Does CPUC’s PD (NEM 3.0) Stall Rooftop Solar Adoption?

California’s proposed decision (PD) of replacing the current NEM 2.0 policy to its successor NEM 3.0, has attracted enormous public attention. The proposed tariff changes are primarily driven by the issue of cost-shifts from solar adopters to non-adopters, which is compounded by the unparalleled huge price mark-up between the retail and wholesale prices in California (see here). Moreover, the “almost” retail-rate compensation of injected generation under NEM 2.0 with the heavily volumetric charge snowballed the subsidies between adopters and non-adopters.

What should the compensation rate for excess generation be?

To answer this question, we must understand how rooftop solar achieves bill savings. Generally, the onsite generation is valued at the retail rate if it is self-consumed and at the sell-rate if it is exported back to the grid. As a special case, under NEM 1.0 and NEM 2.0, these two rates are equivalent. Therefore, for PV adopters under those policies, the value of self-consumption is equivalent to the value of exporting back to the grid. While this is creating considerable bill savings for adopters (see here), purchasing solar customers’ excess generation at the retail rate is a clear overcompensation, especially when the rate design is heavily volumetric.

The arguably high bill savings of PV adopters in California result in a reduced utilities revenue from energy sales forcing them to increase their prices again, which makes it even worse, as PV adopters will achieve bill savings at higher rates and non-adopters (usually less affluent customers) will be unavoidably paying the higher rates. Pricing at the value of solar VoS (or value of DER) reduces utility revenue shortfalls and therefore the need to increase the retail rate, which also reduces cost-shifts. More importantly, valuing the net excess generation at the VoS encourages more self-consumption and discourages net exportation, which necessitates the installation of energy storage devices (batteries).

What should the capacity-based charge (solar tax) be?

It should be ZERO. California can adopt a less volumetric-charge-dependent tariff by considering uniform two-part tariffs (e.g. through delivery charges), rather than discriminatively as in CBC. CPUC’s PD seems to be solving a problem (i.e. volumetric cost recovery) by imposing another one (i.e. partial cost recovery via CBC). The consideration of a uniform fixed fee will reduce the blatantly high retail rate in an equitable and fair manner, resulting in a less severe subsidy issue.

Although solar tax is extremely effective in recovering utility costs, and lowering rooftop solar bill savings, which prolongs payback times and reduces subsidies, it does so in a very regressive way. There aren’t clear justifications for levying such a high charge on adopters. If the utility designed a rate that creates cost-shifts whenever a customer reduces his/her consumption, why should PV owners pay for it?

The CBC would add a minimum of $40/month to the bill of a PV adopter increasing the payabck time to more than 20 years. This will definitely impact the diffusion of solar in California, because the discriminatory two-part tariff would lower the retail rate, which even further prolongs the payback time.

Moreover, unlike reducing the sell-rate which encourages batteries’ adoption, levying solar tax does not push customers toward considering PV+battery pairs. Part of the regressiveness of solar tax has to do with the fact that it cannot be avoided nor minimizedq by installing a battery. In fact, they can only be avoided if you don’t install a DER at all.

What should the successor policy be?

Valuing exported generation at VoS is a move in the right direction, but CBC is not. Although VoS would partially relieve the utility cost recovery issue, a more differentiated time of use (ToU) rate (higher peak to off peak ratio) with a later peak period (16:00 and beyond) applied to all customers would bring the retail rate closer to the marginal cost of electricity, without negatively impacting non-adopters.

A later peak period ToU rate implies that most excess generation is compensated at the off-peak price, which in turn encourages PV+battery adoption to arbitrage the peak/off-peak ratio. The implementation of uniform fixed charges might also be necessary if such rate modifications does not reduce the price markup. Uniform fixed charges are almost applied everywhere in the US. They are easy to implement and understand, effective, equitable, and able to reduce the volumetric cost recovery, which fails miserablly under net-metering. Lastly, the policymaker should consider shortening the billing period, which reduces credit banking opportunities and make VoS compensation more effective.

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Ahmed S. Alahmed

Electrical and Computer Engineering PhD researcher. Interested in electricity markets, optimization, mathematical analysis and economics. https://www.ahmedsa.me