What’s Not Crushing California Rooftop Solar? – Energy Institute Blog – Energy Institute at Haas

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Bill savings from residential PV are as large now as a few years ago, but the industry is facing other big challenges.

2019 was a good year for residential solar in California. In the service territories of the three large investor-owned utilities – Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric – the industry installed over 800 MW of capacity, up 14% from the prior year. The industry leader, SunRun, saw its stock price rise nearly 40%. The California Solar & Storage Association (CalSSA) celebrated hitting 1 million solar rooftops in the state and their annual report gleamed with optimism. 

Fast forward to today and the media is filled with articles about the catastrophic decline of the industry. Most of the blame centers on the change in compensation for electricity that solar homes sell to the grid, which was implemented last April. CalSSA is shouting from the apparently barren rooftops that the California Public Utilities Commission is driving a stake through the heart of the industry with this policy shift. 

(Source, but altered by the author)

But a closer look at that policy change – as well as the recent eye-popping residential rate increases – leads to a very different conclusion.  

Every household that got a permit for a new solar system prior to April 15, 2023 locked in credit for its electricity generation at the retail electricity rate, under what was known as “NEM 2.0”. Systems permitted after April 15 are covered by “NEM 3.0”. They receive a much lower rate when the household exports electricity to the grid, but these customers still save the full retail rate when the power is used on site. 

That last detail is important, because when you do a little math, it turns out that the bill-savings incentive to install solar today under NEM 3.0 is about the same or greater than it was for most households in 2019 under NEM 2.0. 

How could that be? Well, even without a battery, the typical solar household exports less than 50% of its rooftop output to the grid (the Solar Energy Industry Association says it’s 20%-40%) . So, while the new policy cuts the value of exports, the higher retail rates greatly increase the value of the electricity used on site. Here’s a link to my calculation spreadsheet. Even at a 50% export rate, it indicates that the solar incentive is 10% greater today than it was in 2019 for SCE customers, about 4% lower for PG&E customers, and 28% lower for SDG&E customers, though SDG&E is by far the smallest of the three utilities, and it already has the highest solar penetration. (And that is based on the surprising 2024 decline in SDG&E rates, which is not expected to persist.)  

(Source: For 2014-23, EIA-861 data with revenue adjusted for semi-annual Climate Credit. For 2024, Utility Advice Letters.)

These calculations encompass a number of assumptions that are made clear in the spreadsheet. Possibly the most important is that households will consider only 2024 rates in making the adoption decision. Since rates are expected to rise faster than inflation for at least the next few years, this probably understates today’s incentive for a forward-looking customer.

Sure, the incentive to install isn’t as great for any of these customers as it was on April 14, 2023, when NEM 2.0 was about to end, but overall it isn’t that different from a few years ago when the industry was doing just fine, throwing itself parties, and growing at a healthy pace. The policy change has just stepped us back from the recent exponential growth in new systems, which is now creating exponential growth in cost shifts onto other ratepayers.

What’s “crushing” solar?

But if the incentive is still robust, why have new sales dropped off so much in the last year?

The first and most obvious reason is that the much more generous compensation for systems installed before April 15 drove a goldrush during the first three and a half months of 2023. Many of those early-2023 buyers would most likely have been later-2023 buyers were it not for the rush to install before April 15 and lock in NEM 2.0 rules. In fact, overall 2023 sales of residential PV capacity were slightly higher than 2022. 

But there remain a number of other drags on residential PV sales, factors that had been masked by the unprecedented growth in financial incentives from retail rate increases and NEM 2.0 policies.

It’s the interest rates 

Rising interest rates makes any upfront capital investment that pays off gradually over decades less attractive. In fact, if a new solar system were financed at mortgage interest rates over 15 years, a buyer in 2023 would see a 21% higher monthly payment than a buyer in 2021 even though there was a slight decline in the cost of rooftop PV over the period.

(Source: Author calculations based on data from californiadgstats.ca.gov) 

The big winners have already gone solar

Households considering solar differ in many ways, such as their roof size and orientation, their total electricity usage, their ability to finance a big capital investment, and their interest in environmental causes. The folks who jumped at rooftop PV over the last 10 years were the ones with the best sites, the highest electricity usage, access to low-cost financing, and the most interest in fighting climate change. A rooftop solar system lasts decades, so to maintain sales, companies have to convert new customers who were not that interested a couple of years ago. That makes it harder to keep up the growth year after year.

Slowdown in power shutoffs

In its 2019 “Year in Review” report, the Solar Energy Industries Association reported that “A crucial driver of growth for residential PV has been the public-safety power shutoff (PSPS) events in California. Beginning in H1 2019, these power shutoffs provided a key incentive for homeowners to purchase solar, increasingly paired with storage.”  Back in fall 2019, so many people were asking how to deal with the PSPS disruptions that we had two different Energy Institute blog posts addressing the question. 

Overall, from 2014 to 2019, the residential solar business in California grew at a 14% annual average rate. Then, after a flat 2020 during the pandemic disruption, sales exploded, more than doubling by 2022.  

(Source)

PSPS events, however, have greatly diminished in the last couple years, in part due to better luck with the weather and in part because utilities have figured out how to shut off fewer houses when they have to deenergize a risky line. Fewer homes hit by PSPS events means fewer going solar (plus a battery) to minimize the disruption of blackouts.

(Source: Author calculations from the CPUC’s spreadsheet of PSPS events)

Time to stop policy wobbling

There’s now a move in the California legislature to reinstate the NEM 2.0 policy. This would override the CPUC NEM 3.0 decision, which was based on an extensive hearing process and careful reasoning to move compensation for rooftop solar in a more sustainable direction. With the drastically higher retail rates we now have, returning to full net metering would be a massive rooftop solar subsidy paid for by other – generally poorer – electricity customers. It would also drive rates much higher, making building and transportation electrification less affordable.

The rooftop solar market isn’t dying. It is coming down from the 2021-2023 sugar rush when net metering policies combined with rapidly-climbing electricity rates, recent power shutoffs, and the impending switch from NEM 2.0 to NEM 3.0 to produce growth that simply couldn’t be maintained.  It’s tough to unwind bad policy when it creates outsize benefits for a small group of consumers and investors that are paid for by everyone else. But if we don’t do it now, it will be even tougher to address in the future. It is vital for California to chart a path that is sustainable and equitable, so it can be an example for other regions to follow, not a cautionary tale of what to avoid.

I am posting frequently these days on Bluesky @severinborenstein

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Suggested citation: Borenstein, Severin. “What’s Not Crushing California Rooftop Solar?” Energy Institute Blog, April 8, 2024,https://energyathaas.wordpress.com/2024/04/08/whats-not-crushing-california-rooftop-solar/

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