Two men shake hands over solar panels, they are being installed in conjunction with batteries to help with Net Metering.
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Solar energy’s next phase

NEM 3.0 - What You Need to Know About California’s New Net Energy Metering

Daren Wang
December 1, 2023

In April of this year, California rolled out Net Energy Metering (NEM) 3.0, a new residential solar policy that completely changed how residents think about their power. Even as the state aims to lead the way on renewable energy, it has made it hard for homeowners to go solar. As electricity rates continue to skyrocket throughout the state, the reimbursement rate for solar energy has also become more complicated. For most homeowners, energy storage, in the form of a home battery, has become an essential part of a cost-effective solar energy system.

NEM 3.0

In a way, California solar energy has become a victim of its own success. Solar energy supply is most plentiful when the sun is high—in the hours around noon. Most solar energy system owners use less energy than they produce during these hours. However, the demand for electricity peaks in the mornings before people leave for work and in the evenings when they come home and prepare dinner.

As solar power has become a bigger part of the state’s energy mix, the mismatch between the time when energy is produced and when it is needed has become bigger. To make that work, energy from the bountiful midday sun either must be stored for later use, or utilities must generate more expensive, dirtier energy produced by fossil fuels during those peak hours. NEM 3.0’s new pricing structure is designed to pass the burden of storing that excess midday energy on to homeowners.

In the past, there have been various iterations of how much utility providers would pay individuals with solar arrays for the excess energy they didn’t need. Under the new rate structure of NEM 3.0, utilities credit solar customers at a rate tied to the wholesale price of electricity. During daylight hours, when solar electricity is most abundant, that rate is low but is much higher during periods of high grid demand. Practically, this means solar customers get less money for their energy excess than they did in the past.

The solution? By integrating batteries into their home energy system, homeowners can store their own energy when prices are at their lowest while selling energy back to the system when power rates are high.

What You Need to Know About Batteries

A grid-tied battery can enhance a solar energy system’s utility bill offset significantly, raising it from 55% for solar-only installations to as much as 90%. And even though adding a battery means a higher upfront cost, the payback period for such systems is often shorter.

Comparing the return on investment between NEM 2.0 and NEM 3.0 for solar-only systems underscores the benefits of adding batteries in the latter case. While solar-only systems under NEM 2.0 provided high bill offsets and quick payback, NEM 3.0's compensation structure diminishes these advantages. Batteries have become crucial to regain lost ground in bill offset and payback, representing a fundamental shift in their role from providing backup power to taking financial advantage of grid rate variations under NEM 3.0.

The upshot? If you’re considering a solar power system now in California, you should also consider a battery storage system.

The configuration of batteries, system requirements, and installation costs now vary depending on the use case. For backup power, batteries must handle heavy loads like air conditioners and electric water heaters during off-grid operation, requiring larger capacity batteries for extended outages. Backup batteries are also configured with a reserve capacity of 20%-30%, increasing costs due to additional components and labor.

But adding a smaller battery to store midday energy for peak hours use can significantly improve the economics for homeowners. For instance, under NEM 2.0, a solar-only system designed to meet 100% of a home's expected energy demand was able to generate enough electricity to offset 90% of electricity costs. Under NEM 3.0, the same system only yields a 55% bill offset. Adding a small battery can increase the bill offset to as much as 70%-90%.

A home energy system with batteries primarily used to manage buying and selling electricity at optimised times can have a much simpler configuration than a backup system, and the battery can have a lower reserve capacity. This allows more of the battery to store excess solar energy, though it means that both solar and the battery temporarily stop operating during grid failures. This option allows for a much smaller upfront investment than a full backup configuration.

Of course, the homeowner's energy consumption patterns are vital in making this a cost-effective option. Those who consume most of their energy later in the day, especially during peak demand periods, may require a larger battery to avoid peak energy prices. Conversely, homeowners who use most of their energy when their solar panels generate power will need a smaller battery. Changing consumption behavior can have a significant impact on electricity costs.

Energy systems with this configuration can operate in two modes: self-consumption and savings. In self-consumption mode, the system minimizes grid energy purchases to maximize carbon offset, while savings mode optimizes grid energy buying to maximize bill offset.

A solar system with an appropriately sized battery can help maximize the value a homeowner receives for their solar energy, typically reducing payback periods to around six years. However, it's crucial to note that payback periods vary from one homeowner to another, with various financing options further influencing them.

In the context of NEM 3.0, California's solar industry is heading towards a promising future. Solar energy, batteries, and EV chargers will play increasingly vital roles as the state embraces whole-home electrification and market-based utility pricing.

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