Blog: The Need for NEM Reforms and the False Argument About the Cost of Diablo Canyon

Rooftop solar has in many ways been a clean energy success story in California. Generous tax credits and net metering — the ability to use excess generation to offset home energy costs — helped jumpstart solar adoption over the past two decades while largely avoiding conflicts and tradeoffs over land use that can bedevil utility-scale solar. Today about 1.2 million California homes have solar panels — providing around 9% of the state’s total electricity generation.

However, the rapid growth of rooftop solar has led to significant unintended consequences. Historically most of the state’s rooftop solar has been installed by high-income households; half of the state’s solar adopters are in the highest 20 percent of earners, while only 4 percent come from the lowest 20 percent.

Net metering allows households to reduce their bill far more than the market value of the excess solar they produce, effectively shifting the cost of both producing electricity and maintaining the grid onto households without solar who tend to be lower-income. The way net metering works is that residential solar producers get to effectively run their meter backward, getting paid for any extra generation — beyond what their home uses in a given hour — at their average electricity price (usually 20 to 30 cents per kWh).

The actual value of that solar to the grid is much lower, around 7 to 9 cents per kWh or less. This value has also fallen by around 40% relative to other generation sources since 2014 due to more solar generation available during daytimes than the grid can effectively use.

The extra costs avoided by households with solar are picked up by other utility customers without solar who are predominantly lower-income households than those with solar. Most estimate this cost-shift to currently be around $1 billion, which will increase as the grid costs are placed on an ever-smaller group of customers that do not have solar. Everyone's electricity bill goes up to support net metering payment, which no longer reflects anywhere close to the actual real-time value of solar to the grid. Payments for net metering are estimated to have increased electricity rates by 4.5 cents/kWh for SDG&E customers, 2.5 cents/kWh for PG&E, and 1.4 cents/kWh for SCE.

This is a problem because utility rates are, fundamentally, quite regressive. Low-income households pay a much larger portion of their income for energy and are disproportionately impacted by higher rates. And most folks receiving subsidies for solar are higher income.

So how can this problem be solved, with solar households being paid fair value for their panels and low-income customers not footing the bill? The simplest solution would be to simply pay households for excess solar generation at the locational marginal price at the time of generation. In other words, rooftop solar would get the exact same payments for selling solar to the grid that a utility-scale solar plant down the road would get.

The California Public Utilities Commission has proposed reforming net-metering in what they call “NEM-3”: reducing the net metering payments down to around 5 cents/kWh based on the estimated value of solar to the grid — but allowing much higher rates for homes with solar plus storage who sell electricity back to the grid during evening periods.

This would, however, only apply to new solar customers, with existing rooftop solar grandfathered in and continuing to net meter at the old rate (though reducing the period they can claim old rates from 20 to 15 years after the panels were installed). To get around the equity problem of existing customers, the proposal has an additional $8 per installed kW charge that would apply to all households with rooftop solar. This amounts to around $48/month for most households, with additional charges on top of that for SCE and SDG&E customers.

This approach — creating a new fee to offset benefits for legacy customers — represents a bit of a regulatory kludge. A clean slate would be much preferable: switch all rooftop solar, both legacy and new, to be paid for the real-time value of any new solar they sell to the grid, but do not subject rooftop solar to any additional monthly charges that do not apply to other residential customers. Otherwise, new solar customers get hit with a double whammy: much lower net metering value than existing customers, plus fees that they have to pay that largely offset the cost of benefits that they do not enjoy.

The way we design rates matters. Subsidizing low-carbon technology can help accelerate deployment. But we need to do it in a way that is just, equitable, and maximizes the emissions reductions per dollar spent. The current system that subsidizes richer households with higher rates for poorer ones is clearly not.

California also needs to seriously consider how to best reduce its emissions and reach its climate targets at the lowest possible cost. While net metering is in real need of reform, it has always been a relatively costly way to reduce emissions. Rooftop solar is, generally speaking, around three times more expensive per kWh generated than utility-scale solar. The subsidies given to net metering currently amount to around $3.4 billion per year, and all of California’s rooftop solar currently generates as much electricity annually as its last remaining nuclear plant – Diablo Canyon.

Figure 1: Capacity and power produced from residential solar and Diablo Canyon power plant in California. Data from EIA.

If California chose to avoid shutting down Diablo, they could provide clean energy at a far lower cost than that of net metering; even if you consider the incorrect and artificially inflated cost estimates pushed by Friends of the Earth, PG&E, and others of approximately $1.4B per year that spurred the decision to retire Diablo Canyon prematurely, there is no comparison. That doesn’t even take into account the weather-dependent nature of NEM solar, vs the 24/7 clean energy Diablo Canyon provides, or the millions in investments that need to be made to the grid to manage high levels of residential solar production.

Figure 2: Annual additional cost burden to ratepayers in real 2020$. Data for [2],[3],[4], and [5].

The hypocrisy here is notable, as the same clean energy and environmental NGOs that staunchly oppose keeping Diablo Canyon online are having a fit about the proposed NEM 3.0 decision based on its potential impact on California's CO2 emissions and further expansion of rooftop solar.