Solar in California Still Compelling Savings Given Soaring Electricity Rates
Since new regulations on compensation for excess solar energy from rooftop installations went into effect in April 2023 (commonly called “NEM 3.0”), there has been a massive drop in solar installations across the state, leaving many wondering — is it still worth it?
By many calculations, the financial benefit of a solar installation was cut by 75% and the impact on the demand for solar installations was dramatic, resulting in a drop of 70–80% and many subsequent layoffs across the industry. We knew this was coming and I did a big push last year with a previous article encouraging Californians to get solar.
So is it still worth it to get solar in California? In short…yes, because:
- Solar energy is cheap and the utility companies continue raising rates to the most expensive in the US.
- The benefits are even better if you add a battery.
- Even without a battery, there are some factors in your control that can improve the attractiveness of getting solar.
The Rising Costs of Electricity Make Solar More Valuable
One of the most compelling reasons why solar still makes sense, even under NEM 3.0, is the ongoing rise in utility rates in California. The state’s three major investor-owned utilities (IOUs) — PG&E, Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E) — have a track record of consistent rate increases, and this trend shows no sign of slowing down.
PG&E, for example, has been on a rampage of rate increases rubber stamped by the CPUC. In January 2024, rates increased 20%. In April, rates were increased again and another rate hike was just approved to go into effect October 1. PG&E electricity rates have gone up 54% since 2020 (when it exited bankruptcy) and over 110% in the last decade. SCE and SDG&E have also followed suit, raising rates year over year.
For homeowners without solar, these rate hikes can translate into substantial increases in monthly bills. And without solar, you will forever keep paying the utility company. For example, if your bill is $150/month, you will pay over $65,000 to the utility company over the next 25 years (the expected life of a solar installation)…and that doesn’t take into account the increase in rates!
In this context, the financial benefits of solar become clear: by generating your own electricity, you can reduce your reliance on these ever-increasing utility rates and protect yourself against future hikes.
Incentives for Solar Are Strong
A few factors making the case for solar strong:
- Federal incentives like the Investment Tax Credit were restored to previous values under the Inflation Reduction Act. That means you can get 30% of the cost of the system (and related electrical work needed) back in the form of a tax credit. For example, if you pay for a $20,000 system outright or with a loan, you would get a $6,000 credit when you file taxes with the IRS. There are other ways to finance solar too, more more info check out this article.
- Solar prices have continued to come down after a brief period of increases during the pandemic supply chain snarl. Batteries have come down in price quickly over the last few years also.
- Installing solar increases the value of your home! According to an NREL study, every $1 in savings on the energy bill translates into $20 in added value for your home. A Zillow study found that solar increased home values by about 4%.
- To many people, there is more to the value of going solar than the simple economics of offsetting the cost of kWhs from the grid. While this is subjective, it is definitely worth calling out that putting your values into action, taking a stand against the monopolistic utility, and increasing your self-sufficiency all can have value. When you add in energy storage and create resiliency, this also creates security and energy independence.
What Has Changed Under NEM 3.0?
Despite California’s reputation as progressive on clean energy, the state suffers from regulatory capture that has left a damaging history of the CA Public Utility Commission acting against the interest of rate payers and consistently favoring the desires of the utilities. Even while federal incentives have gotten better over the last couples, California has made it less attractive to adopt clean energy — despite policy mandates for 100% clean energy. NEM 3.0, or as it is officially known, the net billing tariff, is a prime example of this.
NEM 3.0 alters how homeowners with solar systems are compensated for the excess electricity they export to the grid. Here’s a breakdown of the primary changes:
- Reduced Export Compensation Rates: Under NEM 2.0, homeowners were compensated for excess energy at near-retail rates, meaning you earned nearly as much for exported electricity as you paid when drawing from the grid. NEM 3.0 shifts this by using a new “Avoided Cost Calculator,” which significantly lowers the compensation rate, often by 75% or more compared to NEM 2.0. This means you’ll earn less for the electricity your system exports back to the grid. This compensation structure is quite complex and the exact rate varies depending on the hour of the day, day of the week (i.e., weekday vs. weekend), and month you export the energy: in fact, there are 576 possible export rates in total!
- Time-of-Use (TOU) Rates Are Now Mandatory: NEM 3.0 requires all solar customers to be on a time-of-use rate plan, where the price you pay for electricity from the grid varies depending on the time of day. Electricity is more expensive during peak periods, typically in the late afternoon and early evening when solar production wanes. Conversely, energy is cheaper during off-peak hours, such as late at night and early in the morning.
- Lower Payback for New Solar Customers: As a result of these changes, the payback period for new solar customers has lengthened. Under NEM 2.0, many homeowners could expect to see a full return on their investment in solar within 5 to 7 years. With NEM 3.0, this payback period may now extend to 9–12 years, depending on system size and electricity usage patterns.
The Long-Term Financial Benefits of Solar Remain Strong
Though NEM 3.0 lowers the compensation rate for exporting energy to the grid, solar still provides long-term financial benefits. The key to realizing these benefits is shifting your consumption habits to maximize self-consumption — using as much of the electricity generated by your system as possible rather than exporting it back to the grid.
Solar electricity is generated during the day, so if you are able to take advantage of this energy, you will get the most financial benefit. If you work from home or have flexible loads that can be programmed to run during the day, you can soak up the solar generated from PV. This will allow you to avoid the high evening TOU rates and save the most money by running high-energy appliances (e.g., dishwashers, washing machines, or EV chargers) during off-peak hours when electricity is cheaper. With smart energy management systems (and battery storage), you can also optimize your home’s energy use so that you minimize grid imports during peak pricing hours and avoid drawing from the grid altogether during expensive periods.
Even with NEM 3.0’s reduced export compensation rates, homeowners can still see significant energy savings, especially as utility rates continue to rise. In addition, as we continue to move more of our appliances to electricity, rather than natural gas, you are more insulated from the increasing cost of electricity from the grid.
Batteries Allow You To Capture More Benefits of Solar
One of the challenges with the way NEM 2.0 was designed was that it treated the grid like a nearly free battery — you could export excess solar to the grid and draw on it when you needed. But as solar adoption increased, this stresses the grid in the evening times when solar production decreases and net load increases, creating the infamous duck curve.
Despite what I believe are fundamental problems with the design of NEM 3.0, what it effectively does is simulate the price of a battery, and in doing so, increases the attractiveness of adding batteries to a solar installation. You can enhance the value of your solar investment under NEM 3.0 by pairing your solar system with energy storage.
Battery storage allows you to:
- Maximize Self-Consumption: Solar is the cheapest form of energy you can get but you don’t always need it all when it is generated. Your battery can capture and store excess solar energy produced during the day, allowing you to consume it when it solar generation is not available. This provides the best long-term protection against increasing utility rates for electricity.
- Enhance Grid Independence: During power outages or grid failures, a battery system can provide critical backup power for essential home functions.
- Avoid Peak TOU Rates: With TOU rates making electricity more expensive during peak hours, battery storage enables you to use stored solar power during these periods, further minimizing your reliance on grid power.
With storage, you also become less reliant on the new, lower export rates imposed by NEM 3.0, as you’re able to keep more of your solar power for your own use rather than exporting it at a reduced rate. For a deeper dive on the payback implications of NEM 3.0, check out this article on EnergySage.
Solar for Savings and Energy Independence
Despite the recent adjustments to NEM, solar remains an attractive option for Californians, especially when viewed through the lens of rising utility costs, energy independence, and long-term financial savings.
While there are lots more details we could go into here, hopefully I’ve been able to create confidence in the decision to get solar (and a battery!). Feel free to reach out if you have questions or would like a referral to an installer!