A recent California Public Utilities Commission (CPUC) decision will protect the net metering rights of existing distributed generation customers. Under Decision 14-03-041 (Decision), customers taking electric service under a Net Energy Metering (NEM) tariff prior to the earlier of (i) July 1, 2017, or (ii) the date that the customer's electrical utility reaches the NEM program capacity limit will be able to remain on the current NEM tariff for 20 years from the date their distributed generation system is interconnected. The Decision, which applies to California's investor-owned utilities (IOUs), will "grandfather" these NEM customers under the current tariff while the CPUC transitions to a new tariff structure for future NEM customers, often referred to as "NEM 2.0." The Decision will provide certainty to distributed generation developers and is intended to enable customers to benefit from the existing NEM tariff for the expected useful life of their systems.
Current NEM tariffs have been a significant factor driving the growth of distributed solar photovoltaics (PV) in California and in many other states across the country. California's NEM tariff allows customers with distributed generation systems to receive a financial credit on their utility bills for excess electricity fed back to the utility grid at retail rates, functionally allowing the customer's meter to "spin backwards" and offset electricity bills. The current NEM tariff also requires compensation to NEM customers for electricity generated in excess of onsite load over a 12-month period. The majority of NEM customers use onsite solar photovoltaic systems.
The Decision is part of the CPUC's implementation of Assembly Bill 327, signed into law on October 7, 2013. AB 327 requires the CPUC to develop a successor to the existing NEM tariff to be implemented on the earlier of (i) July 1, 2017, or (ii) the date the customer's electrical utility reaches the NEM program capacity limit (the Transition Trigger Date). Each IOU's NEM program capacity limit caps enrollment in the existing NEM tariff at 5 percent of aggregate customer peak demand.1 AB 327 mandated that customers who took service prior to the Transition Trigger Date could remain on the current NEM tariff during a transition period to be determined by the CPUC.
NEM Transition Decision
In establishing the 20-year transition period, the CPUC considered both the expected useful life of distributed generation systems and the reasonable payback period of such systems. While utilities and ratepayer advocates argued that a shorter, 4-to-12-year transition period reflected a reasonable payback period, solar advocates and commercial and public entity customers argued that a 20-to-30-year period correctly took into account the expected useful life of typical solar PV systems as reflected in most power purchase agreements (PPAs) and third-party financing agreements, as well as a reasonable expected return on system investments. The CPUC found that the 20-year period would better allow customers to realize their expected system benefits, promote regulatory certainty, and constitute a fair compromise.
The Decision provided that modifications to existing net metered systems remain eligible for the current NEM tariff for the remainder of the transition period applicable to the underlying system, as long as such modification does not increase the capacity of the system by more than 10 percent or 1kW. With the modification, the system size cannot exceed 1 MW or the customer's annual onsite load. To the extent that energy storage systems considered to be an addition to net metered distributed generation systems are granted exemptions from various interconnection fees and requirements, they will be subject to the same NEM transition period as the underlying system to which they are connected.2 Furthermore, if a solar system is transferred to a new owner, operator, or utility account at the original site of interconnection, it can remain subject to the transition period, but the grandfathering period will no longer apply if the system is moved and interconnected at a new location.
Having reliable pricing models for the life of the asset allows solar developers, investors, and customers to make informed decisions about whether to install, sell, or buy a solar system, rather than guessing at the outcome of legislative or regulatory proceedings. The CPUC's grandfathering period will help to provide this market certainty and give the industry a window of time in which to originate, design, finance, and install projects under the existing NEM program. The Decision further facilitated this planning and market certainty by requiring the IOUs to publish on their websites on a monthly basis progress towards their NEM program capacity limits in MWs. The Decision also expresses the CPUC's expectation that solar installers provide "honest and complete" disclosures on the terms that apply to PV systems, including the applicable tariffs, as well as the timing and terms for transition to the new successor tariff.
Next Steps for California's NEM
Next, the CPUC will be turning its attention to NEM 2.0. In so doing, the CPUC is required by AB 327 to "ensure" that the successor tariff: (1) "ensures" that customer-sited renewable distributed generation continues to grow sustainably and includes specific alternatives designed for growth among residential customers in disadvantaged communities, (2) is based on the costs and benefits of the renewable electrical generation facility, and (3) has benefits to all customers (not only NEM customers) and the electrical system that are approximately equal to its costs.3 AB 327 requires that a new NEM tariff be adopted no later than December 31, 2015. Currently, the CPUC is exploring potential changes to residential rates in light of AB 327, including potential adoption of a fixed customer charge or minimum bill amount, reduction of residential rate "tiers," time-of-use rates, and other policies that could have a significant impact on NEM customers and the economics of customer-sited solar. We expect that the development of NEM 2.0 will be interrelated with the outcome of the CPUC's rate design proceeding and highly contested. It will be important for interested stakeholders to engage and stay informed throughout this process.