California’s Solar Dilemma

In the land of palm trees and sunny skies, the saga of California’s energy industry unfolds, and its latest chapters paint a distressing picture. In a state known for its commitment to renewable energy, residents interested in harnessing rooftop solar face a surprising hurdle in the form of government regulation. As the state struggles to grapple with a power grid afflicted with numerous issues stemming from surging demand, the burden of rooftop solar falls disproportionately on the shoulders of individuals and businesses alike, while highlighting the flaws of an adulterated energy market.

The State of California could be “exhibit A” of what utility regulator Travis Kavulla was picturing when he wrote: 

Understanding the [energy] sector is not just important because electricity is important; the market for electricity is really a window into the workings of the modern administrative state. The economic regulation of the sector often blurs the line between government and business, turning each into the other’s client. Even in places where competitive features exist, the marketplace is still designed by government and warped by subsidies. Today there is no genuinely free market for electricity. Ironically, many of the ideologically driven, market-oriented reforms of recent decades have precipitated a retrenchment of the monopoly problem they intended to solve.

California’s history with rooftop solar systems dates back to 1996, when the state introduced the Net Energy Metering (NEM) program. This innovative billing system allowed owners of electricity generation systems, such as rooftop solar installations, to sell surplus electricity back to the grid at retail rates. This incentive proved enticing to consumers, making alternative power generation more appealing as it helped defray the substantial cost of solar systems over their lifespan. Consequently, it fostered a diverse energy resource mix and facilitated private investments in renewable energy.

The initial iteration of NEM, aptly named NEM 1.0, achieved resounding success for California and its residents in terms of increasing solar uptake. Solar system installations surged to record highs, costs of solar systems decreased annually, and the share of energy generated from individual systems kept climbing, meeting all expectations set forth by regulators.

However, after two decades of relative stability under NEM 1.0, the California Public Utilities Commission (CPUC) approved NEM 2.0 as its successor. While NEM 2.0 maintained some benefits of its predecessor, such as full retail rates for excess power generation and exemptions from standby and fixed charges, it introduced a one-time interconnection fee of $75-$150 and a charge of approximately $0.02/kWh on the total electricity consumed by the grid from new NEM customers. 

In less than three years after the launch of NEM 2.0, the CPUC embarked on a reform journey that would change the foundations of this once-celebrated program. Collaborating with Investor-Owned Utility companies (IOUs), the CPUC conducted extensive studies, focus groups, and hearings from August 2020 to August 2021, aiming to evaluate the impacts of net metering on the grid and consumers. A chief concern with NEM 1.0 and NEM 2.0 is that the program was not cost-effective for utilities and non-participating customers. The outcome was a proposed NEM 3.0, released in November 2022, which received unanimous approval from the CPUC in December of the same year and was scheduled to take effect in April 2023 as a net billing tariff.

Under NEM 3.0, consumers could expect to receive a mere 25% of the credit they enjoyed under NEM 1.0 or 2.0 during the summer months. Regrettably, this new policy painted a bleak picture for individuals, schools, and small businesses that were considering future renewable generation. Pre-existing system users could be grandfathered into their current NEM rate by way of an application. However, no such luck for those who were stuck in the process or slow to complete their system installation. 

One of the primary goals behind NEM 3.0 was to nudge consumers into adopting storage systems alongside their solar installations. During the previous iterations of NEM, the percentage of NEM systems that had storage was lackluster, with less than 6 percent of systems including storage by 2019. With NEM 3.0, individuals can expect, on average, to pay an additional $8,000–$16,000 to have a storage system installed alongside their solar. While a 26% federal tax credit for qualifying storage installations provides some relief, it exemplifies a pattern of shifting the cost burden onto the consumers, even customers without solar. According to Severin Borenstein, Meredith Fowlie, and James Sallee at Haas School of Business at the University of California, Berkeley, “Utility customers who install solar save 20 to 30 cents for every kilowatt-hour their system produces, but the utility’s costs go down by only 7 to 9 cents. That leaves 10 to 20 cents in costs that still must be covered, so electricity rates go up, which hits people without solar panels.” Their working paper can be found here. 

The dilemma of rooftop solar does not solely extend from statewide regulations either. Certain municipalities have also enacted restrictive regulations that make it difficult for homeowners to adopt solar energy solutions. These ordinances often impose stringent permitting processes, cumbersome paperwork, and excessive fees, dissuading residents from pursuing rooftop solar installations. Varying and inconsistent permitting requirements across jurisdictions create confusion and prolong the approval process for solar projects, leading to frustration among potential adopters. 

Moreover, solar energy systems face a fundamental challenge—their peak generation occurs during the middle of the day when the demand for power is relatively low. In contrast, the highest demand for energy occurs in the evenings, when people return from work, plug-in electric vehicles, and use air conditioning. While large-scale storage systems could potentially offset this disparity, they are costly and rarely built at the scale required to power entire cities. Unfortunately, the CPUC’s decision seemed to favor the interests of massive IOUs over individual customers.

Adding to this predicament, California enacted a law in 2020 that required all new residential single-family homes, condominiums, and apartment buildings three stories or lower to install solar systems. Although the state aspires to lead in renewable energy production, this rule adds to the housing cost burden, further exacerbating the state’s existing housing and homelessness crisis. As Lawrence J. McQuillan notes in How to Restore the California Dream: Removing Obstacles to Fast and Affordable Housing Development this building requirement can add between “$10,000 to $30,000 to the cost of a new home.” The group Solar Rights Alliance purports that in California, a typical rooftop solar installation costs over $25,000, more than the rest of the United States (~$22,000), and far more than other countries like Japan ($13,200) or Germany ($9,600). Adding additional costs for home buyers while simultaneously reducing the ability to effectively pay off those accrued costs is a surefire way to compound the problem that is already prevalent. 

If the concern is that NEM adds costs to other grid customers, who are not using solar, then all the more reason to have freer markets in electricity. Embracing a more market-driven approach could help alleviate the issues faced by California’s energy industry. By allowing supply and demand dynamics to dictate pricing, consumers who generate excess solar power could negotiate fair compensation directly with those who require it, promoting a more efficient allocation of resources. With a transparent and competitive market, innovative solutions such as peer-to-peer energy trading platforms could emerge, where individuals with excess solar power could sell it directly to others, bypassing the need for complex regulatory frameworks like NEM. This would not only empower consumers but also encourage investments in energy storage technologies that could bridge the gap between solar generation and peak demand periods, benefiting both solar owners and other grid customers. Ultimately, a freer electricity market could pave the way for a more resilient, cost-effective, and sustainable energy future. 

Until then, California’s ambitious journey towards renewable energy and climate resilience is therefore marred by this series of policy choices. IOUs have been either direct beneficiaries, or have been slated to receive billions of dollars in order to develop and maintain infrastructure that is efficient, reliable, and safe. But the results are underwhelming. Planned outages across the state for load management at the hottest points of summer leave people vulnerable to heat-related illness. Their lack of powerline maintenance is a constant cause of fires that have led to tragedies that have burned hundreds of thousands of acres, tens of thousands of homes and businesses, and over 100 deaths.