Proposed Decision would make significant changes in California’s renewable net metering (NEM) tariff

On December 13, 2021 the California Public Utilities Commission (CPUC) issued a Proposed Decision Revising Net Energy Metering Tariff and Subtariffs. The Proposed Decision is based on Guiding Principles adopted in Decision 21-02-011. (See CPUC Adopts New Guiding Principles for Net Energy Metering (February, 2021).) It marks the CPUC’s second significant overhaul of the renewable net metering (NEM) tariff rules and contract since NEM was initially authorized by the Legislature in 1995.

The Proposed Decision finds that the current NEM tariff (referred to as “NEM 2.0”) “negatively impacts non-participating customers, is not cost-effective, and disproportionately harms low-income ratepayers.” On the basis of these findings, the Proposed Decision revises the compensation rate for NEM customers and imposes new charges to ensure that “all customers pay for their usage of the grid.” In response to stakeholders’ concerns that these changes will discourage investment in solar and storage systems, the Proposed Decision establishes a “glide path” in the form of a Market Transition Credit.

In summary, the Proposed Decision:

• Reviews the NEM 1.0 and 2.0 tariff history, a consultant “Lookback Study” of NEM 2.0, the Guiding Principles adopted in February 2021, a white paper developed by consultants E3 as an analytic framework for NEM 3.0, and competing stakeholder proposals for tariff design.
• Adopts key policies to serve as a foundation for the successor tariff:
  • A “glide path” is needed to cushion the market impact of transitioning from NEM 2.0 (and grandfathered NEM 1.0) to the new NEM tariff.
  • The NEM tariff should promote equity and inclusion.
  • The NEM tariff should promote electrification.
  • The NEM tariff should transition the solar market to a solar paired with storage market.
• Replaces the retail rate-based export compensation formula used under NEM 1.0 and NEM 2.0 with a new export compensation rate based on a calculation of utility avoided cost as reflected in the annually updated Avoided Cost Calculator, differentiated by climate zone. Specifically, the export compensation rate is set at averaged monthly values for each hour, differentiated between weekdays and weekends. The Proposed Decision finds that this approach “brings the cost of the successor tariff closer to its value” and that “using monthly values for export compensation also ensures the tariff is based on the generator’s true costs and benefits to the grid, thus leading to equity among all ratepayers while maximizing the value of the generation to all customers and to the grid.” To enable solar providers to predict customer savings, the value for the first 5 years will be based on a 5-year schedule of values taken from the most recent Avoided Cost Calculator. Following this 5-year “lock in” period, export compensation will be based on averaged monthly avoided cost values from that year’s Avoided Cost Calculator
• Requires all NEM customers to take service on time-of-use (TOU) rates that have a “high differential between summer weekday peak and summer weekday off-peak periods” in order to encourage usage during lower-priced hours when the solar system is producing and/or charging storage, rather than at expensive times when the grid’s energy supply is constrained. Specific TOU rates are identified in the Proposed Decision, but low-income customers are given flexibility to choose among any applicable TOU rate.
• Adopts a new Grid Participation Charge to recover system costs caused by NEM customers “even when not directly importing energy from the grid” and “based on the generator’s costs and benefits to the system as a whole.” The Grid Participation Charge will be a fixed monthly charge of $8 per kilowatt installed in a residential customer’s system. It will be waived for low-income customers, and will not apply to non-residential customers because they already have fixed and demand charges in rates. It will apply for 10 years, after which it will be “updated to the charge current at that time and may fluctuate.” Modifications of the charge may be considered and adopted for prospective application following the five-year evaluation of the successor tariff.
• Preserves the current NEM 2.0 approach to recovery of nonbypassable charges (public purpose program, nuclear decommissioning, competition transition charge and DWR bond charge) from NEM customers, and rejects recommendations by some parties to expand this list to include additional categories of charges.
• Adopts a new residential Market Transition Credit to temporarily make up part of the decrease in export compensation rates compared with NEM 2.0 and serve as a “glide path” to the successor tariff. Specifically, all customers who enroll in the new NEM tariff during the first four years of implementation will be eligible for the Market Transition Charge, which will appear as a line item on the customer’s utility bill and offset any other charges for a period of ten years from the customer’s interconnection date. The initial Market Transition Charge will be available to residential customers during the initial period of transition from NEM 2.0 to the new successor NEM tariff. Each year thereafter, the credit will decrease by 25 percent a year until the credit reaches zero. The proposed initial Market Transition Charge values, which are based on a 10-year payback for a combined solar/storage system, are $1.62 (residential) and $4.36 (low-income) for PG&E, $3.59 (residential) and $5.25 (low-income) for SCE, and zero for SDG&E.
• Replaces the NEM 2.0 netting intervals (15-minute for nonresidential and 1 hour for residential customers) with instantaneous netting, where all recorded imports are charged at the retail rate and all recorded exports are charged the export compensation rate.
• Preserves annual true-ups for both residential and nonresidential NEM customers, meaning credits can be carried forward to future months within a 12-month billing period. Customers will be required to pay all incurred charges every month, but netting will occur annually instead of monthly, as had been proposed by some parties. Other elements of the NEM rate structure will remain the same as in the NEM 2.0 tariff, including interconnection fees, and the calculation of Net Surplus Compensation (based on average DLAP prices between 7 am and 5 pm over the past 12 months).
• Addresses equity for low-income customers by waiving the Grid Transition Charge and allowing for TOU rate flexibility for ten years (see above). In addition, the Proposed Decision adopts an Equity Fund with an annual cap of $150 million over a 4-year period. Details on implementation of the Equity Fund will be discussed in an April 30, 2022 workshop and addressed in a future ruling.
• Determines that the Virtual NEM and NEM Aggregation subtariffs will be revised to mirror the new tariff structure. Since many VNEM customers are renters, they will be allowed to choose any applicable TOU rate. The VNEM tariff will allow multiple solar arrays on one property to be treated as one generator, with credits allocated across the property.
• Declines to adopt a successor tariff specifically for community distributed energy resources, because community solar is currently under discussion in other proceedings.
• Requires existing residential NEM 1.0 and 2.0 customers to transition to the new successor tariff at 15 years from their interconnection date (rather than at the end of the 20 year legacy period currently in effect.) The 15 year legacy period will also apply to future residential NEM 2.0 customers that take service prior to sunset of NEM 2.0.
• Offers all existing NEM 2.0 customers a rebate to invest in storage if they voluntarily switch to the successor tariff within four years from the time the storage rebate becomes available. During the first year the storage rebates will be $0.20/Wh, and it will decrease by 25 percent a year over the subsequent four years. The rebates will be funded through a Storage Evolution Fund funded through utility distribution charges.

The Proposed Decision anticipates that implementation of the successor tariff will take 12-24 months. A tariff sunset on NEM 2.0 will be implemented no later than 120 days after the adoption of a final decision, with a buffer period after that to transition customers to the successor tariff.

Comments on the Proposed Decision are due Friday, January 7. Reply comments are due January 14. An on-line oral argument has been scheduled on January 12, 3-4:30 p.m. (details here).

The Proposed Decision has generated heated debate in recent weeks. Some parties argue that its reduction in benefits and grid charges are necessary to protect ratepayers, while others maintain that the proposed tariff changes will discourage customers from investing in rooftop solar at a time when accelerated renewable energy development is needed to meet the state’s ambitious climate goals. The Proposed Decision may be on the CPUC’s January 27, 2022 business meeting agenda, or be delayed for further consideration and modification.

Contact: Brian Biering