“Here comes the sun, and I say, it’s alright” - The Beatles
The Bottom Drops Out
Recent changes to net-metering payment structures in California have threatened to throw the multi-billion dollar rooftop solar industry into chaos. The Net Metering 3.0 (NEM 3.0) decision was approved by the California Public Utilities Commission (CPUC) in December 2022 and formally went into effect in April 2023. In contrast to previous NEM iterations, NEM 3.0 no longer pays utility customers full retail rates for power generated in surplus of their own electricity consumption. Rather, the “net-billing” schema is based on avoided cost: the savings in capital and operating expenditures accrued to the utility by not supplying the electricity itself. All said and done, NEM 3.0 effectively slashes earnings for new solar customers by 75% compared to homeowners with previously existing rooftop panels, who locked in fixed rates before the new rules came into effect.
Moreover, covering the service territories of California’s three Investor Owned Utilities (IOUs) of Pacific Gas & Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E), some 75% of California residents are in the cross-hairs of the new NEM arrangement.
The effects are devastatingly clear. Since mid-2023, demand for new residential solar photovoltaic (PV) installations has cratered, leaving the burgeoning solar industry with stranded assets on its hands, and calling into question state leadership’s commitment to carbon reduction goals.
As the graph below illustrates, solar installation companies rushed to complete projects during Q1 of 2023, followed by a dramatic crash in new applications that shows no signs of abating.
Imbalance of Power
So why would a state whose net zero policies depend on solar as a golden ticket to renewable paradise choose to shoot itself in the foot? The reasoning provided by the CPUC is not without merit. In short, the previous NEM programs were unfair.
As the December 2022 decision states:
The findings…show that NEM 2.0, and thus NEM 1.0, disproportionately benefitted …residential net-metering customers, while all customers, including those with lower incomes, must bear the additional 82 to 91 percent of the cost of service by-passed by net-metering customers.
Put simply, prosumers (an amalgamation of producer-consumer) compensated at retail rates are effectively “nonparticipants” of the grid, generating income but not paying for the upkeep of utility property (transmissions lines, distribution systems, etc.) and overhead costs. And as these services must be paid for somehow, the burdens in the past have fallen on those who do not have rooftop solar. Among these customers, costs fall disproportionately on low-income and disadvantaged communities, who pay a higher percentage of their total income to utility bills compared to the average middle-class customer (the so-called energy burden).
The elephant on the roof is this: homeowners with solar have historically tended to be relatively wealthy, with newer and well-maintained residences. Even with the federal tax credits supplied by the Inflation Reduction Act, the average cost of a 10 kW rooftop solar panel falls between $18,000-$25,000, an enormous up-front cost for most people. While banks in California are beginning to offer solar installation as a feature that can be rolled into a 30-year mortgage, this option is typically only available for new builds, and must be agreed upon at the time of closing.
Thus in reality, not only do those affected by the energy burden subsidize solar panel users, they are subsidizing the most affluent members of society.
Biting the Hand That Feeds
Nevertheless, the new NEM leaves the state in a bit of a quandary. As hinted at earlier, California’s ambitious SB 100 promises net-zero by 2045. Riding high on the assumptions underlying the phase-out of fossil fuels is the critical role that both rooftop and utility-scale solar play to facilitate the renewable transition. Crushing demand for further solar build-out thus seems like an odd way to achieve stated policy goals.
Furthermore, NEM 3.0 puts the breaks on the exact expansion into low-income and middle class markets that could even out the playing field, denying these sectors of the economy a chance to participate fully in the prosumer game. To add insult to injury, the net metering benefits of locked-in rates will continue to flow to those who were early adapters, i.e., rich people. No water off the duck’s back.
Like any new technology, solar installation follows an s-curve (also called a diffusion curve), first attracting the wealthy and true believers, before gradually dissipating out into the general public. Unlike most consumer electronics products that live and die on the planned obsolescence treadmill, however, solar panels have a decades-long estimated useful lifetime. That means there is a saturation point for any one market segment: you can only sell one (or maybe two) solar panel(s) to any given household.
A market in want of a customer will inevitably find one, that is, if you don’t destroy demand first. But that is exactly what’s happening in the California solar market. A look back at PV adopters from 2022, as depicted in the graph below from Lawrence Berkeley National Laboratory, shows a more nuanced trend of solar installation than the authors of the new NEM guidelines would have one believe. To wit: households earning between $50,000-$150,000 had the highest percentage of solar installations (thoroughly middle class incomes in the notoriously expensive urban areas of California, where rooftop solar concentration is highest). As State Senator Josh Becker of San Mateo told Cal Matters, “Rooftop solar is not just [for] the wealthy homeowners anymore.” He added that solar installation has made significant inroads into lower income communities in the Central Valley, where recent heatwaves have pushed customers to shore up their own electricity generation capacity.
However, without the promise of retail rate compensation, the middle class prosumer dream becomes a nightmare. While simple payback for PV panels under the previous NEMs was in the 5-6 year range, this figure is estimated to reach 10+ years under NEM 3.0. Recouping the initial costs of installation thus becomes a challenge, and consumers sour on a prospect that looks increasingly uneconomic. Indeed, in the second half of 2023, demand had plummeted by 66-83% year-over-year from 2022.
Reeling In The Losses
Meanwhile, on the other side of the equation, the abrupt transition to the new NEM policy has sent the rooftop solar industry reeling. According to a study published by the California Solar and Storage Association (CALSSA), a leading trade organization for the industry, NEM 3.0 has led to a massive hemorrhaging of jobs. Up to 17,000 installers and other employees had already been laid off by the end of 2023, representing 22% of the state’s entire solar workforce. The collapse of the industry further destroys relatively high-quality, well paying jobs compared to many other vocational and industrial sectors. The average annual salary for a solar installer is $70,000, said Bernadette Del Chiaro, CALSSA executive director. Del Chiaro further pointed out that the job loss will be particularly hard-hitting for women and communities of color.
With demand still in the gutter, many small businesses in the industry are considering whether they should stay in the game at all. As a contractor interviewed for the CALSSA report stated bluntly: “ We exited the residential sector 100% due to CA market conditions.”
The Takeaway: The Buck Doesn’t Stop with You
As with many poor policy decisions, it didn’t have to be this way. Stanford University researcher Mark Jacobson places the blame squarely on the utilities and CPUC. Jacobson, an expert in energy policy, points to a culture of “hostile regulations” and dereliction of duty on behalf of regulators to make solar installation easy for homeowners — a necessity to meet the state’s climate goals.
Others describe the utilities’ actions in petitioning for the NEM changes as profit-seeking, with an ulterior motive to stymie the the ability of ratepayers to produce their own electricity and exert influence on the market. Critics also point to a concerning submissiveness embodied by the CPUC, which has long been criticized as being too cozy with the utilities they regulate. As Ken Cook, president of the non-profit Environmental Working Group put it, “The CPUC, as always, did exactly what PG&E told them to do.”
What’s clear is the actions of the IOUs and CPUC reveal a deep cynicism about their commitments to decarbonization. Rooftop solar is expected to contribute about 25% of electricity to the grid under the state’s modeled net zero scenarios, but this will simply not happen if homeowners are not adequately compensated for taking on a risky investment. It would seem that the utilities are only interested in their stated climate goals as long as they don’t eat into their profits — the very definition of greenwashing.
Furthermore, the crux of the issue at hand - rising utility bills - is not mainly driven by solar users free-riding their fair share of grid maintenance. By far the rise in California retail rates is the result of utility capital investments, grid hardening measures, and wildfire mitigation efforts. That is, costs that should be primarily burdened by the utility rather than passed on to ratepayers. In other words, it’s a bit of a canard for utilities to blame solar users for California’s eye-wateringly high electricity prices.
At the same time, the state should do more to make a realistic assessment of the solar market landscape. Not every home is a good candidate. But, as California energy policy is Manichean in its reverence for all things renewable, there are very few transparent and neutral resources available to customers to make an informed decision about whether solar is a good choice for them.
In short, what’s needed is a lot more honesty about the propositions offered to homeowners by rooftop solar, and a more truthful accounting of the cost-benefit analysis incurred by utilities. Until then, the CPUC and IOUs will continue to pass the buck. Just not to you.
Electrically yours,
K.T.