the excess energy they produce when they export it back to their utility grid. California historically had one of the most consumer-friendly net-metering programs in the country with its NEM 2.0 policy.

However, on December 15, 2022 the California Public Utilities Commission (CPUC) unanimously passed a successor program to NEM 2.0 called NEM 3.0, which will have a significant impact on the market and viability for both residential and commercial solar projects.

This blog post will cover the main differences between NEM 2.0 and NEM 3.0 for commercial solar projects, and what steps facilities owners in California should take to capture the benefits of NEM 2.0 before the program is fully retired after April 15, 2023.

Energy Export Costs under NEM 2.0 vs NEM 3.0

Retail pricing model in NEM 2.0

The main difference between NEM 2.0 vs NEM 3.0 is the value utilities in California will credit residents and businesses for the energy they export back to the grid. Under NEM 2.0, utilities calculated the cost of energy based on full retail value, or what customers would have paid the utility to use that energy. Under this model, the energy export cost averaged at 27.5 cents per kWh.

That may not sound like much at first glance, but it adds up. For example, if a business has a solar system that can export in excess of 1 million kWh per year, the NEM 2.0 rates would generate $275,000 in added value, increasing the project’s ROI and reducing the payback period.

Time of use (TOU) pricing model in NEM 3.0:

The new cost structure for NEM 3.0 no longer uses the full retail value and instead relies on the “Avoided Cost Calculator”, which is based on time of use (TOU) rates, meaning the energy rates depend on the season and time of day. The below chart is from the NEM 3.0 proposal and illustrates the variability in export costs based on TOU rates.

TOU pricing California Solar NEM 3.0

Image: NEM 3.0 Proposal

While the price per Kilowatt-hour would vary in this model, the average is around 8 cents per kWh. The 75% cost reduction amounts to essentially a wholesale versus retail difference in value.

Average Export Rates California solar

Image: Save California Solar

The 1 million kWh per year solar project example we referenced earlier would only get a return of $80,000 in its first year. At less than a third of the value, the project payback period would lengthen, drastically affecting the return on investment for standalone solar projects.

The value of energy storage under NEM 3.0

Standalone solar projects have taken a huge financial hit under NEM 3.0, but under the same new rate structure, the value of adding energy storage to a solar project under NEM 3.0 goes up considerably. Since the ROI for participating in net metering is not as robust, utilities are encouraging businesses to invest in energy storage to offset higher off-peak prices. This way businesses can repurpose the energy they produce at times when it would be more costly for them to purchase it from the utility.

Since the timeline for still qualifying for NEM 2.0 is likely too imminent for businesses still in the planning phase, adding energy storage is the best option for projects applying for NEM 3.0. Add in the substantial boost to energy storage incentives under the Inflation Reduction Act, and initial modeling suggests supplementing California solar projects with energy storage will still have a massive impact on project ROI.

Can commercial solar projects get grandfathered into NEM 2.0?

They can! Fortunately, there is still a small window for commercial solar projects to receive the cost benefits of NEM 2.0.

Projects can be grandfathered into the NEM 2.0 rate structure for nine years if the site owner is able to submit an interconnection application to their utility before April 13th.

While this is an aggressive timeline to begin a commercial solar project, it is not impossible to achieve. Empower Energies has determined a path forward for companies who wish to get started now. Whether you are interested in rushing to apply for NEM 2.0 or exploring energy storage under NEM 3.0, achieving your clean energy goals is possible. Get in contact with an Empower Energies representative to talk about next steps.