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Will California’s Cut in Payments to Rooftop Solar Owners Hurt Demand?

New net metering rules have taken effect, giving solar owners a much worse deal than they had before on the excess power they sell back to the grid. The change could diminish the state's lead in small-scale solar electricity.

The California Public Utilities Commission adopted the policy in December, which included a 75 percent decrease in the rates that solar owners receive for excess electricity that flows back to the grid.
(Mel Melcon/Los Angeles Times/TNS)
This article originally appeared on Inside Climate News, a nonprofit, independent news organization that covers climate, energy and the environment. It is republished with permission. Sign up for their newsletter here.

A new era has begun for rooftop solar in the country’s leading market, California.

People in the solar industry are exhausted from a rush of sales to customers who wanted to get ahead of new state rules for net metering. They are apprehensive because the rules are a much worse deal for solar owners than before. But they also have moments of optimism due to faith in the value of their product and because of the way that the rules encourage people to buy energy storage systems to pair with solar.

“We are in completely uncharted territory,” said Bernadette Del Chiaro, executive director of the California Solar & Storage Association.

By that, she means the industry has never seen a regulatory change this extensive or complicated. The California Public Utilities Commission adopted the policy in December, which included a 75 percent decrease in the rates that solar owners receive for excess electricity that flows back to the grid.

The term net metering refers to the policy that gives solar owners credits for excess electricity, which is an important part of the financial calculus for people considering whether they can afford solar. When rooftop solar was new, the typical credit was the same as the retail rate for buying electricity. But as the rooftop solar industry has grown, states have taken steps to reduce the credit, often at the behest of utilities, with California now having an unusually low credit compared to other states.

The commission gave little time for solar installers to adapt, saying that customers had until April 14 to file an application to connect to the grid and receive the old rates for 20 years. The result was a surge in sales that will keep installers busy for the rest of this year.

Rooftop solar sales for houses were so high in the first four months of the year that overall sales for 2023 are on track to be about the same as 2022, even though sales are likely to drop for the remainder of this year, according to the research firm Wood Mackenzie.

The sales decrease due to the new policy won’t show up on an annual basis until 2024, when sales are projected to fall by 38 percent compared to the prior year, the firm said.

Sales are dropping because solar is now a less attractive financial proposition than before. The new rules mean that a household buying rooftop solar will take 9 to 11 years for electricity bill savings to pay off the costs of the systems. Under the prior rules, the payoff period was 4 to 6 years. These are rough estimates, which vary depending on the customer’s local utility.
So why would California policymakers do this? It’s a good question, considering that California also is working toward some of the most ambitious goals for renewable energy deployment in the country, with a target of adding 54 gigawatts of renewable energy capacity by 2035.

In the last five years, distributed solar, which includes customer-owned systems on homes and businesses, has provided more than one-third of the state’s new solar power as measured in gigawatts of capacity. A slowdown in rooftop solar adoption is almost certainly going to hurt the state’s ability to meet its targets.

The answer to the “why” question is pretty much, “Because the utilities wanted it.” The state’s major utilities—Pacific Gas & Electric, San Diego Gas & Electric and Southern California Edison—have spent years building the case that rooftop solar is an unfair subsidy that mainly helps affluent households and shifts some of the burden for maintaining the grid to non-solar customers.

Even many rooftop solar advocates would concede that the prior rules were a good deal for solar owners and that the fairness argument made by utilities, while exaggerated to a ridiculous extent, had at least some basis in fact.

The commission could have used the evidence to justify a gradual shift in solar policy, one that would not be jarring for the market. Instead, it approved a drastic change that has left solar installers whipsawed between the growth in business to get ahead of the policy and the drop in business that will likely follow.

One wrinkle with the new rules is that the decrease in rates for exporting electricity creates an incentive for customers to install energy-storage systems. With storage, instead of exporting electricity for a cut rate, customers can save it for their own use and reduce the amount they need from the utility.

I asked Del Chiaro if the utilities may have shot themselves in the foot by advocating for a policy that encourages customers to get energy storage, which makes people less dependent on utilities.

She said it’s too early to say. One challenge is that storage is expensive, with leading systems in the $10,000 range. It’s a lot to ask a customer to spend $15,000 or more on solar and then $10,000 or more on storage.

“I would love to snap my fingers and add a battery to every solar system in California, not to mention America,” she said. “Just realistically, that’s going to take time to build.”

I expect that California’s policy is going to accelerate something that was already happening, which is a growing variety and sophistication of battery storage options.

SolarEdge is one of the companies selling energy systems for homes and businesses that include solar and storage. The company, founded in Israel, touts its highly efficient inverter technology, which is the part of a system that converts electricity from solar panels into a form of electricity usable in the home and on the grid.

I spoke with Amir Cohen, SolarEdge’s general manager for North America, to get an idea of what his company expects in California, based on experience in European markets that had major changes to rooftop solar rules.

“The expectation is that demand will return,” he said.

One reason he anticipates a rebound in sales is that the price of electricity from the utility is only going to grow, which will increase the value of solar and create additional reasons to pair solar with storage.

The policy change in California is part of a national debate about how large a role customer-owned resources should have in the transition to clean energy.

Arkansas, Indiana and North Carolina are among the states that have had regulatory rulings or court decisions in the last few months that reduce the financial benefits of rooftop solar, according to the NC Clean Technology Center at North Carolina State University.

And, there is an ongoing push by utilities in just about every state to try to limit the growth of rooftop solar. Utilities would prefer that the country rely much more on utility-scale renewables like solar farms and wind farms, from which utilities can make a profit by owning the systems and owning the lines that deliver the electricity.

But the country’s rooftops need to play a large role, which includes warehouses, big-box stores and tens of millions of houses—even if that means utilities will be selling less electricity to those customers.
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