California’s net metering transformation has dominated the energy transition discourse over the past 12 months, and for good reason. The Net Billing Tariff, more colloquially termed NEM (net energy metering) 3.0, has drawn the ire of industry advocates and consumers for its complexity and ninth inning tariff changes.

The evolution of net metering in California

In 1996, California introduced its first net metering paradigm that enabled solar customers to sell their excess electricity back to the grid. NEM 1.0 established that customers would receive full retail rate credit for energy exports. This construct made solar more economically attractive and accelerated the adoption of residential PV systems. 

In July 2017, California gradually moved from NEM 1.0 to NEM 2.0, which preserved retail rate bill credits, but moved solar customers to a time-of-use (TOU) rate structure. In 2022, the California Public Utilities Commission (CPUC) approved a third net metering structure, or NEM 3.0. 

How NEM 3.0 is impacting residential solar and storage 

California’s residential solar installer community weathered past net metering transitions gracefully compared with the latest industry shift.

The new paradigm, which went into effect in April 2023, significantly reduces the value of energy exports by about 75% for most of the year for residential PV systems. This change has led to longer payback periods for residential solar customers, and the impacts on California rooftop solar installations are clear. More NEM 2.0 applications were filed during the last three months of 2017 (when NEM 2.0 made its debut) than NEM 3.0 applications submitted throughout all of 2023, a signal of weakening project economics for solar under the latest tariff.

A key feature of NEM 3.0 is that the tariff decouples the value of exported energy from imports, meaning that customers are no longer credited for solar exports at the same rate as what they pay to import electricity from the grid. Instead, the export rate is now determined by the Avoided Cost Calculator (ACC) - costs in this case being the utility’s cost of procuring electricity. The ACC spikes up over just a few evening hours over the year when stored electrons are most valuable to the grid. 

One implication of this new construct is soaring attachment rates (a larger proportion of new installations pairing solar and storage) relative to years past. Storage customers are better suited to capitalize on evening price spikes under the new construct, whereas solar-only projects can’t yield favorable cost reductions and export credits. Adding a battery has become a critical feature for maximizing a project’s return on investment (ROI). 

Building a strategy to maximize NEM 3.0 and grid services revenue

Under NEM 3.0, solar and storage projects that traditionally relied on high export values will need to take a more targeted approach to generate value. Speaking broadly, the new incentive structure pushes NEM 3.0 customers to employ a discharge strategy that follows load for the vast majority of the year, then focuses discharge over the sparsely available high-value export opportunities. The devaluation of NEM 3.0 exports relative to NEM 2.0 cannot be understated. As shown in the chart below, the value of exported energy falls well below import costs for most hours of the day and year.

At a time of elevated interest rates and cratering solar incentives, virtual power plant (VPP) programming will be crucial for residential storage developers. By leveraging the full range of grid services opportunities available in California, developers can recoup lost revenue and help cut back the elongated ROI imposed by NEM 3.0.

Leap recently helped develop a new value stream for solar and storage customers that complements the NEM 3.0 incentive structure and supports California’s solar industry through the net billing tumult. The Demand Side Grid Support (DSGS) program was introduced by the California Energy Commission (CEC) to encourage residential storage participation to alleviate grid constraints when energy prices spike. 

Locational Marginal Prices (LMPs) dictate whether or not a DSGS event is called. When Day-Ahead energy prices (LMPs) meet or exceed $200/MWh from 4:00 PM until 9:00 PM during the summer, this signals that the California grid is strained and DSGS events are called. In the past, high Day-Ahead energy prices have lined up well with key hours for NEM 3.0 export. When scheduling a test event, during months where no events are called, it’s important that the test aligns with the highest LMP hours over the course of the testing day to maximize monthly performance.

The graphs below highlight the DSGS event window alongside 2022 and 2023 pricing trends for Pacific Gas and Electric (PG&E), showing the hourly average NEM 3.0 export rate for September on the left hand y-axis, and hourly LMPs on the right hand y-axis.

Leap has crafted a dual-participation strategy that maximizes revenue from both the NEM 3.0 structure and the DSGS program. By adding DSGS to a storage project’s value stack, developers can yield a 20% increase in value over NEM 3.0 alone under current incentives.

California’s developer community may face somewhat of an uphill battle financing projects under the latest tariff update, but Leap can help storage providers optimize the different revenue streams available. Get in touch to learn more.