By Matt Nesburn

A series of bills that cleared the California legislature in September could dramatically alter an already rapidly-growing market for distributed solar.

Chief among these is AB 327, which passed the state legislature on September 19 and is awaiting an all-but-guaranteed signature by the California governor.

Many in the industry believe that AB 327 effectively changes California’s 33% renewables portfolio standard from a “ceiling” to a “floor,” but it is also fraught with potential pitfalls for the solar industry. 

AB 327

AB 327 makes major changes in the energy rate structure in California, with both the solar industry and investor-owned utilities declaring victory. There are potential spoils for both sides: solar advocates achieved long-awaited fixes to the net metering policy, while the three major utilities — Southern California Edison, Pacific Gas and Electric Co. and San Diego Gas & Electric Co. — secured long-sought changes in tiered customer rates and a flat monthly fee for all customers.

The retail solar industry nearly unanimously opposed AB 327 just weeks before the bill passed the legislature. The original bill addressed only the utility priorities of flattened pricing and a $10 across-the-board surcharge on customer utility bills. The solar industry managed to amend the bill toward the end of debate with instrumental support from California Governor Jerry Brown. The final bill grants a permanent reprieve from the scheduled expiration of net metering in California. Net metering refers to what happens when a homeowner or business with solar panels on its roof sells any excess electricity it generates back to the local utility. The homeowner’s utility meter runs backwards. In this way, he receives credit at retail rates for the electricity he returns to the grid.

California has nearly three times more rooftop solar than the next highest state. Installed distributed solar capacity in California is 3,761 megawatts.

Net metering had been expected to end as early as late 2014. The bill extends the current program for each investor-owned utility through July 1, 2017 or, if earlier, the date when the amount of installed distributed solar capacity in the utility’s service territory reaches the following level: 607 megawatts for SDG&E, 2,240 megawatts for Southern California Edison and 2,409 megawatts for PG&E.

However, the real win for the solar industry is that the bill authorizes the California Public Utilities Commission to extend net metering indefinitely via a new program set to take effect by July 1, 2017, and it lays out a procedure for how the CPUC will calculate the cost of net metering moving forward. The CPUC must also propose rules for a transition from the current net metering program to the new program by March 2014.

If the extension of net metering leads to more widespread installation of distributed solar, then it could have a dramatic effect on the utilities. A recent forecast by the CPUC suggested that net metering could cost the three main utilities $1.1 billion a year by 2020, primarily in the form of additions to transmission infrastructure, and customers using solar panels will shift nearly $359 million a year in costs to other customers.

AB 327 will also alter the rates that utilities charge customers. California will move to a simpler, two-tiered system in place of the current multi-tiered system. The current rate structure dates from 2000 and was adopted in the wake of the California energy crisis. Heavier electricity users pay higher prices. Rates range from 13¢ to 50¢ a kilowatt hour. Under the new two-tiered structure in AB 327, customers using the least amount of energy will pay higher rates per kilowatt hour, while the highest-use customers will pay decreased rates.

The simpler rate structure may help utilities retain customers in inland regions who require heavy air-conditioning use year round. This has been a prime region for solar installation. The rate reduction for such customers may blunt the rapid adoption of solar.

Under the current California net metering program, a customer is paid for the energy he sells back to the grid at the same retail rate that he pays to buy electricity from the grid. If rates are cut for this target demographic, then not only are the savings from solar power not as significant, but it will also take a homeowner a longer period to amortize his investment. According to one analysis, flattening tiers would essentially negate the federal tax incentive for rooftop solar customers by increasing the cost of solar by $2.50 per watt of installed capacity, or 30% of the total cost of a typical system. Another analysis suggests that it will take 30% more time to recoup energy efficiency investments due to the combined effect of the $10 fixed monthly charge and the new flattened rates.

On the other hand, when electricity rates increase for homeowners who use relatively little electricity, it could make such homeowners more likely to switch to solar.

The new rates remain to be worked out. Rulemaking in California can be an attenuated process. One potentially unsettling aspect of AB 327 for solar companies is that while the CPUC is required to fill in details of the new net metering program, AB 327 offers no guidance. It merely sets a December 2015 deadline for the rules to be completed.

The bill gives the CPUC until March 2014 to specify how customers who receive benefits under the current net metering program will transition to the new net metering program. Particularly troublesome to many solar companies and customers alike is the ability of the CPUC to revise current net metering contracts. According to the bill, “Any rules adopted by the commission shall consider a reasonable expected payback period based on the year the customer initially took service under the tariff or contract authorized by Section 2827.” There is no gloss on what “reasonable expected payback” means. The bill allows for the possibility of retroactive changes to binding contracts. The concern over this uncertainty prompted Governor Brown to address the matter by vowing that the sanctity of the current contracts will be respected. 

Two Other Bills

Another bill that was signed into law in September, SB 594, would establish a new version of net metering called “meter aggregation.” Meter aggregation allows property owners to select the prime locations on their property to be used for solar generation, without restriction. The measure would allow an infinite number of solar energy facilities on an individual property, as long as each separate facility has a capacity of one megawatt or less. Meter aggregation would also allow individuals to use the energy generated on one property to offset their bills on a contiguous property, as long as the owner of both properties is the same.

A third bill, SB 43, was signed into law in early October and will create a 600-megawatt “green tariff shared renewables program.” The program will let Californians who are unable to install solar energy generators at their places of business or homes purchase up to 100% of their energy from a community renewable energy facility. The target audience is local governments, businesses, schools, homeowners and the millions of renters and business owners who lease stores or offices. The bill also provides special treatment for communities adversely affected by pollution and for homeowners unable to finance installation of renewable energy systems. The renewables referred to in this bill would not be limited to solar energy, but also include wind, geothermal and other forms of renewable energy.

The California solar market has seen tremendous growth despite diminishing state subsidies. For the first half of 2013, 57.2 megawatts (out of 258.3 total megawatts added) of residential and commercial rooftop systems were installed in California without any government subsidy. Installations of solar energy systems were up 78% in the residential market and 26% in the non-residential market, making the second quarter of 2013 the strongest second quarter in California history.

Attention will now shift to the California Public Utilities Commission. The CPUC has been granted tremendous new power to shape the future of the California energy industry as well as the fate of both the solar industry and the regulated utilities. It remains to be seen how the CPUC will perform this balancing act, but both sides are certain to press their cases.