Two looming regulatory developments in California will have a
significant effect on the residential solar market.
The state is rewriting the rules for net metering, where
homeowners who use solar to generate their own electricity
can sell any excess electricity to the grid. The rewrite is
expected to scale back the benefits of net metering for solar
The current multi-tiered residential rate structure used by
investor-owned utilities in the state, which has been an important driver of the economics of solar for high-usage customers,
is being re-evaluated and is likely to undergo substantial change
or to be superseded by a new structure entirely.
These developments are likely to make California a tougher
market for rooftop solar companies. However, the market
should still remain viable, and there could even be new
California has long supported behind-the-meter residential
solar electric generation through net metering, which allows
customers to sell surplus solar power back to the utility at the
full retail value of the electricity. Net metering was instituted in
California in 1996 and has been expanded several times over
the years to allow for wider participation and greater benefits.
Under the existing net metering program, the amount of
net-metered capacity that can be added for each investorowned utility is capped at 5% of the utility’s aggregate customer peak demand, which is defined as the sum of the
maximum peak demands for each customer rather than the
maximum demand for the utility as a whole.
When the cap is reached, there will be approximately 5,570
megawatts of installed solar capacity across the systems of
the three California investor-owned utilities. At the end of
September 2013, Pacific Gas and Electric reported that it had
902 megawatts of net-metered capacity connected to its
system, which is the equivalent of 1.87% of the utility’s aggregate customer peak demand
San Diego Gas and Electric and Southern California Edison had
net-metered capacity of 1.67% and 1.46% of aggregate customer peak demand, respectively.
California’s net metering program allows a customer who
installs a solar photovoltaic system of one megawatt or less to
receive a financial credit for power generated by his or her
system and delivered to the utility grid. A typical solar customer will generate more solar power than needed during
some parts of the day and less than needed, or none at all,
during other parts of the day and throughout the night. The
same pattern can arise seasonally, often with the generation
of more power than needed during the summer and less than
needed during the winter.
Under net metering, customers can send excess power to
the grid and use this power as a credit to offset purchases of
power from the grid that are made in the same 12-month
For a customer whose rates are wholly volumetric, meaning
that the customer is charged for the kilowatt hours of usage
without any fixed charges or demand charges, as is the case
for customers of PG&E and SDG&E, this allows the customer
to sell power back to the utility at the full retail rate for the
power, including all generation, transmission and distribution
cost components. Aside from small minimum charges, which
are binding only for customers with extremely low net usage,
these customers can avoid having to pay electric bills by selling
back enough solar power to offset all grid purchases.
Customers who generate enough solar power to more than
offset all grid purchases can also receive net surplus compensation payments, but at the wholesale rate ― rather than
retail rate ― for the surplus power generation.
Impact of Rates
Net metering has worked hand in hand with residential rate
design structures to make solar PV economical for many customers, particularly high-usage customers. Most of California’s
residential customers have inclining block rates, with prices
increasing over two, three or four tiers of rates as usage
increases. Net metering is particularly valuable for high-usage
customers because it allows them to avoid being pushed into
higher tiers and rates.
For example, the January 2014 rates under PG&E’s default
residential rate schedule were 13¢ per kWh for “baseline”
usage, 15¢ per kWh for 100% to 130% of the baseline amount,
and more than 32¢ per kWh for usage greater than 130% of
baseline amount. In other words, rates for highest levels of
energy usage are about two and a half times the rate for the
baseline level of usage. (The
amount of energy in each tier is
linked to the customer’s “baseline” usage amount, which is
set at 50% to 70% of the
average residential electricity
usage in the customer’s climate
The steeply inclining block
structure greatly increases the
value of net metering for highusage customers, and these
customers have represented a
significant portion of the
market for residential solar in California. Under the January
2014 rates, a high-usage PG&E customer whose solar system
reduces electricity consumption from 200% of baseline to
130% of baseline has effectively sold power to the utility at a
rate of 32¢ per kWh. By contrast, a low-usage customer whose
energy usage without solar PV is at 130% of baseline would
sell power to the utility at just 13¢ to 15¢ per kWh.
Customers also have the option to select a time-of-use rate
schedule, under which rates are higher during peak periods of
the day and during the summer months and lower at night
and during other low-usage periods. These rate schedules are
usually tiered, meaning that rates vary both by time of consumption and by level of consumption. For customers on timeof-use rate schedules, net metering credits are assigned a
value based on the retail cost of power in place at the time of
the power generation.
As a result, solar power generated during a summer late
afternoon may offset two to three times that amount of
winter or nighttime power consumption. For example, under
January 2014 rates, one kWh of solar power sent to the PG&E
grid between 1 p.m. and 7 p.m. on a summer weekday would
earn a credit of 28.7¢, which is the summer peak-period residential time-of-use charge for one kWh of baseline usage.
During the summer months between 9 p.m. and 10 a.m., this
credit would offset 2.85 kWh of power, since the baseline cost
of power is just 10.1¢ per kWh during this interval.
Concerns that the net metering program was shifting costs
to customers who do not have solar on their roofs led to legislation requiring a study of net metering’s costs and benefits
for all ratepayers. AB 2514, enacted in 2012, directed the
California Public Utilities Commission to undertake a study “to
determine who benefits from, and who bears the economic
burden, if any, of, the net energy metering program.”
The study was completed in October 2013 by an outside
consultant, Energy and Environmental Economics, Inc.
The study found that the level of the net metering subsidy is
highly linked to the rate structure and that the utilities’ current
residential rate structures, with steeply inclining block rates
and little or no fixed charges, yield a subsidy of 20¢ per kWh of
Critics of the study claim the study does not account for the
full benefits that solar PV provides to the grid and overstates
the cost-shifting impacts. Despite the criticism, the study is
being used to support proposals for changes in the residential
rate structures of the three main California utilities.
In the fall 2013, the state legislature enacted another bill, AB
327, that will end the current net metering structure in mid-
2017 or, if earlier, when net-metered systems reach 5% of a utility’s aggregate customer peak demand. AB 327 requires the
California Public Utilities Commission to develop a new “standard contract or tariff, which may include net metering” for
solar customers, to replace each utility’s current net metering
structure when the current program expires.
/ continued page 14
/ continued page 151 4 P R O J E C T F I N A N C E N E W S W I R E F E B R U A R Y 2 0 1 4
continued from page 13
Unlike the current structure, the new net metering structure
would not have any cap on participation. However, the new
net metering program must ensure that no costs are shifted to
non-participating customers. Current net metering customers
would be grandfathered under the current system for a period
of time that has not yet been determined.
The practical effect of the law is that there will soon be two
or possibly three distinct sets of net metering customers: one
set that will remain under the current program for an indeterminate period of time, another set that will be put under the
new program, and a third set that did not have solar when AB
327 was enacted but installs it before the current net metering
program ends and that may be under a different set of grandfathering regulations than pre-AB 327 net metering customers.
To implement AB 327, the California Public Utilities
Commission must first determine a schedule to transition
from the current net metering program to the future
uncapped program as well as the rules for grandfathering
existing net-metering customers. The CPUC received a range of
proposals for how to structure a transition period and the
PG&E and SDG&E both proposed that existing net metering
customers with solar systems installed before April 2014 be
allowed to remain on the current program through the end of
2023. Net metering customers with systems installed between
April 2014 and December 2015 would be allowed to remain on
the current program through the end of 2020. Net metering
customers with systems installed between January 2016 and
June 2017 would be transitioned to a new net metering
program that would take effect on July 1, 2017.
SCE proposed that customers who participate in the existing
net metering program before July 2017 would be grandfathered in the program through the end of 2023.
The California Solar Energy Industries Association recommended a more extensive grandfathering program that would
allow customers who participate in the net metering program
before July 2017 to remain under the current program for a
minimum of 30 years.
The CPUC is expected to issue a decision on grandfathering
rules by March 2014.
The commission has until the end of 2015 to develop the
new structure for net metering. AB 327 gives the CPUC wide
latitude to determine what should replace the current
program. Possibilities include a feed-in tariff that allows customers to sell solar power to the utility at a fixed price or a
new net metering program that reduces the amount of power
that can be sold back to the utility or reduces the financial
credit associated with that power.
In all likelihood, the structure of the new program will
depend on the default residential rate structure in place when
the program rules are adopted. The commission has a rulemaking underway to re-evaluate the current rate structure.
AB 327 gave the CPUC authority to make radical changes to
residential rate design, including reducing the number of rate
tiers to two through 2018, eliminating the inclining block rate
structure entirely thereafter, and imposing fixed monthly
charges of up to $10 per month for non-low-income customers
beginning in 2015, with inflation adjustments thereafter.
A CPUC staff proposal released in January 2014 recommends that default residential rates shift from inclining block
rates to non-tiered time-of-use rates beginning in 2018, and
that until then the CPUC reassess the appropriate time-of-use
period definitions ― for example, what hours and months
should be included in the summer peak rate period ― and the
rate differentials between time-of-use periods ― for example,
how much higher the summer peak-period rate should be than
the summer off-peak-period rate. The proposal also recommends gradually reducing the number of tiers to two between
2014 and 2018, and greatly reducing the rate differentials
between the tiers to just 20% by 2018, at which time the tiered
rates would be an optional alternative to the default time-ofuse rates. Finally, the staff recommends phasing in a fixed
charge that would start at $5 a month and increase to $10 a
month by 2018 with future inflation adjustments. The staff
proposal does not recommend using minimum bills (instead of
fixed charges), but if the CPUC were to adopt minimum bills, it
recommends that they should start at $10 per month in 2015
and increase with inflation.
These potentially substantial changes to the residential rate
design structure create many unknowns for residential solar
developers, as the implications of the changes for the market
will depend on the details of the new rate structures.
There are three areas in which changes in residential rate design
could alter the market for residential solar.
One is time-of-use rates or inclining block rates. A shift to
non-tiered time-of-use rates (from the current default inclining
block rates and optional tiered time-of-use rates) may improve
the economics of solar PV for moderate usage residential customers with relatively high shares of energy consumption
during peak periods. The extent to which this will be the case
will depend on the rate differentials between the peak and
non-peak periods and on how much overlap the new time-ofuse period definitions retain between the peak time-of-use
period and the period of maximum solar generation. These
structural time-of-use definitions are likely to differ from those
in place in the optional time-of-use rates that are currently
available, and how they are structured could significantly
support or debilitate the market for residential solar.
For example, the current on-peak period for customers on
SDG&E’s optional residential time-of-use rate is weekdays from
noon to 6 p.m., a period that captures about 35% of the output
from solar PV systems in the San Diego area. In January 2014,
SDG&E proposed to shift the on-peak period in the winter to
weekdays from 5 p.m. to 9 p.m., a period when little solar generation can be expected and, in the summer, to weekdays from
2 p.m. to 9 p.m. These new time-of-use periods would lead to a
significant reduction in solar PV generation during the peak
periods: less than 10% of the output from solar PV systems
would occur in the peak period under SDG&E’s proposal instead
of about 35% under the current definitions, with the remaining
output occurring in the semi-peak period.
If large differentials are maintained between on-peak and
semi-peak rates, then this shift could undermine solar PV economics for customers on time-of-use rates. However, changes
to time-of-use period definitions may not be quite so detrimental to solar PV economics. For example, the CPUC staff report
raised an idea of a split on-peak period that would include both
morning hours and late afternoon or evening hours. This structure would offset a portion of the loss of mid-afternoon
on-peak hours with the addition of morning on-peak hours,
which could include hours of high solar generation.
Another area where change could have an effect is a reduction in the rate differentials for inclining block rates. A reduction in the rate differences between tiers would eliminate the
very high upper-tier rates that have been a cornerstone of residential solar economics. / continued page 16 / continued page 171 6 P R O J E C T F I N A N C E N E W S W I R E F E B R U A R Y 2 0 1 4
continued from page 15
However, reductions to the upper-tier rates would be done
concomitantly with increases in the lower-tier rates, potentially making residential solar economic for lower-usage customers whose rates were too low earlier for the investments
to pencil out.
Finally, another area where change would have an effect is
the introduction of fixed charges or higher minimum bills.
Fixed monthly charges make residential solar less economic
because these charges cannot be avoided through net metering. However, the extent of the impact depends on the level of
the charge. Furthermore, if a higher minimum monthly bill is
used in place of a fixed monthly charge, then the impact is
likely to be less significant, particularly for those customers
who offset most, but not all, of their electric bills with solar
generation and continue to purchase a small amount of power
from the utility. Under a fixed charge, these customers would
pay the fixed charge in addition to their volumetric charges.
Under a minimum bill, the volumetric charges would be credited against the minimum bill amount.
How the net metering program is restructured will also have
a significant effect on the long-run viability of residential solar
in California. The restructured program is likely to be less generous than the current program. These very important residential rate design and net metering program details have yet to
be worked out.
That said, the California Public Utilities Commission has a goal
of maintaining a viable and growing residential solar market in
California. It is a daunting task, given the competing interests.
Residential rate structures must be designed to balance a
number of equity and efficiency concerns that have implications both for solar and non-solar customers. The grandfathering provisions for customers who installed solar before AB
327 became law must be sufficient to provide confidence to
customers who are evaluating
new solar installations that
their investments will not be
undermined through future
rate design or net metering
changes while also satisfying
concerns about cost-shifting.
The design of time-of-use
periods must be done carefully
to provide the proper price
signals to consumers while at
the same time being sensitive
to the potentially significant
implications for commercial
and industrial customers that have structured operations and
entered into investments based on the current time-of-use
periods. The restructured net metering program must support
the residential solar market without increasing rates for nonsolar customers.
Given these challenges and complexities, some amount of
market disruption is inevitable.
However, there is also opportunity in that new segments of
the residential population may be open to solar for the first
time with the shift to non-tiered time-of-use pricing.
The retail electricity rate structure and the