The California government used to provide solar energy users with a generous rate to sell excess energy back to the grid, catalyzing the strong development of solar energy in the region. In recent years, the government believes that the policy will cause a financial burden while installed PV capacity increases. Therefore, on December 15, 2022, the California Public Utilities Commission (CPUC) passed the NEM 3.0 proposal, lowering the export rate to an average of USD 0.08/kWh, a 75% drop compared to the NEM 2.0 rate. The new law took effect on April 15, 2023. To determine whether the policy is an advantage or a disadvantage to the development of energy storage, InfoLink analyzes the 10-year cumulative operating costs before and after the rate adjustment.
What is NEM?
As mentioned in Electricity pricing and development of FTM, BTM-storage market: Part 2, Net Energy Metering (NEM) is a measure to calculate electricity prices. The gist is to allow solar energy users to sell back excess power to the grid.
Take California as an example. Users use the amount of electricity sent back to the grid to offset electricity purchases on the bill, selling the excess electricity at the same rate as the buying rate. However, sending excess electricity back causes additional burdens to the grid. As a result, maintenance costs increase, which is to be borne by the people. In light of that, California launched NEM 2.0 in 2017, charging users with facilities under 1 MW a one-time interconnection fee ranging from USD 75 to USD 145 when selling electricity back to the grid, to make up for the government's infrastructure costs.
From NEM 2.0 to NEM 3.0
In addition to the interconnection fee, NEM 2.0 incorporated the time of use rate system, offering a higher rate for users who sell electricity back to the grid during peak hours. The average export rate under NEM 2.0 was USD 0.3/kWh, which was lowered by 75% to USD 0.08/kWh under NEM 3.0, prolonging project payback period significantly. InfoLink expects NEM 3.0 to drive up the demand for residential energy storage, despite resulting in less demand for PV installation.
Cost calculation under NEM reform
Figure 1: cumulative costs before and after NEM reform
*The calculation is based on a household with an annual electricity consumption of 6000 kWh, a 7-kW solar system, and a 13-kWh energy storage system, taking into account system efficiency and 85% degradation rate.
Figure 1 shows the ten-year cumulative costs of households with PV systems, solar-plus-storage systems, and electricity all purchased under NEM 2.0 and NEM 3.0. Figure 2 shows that the payback period of PV and solar-plus-storage systems is shorter under NEM 2.0 due to the decreased export rate.
Two aspects worth noting in Figure 1:
- After the reform, the cost of PV systems remains constant and even goes up a little. This is because users can only sell electricity generated by PV systems at noon when the rate is the lowest, while still needing to purchase relatively more expensive gray electricity in the evening., As a result, the cumulative cost may increase marginally over the next decade.
- After the reform, the cost of PV systems will change more than that of solar-plus-storage systems. While NEM 3.0 maintains the time of use rate system employed in NEM 2.0, the export rate is lower. Even though the rate change affects users with storage systems, they can choose to sell back when the rate is better. Therefore, solar-plus-storage users are more advantaged, compared with PV users.
NEM 3.0: boon or bane for residential ESS installation?
Most people think the reduced average export rate from USD 0.3/kWh under NEM 2.0 to USD 0.08/kWh under NEM 3.0 will discourage PV and ESS installations. Since the growth of residential energy storage mainly hinges on the development of solar energy, residential ESS installation will decrease inevitably if NEM 3.0 slows down PV installation.
However, there are two sides of the same coin. InfoLink believes that NEM 3.0 is not a death penalty imposed by the California government on residential energy storage. As the export rate lowers, self-consumption becomes the more economical option. Installing ESS allows users to increase their PV self-consumption ratio and sell back electricity when the rate is better under the time of use rate to leverage against significant changes under NEM 3.0.
The export rate is undoubtedly a strong incentive for residents to install energy storage systems, but there are also other important factors, including government subsidies, participation in auxiliary services, and the stability of electricity supply. Additionally, the CPUC's Self-Generation Incentive Program (SGIP) offers rebates for installing energy storage technology at residential facilities through 2024, boosting residential ESS installation. Therefore, the California government lowering the export rate of solar energy does not necessarily affect the growth of the energy storage industry.
Figure 2: Comparison of NEM 2.0 to NEM 3.0