NEM-3 Explained: What Every California Homeowner Needs to Know
NEM-3 Explained: What Every California Homeowner Needs to Know
As more homeowners and businesses in California turn to solar energy, it's important to keep up with the latest policy changes. The newest update, called NEM-3 (Net Energy Metering 3.0), brings some big changes that affect how you're paid for the extra electricity your solar system sends back to the grid. In this easy-to-follow artible, we'll cover the most important things you need to know about NEM-3, especially if you're thinking about going solar.
What Is NEM?
Net Energy Metering (NEM) is a billing system. It lets solar energy system owners earn credits for extra electricity their systems generate and send back to the grid. This setup encourages more people to use renewable energy by offering financial rewards. When your solar panels produce more electricity than you need, the extra energy goes to the local power grid. Your utility company then gives you a credit for that energy, which helps lower your electricity bill. This system benefits both the solar system owner and the community by adding more renewable energy to the grid.
The NEM policy has changed over time as more people adopt solar technology. The first version, NEM-1, was simple. For every kilowatt-hour (kWh) you sent to the grid, you got one kWh taken off your energy bill. But as solar became more common, the California Public Utilities Commission (CPUC) introduced NEM-2 in January 2016. NEM-2 slightly lowered the value of these credits and required customers to follow time-of-use rates, where electricity costs vary depending on the time of day. Under NEM-2, the credit for solar energy was about 2.5 cents per kWh lower, or roughly 10% less, than under NEM-1.
The latest version, NEM-3, started on April 15, 2023. This update brings big changes to how solar energy is valued in California. If you didn’t submit your solar project application before this date, you’re now under the new NEM-3 rules. The most significant change is a large reduction in the value of the credits for extra energy sent to the grid. Compared to NEM-1, these credits have dropped by up to 80%. Under NEM-3, solar energy is now compensated closer to the wholesale price of electricity, which is much lower than the retail price that currently pay. This update aims to balance the financial rewards of solar energy with the need to keep the power grid stable and reliable for everyone in California.
Biggest Changes with NEM 3.0 vs. NEM 2.0
NEM-3 introduces a new billing system that changes how you pay your electric bill. It also changes how your solar credits are calculated. Now, the credits for extra energy from your solar system are based on something called the Avoided Cost Calculator (ACC). This is different from the Time of Use (TOU) rates used under NEM-2.0. The rates with NEM-3 are now much lower and are closer to the price of wholesale electricity, compared to NEM-1.0 and NEM-2.0.
Net Billing Tariff (NBT) Structure
With the NBT system, any extra solar credits you earn at the end of the month will roll over to the next month until your yearly true-up. For instance, if you send 500 kWh of energy to the grid but only use 300 kWh, the extra 200 kWh becomes a credit for the next month. If you keep having credits each month, you’ll get paid for any leftover energy at the end of the year, just like in NEM-1 and NEM-2.
However, if you use more energy than you send to the grid, you’ll have to pay the difference at the end of the month. This is different from NEM-1 and NEM-2, where credits carried over until the annual true-up.
Export Rates, Avoided Cost Calculator (ACC) & Adders
Under NEM-2.0, the credit you received from extra solar energy was based on Time of Use (TOU) rates. For example, if the Off-Peak rate was 35¢ per kilowatt-hour (kWh) and the Peak rate was 45¢ per kWh, you would get a 35¢ credit for exporting energy during Off-Peak times. Now, with NEM-3.0, these rates are decided by the Avoided Cost Calculator (ACC). The ACC changes the rate based on the time, day, and whether it's a weekday or weekend.
The ACC was created by the California Public Utilities Commission (CPUC) in 2006. It was made to figure out how much money utilities save when solar projects add energy to the grid. In simple terms, "avoided cost" is what the utility doesn't have to spend on making or buying energy at certain times. This cost changes throughout the day and depends on how much energy is available on the grid. Now, the ACC is also used to determine how much you’ll get credited for the extra energy your rooftop solar sends back to the grid.
This graph is an example of export rates based on the Avoided Cost Calculator.
When you sign a new net metering agreement under NEM-3, your export rates will be set by the latest ACC. The ACC is updated every two years, with the last update in September 2022. So, if you install your solar system in 2023 or 2024, your rates will follow the 2022 ACC. Systems installed in 2025 or 2026 will use the updated 2024 ACC.
Once your agreement is approved, your rates stay the same for nine years. This is good news for new NEM-3 homeowners because rates might drop over time. Installing your system sooner can help you lock in better rates. After the nine years, your rates will adjust based on the latest ACC.
If you sell your home, the new owner will keep the net metering agreement. But they won’t get the nine-year rate guarantee. This is different from NEM-1 and NEM-2, where the rate guarantee could pass to the new homeowner.
To help with the lower payments under NEM-3, "adders" have been introduced to make solar installations more attractive. These adders are particularly helpful for low-income customers and those in disadvantaged areas, giving extra value in the early years. Although the adders for other customers are smaller, they still provide some benefit. These adders are only provided to PG&E and SCE residential customers. Non-residential and SDG&E customers will not receive the ACC adders.
These adders, which are measured in cents per kilowatt-hour (¢/kWh), will be added to your export rates each hour for the first nine years of your system. The adder amounts decrease by 20% year on year until April 2028 when no more adders are provided to new solar customers. For example, if you install your system in 2023, you'll receive the Year 1 adder for nine years. If you install in 2027, you'll get the Year 5 adder for the same period. The sooner you install, the higher the adder, making it more beneficial to go solar early.
Expanding Your Existing NEM-1 & NEM-2 System
If you're a NEM-1 or NEM-2 customer, you can add a battery to your system without losing your NEM-1 or NEM-2 status. There's a special rule for batteries because the CPUC wants to encourage existing NEM customers to install them. Even though adding a battery might increase your system size, it won't affect your NEM status as long as it's just the battery being added.
When it comes to solar, if you add more capacity to your system (beyond the 10% allowed for maintenance), your system will switch to the new NEM-3 NBT rules. However, if your inverter is a certified power control system (PCS), like Sol-Ark or Luxpower, then you can expand your existing solar system, while limiting export and maintaining your NEM-1/NEM-2 agreement.
Additionally, you can increase your existing system's capacity without losing your NEM status if the added capacity is a separate system that doesn't send energy back to the grid. Luxpower SNA 6000 is an excellent and cost-effective non-export, battery compatible inverter for this purpose.
Battery Storage is Essential for NEM-3
Solar has been a great financial investment for many California homeowners. With the recent changes under NEM-3, solar can still be a great investment, but are now essential for solar to make it worth it financially . Batteries allow you to store the energy generated by your solar system. With the right size batteries, you can power your home in the evening and throughout night. This reduces your reliance on grid energy, lowers your electric bill, and maximizes the benefits of your solar energy. Additionally, battery storage protects your home from unexpected blackouts.
Summing Up NEM 3.0
As more Californians turn to solar energy, understanding the latest policy changes is crucial. The new Net Energy Metering 3.0 (NEM-3) policy, which took effect on April 15, 2023, brings significant changes to how solar system owners are compensated for excess electricity. Under NEM-3, credits for exported energy are now calculated using the Avoided Cost Calculator (ACC), resulting in lower rates compared to previous versions. These rates are locked in for the first nine years after installation.
To ease the transition, NEM-3 introduces "adders" that boost the financial benefits of solar installations, particularly for low-income customers and those in disadvantaged areas. These adders are highest for early adopters, providing an incentive to install solar sooner.
For existing NEM-1 or NEM-2 customers, adding a battery won't affect their current status, but expanding their solar capacity might shift them to NEM-3 rules unless certain conditions are met. Understanding these changes is key for anyone considering solar energy in California.
For new NEM-3 solar customers, adding battery storage can help you get the best return on investment (ROI). With batteries, you can generate, store and use your energy. This helps you reduce the grid energy, which helps you save on your electric bill. For any battery-related questions, we're here to help. Give us a call or send us an email to help design your solar and battery system today. Also, you can visit our website for complete battery system kits for your home.