NEM 3.0 will cut California’s residential solar market in half, WoodMac says

Consulting firm Wood Mackenzie released analysis saying California’s newly proposed net metering tariffs would cut the state’s residential solar market in half by 2024.

The California Public Utilities Commission (CPUC) proposal, known as NEM 3.0, would reduce payments granted to rooftop solar customers for the excess power they generate, which is known as net metering.

The proposal would also add monthly hookup charges of $8 per kilowatt (kW) of installed solar. The charge is intended to capture residential solar adopters’ “fair share of costs” to maintain the grid and fund public purpose programs.

The proposal, issued by energy regulators December 13, was scheduled for a CPUC vote on January 27 but has since been delayed. NEM 3.0 has received backlash from solar companies, renewable advocates, and California Gov. Gavin Newsom.

MORE: Solar backers pan California’s net metering plan, hint at a possible federal challenge

Wood Mackenzie’s analysis for two of the state’s largest utilities – Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) – revealed payback periods for typical residential solar projects would increase from five to six years under current net metering to 14-15 years, depending on the utility. This would make customers less inclined to invest in solar projects and installers less motivated to sell them.

“Under the terms of the [proposal], NEM 3.0 rates would more than double solar project payback periods,” said Bryan White, research analyst and co-author of the Wood Mackenzie report. “Both the new monthly fixed charges and the lower export rates will reduce economic attractiveness.”

Researchers added that NEM 3.0 would result in more than 2.4 GW of demand reduction in California’s residential solar market through 2026. This represents a 36% decrease compared to the consulting firm’s forecast in the U.S. Solar Market Insight Q4 2021 report, which had already considered modest impacts from the proposal.

“Energy storage and financial products offer modest hedges against NEM 3.0 but will not yield sufficiently attractive economics to maintain residential solar market growth in California,” said White. “Installers will most likely need to sell much smaller solar projects to achieve savings for customers. This will put immense pressure on project margins as installers collect less revenue to cover fixed costs.”

Wood Mackenzie said that if approved, NEM 3.0 will likely start impacting solar installations in July or August of this year. Accordingly, researchers predicted installers will spend the first half of 2022 selling as many residential solar systems as possible under NEM 2.0 rates.

Under NEM 3.0, the researchers believe annual residential installed capacity will fall to just over 700 MW in 2024 – roughly half of 2021 volumes, and the lowest annual output for California since 2014.

“The market will return to single digit growth in 2025 and 2026 as it begins a modest recovery,” the Wood Mackenzie analysis said. “Solar and storage system price declines will provide some relief to industry players after a few tough years.”