July 27, 2023

California's NEM3 solar policy

What it is and what it means for residential solar
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What is NEM3 in California and what does it mean for the solar industry?

After years of heated debate, California’s new solar Net Billing Tariff — commonly called NEM3 – went into effect for all systems that are applied for after April 14, 2023 for SDG&E, PG&E, and SCE customers. At its core, NEM3 reduces the value of energy exported by new solar customers by 75%. This has prompted frustration with a policy that makes it harder to adopt solar, potentially hampering the state’s solar industry and objectives.

Multiple sources have pointed out that NEM3 extends the payback period on solar projects for homeowners, but it’s not all doom and gloom.

Despite its shortcomings, solar customers and installers can still earn attractive returns on their solar projects while getting more features – like backup power and load flexibility – paid for along the way. Customers that opt for solar and energy storage under NEM3 are, on average, going to be more resilient, flexible, and may find unique new sources of savings. Let’s break down how.

Net metering explained

Net energy metering (NEM) is a billing mechanism that allows homeowners with solar panels to receive credits for the excess energy they generate and send back to the grid (aka exported energy). This means that homeowners can offset their electricity costs by generating their own power, and sell or get credit for any excess energy that flows back to the electrical gird grid.

Net Energy = Energy Generated (from solar) – Energy Consumed (from house electrical loads)

In the chart below showing power generation and consumption over 24 hours for a house with solar, you can see that Energy Generated at a house is greater than the Energy Consumed at the house in the middle of a sunny day. The difference between the two, or Net Energy is sent to the grid and customers receive utility bill credits for the “Net metered” energy according to the utility rate plan.

The value of net energy was gutted under NEM3

Under the previous NEM 2.0 policy, a kilowatt-hour (kWh) of electricity pushed onto the grid was worth the same as a kWh pulled off the grid, or about $0.30/kWh on average. With NEM 3.0, the export rates, which is the value of excess electricity pushed onto the grid by solar systems, are reduced by around 75% on average compared to NEM 2.0. See chart below from CALSSA (California Solar and Storage Association) which shows the reduction in net energy rates by utility.

Source: CALSSA

Why the sky isn’t falling.

On the surface, this looks like a disaster for the solar industry and homeowners looking to adopt solar in CA. But it’s not. It’s not because of three primary reasons: electricity rates, batteries, and incentives. Let’s tackle them one at a time.

Very high electricity rates. This is bad news for the average electricity consumer, but the higher the electricity rates, the shorter the solar payback periods are. And California energy rates are remarkably high. In particular, the utilities increased the peak energy rates, which occur during the afternoon hours, to $0.53+ per kWh - see below for each utility.

Residential electricity rates ($/kWh) under NEM3

For context, the peak pricing from CA IOU utilities are the highest rates in the nation, and the average rates rank 2nd only to Hawaii – see chart below.

Source: Energy Information Administration (EIA)

Batteries will offset peak electricity rates

Batteries offset peak energy rates. With the utilities offering little incentive for net energy sent to the grid, batteries can charge during this period, then discharge the energy during the expensive on peak hours.

Using the same 24 hour load profiles, we can illustrate battery operation in conjuction with solar production. Batteries will charge off any excess solar during the middle of the day, then discharge in the afternoon when energy is worth worth $0.53+/kWh… a huge savings.

With solar + storage, customers net electrical impact on the grid will be minimal and flexible. Batteries enable the shifting of energy consumption to what is most economically optimal for the customer, according to load profiles and ever-changing utility rate plans and incentives. See below image for net load after solar + battery operation is combined:

Battery technology and cost reductions have also come a long way, and the energy storage industry is now nearly synonymous with solar. In addition to the utility bill savings enabled by batteries, now customers have some additional potential benefits, including backup power and participating in demand response or virtual power plant programs. Backup power enables homeowners to keep the lights on, fridge cold and more even if the grid goes down. Demand response programs and virtual power plants enable customers to receive payments or bill reductions for flexing their battery load at specific times. Both stack value to the original solar + battery installation..

Incentives are available for it all.

With the Inflation Reduction Act passing recently, home solar and storage installations are eligible for a 30% investment tax credit (ITC). This basically gives 30% off the entire project – including battery systems to enable backup power.


NEM3 in California has altered the residential solar landscape such that nearly every installation with one of the investor owned utilities will include batteries. Despite the challenges associated with learning to sell and install these new battery systems, there is a path to a win-win situation for residential customers that are looking to go solar in the NEM3 world.

At Tigo, we’re taking a proactive approach to offer training and information sessions on battery operations and setting customer expectations. Every EI Residential solar solution features a battery-ready hybrid inverter and an advanced software platform for control and visibility. If you are interested in more information, visit the Tigo Academy or contact our sales team for group training sessions.


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