Will California’s Successor Tariff Discourage New Residential Solar?

Solar installers, residential customers, utilities, and a host of other stakeholders in the residential solar market are waiting for the California Public Utilities Commission’s (CPUC) Net Energy Metering successor tariff (NEM 2.0), due by the end of 2015.

The issue at hand is whether or not, and to what extent, those without solar are subsidizing those with solar by paying for grid upkeep and modernization. Because utilities fall on one side of the spectrum and nearly everyone else falls on the other, there is no love lost between stakeholders in the industry.

Regardless of the CPUC’s decision, the new tariff structure is set to go into effect when utilities reach a 5 percent net metering cap or by July 2017, whichever comes first.

Why is a successor tariff necessary?

Currently, California has a very favorable NEM tariff structure, compensating residential solar customers at the retail rate for the electricity they produce through bill credits. Under this structure, when a residential solar customer is compensated for producing excess energy, the customer does not pay for upkeep or modernization of the grid since these charges are built into the retail rates.

Some sources say solar has exploded in recent years due in large part to NEM.

NEM is directly tied to the return on investment (ROI) of a residential system. It is responsible for pioneering new financing options available to homeowners.

On-bill financing, solar leases, power-purchase agreements, solar loans, and property-assessed clean energy (PACE) programs are currently attractive to consumers and providers because of NEM tariffs and the investment tax credit (ITC), which is set to expire at the end of 2016.

However, as penetration levels of distributed generation continue to rise and utilities approach their NEM caps, it is possible that adjustments to incentives and rate structures need to evolve along with the industry.

Are the costs and benefits being shared by all stakeholders?

“There is a problem with the current rate structure, NEM 1.0,” said economist Ahmad Faruqui, principal at the Brattle Group. “[NEM 2.0] is an attempt to address the inequity through which a customer [with solar] is being overpaid for the power they sell back to the grid.”

Faruqui said, “There is a revenue shortfall which is being collected from all of the other customers. For a small number, it could be lost in the noise… but it is hard to ignore the fact that the subsidy is rising with time and that’s why the new rate-design alternatives are being considered.”

There are advocates on both sides of the issue. Pacific Gas and Electric Company, Southern California Edison, and San Diego Gas & Electric, the three largest investor-owned utilities in California, have submitted proposals to the CPUC with updated rate structures that they feel better align with the costs and benefits of solar. The changes proposed include different rate structures such as demand charges, fixed charges, and a decrease in compensation that is brought in line with wholesale rates.

Proponents say that many of these proposed changes will more accurately reflect the benefits and costs of rooftop solar while ensuring that future growth is sustainable. Opponents, however, feel that many of these proposals would unfairly hamper the industry, especially at the extent to which they are being proposed.

At the other end of the spectrum, some stakeholders believe that California should be promoting solar instead of trying to hinder growth. They point to both global warming and residential solar benefits to the grid in terms of ancillary services, avoided generation capacity, and transmission or distribution capacity. They advocate for maintaining the current NEM tariff in order to promote adoption, especially considering the ITC is set to expire at the end of 2016.

The loss of a 30-percent tax credit and the presence of less-favorable rate structures will have a significant impact on ROI. Depending on the nature of the new tariff, this could have extremely detrimental effects on the residential solar market in California, especially for lower and middle income homeowners.

The prevalence of these opinions was directly measured in a recent poll conducted by the California Solar Energy Industries Association and Brightline Defense. The poll found “overwhelming support for rooftop solar power and related policies among California voters,” with 88 percent of respondents indicating that more should be done to encourage rooftop solar and 80 percent disapproving of utility proposals to reduce NEM.

How have other states addressed a growing residential solar market and what can we expect for California?

Other states, such as Arizona and Hawaii, have adopted new NEM tariffs that have been debated. In particular, many stakeholders in the industry have said that Hawaii’s new “grid-supply” tariff, under which solar customers will be compensated at less than half the retail rate, is a far cry from a fair rate.

When asked about the Hawaii decision and whether it would set a precedent for the industry, Faruqui said, “I was very surprised when that news broke. It certainly has sent shockwaves across the country – some liking it and some hating it depending on which side of the solar transaction they’re on. I think it’s a very radical move and I don’t think it will be imitated anytime soon.”

There are strong opinions on both sides of the argument. There is significant uncertainty about how the CPUC will structure NEM 2.0. Faruqui said that the most likely outcome will be new rate structures with a fixed charge, a demand charge, and an energy charge. While the new rate structure may lower the attractiveness of solar in the near term, it will regain its momentum over the long term.

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