California’s rooftop solar policy launched the solar industry and our fight against the climate crisis
Rooftop solar plays a central role in our efforts to address the climate crisis. Building a cleaner grid is necessary to both cut greenhouse gas emissions from the electric sector and to enable carbon reductions through electrification of fossil-fuel end uses, like heating our buildings and powering our vehicles.
To help kickstart the small and unproven rooftop solar industry, the California Public Utilities Commission (CPUC) implemented the solar net energy metering (NEM) policy, which pays rooftop solar owners retail electricity rates for whatever generation exceeds their household needs. Thanks to this policy, California has more rooftop solar than any other state, with over 11 GW of solar capacity on more than 1.15 million buildings. The cost to install rooftop solar has steadily dropped, falling over 66% since 2000. Prior to the COVID-19 pandemic, the solar industry employed over 68,000 Californians.
In addition to cutting pollution, rooftop systems provide huge value to the grid and all ratepayers, including reduced needs for new transmission, driving down solar panel costs, and creating a tectonic shift in democratizing energy production. Clean, local energy decreases the need for gas power plants and is critical to building local resilience in case of downed or de-energized power lines. Rooftop solar is a critical part of our energy system, and it needs to keep growing to meet our climate goals. Regulators are now reviewing the NEM program to determine whether and how to update it.
The current gap between retail rates and the value of energy has real consequences.
The current NEM program pays owners of rooftop solar the full retail rate for solar energy that they export to the grid, which is a larger benefit than the market value of the delivered energy.
California’s retail electric rates are unique because the volumetric rates — the amount charged per kilowatt-hour used — include more than just the cost of electricity; they include fixed infrastructure costs, wildfire costs, low-income bill discount programs, energy efficiency programs, and more. Wrapping those costs up in volumetric rates creates a gap between the retail rates we pay rooftop solar owners and the actual cost to power our homes. In other words, tying the NEM incentive to retail rates pays rooftop solar customers more than their electricity is worth.
Paying a premium for energy from rooftop solar is a reasonable policy decision to account for the unique benefits of local energy (like avoided transmission and increased local resiliency) and it’s appropriate to pay a premium where solar technology is an emerging resource. In California, however, the solar industry has matured to a point where a smaller incentive is appropriate since the benefits don’t make up the full gap between the retail rates and the value of the energy.
Another consequence of the gap between NEM and the actual cost of powering our homes is that rooftop solar customers avoid paying those extra non-energy costs. Instead, everyone else has to pick up the difference. This raises pointed equity concerns for customers who do not, or cannot, adopt rooftop solar themselves — such as renters or people living in multi-family buildings. A thriving and equitable rooftop solar program requires a reasonable balance of costs between customer groups.
Policy changes are necessary to balance competing values, provide renewable access to more Californians, and reduce greenhouse gas emissions.
With the right price signals, rooftop solar could fairly compensate NEM customers and be less expensive to ratepayers. During the daytime hours, when rooftop solar systems are operating, the wholesale value for that energy is relatively low. This is a really good thing because we need cheap and abundant renewably-sourced electricity to make it cost-effective to slash our dependency on fossil fuels, especially as we electrify and decarbonize our buildings and vehicles. But, if people aren’t consuming that electricity when it is sunny out, rooftop solar does not provide as much value to the grid. The solution is to get customers to use that energy when it is cheap, plentiful, and clean, rather than pushing it on to the grid.
Adjusting rates based on the time of day can help with this, and it’s already part of the NEM program. The current NEM program gives rooftop solar customers the full retail value for the energy they send back to the grid based on time-of-use rates, but those time-based price signals need to be stronger, with a lower reimbursement rate for excess energy when solar generation is plentiful. “Electrification-friendly rates” are designed to do exactly this. They encourage customers to consume electricity when solar energy is plentiful and to limit their usage in the peak evening hours when most of our electricity is coming from polluting gas plants. Electrification-friendly rates are especially beneficial to homeowners who swap out their gas-powered cars and appliances for electric vehicles and all-electric appliances, like heat pumps, since they can charge or power those items at a lower cost when solar generation is plentiful.
Many savvy customers (including many Sierra Club members) are willing and able to electrify in their individual capacities, but a sense of climate duty isn’t enough to motivate everyone. For many customers, electrifying their homes and buildings won’t happen unless it can save them money. Electrification-friendly rates can do that, and it’s why Sierra Club recommends they form the basis for California’s updated rooftop solar program.
Updating the rooftop solar rates can help customers save hundreds more when they electrify cars and appliances
Sierra Club submitted expert testimony showing that moving NEM customers to an electrification-friendly rate can save them money. Our expert found that converting an existing NEM customer in SoCal Edison territory to an electrification-friendly rate would save the customer $500 in annual fuel cost savings when they electrify their vehicle, and over $225 in annual fuel cost savings if they install a heat pump water heater.
Two California utilities have passed electrification-friendly rates that fit the bill: PG&E and SoCal Edison. These rates have steep price differences between peak and non-peak hours, meaning that customers who use most of their electricity outside of peak evening hours can pay a lower-than-standard rate for each kilowatt-hour they use. Electrification-friendly rates also include a monthly charge to cover only the marginal cost of service — meaning the costs associated with serving each customer — even if they don’t consume any electricity. Because the monthly charge is cost-based, these monthly charges ensure that each customer only pays the costs of connecting their own home to the grid, and nothing extra.
Other parties have proposed higher monthly charges that don’t relate to actual costs of service and instead act as an illegal penalty for rooftop solar. Sierra Club’s testimony aligns with other studies that find that widespread building and vehicle electrification can save all customers money by spreading the fixed costs of the electric system over a broader base of kilowatt-hours and customers, even saving money for customers who don’t have all-electric appliances, an electric vehicle, or a rooftop solar system.
Low income and disadvantaged communities still need more generous NEM rates to access rooftop solar
The other important equity concern for the next iteration of the NEM program is how to ensure all customers can access rooftop solar. Low-income customers and customers in disadvantaged communities face particular hurdles to accessing rooftop solar, and have had far lower rates of rooftop solar adoption, meaning that, as a customer group, these populations have shouldered more than their fair share of grid costs. Adjusting the rooftop solar incentive will decrease these cost impacts, but we also need to provide more opportunities for low-income customers and disadvantaged communities to deploy rooftop solar. So, the Sierra Club partnered with Vote Solar and GRID Alternatives to put forward an equity proposal that preserves the more generous 2021 NEM retail rates for low-income households as well as community-owned and operated solar projects in environmental and social justice communities. Customers with discounted electric rates through the CARE or FERA programs currently receive a lower benefit for their solar energy because their energy exports are valued at their discounted electric rates. For these customers, our equity proposal would provide a new, additional incentive to adopt rooftop solar that would stay the same for 20 years — providing rate stability, but also preventing the benefit from growing over time as rates increase.
Rooftop solar incentives alone are not going to get us to our climate targets, but they are an important piece of the puzzle. We need rooftop solar and much more to meet this moment in the climate crisis. An updated NEM tariff fortifies the pathway to carbon-free energy production by ensuring that the rooftop solar program is economically and politically sustainable, increases equitable access to rooftop solar, and supports the transition to pollution-free, all-electric buildings and vehicles.