301 Moved Permanently

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Net energy metering (NEM) was created in California in 1996 with a cap of one-tenth of 1% of the utility load. The policy was successful at enabling solar, and the cap was increased several times. When utilities started approaching a 5% cap, however, legislators refused to simply raise it and, instead, directed the California Public Utilities Commission (CPUC) to replace it with a “successor tariff.”

The proceeding to create the new tariff lasted 21 months, and for most of that time, the utilities and the solar industry were miles apart. Solar groups proposed maintaining NEM with some added fees. Utilities proposed major changes, including compensation at less than half the retail rate, demand charges, fixed charges and more. Utilities issued a separate proposal as a compromise at the last minute, but by that point, it was too late procedurally to be considered.

In January, the CPUC issued a ruling that is widely seen as a victory for solar because it more closely resembles proposals from the solar industry itself. It does make significant changes to NEM and marks the beginning of what is likely to be a continual shift in the tariff over time, but this round of changes is a gradual step and will stand for four years. The decision maintains the important principle of NEM credits at full retail value and adds new charges and requirements that will result in solar customers paying more than they have been under the current NEM tariff.

 

Changes to NEM

NEM 2.0 has three major changes. First, there will be a one-time interconnection fee of up to $150 for systems of all sizes. The fee will be based on actual utility expenses to process applications and do engineering studies on grid impacts. If those costs increase over time, the utilities will be able to propose increases in the fees.

Second, the new tariff will increase the assessment of “non-bypassable charges” (NBCs). These are charges that help ensure that everyone pays for certain expenses that have broad benefits, such as energy-efficiency programs and low-income bill assistance.

Solar customers have been avoiding some of these costs because their NBCs are based on net consumption. The decision will require new solar customers to also pay NBCs on consumption from the grid that is offset by NEM credits. Electricity consumed behind the meter will continue to be exempt from NBCs, so customers who use more of their power on-site will be affected less by this charge.

Depending on the rate schedule, NBCs range from 1.5 cents/kWh to 2.4 cents/kWh. For a typical residential customer, this will likely result in an increased charge of around $6 per month. For a commercial customer installing half a megawatt, it could top $7,000 per year.

The third change is to require all residential NEM 2.0 customers to be on time-of-use (TOU) rates. The commission is strongly supportive of TOU as a way to discourage consumption at times of high demand. Nearly all commercial and agricultural customers are already on mandatory TOU, so this new requirement only affects residential solar customers.

The effects of this requirement will depend greatly on future TOU structure. With peak periods in the afternoon, TOU is a benefit for most solar customers. However, if peak periods shift to the evening hours, solar customers will be selling low and buying high.

Each of the California investor-owned utilities has proposed evening peak hours due to shifts in system peak caused by solar already on the grid - both utility-scale and distributed. Pacific Gas & Electric’s (PG&E) main residential TOU rate already has a 3:00 p.m. to 8:00 p.m. peak period. San Diego Gas & Electric (SDG&E) has proposed moving its peak period to 4:00 p.m. to 9 p.m.

With evening peak, the impact on monthly bills should still be tolerable if the CPUC maintains a rate option with a relatively small differential between peak and off-peak rates. When the peak period is in the daylight hours, a higher differential is preferable for solar; but with evening peak, a smaller differential is preferable.

The CPUC-approved NEM 2.0 tariff only applies to the state’s three large investor-owned utilities. The Los Angeles Department of Water and Power (LADWP) and all other publicly owned utilities make their own tariffs independent of the CPUC. LADWP appears confident it will continue the current NEM tariff for the foreseeable future. Other publicly owned utilities are starting to hit their caps, and the outlook is mixed on what their successor tariffs will look like.

Existing customers are not impacted by these changes, nor are customers who install solar before the utilities meet the 5% caps on the current NEM tariff. Those caps are likely to be met in April for SDG&E, September for PG&E and early 2017 for Southern California Edison.

 

Costs and benefits

At the heart of the debate is the question of utility avoided costs. When customers go solar, utilities lose revenue. If they are able to reduce costs by an equal amount, NEM is neutral to them. If utilities fail to reduce expenses, non-solar customers have to pick up a higher portion of the tab.

The CPUC contracted with E3 to create a model that measures the costs and benefits of different proposals for the successor tariff. Many parties used the tool to produce extensive data. Utilities created scenarios showing that the expansion of solar increases the bills of non-solar customers. Solar companies demonstrated that any such cost shift is mostly a problem of the future and will only be a major issue if utilities continue overbuilding infrastructure.

Ultimately, the commission decided that measuring the costs and benefits of solar is more complicated than one computer model can calculate. It also noted that some key pieces of this evaluation are under consideration in other proceedings.

In particular, the commission is undertaking a review of the utilities’ planning processes for distribution-system maintenance and expansion. One goal of this is to find ways for utilities to build less infrastructure by doing a better job at incorporating distributed generation into their forecasting. Another goal is to calculate the location-specific benefits of solar and modify tariffs to encourage the right resources in the right places.

The commission is also developing standards for advanced inverter functionality. The first round of recommendations from the Smart Inverter Working Group has been adopted, and another round is under development. Systems will soon begin delivering reactive power support and other services. The conversation is now beginning on tariffs to compensate customers for a deeper level of grid support.

Because solar systems last for decades, these future benefits are an essential part of calculating the costs and benefits of distributed generation installed in the coming years. The smart grid proceedings are needed both to better understand the current costs and benefits of distributed solar and also to enable a greater level of benefits.

The commissioners made it clear that they consider those proceedings to be a continuation of the updating of tariffs for customer generators. This began with the flattening of residential tiered rates in 2015 and includes the new changes to NEM. They will continue with the consideration of locational benefits and smart inverters. Then the commission will open up the NEM tariff again in 2019.

 

Positions of the commissioners

There is a strong interest at the CPUC in having solar customers pay more for transmission and distribution infrastructure, but there is also an understanding that changing the rules too quickly could damage the solar momentum that California has worked hard to achieve. All five commissioners spoke in favor of a more stable regulatory environment during the vote on this decision. The 2013 legislation that required the creation of the successor tariff ordered the CPUC to make sure the new tariff ensures that solar “continues to grow sustainably.” The commission took this mandate seriously and avoided changes that would have severely impacted customer adoption rates.

The three commissioners voting for the decision stated that it is a good first step and there is more work to be done. The two commissioners voting against the decision stated that they supported its general construct and direction but wanted it to go further to increase charges to solar customers for utility infrastructure costs.

 

New opportunities

In all, the new tariff begins a gradual evolution of net metering. In explaining the decision, CPUC President Michael Picker said, “By doing this, we’re forcing the rooftop solar industry to prepare itself for a world where the customer becomes a critical energy resource. They’ve led the way, and they’re going to continue leading.”

This is a call to action for companies to offer services that will enable the utilities to get maximum value from distributed energy resources. Because the solar industry has become good at talking to customers and explaining energy opportunities, it is well positioned to also market solutions beyond solar.

First and foremost, this means batteries. The most effective solution to balancing power needs with energy from the sun is to be able to store electricity. As storage becomes more affordable for a broader customer base, clean energy providers need to help customers take a more active role in their energy patterns.

Beyond storage, smart appliances and building energy controls will be needed as the penetration of solar increases. Companies that have specialized in rooftop solar will likely see opportunities to bring these tools to customers, as well.

 

Alternative tariffs

In addition to the primary successor tariff, the legislature also directed the CPUC to create alternative tariffs specifically designed to spur solar growth in disadvantaged communities.

On this, the commission punted to the next phase of the proceeding. The initial version of the proposed decision included language that the commission “adopts in principle” a community solar program for census tracts that are low-income or have been burdened by pollution. That language was struck from the final decision, but such a program will almost certainly be considered this year.

One positive change for solar customers within the decision is expansion of the virtual net-metering tariff. Currently, tenants can only get credit from a solar system if they are behind the same connection to the feeder. The new rules will allow participation throughout a single property even if there are multiple tie-ins to the grid.

 

NEM 3.0

This decision will be revisited, but the proceeding to consider the next version will not start until 2019. This means the new tariff will be in effect until at least 2020.

Unlike in Nevada, where the utilities commission did not even grandfather existing solar customers, the California commission has grandfathered customers going forward.

Any customer that goes solar under NEM 2.0 will continue with that version of the tariff for the first 20 years of operation of the system, even after further changes are made to NEM. A deal is a deal for 20 years.

As part of this decision, commission staff is directed to produce data before 2019 on the impacts of an export feed-in tariff, which covers only power exported to the grid. In voting for the decision, Commissioner Carla Peterman said, “I appreciate the direction that’s included to think about alternatives to NEM and particularly an export-only model in 2019,” referring to an export feed-in tariff.

Another possibility for 2019 is to create new fees in addition to the NBC charge. The type of fee that got the most consideration in this round is an installed capacity fee: a monthly charge based on the nameplate kilowatt output of the installed system. Residential demand charges and volumetric grid access charges will also likely be considered.

In all, the CPUC wants to continue making changes to NEM, but commissioners appear to be committed to making changes gradually. If average utility rates continue to rise and solar companies are able to reduce costs, the value to customers may remain consistent even if fees rise. A fair balance for the next four years has been struck, and later changes will only affect customers who install solar after the changes are adopted.

 

Brad Heavner is policy director at the California Solar Energy Industries Association. He can be reached at (415) 328-2683.