California’s NEM 3.0 To Shrink Residential Solar

• Wood Mackenzie fears demand for Californian residential solar to come down in half by 2024 if the state decides to implement NEM 3.0 in its present form
• The new net metering regime will extend payback periods for solar, making it more expensive for residential segment
• There could be installation rush now under NEM 2.0 before NEM 3.0 kicks into effect, whose real impact will be visible in 2023
• Market consolidation may be on the anvil as small installers bear the brunt of the changes proposed

Expect more than 2.4 GW DC of residential solar demand 'destruction' in California through 2026, if the state administration decides to implement its new net metering tariffs, dubbed NEM 3.0, according to Wood Mackenzie that fears the market to be cut in half by 2024.

"Market decline will continue in 2024, with annual residential installed capacity in 2024 expected to fall to just over 700 MW DC – roughly half of 2021 volumes, and the lowest annual output for California since 2014. The market will return to single digit growth in 2025 and 2026 as it begins a modest recovery," according to Wood Mackenzie.

For the background, the California Public Utilities Commission (CPUC) on December 13, 2021 issued a Proposed Decision (PD) for the state to implement a new net metering tariff regime which the solar industry stakeholders claimed would be detrimental to the growth of residential segment in the state.

According to the California Solar & Storage Association (Calssa), the new proposal would make California the state with the highest solar penalty fee in the country, while credits for excess solar power exported to the grid would be slashed by 80% to around $0.05 cents per kWh on all solar users from the current $0.20 to $0.30 cents per kWh. All in all, the measures would make solar and storage expensive for consumers to invest in and maintain, making it less accessible.

While the final decision by the commission is still pending, Wood Mackenzie analysts expect these and other changes in the PD for NEM 3.0 to more than double solar project payback periods from around 5 to 6 years to 14 to 15 years, negatively impacting its economic attractiveness for the users. Impact will be seen from July 2022 or August 2022—in case the PD is approved in its present form—leading to record quarters now under NEM 2.0, before activity drops in H2/2022.

Activity would drop further under NEM 3.0 in 2023 when the impacts of the PD will be seen more clearly and installed capacity is expected to decline by 42% YoY in 2023, driven by a 53% drop in installed capacity in investor-owned utility territories affected by the new program and step down of the Investment Tax Credit (ITC).

It would be a blow to installers some of whom will not be able to survive the changes and the market will witness more consolidation, warns Wood Mackenzie

"Energy storage and financial products offer modest hedges against NEM 3.0 but will not yield sufficiently attractive economics to maintain residential solar market growth in California," explains Wood Mackenzie Research Analyst Bryan White. "Installers will most likely need to sell much smaller solar projects to achieve savings for customers. This will put immense pressure on project margins as installers collect less revenue to cover fixed costs."

The Solar Energy Industries Association (SEIA) has already said that this PD will leave rooftop solar to be afforded only by the rich, leaving out schools, small businesses and average families. "The only winners today are utilities, which will make more profits at the expense of their ratepayers," stated SEIA President and CEO Abigail Ross Hopper.