The Basics of Solar Billing, Net Energy Metering 3.0, and How You Can Help Solar Grow

This article is designed for people considering home solar; it will give a brief overview of how owning a solar system works financially and how those benefits in California might change due to a new law being created. If you already know how solar billing works, you can go directly to the petition to help keep solar as advantageous as possible for California homeowners.

Everyone knows that home solar produces electricity to power the house during the day. What’s less known is that homes with solar are still (in nearly all cases) connected to the utility grid to have power to use at night or when the solar system is not producing enough electricity. Even homes with a battery system are connected to the grid.

The goal of a solar system’s design is to make a home’s electricity bill as close to zero as possible. To do this, a system is built to produce more electricity than the home can use during the day. Being connected to the grid, the home sells back the excess electricity it produces. The utilities in California are required to buy back that electricity at the prevailing market rate. So if the utility sells a kilowatt hour (kWh) for 20 cents at noon, it will buy one for 20 cents at noon.

Sounds simple, right? Sounds like you could make enough power to make your electricity bill free, right? Maybe even make a profit… But there are a few rules that make it unprofitable to make a profit. Huh? We’ll explain.

Once the homeowner has ‘paid back’ more than the grid electricity used with excess solar energy, the homeowner has a credit on the bill. That credit can be carried forward, or cashed out. But the cash-out rate (the Net Surplus Compensation Rate (SNCR))¹ that the utility pays for the excess-excess solar electricity drops down dramatically. In effect it’s like a ‘safety valve’ for the utility to limit how much cash it might have to pay out to the homeowner.

For example, if over the year a homeowner overproduced 1000 kWh during a given year and the prevailing market rate for each kWh is 20 cents, then the homeowner would receive a credit for $200, right? It doesn’t work that way. For each kWh that a homeowner over produces on an annual basis, the rate drops to around 3.5 cents, so the homeowner would only receive a $35 credit.

You can see why once a home’s energy use in dollars has been balanced out with excess solar-produced electricity, the rate drops so drastically that it does not make financial sense to wildly overbuild a solar system. A solar system should produce just enough excess electricity to offset the amount bought from the utility company.

So the basic premise of solar under NEM 1.0² looks mostly fair. Homeowners can make their own power and sell their own power, but not to the point of making a real profit off of the utility.

A problem arose that the utilities were buying too much electricity during the day, a time when they needed it less and less due to more and more homes and businesses installing a solar system. So the utility concerns passed the law called Net Energy Metering 2.0³, which dropped the value (price) of electricity during the day. Speaking strictly on a financial basis, this made home solar systems less advantageous to homeowners and more advantageous to the utilities.

Any homeowner going solar after June 2016 (for SDG&E customers) was put on NEM 2.0 (NEM 1.0 was no longer available) and this required them to get onto a Time of Use⁴ billing plan from their Tiered Rate plan⁵. This was a method to give electricity a different price value at different times of the day. During the daytime, the price of electricity was low. During the evening when the sun was going down and people were getting home (this law was passed during pre-COVID lockdowns) the price of electricity was high, and late at night the price dropped way down simply due to supply and demand. The significant thing here was that electricity produced by solar had a lower price tag than most of the electricity delivered from the grid. It was a negative development for home solar, yet solar still remained a very positive financial proposition for the homeowner.

For some perspective to aid here - many of the NEM 1.0 systems are less efficient, so this is not a case of ‘too late, not gonna join.’ A solar system today on NEM 2.0 could be a better financial deal than a system built during the early stages of home solar that is billed under NEM 1.0.

NEM 2.0 also required new solar households to pay a one-time interconnection fee, and then pay monthly non-bypassable charges⁶ on the grid power they bought. These are fees that go toward various things including programs that ensure nearly all California residents can have electricity.

Now there is a process happening at the California Public Utilities Commission (CPUC) to define and bring to law NEM 3.0⁷. The plan is to implement NEM 3.0 into law in California no later than the end of 2021. If that takes place, all systems activated after NEM 3.0 goes into effect will have less advantageous rates compared to NEM 2.0, and customers on NEM 2.0 and NEM 1.0 will likely have a ticking clock before they are required to switch to NEM 3.0.

There’s a push from solar advocates and the solar industry to limit NEM 3.0’s negative impact. You can help by signing this petition started by CALSSA. Please click the link to join the effort to keep solar as advantageous as possible for California homeowners.

We hope this article has given you a good overview of solar. If you would like to learn more about how a system works, the process of designing a system for your house and your household needs of today and into the future, utility billing, how a home battery system can help limit the impact of NEM 3.0, how today’s ITC tax credits and SGIP storage rebate programs apply specifically to you, how you can make money as a solar advocate through referring customers, or any other aspects of going solar in Southern California, we’d love so speak with you to help you on your exciting journey into possibly becoming a renewable energy producer.

¹DEFINITION of Net Surplus Compensation Rate (SNCR): The price put on electricity once a customer has zeroed out their utility bill. This rate is always well below the actual rates (prices) used when homes are buying or selling electricity back and forth with the utility. This of this like the ‘overstock’ discount rate of too much electricity, and that discount is a huge drop in price.

²DEFINITION OF NEM 1.0 (Net Energy Metering 1.0): The original NEM program applied to homeowners who had their system activated before 2016. It ensured a 1:1 sale price to purchase price exchange between utilities and homeowners/customers who were producing renewable energy. Homes with NEM 1.0 were allowed to keep NEM 1.0’s terms for 20 years from the date the system had been activated.

³DEFINITION OF NEM 2.0 (Net Energy Metering 2.0): This state tariff was signed into law in 2013 and took effect in 2016. This is, as of February 2021, the current law for home solar billing.

⁴DEFINITION of TIME OF USE (TOU) Billing: A billing structure in which the price of electricity varies based on the time of day, the day of the week, and the season. For example, electricity at 6:00PM on a weekday in the summer would be drastically more expensive than electricity used on a weekend after midnight in the winter. The utilities offer many TOU plans and it’s good to get an expert to help determine the best plan for each households’ current and future use habits.

⁵DEFINITION of Tiered Rate Billing: A billing structure in which the price of electricity is not tied to when the electricity is bought or sold. The cost of electricity from the utility will increase (in tiers) based on overuse in a month. That is, electricity price steps up the more you use it.

⁶DEFINITION of non-bypassable charges: This acts like a tax on electricity purchased from the utility, but are not added to electricity the utility buys from the homeowner. Think of these like the green square on a roulette table - something to tip the odds to the casino’s favor. This rate under NEM 2.0 is under three cents per kilowatt hour. The good news is much of these fees help others.

⁷DEFINITION OF NEM 3.0 (Net Energy Metering 3.0): A future bill currently (as of February 2021) in the Order Instituting Rulemaking process (discovery and debate phase) at the California Public Utilities Commision (CPUC) that would potentially alter the Net Metering tariff structure in a way that makes home solar less financially beneficial to homeowners and thus, from a financial standpoint, would discourage the adoption of solar energy by California residents.

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