California’s two biggest utilities have just fired the first shots in a battle over the state’s net metering future by proposing a system that would pay futuresolar-equipped customers less for the green electricity they feed back to the grid, as well as imposing monthly charges for the utility power they consume.

In a move that’s likely to draw fire from the solar industry and environmental groups, Pacific Gas & Electric and Southern California Edison filed proposals with the California Public Utilities Commission on Monday that, while complex in their details, would have the broad effect of significantly reducing the economic value of customer-sited solar systems, compared to today’s current net-metering rules.

But the utilities say the changes are needed to more fairly spread the costs of serving solar-equipped customers with reliable grid power and avoid pushing additional costs onto non-solar customers. At the same time, they say the new rules will still provide a healthy financial incentive to keep California’s solar industry growing in years to come, as required under state law AB 327. 

Monday’s proposals are the first to be filed under the compromise plan created by the 2013 law, which made several major changes to California energy policy. Under AB 327, the CPUC has until the end of 2015 to create a successor “NEM 2.0” tariff to kick in once the state’s big three investor-owned utilities, PG&E, SCE and San Diego Gas & Electric, reach a threshold of 5 percent of nameplate generation capacity under net metering, or in mid-2017 -- whichever comes first.

Under today’s net-metering rules, customers are paid for the solar power they produce at the same retail rates they pay for utility electricity. But solar power costs have fallen dramatically since that regime was created. Meanwhile, innovations from companies like SolarCity, Sunrun, and an ever-growing list of third-party residential solar providers have drastically reduced solar’s upfront costs for homeowners and businesses, and helped to boost rooftop solar installations to record growth rates in the state.

California’s NEM 2.0 successor tariff won’t have caps like the current net metering regime does. That means that, as directed by AB 327, the new regime will need to support continued solar growth while avoiding an undue shift of costs associated with maintaining utility grid infrastructure onto customers who don’t have solar.

Both PG&E and SCE say that net-metered solar customers are reducing their utility bills at levels that are projected to push billions of dollars of costs onto non-participating customers over the next decade -- $16.7 billion in SCE’s case and $24 billion in PG&E’s case, according to Monday’s filings. 

The new net-metering rules won’t apply to customers who are already net-metered or those who install systems before the utility caps are reached. But they will apply to all future installations -- and with the state’s current solar growth trajectory, that's going to affect a lot more customers in the long run. Here are some of the key changes being proposed. 

New charges for homeowners

PG&E's and SCE’s proposals differ in some important ways in terms of how they alter compensation for solar. But both share a common feature: a charge specifically levied on residential customers with solar systems. The utilities are proposing a maximum charge of $3 per kilowatt per month, to help pay for the fixed costs of maintaining transmission and distribution grid infrastructure that are otherwise bundled into kilowatt-hour, or “volumetric,” charges. But each is assessing that charge in different ways.

PG&E will base its charge on the customer’s highest demand over the month -- in other words, a demand charge. These tariff structures assess costs based not on how much energy a customer uses over a month, but on the peak amount of energy they consume during that month. They’re often used for commercial and industrial customers, but are rare for residential customers.

SCE, in contrast, will assess a $3 per kilowatt-month “grid access charge” (GAC) based on the nameplate capacity of the distributed generation system involved. While that's also meant to provide a revenue stream to cover the utility's fixed costs, it's tied specifically to the solar system's output, rather than the customer's peak energy consumption. 

These monthly charges aren't as high as those being proposed for solar customers in states like Arizona. But it’s important to note that, under the CPUC’s recent rate reform plan, both utilities are also allowed to start imposing minimum bills of up to $10 per month on customers, whether or not they have solar.

PG&E spokesperson Greg Snapper noted that demand charges could also provide customers with an incentive to cut down on their peak energy usage. That’s important for utilities, since peak power costs a lot more for utilities to provide, and tends to come from less efficient, more greenhouse-gas-intensive peaker plants.

It’s less clear how SCE’s charge, which is tied directly to the size of the solar system, could serve a peak-reduction goal. SCE’s proposal notes that net-metered solar customers actually tend to shift energy consumption to later in the day, when California’s grid tends to reach its system-wide peak.

Lowering the rates on net-metered solar energy

Both utilities are also proposing significant changes to how much customers are paid for the solar power they produce, as well as how that value is calculated. In simple terms, they’re asking for permission to pay customers not at the retail rate, but at a reduced level based on the generation portion of that rate. 

PG&E proposes that “generation exported to the grid by NEM-eligible systems receive a credit based on the generation portion of the energy charges in the relevant utility rate.” PG&E notes that the figure will change depending on the time of day and season of the year, but it averages out to about 9.7 cents per kilowatt-hour -- quite a bit lower than PG&E’s average baseline retail rate of 16.3 cents per kilowatt-hour. 

SCE’s proposal seeks to pay eligible customer-generators an "Export Compensation Rate" of 8 cents per kilowatt-hour, which is based on a calculation of the solar’s value using the “Public Tool” software developed for the CPUC for valuing net-metered distributed generation, plus a small premium for the fact that it’s renewable energy. Again, that’s much lower than SCE’s average baseline retail rate of 15 cents per kilowatt-hour.

Just how these changes will affect individual solar-equipped customers will vary significantly. But PG&E provided a hypothetical example of a “representative customer with an average monthly maximum demand of 5 kW,” who decides to install a 3.7-kilowatt solar system to offset two-thirds of the household load.

Under today’s net metering regime, that customer’s bill would fall from $160 to $56 per month, for a savings of roughly 60 percent. Under PG&E’s proposal, the same customer would see his bill fall from $160 to $77 per month, or roughly 50 percent.

These before-and-after comparisons are complicated by the fact that the CPUC has ordered PG&E, SCE and SDG&E to move all their residential customers to time-of-use (TOU) rates by decade’s end.

These billing regimes will charge higher prices during peak afternoons and evenings in exchange for lower prices in off-peak times, which could provide more lucrative returns for solar systems that generate more power at peak times. PG&E’s proposal explicitly seeks to put new net-metered customers onto TOU rates, while SCE’s doesn’t specifically call for that.

Cost-benefit calculations, energy storage and data complications

As for how these changes will affect the cost-competitiveness of rooftop solar, the utilities provide a breakdown of a key measure used by the CPUC: the Participant Cost Test (PCT). This number represents the value of a solar system over its lifetime, with anything over 1 paying off its owner.

According to PG&E, while existing net metering policies yield PCTs in the 1.3 to 2.7 range, “PG&E suggests a PCT above 1.25 will identify a program that can ensure sustainable growth.” And both PG&E and SCE say that their proposals yield that level or better across most realistic future scenarios.

“A PCT of 1.25 -- indicating bill savings of at least 20% over the life of a DG generator -- represents a very strong value proposition for customers,” PG&E wrote. “Leading DG solar companies are currently marketing bill savings of 20% for residential customers and reporting to investors that participating small businesses are saving '5% to 25% from day one.' These levels of customer savings have demonstrated an ability to spur dramatic growth in these markets.”

These factors are going to change over time, and both PG&E and SCE want regulators to reassess their tariffs, demand charges and other facets of the program within three years of instituting the new program. But of course, there are many more changes coming to California energy policy that will have an important impact on the value of distributed solar.

For example, AB 327 set up a separate distribution resource plan (DRP) regime, one that will see the state’s big investor-owned utilities incorporate distributed energy resources like rooftop solar into their distribution grid plans. That regime may lead to alternative revenue potential for solar that serves a positive grid value, although there’s a long road ahead for setting up the rules that will turn that value into cash for solar owners.

That’s one of the reasons that PG&E’s proposal calls for requiring all new net-metered solar systems to provide more detailed generation data, and points to the work being done on solar smart inverters as a promising path for that to happen.

“The value of information about gross generation to the utility customer service, operations, and planning is increasing as the penetration of customer generation increases dramatically,” notes the utility.

SCE’s proposal also asks the CPUC to consider ways to more accurately measure solar systems that are paired with behind-the-meter batteries. Last year, the CPUC ordered the state’s investor-owned utilities to allow battery-solar systems to interconnect under net metering without the expensive and time-consuming studies they had been subjecting those systems to.

But with solar-storage systems expected to become a far more significant part of the grid, SCE notes that “parameters are necessary to ensure that the exported kWh being compensated under the successor tariff program is being generated by the renewable DG system.”