Why Is California Reducing Solar Compensation for Homeowners?

Color daytime outdoor photo of a elderly smiling black man and son carrying a solar panel while standing in their yard.

California is known for its sunny climate and strong commitment to renewable energy. Therefore, it may be a surprise to hear that the state is reducing solar compensation for homeowners. Why is California making this change? 

California is reducing solar compensation for homeowners to create the perception of a equitable energy system. The decreased financial benefits policy will significantly decrease solar energy adoption rates in California, just when the state is transitioning to clean energy.

In this article, we will explore the reasons behind the reduction in solar compensation and the potential consequences for homeowners and the renewable energy industry as a whole.

How the Reduced Compensation Will Affect Homeowners

On December 15, 2022, the California Public Utilities Commission (CPUC) approved Net Energy Metering (NEM) 3.0 which reduces solar compensation for homeowners. For existing NEM customers and customers with NEM 2.0 agreements through April 14, 2023, NEM 3.0 has no impact.

The reduced compensation for solar energy in California affects homeowners in the following ways:

Decreased Financial Benefits

Color photo of a stressed young hispanic couple paying bills at home.
Stressed young couple paying bills at home.

Net metering is a system that allows homeowners to reduce their electricity bills. It allows excess solar power generated by the home to be fed into the grid. This excess power is then credited to the homeowner’s account, which is used to offset the electricity the home consumes from the grid. 

For example, if a home generates more solar power than it uses during the day, the electricity meter may run backward, effectively giving the homeowner credit on their bill. 

Under NEM 2.0, this credit equals the current electricity rate of 30 cents per kWh. As a result, the homeowner is only billed for the net energy use, which is the difference between the power generated and consumed.

Net Metering 3.0 reduces the financial benefits for homeowners with solar systems feeding into the grid. NEM 3.0 reduces the compensation credit rate for any excess solar energy homeowners pump into the grid by up to 75% starting April 2023. This fall in credit value is attributed to the net billing policy that NEM 3.0 will use. 

Under net billing, the credit rates for the electricity you send to the grid will not be based on typical electricity rates but will be calculated separately. 

These rates will fluctuate depending on the following: 

  • Time of the day
  • Day of the week
  • The month of the year when you export electricity to the grid

In California, over 1.5 million homes have rooftop solar systems that generate up to 10% of the state’s power. Homeowners with these systems who sell excess electricity back to the grid will now pay higher rates for net electricity consumption.  

Decreased Return on Investment

Blue and silver chart 1.1 showing California Solar Panel Return On Investment Time Table NEM 2.0 Compared To NEM 3.0.
Chart 1.1 showing California Solar Panel Return On Investment Time Table NEM 2.0 Compared To NEM 3.0.

Installing solar panels involves a significant financial investment due to high upfront costs. Net metering allows homeowners to recoup their investment gradually by selling excess electricity back to the grid. 

However, the new net metering policy (NEM 3.0) will reduce the return on investment by extending the payback period, or the amount of time it takes for homeowners to recoup the cost of their solar panels through solar export credits. 

Under the previous policy (NEM 2.0), the payback period was typically 5 to 6 years. However, under NEM 3.0, it is expected to be 9 to 10 years

This decrease in the return on investment for solar panel systems is due to the reduced credit value for solar energy exports. With lower export credit rates, it will take longer for homeowners to recoup their investment through savings on their electricity bills.

Increased Difficulty Financing

Under NEM 3.0, homeowners must install backup battery storage systems to make the most of their solar panel systems. With lower credit rates for solar energy exports, it is more financially beneficial to store excess solar energy in a battery for later use rather than selling it back to the grid. 

By using stored solar energy, homeowners can minimize their exports to utility companies and maximize the value of their solar energy. This self-consumption will also help reduce electricity consumption from the grid, lowering energy costs. 

While this is actually a good thing for homeowners, solar battery systems can be expensive, and currently, only 15% of homeowners have them due to the high cost. 

Decreased Adoption of Solar Energy

Color indoor photo of a young asian couple in their living room with a calculator doing the math on the use of solar energy and deciding if it makes financial sense.
Young couple doing the math on the use of solar energy and deciding if it makes financial sense.

Bernadette Del Chiaro, the executive director of the California Solar & Storage Association, considers the adoption of NEM 3.0 to be a setback. Del Chiaro warns that the new policy will significantly decrease solar energy adoption rates in California, just as the state is working towards a transition to clean energy. 

The reduced credit rates will discourage homeowners from installing solar panel systems. Woody Hastings from the Climate Center echoes these concerns, stating that the rules adopted by the CPUC risk slowing the growth of clean energy in California.

Also, many solar companies will face headwinds, and many clean jobs will be lost. 

California Reduced Compensation for Solar Energy NEM 3.0 isn’t All Bad News.

Vector image of a small model house with green pitched roof with solar panels on top. House is sitting in between rolled up blueprints with pencil and measuring instruments next to it. On a white background.

There are a few potential benefits to the reduction of solar compensation in California.

More Sustainable and Equitable System

Critics of NEM 2.0 have pointed out that it is not equitable, as solar panel systems are typically installed by high and middle-income families rather than low-income families. 

Solar homeowners tend to have lower energy bills due to their solar systems, which means they contribute less to the fixed costs of utility companies, such as transmission and distribution costs, which are ultimately passed on to all taxpayers, including non-solar homeowners.

Meanwhile, solar homeowners receive credits as incentives, which again are a cost that is passed on to taxpayers. 

The new net metering policy, NEM 3.0, aims to create a more sustainable energy system in California by reducing credit compensation rates and thus increasing equity. 

Non-solar homeowners, many of whom are low-income families, have shouldered a disproportionate share of the costs in the past.

Unfortunately the postulation that reducing incentive for residential solar panel installation while simultaneously telling everyone they need an electric vehicle by 2030 does not help the poor either.

Not only does it stimy the effort to increase solar power but happens right when you need it most to facilitate the power grids transition to electric vehicle charging.

Lower Electricity Rates for Non-Solar Users

Under NEM 3.0, the subsidies paid to solar homeowners as compensation for exporting excess energy may be reduced, which could lead to lower electricity rates for non-solar homeowners.

These subsidies are factored into electricity bills, and by decreasing them by as much as 75%, the cost of electricity for non-solar homeowners could be reduced.

Encouragement of More Advanced Solar Technologies

The adoption of NEM 3.0 is a challenge for solar companies, as they may need to adapt in response to changes in demand and incentives. This may involve developing more efficient solar systems and battery packs and improving installation techniques to encourage the continued adoption of solar energy in the future.

The Impact of Solar Farms on Real Estate Values

Color daytime photo of a large solar farm, with a large amount of solar panels surrounded by grass in a residential area taken from the air.
Large Solar Farm.

It is generally thought that the presence of a solar farm can have a positive impact on the value of the nearby real estate. Solar farms can be seen as a sign of progress and a commitment to sustainability, which can attract potential home buyers. 

In addition, solar farms can provide a source of local economic development and jobs, which can also benefit the value of the nearby real estate. 

However, it is important to note that the actual impact of a solar farm on real estate values can vary depending on several factors, such as:

  • The size of the solar farm.
  • Its proximity to homes.
  • The overall real estate market conditions in the area.

Now speaking of progression and sustainability, did you ever wonder if an AI program could be used to run itself? Check out my article on the topic to know more about the potential of AI and interesting use cases. [Could an AI Program Be Used to Run Itself?]

Key Takeaways 

Color vector image of multiple houses with solar panels located in the countryside receiving rays from the sun but separated by a large casam.

The new solar energy regulatory policy, NEM 3.0, has received mixed reactions. While electricity utility companies are pleased with the decision, citing its potential to increase equity and sustainability in the energy system, environmental groups are concerned that it may lead to a decrease in solar energy adoption and hinder clean energy efforts in California. 

It is worth noting that NEM 3.0 does not apply to homeowners who already have solar systems installed.

By using stored solar energy in their backup battery storage systems homeowners can minimize their exports to utility companies and maximize the value of their solar energy for their own use. This self-consumption will also not only help reduce electricity consumption from the grid, but also lower their own energy costs. 


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John Mortensen

As a kid I wanted to be an astronaut, geologist, or scientist. I became a project manager which is involved with many of those things. I am a project manager and tech writer who researches the latest alternative and green technologies. We write helpful articles about green electronics and green technology products. AI, extreme weather, electric vehicles, are all in our future and we want to know the best way to deal with the effects of these on the power grid and emergency preparedness. https://techevaluate.com/author-bio-page-john-w-mortensen/

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