NEM 3.0 in California: What you need to know

Looking at the best solar & renewable energy markets in the U.S., they all have one thing in common: a robust net metering program. Net metering – or NEM – allows you to earn credits for any excess solar electricity you send to the grid when your solar panel system generates more than you need.

After years of back and forth before coming to a proposed decision, on December 15, 2022, the California Public Utilities Commission (CPUC) voted unanimously to approve California's third iteration of net metering, or NEM 3.0. Under the new tariff, NEM 3.0 has significantly reduced net metering compensation rates for new California solar customers (by about 75 percent). We'll explain what you need to know about NEM 3.0 and what steps you can take to guarantee the best solar savings now that it has taken effect.

Implementing new net metering policies is no small feat; many stakeholders are involved, and the process involves many steps, including studies, proposals, testimonies, and hearings – all before the actual decision! After many years of deliberation, delays, and iterations, NEM 3.0 was finally finalized on December 15, 2022 – let's explore how the changes have impacted the California solar industry:

Reduced net metering credits

The main impact of NEM 3.0 is that it reduces compensation for excess power sent to the electric grid. Many states offer a credit equal to the retail electricity rate for exported solar production: this is known as one-to-one net metering, in which you're credited at the same rate for solar exports as what you'd pay to use electricity from the grid. In NEM 3.0, the CPUC established a new rate for crediting solar exports, shifting the structure from net metering to net billing, which is much lower in value – and by lower, we mean…lower. NEM 3.0 is based on "avoided cost" rates, meaning what your utility pays for any electricity you send to the grid is no longer based on your typical electricity rates, like a traditional net metering credit, but rather calculated separately. The exact rate varies depending on the hour of the day, day of the week (i.e., weekday vs. weekend), and month you export the energy: in fact, there are 576 possible export rates in total! On average, the avoided energy costs rates come out to about 25 percent of retail electricity rates during those same hours, meaning the value of net metering credits has decreased by about 75 percent under NEM 3.0.

Solar savings: How NEM 3.0 will impact solar payback periods

When the CPUC passed the NEM 3.0 in December, our initial analysis showed that the payback period for solar would be eight to ten years for solar on its own and shorter for homeowners who installed a battery with solar. However, since NEM 3.0 went into effect in mid-April, the payback period for solar quotes in California has actually been much shorter than we anticipated. In January, all three of the investor-owned utilities in California raised their electricity rates significantly. San Diego Gas & Electric increased their rates by 25% over the rates in the NEM 3.0 filing. Higher electricity rates translate directly to shorter payback periods.

The second major factor that changed since early 2023 is that solar prices in California have decreased recently: quoted solar prices in California have dropped more than 5% in the third quarter of 2023 compared to their peak in April 2023. Paying less for solar translates directly to faster payback periods. Combined, these two factors have meant that solar shoppers in California are still seeing very favorable economics for solar on EnergySage in 2023.

Increased importance of solar batteries

NEM 3.0 has increased the savings potential of pairing your solar panel system with a battery. In fact, under NEM 3.0, the payback period for a solar-plus-storage installation is now faster than for a solar-only install.

As a new customer under these rules, If you install a solar battery and store excess surplus energy onsite, you can charge your battery system for use later, maximizing the value of your solar power and minimizing what you export to your utility company through self-consumption, especially when the time of use rates are higher. While your payback period for a solar-plus-storage system may still be higher under NEM 3.0 than under NEM 2.0, it's now less than if you install solar. This means that under NEM 3.0, you'll save the most over your solar energy system's lifetime if you add a battery.

Grandfather clause

At least some consumers can still qualify for the NEM 2.0 structure, but it's a small group. If you applied for grid interconnection by April 14, 2023, you have until April 15, 2026 (three years from the date NEM 3.0 began) to make the connection and still qualify for the terms of NEM 2.0. Importantly, you can also change the equipment planned for your system between now and the cut-off date as long as it doesn't increase its size or decrease it by more than 20 percent.

Want to learn more about solar and net metering policies in California? Check out some of the sources below:

Solar and net metering in California

• What is net metering? (EnergySage)

• California net metering: everything you need to know about NEM 2.0 (EnergySage)

• What's happening to net metering in California? A Q&A with CALSSA (EnergySage)

• California solar panels: local pricing and data (EnergySage)

• Net Energy Metering (NEM) (CPUC)

Net metering policies: PG&E, SDG&E, and SCE

• Understanding Net Energy Metering and Your Bill (Pacific Gas & Electric)

• Net Energy Metering Program (San Diego Gas & Electric)

• Net Energy Metering FAQ (Southern California Edison)

Robust solar incentives, plenty of sunshine, high electricity rates, and existing net metering policies have helped California become one of the nation's leading solar markets. And as more and more people installed panels in the state, the three investor-owned utilities (IOU) – Pacific Gas and Electric (PG&E), San Diego Gas and Electric (SDG&E), and Southern California Edison (SCE) – inched closer to their net metering "cap," each respectively hitting it between 2016 and 2017. This prompted the California Public Utilities Commission (CPUC) to create its next-generation net metering policy, NEM 2.0.

Compared to CA's original net metering policy, NEM 2.0 provides solar rebates at a slightly reduced rate (about two cents less per kilowatt-hour (kWh), to be specific) after accounting for non-bypassable charges (which support public-benefit programs). But considering what was at stake, NEM 2.0 was a win for rooftop solar; the industry has continued on a strong growth trajectory since, and homeowners taking advantage of this policy today continue to see thousands of dollars in savings on their electricity bills.

We won't dive deep into the technicalities of NEM 2.0 here, but if you're interested, we have a separate article about its history and mechanisms. Concerning the new changes, though, it's important to know that this isn't the first time CA has instituted a new net metering policy. However, some of the changes for NEM 3.0 will significantly impact the economics of rooftop solar in CA, more so than past modifications.

Has NEM 3.0 been approved?

NEM 3.0 has been approved as of December 15, 2022, and went live in April 2023.

Is NEM 3.0 retroactive?

No – utilities must grandfather NEM customers in either NEM 1.0 or NEM 2.0 into their existing net metering rate for 20 years unless you add capacity to your system.

Is NEM 2.0 still in effect?

Only for community solar programs. For everyone else, NEM 3.0 replaced NEM 2.0 on April 15 2023.

Could NEM 3.0 be overturned?

It's possible – but very unlikely – that NEM 3.0 will be overturned. The most likely ways would be through legislation or a ballot measure. While it's still worth contacting California legislators to let them know you don't support NEM 3.0 changes, it's important to understand that both of these initiatives would take a long time to implement and would cost a lot of money.

What if you buy a house with solar?

If you bought a house with solar panels after April 14, 2023, you'll be under the net metering rate plan of the original property owner. If the previous homeowners were grandfathered into NEM 1.0 or NEM 2.0, you will be too.

If you're a California homeowner or business owner, we can still help you get quotes and answer your questions about how to make solar panels work for you. On the EnergySage Marketplace, you can receive up to seven quotes from local, pre-screened installers. These quotes include cost information, savings estimates tailored to your property, and current net metering incentives. If you'd prefer to start with a quick ballpark estimate on solar savings, try our Solar Calculator.