California’s shift to a “NEM 2.0” net metering regime has brought uncertainty to the state’s solar industry.
That’s largely due to two main changes -- non-bypassable charges, which reduce the share of a utility bill that can be reduced by net-metered solar, and time-of-use rates, which reduce solar’s value during its midday peak, and increases it in late afternoon and evening.
Developers and installers are trying to adapt to this new regime in the country’s biggest solar market. One common question is whether solar panels should be oriented in a more westerly direction, to capture more late-afternoon sun at higher rates. Another is whether installers should reduce the size of a typical home’s PV array, to account for the fact that rooftop solar can’t spin back as much of their utility bill as before.
In fact, according to its analysis of real-world data from 630 homes across California, the shift to NEM 2.0 actually means that solar arrays shouldn’t be smaller -- they should be larger.
This result emerges out of modeling more than 900,000 possible combinations of home electricity load, usage patterns, and solar systems of different sizes and orientations. But it wasn’t intuitively obvious to Aurora when it began its analysis project nearly a year ago, said Samuel Adeyemo, Aurora’s COO and co-founder.
“Even we didn’t find this result at first,” he said. "Anecdotally at least, there are quite a few customers who have been surprised.”
Indeed, when this larger-is-better result showed up in one client’s design specifications, it asked Aurora to dig through the data for a week to prove it wasn’t a mistake.
Why are solar installers so convinced that bigger systems won’t be as lucrative under NEM 2.0? It’s largely because of non-bypassable charges, Adeyemo said.
Under the old “NEM 1.0” regime, a home solar system could receive the retail rate for every cent of its energy bill. But adding a portion of utility bill charges that can’t be "spun back" reduces that excess solar value to about 2 to 3 cents less than the retail rate -- at least, for homes that offset their utility bills by less than 90 percent.
There would appear to be little point in spending money on extra solar generation capacity if it’s going to be paid that lower rate. That's the rationale behind sizing NEM 2.0 solar systems smaller than their NEM 1.0 forebears.
What changes that equation, said Adeyemo, is the introduction of time-of-use (TOU) rates that increase retail costs, and thus retail-rate net-metered compensation, during the late afternoon.
TOU pricing could reduce compensation of solar systems installed to maximize value under the NEM 1.0 rules, mainly because of their misalignment with solar’s midday generation peak. But solar panels are still generating power in the late afternoon, even if not as much, Adeyemo said -- and that power is worth more, because it’s reducing high-priced electricity coming from the grid at times when most homes are using more of it.
In fact, it’s worth enough to the homeowner that it more than makes up for whatever will be lost through the reduction in value from non-bypassable charges, he said.
There are good reasons why this might not register at first glance. Almost all solar installers are familiar with the negative effects of non-bypassable charges, and the common-sense idea that you don’t want to generate power that will be impacted by them. But the effects of TOU rates, whether positive of negative, are far more complicated to calculate, since they’ve never been part of the California homeowner’s utility bills until now.
Still, making a decision based on the former and disregarding the latter means that installers “don’t realize that minimizing their production at noon really minimizes their production at 5 or 6 in the afternoon -- and that means they’re losing out,” said Adeyemo. “What they should do is make a bigger system, accept that they’re going to get dinged a little bit on noon generation, but that it’s more valuable to offset those 18, or 20, or 25, or 30 cents in the afternoon -- whatever they are paying.”
We’ve seen lots of studies looking at the value of west-facing panels to help align solar production with most utility peak demand hours, as well as calls to create new incentives to help encourage this design choice. But turning solar panels west without any extra incentives doesn’t really help solar systems achieve greater value under NEM 2.0, Aurora found.
There’s a simple reason for this. South-facing panels simply capture more sunlight over the course of a day than do west-facing panels, and whatever extra late-afternoon generation they capture is counterbalanced by the losses in overall generation.
Slightly shifting solar panels’ orientation to a south-by-southwest orientation does provide a slight benefit when lined up against California’s TOU rates, the analysis found, but not that much -- only about $35 a year.
Meanwhile, no matter what changes in design, residential solar systems under NEM 2.0 won’t be able to achieve the same utility bill reductions available under NEM 1.0, Adeyemo said. That’s because the combination of non-bypassable charges, minimum monthly bills, and the shift from old monthly tiered rates to time-of-use rates puts hard limits on how much utility bill reduction can be achieved with any size solar system.
According to Aurora’s analysis, “Under NEM 1.0, you were getting about 89.5 percent reduction in your utility bill. Under NEM 2.0, you're only getting an 86 percent reduction,” he said. “That’s pretty in line with what people were expecting, but now we have a little more precise data.”
The shift to NEM 2.0 hasn’t been in place long enough to give most installers long-running experience with real-world systems -- San Diego Gas & Electric and Pacific Gas & Electric transitioned to the new regime last year, and Southern California Edison transitioned this month. Nor has it been linked to the state’s recent decline in residential solar installations so far this year, according to GTM Research.
Indeed, if Aurora’s findings lead to more solar companies designing bigger systems, “If the goal was to slow solar, or slow how much solar energy gets onto the grid, you’ve actually done the opposite," said Adeyemo.
You can read the full report, titled, The Financial Impact of Net Energy Metering 2.0 Policy, here.