By the end of this year, a California residential solar subsidy is expected to cost around $8.5 billion annually for ratepayers who don’t have rooftop panels, leading to higher electricity bills for those unable to afford solar technology. The California Public Utilities Commission (CPUC) revised the rooftop solar policy known as net energy metering (NEM), which previously allowed homeowners with solar panels to receive credits for the surplus electricity they generated. The updated policy, NEM 2.0, reduced the credit rate from the full retail electricity rate offered under the original NEM 1.0 program and introduced additional charges known as non-bypassable charges. While this adjustment made solar power slightly less financially beneficial, it still offered a positive return on investment.
On April 15, 2023, the CPUC introduced another revision, the net billing tariff (NBT), or NEM 3.0, which further altered the payment and compensation framework for solar panel owners. Under these latest changes, homeowners seeking maximum benefit now need to install battery storage. This policy shift has led to a loss of over 17,000 jobs in the solar installation sector.
According to the CPUC’s Public Advocates Office, the costs of these net metering programs are passed on to customers without rooftop panels, as they cover utilities’ fixed expenses such as wildfire safety measures and grid maintenance, which many solar panel owners effectively avoid by selling their surplus power to the grid at near or full retail prices. While electric generation constitutes part of a customer’s bill, other components cover transmission, distribution, and maintenance costs, like tree removal and line repairs. Net metering at retail rates means that non-solar customers are paying for the electricity costs that rooftop solar customers bypass. Customers who signed up for these programs are locked into the incentives of their original plan for up to 20 years.
The financial impact, commonly known as a cost shift, on non-solar customers of Pacific Gas and Electric, Southern California Edison, and San Diego Gas & Electric has surged from $3.4 billion annually in 2021 to $8.5 billion annually by the end of 2024, with expectations for continued growth in future years as electric rates rise. This situation allows rooftop solar owners to sell their excess solar power—essentially a wholesale product—to their neighbors at near or full retail prices. The rise in costs between 2021 and 2024 is attributed to two main factors: (1) a significant increase in the number of new rooftop solar installations before the new phase of changes, and (2) high compensation for the energy generated by these systems at or near full retail rates. The cost shift under NEM 2.0 is more substantial than under NEM 1.0, primarily because NEM 2.0 has led to a larger volume of installed solar generation, with residential installations under NEM 2.0 being approximately three times those under NEM 1.0.
Under NEM 2.0, the compensation rate for solar customers’ excess energy excluded non-bypassable charges, leading to reduced payments for NEM 2.0 participants compared to those under NEM 1.0. Non-bypassable charges are fees included in utility bills that all customers must pay, typically covering costs related to maintaining the electric grid, public purpose programs, and other state-mandated initiatives. Despite these adjustments, the subsidies under both NEM 1.0 and 2.0 remain substantial, disproportionately increasing energy bills for renters and lower-income households who lack rooftop solar.
The total financial impact on households without solar is determined by the difference between the compensation provided to NEM 1.0, 2.0, and NBT customers (known as bill savings) and the total benefits of solar projects (referred to as avoided costs). These benefits include reductions in greenhouse gas emissions, savings on power plant fuel and generation costs, and other avoided grid infrastructure expenses. The study estimates that by the end of 2024, approximately 21 to 27 percent of the average non-rooftop solar household’s electricity bill will be allocated to subsidize the solar program across all utilities. About a quarter of a non-solar consumer’s bill covers the premium paid to solar-equipped neighbors for their electricity.
Suggested Changes
The current incentives for NEM 2.0 customers enable them to recoup their system costs in as little as 4 to 5 years. As electricity rates continue to rise, NBT customers are also seeing reduced payback periods, recovering their costs within 6 to 7 years, rather than the 6 to 9 years initially estimated when the NBT was established in December 2022. To alleviate the financial burden on non-rooftop solar customers, the study proposes policy changes that would maintain a quick payback period for solar customers while making the subsidies more manageable for those without solar.
- Adjust Compensation Rates: Set compensation for NEM 2.0 customers based on the electric rates in effect when the incentives were adopted, rather than allowing them to increase with retail rates. This approach would ensure rooftop solar customers receive the full benefit of their investment within a reasonable timeframe of about 10 years.
- Transition NEM Accounts to NBT: Convert NEM 1.0 and 2.0 accounts to the NBT program upon the sale of a home or after 10 years of interconnection. Currently, new homeowners with solar systems under NEM 1.0 and 2.0 enjoy the same benefits as the original owners. This change would not have an immediate effect but would gradually reduce the cost shift and still offer new homeowners bill savings over the system’s lifespan. For a more significant reduction in the cost shift, transitioning NEM systems to the NBT program after 10 years of interconnection would still provide ample time for NEM customers to achieve a return on their investment, given the short payback periods associated with these systems.
Conclusion
Despite making changes to the net metering program twice, California non-rooftop solar consumers are still paying large subsidies to rooftop solar homeowners, who are being compensated for excess solar power that they provide to the grid. That charge has increased to $8.5 billion by the end of 2024 from $3.4 billion in 2021—2.5 times higher–as electricity rates increase and as more homes have elected to add solar rooftop systems. By the end of 2024, approximately 21 to 27 percent of the average non-rooftop solar household’s electricity bill will go to subsidizing the program across all utilities, which puts a disproportionate burden on renters and lower-income households in California. Several changes are suggested to make the cost shift more reasonable including setting net metering compensation at electric rates that were in effect at the time a household joined the net metering program rather than the current, higher rates.
