Net Energy Metering (NEM) is a highly effective policy that grants those with solar energy systems the ability to save on their utility bills in exchange for sending the excess electricity they generate back to the grid. Overall, NEM encourages the adoption of renewable energy sources, supports the integration of solar power into the grid, and helps reduce overall energy costs for solar system owners.
The program not only provides financial incentives for investing in solar technology but also promotes environmental sustainability. Since 1995, it has evolved into a program that is designed to encourage the adoption of solar energy technology in the great state of California.
Read on to learn how NEM 2.0 has transitioned to NEM 3.0, a program that addresses California’s quest to expand its clean energy sources. Although it has evolved over the years, NEM remains a highly beneficial program for solar energy consumers.
What is Net Energy Metering?
Net Energy Metering (NEM) is a program granting owners of solar energy solutions the opportunity to earn credits on their utility bills. With NEM, property owners can send back their excess electricity to the grid in exchange for a credit on their utility bill. Not only does this serve as a great incentive for homeowners and businesses to invest in renewable energy sources, but it also helps to offset installation costs and increase overall savings on utility bills.
Believe it or not, this lucrative program was introduced in the early 1980’s in Idaho and Arizona, but California took the lead nearly 30 years ago when the state introduced NEM 1.0 in 1995. It was a key part of the state’s efforts to promote renewable energy. Since then, the program has been adapted several times to more effectively encourage homeowners to make the switch to solar while balancing the needs of the greater utility grid. California keeps the NEM program relevant by recognizing that the lifestyle trends and needs of California’s energy consumers are ever-evolving. Hence, the NEM program is constantly being reevaluated in order to have the most positive impact on our communities.
How Net Energy Metering Works
To participate in NEM, you’ll have to install a special bi-directional meter. This device measures electricity flow two ways; from both the grid to the property, and from the property back to the grid. Then, the meter records the two values in order to interpret how the electricity a household draws from the grid compares to the electricity the household contributes to it. These figures are used to determine net usage – hence, “net metering”. At the end of the billing cycle, the property owner’s bill will reflect the net amount of electricity consumed versus generated and exported. The result? Reduced utility costs.
Savings to Expect with NEM
California has some of the highest electricity rates in the country, so homeowners can benefit significantly from the NEM program. Depending on your solar system’s output and your energy use, NEM has the power to significantly reduce, or even eliminate your monthly electricity charges on your bill. The long-term savings goal of NEM is to eventually recoup your entire initial investment, and then continue to benefit from extra electricity you generate for years to come.
The average savings Californians will experience can vary widely based on several variables. System size, electricity consumption, and local utility rates are three of the main factors a homeowner should take into consideration.
Generally speaking, it wouldn’t be a stretch to say that homeowners can potentially save thousands of dollars per year. Of course this all depends upon the size of the solar system and energy consumption habits. It is true that larger systems are likely to yield higher savings, but you have to balance all of the above factors to make sure you aren’t overshooting or undercutting your needs.
The Evolution of California’s Net Energy Metering Policy
Since its inception in 1995, NEM has evolved in several ways. Changes to the program have been made as recently as 2023. These changes aim to provide more effective – and equitable – solutions for the growing adoption of solar energy and its impact on the grid. As solar installations increased, California opted to adjust its NEM policies. At the top of mind is maintaining a sustainable cost of grid maintenance and operation for all energy consumers.
The main goal of NEM is to promote financially sustainable utility rates for all California residents, even those who use traditional energy sources and choose not to install solar panels. In 2016, officials felt it necessary to reevaluate California’s NEM policy. This marked the introduction of NEM 2.0 which was adapted in order to better respond to the energy trends of our population.
What is NEM 2.0?
NEM 2.0 is a new policy designed to ensure fairness and sustainability in the solar market. NEM 2.0 mainly addressed concerns about the costs of maintaining the electrical grid and ensuring that non-solar customers do not bear an unfair burden. But that wasn’t the only reason this change came into play. Other key factors considered were grid maintenance costs, creating equity among customers’ contributions to utility infrastructure, and balancing incentives in order to maintain sustainable growth.
A major change brought about by the NEM 2.0 program was the pivot to a time-of-use (TOU) rate structure. TOU calls for the value of solar energy credits to vary based on the time of day electricity is used. This change aimed to better align compensation with the cost and value of electricity, balancing the benefits of solar with the need for grid reliability and maintenance. There’s still a lot of discussion around a phenomenon known as the “duck curve”, when solar produced in the middle of the day exceeds the demand for energy usage, but then falls short as the sun sets and energy demand increases later in the evening.
In addition, NEM 2.0 included new rules for interconnection and updated program eligibility. Property owners are now required to arm their solar systems with smart inverters which are devices designed to manage the flow of electricity and respond to current grid conditions. Smart inverters greatly promote grid stability in that they keep tabs on the utility and can provide useful insight on how to prevent blackouts and brownouts.
The updated program eligibility presented by NEM 2.0 increased the allowed system size to a maximum of 1 megawatt (MW) for both residential and commercial customers. A megawatt is 1,000 kilowatts, which is way bigger than any single-family home will ever need to install. Also, NEM 2.0 increased the eligibility of low-income property owners in disadvantaged communities to convert to solar by incorporating new incentives and special provisions.
Introducing: NEM 3.0
In 2023, NEM 3.0 entered the solar scene. NEM 3.0 was touted by the utilities as an improvement upon NEM 2.0 since the new program incorporates important changes intended to address evolving grid and energy needs. But some homeowners and industry experts beg to differ.
With NEM 3.0 comes a pretty significant adjustment to compensation rates. TOU pricing is revised to a set of complex monthly matrices with hour-by-hour shifts based on the anticipated needs of the grid.
Unfortunately, these changes have resulted in a drastic decrease of compensation for homeowners sending their excess solar directly to the grid in the middle of the day. This means that a traditional PV-only installation won’t net you anywhere close to the savings NEM 1.0 or NEM 2.0 customers enjoy – unless you install a battery. Being able to capture the energy and save it for later basically puts it into a time capsule, to deploy when it’s more valuable to you and the utility. This is called self-consumption or “rate arbitrage” which is just a fancy way to say “buy low sell high.” The TOU rates are rock bottom at midday but then jump through the roof for a couple hours in the afternoon and evening. Homeowners who store the solar energy generated during daylight hours can be compensated handsomely when they sell it to the grid at peak demand.
Again, the utilities’ position on introducing NEM 3.0 is that it was a necessary adjustment in order to comfortably cover the costs of grid maintenance. They also had a stated aim of providing a more equitable balance of costs between solar and non-solar consumers. This new initiative incorporates additional measures to promote energy storage and support grid reliability.
Solar professionals should consider developing financing & equipment solutions that accommodate the updated cost structure introduced by NEM 3.0 and include batteries while still maintaining reasonable monthly payments. A good solar sales pitch offers lucrative loan or financing terms, leasing opportunities, or other creative ways that can make solar installations more accessible to your customers.
How NEM 3.0 Is Impacting Consumers
The introduction of NEM 3.0 reflects California’s ongoing quest to expand its sources of renewable energy, but the harsh reality is that many solar companies have shuttered their operations since the policy was launched.
It is true that the program helps municipalities to carefully manage their impact on their local grid. This is because the change in TOU pricing helps to better align solar energy use with grid demands, supporting overall grid reliability and efficiency.
Unfortunately, the value of credits for excess solar energy is lower than compared to previous policies like NEM 2.0. This may ultimately result in less utility cost savings. On the bright side, this new policy provides better integration opportunities. The goal in mind is encouraging more homeowners to consider adopting one of the many advanced energy storage systems available on the market.
To mitigate the impact of lower export rates, it is a good idea to encourage your clients to add a battery storage solution to their solar package. Battery storage allows customers to enjoy savings that still rival their older NEM predecessors, just on a slightly longer ROI. Typically, homeowners can expect to break even in less than 10 years, even given the reduced export rates.
At the end of the day, it is up to people like you to ensure that California’s future remains sustainable. With the industry constantly undergoing policy changes, it is important to keep in the loop about incentives and ways to leverage the power of solar technology. If you’re interested in exploring the benefits of installing a home solar system in California, contact us today to receive a free quote.