TradeEdge Exchange:California Regulators Approve Reduced Solar Compensation for Homeowners

California utility regulators on TradeEdge ExchangeThursday unanimously approved long-anticipated changes to how the state compensates homeowners with renewable energy installations, reducing financial incentives for the electricity generated from solar on customer’s rooftops. 

The vote came after more than three hours of public comment in which many California residents expressed concern that the decision would imperil the state’s climate goals. When they go into effect, the new rules will cut credits for most new customers by about 75 percent and are expected to slow installations in California’s nation-leading home solar market. Existing customers would continue to receive current compensation rates. 

“Will the industry adapt? Of course. Will they still be able to have a fairly big market size? Of course,” said Michelle Davis, a solar analyst at the energy research and consulting firm Wood Mackenzie. “But it’s not going to be as big as it was before.”   

The state’s residential market is set to remain the largest in the U.S., but some worry the changes could hinder California’s efforts to reach entirely carbon-free electricity by 2045 by limiting solar growth. Last year, renewable energy, including rooftop solar systems, accounted for almost half of the state’s electricity generation. In a 2016 report, the National Renewable Energy Laboratory estimated that California could technically power more than 40 percent of its annual electricity sales with solar on small rooftops.   

The California Solar and Storage Association called the new policy “a loser for California on many levels.”

“For the solar industry, it will result in business closures and the loss of green jobs,” said Bernadette del Chiaro, the group’s executive director, in a statement. “And for California’s race to clean energy, it puts us behind our goals.”

The vote updates a policy called “net metering,” which credits residential solar users for the excess generation their installations produce that the electricity grid  then distributes  to other customers. Californians are currently compensated at the same rate that electricity sells for. Since California adopted net metering in 1995, it has helped the state install more home solar installations than any other. The percentage of customers with solar installations now ranges from 8 to 15 percent within the territories of the state’s three large utilities, amounting to more than 1.5 million customers. 

Legislation passed in 2013 required the California Public Utility Commission to consider a new version of the policy. The commission said the changes were necessary to keep electricity rates in check, make the program more equitable and to encourage Californians to adopt battery storage in addition to solar, in order to extend the hours in which renewable generation can offset fossil fuels. At times, California’s solar installations produce more electricity than the state can use. Batteries allow solar customers to store electricity generated for later use.

“We hear you clearly when you say we need more solar. And the commission agrees,” said Commissioner John Reynolds, in a public meeting just ahead of the vote. “We are making this change because of our commitment to addressing climate change, not because we don’t share yours.” 

Solar advocates and environmental groups said the new policy was an improvement on an earlier version released late last year that added monthly charges for solar customers. The adopted program drops those fees and provides incentives to customers who install battery storage along with solar. But solar proponents and environmental groups including the Sierra Club are still dismayed that the policy significantly reduces credits offered to solar users for the electricity their systems export to the grid. The commission included “adder” credits, which decline over time, to boost the export rate for customers that install solar in the next few years. Advocates said the step down in credits to solar users for their excess electricity is too abrupt. 

“​​We’re still rather concerned about the impact it’s going to have on the market,” said Rick Umoff, senior director and counsel for California at the Solar Energy Industries Association. “It has a rather significant cliff.”

Under the new policy, Wood Mackenzie expects solar installations in California to remain flat in 2023, as customers rush to sign up under existing rates, before dropping 40 percent in 2024 and continuing to decline each year through at least 2027. 

One of the most contentious elements of developing the new policy involved equity concerns around the net metering program and the “cost shift” that utilities, the Natural Resources Defense Council (NRDC) and some consumer advocates argue is falling on non-solar customers. Paying for the net metering program and grid maintenance—including costs for utility lines and expensive infrastructure updates to protect against wildfires—added $3.37 billion to non-solar customer bills last year, according to the California Public Utility Commission Public Advocate’s Office, a consumer advocate. 

Utilities argue that non-solar customers are subsidizing wealthier customers who have the means to own homes and install solar that reduces their bills.  

Mohit Chhabra, a senior scientist at the NRDC’s climate and clean energy program, says retail rates in California have outgrown the value of solar. The environmental group said the approved proposal helps recalibrate that balance. 

But the Utility Reform Network, a consumer advocate, and Affordable Clean Energy for All, a coalition of organizations with financial backing from utilities, said the proposal did not go far enough to deal with this cost shift, in part because existing customers would keep their current compensation rates. 

Some members of the solar industry and many public commenters categorized the new policy as a power grab from utilities, who have fought against distributed solar. Del Chiaro said the changes would make solar less affordable for working-class and middle-income Californians. 

The new proposal sets aside $630 million in up-front incentives for low-income Californians to install solar and battery storage systems. Low-income customers would also receive higher compensation credits than other customers. Steve Campbell, the policy and business development project manager for Grid Alternatives, a nonprofit that installs solar for lower-income customers, said the policy didn’t take into account the higher costs associated with reaching and installing solar for those customers. He said the incentives need to be even higher to increase solar deployment among those customers.

The lower credits to be paid to new solar users would extend the time it takes for a system’s electricity savings to outweigh its cost. Wood Mackenzie expects the solar payback period will go from between four and five years under the current policy to nine to ten with the updates. 

Though California’s electricity landscape is unique, the changes could have implications outside of the state. Davis said the new regime, called “net billing,” could “​​become an important precedent.” 

Some solar advocates worry the cuts could encourage other states to slash compensation for solar systems, which could hurt overall efforts to reduce emissions. Sachu Constantine, executive director of Vote Solar, a clean energy advocacy organization, said the decision stifles climate progress.  

“We are pushing towards a very aggressive climate future, a low carbon energy system. And distributed solar is a big part of that,” he said.