Earlier in the year, we reported on changes to California’s “Net Energy Metering”, or NEM, regulations that are now beginning to take effect. PG&E reported yesterday that the cap for NEM 1.0 had finally been reached – only days from the date we predicted in our earlier blog post.

NEM is a policy that allows utility customers with onsite solar photovoltaic (PV) energy systems to be compensated for the energy they produce at retail rates, regardless of whether it is used to power instantaneous energy usage at their site. This is achieved through a “kilowatt-hour (kWh) accounting” method, whereby the utility provides a monthly statement that compares total energy charges and total solar production credits over the period and calculates the difference between these numbers – or the “net energy” use. For PG&E, SCE and SDG&E this billing is performed on an annual basis, and a 12-month true-up statement is provided at the end of the year charging the customer only for net use (and in some cases compensating them for net generation). This true-up can also be performed monthly – the billing period depends on local utility rules.

NEM is important to the economics of onsite commercial solar because it credits customer accounts for their solar generation at full retail electricity rates and allows them to zero-out or significantly reduce their energy charges over the course of their respective true-up period. Without NEM or some other form of assured compensation for solar energy generation (such as a Feed-in-Tariff), customers can economically only procure systems that are non-exporting and of a smaller size than is truly optimal. In electricity markets without NEM or a similar compensation mechanism, any kWh of solar that is exported to the electric grid (i.e. not employed to offset instantaneous energy usage at the same facility where it originated) is compensated at less than the retail rate, or potentially not compensated at all (rarely, in certain disadvantageous markets).

NEM is one of the fundamental underpinnings of most successful distributed solar markets in the US such as California, Hawaii and Massachusetts, and is prevalent across the country with 43 states employing some form of the policy. As the adoption of distributed solar grows around the country, NEM policies are facing increasing discretion from utilities and other interested parties. NEM policies are in fact being reevaluated in many states, such as Nevada, where a controversial decision to drastically alter the NEM compensation structure came under intense scrutiny over the course of 2016.

Proponents of net metering, often representatives of the solar energy industry or businesses and residential customers that wish to employ solar, argue that NEM achieves a fair compensation structure for customers that choose to invest in a clean energy generation system. Opponents, such as utilities and certain public advocacy groups, argue that NEM allows solar energy customers to avoid paying their fair share of the costs of running the electric grid.  Regulators like the California Public Utilities Commission (CPUC) must decide what is the best policy.  This post reports on how the CPUC’s recent decision regarding NEM will roll out in the California commercial solar market, and how the specified policy changes will affect the economics of commercial solar projects.


The first version of California’s net metering program, NEM 1.0, was established for the California Investor Owned Utilities (IOUs) in 1996. The policy has been subject to numerous amendments, one of which was to limit total installed NEM capacity in a utility territory to 5% of its aggregate customer peak demand. This decision established that once the cap is reached, no additional solar PV systems may be added to the grid under NEM 1.0 rules.

Each utility has progressed towards its respective cap at different rates. We covered the progression of PG&E’s program as it marched towards its cap in a past blog post, while SDG&E was the first to exceed the cap and had already discontinued new enrollment in its NEM 1.0 program. As mentioned earlier, PG&E announced just yesterday that they had reached their own cap, leaving only SCE to reach the end of their respective NEM 1.0 capacity. The table below shows the progress made to-date.

Table 1: Remaining NEM 1.0 Capacity for the Three CA IOUs

Two of the three CA IOUs have met their respective caps and SCE will soon follow, making it important to understand what comes next for net metering customers in California.

Two of the three CA IOUs have met their respective caps and SCE will soon follow, making it important to understand what comes next for net metering customers in California.

In January of this year, Decision (D.) 16-01-044, specified that upon fulfillment of the 5% cap, net metering would not simply disappear, but rather that a new NEM tariff, NEM 2.0, would take effect. This ruling was widely lauded as a success for the solar industry because NEM enables home- and business-owners to be compensated at full retail value for electricity produced by their solar energy systems. The decision indicates a reinforced commitment from the CPUC to support the addition of solar on the grid.

While the successor tariff leaves the structure of NEM relatively unchanged, it does differ from its predecessor, NEM 1.0, in several key ways that could affect the economics of any project that is incorporated into the NEM program under the new tariff. The key differences are the removal of non-bypassable charges (NBC’s – explained below) from the NEM compensation model, the implementation of mandatory time-of-use rates and the withdrawal of a cap on system size – the third being a very favorable change for large commercial and industrial energy users. To understand the effects that NEM 2.0 will have on commercial solar energy projects, it is necessary to recognize the good, the bad, and the unknown of the new structure.

We have modeled a scenario below employing Department of Energy (DOE) reference energy data for a medium-sized office building in San Francisco, CA[1] to illustrate what will change, what will remain the same and how these variables will impact the value of renewable energy to businesses in the operating areas controlled by these IOUs. Our analysis illustrates some less than advantageous changes to the utility bill savings achievable with the use of solar in the commercial and industrial (C&I) sector in California. It becomes clear, however, as we traverse the pros and cons of the new policy that the overall potential for savings remains high, and in fact increases under certain scenarios.


The Bad

One of the complaints most commonly directed towards NEM systems in the past was that their interconnection to the grid was subsidized. Under NEM 2.0 this argument should be negated, as net metering customers will need to pay an interconnection fee based on the size of their system. This should not have a significant effect on project economics for small systems of less than 1 MW, as they will pay only a “reasonable fee” for interconnection, which will differ by utility ($132 for SDG&E, $145 for PG&E, and $75 for SCE). These smaller systems will not be subject to study fees or upgrade costs.

For larger systems with a capacity of greater than 1 MW, interconnection costs could prove to cost substantially more, and the interconnection process will be more complex. These systems will now have to go through the Rule 21 interconnection process, and will be subject to pay full Rule 21 interconnection and facilities upgrade costs. While in some instances interconnection costs could be large to the point of adversely affecting project economics, these larger systems will also benefit from the ability to take part in NEM, which was not allowed under NEM 1.0 rules.

Another common objection to NEM 1.0 was that net metering customers were exempt from paying their share of “non-bypassable charges” (NBC’s). These charges, which are levied on grid users to pay for public programs such as energy efficiency and nuclear decommissioning, account for the 2 – 2.5 cent difference in savings outlined in Table 2 below.  In effect, the argument goes, they are receiving a “subsidy” for the benefits they receive from these programs. NEM 2.0 addresses this issue by removing NBC’s from the repayment structure that is applied to net-metered solar energy – NEM customers under the new tariff will no longer be compensated for these charges on energy exported by their NEM system.

The removal of these NBCs from the NEM 2.0 compensation structure alters the value of solar energy (in terms of savings accrued through offset utility charges) that is exported to the grid. We at Alta Energy use a metric called value of solar (VOS) to calculate the value that each kWh generated by a solar PV system is worth at a given time. This metric is dependent upon utility rate structures, a customer’s energy usage, and of course the structure of the NEM system in which the energy is accounted for. Table 2 below outlines the observed differences in the value of energy offset by solar at different times of day on a PG&E tariff.

Table 2: Value of Avoided Utility Energy per kWh When Exporting under NEM 2.0*

* Values calculated for a summer day under PG&E Tariff E-19, Option R

* Values calculated for a summer day under PG&E Tariff E-19, Option R

This does not mean a decrease in the value of all solar energy generated, however – only when a system “over-produces” and exports energy to the grid is the VOS metric affected.

Under NEM 1.0, a solar customer only paid NBCs on “net” energy consumption, meaning that if, for example, a solar PV system produced enough energy over the course of the year to offset 80% of a business’ energy use, they would only pay NBCs on 20% of their total annual energy charges (by kWh).  Under NEM 2.0, however, a solar customer must pay NBCs for all energy consumption that is imported from the electric grid and not directly produced by their on-site solar system. NBCs will no longer be offset by exported energy, meaning that depending on an energy users’ load profile, a portion of the solar energy produced by their PV system would be compensated only for the cost of the electric generation they offset, and not the NBCs – this concept is illustrated in the graphic below with reference data from the DOE on a typical summer day (June 8 was used for modeling purposes).

Graph 1: Exported Solar Energy No Longer Compensated for Non-Bypassable Charges under NEM 2.0

This graph, generated with energy consumption data from DOE reference building data and PV production data from PVWatts, a database maintained by NREL, illustrates how a portion of the solar energy (in dark blue) produced under NEM 2.0 will be worth marginally less (around 2 cents/kWh) than it would have been under NEM 1.0. The portion of the energy in light blue (representing >90% of daily production) is worth the same as it would have been under NEM 1.0. This graph represents data for a typical summer day, with electric load from a medium-sized office building in San Francisco, CA.

This graph, generated with energy consumption data from DOE reference building data and PV production data from PVWatts, a database maintained by NREL, illustrates how a portion of the solar energy (in dark blue) produced under NEM 2.0 will be worth marginally less (around 2 cents/kWh) than it would have been under NEM 1.0. The portion of the energy in light blue (representing >90% of daily production) is worth the same as it would have been under NEM 1.0. This graph represents data for a typical summer day, with electric load from a medium-sized office building in San Francisco, CA.

Depending on the building’s electric load and the solar generation for the day, the system might export no energy at all. On the example day shown above, the system exports only 8.4% of its solar generation (the portion shown in dark blue).

Table 3 below illustrates in more detail how the VOS for energy generated by an onsite PV production system is eroded only marginally over the course of any given day. While each kWh of solar energy exported to the grid under NEM 2.0 is worth approximately 2 cents (or 10-20%) less than it would have been under NEM 1.0, with proper system sizing only a small percentage of the energy produced any given day ends up being exported to the grid. While the value of exported energy is reduced by about $.02/kWh, the average VOS for the entire day is reduced by only $.002 ¢/kWh, or a tenth of this amount. This makes sense when you consider that energy is only exported from 10:00 AM to 3:00 PM for the reference day.

Table 3: Changes in VOS over the course of a day under NEM 1.0 vs. NEM 2.0 for model building

table4-2One consequent and potentially unanticipated effect of this aspect of the new NEM structure is that the relative value of non-exported solar energy increases. This enhances the economics for self-generation and as the cost of energy storage decreases there may be more opportunities for self-generation.

The Good

The good news is that the structure of NEM was left mostly unchanged. This means that there is still substantial value to be created from the use of solar energy for C&I enterprises in California, who will continue to be compensated at full retail rates for the solar energy they produce through the NEM program.

NEM 2.0 retains the key features of the previous program: annual net energy accounting and no NEM-specific charges, capacity or grid access fees. Prior to the establishment of NEM 2.0 there was mounting concern that NEM-specific charges would create an un-level playing field and negatively impact the value of NEM projects –  utilities pushed for this amendment. Favorably, the CPUC wisely decided not to allow this and it did not come to pass, and only a small portion of the value produced by C&I solar systems stands to be eroded under the new policy.

The largest potential opportunity created under the new tariff, especially for the C&I segment, is the elimination of the 1 MW maximum system size. For C&I enterprises with large loads and available space, this really opens up the benefits of NEM. Enterprises who have undeveloped adjacent property can even benefit from the significant decreases in the cost of large scale solar in combination with the value of NEM by constructing large systems that can offset most or all of their annual energy usage. The best part is that customers who take advantage of NEM 2.0 will have their accounts grandfathered on this NEM successor tariff for 20 years, providing a significant amount of certainty and protecting against potential changes to future NEM rules. This provision ensures that customers who enroll under NEM 2.0 will continue to receive value for years to come.

It is not only large-scale systems that stand to benefit under the successor tariff, however. More moderately sized systems can still prove quite profitable under the new rules – the below graphic outlines our analysis of the savings accrued to the DOE model office building with a no upfront expense PPA model under NEM 2.0.


* Solar Generation and Annual Savings values represent first year of project life

The system would generate nearly $425,000 in utility bill savings over a 25-year project life, with predicted future energy rates. With the same PPA under NEM 1.0, the same solar energy system would have netted the property owner an additional $1,330 per year due to being credited for offset NBC’s in addition to energy generation charges. Table 4 below outlines the differences observed and highlights the remaining potential for attractive savings under the new NEM structure.

Table 4: Model PPA Savings under NEM 1.0 and NEM 2.0


While the value of the savings generated with a NEM solar energy system does stand to decline somewhat with the shift to NEM 2.0, the good news is that the potential for substantial savings will continue to exist under the new structure. The best part is that NEM 2.0 contains a provision for grandfathering, which means that even if the NEM structure changes in the future, customers who enroll under the current program are guaranteed to benefit from this structure for years to come.

The Unknown

One of the main issues with NEM 2.0 is that it does not specifically identify a value of net-metered energy or specify rate designs applicable to NEM customers. This means that utilities will continue to have an incentive to push for fixed charges and rate structures that reduce the value of net-metered energy. This creates uncertainty regarding the future value of net-metered systems – especially given that the CPUC specified in their January ruling that NEM rules will be revisited again in 2019.

In the meantime, that gives California solar customers just over 2 years to file their projects for inclusion under NEM 2.0 and be grandfathered into the policy for the following 20 years – providing an attractive degree of certainty for investment in solar over the next few years.


While NEM 2.0 presents an opportunity to profitably invest in a solar energy project in California today, the window of opportunity to act on these favorable policy conditions may be as short as several years. No one can say for certain what the next iteration of net energy metering rules might look like, but Alta Energy can help you to maximize the value of renewable energy solutions for your portfolio under the current rules – contact us to learn how to procure optimized solar PV systems under the NEM 2.0 successor tariff, or for any other NEM- or policy-related questions!

[1] Using reference building data from the DOE (link – http://energy.gov/eere/buildings/commercial-reference-buildings )





Go top