The Duck Curve, NEM 3 and YOU - Part 1
- Jeff Jorgenson
- Jan 20
- 8 min read
Updated: Apr 4
I was fascinated by Mehrnaz’s report on the SunWorks bankruptcy and the implosion of California’s Solar installation industry and how it ties directly back to the California Public Utility Commission’s (CPUC) Net Energy Metering (NEM 3) decision. It seemed so obvious. Where have I been? What is NEM 3?
If you have solar in California then you’re probably already aware that Net Energy Metering (NEM 3) is the mechanism that the Investor Owned Utilities (IOUs) use to credit homeowners (and businesses) when they produce more Solar than they use and sell it back to the utilities.
If you’re new to solar and solar curious like me then chances are you didn’t know anything about NEM but found the headlines alarming. So I decided to dig a little deeper. I found out more than I can put into just one post so it’s spread over multiple parts. Every time I learned something, it seemed there were four more things to learn.
Part 1 below is some background on how we went from the generous buy back rates of NEM 1 in 1995 to the industry crushing lower rates of NEM 3.
Part 2 will look at a typical Return on Investment (ROI) for Solar plus Storage and why it’s still attractive…if you can afford it.
Part 3 will cover various programs that can help you afford it if you qualify.
Next up in Part 4 we’ll explore various strategies and programs that can leverage your new investment in increasingly “smart” ways: VPP, V2G, Peak Shaving, ELRP, DSGS…etc. You may want to look up the word “arbitrage”.
Then in Part 5 we’ll take a closer look at the Duck Curve and how it affects the operations and profits of the Utility Companies.
And finally in Part 6 we will conclude this series by asking the experts why they think the CPUC made the decision to drastically reduce buy-back rates and tank the states solar installation industry via NEM 3.
Part 1 Background: Impact
NEM 3 is a big deal. NEM 3 drastically reduced the rates that customers would get paid for selling their excess energy back to the utilities, making adding solar less attractive to home owners.
It spawned alarming Headlines:
Ryan Kennedy of PV Magazine immediately (Dec 2022) declared: California pulls the plug on rooftop solar:
“As exported power loses its value, Californians now have their hand forced to adopt batteries with their solar installations if they want a reasonable return on investment.”
He quoted the Solar Energy Industries Association (SEIA) saying that the decision is “too abrupt” and will slow rooftop solar deployment in the state.
He quoted Phil Shen of ROTH Capital predicting “We believe this would represent a potential 70-85% drop in economic value for solar-only systems, which would suggest California would effectively become a 100% solar and storage end market, which ultimately makes solar much less accessible and affordable”.
He quoted California Solar & Storage Association (CALSSA) “For the solar industry, it will result in business closures and the loss of green jobs. For middle class and working class neighborhoods where solar is growing fastest, it puts clean energy further out of reach.
And they were all correct.
Follow ups:
In November 2023 CALSSA followed up: NEM 3 Slammed the Brakes on Solar - Solar sales are down between 77% and 85% since last year following the NEM-3 implementation.
In January of 2024 Cal Matters weighed in: What’s happened since California cut home solar payments? Demand has plunged 80%. They quote Carlos Beccar, marketing manager for Energy Concepts in Fresno his area covers neighborhoods that experience extreme heat, where it’s common to see utility bills averaging $800 in the summer months: “This policy was a bat to the knee, not a soft punch to the gut”.
From the Solar Energy Industries Association (SEIA) also in January of 2024: “In total, the state’s solar market is expected to decline 36% across all market segments in 2024.”
From the same article, Wood Mackenzie: “California’s residential solar market will see a 40% decline in 2024, and the state’s commercial rooftop sector will decline by 25% from 2024 to 2025.”
Ouch!
The SEIA continues: "Solar provides nearly 30% of California’s electricity needs".
Indeed the state has passed laws committing itself to deploy more solar projects of all sizes to meet its ambitious climate goals. And yet with NEM 3 it appears the CPUC intentionally tanked California’s installation industry and scuttled any homeowners dreams of being able to add affordable solar.
Background: How did we get here?
I’m going to start our story in 1978. The US Congress passed the Public Utility Regulatory Policies Act of 1978 (PURPA). A part of PURPA requires a utility to purchase net surplus generation from a customer who produces more power than they consume. The price is equal to the incremental cost of alternative energy that the utility would generate itself or purchase from another source. PURPA’s purpose was to encourage renewable resources and promote competition for electric generation.
What PURPA did was open the door for consumers to get paid for excess power generated from their installed solar panels. My Grandmother installed solar on her house in the 1970s as did President Jimmy Carter.
California upped the ante in 1995 by passing SB 656, establishing Net Metering 1
(aka NEM 1). NEM 1 is designed to encourage private investment in renewables, spur economic growth and diversify the state’s energy mix. NEM 1 enabled residential solar customers to send the solar power they didn’t immediately use to the grid in exchange for bill credits at the full retail rate of electricity. NEM 1 was to continue until residential Solar became 5% or more of peak electricity demand.
So the stage is set for solar adoption to grow in California. And as the solar panels and systems became more affordable the number of installations grew steadily.
As California solar grew, the lawmakers needed to prepare for NEM 1 to reach its authorized limit.
So in 2013 the California Assembly mandated that the CPUC adopt to a successor to NEM 1 to take effect after each individual investor-owned electric utility (San Diego Gas and Electric (SDG&E), Pacific Gas and Electric (PG&E), and Southern California Edison (SCE)) reached their individual NEM caps. (5% peak solar) which occurred in July of 2017.
NEM 2 had these changes for new customers, starting July 1, 2017:
Pay a one-time interconnection fee of around $150
Customers still compensated for excess power sold to the grid.
Pay non-bypassable charges (similar to non-NEM-customers). These are small charges to help fund low-income customers and energy efficiency programming. This actually reduces the rate the utilities credit for excess power as these charges cannot be offset by selling your excess solar production back.
Migrate to a Time-Of-Use (TOU) Rate. Where rates are dependent on the time of day.
Existing NEM 1 folks keep their rates for 20 years.
On the way there however, in 2015, a funny thing happened.
The Duck Curve…
What happens to Solar power at night? It’s simple. No sun, no power. In the bigger scheme of power generation the daylight hours provide a glut of power for the power companies to manage. In 2015 this resulted in a Net Load graph that looks increasingly like a duck, (Net Load is Total Load minus Solar Power) and has gotten fatter and fatter since.
When the sun is shining, solar floods the market and then drops off as electricity demand peaks in the evening. These demand ramps and un-ramps result in grid operators being forced to take a bunch of power plants offline, or put a bunch online, rapidly. Solar (and Wind) have introduced what the California Independent System Operator (CAISO, who manages the flow of electricity across the state) calls “higher levels of non-controllable, variable generation resources.” These stop-starts are expensive and inefficient, introducing complexity into an industry that is expected to perform like - well - like a utility!
The popularity and success of solar implementations were creating unintended circumstances. The solar glut was creating an imbalance in the wholesale energy market and headaches for the operators.
What the generous NEM 2 rates were also doing was creating a tiered system of compensation where customers who do not own solar generation were subsidizing those who do. What the CPUC calls the “Cost Shift”.
So with the imbalances and the utilities reaching their NEM2 caps the CPUC conducted a series of meetings, solicited public feedback, held hearings and the unanimously voted to enact NEM 3.
The CPUC decision was heavily influenced by a Lookback Study (produced by Verdant Associates (Verdant), Energy and Environmental Economics (E3), and Itron, Inc.). Key comment: “The study found that, after installing the NEM 2 system, residential participating customers on average pay lower bills than the utility’s cost to serve them.” This is obviously unsustainable even for a public utility.
So the commission engaged E3 to support and facilitate the development NEM 3. According to the E3 White Paper - Key findings:
(a) NEM 2 has negatively impacted non-participant ratepayers.
(b) NEM 2 is not cost-effective.
(c) NEM 2 disproportionately harms low-income customers not participating in the net energy metering tariff.
There were 18 organizations that officially filed proposals for the new tariff. Their recommendations are widely varied and often times in opposition to each other. Many options for the critical “glide path” were presented. A healthy exchange of ideas that the CPUC addresses in their 11/10/22 Decision Revising Net Energy Metering Tariff and Subtariffs document.
There was a spirited discussion where all parties agree that the final successor to the current net energy metering tariff should comply with Public Utilities Code Section 2827.1(b)(1), which mandates that the Commission adopt a successor to the existing net energy metering tariff that “ensures that customer-sited renewable distributed generation continues to grow sustainably…”
The CPUC believes that “This decision clarifies that because most customer-sited renewable distributed generation in California is from solar systems, the sustainable growth of the solar industry must also be considered to ensure the sustainable growth of customer-sited renewable distributed generation.”
And yet residential solar installation demand fell off the roof:
NEM 3 was adopted on December 15, 2022. The basics:
Solar systems placed in service prior to April 15, 2023 will remain under their existing net metering policy for 20 years from their interconnection date.
Solar systems under NEM 3 billing will earn, on average, 75% less for the excess electricity they push onto the grid
Exports based on an Avoided Cost Calculator - which is line with PURPA and comparable to wholesale rates.
NEM 3 will only be locked-in for 9 years and is only transferable to a spouse, partner, or to another tenant (if the landlord stays the same). If the property or home is sold, the new owners will not receive NEM benefits.
Includes sell back rate bonuses for early adopters that phase out after 5 years.
(Here’s a very easy to follow net metering guide: https://solarunitedneighbors.org/resources/net-metering-what-you-need-to-know/)
Despite the strong arguments from advocates to keep NEM 2 rates in place, MCR considers #3 to be reasonable and in line with PURPA’s intent.
However we do agree with SEAI that the abrupt implementation, and short “glide path” that caused the solar installation market to tank could have been handled better.
We’re also uncomfortable with the use of the word “incentivize” in the CPUC NEM 3 decision where they claim NEM 3 will: “incentivize adoption of combined solar and storage systems.” Being forced to add storage to deploy solar is quite different than being “incentivized”! We will address this aspect of the CPUC decision and its effects in a future installment.
We’ll give Enphase co-founder Raghu Belur the last word from PV Magazine: “Under California’s NEM 3 policy, what used to be a four-to-five-year payback period, or return on investment, for rooftop solar, is now about seven to nine years. But you’re buying a 25-year asset, so you’re still coming out way ahead.”
We feel strongly that Mr. Belur is correct. Adding solar plus storage is still a very attractive investment. So come on over to Part 2 and I’ll show you how the numbers worked out for me and give you an idea how they could work for YOU.
