California Redefines Solar Net Metering, Will Restructure Residential Electricity Rates

Sanjay, as the Assistant General Counsel and Director of Policy and Electricity Markets at SolarCity, the nation’s largest full service photovoltaic solar power provider for residential, commercial, and government customers, please bring our readers up to date on the evolving marketplace for rooftop solar.

Sanjay Ranchod: On the policy front, the California legislature passed Assembly Bill 327 just before adjourning for the year, and this legislation is going to make a big difference for the rooftop solar industry. 

More specifically, AB 327 is going to result in the removal of restrictions on the state’s net energy metering law and is also going to result in some significant reforms to the electricity rate design for residential customers of the state’s investor-owned utilities. The biggest change is that the bill establishes a process and timeline for the development of a new, uncapped net metering program. That’s important because currently the net energy metering law in California includes a 5 percent statutory cap, which means when that cap is reached, which the industry generally projects would occur in 2016 to 2017, under current law, the investor-owned utilities would have no obligation to continue to provide net energy metering to new customers. 

The bill requires that the California Public Utilities Commission develop rules for a new program that will go into effect July 2017 or prior to that date if the cap is reached earlier. And that new program will have no participation cap, both in terms of the number of new eligible customer generators entitled to receive service or the total generating capacity.

That’s a big deal because, as you may know, up until this point the statutory cap has presented an arbitrary and artificial limit on the growth of rooftop solar in California. The solar industry has had to battle every few years to get that statutory cap increased in order to not hit a cliff. The cap started at 0.1 percent in the mid-1990s and then was raised in increments until today. In 2002 it was increased to half a percent; in 2006 it was increased to 2.5 percent; in 2010 it was increased to 5 percent; then last year the Public Utilities Commission issued a very important decision that clarified how the 5 percent cap is to be calculated and effectively increased the generating capacity under the cap significantly. But still the 5 percent cap was a real threat to growth of the rooftop solar industry, and even before hitting the 5 percent cap there was the potential for the PUC to suspend net metering for new customers on January 1, 2015. The bill, AB 327, clarifies that net metering cannot be suspended before the 5 percent cap is reached, and it codifies in statute the methodology that the PUC adopted in its decision last year for how the cap is to be calculated. 

There are a couple important things in the bill for stakeholders to be aware of. Two things that the utilities pushed very hard for are authority for the PUC to raise tier 1 and 2 rates for residential customers. That gives the PUC the ability to, at the same time, lower the tier 3, 4, and 5 rates. The result is there likely will be a decision by the PUC at some point in the next six to nine months to reform our current residential rate design structure to effectively collapse it a bit and reduce the number of tiers and reduce the increments between those tiers so that we have a somewhat flatter rate structure. That’s helpful for some customers, for example, in the Central Valley, who pay extremely high monthly electricity bills in the summer when they have to run their AC continuously and get kicked up into tier 4 and 5 at a very high marginal rate. What that would do for the solar market is reduce the potential savings for the tier 4 and 5 customers who have the highest bill, but it will also increase rates for certain rate payers for whom solar currently does not pencil, so it may increase the number of rate payers for whom solar really is a good value proposition.

Elaborate on the business model tensions that have long festered between the rooftop solar industry and investor-owned utilities to give our readers a full appreciation of what the passage of AB 327 accomplishes.

The bill was amended significantly during the last few weeks of the legislative session to include the net metering and other solar amendments. At the end of the day, this is a bill that was supported by the solar industry, the utilities, and the ratepayer advocates. It was a very unusual coalition of stakeholders who supported the final product, and the bill is not perfect for any of those stakeholders. 

There are provisions in the bill that the solar industry would rather not be included, and there are certainly provisions in the bill, namely the net metering amendments, that the investor-owned utilities prefer not to be included. But this legislation is going to provide greater certainty and a clearer path forward for both the investor-owned utilities and the rooftop solar industry because we have clarity on the future of net metering. This is taking into account that a number of important decisions about implementation will be made at the PUC in the next couple of years, so it will be important for the PUC to implement the bill correctly to achieve its intent. The rooftop solar industry gets a path forward, and the investor utilities are going to receive the ability to make significant changes with the PUC’s authorization to their residential rate design, which they have sought for some time. They are also going to have the opportunity to request the PUC to implement a low monthly fixed charge on residential customers, which is a very controversial change that will be vigorously debated at the PUC.

The ratepayer advocates were significant stakeholder in AB 327’s crafting. How did they view the passage of this important California legislation?

One of the key ratepayer advocate groups (TURN) supports the bill in part because it does two things: it establishes a cap on fixed charges of $10 a month—that’s important because it means that fixed charges cannot be higher than that level—and it also will continue the significant  rate discounts for low-income customers who are on the CARE program.

What precedential value will AB 327 have for other states and their regulatory agencies, and for public power utilities not governed by state PUCs?

Like many aspects of energy and environmental policy made at the state level, California’s decisions carry a lot of weight and are watched closely by the rest of the country. This solution embodied in AB 327 becomes a template and a precedent for other states who are trying to find a path forward for continued growth of the rooftop solar industry in a way that’s sustainable for the investor-owned utilities as well.

If the goal of the rooftop solar industry is to grow significantly, how will California’s energy policies impact and accelerate customer investment and installation? 

AB 327 removes the cloud over the future of net energy metering, which is the key policy that enables rooftop solar to provide economic value to its customers. Any limit or restriction on net energy metering programs and availability to future customers presents the possibility of limiting the rooftop solar industry’s growth. This bill really makes clear that while we don’t yet know what the specific rules of that new uncapped program will be, we will have an uncapped program, and we will know what the rules are before it is implemented. That certainty and visibility for the industry are really key for continuing to raise the financing, to install systems and to accelerate the deployment.

Rooftop solar industry’s profitability relies on a positive delta between the cost of solar energy (and its installation) and utility rates for residential energy. What gives your industry confidence that this delta will be positive in future years?

The solar industry and SolarCity in particular are constantly trying to drive our costs down, and this has been important because, for example, the California Solar Initiative financial incentives and rebates have declined over time to the point where they are are no longer available for most residential customers in the service territories of investors-owned utilities. It’s a need by the industry, as we scale and mature, to continue to bring our costs down so that we can be profitable. The industry will face another significant challenge in 2016 when the federal Investment Tax Credit drops from 30 percent to 10 percent, so that further compels the industry to continue to drive costs down so that we will be able to offer economic value through solar even when the biggest single incentive is lowered.

How will adoption of AB 327 affect California’s renewable portfolio standard program goals – 33 percent renewables by 2020?

It does include provisions concerning California’s RPS, which currently requires utilities to procure 33 percent of their electricity from eligible renewable resources by 2020. Existing law prohibits the PUC from requiring the procurement of eligible resources in excess of that 33 percent level so in a national first for RPS programs, AB 327 removes that restriction and actually authorizes the PUC to require procurement by the investor-owned utilities of resources even in excess of 33 percent. Now the PUC does not have jurisdiction over the municipal utilities, so this change in law applies only to the investor-owned utilities but it is an important signal that the 33 percent RPS is considered by Sacramento to be a floor and not a ceiling.

To conclude, how would you assess the environmental record of California legislature in 2013, specifically, vis-a-vis solar and incenting greater reliance on clean energy?

I think there will be agreement, assuming that the governor signs AB 327 into law, that California in 2013 demonstrated that it continues to be the national leader in solar and thatit will continue to set cutting edge policy to advance and accelerate the transition to a clean energy economy and do so in a way that enables the private sector to create jobs around the state.